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2922 B A N K IN G AND CUKRENCY. this plan the bank in a high interest rate community, where every one of its neighbors was paying more than the minimum, when there came need for it to borrow could borrow at the minimum rate up to 30 per cent of the total amount it could borrow, the minimum rate in the West being just as low as for New York banks, New England banks, or any other banks. That would be perfectly fair to every bank, and the minimum rate would apply everywhere throughout the country to every bank alike, and would be advanced as the in dividual bank’s borrowing increased above, let us say, 30 per cent of the total. Now, it was the discovery of that idea that brought me to the conclusion you could have a Government bank officered by public authority. Without that, this thing would be perfectly certain to happen: There would be political pressure from the community that was being charged a higher rate than some other community, and that political pressure would certainly move a public body, and you could not get the repressive action of the discount rate which you would be aide to get by this very simple method. I was somewhat astonished and greatly pleased that you had arrived at that con clusion. Senator H itchcock. I am very glad to have your indorsement. [Laughter.] Mr. V a n d e r l ip . As fiscal agent of the Government I would have the Federal reserve bank charged with the duties now imposed on the Treasury of the United States, and on the Bureau of Redemption in the office of the Comptroller of the Currency. I would transfer the present redemption fund which is now in the general fund—im properly in the general fund, because it is a trust fund—I would transfer that to this bank to be held as a trust fund, never as a part of its reserve, but to be held as a trust fund, and would charge this bank with the detail of redemption and the custody of bonds to secure national bank note circulation as long as that circulation is out standing. Senator H itchcock. Of course, that would not add to the resources of the bank; it would simply be for economical reasons. Mr. V a n d e r l ip . Yes. Senator W eeks. H ow much of a charge would that bank be per mitted to make for that service? Mr. V anderlip. I think it should not make any charge. The Gov ernment does not make any charge, and the bank ought properly, as fiscal agent, to assume that duty. Now, that is a suggestion. It is not an essential part of this plan, but it seems to be a sound suggestion. I would authorize this bank to issue circulating notes. Now, there is the great difference and the great improvement that this plan would have over any plan that has been having your consideration, so far as I know. I think I said in my former hearing that I re garded the issue of these notes in the form of an obligation of the Government as wrong and as tending to lead to disaster, but that until it led to disaster that scheme would work. That I believe. But the more I reflected on it the greater emphasis I put upon the unwisdom of placing the Government obligation on the notes. Here anyone who holds the opinion that the people should control the B A N K IN G AND CURRENCY. 2 923 c u r r e n c y w o u ld fin d n o t h in g c o n tr a r y to th a t v ie w b y p e r m it t in g this b a n k to m a k e th e o b lig a t io n a n d to b e s o le ly r e s p o n s ib le f o r th e r e d e m p tio n o f th e n o te s . I t w o u ld be th e p e o p le . A b a n k w h o lly officered b y p u b lic e m p lo y e e s is th e v o ic e o f th e p e o p le , a n d th a t is th e w a y th e n o te o u g h t to b e is s u e d — th e o b lig a tio n o f th e b a n k a n d n o t th e o b lig a t io n o f th e G o v e r n m e n t. Senator H itch co ck . What would be back of the note of such a bank ? Mr. V a n d e r l i p . The note should be secured by segregating redis counted paper to the amount of 100 per cent, or one-year exchequer notes of the Government, to which I will refer later, and a 50 per cent gold reserve. Or the note might be secured by 100 per cent gold reserve. Now, there might be conditions arise where there will be outstand ing notes in excess of the amount of commercial paper the bank will have, but under those conditions the notes should be covered by 100 per cent of gold, and the bank should be perfectly free to issue its notes without limit so long as they are covered by 100 per cent in gold. There will be an actual flow of gold into the bank, and notes should be put out whenever they are demanded, and the bank’s gold stock could always be increased in that way with 100 per cent gold covering notes outstanding to any extent. Senator H itch co ck . Y ou mean notes may be put out even when rediscounts are not coming in, simply because the banks are asked for currency. Mr. V an d erlip . Yes; but in that case they should have 100 per cent gold back of them. Senator H itchcock . The bank asking for currency may procure it either by depositing gold or drawing against their balances? Mr. V a n d erlip . Yes. Senator P om erene . Then you have two distinct classes of notes ? Mr. V an d erlip . N o, sir; they would be exactly the same. The note must be covered either by 100 per cent of gold or by 100 per cent of rediscount paper. Senator N elson . With a reserve o f 50 per cent? Mr. V anderlip (continuing). Or exchequer notes and 50 per cent of gold. Senator N elson . Your reserve? Senator H itch co ck . But to the extent that the notes exceeded the discount paper, they must be covered entirely by gold? Mr. V an d erlip . Entirely w ith gold. Senator P om erene . Y ou would expect those notes, redeemable then by the gold, to be practically the same as all gold certificates? Mr. V a n d erlip . Yes. Senator W ee k s . Would you make them legal tender? Mr. V a n d erlip . I would not. Senator P om erene . Why? Mr. V a n d erlip . Because they are, after all, a credit instrument. I see no reason whatever why a gold certificate, which is not a credit instrument, but a representative of gold, should not be a legal tender. I can not conceive any reason at all why it should not. But, paren thetically, I believe there are the strongest reasons why the size of the gold certificates should be increased. Gold in the form of gold certi- 2924 B A N K I N G AND CURRENCY. ficates of $10 and $20 denomination ought not to be found in the pockets of the people. They ought to be in the bank reserves, and the thing in your pockets ought to be the note of the bank, always re deemable in gold. S e n a to r N elson. Y ou w o u ld h a v e th e s e n e w n o te s le g a l te n d e r ? Mr. V anderlip. I would not, sir. Senator B ristow. But you would make the gold certificates legal tender ? Mr. V anderlip. Yes. Senator H itchcock. Can you state briefly what evil might result from making them legal tender? Mr. V anderlip. They are not money in any sense; they are a credit instrument; they are a promise to pay—they are a promise to redeem in money. They ought not to be made money, and no hardship can follow not doing so. It may be that there has been sometimes a case where a man presenting a national-bank note has met with the statement, “ That is not legal tender, and I will not receive it.” That case is so rare, if it ever did occur, that the point is negligible. Cer tainly the national-bank note was always convertible into legal tender, and, of course, the note of this bank always should be. Senator H itchcock. I understand, as an academic proposition, it is not sound or not wise or not legitimate to make them legal tender. But as a practicable proposition, I can not see what evil would result. Supposing it were done, just for the convenience of the peo ple, what evil could result? Mr. V anderlip. An obligation to pay is and ought to continue to be an obligation to pay money—to pay gold—not an obligation to give somebody’s promise to pay gold. 1 do not think that is aca demic; I think it is real. On the other hand, I can see no objection at all to their not being made legal tender, because they will perform every function you want a circulating note to perform. I would give them every quality that the present national-bank note has They should be received for public dues, and they should have all the qualities contained in the national-bank act in reference to na tional bank circulating notes. Senator H itchcock. I can see why they should not be made good for bank reserves, because then the gold might get away from the banks, which would be bad; but I have not been able to see why they should not be made legal tender. The man who receives them per force can get gold for them. I can not see that he suffers anything. Now, there must be some practical reason. Mr. V anderlip. He does not suffer anything if he can get the gold. If he can not get it, he certainly ought not to be forced to take the promise to pay. Senator H itchcock. Y ou are assuming that the note is always redeemable in gold. Mr. V anderlip. If that is so, the note will always circulate as well as legal tender, except in the rarest possible instances. Senator H itchcock. I realize that, but is there anything that can result as a practicable evil by making them legal tender ? Mr. V anderlip. Yes. If by any chance this bank got in such a condition that it could not redeem those notes and reserve conditions were suspended, and it was not compelled to redeem them, just as the Government itself did not redeem its promises to pay for a great B A N K IN G AND CURBENCY . 2925 many years, then to force a creditor to take that depreciated note, instead of the gold he is entitled to, would be an evil. Senator N elson. And they would be depreciated in price, as wa& the case of the legal-tender notes during the war. Mr. V anderlip. Yes. Senator O’G orman. They went down, I think, as low as 33 or 35 cents on the dollar. Senator N elson. It might not get as bad as that, but it would lead to depreciation. Senator H itchcock. Of course, those notes were issued without any gold reserve at all, without any provisions that are now made for safety. But I am still not able to see who would suffer or what evil would really arise by making them legal tender. They are legal tender, as I understand you to propose, when presented to the Gov ernment. Mr. Y anderlip. Because this is a Government institution. Senator H itchcock. Yes. Mr. V anderlip. The Government ought to be ready and announce its purpose to receive them. Senator H itchcock. Therefore the Government, receiving them, can pay them out for any purpose. They are perfectly good. Mr. V anderlip. It could not pay them for any purpose where its contract was to pay gold. Senator H itchcock. Those cases are rare, and the great volume of obligations could be made in them. Mr. V anderlip. Nearly every corporation mortgage for the last 10 years has been made payable in gold. Senator H itchcock. They would not be affected, then; they would not suffer by making these legal tender? Mr. V anderlip. They certainly might if they became depreciated and the income of the corporation was paid in the depreciated note, while the outgo was paid in gold. It would suffer very much. Senator B ristow’. Would making these legal tender have a tend ency to have contracts made payable in gold more than would be the case if they were not made legal tender ? Mr. V anderlip. It would have a tendency. Contracts are now very largely made payable in gold when the amount is large and the period considerable. Senator N elson. Are these long-time railroad bonds payable in gold ? Mr. V anderlip. Almost invariably. Now, on the subject of having those notes the obligation not of the Government but of the banks I heard a witness in this room this morning say that universities are teaching disloyalty to our Gov ernment. They are teaching history, and there never has been a case in history where the Government established a fiat obligation that that obligation did not go below par and usually lead to disaster. Senator N elson. Are you taking up the question of how to secure the gold for the redemption ? Mr. V anderlip. I am providing that they keep 50 per cent gold reserve. Senator N elson. Yes; but how is that gold to be acquired ? Mr. V anderlip. That will come in in the payment for the stock, in the deposits of the Government, and in the deposits of reserves by 2926 B A N K IN G AND CURRENCY . all the depos ting banks. That will not all be gold; that will be partly gold and partly legal tender. I think that part of the reserve which specifically covers the note might well be made gold—to pro tect a note redeemable in gold. Senator N elson. Would it not help us if we made the customs pay able in gold? Mr. V anderlip. N o , sir; the customs in this case might just a s well be payable in notes as gold, because they are going to be deposited right back into the banks. If the import dues were paid in gold, im porters wTould draw gold out of the bank for it and it would come right back into the bank again. Senator H itchcock. Have you made any estimate as to the possible volume of these notes which would be issued ? Mr. V anderlip. A suggestion I am just about to make would oper ate at once, or as soon as would be practicable, to replace $300,000,000 or $350,000,000 of national-bank notes by these notes. Except from that I should doubt if in normal times there would be very many of these notes with the present level of business. In the crop-moving period I think there would be $200,000,000 more. Then in future years, as the needs for currency expanded with growing business, the amount of these notes would expand. Senator H itchcock. Why would you retire $350,000,000 of na tional-bank notes, when in your former testimony you expressed the opinion that our currency is not redundant at any time to an extent greater than $150,000,000, as I recall it? Mr. V anderlip. I would do that and keep exactly in accord with my former testimony. It was to the effect that if you did not retire some of the present existing national-bank notes there would not be room enough in our circulation for the purely elastic factor; that in normal times we have enough circulation. We would only, there fore, have to issue these notes for the peak of the load, and there might be none at all in the springtime, but only in the fall, in the crop-moving period. We ought to get some of these out of the way to make room for a note of an elastic quality. And then I would also provide the bank with a one-year exchequer note, as I explained in the hearing before. In a word, the plan would be this: Gradu ally, and over such period as the Federal reserve board may decide upon, the Federal reserve bank shall offer to purchase the 2 per cent bonds of the United States deposited to secure circulating notes of the national banks, at par, and up to an amount equal to one-half of such bonds deposited with the Treasury of the United States as security for national-bank note circulation. Now, it would pay for these by taking the redemption responsibility for the notes that are outstanding and would then exchange the 2 per cent bonds that it got for the 3 per cent one-year exchequer notes. Now, you may say at once that that represents a loss to the Govern ment. But with the tax the bank would pay—and that tax to be a lien upon its earnings ahead of any dividends—an amount equal to per cent on an amount of notes equal to these exchequer notes issued—that would compensate the Government for the payment of 1 per cent additional interest, and would compensate also for the loss of the one-half of 1 per cent tax now paid on circulating notes se cured by 2 per cent bonds. B A N K IN G AND CURRENCY. 9,927 Senator P omerene. D o I understand that tax to be on the ex chequer notes you referred to? Mr. V anderlip. The tax would be on circulating notes secured by exchequer notes. Senator P omerene. Yes. Mr. V anderlip. I would gradually substitute rediscounted paper for the exchequer notes and leave them free in the treasury of the bank. This gives the bank an employment for its funds in normal times. In normal times there wall be no great amount of rediscounts in this country. You remember the advantage of the rediscount sys tem is not to employ all of your funds all the time in such redis counts. It is not for a bank to borrow from this central reserve bank, and loan those funds at a higher rate to its customers. In normal times the bank will not go to the central reserve bank to re discount at all. The advantage is only that you can go there in the last emergency; that is the great advantage of it, that you can always go there; that you can always make your commercial paper liquid. Nor mally, the rate will be too high to go there. Normally, a bank will go into the open discount market and sell some of its commercial paper; or it may borrow through other banks. But the knowledge that it can always go there, can always make liquid its commercial paper, is the great thing. Senator H itchcock. I do not believe I quite get clear in my mind this process. You would have the banks take over $350,000,000 of 2 per cent bonds now held in the Treasury for the various banks? Mr. V anderlip. Yes. Senator H itchcock. N ow, what wuuld the bank pay for those? Mr. V anderlip. It would assume the national bank notes now outstanding. That would be equivalent to paying par for the bonds. Senator H itchcock. Well, the national-bank notes outstanding belong to the banks of issue. Mr. V anderlip. I know. Now, this bank would assume those notes outstanding that are secured by this $350,000,000 of bonds. Senator H itchcock. It would assume their redemption ? Mr. V anderlip. Yes; it would assume their redemption and retire ment. Senator H itchcock. And what would it redeem them with? Mr. V anderlip. With its own notes, which it would be enabled to issue by putting these exchequer notes under the new circulating notes. Now, they would only remain under them temporarily. Ultimately commercial paper would come under them and the ex chequer notes would be free in the Treasury. But, generally speak ing, the $350,000,000 of national bank notes would be replaced by $350,000,000 of notes of the Federal reserve bank. Senator H itchcock. Well, the $350,000,000 of 2 per cent Govern ment bonds which would be taken over would be replaced then-----Senator O ’G orman (interposing). Substituted. Senator H itchcock. Substituted by exchequer notes. Mr. V anderlip. They would be absolutely retired by the Govern ment. They would be received by the Government, and in their place the one-year exchequer notes would be issued. Senator H itchcock. And they would belong to this bank? 2928 B A N K I N G AND CURRENCY. Mr. V a n d er lip . Yes. Senator H itchcock. And bear 3 per cent interest? Mr. V anderlip. They would bear 3 per cent interest; they would mature every year; but the bank would be under obligation to renew them. They would renew them, probably, one-twelfth each monthr or something of that kind. Senator N elso n . But that right of converting 2 per cent bonds into 3 per cent exchequer notes, as you speak of, ought to be prorated among the banks, ought it not? Mr. V anderlip. Oh, yes. Senator N elson. According to their bond holdings? Mr. V anderlip. Certainly. Senator N elson. Otherwise it would not be fair. Mr. V anderlip. It would not fair. Each bank ought to be per mitted to sell one-half of its bonds that are up to secure circulation at par for this purpose. Senator H itchcock. But the Government would be paying 3 per cent on its bonds instead of paying 2 per cent. How do you compen sate it for that loss? Mr. V anderlip. By giving them the tax of IT per cent on the notes. Senator H itchcock. What notes? Mr. V a n d e r l i p . The notes that the Federal reserve bank is to issue to retire the national-bank notes. Senator H itchcock. But you see that would be taxing itself, would it not? Mr. V anderlip. It would be taxing itself, except that I say that that tax shall be a lien ahead of any dividends. Senator H itchcock. But, then, if the bank earns dividends any surplus over the dividends it is allowed to pay goes to the Govern ment ? Mr. V anderlip. Then you might say, in effect, that it will be taxing itself. Senator H itchcock. S o that you do not relieve the Government; and the Government would be paying 3 per cent interest instead of 2 per cent. Mr. V anderlip. The Government would be taxing itself, in effect, if you could accomplish all the purposes that are sought to be accom plished, without doing this thing and make the earnings of the bank as high as they would be if you had not converted 2 per cent bonds into 3 per cent notes. But the earnings of the bank would really be materially higher as a result of converting bonds into notes; so much higher that the Government would profit instead of lose by making the notes bear 3 per cent. Senator O ’G orm an . Would not the benefit that the Government would derive from the enjoyment from the surplus profits of this Federal reserve bank be more than ample compensation? Mr. V anderlip. Very much more, in my opinion. Senator O ’G orm an . For the immediate loss to which it may be exposed. Mr. V a n d er lip . Yes, sir. Senator O ’G orm an . In paying 3 per cent interest, where heretofore it has paid only 2 per cent. Mr. V an d er lip . Yes, sir. B A N K IN G AND CURKEN CY. Senator iV e e k s . 2929 Have you made any estimate of how much that surplus profit would be ? „ Mr. V anderlip. I have not; but I feel quite confident that that would be the case. . Senator W eeks. Do you think the dividends should be made cumulative ? Mr. V anderlip. Yes, sir. Senator N elson. With a 50 per cent reserve in gold, Mr. Vanderlip, could you not issue that currency based upon these exchequer bills in larger volume than the par value of the exchequer bills—than their face value? Mr. V anderlip. I would not advise that, and I would not encour age the bank at all to use these exchequer bills as cover for circulat ing notes. The rediscounted paper is what should be used, and the •exchequer notes should be held there in the Treasury for the employ ment of funds in a scant time. You see you pay 3 per cent on these notes, but to whom do you pay it? You pay it right back to your self, practically, because the Government gets the earnings of the bank. Then these exchequer notes become of the greatest value in in fluencing a gold movement or in protecting the bank in any time of stress. They would be a perfectly ideal bankable paper in any commercial market in the world. With the highest possible credit and short maturity, they would be the ideal thing for a bank to have to operate with in the money markets of the world. The bank could go to the Bank of France or to the Bank of England or any where where there was credit to be had or gold to be bought and buy it with that obligation. Senator H itchcock. Well, as a matter of fact, would not they slowly drift out of the country, and would it not happen after 10 years that this bank would not have any of these choice 3 per cent bonds ? Mr. V anderlip. At the end of every year they come back into the hands of the bank. The Government pays them and issues new ones in their place, which the bank buys. They can not drift out of the country in the way you suggest. If they drift out of the country— that is, if the bank used them in order to buy gold, we will say, in London as soon as they mature—and some of them will mature in 30 days, some of them will mature in 60 days, and so on, and the last will mature in a year—they will at maturity be presented for payment and new ones at once bought by the bank. Senator H itchcock. Then, suppose the United States should be come involved in war and it should find itself in a position where it had to market great quantities of bonds, would it not happen that it would not be able to renewTthese bonds on a 3 per cent basis ? Mr. V anderlip. The bank pledges itself for 20 years to renew them----Senator H itchcock (interposing). Oh, you have that in the char ter of the bank, have you ? Mr. V anderlip. Yes, sir. That must be fundamental, that the bank is under pledge to renew them. I would have this measure provide a national clearing house, as I explained this morning, and not alone for the reason that it would be a great economic engine, but that you must provide for the col- 29hU B A N K I N G AND CURRENCY. lection of checks without imposing on banks the necessity of keeping balances with other banks. Senator W eeks . Mr. Vanderlip, that would be one o f the most difficult things to do in this measure which you propose. Country banks —probably 22,000 or 23.000 out of the 25,000 believe that their interests are going to be jeopardized if that is done, and universally they have opposed any such action. Now, what can we do to pre vent their making a material loss in revenues and still carry out the suggestion which you make? Mr. V anderlip . Point out that they oppose it, not on economic grounds, -which, if they understand it they must admit are sound, but on selfish grounds of earnings; and try to show them that if they will be broad gauged and put into operation a measure that will be for the best interests of this whole country, their earnings will be larger, although reduced by this small amount of profit which they make now on collections. Senator O ’G o r m a n . Mr. Vanderlip, let me give you a concrete case. A gentleman representing the second largest bank in the State of Mississippi testified before us recently that the net profits of the bank amounted to $40,000 a year. Senator W eeks . $48,000, was it not ? Senator O ’G orman . Perhaps it was. It was something over $40,000, and he said $20,000, almost 50 per cent of the net profits of the bank, were derived from exchange charges; and he said, in substance, that if a system were adopted by which their profits would be so materially reduced, that they would, of course, surrender their national charter, and continue as a State bank and continue to enjoy that revenue. Now, what would you say to that? Mr. V anderlip . I would say that I fear that these $20,000 profits were gross. If you analyze exactly what he said, he probably said that he got $20,000 in gross—he may not have used the word “ gross ”—in his collection charges. I can not believe that any bank that is doing anything like a normal business derives half of its net profits out of the net profits of the collection business. It is not so; that is all. Senator O ’G o r m a n . We have been told by all representatives of country banks that their profits, perhaps on a capital of $25,000 or less, might probably not exceed $15,000 or $20,000 a year—and that they may make as much as $2,500 a year or $3,000 from exchange charges. Mr. V anderlip . A gentleman was making that statement to me the other day, and I challenged i t ; and he admitted that what he meant was that the gross profits out of collections were equal to one-half of his net earnings. Well, when you come to analyze that statement, the taking away of the collection business would not fall so heavily on that bank. If a bank is doing a business where half of its earn ings come out of the community for paying collection charges, it is charging the community too much, and that community is paying too great a charge for that bank’s services. Senator W eeks . I s it not true in the case of small banks of that kind, that about the same force would have to be maintained, whether they were doing this collection business or not; so that the receipts from the collection business are practically net? B A N K IN G AND CU E E E N C Y . 293 1 Mr. V a n d e r l ip . Well, that might be, in some measure, true. Senator W eeks . In small banks ? Senator N elson . N ow, is not the situation altered somewhat under your plan from what it is in the bill, because there is nothing com pulsory? That is, the country bank need not come into the sys tem; they can stay outside and are not obliged to come in. Mr. V anderlip . They must come in, so far as the reserve p rovi sions are concerned. Senator N elson . Yes. Mr. V a n d e r l ip . That is all. There is nothing else compulsory, particularly if you do not compel them to underwrite this public subscription of stock. There is nothing compulsory at all, except this reserve requirement ; they must keep their reserve where you tell them to. That is all. Senator N elson . They need not do their clearances through these subsidiary banks? Mr. V a n d e r l ip . Not at all. Senator N elson . S o that the situation is not, practically, under your plan as it would be under the plan proposed in the bill? Mr. V a n d e r l ip . Well, in effect this bank would do the clearing business so cheaply and so effectively that it would take it away from the other banks The economy would be so great that that would be the effect. Senator N elson . Yes. Senator H itchcock. T would like to have your opinion on this, Mr. Vanderlip. Suppose it is a fact, as 1 believe it to be, that there are possibly several thousand small communities in the United States which depend upon a bank, say, of $10,000 capital, and that bank is a great convenience to that community, and it has, say, $7,000 of deposits. It is not possible with that volume of deposits to have loans sufficient to pay a dividend upon the capital and a decent salary to the men that run the bank. Now, they eke out dividends and their salaries by these collection charges. Would you not say that the bank is of sufficient convenience to that community to warrant a continuance of that system? Mr. VANDERLTr. I would say that it is a great convenience to the community, and that under this plan it still would retain a consid erable amount of what it makes out of collections. That is to say, a merchant in that community having a bill to pay in New York will come in to buy a New York draft under our present system. In order to sell a New York draft that bank has got to keep a balance in New York to write it on. Under the system that I propose, or that is proposed in the bill that is before you, when a merchant comes in to get a piece of paper that will pay a New York draft the bank will merely write its check on the central reserve bank or, in the other case, on the regional bank. Instead of writing it on a New York bank it writes it on the central reserve bank or on the regional bank. It can sell it; it can get some charge, some commission, there just the same. But its check on its deposit in the central reserve bank is par in New York or par anywhere else. It can write drafts for its custom ers that will be par anywhere in the United States, without keeping 2932 B A N K I N G AND CUBKENCY. the balance anywhere in the United States, except in the Federal reserve bank. Senator H itchcock. Well, that is true. But it still is not getting what it gets now. I understand a discount on such checks of its cus tomers has come to it for collection. And now suppose that bank, not being able through a little charge on its drafts and through the interest on its loans to make a living, to make an existence possible, goes out of business. The people of that community then go back to the idea of keeping their little hoards in stockings or in bedticks or under mattresses or they go 10 or 15 miles away and deposit it in a bank. Has not that community suffered a loss? Mr. V a n d e r l ip . They have suffered a very great and very real loss if that were the effect, but that will not be the effect. The effect will be that that bank having the new facilities provided by either of these plans will prosper more, even in spite of this small loss, than it ever prospered before. Senator H itchcock. I think it is very questionable whether that bank gets any advantage out of this new system, however, which is proposed, because it has a privilege of discount now with its city correspondent, and its city correspondent might take paper which could not be available under the bill that we have before us or the one which you have, so that it gets no benefit at all. Mr. V anderlip. The community in wThich that bank is operating will get a lower level of interest under either of these plans. Senator H itchcock. Well, I hope that will be the result, but I have never been able to see how such a bank gets any benefit out of this system. Mr. V anderlip. If the community does get a lower level of interest rate, the community will prosper more. Senator H itchcock. But I think all these little banks will be wiped out. They do not exist in any European country where the cen tralized bank system prevails. You will find no such banks in France or in Germany or anywhere where that system prevails. Mr. V anderlip. Personally I should be very glad, looking at the question from the point of view of the bank with which I am con nected, to pass a measure that will compel the small banks of the country to Keep deposits with us. My whole personal interest is on that side. But my judgment is that the advantage of the whole country lies on the side of the national clearing house. Senator N elson. Well, the little country banks, Mr. Vanderlip, not being required to keep deposits in other banks for exchange busi ness as they do now -would have more loanable funds at home, would they not? Mr. V anderlip. Yes; and instead of getting 2 per cent for that balance as they now do they would get 5 or 6 per cent. Senator N elson. And that would compensate them in a measure for that small loss, would it not? Mr. V anderlip. I believe it would compensate them fully. Senator B ristow. Mr. Vanderlip, if Senator Nelson is through, I should like to ask you a question. Senator N elson. I have finished. Senator B ristoiv. There is one feature that has been discussed a good deal since you were here the other day in regard to this exchange B A N K IN G AND CURRENCY. 2 933 matter, and that is the payments by check. Bankers do not like it, but the people do. We have developed these small banks all over the country, and the country bank solicits from farmers and different citizens in its community and asks the people to deposit their money with it, and then to take a check book and pay out by check. And I think that that has resulted—the use of checks in this country in the establishment and maintenance of a great many small banks, because it has drawn the money that was kept around in bureau drawers and other places in the community into a center; and instead of keeping the money in his pocket or hidden away somewhere, the citizen takes a check, and when he pay for any article of merchandise, or for a pig, or a cow he draws a check for i t ; he does not carry the money with him; the money is in the bank; and some body has borrowed it that needed it; and so it builds up the com munity. Now, the use of checks has become so common in this country that when a merchant in Salina, Ivans., pays his Chicago house, lie fre quently—I say usually—simply draws a check on his local bank and sends it; it goes to Chicago, and they do not have to go and get a money order; they do not have to go and get an express order, or they do not have to go and buy a bank draft. The citizen does it at night, after everything is closed up. And in our part of the country the pay rolls are paid by check; everything it done by check. Now, with this discount system—not discount system----Senator O ’G orman (interposing). Clearing system. Senator B r ist o w . Yes; clearing system that is suggested here; would not that break up or interfere with that process? Mr. V a n d e r l i p . No ; it would greatly facilitate it. Senator B r ist o w . N o w , tell me how it -would facilitate it. Mr. V a n d e r l ip . By facilitating the collection of the check. If that check reaches the Chicago merchant, he deposits it with his bank and is charged exchange on it. Anything that will facilitate the collection of that check is of advantage to the merchant, and therefore of advantage to the man who issues the check, because, in the end, that is where the cost must fall. The merchant is not going to do business without profit. He is going to put into his pocket something to cover the loss of time and of commission in collecting that check. Anything that will facilitate the collection of that check will increase the use of similar checks. Senator B r ist o w . Well, that is very satisfactory if it will operate that way. Now, there is another advantage to the local merchant or the local citizen in our part of the country. Settlements are made the 1st of the month; and nearly all of the routine business is done and pay ments made the 1st of the month; collections are made the 1st of the month. The merchant on the last day of the month will go over his accounts. He knows what is due and where his check will reach the creditor on the 1st of the month; that if it does, he will get a discount probably. He collects on the 1st of the month. He draws those checks when he probably has not the money in the bank. His bank account may be low; it would not begin to pay them, and he depends upon his collections on the 1st or 2d day of the month to S. Doc. 232, 63-1— vol 3------ 64 2 9 84 B A N K I N G AND CUBRENCY. meet those checks by the time they get back; and that is done every where. Now, in the normal operations of the business of the country there are thousands and hundreds of thousands of men who handle their business in that way. And anything that we did here that would disturb or make difficult this routine-established method of business, would be received with very great disfavor. And I do not want anything in this bill that we may pass here to in any way disturb that situation. Mr. V a n d e r l i p . This measure will not facilitate the kiting of checks. It will not facilitate the business of writing a check when you have not a balance in the bank to pay it with. This will shorten the time between the blotting of your signature on a check and the time when that check is charged against your account; there is not any doubt about that. Now, if you think it desirable for people to be able to write checks without having a balance in the bank, and let those balances come after a while, and increase the time between the day you sign the check and the day you are charged with it, you do not want this system. Senator P o m e r e n e . And the kiting of a check is neither fair to the banker nor fair to the payee of a check, is it? Mr. V a n d e r l ip . No, sir. Senator S h a f r o t h . Mr. Vanderlip, how would it do to put a maximum charge of $1 a thousand for collection? Mr. V a n d e r l ip . I would not be prepared to answer that as to the figure. Certainly you do not want this bank to do a service without being paid for it. You do not want to impose on this bank the neces sity of crediting in New York at par a check that has been drawn in San Francisco, and that the bank can not get its credit for until that check has traveled to San Francisco. You must permit it to charge what it is right to charge—what would be fair for the service per formed—either a charge in the form of a commission, or in a de layed credit of the item----Senator S h a f r o t h (interposing). The only thing is, the country banks are protesting very strongly against this bill, and there is also some protest that excessive charges are made; and I thought that if you could put a limit upon it it might be a compromise that would be well to consider. Senator B r isto w . Mr. Vanderlip, suppose that I draw a check for $1,000, living in Kansas, as I do, to pay a debt which I owed in Chicago—we will say to the Butler Paper Co. And that company deposits that check in a Chicago bank with which it does business, and that check is then sent back to the bank upon which it is drawn at Salina. The bank at Salina, Kans., does not charge me anything. It wants me to make my remittances that way. It prefers that I should do so. What charge is made—what bank gets the charges on that check? Mr. V a n d e r l ip . I will tell you who does charge you something; that is, the Butler Paper Co.; because you have paid them with something that is not worth par; you have paid them with a piece of paper that they have to do one of two things with, either to put it in their bank and get a delayed credit for it, which means a credit after B A N K IN G AND CUBRENCY. 2935 so m e d a y s , j u s t to g iv e th e b a n k tim e to c o lle c t it, o r be c h a r g e d a c o lle c tio n c o m m issio n . Senator B r ist o w . Theoretically you are right, but practically y o u are not. Senator O ’G o r m a n . Y ou are a favored depositor there, Senator Bristow. Senator B r ist o w . The Butler Paper Co. credit me with that check just the same as if it were a bank draft, or a postal money order, or an express money order; it makes no difference to them. I get ex actly the credit, penny for penny, that I would even if I sent the money by express. Mr. V a n d e r l i p . Y ou will admit that it is worth less to the Butler Paper Co. than cash or a Chicago draft, will y o u not? Senator B r is t o w . I do not know. Mr. V a n d e r l ip . I can prove that it is, because I can tell you that they will not be able to get a par credit for that. They must pay a commission. Senator B r ist o w . Well, I want to know what charges are made as against this check in its trip from Salina to Chicago and back again. Mr. V a n d e r l ip . The Chicago bank will charge the Butler Paper Co. a commission. The Chicago bank will probably send that check to Kansas City and will pay nearly all of their commission to Kansas City. Kansas City will send it on to Salina, Kans., and probably has an arrangement with the Salina bank to remit once a week, so that the Kansas City bank will be out an average of four days. It must have charged a commission that will compensate it for interest. The Chicago bank must have charged a commission that will com pensate it for interest, because it has credited this as cash to the Butler Paper Co. It does not get it back under a week. It is not cash, it is froth. It is a piece of paper in the mail. It will take a week to get that back from Salina, Ivans., and perhaps more; a week to get it in the form of money in the vault of the Chicago bank. The Butler Paper Co. has, however, obtained a balance that it can check on, and they must be charged a commission for collecting that piece of paper equal to the interest and to such work as may be con nected with the collection, interest for the period from the time the credit is given to the paper company until the time the bank gets into its vault the equivalent amount of money. Senator B r ist o w . As a matter of fact, the bank may charge the Butler Paper Co., and it may not. All banks do not make a charge for that. Mr. V a n d e r l ip . I believe they d o in Chicago. I believe there is a clearing-house rule there compelling all banks to charge. Senator B r is t o w . N ow we will take another illustration. Sup pose that I have a customer at Plainville, Ivans., who owes me $100 and sends me a check on the Plainville bank in payment of that $100, and I deposit the check and credit his account with $100. When I deposit that check it is credited to my account for $100. Well, as a matter of fact, that bank in the town where I live makes no charge. I never pay anything, and my Plainville custoirer never pays any thing. Mr. V a n d e r l ip . Y ou p a y s o m e th in g , a n d y o u d o n o t k n o w it. Senator B r ist o w . That is a v e ry c o n v e n ie n t way to pay d eb ts. 2936 B A N K IN G AN D CURRENCY. Mr. V a n d e r l ip . Y ou keep a deposit balance with that bank, else it would not receive that check and credit you with it at once. Senator N e l s o n . Why? Mr. V a n d e r l ip . And i t pays you no interest on that deposit bal ance. Senator B r is t o w . N o. Mr. V a n d e r l ip . And t h a t is w h e re y o u p a y it. Senator B r is t o w . Well, i f this system were changed so that I could not do that, I would get no interest on the deposit anyhow. Mr. V a n d e r l ip . The system would not be changed so that you could not do that. You could do all of these things. You could" do everything you have been talking about here. The new system would only facilitate—it would only shorten the time, make the collection more rapid. Senator B r is t o w . I do not object to shortening the time. T do not ask that this be artificially delayed. I think that it would be dis honest to artificially delay it. But I do contend that the system that has been developed by tiie small country banks for the purpose of gathering together the money in its vaults, so that the people can loan to the bank and the bank can loan it to the people, and take it out of the dark places where it does no good to anybody, and bring it where it can be used by the community—which is all the product of or which has resulted, rather, in the checking system—I think that any thing that would destroy the check system or retard it would be injurious to the community and to the country as a whole. And then its convenience is such that my sympathies have all been with the country bankers, because I felt that it was of great advan tage to the country and that if these small banks had not been estab lished, so as to gather together these sums and send them to the cen ters, we would not have anything like the banking system we have got now. And it is a wonderful convenience. And that is why I do not want to favor any exchange provisions here that will in any way interfere with that. Mr. V a n d e r l ip . The bank is compensated by the proposed new conditions. They will more than compensate it. Senator B r ist o w . S o far as the checks of a bank are concerned, that was only of secondary importance, except as it might affect its earnings which are necessary, but I was primarily looking at the convenience to the community, and I know that if that convenience was taken away the measure would not be considered upon its merits; it would be regarded as an aggravation; it would be a source of great opposition. Senator W e e k s . I s it not possible that the Butler Paper Co. might have sold to Senator Bristow a bill of goods at a slightly lower price if they knew they were going to receive cash instead of a check which would take five or six days to collect? Mr. V a n d e r l ip . I think it possible; certainly if it were a large transaction. Senator B r ist o w . I think the banks who get the use of this money absorb that charge, because they can afford to do it on account of the deposits they get, and the business men keep the deposits there be cause it is convenient to have them there. The banks absorb those checks, and what I suspect is that the big banks who feel the burden of those country checks would like to get out from under. B A N K IN G AND CUBBENCY . 2937 Mr. V a n d e r l if . We get from $200,000 to $300,000 a year gross in charges. Senator O 'G o r m a n . Exchange charges? Mr. V a n d e r l ip . Exchange charges. Senator B r ist o w . New York has the reputation of being pretty swift on exchange charges. Senator O ’G o r m a n . I understand you are quite prepared to see a system adopted by which you will lose that revenue? ' Mr. V a n d e r l ip . Yes, sir; b ec au se w e b e lie v e w e w o u ld g e t o th e r ad vantages. Senator H it c h c o c k . Would you materially reduce the force in your bank? Mr. V a n d e r l ip . Yes; quite materially. Senator W e e k s . I would like to call attention to a controversy which has been going on in the press between two usually wellinformed men about the cost of this collection system, and I would like your opinion in regard to it. I do not remember the figures. Senator H it c h c o c k . I have them right here. One man estimates the cost of such a system to be $8,675,000 a year, and the other says that is about $6,000,000 more than it should be. Senator W e e k s . What have you to say about that, Mr. Vanderlip* Mr. V a n d e r l ip . I am not a technical banker. I did not grow up in a bank. I know very little about the technical details of a bank. I am not prepared to express an opinion. I would suspect, perhaps, that here, as in many other cases, the truth will lie between the ex tremes. I am not prepared to express an opinion on that. I know the gentleman to whom you refer, and I have a very high opinion indeed of the technical knowledge of the one who makes the highest estimate. I am inclined to think he may be too high, but I would not undertake to demonstrate that without a study which I have not given to the subject. Senator O ’G o r m a n . Y ou may proceed, Mr. Vanderlip. Mr. V a n d e r l ip . I would enlarge the charter rights of the national banks in order to permit them to compete successfully with trust companies that will be admitted to the system. That is to say, I would not put a premium on a national bank going out of the system, taking out a trust company charter and becoming a depositor of a Federal reserve bank. The main expansion of charter rights should be to permit a na tional bank to have branches in the city where it is located, and to establish foreign branches, and to exercise general trust-company functions. That will prevent banks going out of the national bank ing system, taking out trust company charters, and becoming de positors in the central bank. Senator N e l s o n . Let me see if I understand you right there. You speak of trust-company functions. Would you include in that the right, under proper restrictions, to loan on farm mortgages? Mr. V a n d e r l ip . I w o u ld not, if I was personally writing the bill. Still I sympathize quite strongly with the view of western bankers, who find they can make a better loan on that kind of security, and who fin d that State banks are competing with them. Senator N e l s o n . Y ou must remember one thing, Mr. Vanderlip, and that is what a great thing those farm mortgages are for the big insurance companies. 2938 B A N K I N G AND CURRENCY. Mr. V a n d e r l ip . Yes; I know. Senator N e l s o n . They are a very great source of investment. The insurance companies prefer them to stocks and bonds. Mr. V a n d e r l ip . A s I have said before, I do not believe the pro vision in this act that is on the table is a dangerous one. I do not altogether like it, but I do not believe it is dangerous. Senator W e e k s . Y ou spoke of foreign banks just now. Have you come to any conclusion in regard to the amount of capital that would be required in order to establish a bank, for instance, in the Argen tine Republic, to successfully compete with foreign banks there? Mr. V a n d e r l ip . It would take a large amount of capital. They are used to seeing very large figures in the capitalization of banks there, although in that case the stock is not fully paid, as a rule. We have, and I think should have, no system of partly paid capital stock, and I think to successfully establish a bank in any South American country will require a showing of very considerable capital in order to compete with existing banks. Senator W e e k s . About how much? Mr. V a n d e r l ip . I would not think of anything under a million dollars. In Buenos Aires, I should think $5,000,000 would be a minimum for a great American bank. Senator W e e k s . That is, capital segregated for that purpose? Mr. V a n d e r l ip . If you are going to segregate capital—I do not quite see the point of it. It seems to me that the honor, and really the credit of the whole bank, would have to be pledged to any branch of the bank. Senator N e l s o n . Would it not do to have a branch in South Amer ica and in London, and have those branches with the power of what you call accepting houses? Mr. V a n d e r l ip . They s h o u ld h a v e . Senator N e l s o n . S o that drafts could be drawn on those branches and accepted by them, and would not such drafts circulate like the European drafts? Mr. V a n d e r l ip . Yes, sir; they would go into the open discount market then. Senator N e l s o n . They would go into the open discount market in London and every other continental bourse. Senator O ’G o r m a n . Mr. A^anderlip, have you any acquaintance with the banking requirements in different foreign countries where some of our national banks would establish branches under either of these plans ? Mr. V a n d e r l ip . I have made a wide study of South American banking conditions. Senator O ’G o r m a n . Of course, you would expect that any branch of a national bank doing business abroad would continue to conform to the requirements of the national banking act? Mr. V a n d e r l ip . Perfectly. Senator O ’G o r m a n . A s we may modify it. _ Suppose the local laws may have some requirements at variance with the requirements of our national laws. How would that conflict be met—because the natives of those foreign countries will have an interest in the proper maintenance of these banks; they will be doing business with our banks; they will be depositors and borrowers? B A N K I N G AND CUBKENCY. 2939 Mr. V a n d e r l ip . A s a matter of fact, the laws are very generous in South American countries toward either branches of foreign banks or banks organized under the laws of foreign countries. Of course, you could not permit a bank organized under our laws to have branches in another country that would impose conditions opposed to the conditions you impose. They might impose conditions in addi tion to those; but you could not permit the establishment of a branch where the law of some other country would in anyway fundamentally change the impositions of our own laws. Senator H it c h c o c k . Would the reserves b e kept in this country? Mr. V a n d e r l ip . They could not be entirely.^ That is a point that would have to be worked out. The whole subject needs very careful study, and is very lightly treated in the bill before you. Senator H it c h c o c k . There is nothing in the bill that would indi cate what should be done with the reserves? Mr. V a n d e r l ip . N o . Senator H it c h c o c k . Y o u are opposed to segregation? Mr. V a n d e r l ip . I do not say I am opposed to segregation; but, as a matter of fact, I feel sure that the whole credit of the bank is pledged to the support of the credit of the branch. Senator H it c h c o c k . Unless you have segregation and the branch be organized, the reserves would necessarily have to be kept in this country ? Mr. V a n d e r l ip . They w o u ld , a n d a n y t il l m o n e y t h a t th e b ra n c h k e p t w o u ld h a v e to be in a d d itio n . Senator O ’G o r m a n . D o you not think the laws of foreign countries would have to be very liberal which would permit the reserves of one of our branches in a foreign country to be retained in this country ? Mr. V a n d e r l ip . There are few countries that have any minimum reserve requirements. Senator R eed . Mr. Vanderlip, is not this question you are now discussing—the amount of reserves to be kept in a foreign branch— one that would almost necessarily have to be referred to the discre tion of a central board of control, so that that board, within the exercise of its discretion, could prescribe the rules and conditions with reference to the reserves of such banks, and generally with refer ence to the transaction of their business? Mr. V a n d e r l ip . I think it is, and T think it well could be with such a board as I have suggested here—a board absolutely removed from politics, made permanent, having continuity, and being of the char acter that I believe such provisions as I have suggested here would insure. Senator N e l s o n . These foreign branches, would they be branches of this big central Federal bank, or would they be branches of our national banks? Mr. V a n d e r l ip . Those are two entirely different subjects. Senator N e l so n . What have you been referring to? Mr. V a n d e r l ip . I have been referring to our national banks up to this time. It is true that the Federal reserve bank itself ought either to have agents or branches in at least three of the European centers. Senator N e l s o n . Ought it not to have branches there, through which they could make our acceptances over there ? 2940 B A N K I N G AND CURRENCY . Mr. V a n d e r l ip . I think, probably, it would have to be some thing in the nature of a subbranch. We have talked here o f 12 branches and any number of subbranches, and I should think the f o r eign offices would be in the nature of subbranches. Senator W e e k s . Is the National City Bank doing any business through such an agent at this time? Mr. V a n d e r l if . It is doing no business. The National City Bank has a resident representative in London. He does no actual business. I mean he signs no paper; he is not an officer of the bank. Senator N e l s o n . Does he make any acceptances? Mr. V a n d e r l if . Nothing o f the k in d . Senator N e l s o n . What we need is practically an acceptance house abroad, is it not? Mr. V a n d e r l ip . Yes; a n d we n e e d the r i g h t o f a c c e p ta n c e b y n a tio n a l b a n k s , a n d I w o u ld n o t lim it t h a t as in th is b ill to th e a c c e p t a n c e o f p a p e r t h a t a ris e s o u t o f th e im p o r ta tio n o r e x p o r ta tio n o f g o o d s. I w o u ld p e r m it a c c e p ta n c e s also in d o m e stic tr a n s a c tio n s , a n d keep a lim it to the a m o u n t o f h a l f ------Senator N e l s o n (interposing). And acceptances of finance bills, too? Mr. V a n d e r l if . N o, sir. Senator N e l s o n . Commercial bills? Mr. V a n d e r l if . Commercial bills. Senator R eed . What limit d o you r e f e r to? Mr. V a n d e r l if . Half th e capital and surplus would be a fair limit. Senator R eed . What is the objection, if any, to banks dealing in exchange ? Mr. V a n d e r l ip . What is the objection to banks dealing in exchange ? Senator R eed . Yes. Mr. V a n d e r l ip . N o objection in the world that I know of. Senator R eed . Foreign exchange? Mr. V a n d e r l ip . The National City Bank is quite the largest dealer in exchange in the country, and I have never heard any objection to engaging in that business. It is essentially a part of the commerce of the country to handle foreign exchange. Senator R eed . When I say exchange—what is the objection to a bank dealing in acceptances with foreign banks, provided there is a reasonable limit; is there any sound objection? Mr. V a n d e r l ip . There is no sound reason whatever, and there is a great advantage. It permits a bank which has the power of accept ance to sell its credit, and it is a perfectly proper act for the bank to do. Under our present system you can not sell the credit of a bank. Its credit is only evidenced in the willingness of people to deposit monev in it. Senator O ’G o r m a n . The moment a bank gives its acceptance, it en larges its liability ? M r. V a n d e r l if . Yes, s ir. Senator O ’G o r m a n . It is not contemplated that such a liability is to be taken into consideration in fixing the reserve? Mr. V a n d e r l ip . N o ; and therefore you limit the liability and hedge it about with collateral security. That is to say, collateral credit in the form of the liability of the drawer of the bill you accept. B A N K I a 'G and currency . 2941 Senator O ’G o r m a n . In other words, when you give your accept ance, if at the same time you btain adequate collateral, you are really enlarging your assets, at least to the same extent you are increasing your liabilities? M r. V a n d e r l ip . Yes, sir. Senator O ’G o r m a n . S o the safety of the plan would depend upon the judgment employed in the acceptance of the collateral? Mr. V a n d e r l ip . Exactly. Senator H it c h c o c k . When you make a loan you increase your as sets, do you not? Mr. V a n d e r l ip . It is ju s t the same except that it does not take the cash out of your bank. Some one else provides that, because they put weight upon your credit which you have added to the credit of the other man. Senator R eed . And the same character of judgment must b e ap plied in making an ordinary loan over the counter as would be applied in issuing an acceptance or signing an acceptance. It is the same thing? Mr. V a n d e r l ip . Just the same character, but perhaps a little more caution would be exercised in regard to an acceptance because it' runs longer than the average loan. An acceptance might run for six months, while the average loan of city banks is less than that. Senator N e l s o n . A good many of these bills are drawn upon the proceeds of the bills of lading which accompany them, and that amounts to a security accompanying the bill, does it not? Mr. V a n d e r l ip . That is a d ir e c t c o lla te r a l se c u rity . Senator N e l s o n . That is a direct collateral security in the very highest grade of bills? Mr. V a n d e r l ip . It is typical of the right kind o f loans a bank should m a k e. Senator W e e k s . A s a result of your investigations in South America, if proper provision were made in this bill for establishing branches, do you think you would divert any of your capital to that purpose ? Mr. V a n d e r l ip . There are great difficulties in the way. There is, unquestionably, a profitable field there, and merchants of the United States would be greatly aided by the establishment of American banks. The greatest difficulty lies entirely outside of any legisla tion. It lies in the inability to get men of the right type who will learn the language, and who will become residents among the people, and who will absent themselves from the country. I have become almost convinced that it is, at the present time, so difficult that at least the establishment of South American branches is going to be a slow process. S e n a to r W e e k s . D o c o m m e r c ia l h o u se s h a v e a n y d iffic u lty in g e t t i n g m en for th a t p u r p o s e ? Mr. V a n d e r l ip . They do. Senator H it c h c o c k . If a bank should keep a reserve against a note which it issues, why should it not keep a reserve against an acceptance which it gives? Mr. V a n d e r l ip . Because an acceptance is not a demand obligation; that is, it is an obligation maturing at a fixed date. Why should you keep a reserve against that any more than against loans? 2942 BA N K IN G AND CURRENCY. Senator O ’G o r m a n . Y ou m a y continue, Mr. Vanderlip. Mr. V a n d e r l ip . I would permit State banks and trust companies to be admitted to membership by conforming to the same capital, reserve, and examination requirements which national banks are obliged to meet in similar localities. The Federal reserve board should have the power to examine any member bank, and should examine a State bank before it was admitted to the advantages of the system. I would make the circulating notes of the Federal reserve bank a first lien upon all its assets, and I would make----Senator N elso n (interposing). Prior to dividends? Mr. V a n d e r l ip . Prior to deposits, absolutely a first lien on every thing, and depositors could not be paid off until the circulating notes were paid. I would protect the innocent holder of a circulating note, absolutely. Then, in turn, I should let the Federal reserve bank have the first lien upon assets of member banks for any indebtedness due from the member banks. This central bank must not lose money on bad loans. You would, by that method, give it not only the redis counted paper but you would give it a first lien beyond that if some of the rediscounted paper proved bad. If it proved bad you have recourse to the first lien. In respect to the rate of dividend that you would have to pay in order to float the stock at par, if you will exempt that dividend from all taxes which it is feasible to exempt it from—I am not a lawyer and I do not know how far you could go on that—that would be, of course, helpful in enabling you to float the stock at a lower dividend rate than otherwise. These are the general heads of what I believe would be an econom ically sound scheme for a bank entirely controlled by the Government, and I believe it would be acceptable to the bankers of the country, after they came to understand it. I am not at all sure----Senator H it c h c o c k (interposing). You did not make any state ment of the subject of bank reserves since luncheon, did you? Mr. V a n d e r l ip . I believe I discussed that before luncheon; but I would have a uniform reserve requirement for national banks. That reserve, of course, would have to be kept either as a deposit balance or as cash in the vaults; rather, it would have to be kept as both, and I would permit a national bank to keep any part of the reserve which it saw fit with the Federal reserve bank, but would compel it to keep some minimum amount. Senator H it c h c o c k . Do you think that a bank which itself acts as a reserve agent for country banks should keep a larger reserve than the bank which does not? Mr. V a n d e r l ip . I k n o w i t sh o u ld . Senator H it c h c o c k . What would you fix the reserve to be? Mr. V a n d e r l ip . I think probably 12 per cent would be sufficient, if you increased the reserve to be held by the central reserve bank. If you left that reserve at 33^ per cent and dropped the reserve of all national banks to 12 per cent, there would be too much capacity for expansion. I would make the Federal reserve bank keep a minimum of 50 per cent reserve. Senator N e l s o n . For notes and deposits? Mr. V a n d e r l ip . For notes and deposits both. B A N K IN G AND CURRENCY. 2943 Senator O ’G o r m a n . Mr. Vanderlip, why do you propose that the central reserve banks should have 12 agencies? How do you fix on the number as 12? Mr. V a n d e r l i p . I only fixed on it because presumably a great deal of thought has been given to the subject, and 12 was fixed on by the measure before you, and that seems to me about right. Senator O ’G o r m a n . Would you be prepared to recommend that the number of agencies be left to the discretion of the Federal reserve board ? Mr. V a n d e r l ip . I would. I should say it would be wiser to fix the exact number in the first instance in the bill and leave it, after one or two or three years, to the discretion of the board to increase or de crease that number. Senator O ’G o r m a n . Mr. Vanderlip, is there any substantial differ ence between the plan which you suggest and the plan described in the pending bill, excepting that you have revived a method of creat ing a banking system without requiring the qualifying banks to fur nish the capital ? Mr. V a n d e r l ip . I believe there are most fundamental differences, and one that is of more importance than any other is the fact that you have made the bank note the obligation of the bank and not un necessarily and dangerously added the obligation of the Govern ment. Senator O ’G o r m a n . Even under tiie system proposed in the pend ing bill, that is still an open question. Mr. V a n d e r l ip . Of course, I can only talk to what the pending bill is. Senator O ’G o r m a n . Yes. S e n a to r H it c h c o c k . Y ou s a y t h a t is th e o b lig a tio n o f th e b a n k ? Mr. V a n d e r l ip . Yes, sir. Senator H it c h c o c k . Can you conceive of the possibility that a bank officered entirely by United States officials appointed by the President would default on its obligations and those obligations not be assumed by the National Government? Would not the National Government be morally responsible for them? Mr. V a n d e r l ip . The National Government might ultimately as sume those obligations. I am not altogether sure. I do not think the National Government has thus far shown to a certainty that it is going to discharge its obligations against the 2 per cent’ bonds, and the public does not think so; if it did, the bonds would not be selling below par. Senator R eed . Mr. Vanderlip, say the Government sold a 2 per cent bond to A B ; it agreed to pay him 2 per cent interest, and it has done so. It agreed that it would pay that bond at a given date, and that date of maturity has not yet arrived. Senator S iia f r o t h . It will be 1930. Senator R eed . H ow can you justly say the Government has de faulted in its obligations? Mr. V a n d e r l ip . I do not say the Government has defaulted in its obligations, but I do sav that it has not. as yet, indicated to a cer tainty that it is going fully to fulfill its obligation. Senator R e e d . What is its obligation? 2944 B A N K I N G AND CUBBENCY . Mr. V a n d e r l ip . Its obligation, presumably, is to leave a free field for circulating notes to the national banks who buy these very low interest rate bonds for the purpose of taking out circulating notes. You now propose to fill that field otherwise. S e n a to r R e e d . Y ou a re s p e a k in g a b o u t th is b ill, t h a t w e m ig h t in t h i s b ill d o s o m e t h in g ------- Mr. V a n d e r l ip (interposing). Oh, certainly. It is the prospect as to whether you w ill or will not do the right thing in this bill that has sent the bonds below par. Senator R e e d . That is a very different thing from saying the Gov ernment has defaulted. What you really mean to say is that some body has imagined that the Government may do something that will impair a utility that has been heretofore attached to these bonds, and that that gentleman, in anticipation of a general fall which may never come, has been around peddling his bonds for less than their face. Mr. V a n d e r l ip . I would also say that nobody has imagined you would do something that would keep them at par and is therefore a buyer at par. Senator R e e d . Of course, it is said that bankers are the most un imaginative people in the world. [Laughter.] And I suppose that is a good thing. Mr. Vanderlip, I am interested in one question here that I wish you would go into, even at the risk of repetition. It is proposed to establish, under this plan which you suggest, a Govern ment bank. It is organized under a law to be enacted. It is to be officered, from president to janitor, by men appointed by the Presi dent of the United States. Its very activity and power spring from the Federal Government. It is to become the fiscal agent of the United States Government, and into its vaults every penny of money collected by the Government is to go. Now, that institution, created in that way, is about to issue letters of credit, if you please, and put them out to the people of the country as money. What reason is there that it should not make them good? M r. V a n d e r l i p . N o r e a so n u n d e r h e a v e n , a n d y o u m u s t b e su r e t h a t t h e y w ill m a k e it g o o d a n d n o t d e p e n d o n so m e o u ts id e a g e n c y to d o it. Senator R e e d . Now, if the people must make it good, what is the difficulty about saying on the face of the note that the United States Government will make that note good? Mr. V a n d e r l i p . Because it is no function of the Government at all to create a piece of fiat money and lend it to a banking institution. And if I can read history, there never has been a case where a Gov ernment has started in to create fiat money in that way that it has not, after starting on a sound principle, edged along toward an un sound principle and eventually found itself with its obligation below par and discredited. Senator R e e d . I think we differ about terms. I want to ask you what you mean by fiat money. Mr. V a n d e r l i p . I mean an obligation to pay on demand without having deposited in full the thing that you have agreed to pay. Senator R e e d . Very well. I am not assuming now that this bank will issue a single note unless it has back of that note gold coin or gold bars or good commercial paper guaranteed by the member banks B A N K IN G AND CURRENCY. 2 945 and all the safeguards thrown around this currency that can be thrown around it. Now, you do not call that fiat money, do you? Mr. V a n d e r l ip . Absolutely fiat. That only speaks for the" credit of the borrower. The Government loans this note to the bank. The Government has no reserve back of it; it merely has looked well to the credit of the borrower. Senator R eed . Very well. You say that it fia t money? Mr. V a n d e r l ip . Absolutely. Senator R eed . N o w , the bank, under proper management, may want to issue a billion dollars of that fiat money, secured in that way. If the bank makes a bad disposition of it, disposes of it without proper collateral, of course the bank will go down. But it is pro posed to make the conditions so that the bad disposition is impos sible— Mr. V a n d e r l ip (interposing). Then why a d d to a perfect note? Senator R eed . I ask you the corresponding question. If a failure is impossible, what difficulty is there about writing your name upon it? Mr. V a n d e r l ip . There is no demand on the part of anybody who will take that paper to have the name of the Government written on it. If there is any danger at all then the danger is a great one to the guarantor, and there is no demand for the guaranty; there is no necessity for it; you have created a good note. It will float on the characteristics you have given it, and you should not involve the credit of the Government by adding something that no one calls for simply because you feel that the Government should control the issue. Under the plan proposed the Government will control the issue, but the obligation will extend only to the assets of the bank. Senator R eed . N ow , I propose to sell to you the promissory note of A B, which I decline to indorse except without recourse, and yet I say to you, “ There is no possibility of this note ever being de faulted.” Mr. Vanderlip, is the only reason back of this argument the possible fact that the Federal Government may incur a loss by guaranteeing an absolutely sound currency? Mr. V a n d e r l ip . N o, sir ; the reason is the Federal Government has started upon a course of issuing these demand promises to pay and loaning them to a bank. Started on that course, history tells us that the next step will be the creation of more money of the same kind for another purpose not so sound. Senator R eed . Y ou are afraid, then, not so much of this system which you propose to inaugurate, with the modification I am now discussing, as you are that in the future the Government of the United States might issue other and different money upon other and different kinds of security? Mr. V a n d e r l ip . That it may issue exactly the sa m e kind of money upon a less security. Senator R eed . In other words, the bank board o f seven men which you propose to create might, simply because the Government created the note, proceed to let those notes pass out with less security than they would i f the Government had not created the note? Mr. V a n d e r l ip . That is not the point; not that that bank board will not care for the credit of that bank, but that there will come a demand, if you are willing to create this fiat money and lend it to this 2946 B A N K IN G AND CURRENCY. central bank, that you next create some more of it and lend it to the shippers of wheat and the growers of cotton, to whom you will----Senator R eed. I catch your point. You are afraid that the mere fact that the Government guarantees this money would lead to the demand that the Government guarantee other and different money. That would be a very different proposition. Mr. V anderlip. History is full of just such instances. Senator R eed. I know; but, Mr. Vanderlip, history is full of every kind of wildcat banking. History is full of every kind of failure in government. The history of the world shows that there never was a Government set up that did not end in a monarchy, and yet our fathers had the temerity to build a Republic. I want to know if there is anything economically sound except that, because I am very much interested in it. Mr. V anderlip. N o , sir. As I have said repeatedly, the plan in this bill will work just as well if the note be the obligation of the Government as it would if it were properly and soundly the obliga tion only of the bank, up to a point where the credit of the bank or the credit of the Government becomes involved, or, of course, up to a point where the Government will issue some more or similar notes for a dissimilar purpose. Senator R eed. Yes. Now, you propose, under your plan, to make these notes a full legal tender? Mr. V a n d e r l ip . N o , sir; I make them the same quality as the present national-bank notes. They are receivable for public dues, but are not a full legal tender. S e n a to r R eed. R e c e iv a b le fo r p u b lic d u es? Mr. V anderlip. Yes, sir. Senator R eed. That is, the Government must take them ? Mr. V anderlip. The Government must take them. Senator R eed. But private individuals not? Mr. V anderlip. Yes, sir. Senator R eed. N ow, will you tell me why a private individual should not take them? Mr. V anderlip. Because if a private individual has made a con tract to receive gold he should not be compelled to receive payment in somebody’s promise to pay gold. Now, in the case of the Govern ment, the Government would deposit its receipts with the bank daily in any event. It may just as well receive them in the bank’s notes as in gold; whichever way it receives them, it would turn them that day into a deposit balance with the bank. By depositing the note the bank redeems the note. Senator S hafroth. Why do you say, Mr. Vanderlip, that the con tract is made for payment in gold, when we know when we can take the Gmted States notes there and compel the party to take those in liquidation of the claim? Mr. V a n d er lip . I say that it is payable in gold. It is true you can compel the other party to accept something else, because you have made a law which says that something which is not money is legal tender. Because of that law you can compel a man to receive a thing that is not money. Now, that is wrong. However, it is the law. Senator S hafroth. I) o you not recognize that at the same time we have not a sufficient quantity of legal-tender money to act as re serves for national banks? B A N K IN G AND CURRENCY. 2947 Mr. V anderlip. N o , sir. Senator S hafroth. D o not a stream of redemptions go to the Treasury every year to the extent of $600,000,000? Mr. V anderlip. I am happy to say they do; that is the proper function of the bank note. It should go to redemption. Senator S hafroth. Then you think that is an advantage instead of a disadvantage? Mr. V anderlip. Unquestionably; that is perfectly fundamental. A bank note that did not go to redemption would cease to perform its. proper function. Senator S hafroth. Did they go to redemption as much when there were fewer bank notes and proportionately a larger amount of legal-tender money? Mr. V anderlip. I think the proportion of redemptions was about the same "when the amount was very much smaller. Of course, it is true, and should be true, that if there is a greater demand for cur rency the bank note will not go to redemption so rapidly. That is what should happen and that is what happens in this case. That is to say, if there were a greater demand even for reserve money, the banks would collect reserve money from the public and it would be replaced by the bank note. Senator S hafroth. And is not the member bank sending that money down here to Washington to get legal-tender money for it? Mr. V anderlip. It is. Senator S hafroth. And you think if there were more legal-tender money that would still continue? Would not the bank have actu ally more of the legal-tender money in circulation, and therefore would not have to send to Washington for it? Mr. V anderlip. No; it would go on just the same. If you had more legal-tender money, if the bank reserves were redundant, the bank loans would be expanded just as certainly as any effect will fol low a cause; and as the note came into the bank, not being available for reserve, it would then flow down here to be redeemed in legal tender. We always want more legal tender, because we will always expand our loans as long as we have legal tender enough to support the expansion. Senator S hafroth. Mr. Vanderlip, if the State banks and trust companies come into this system, they will make a very large demand for more legal-tender money, will they not, to act as reserve? Mr. V anderlip. That would depend upon whether the total re serve requirement were larger in this measure than is now required from State banks. That would not be the case in New York; it would be the reverse. Senator S hafroth. But if the 18,000 banks that now have a right to keep bank notes for their reserves were to come into this scheme with the same requirement as national banks, of compelling reserves, would not that necessitate a great quantity of legal-tender money toact as reserve? Mr. V anderlip. Y ou mean to take the place of the bank notes that they now hold in their reserves? Senator S hafroth. Yes. Mr. V anderlip. I was told by the chairman of the committee at the last hearing that the total amount of such notes held by State 2948 B A N K IN G AND C UBE E NCY. banks and in National banks was around $80,000,000, as I recollect. It is not a large amount. Senator S hafroth. Yes; but don’t you see the State banks are not required to keep as large reserves, and if that requirement is made larger there will be a large demand for legal-tender money to act as reserves. Mr. V a n d e r l ip . But I say the State banks with which I am fa miliar are required to keep a larger reserve. Senator O ’G orman. O f course, there are some States that do not require any reserve. Mr. V anderlip. Exactly; but even if there were no reserve re quirement you would probably find they would keep a reserve about as large as this provides. Senator R eed. Mr. Vanderlip, I confess that I still am unable to comprehend the real utility of a scheme which results in $600,000,000 of the $700,000,000 of national-bank notes being sent to the Treasury even*- year, redeemed at the Treasury, and immediately reissued. What useful purpose does that serve? That may seem a kindergarten question, but I want to get at it. Mr. V anderlip. A bank note ought to be the currency in the pock ets of the people, of course, ought it not? Senator R eed. The more we have of small currency in the pockets of the people, I presume, the better. Mr. V a n d e r l ip . Not at all. You only want an amount in the pock ets of the people that will facilitate their ordinary business. And, as I said, with much emphasis at my former hearing, that is a matter over which you have as little influence as any matter connected with the banking business. What we carry in our pockets is a fixed amount. Senator R eed. Very well. Mr. V anderlip. N ow, that amount will fluctuate-----Senator R eed (interposing). Why should it be a bank note rather than any other note? Mr. V anderlip. Because you want the reserve money to be in the bank to form a basis for credit. You want circulating in the hands of the people a note that will conform in volume absolutely to the needs of the people and will be wiped out of existence as soon as it is not in use' in their pockets. As soon as it comes into the bank it should disappear. And you can not pay that note out again, as you say, unless there is a demand for currency. Frequently there is a little demand for currency and we are unable to get out our own cir culation at all. That is the case through several months of the year in some years. You can not always get out circulation. You have an inflow of these notes for redemption that is much larger than the outgo of currency that is demanded, and you redeem the surplus----Senator R eed (interposing). Let us say that your bank has—how many million dollars do you have out in bank notes? Mr. V a n d e r l ip . About $3,500,000. Senator R eed. Very well. Those bank notes of yours are gathered up by other banks and sent into the Treasury for redemption? Mr. V anderlip. Yes. Senator R eed. And pretty soon all your $3,500,000 is wiped out and there has been sent out in lieu of it greenbacks, silver certificates, «tc. BANKING AND CURRENCY. 2949 Mr. V anderlip. N o . This i s the point. There probably has been nothing sent out in lieu of it. There has been less demand for cir culation in the pockets of the people. Senator R eed . Very well; it is retired? Mr. V anderlip. Yes. Senator R eed. And you have not any money out? Mr. V anderlip. Yes. Senator R eed. H ow does it get out again ? Mr. V anderlip. Then, when the people want more money, when we have crops moving, when we have to hire the labor for crop mov ing, and have that larger use for money, it comes out. Senator R eed. That is what I want to get at. How does it come out? Mr. V anderlip. Because the banker in your State that is in a com munity where the farmer is going to use more money finds his re serves being drawn out, and he sends to St. Louis for currency, and St. Louis in turn sends to New York, and unless they ask for reserve money we will send them a bank note. The bank note gets right out into the hands of the day laborer----Senator R e e d (interposing). And you send t o the Government, saying you want some more money ? Mr. V a n d e r l i p . Yes, sir. S e n a t o r R e e d . Y o u s a y , i n e f fe c t , “ Y o u h a v e r e t i r e d all o u r bank c u r r e n c y , a n d n o w w e w a n t i t a g a in ” ? Mr. V anderlip. As soon as it is retired we get it again and hold it in our own vaults. We have to pay no tax on it as long as it is in our own vaults. When a demand for currency comes we ship it out, unless it is a demand for reserve money. Senator R e e d . N o w , you get $3,500,000 from the Treasury to-day. You take it down and put it in your bank vaults and hold it there, and you have to pay a tax upon it----Mr. V a n d e r l i p (interposing). No, sir; w e do not, until w e e m i t i t . Senator R e e d . Unless you emit it ? Mr. V a n d e r l i p . Yes, sir. Senator R eed. It goes around and circulates and gets into the banks in Chicago. The banks in Chicago send it down for redemp tion, and now it is retired. Immediately it is sent back----Mr. V a n d e r l i p . Y es, sir. Senator R e e d . And you either pay it out at once or lock it up u n t i l you need it ? Mr. V a n d e r l i p . We lock it up if our receipts of national-bank notes are larger than the shipments of money that need not be reserve money. Now, we are shipping money, we will say, every day, some of which must be reserve money, because we are asked to send reserve money, and some of which need not be reserve money. We are re ceiving national-bank notes every day. If the amount of our ship ments is less than the amount of our receipts there is no point in getting out our own notes for these shipments. We might just as well pay out in these other notes and send the surplus down here for reaemption. Senator R e e d . Then, as I understand you, the whole question amounts to this: The method of redemption, plus the tax, is a means of limiting the amount of this currency which may be out. If you S. Doc. 232, 63-1—vol 3---- 65 2950 B A N K IN G AND CURRENCY . had no tax you would draw7your $3,500,000, you would put it in your vaults, and you would lend it whenever you pleased. It would go out into circulation, other banks would keep it in their vaults, lending it when there was a demand made. But, in view of the fact that there is a place of redemption and that by sending it in a bank can thereby escape this tax, there is an incentive to send it in and have it canceled? Mr. V a n d e r l ip . The great incentive is another one, howrever. The bank that sends it in does not thereby escape any tax. The motive for sending it in is to get reserve money. The bank has more currency than it can pay out. You can not pay out currency unless somebody wants it. It is not because you have a surplus of currency you are going to increase your loans. A loan is usually collected in the form of a deposit balance; it is seldom collected in currency. Senator R eed. But you must have a legal-tender reserve, so they send it in and exchange it for a legal-tender reserve? Mr. V anderlip. Yes, sir; that is the motive back of the redemption of the national-bank note. Senator R eed. In other words, the Government with its funds has to continually furnish the reserves back of the national-bank money ? Mr. V anderlip. The Government is merely an agent. The national banks must first put up the money that the Government uses to redeem these notes. It is not Government funds at all that are going to be used to redeem the notes. Senator R eed. It is the money we got for the bonds. Mr. V anderlip. Not at all; it is the money that is put up in the 5 per cent redemption fund. It always has to be kept there, and always does redeem all that comes in. We have to make that good daily; just as often as there are charges against it we are notified that our redemption fund is deficient and we must build it up. Our redemption fund is never exhausted. Senator R eed. If those bank notes were a full legal tender and could be used for reserves, there would not be any necessity for sending them in at all? M r. V anderlip. N o ; n o r a n y lim it to th e e x p a n s iv e p o s s ib ilit ie s they w o u l d b e m a d e a b a s is f o r . Senator R eed. Except that the bank would have to buy Govern ment bonds. Mr. V anderlip. That would be the only limit. Senator P omerene. Mr. Vanderlip, did you discuss the question of the qualifications which you would require of State banks and trust companies in order to enter into this plan of yours? Mr. V anderlip. In a general way. I 'would make the qualifications the same as for national banks, with similar limitations as to capital, as to reserves, and as to examinations. I would permit the Fed eral reserve board to make such other regulations as they found in practice necessary to make. I 'would always insist that that board examine a bank before it was admitted as a depositor, if it were a State bank. Senator O’G orman. Then, in a word, you would permit the State banks to come into the system under such rules and regulations as the reserve board would establish? Mr. V anderlip. I would; such a reserve board as I have suggested here. I would always emphasize the character of that board. B A N K IN G AND CUKREN CY. 2951 Senator O’Gorman. T wo of those essential requirements, however, would be that the State bank would comply with the national-bank requirements respecting reserve and the State bank would also, as you stated, deposit in this Federal bank? Mr. V anderlip. Oh, of course. Senator O’G orman. What is your suggestion as to the amount or extent of the deposit that would have to be made by a State bank? Would you leave that with the reserve board? Mr. V a n d e r l ip . It s h o u ld m a k e e x a c tly th e sa m e d e p o s it as a n a t io n a l b a n k w o u ld m a k e . It m u s t h a v e th e sa m e r e s e rv e r e q u ir e m e n ts. Senator N elson. And the same capital? Mr. V anderlip. The same capital as a national bank in a similar locality. Senator O’G orman. What would be the requirement of a national bank with respect to deposits? I did not hear you state that. Mr. V a n d e r l ip . That the national bank would keep a reserve of 12 per cent, of which at least 5 per cent must be kept on deposit with the Federal reserve bank. Senator O’G orman. When you spoke, then, of deposits by national banks you had reference to the portion that would be deposited? Mr. V anderlip. Nothing more at all. Senator F eed . There has been a great deal said here about the re luctance of banks to rediscount, and the figures compiled by the comptroller show that there is an astonishingly small amount of dis counts recorded. What do you know about the custom of indirectly discounting paper? Mr. V a n d e r l ip . There is such a custom. Senator R e e d . T o what extent do you think it is practiced? Mr. V a n d e r l ip . I do not know. It is discouraged by leading banks. I believe the highest amount of direct rediscounts that the comptroller’s reports have shown is $109,000,000, which was reported last summer. Senator O’G orman. Outstanding at one time? Mr. V anderlip. Outstanding at one time. As a guess, I should think there might be $30,000,000 of rediscounts that do not show. Senator N elson. What is the form in which those indirect dis counts appear? Mr. V anderlip. The form varies. A bank may induce a lending bank to buy certain commercial paper which it holds and give it a letter directing it to charge the borrowing bank’s balance when that paper matures. Sometimes the bank will sell to its own directors commercial paper, and its directors will unite in making a loan, the bank showing no rediscounts. Those, I think, are the two most important methods. Senator O’G orman. Why is that resorted to? Mr. V anderlip. S o as not to show a rediscount on the published statement. Senator R eed. Mr. Vanderlip, I was told of one bank that carries $9,000,000 of bank deposits, the president of wThich stated they actu ally had loaned $4,500,000 to the banks by what he called indirect discounts. Mr. V anderlip. That bank was encouraging that sort of business. That is not a fair average. 2952 B A N K I N G AND CURRENCY. (•At this point, to enable members of the committee to vote in the Senate, a recess was taken, at the expiration of which the hearing was resumed.) Senator O’Gorman. Mr. Vanderlip, have you any further observa tions to offer? Mr. V anderlip. I have gone through the details of the plan. I have no specific observations to offer, except possibly to try further to emphasize the essential differences between the plan I have sug gested, or outlined, and the plan that is before you, as it has passed the House. I believe those differences are absolutely fundamental and make the differences between a sound and unsound piece of legislation. I should say there are three differences of vital impor tance : The difference that makes the note the obligation of a bank and not the obligation of the Government I regard as of the greatest importance. I can not overemphasize my feeling in that respect. The difference which permits of a single bank and of a single dis count rate alike to all banks I regard as a difference of great impor tance, and one which gives much greater equity to this measure than to the other. It would be impossible to adopt this theory with 12 or any other number of various banks—this theory of a uniform dis count rate. It can only be adopted by a central bank. Senator H itchcock. Will you permit me to interrupt you for a question ? I intended to ask you some questions before we took this recess. Senator B ristow. He was outlining the differences between this suggested plan, Senator, and the present bill. Suppose he completes that first. Senator H itchcock. Yes. Mr. V anderlip. This measure will not be compulsory upon the banks unless you compel them to underwrite the stock, which you may do. But, in that event, the compulsion would be not nearly so ob noxious, because the bank could sell the stock if it so desired. I think it is superior in that it would distribute the stock to a large number of people. Senator O’G orman. Right there, if you will pardon me. Having in mind the dividend would probably be exempt from all taxation, do you care to modify the view you expressed this morning that it ought to be 5 | or 6 per cent? Mr. V anderlip. I am inclined to think if the dividend is exempt from all tax and there is no double liability on the stock, you could float it at 5 per cent. S e n a t o r H itchcock . N o w , y o u s p e a k o f t h e n a t i o n a l b a n k s m e m b e r b a n k s u n d e r w r i t i n g t h i s s t o c k s u b s c r ip t io n . Mr. V anderlip. Yes. Senator H i t c h c o c k . Y ou would give them a monopoly o f or the initial purchase of this stock? Mr. V anderlip. Exactly the reverse. I would give the public the monopoly, permitting the banks only to buy after the public had refused to take it. Senator H itchcock . Would you perm it the public to take it at par? Mr. V anderlip. Certainly. B A N K IN G AND CURRENCY. 2953 Senator W eeks. H ow would you allot it? Mr. V a n d e r l i p . I would allot it first to the smallest subscribers, just as the Spanish War bonds weie allotted, so as to get as wide a distribution as possible. „ Senator W eeks. At par? I understood you to say you would sell to the highest bidder. . Mr. V a n d e r l i p . That would be another view to take. In that eventj of course, the stock would be allotted to the highest bidders, and you could not allot it to the smallest subscriber. Senator N e l s o n . The fairest would be to make the dividend so fair and low that you would sell it at par. Mr. V a n d e r l i p . I think that would be the fairer way, to sell it at par and then to allot to the smallest subscriber. Senator H itchcock. Y ou would not exempt the dividend from this stock as far as the income taxes are concerned—the Federal income tax? Senator O’G orman. If you say “ all taxes ” that would embrace it. Mr. V a n d e r l i p . I would, if you deemed that feasible. That is to say, if you want to float this stock at the lowest possible dividend basis, then you will exempt it from all taxes. Any taxation you add would in effect make it necessary to pay a higher dividend rate. Whether the small amount of the income tax would make it neces sary to pay a dividend above 5 per cent is a question. Senator H itchcock. Would not that be a direct inducement for wealthy people who would have a very high rate of income tax to pay, to invest in this stock and thus concentrate its ownership ? And that is exactly what we do not want to do. Senator O’G orman. Y ou could place a limitation as to the num ber of shares any individual would be permitted to take. Mr. V a n d e r l i p . That would be possible. There would be no point in doing that, as the stock has no voting rights in any way. Senator H itchcock. But you said it was very desirable to have this widely scattered among the people. Mr. V anderlip. I think so. Senator H itchcock. In rather small allotments, as those are people who have difficulty in making investments; but if you exempt it from the income tax it would not affect many of them, because those people have the minimum of income. But it would be an inducement for the very wealthy people to buy this stock, because they might escape a 10 or a 5 per cent income tax, so, I think, it should not be exempted from the income tax. Mr. V anderlip. There is no principle involved in exempting it from any tax. The only point in exempting it from a tax is to enable you to float it at the lowest dividend rate. Senator H itchcock. Have you any doubt that a 5 per cent Govern ment stock of that sort would sell at par without any exemptions ? Mr. V anderlip. If you are perfectly sure of it, and will provide that the Government will take any unsold part, all right. Now, the last and one of the very important points of difference I want to emphasize is the character of this board of management. I think I said at the last hearing, in answer to a question of Senator Pomerene, that I was not afraid of Government management; I was greatly afraid of inexperienced or partisan management. I believe 2954 B A N K I N G AND CU B E E N C Y . this insures a management that is continuous, experienced, and that will be free from partisan influence, and will be of a character that the banks can fairly trust. The long term, without any ex officio members, is of vital significance. Senator H itchcock. What limitation would you put on the power of that board as to the rate it would charge for the use of redis counts ? Mr. V a n d e r l i p . N o limitation whatever. Senator H itchcock. Y ou would allow them to give this for noth ing—to give rediscounts for nothing ? Mr. V anderlip. It is inconceivable that a board that is sane would do that. They are governed by the reserve requirement. You do not need a law further than that. If they must have a minimum 50 per cent gold reserve, they would very quickly reach a point where they would have to raise the rate. Senator H itchcock. They might have a reserve of 60 per cent gold and yet refuse to discount, too. Mr. V anderlip. They should never refuse to discount sound paper. They should make the rate as high as the necessities of their position dictate. They should never refuse to discount sound paper. Senator H itchcock. Y ou place this absolutely in the hands of this board—the power to say what the volume of currency should be— subject to the demands of the business world? Mr. V anderlip. Ah; subject to the demands of the business world. The board would have no influence whatever, any more than your enactment would have an influence, upon what the volume of circula tion will be. Senator H itchcock. If it made a discount rate of one-half of 1 per cent, that would certainly greatly expand currency, would it not? M r . V anderlip . N o , s i r ; i t w o u l d e x p a n d t h e c r e d i t s o f t h e b a n k , bu t n o t th e cu rren cy. Senator H itchcock. That additional credit of the bank after the reserve surplus of the deposits is exhausted would mean an increase in currency ? Mr. V anderlip. H ow can a bank get out any currency that is not needed for use in the hands of the people? Let us take a definite illustration. Suppose the National City Bank is a member and decides to rediscount $10,000,000 of paper, can it get out any more cur rency as a result of that? It will have a credit; it will have a balance in the central reserve bank, but it can not make you carry any more currency in your pocket, nor can it make any customer of the bank take any currency because it happens to have a credit somewhere. Senator H itchcock. Let me put a case this way: Suppose a bank out West has reached its legal capacity, and borrowers come to it for additional loans, and it finds that by applying to a branch of the United States bank it can discount paper on a very low basis. It will make the loans, because the discount rate is so low as to enable it to make an adequate profit. Mr. V anderlip. The discount rate of the Federal reserve bank will never be lower than the current rate that the depositing bank is loaning to its customers, presumably. It would be a very extra ordinary condition under which you Avould find the discount rate lower than the current rate. The function of this bank is to be a place of last resort to go to after banks have found, because of B A N K I N G AND CU BE E N CY . 2 955 changed conditions, they have taken too much commercial paper. It offers a means to turn commercial paper into a liquid reserve. Senator H itchcock. Take your bank. Suppose there is a strong demand for money, and you have been loaning freely, obtaining 4-| and perhaps 5 per cent, and you reach a point when you want to discount some paper. Suppose they refused to discount for you at less than 6 per cent. What would you do ? Mr. V a n d e r l ip . We will discount at 6 if we find we are running below our reserve. We would not do it in order to loan at 5^. Senator H itchcock. Suppose they made a discount rate of 3 per cent, what would you do? Mr. V anderlip. If they made a discount rate of 3 per cent it would be certain we could not loan at 5 | per cent. That situation can not exist, because our neighbors would also have a rediscount rate of 3 per cent. Senator H itchcock. If you could discount your notes at 3 per cent you certainly can accept those loans that come over your counter ? Mr. V anderlip. At 5^ per cent: yes. But water would run up hill as quickly as such a situation would exist. It can not exist. Senator H itchcock. Has not that been the history in Germany? Whenever abroad there has been a strong period of exploitation of business and industry Germany has been developing and her foreign trade has been growing; that the German bank has rediscounted heavily at the Reichsbank, and the Reichsbank has finally reached a period of expansion? Mr. V a n d e r l i p . Has reached a period, undoubtedly, where it has a large amount of rediscounts, but has always sustained itself by advancing the discount rate until we have found the German banks borrowing in the New York market at times at 9 per cent. We have loaned to first-class German banks at 9 per cent. Senator O ’G o r m a n . D o you expect, then, that this system of re discount will be used by a member bank for the purpose of making new loans, or will it be devoted entirely to procuring the money to keep up the required reserve? Mr. V anderlip. It will be its function to keep up the required reserve. Senator O ’G o r m a n . N o w , with that limited field of activity on the part of the Federal bank, will it be able to make this money that will be required for its maintenance and pay 5 per cent, if that be the dividend provided for, to the stockholders? Mr. V anderlip. It will be able to employ $350,000,000 at 3 per cent, less the H per cent tax, and to loan $350,000,000 circulating notes, as we have provided that amount of one-year Treasury notes. It will be able to go into the open discount market and buy paper indorsed by any member bank at whatever rate is ruling. It will be able to go into the foreign discount markets and buy prime bankers’ bills at whatever rate is ruling there. Senator H i t c h c o c k . Would you explain how the bank can issue $350,000,000 of notes? Perhaps you will let me ask some questions to develop it. You say a bank with 100 millions of capital? Mr. V a n d e r l ip . Yes. Senator H itchcock. Suppose that is all put in in gold. Mr. V a n d e r l ip . Yes. 2956 B A N K I N G AND CUBBENCY . Senator H itchcock. Y ou then propose that it shall take, we will say, over $300,000,000 of 2 per cent bonds; and you say issue $300,000,000 of its notes? Mr. V a n d e r l i p . It will issue them as rapidly as the notes that the bonds are sustaining are retired; that is, as rapidly as an equivalent amount of national-bank notes are retired. Senator H itchcock. N ow, then, it must keep a 50 per cent reserve against those notes. How is it going to get that 50 per cent reserve ? Mr. V anderlip. It will have 100 millions of capital, presumably $150,000,000 of Government deposits. I have not the figures in mind, but let us say four or five hundred millions of deposits of reserve banks. Senator H itchcock. It must keep, though, a 50 per cent reserve against the Government deposits and also against the other deposits. Mr. V anderlip. Yes. Senator H itchcock. N ow, then, what has it to loan in that case, if its capital is more than absorbed by the reserve required against the notes ? The notes are $300,000,000, and there will be $150,000,000 reserve there, at the outset. If the Government deposits $150,000,000, that would require another 100 million of reserve. Mr. V anderlip. N o ; seventy-five. Senator H itchcock. $75,000,000 in reserve; and if the banks de posit, say, $300,000,000, that would require another $150,000,000 in gold reserve. Senator O ’G o r m a n . Did you not say the banks might deposit a b o u t $400,000,000? Mr. V anderlip. I should think they would deposit about $400,000,000. The statement of the bank would be about this: It would have capital, $100,000,000; Government deposits, $150,000,000; and bank deposits, let us say, of $^00,000,000. Senator O’G orman. Making a total of $650,000,000. Mr. V anderlip. It would have deposits of $550,000,000, against which it would have to keep $275,000,000 of gold. It would have $375,000,000 of gold free. Senator H itchcock. H ow does it get that $375,000,000? Mr. V anderlip. Capital, $100,000,000, Government deposits, $150,000,000, and bank deposits, $400,000,000. Senator H itchcock. H ow can all the banks—all the banks could not pay in that much gold. How could you require the banks to make their deposits in gold? Mr. V anderlip. They would pay in that much gold—gold or law ful money. They might have to rediscount some. I am presuming, in setting up this statement of the bank, that on the start they all pay it in and rediscount nothing. Senator H itchcock. Y ou have a need for $275,000,000 in gold reserves right off. Mr. V anderlip. Yes, sir. Senator H itchcock. Against your notes. Mr. V anderlip. Y ou have $375,000,000 of free gold or lawful money. Senator H itchcock. Y ou have $375,000,000 cash? Mr. V anderlip. Of cash. Senator R eed. Y ou can loan that cash to the banks and rediscount paper with it? B A N K I N G AND CURRENCY. 2957 Mr. V a n d e r l ip . Let us say you loan $100,000,000 to the banks; then you would have $275,000,000, and you would only need $175,000,000 as a gold reserve against this $350,000,000 of notes, and you will have $100,000,000 of free cash remaining. Senator H it c h c o c k . Y ou figure it will not be necessary to procure gold in any way except through the sale of capital stock----Mr. V a n d e r l ip (interposing). The deposit of the Government and the deposit of the banks. Senator H it c h c o c k . And that that would procure sufficient gold for the initial issue of $350,000,000 in notes? Mr. V a n d e r l ip . Yes. Senator O ’G o r m a n . Will interest be paid on Government deposits? Mr. V a n d e r l ip . Oh, no; not under any circumstances would in terest be paid. Now, Senator Hitchcock, if the bank did find itself short, it could sell some of these one-year exchequer notes either in the domestic market or abroad. They would be freed from segrega tion to secure the note issue as rapidly as the Federal reserve bank discounted for other banks and got rediscounts in hand to put under the note issue. Senator O ’G o r m a n . Does any other Senator desire to a s k any ques tions ? Senator B r ist o w . I have been very much interested in this, Mr. Vanderlip. I have been in favor of a Government bank, such as you have described, controlled by the Government, the stock owned by the people and not by the banks, which was entirely independent of the banks and in shape so as to serve the banks when they needed it, and that this service will be extended under conditions which the law prescribes, and any bank that complied with those provisions as outlined in the law should have the right to the aid which it needed in time of stress as a matter of right. I have been in favor of that because I believe it is necessary in order to maintain the democratic banking system which we have, so as to render all of the banks in dependent of any monopolization of credit. I do not think that there is that independence now that ought to have been. I do not agree with the opinion which you advanced in your last hearing, that any body who had good security could get credit at the banks. I think that depends upon the interest of the bank, its depositors, and the directors, and if some one should come and want credit that came in conflict with the interests of some of the patrons of that bank that were powerful and had enough influence with it, it would be denied, not because it was not good but because it interfered with some other business. Now, naturally I am interested in the view—I know you are not for a Government bank, managed by the Government, for the same reasons I have indicated, which are reasons that prompted me. Mr. V a n d e r l ip . I believe those reasons do not exist, and I challenge you to present a single case where there has been such a discrimina tion in any important way in New York. I never have heard of it. It may exist, but I do not believe it does exist, and I know that it does not exist as a general thing. But that is neither here nor there. Senator B r ist o w . We had one gentleman before the committee yesterday who told us his story, which I believe to be substantially true in some particulars. Senator O ’G o r m a n . Did you credit the whole of it, after Senator Weeks’s statement ? 2958 B A N K I N G AND CURRENCY. Senator B r is t o w . N o. Senator W e e k s . I am sorry that the Senator from Kansas believed it, because I denied it explicitly. Senator B r is t o w . The Senator from Massachusetts denied his statement as to one of the banks, but not as to the others. Senator W e e k s . If the Senator from Kansas will recall, I asked the witness if the corporation of which he was complaining had any de posit in any banks where his deposits were, and he replied in the negative in each case. Senator B r is t o w . I remember distinctly those questions, and I think they were very ingenious and plausible; but, nevertheless, I think the shoe machinery company is powerful enough to prevent a man from getting credit if it interferes with their business. Senator W e e k s . I think that i s likely, but I do not think it has ever been done. Senator N e l s o n . Would you limit the deposit to b a n k s ? Mr. V a n d e r l ip . Banks and the Government positively to be the only depositors. Senator N e l s o n . And would you limit the discounts to the banks? Mr. V a n d e r l ip . Unquestionabty. I would permit them to have no domestic transaction that did not bear the indorsement of a member bank. Senator N e l s o n . The deposits and discounts must all be carried on with banks and not individuals? Mr. V a n d e r l ip . Yes, sir. Senator P o m e r e n e . Would you p e r m it it to go out and buy securi ties of any kind ? Mr. V a n d e r l ip . N o securities except the bonds of the United States and its insular possessions; and, really, the bank ought to have no obligations of that sort except short time ones. I would be quite willing to prohibit the bank having any obligation of any kind, even of the Government, which ran over a year, except the first issue of 2 per cent bonds, which would at once be changed to exchequer notes. Senator O ’G o r m a n . Y ou have alluded to some great differences between the plan you suggest and the plan embodied in this bill, and I think the Senators recognize the difference between the two plans. With respect to one, I want to see if I understand you correctly, and that is, while under the plan proposed by the pending bill the banks will have a controlling interest in each one of the proposed 12 regional banks----Mr. V a n d e r l ip (interposing). They will elect six of the nine d i rectors. Senator O ’G o r m a n (continuing) . Under your system, which you recommend and suggest, the banking interests of the country will have no representation of any kind, from the top of the system in Washington down to the most humble position in any one of the agency banks. Mr. V a n d e r l ip . Absolutely none at all; no more than it has in the Treasury or in any other department of the Government. Senator O ’G o r m a n . Every official would get his authority either through the President or through some one appointed by the Presi dent of the United States? Mr. V a n d e r l ip . Yes, sir. B A N K I N G AND CURRENCY . 2959 S e n a t o r O ’G o r m a n . I s t h e r e a n y t h i n g e ls e t o b e a s k e d o f t h e w i t n ess? Senator B r is t o w . Yes; I have a number of questions I wanted to ask. Continuing the matter which we were discussing, Mr. Vanderlip. it of course would be unnecessary for you and I to proceed into an argument as to the control of credits by these great institutions of the country. I think Mr. Moffitt, in the financing of his railroad, was handicapped by the banks of New York who refused him the credit he was entitled to, because of the powerful interests he was antag onizing, and not because he was not promoting a railroad that was just as good a railroad as those who were fighting him. And, I think, in my own State, that the railroad enterprises have been killed not because they were not good, sound, and economical, but because they interfered with the interests of the Santa Fe Railroad, the Union Pacific, the Southern Pacific, and other lines that run up there. M r . V a n d e r l ip . D o y o u r e g a r d t h e b u i l d i n g o f a r a il r o a d p r o p e r f u n c t i o n f o r a c o m m e r c ia l b a n k ? as a Senator B r ist o w . Banks that would be a part of this system finance railroads and handle their bonds and sell them. That is done by the banks that would be part of this system or any system that- is created. But that is simply an illustration. But if those are the reasons which have prompted me, that is to preserve the democratic independence of our banldng system, which 1 think is the best system in the world, because it gives opportunity to men to go out into the banking business and make a success on their own initiative; and this is one of the fields of activity in our country that is not monopolized, except when you get into the larger matters of credit. And I want to preserve that democratic inde pendence. Now, I was interested, therefore, in the reasons that led you, holding views so radically different from mine, to finally come to the same conclusion I do. Mr. V a n d e r l ip . I would say that I never would have reached this conclusion, I believe, had it not been for the views you hold. I was profoundly influenced in my mind when I was before this committee the last time by what seemed to me a general opinion that tended toward this sort of a solution. I was given special impetus to study the matter by the opinions you expressed—not at the hearing, but afterwards—outlining almost exactly the plan that I have tried to explain—not in detail, but in a general form. It was the interest of yourself and of other members of this committee that has led me to put almost continuous study on this idea for nearly all of the time since I was last before this committee. Senator B r ist o w . D o you believe that such an institution as has been outlined here would preserve the independence of our country banks—the25,000banks that are now doing an independent business? Mr. V a n d e r l ip . I do. Senator B r ist o w . D o you not think it is a very desirable thing that it should ? Mr. V a n d e r l ip . Extremely so. Senator B r ist o w . Well, you say “ loan only banks.” Why not loan to individuals in order to establish the rate? Mr. V a n d e r l ip . And then, after a while, have the Government issuing notes to individuals. There you go. [Laughter.] 2960 B A N K I N G AND CUBRENCY . Senator N e l s o n . And would not that, Senator Bristow, compete with your little country banks? Senator R e e d . I suggest that the Senator from Kansas and Mr. Vanderlip have another private conference, so that we may derive still more benefit. [Laughter.] Senator B r is t o w . Well, now, tell me the danger. I w o u ld like to know the danger of this bank discounting paper in the open market? Mr. V a n d e r l i p . I can hardly conceive a greater danger to our whole Government than the creation of a Government organization which might loan directly to individuals. I can hardly conceive of there ever having been thought of such a machine for the control of politics or for the aggrandizement of a body of men than to put in their power such a great aggregation of capital as this and allow them to deal directly with individuals and to extend them credit. Senator O ’G o r m a n . D o you think that bank would be over whelmed with applications if that was done? [Laughter.] Mr. V a n d e r l i p . I am quite sure it would. And there would be no relation of credit and deposit balance between the borrower and the bank such as we are establishing by law here—between the de positing banks and the central bank. Here we are requiring that the reserves shall be kept within the vaults of the banks themselves and in the vault of the central reserve bank. That is the very sinew that the central reserve bank has to loan. It is inconceivable to my mind that there could be safely created such a machine as this that would be permitted to deal directly with individuals. Senator B r is t o w . You think, then, as I understand, that it would be very dangerous for a reserve bank, a bank created to serve that purpose, and thereby strengthen the independent banking system of the country—for it to go and loan that money to individuals; you think that would destroy the very purpose for which it was created? Mr. V a n d e r l i p . Yes, sir. Senator B r is t o w . And make it impossible to serve it? Mr. V a n d e r l i p . Yes, sir; and be filled with collateral dangers. Senator O ’G o r m a n . And discourage banks from entering the sys tem if the accommodations of the central bank were to be extended to the public at large? Mr. V a n d e r l i p . I have no conception of government that would permit the Government to enter into business in this way. Senator O ’G o r m a n . I do not understand that Senator Bristow recommends this. He only wanted to get your views. Senator B r is t o w . Well, I wanted to understand its dangers. It has been urged, you know, that it would be necessary or ought to be. Now, I do not know whether I got a very clear notion as to the requirements that would be necessary for a bank to have in order to avail itself of the benefits of this central reserve bank. It would become a part of the Federal system and be under its protection and entitled to the aid which this bank could give. You would extend it first to national banks, then to State banks and trust companies, if I understood properly, provided that the requirements of the na tional bank and of the trust companies and of the State banks should be the same, so that they would all be on an equality. Mr. V a n d e r l i p . The requirements as t o capital, examinations, and reserves. B A N K I N G AND CURRENCY. 2 961 Senator B r is t o w . Yes; and you would modify the national bank ing law so as to enable the national bank so as to enlarge their ac tivities in certain States so as to compete with certain State institu tions and be on an equality with State institutions ? Mr. V a n d e r l ip . I would, so as to prevent national banks from go ing out of the national system, taking out State charters, and then joining this new organization. Senator O ’G o r m a n . Bight there, if you will permit me one ques tion, that bears on what was asked by Senator Bristow: What would be done by the national banks that, for any reason would not care to come into the system, if it should be optional? Mr. V a n d e r l ip . Any bank that refused to keep its reserves ac cording to law would have to get out of the system. Senator O ’G o r m a n . Then you would make it compulsory that every national bank would have to keep part of its reserves in this Federal bank? Mr. V a n d e r l ip . I certainly would. Senator O ’G o r m a n . So that, to that extent, it would b e com pulsory ? Mr. V a n d e r l i p . N o more compulsory than the present reserve re quirements. Senator K eed . Just about as much. Mr. V a n d e r l i p . No; n o t n e a r l y s o m u c h i n a m o u n t a s t h e p r e s e n t r e q u ir e m e n t . Senator S h a f r o t h . Mr. Vanderlip, how much money, under the system you have proposed do you think it would be safe to issue ? ' Mr. V a n d e r l ip . Just as much as you could cover with the proper sort of rediscounted paper and with a 50 per cent gold reserve; and always have, really, something more than 50 per cent reserve, because that would be the minimum permitted by law as a general reserve of the bank. Senator S h a f r o t h . Can you estimate about what, in y o u r j u d g ment, that would be—the maximum? Mr. V a n d e r l i p . If the whole plan were adopted, there would first be $350,000,000, which would replace an equal amount of nationalbank notes. At the present time I think there would not be over $200,000,000 in addition to that, and that much only at the season of the year when there was a demand for the largest amount of circu lation. With the growth of the country, with the development that would surely follow such a sound banking scheme, I can imagine that amount might grow to a very considerably larger volume. I would hope to live long enough to see it 1,000 millions. Senator K eed . Have you consulted or talked with other bankers or financiers about this plan of yours? Mr. V a n d e r l i p . I h a v e . Senator K e e d . H o w have they received it? Mr. V a n d e r l ip . With great favor. I have talked with very few. Senator R e e d . H o w do you believe it would be received by t h e banks? Do you think they would accept it, or do you think we would have another “ Boston convention ”—I do not speak of that unkindly; but it was an opposition convention. Mr- V a n d e r l ip . It is difficult for me to say how they would receive it a t first. I think they would be somewhat shocked at the idea of 2962 B A N K I N G AND CURRENCY . complete Government control. When they came to understand the safeguards that it is proposed to throw about that, the character of the control which would flow from the method of its appointment, its term of service, and so on, I believe that they would accept it with great favor. They certainly would be relieved from the compulsory features of the bill that is now before you. They would be relieved from this extremely unsatisfactory but necessary provision for forced loaning by one Federal bank to another. And, more than everything else, they would be relieved, I believe, to find that the circulation was to be bank-note money and not a fiat obligation of the Government. Senator R eed. Y ou spoke about requiring the banks to underwrite a portion or all of the stock, except such portion as the Federal Gov ernment might take. How would that be worked out, in a practical way? Mr. V a n d e r l i p . In a practical way, the banks would be compelled to underwrite a prorata proportion, based upon the relation of an individual bank’s capital to the total capitalization of all national banks. Senator R eed. H ow compelled? Mr. V anderlip. By the act. Senator R eed. And then if they did not ? Mr- V anderlip. If they did not, they would have to get out of the system. Now, I do not recommend that plan, if you think you can float the stock to the public without it or if you are willing to have the Government stand in the gap and take any stock that the public should fail to subscribe for. There is no desire at all to have the banks do this. They would not regard it as a desirable thing to do. They would not want to retain the stock. And the only reason whatever foir proposing such a scheme would be to insure the success of the public subscription. Senator R eed. A s I understand your plan, you would first open the subscriptions to the public? Mr. V anderlip. Yes, sir. Senator R eed. On a competitive basis, giving the preference to the smaller subscribers? Mr. V anderlip. Yes, sir. Senator R eed. If, then, there was, by a given date, not enough offered you would then have a provision in the bill that at that time it would become the duty to take a certain proportion of these bonds? Mr. V anderlip- Yes, sir. Senator R eed. And to pay for them at their face. Now, you spoke of underwriting. Mr. V anderlip. I would not do it quite that way, because, if it be came obvious that it was going to be a failure—if that subscription ran for 30 days and on the twentieth day it became evident that the public was not going to take stock and that the banks would have to do so—you might have a scramble right then to get out of the national system. I would compel them to make the underwriting obligation. Senator R eed. In the first instance ? Mr. V anderlip. In the first instance. I would compel them to agree to take all of that stock, provided the public did not take i t ; but they would get none of it that the public was willing to take. Senator R eed. Then you would provide, in this bill, that by a given date the national banks of this country must file with the Federal B A N K I N G AND CURRENCY. 2963 Government an obligation binding each of them to underwrite—to accept that portion of these bonds which their stock bore to the entire amount of the capital stock----Senator O ’G o r m a n . In the national banks. Senator H eed . In the national banks. And that in the event of their failure so to do, their charter should be arrested and their business wound up. Mr. V a n d e r l ip . It would be equal to that. Senator H eed . If they did that, then you would further provide that the banks had so underwritten the Government would offer this stock to the general public, and so forth—we need not go into the details. Mr. V a n d e r l ip . Yes, sir. Senator N e l s o n . And that the banks could then only get what the public did not take. Mr. V a n d e r l ip . That would be all. Senator N e l s o n . I suppose in this plan you would adopt the same quality or the same rules as to the paper that could be discounted as there are in the bill before the committee, substantially. Mr. V a n d e r l ip . Substantially the same. Senator N e l s o n . The same quality of paper? Mr. V a n d e r l ip . Yes, sir; self-liquidating paper—that is, paper arising out of commercial transactions. Senator O ’G o r m a n . Mr. Vanderlip, Senator Weeks has a question or two he would like to ask you. Senator W e e k s . Suppose we provided for the engraving on the notes of this reserve bank something like this—I am led to ask this question on account of your discussion of issuing a bank note rather than a Treasury note: United States of America. National reserve bank note. This note is secured by a gold reserve equal to 50 per cent of its face value by Government bonds or commercial paper equal to its face value by a first lien on all of the assets of the reserve bank and will be redeemed on presentation at the reserve banks, or any branch thereof, or at the Treasury of the United States. Would that be a bank note or would it be a bank note with the Government guaranty ? Mr. V a n d e r l ip . It would be a bank note with a Government guar anty of redemption. Senator W e e k s . D o you think it would be unfair to arrange the guaranty of redemption—assuming that we provide in the law that the bank shall keep the Treasury properly supplied with funds to guarantee the payment of any notes that may be presented at the Treasury. Mr. V a n d e r l ip . I do; unnecessary and involving the Government in a possibly dangerous obligation. Senator W e e k s . Well, do you think that would be sufficient as I have written it? Mr. V a n d e r l ip . If the Government redeems them, it is as great a danger as it would be if they were the obligations of the Govern ment. Senator W e e k s . Of course, we are going to provide that the banks shall provide the means for the Government redeeming the notes. 2964 B A N K I N G AND CUBBENCY . Mr. V a n d e r l ip . Very well, i f y o u will so s ta te o n th e fa c e o f th e note. Senator O ’G o r m a n . I t would be stated in the bill that we pass. S e n a t o r W e e k s . Yes; i t would be stated in the law. Mr. V a n d e r l ip . Y ou ought then to state on the note that they will be redeemable by the Government, if the Government is in funds provided by the banks for the purpose. Then that would be all right. [Laughter.] Senator K e e d . That would be worse than saying nothing. [Laughter.] Senator O ’G o r m a n . I s there any other question any Senator d e sires to ask of Mr. Vanderlip? Senator H it c h c o c k . I do not quite see yet, Mr. Vanderlip, where you are going to get your gold reserve. Mr. V a n d e r l ip . I would like to figure that out with you. Senator H it c h c o c k . I wish you would put in writing in the record the statement of how a bank would start in business when it had $150,000,000 of Government deposits, bank deposits of $300,000,000, and outstanding notes of $300,000,000. Mr. V a n d e r l ip . I s h o u ld lik e to d o th a t. I s h o u ld lik e to a s k i f i t w ill b e h e l p f u l to p u t in th e re c o rd th e p la n a s I h a v e it, v e ry b rie fly o u tlin e d ? Senator O ’G o r m a n . If there is no objection, the paper now in Mr. Vanderlip’s hands will be incorporated in the record. And when will you be able to send the memorandum desired by Senator Hitch cock, Mr. Vanderlip? Mr. V a n d e r l ip . I shall hope to do so within 24 hours. Senator H it c h c o c k . Mr. Vanderlip, the only means this b a n k would have for securing additional gold for a reserve as its business grew would be the use of these Treasury notes, would it not? Mr. V a n d e r l ip . Or its obligations; it could sell its own obliga tions. Senator H it c h c o c k . T o w h o m ? Mr. V a n d e r l ip . T o anybody who would buy them—any foreign money market. It could sell its obligations secured by rediscounted paper. Senator O ’G o r m a n . I think that will be all, Mr. Vanderlip. (The statement or plan referred to by Mr. Vanderlip is as fol lows:) The Government is to grant a charter to the Federal reserve bank of the United States, with capital stock of $100,000,000, the charter to extend for a period of 50 years. The head office is to be located in Washington, and 12 branches to be located in the cities selected by an organization committee, and subbranches wherever designated by the board of the Federal reserve bank. As soon as practicable after the passage of the act the President is to appoint a committee of five, to be designated as the “ Federal reserve bank organization committee.” This committee will divide the country into 12 commercial dis tricts, and designate one city in each district as the seat of a branch of the Federal reserve bank, and generally be charged with the responsibility of organization. The stock of the Federal reserve bank may either be subscribed for entirely by the Government, with funds raised by the sale of bonds or offered for public subscription, the success of such subscription to be insured by requiring all national banks to be liable for the purchase of their pro rata proportion of any stock not taken by the public. B A N K I N G AND CURRENCY. 2965 The stock shall have no voting power, and no rights of any kind shall attach to it except to receive dividends. There need, therefore, be no restriction on its purchase or sale or accumulation, either by banks or individuals. The Federal reserve bank will be wholly under the management of a board of seven directors, to be appointed by the President, with the advice and consent of the Senate, with terms of 14 years, but the first board to be classified and the term of one director to expire each two years. The bill should provide that the President will select men qualified by experi ence and training for the proper discharge of the duties imposed and make no appointments in order to confer political rewards. At least three of the mem bers should be recognized to have had wide financial and banking experience. Appointments are to be distributed geographically so as to give due weight to the commercial sections of the country. The President, with the advice and consent of the Senate, will designate one director as governor and another as deputy governor, and the governor, or in his absence the deputy governor, shall act as chairman of the board and be the chief executive officer of the bank. Members of the board to automatically retire at the age of 70. The board of the Federal reserve bank shall appoint for each branch an exec utive committee of seven members. The bill will contain the same general directive clauses as to their character as in the case of the board itself, includ ing the provision that at least three of the members of the executive committee shall be recognized to have had wide banking and financial experience. The term of office of the members of the executive committee will be seven years, but in the case of the first members appointed they shall be classified so that one director shall retire each year. One member of the executive committee will be designated chairman and one vice chairman, and the chairman, or, in his absence, the vice chairman, will act as chairman of the committee. All actions of the executive committees will be subject to the approval of the board of the bank. Each executive committee will elect a president and other executive officers to conduct the business of the branch, the men filling these offices to have no official or financial relation with any other bank. The earnings of the bank shall, in case the Government subscribes to all the stock, be first devoted to an accumulation of a surplus of 20 per cent, and thereafter one-half of the earnings will be devoted to a further increase of the surplus until it reaches 50 per cent, and the other one-half go to the Government. After the surplus has reached 50 per cent all the earnings will go to the Gov ernment. In case the public subscribes to the stock the net earnings will first be devoted to paying a 6 per cent cumulative dividend, then to an accumulation of a surplus equal to 20 per cent of the capital, after which one-half of the earnings will go to the Government and one-half be devoted to the accumulation of a further surplus until the surplus reaches 50 per cent of the capital, and thereafter all the earnings beyond the dividend requirement will go to the Government. All earnings received by the Government will be devoted to the retirement of the Government debt. The customers of the bank shall be the Government and qualified member banks, which will include all national banks and may include State banks and trust companies. The Government shall deposit all of its general fund with the bank and con stitute the bank its fiscal agent. The reserve requirement for national banks will be so changed as gradually to transfer all reserves away from correspondent banks now acting as reserve agents, and after this gradual transfer has been fully accomplished all reserves will be held in the vaults of the member banks and with the Federal reserve bank. The reserve requirement will be the same for all member banks and shal be ultimately 12 per cent. The reserve to be held by the Federal reserve bank shall never be less than 50 per cent of its demand liabilities, including note issue, in gold or lawful money. The board of the Federal reserve bank may, in an emergency, suspend all reserve requirements for 30 days, and continue such suspension for periods of 15 days. The Federal reserve bank may rediscount for member banks paper self-liqui dating in character, to be defined by the act. It shall not rediscount for any one bank an amount exceeding the capital and surplus of such bank. The bank may buy in the domestic market from member banks, nonmember banks, and individual self-liquidating paper under conditions to be defined in S. Doc. 232, 6 3-1— vol 3----- 66 2966 B A N K I N G AND CURRENCY . the act, bearing the indorsement of a member bank, and may buy in the foreign markets prime banker’s bills. The bank may also deal in gold coin and bullion and in obligations of the United States Government and its insular possessions. The board of the Federal reserve bank shall establish a minimum rate of discount, which shall be uniform at all branches and subbranches, and which shall be changed from time to time as conditions demand. While the minimum discount rate shall be the same at all branches and to all banks, that minimum rate will only apply to the rediscounts of a bank up to an amount equal to a fixed percentage of its capital and surplus; thereafter such bank shall be charged a uniform progressively increasing rate upon discounts until said discounts shall have amounted to a maximum permitted by the act, fully equal to the capital and 8111131118 of said bank. As fiscal agent of the Government the Federal reserve bank shall be charged with the duties now imposed upon the Treasurer of the United States and the Bureau of Redemption in the Office of the Comptroller of the Treasury in re spect to the custody of bonds securing national-bank notes and the redemption of such notes. The 5 per cent redemption fund now in the general fund of the Treasury shall be transferred to the Federal reserve bank as a special trust fund and shall be held intact and shall not count as a part of the reserve of the bank. The Federal reserve bank shall be authorized to issue its circulating notes. Such notes shall be secured by the segregation of rediscounted paper, as de scribed in the act, equal to 100 per cent of such notes outstanding or one year exchequer notes of the United States Government hereinafter provided for, and by a reserve in gold equal to 50 per cent. The notes shall have the same qualities as the present national-bank notes, shall be redeemable at any branch on demand in gold, and shall be the obligation of the bank. There shall be no restriction upon the issue of notes by the bank when the-notes are fully covered by gold coin or bullion, it being intended that to the extent that the out standing notes of the bank are not fully covered by gold they shall be secured by 100 per cent in rediscounted paper, or exchequer notes, and by a reserve in gold equal to 50 per cent. Gradually and over such period as the Federal reserve board may decide upon, the Federal reserve bank shall offer to purchase 2 per cent bonds of the United States deposited to secure circulating notes of national banks at par and up to an amount equal to one-half of such bonds deposited with the Treasurer of the United States as security for national-bank note circulation. It shall pay for these bonds by assuming the responsibility for the redemption and retirement of the national-bank notes secured by them. Upon acquiring these bonds the Federal reserve bank shall receive from the Government of the United States in exchange for the 2 per cent bonds an equal amount of one-year exchequer notes bearing 3 per cent interest. The Federal reserve bank shall give an undertaking to the United States Government that it will renew such one-year exchequer notes each year at maturity for 20 years. These notes will be made to mature at various periods during a calendar year. So long as these notes are outstanding the Federal reserve bank shall pay to the United States, out of its earnings and before any dividends are paid upon the stock, a tax of 1 } per cent on an amount of circulating notes equal to the amount of exchequer notes outstanding. The bill should provide for a national clearing house. The charter rights of national banks should be so enlarged as to permit banks to have branches within the city in which they are located, to establish branches abroad and to exercise general trust company functions to be defined in the act. National banks shall have the right to accept drafts of a character to be defined up to an amount equal to one-half of their capital. State banks and trust companies may be admitted to membership by conform ing to the same capital, reserve, and inspection requirements that natural banks are obliged to meet in similar localities. The Federal reserve board shall have power to examine any member bank. The circulating notes of the Federal reserve bank shall be a first lien on all the assets of the bank. The Federal reserve bank shall have a first lien upon the assets of member banks for any indebtedness due from them. As far as feasible the Federal reserve bank shall be exempt from the payment of all Federal and State taxes except taxes upon real estate. As far as feasible the stock of the Federal reserve bank and the dividends thereon shall likewise be free from all Federal and State taxes. B A N K IN G AND CURRE NCY . 2967 (Mr. Vanderlip, at the request of the committee, also submitted the following:) Hon. R obert L. O w e n , W a s h in g t o n , D . C., O c to b e r 2Jh 1913. C h a irm a n C o m m itte e on B a n k in g a n d C u rren cy, U n i t e d S t a t e s S e n a t e , W a s h i n g t o n , D . C. Sir : In compliance with the request made by the members of the committee at my hearing yesterday, I am sending you a statement of the Federal reserve bank after a transfer of reserves from correspondent banks. Such a statement, of course, can not be made with accuracy, nor can any figures be compiled with accuracy that will show the effect upon the reserves and upon the deposits of national banks, as there are too many variable ele ments to be considered. The statement of the Federal reserve bank might be as follow s: ASSETS. Cash from stock----------------------------------------------------------------------$300, 000, 000 Cash from banks-------------------------------------------------------------------- 356, 000, 000 Cash from United States____________________________________ 150, 000, 000 T o ta l-------------------------------------------------------------------------Exchequer notes-------- ----------------------------------------------------------- 606,000.000 350, 000, 000 LIABILITIES. Capital ------------------------------------------------------------------------------Government deposits-------------------------------------------------------------Reserve deposits----------;--------------------------------------------------------- 300,000,000 350. 000, 000 356, 000, 000 T o ta l________________________________________________ Circulating n otes------------------------------------------------------ ----------- 606,000,000 350, 000, 000 RESERVE REQUIRED. Against deposits-------------------------------------------Against notes------------------------------------------------ 253, 000, 000 175, 000, 000 T o ta l-------------------------------------------------------------------------- 428,000,000 E x c ess--------------------------------------------------------------------------------- 178, 000, 000 It will be observed that the bank’s holdings of cash will he sufficient to pro vide the minimum reserve of $253,000,000 against its total deposit liabilities, a minimum reserve of 50 per cent against $350,000,000 of notes issued in retire ment of an equal amount of national-bank notes, and still have in excess of $178,000,000. It is probable that banks in central-reserve cities and. perhaps to some ex tent, banks in reserve cities would find it necessary to rediscount at the Federal reserve bank in order to meet the drafts made upon them by correspondent banks removing tbeir reserve balance's. I would estimate that rediscounts of $100,000,000 would permit that to be done without undue strain upon the banks of reserve and central-reserve cities. It is obvious that the transition from the present system to any new system which would impound reserves in the vaults of member banks and in the Federal reserve bank should necessarily be made slowly and with great caution, and it would seem to me desirable that the board of the Federal reserve bank should be given latitude as to the various periods during which this transition should be made. The figures that I have used are based on the abstract of the condition of national banks in answer to the call of June 4, 3913, as I did not have the later abstract at hand. Figures made up from the later abstract would vary slightly, but in a general way the foregoing will indicate the possible position of the reserve bank. Respectfully, F. A. V a n d e r l ip . STATEMENT OF JACOB S. COXEY, OF MASSILLON, OHIO. Senator O ’G o r m a n . Mr. Coxev, will you state your name, your residence, and your business activity? Mr. C o x e y . My name i s Jacob S . Coxey. Senator O ’G o r m a n . And what is your residence, Mr. Coxejr? 2968 B A N K I N G AND CUBBENCY . Mr. C oxey. Massillon, Ohio. Senator O ’G orman . And your business activity? Mr. C oxey. I am in the stone-quarry business. Senator O ’G orman . Have you read the pending bill? Mr. C oxey. I have, sir. Senator O ’G orman . Kindly state to the committee your views in regard to it. Mr. C oxey. A s I view this bill, I take it, you are trying to arrange a currency system that will transact the commerce of this country. But I think you should take into consideration the burden under the present system and under the proposed system that will be placed upon the producers of this country in obtaining the funds to exchange their products. There are three Government functions, and this, the means of exchange, is the greatest of the three, that are necessary for the ex change of the commerce of the country. The first one is the means of communication. This one the Government has retained; that is, the postal system, and is operating that system at cost to the people. They engrave and print the postage stamps and furnish them at cost to the people. John D. Rockefeller, with all his corporations, if he needs 10,000 postage stamps for the use of those corporations has no advantage over the man who is tearing that brick building down over across the street when he needs only 1 postage stamp. That the postal is a Government function, and that is being fur nished at cost to the people, and when I say the stamps are being furnished at cost to the people the stamp simply represents the cost of the transmission of the mail that it is put upon. After it has done that it is canceled and has performed its functions. Now, when we come to the second one, the means of exchange, you have granted franchises to private corporations. You have been creating, and do propose to create, under this bill the money at cost to these corporations, and then when even you, the creator, the Fed eral Government, needed or will need any of this money, as, for instance, you needed it in the building of the Panama Canal, you is sued several hundred millions of dollars of interest-bearing bonds that were nontaxable, sold them to the banks, and the Government borrowed from the banks its own money and is now paying interest for the use of its own money. This system seems to me to be absurd. When we come to the producers of the country, let us examine their burden. Last year President Taft called the governors of the various States together and he stated to the governors the necessity of estab lishing State banking institutions in order to lessen the burden that was placed upon the American farmer. He said to the governors that there were 12,000,000 American farmers, and that they were pro ducing annually $9,000,000,000 of products upon a borrowed capital of $6,040,000,000, for which they were paying in interest and com missions in order to obtain that money 84 per cent. This makes a total burden of $513,000,000 annually, taken from the statement of Mr. Taft, which burden is placed upon the tiller of the soil, who pro duces the products we are consuming in this country. Senator W eeks . D o you think those figures as you have given them to us are accurate as to the rate of interest? Mr. C oxey. Yes, sir; the average rate of interest is 84 per cent. B A N K I N G AND CURRE NCY . 2969 Senator W eeks . I have heard those figures, and I do not know a single State, even in the South, where that rate was charged. Mr. C oxey. There are Senators here from Western States where rates as high as that are charged, and I think they will bear me out in that statement. Senator R eed. The average rate in m y State of Missouri is about 5^ per cent. Senator B ristow. It runs from 6 to 7 per cent in my State of Kansas. Senator S hafroth . In mining sections of my State of Colorado it runs as high as 1 per cent a month. Mr. C oxey. In the State of Ohio it is from 6 to 8 per cent; 8 per cent is the average. Senator O ’G orman. What changes would you propose in the pend ing bill? Mr. C oxey. I want to show you first where the burden lies under the present system and will not be lightened under the pending bill. President Taft called attention to the burden upon the tiller of the soil of $513,000,000 annually. I see from the bank statements that the other producers outside of the farmers are paying for the use of that money and bankers’ credit which the Government is creating at cost to the banking institutions, besides legalizing 85 per cent of the banks’ credit, which they, the bankers, are levying a toll uppn to exchange the products, because the bank credits are exchanging the products from the producer to the consumer, exactly the same as the real money. I find from the bank statements that there are about $17,000,000,000 of deposits and $13,500,000,000 of loans out of those deposits, and one billion and a half of real money in the banks as a foundation for those loans. That is nine of bankersy legalized credit to one of real money. Now, an average of 6 per cent upon that $13,500,000,000 is nearly $800,000,000 annually for the use of those banks’ credits and money to exchange the products from the producer to the consumer. Now, the banks, in order to inflate their credits higher do as one bank president from Columbus, Ohio, told me last spring, that he wanted to use his bank reserves and he went to New York—he told me this in New York at the Waldorf-Astoria Hotel—he said, “ Our daily balance of legal reserves in New York amounts to about $100,000,” and he went to four different banking institutions and tried to get it through their noddle—that is the expression he used—that they would make more money by carrying out his plan, and his bank would make more money if they would make a loan to his bank of $100,000, upon which they would pay 4 per cent, and the New York bank agreeing to make the loan, but the proceeds of that loan should be held there with the New York bank as their, the Columbus bank’s, legal reserve, and then that the New York bank should pay them 2 per cent upon their daily balance. That would be making a profit to the New York bank of 2 per cent and make it cost the Columbus bank 2 per cent, and it would allow the New York bank to loan out 75 per cent of that loan to their customers there at the market rates and then redeposit 9 per cent of the reserves of the 25 per cent in the reserve bank, they to receive 2 per cent on this reserve. That al lowed the Columbus bank to withdraw the $100,000 of their cash re serves from New York, which the Columbus bank did loan at Co- 297 0 B A N K I N G AND CURRENCY . lumbus at 6 per cent. The Columbus banker got that through, and that is the way he is doing to-day, utilizing his reserves and extend ing his bank credits in that manner. Now, the question comes as to the remedy I will suggest here. You must arrange under this bill to not only furnish the money necessary for the exchange of the products and the commerce of this country, but to furnish the money for all public improvements and for the building and equipping of our railroads. It will take over a billion of dollars annually for the equipment for our railroads. Under the present system those railroads must issue bonds bearing interest and sell those bonds to the banks in order to borrow this money. Under the present system we must do the same so far as public improvements are concerned. Take, for instance, the public highways. At a road convention last fall, at Atlantic City, I spoke upon that question, and I said the most important thing is the financing of the highways; and that Atlantic City road congress was inclined to ask the Government for Federal aid. I said it is not Federal aid we need, but it is a Federal duty. When this Govern ment imposes a tax of 10 per cent on State issues of currency, it pro hibits its different subdivisions—the States, cities, counties, and town ships—from issuing a currency in order to relieve any stringency and to make any public improvements. When they do that, then it is the duty of the Federal Government to furnish this money at cost for all public improvements by allowing the States to issue their noninterestbearing bonds to run for 25 years, and then deposit these bonds with the Secretary of the Treasury, when it shall be mandatory upon the Secretary of the Treasury to issue the face value of the bonds in full legal-tender money. Senator N elson . Notes of the Government ? Mr. C oxey. Real money. I contend that the only real money is the fiat of the Government. Money is simply an idea of Congress enacted into law. It is a representative of value, and should never have a value of or in itself. And as it passes from the Government under this system, if these bonds were deposited with the Government and the face value of them would be issued in full legal-tender money, the cost of the engraving and distributing of this money would be charged against this issue, and that would not exceed over 1 per cent. Ninety-nine per cent would be forwarded to its subdi visions, which they would have to use for the purpose of making pub lic improvements. Now, under this plan you have the State, county, township, or municipal noninterest bonds deposited as security for this issue of legal-tender money. Then they start the people to work to make improvements, and as the service is rendered or the material is fur nished this money is turned out, and it then represents that service or that material and that value created. As to the redemption or repayment of this money, levy a tax as you do now, and instead of paying 4 per cent interest return 4 per cent annually to the Government, and as it is returned and retired annually it can be canceled. It has performed its function, and in 25 years you will have paid off the noninterest-bearing debt of all the subdivisions of this General Government and there is no bonded debt left at all, as the money has been furnished at cost, the same as postage stamps are now. B A N K I N G AND CURRENCY . Senator R eed . 2 971 Suppose the people do not take that money? Mr. C oxey. T hey w ould be very glad to take it w hen it is m ade leg a l tender for debt. T here should be no money issued th at would not be a fu ll legal tender for all debts. Senator O ’G orman . Y ou may proceed, Mr. Coxey. You were speaking of the city of New York, and I was somewhat interested in that. Mr. C o x e y . The city of New York has a bonded indebtedness of about 1,100 millions of dollars. They are not paying off the prin cipal ; they are simply levying a tax rate in order-to pay the interest, and they are pyramiding the principal. There" was an issue within the last year in regard to the building of the subway. They needed $200,000,000 to do that. They should have passed this law, and if this law were put into effect the city of New York could have issued its noninterest-bearing bonds for $200,000,000, running for 25 years, and could have forwarded those bonds to Washington and have had the face value of those bonds issued in full legal-tender money, deducting 1 per cent to pay for the engraving and printing and distributing by the Government. They would have had $198,000,000 to pay for all these subways, and then out of the revenues of the subways they could return to the Govern ment annually $8,000,000, and in 25 years the entire bonded indebted ness would be paid off. Now, then, they propose issuing, and are now issuing, $200,000,000 of 5 per cent bonds, which they will sell or have sold to the banking syndicate, and they will pay interest for 50 years and still owe the principal. I claim that this is a correct principle. Mr. Chairman. It is the duty of the Government, I contend, this being a Government func tion, that all money necessary for all public improvements and utilities should be furnished at cost to the people, the same as the postage stamps are now. Now, I have illustrated to you the plan of public improvements. When it comes to the plan of furnishing the money at cost to the producers to exchange their products there should be a Government bank established in every municipality of over 1,000 population. In towns under 1,000 and over- 500 population this money should be handled through the post office. These banking institutions—take, for instance, in the town where I live. We have five banking institutions. The economical way of handling that would be to have one Govern ment bank, with a sufficient volume of money on hand there for the needs of the community. I t should be the same in every municipality of over 1,000 population. That money should be furnished to the people at a tax of 2 per cent. I t will cost one-hal| of 1 per cent to pay for the operating expenses of the bank, the furnishing of the money, insuring the property pledged, and all necessary expenses. That deducted from the 2 per cent will leave a net revenue to the Govern ment of 1^ per cent. That means for the total amount of money loaned by the Government a total revenue to the Government, after deducting expenses of operation, of $15,000,000 upon every billion dollars of loans. You can see from the statement of President Taft and from the bank statements that there are about $20,000,000,000 now being loaned by the banking institutions to the people in the shape of $9 of bank credits to $1 of real money for the exchange of our commerce. If 2972 B A N K IN G AND CURRENCY. we take and gradually substitute this $20,000,000,000 of legal-tender money that should be full legal tender for all debts and substitute it in place of the same amount of bank credits being used now this would establish a banking system which would give a revenue of $300,000,000 annually from this source, besides saving to the pro ducers $1,200,000,000 annually in interest charges. Senator S hafroth . What security would you have for the obtain ing of money under those circumstances? Mr. C oxey. The same as the banks now take. I will illustrate with my own business. I quarry stone and grind it into sand. I supply some of the principal steel works of the country, and have been sup plying the steel works of the country for 32 years. When I ship out a carload of sand to-day we get the railroad weight to-morrow, and we make an invoice against the party to whom we have shipped the sand. We attach a draft and bill of lading to the invoice, take it into the bank, and the banker takes his rake-off of 8 per cent and credits me with the balance. I make that draft due and payable on the 20th of the month following the month of shipment. If it is shipped to-day, that account will be due on the 20th of next month, and I make that draft for that number of days and they discount it and place the balance, after deducting the discount, to my credit. When they remit for this—they may remit direct to the bank or they may remit to me, but in every case that remittance is taken in and the draft taken out. If it is not paid on the day that it is due, it runs on and the interest is charged up to me. That is one system. Under that system the banks are furnishing the means to exchange the products; they are furnishing in this case the working capital— the money with which to do business—because we have first the money for the investment in the enterprise which is necessary. In a case of this kind the bank furnishes the working capital, but they get their interest in Ohio of 8 per cent for doing it. That is one means. Another means would be for the people to bring in their tax dupli cate or tax receipt and loan direct to all people upon their taxable real and chattel property. This Government fixes a value upon your property and levies a tax upon that property, and compels you to pay it, and therefore the Government ought to be compelled to furnish you the money at cost upon it in case you needed it for the exchange of your commerce. Take, for instance, the farmer in the West. There comes a time when he wants to turn his corn into beef or turn his corn into pork, and he can go into the bank and put up his tax receipts to the bank and borrow enough money to purchase the cattle or the hogs to turn that corn into beef 6r into pork, and then as he ships it out he can cancel his obligation to the bank. Senator N elson . Mr. Chairman, I would like to suggest that we are running pretty late. I t is now 10 minutes of 6. Senator O ’G orman . H ow much longer will you be likely to take? Mr. C oxey . I f there are no questions from the com m ittee, there is n oth in g further that I desire to say. Senator N elson . N ow, what have you to say about this bill? Mr. C oxey. I think it should be made to take into consideration and lessen the burdens of the borrower. You do not propose to read just the interest rate in this bill at all. Here is an interest rate of at least per cent all over the country. B A N K IN G AND CURRENCY. 2973 Senator N elson . D o you approve th is bill? Mr. C oxey. No, sir. Senator N elson . What are its radical defects? Mr. C oxey. In the first place, I do not believe that any money should be issued unless it is made a full legal tender for all debts, and issued direct by the Federal Government. Senator N elson . What next? Mr. C oxey. And that it should be taken out of the control of the bankers, who control the commerce of this country. There is a little item that I have in my vest pocket here that I cut out of the New York Times last Sunday, which shows that there is very little car buying. Now, the average man reading that probably would not see much in it. It shows what the railroads purchased last year in cars. They purchased last year 235,000 cars. This year they have purchased for the first nine months only 88,000, a falling off of over 60 per cent. Senator O ’G orman . Why is that? Mr. C oxey. I have an idea what it is. I can give you m y own reason for it. Senator O ’G orman . Of course that is all we want. Mr. C oxey. The gamblers in New York had gotten last year’s stocks up to a high point, and then they commenced to unload,.and they have sold and sold and sold them out at the high prices. Now, then, they are commencing to break the market, and my contention is that the people that control the money volume also control the trans portation of this land and control its commerce in the palm of their hand. They can make times good or they can make times bad, be cause they have the interlocking system of directors in all the rail roads and banking institutions, so that they can order the railroads to buy cars and other equipment, and this makes times good, or they can order those railroads to stop buying, and when they stop buying it simply stagnates the great manufacturing plants of the country. They cut off the orders from the steel plants, and that throws hun dreds of thousands of people out of employment. My business in the last four months has been cut in two. It is only 50 per cent of what is was last year at the same time, and simply from this fact. Now, the railroads of the country need the cars, but the railroad directors and the money interests have ordered the railroads to stop placing further contracts for material, and in doing that it is bring ing on a stagnation of business all over the country, and there will be hundreds of thousands of people out of work just through that fact. Now, that should not be allowed to go on, and therefore, while it is not germane to this bill, yet I am of the opinion that we should own, operate, and control the railroads. Senator O ’G orman . The same as we ought to own and control the banks ? Mr. C oxey. Yes, sir. Senator N elson . Y ou think the Government should control all banks? Mr. C oxey. Yes. Senator N elson . Y ou think all banks should be controlled and run by the Government? Mr. C oxey. Yes. 2 974 B A N K I N G AND CURRENCY . Senator N elson . Wouldn’t that make a pretty b ig army of office holders ? Mr. C oxey. I am not afraid of an army of officeholders. We have a pretty large army now. They have never scared me any. Senator N elson. N ow, what other defects are there in the bill here ? Mr. C oxey. The main defects are simply these: That you are not going to reduce the interest rate. That is the principal thing. It is the burden that is placed upon the producer’s back that should be lightened, and this will not lighten it. Senator N elson . Would you have these notes redeemable in gold? Mr. C oxey. No, sir. Senator N elson . What would you have them redeemable in? Mr. C oxey. I would have them redeemable in the products of labor and through taxation. Senator N e l s o n . What would be the basis of issue for these notes? Mr. C oxey. The basis of issue of the notes should be legal-tender money issued, based upon State, county, township, and municipal bonds, and for the commerce of the country the notes would be issued upon the collateral that the people would put up. Senator M cL ean . What would the total reach? Mr. C oxey. Whatever the necessities o f the people w ould be. Senator M cL e a n . Y ou say there are about $20,000,000,000 of obli gations out now. Mr. C oxey. And my idea is that instead of having the bankers do this for us and charging an exorbitant toll we should utilize our own credit and get it at cost. Senator N elson . Your scheme is very interesting, and I would sug gest that you prepare a skeleton bill giving us an idea of the legisla tion that you think ought to be enacted and leave it with the com mittee. I understand that you believe the Government should take over all the banks? Mr. C oxey. No ; I believe that the Government should establish banks itself. Senator N elson . Y ou believe that the Government should estab lish its own banks? Mr. C oxey. Yes. The first thing the Government should do would be to build a bank in every town, the same as the post office, and they should issue to pay for them legal-tender money. I told President Roosevelt----Senator N elson (interposing). You would not have that money redeemable at all? Mr. C oxey. Only through taxation, as it comes in through the revenues of the Government. Senator N elson . Y ou would not issue Government bonds, then? Mr. C oxey. No ; no bonds at all. There never should have been a single interest-bearing bond issued by the Government. Senator N elson . Well, now, your scheme is very interesting, and I wish you would prepare a skeleton bill and file it with the com mittee. That is what other gentlemen have done who have come here with plans of their own, and we can judge of it better when you put it into concrete form. You are a man of a good deal of business experience and I can see that you look at it from the standpoint of the borrower. B A N K I N G AND CURRENCY. 2975 Mr. C oxey. Yes; I belong to that side. I have been paying 8 per •cent interest for the last 35 years. Senator N elson . T hen you are the class o f man that we w ant to hear from , rather than the bankers. Mr. C oxey. Senator, that is the position that I took when I tried to get a hearing here. Senator Norris, of Nebraska, requests that I state how goods pur chased in foreign countries would be paid for in case the Government issue full legal-tender money under my proposed plan. Just the same as goods are paid for under the present system, viz, if goods are bought abroad and shipped to this country, usually they have drafts attached to invoice and bill of lading, which is sent through some bank to the purchaser, who then pays the draft either by his"check or cash. This releases the bill of lading and he obtains the goods. The bank then remits to the foreign banker that which he, the foreign banker, desires. It may be foreign exchange or it may be gold or silver bullion or other American products or securities. Money between countries has no particular significance. It can only go to the United States line. If the banker desires gold or any other product, it must be purchased at the market price, just the same as if you want a draft to pay £100 in London. That which most concerns us is to arrange a system to exchange our own products at cost and we will have to settle foreign trade balances as we have been doing for the last 50 years, with commodi ties such as gold, silver, steel, cotton, and other American products and securities. Senator N elson . I think, Mr. Chairman, if he will file with us a skeleton form of his bill we can then go over it. Senator S h a fr o t h . And put in any suggestions that you w a n t to make. Senator O ’G o r m a n . Without objection, that will be done. We will now adjourn until 10.30 to-morrow morning. (The witness furnished the following for insertion in the record in response to the above request:) Mr. C h a i r m a n a n d G e n t l e m e n o f t h e C o m m i t t e e : A request was made of me by Mr. Nelson and the chairman that I incorporate my ideas in a skeleton bill, which you will find attached. The first one is to furnish a money medium to all of the people at cost through a system of Federal banks established in all municipalities, towns, and villages over 1,000 population and through post offices under 1,000 and over 500 population; these loans to be made upon their real and chattel property, evidenced by the tax receipt and duplicates in the various localities to the amount of the assessed value thereon; also on cattle, hogs, sheep, horses, all farm products, and lumber, ore, minerals, coal, stone, sand, and all raw materials of every nature and description, as well as all manufactured products and plants, the charge or tax for these loans to be at the rate of 2 per cent per annum, payable semiannually. In case of long time, 25-year loans, which should be made so as to enable the farms to be occupied and tilled and the workers in our cities to obtain homes and an opportunity given the farmers and workers to live decently and pay for their farms and homes, and allow the enterprising citizens of the United States an opportunity to develop the resources of this country, therefore the rate of return of the principal of such loans should be no less than 4 per cent per annum, the prin cipal, in whole or in part, to be payable on or before 25 years. Such reasonable safeguards should be taken by the Government officials granting such loans as to insure the return of the principal of such loans as well as the tax of 2 per cent upon the same. The amount to be loaned upon the raw and unfinished material should be determined by the amount of the actual cost in labor and material expended upon the same, and upon the finished products, if in transit, 2976 B A N K I N G AND CURBENCY . the invoice value thereof. In case of wheat, cotton, corn, and other farm products and all finished and raw products in warehouses loans should be made to the face market value thereof. The second one is to provide for public improvements and employment of the citizens of the United States, to encourage industry and produce prosperity, and to procure money to purchase and pay for public utilities, and for the redemption of such money. B e it en a c te d by th e S e n a te a n d H o u se o f R e p r e s e n ta tiv e s of th e U n ited S ta te 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 whenever any State, Territory, county, township, municipality, or incorporated town or village deeming it necessary to make any public improvements and give employment to unemployed citizens of the United States, or to procure money for the purchase of or construction and operation of State capitols and all State institutions, railroads, ship canals, waterways, harbors, levees, bridges, ditches, tunnels, telegraphs, telephones, public roads or highways, courthouses, street car lines, waterworks, gas and electric-light plants, schoolhouses. public halls, libraries, market houses, sewer ing and paving streets, public parks, or any other public utility so as to furnish employment for all surplus or unemployed citizens in beautifying and improv ing the country when there is a surplus production or no demand for labor in production at living wages, they shall deposit with the Secretary of the Treasury of the United States a noninteresting-bearing 25-year bond and not to exceed one-half of the assessed valuation of the taxable real estate, exclusive of all improvements thereon, less all outstanding and existing indebtedness in said State, Territory, county, township, municipality, or incorporated town or village, and said bond or bonds to be retired at the rate of 4 per cent per annum. Sec. 2. That whenever the foregoing section of this act shall have been com plied with it shall be mandatory upon the Secretary of the Treasury of the United States to have engraved and printed Treasury notes in the denomina tions of $1, $2, $5, $10, and $50 each, which shall be a full legal tender for all debts, public and private, to the full value of said bond, and deliver to said State, Territory, county, township, municipality, or incorporated town or vil lage 99 per cent of said notes and retain 1 per cent for the expense of engraving, printing, bookkeeping, disbursing, and taking care of this department. S ec . 3. That on and after the passage of this act every State, Territory, county, township, municipality, or incorporated town or village may deposit their noninterest-bearing bonds in compliance with this act in order to give employment to any idle man or woman applying for work, and the rate shall be not less than $1.50 per day for common labor, and not less than $3.50 per day for team and labor, and that eight hours per day shall constitute a day’s labor under the provisions of this act, the same rate to be paid to both men and women. S ec . 4. That any State, Territory, county, township, municipality, incorpo rated town or village issuing noninterest-bearing bonds under the provisions of this act shall levy and collect an annual tax on all taxable real estate, ex clusive of all improvements thereon, of the State, Territory, county, township, municipality, incorporated town or village depositing noninterest-bearing bonds sufficient to pay into the United States Treasury each year not less than 4 per cent of the total amount received from the United States Treasury until the whole amount shall have been paid, and that whenever these Treasury notes are returned to the Secretary of the Treasury at the annual payments of 4 per cent they shall be retired, canceled, destroyed, and not again reissued. In case either gold, silver, or any other lawful money shall or may be sent in lieu of the Treasury notes issued on any noninterest-bearing bond deposited under the provisions of this act the Secretary of the Treasury shall hold or retain such lawful money aforementioned until the Treasury notes issued on noninterest-bearing bonds deposited by State, Territory, county, township, munici pality, or incorporated town or village shall come in or be presented through the regular channels of business with the Secretary of the Treasury when he shall release the lawful money so held and retire, cancel, and destroy as hereinbefore mentioned. Sec. 5. That this act shall be in- full force and effect from and after its pas sage and all acts and parts of acts in conflict herewith be and they are hereby repealed. (Whereupon, at 5.55 p. m., the committee adjourned to meet at 10.30 o’clock a. m. Friday, October 24, 1913.) I B A N K I N G AND C UE BE NCY. 2977 F R ID A Y , OCTOBER 24, 1913. C ommittee on B a n k in g and C urrency , U nited S tates S enate , Washington, D. C. The committee assembled at 10.30 o’clock a. m. Present: Senators O’Gorman (acting chairman), Hitchcock, Reed, Pomerene, Shafroth, Hollis, Nelson, Bristow, and McLean. Senator O ’G orman . Mr. Kent, will you state your full name to the reporter ? STATEMENT OF FRED I. KENT, VICE PRESIDENT OF THE BANKERS’ TRUST CO. OF NEW YORK. Mr. K e n t . My name is Fred I. Kent. Senator O ’G orman . And your banking experience and activities? Mr. K en t . I was connected with the First National Bank of Chi cago until 1909, since which time I have been one of the vice presi dents of the Bankers’ Trust Co. of New York. Senator O ’G orman . Where do you reside? Mr. K e n t . In New York City. Senator O ’G orman. And you have been engaged how many years in banking activities? Mr. K e n t . About 27 or 28 years. Senator O ’G orman . Y ou have been asked to come here to give any views you care to offer with respect, particularly, to the subject of foreign exchange and any kindred subjects. Are you familiar with the bill now before the committee? Mr. K en t . Yes, sir. Senator O ’G orman . What general observations do you care to make on the subject to-day? Mr. K e n t . Understanding that that was what you desired, I de sire to make a preliminary statement that I think will serve as a foundation upon which the committee may ask me questions, if they so desire. Senator O ’G orman . Yes. Mr. K e n t . One very important and principal reason why it is necessary that a proper banking system be established in the United States is our present lack of properly concentrated effort to protect or gold supply in times of need. In the fall of 1907 the banks engaged in the foreign-exchange business imported, including arrivals in January, about $107,000,000 in gold. But there was a period of time extending a little over 48 hours during which there was hesitation upon the part of the bankers as to how to act. This uncertainty resulted in the stoppage of the purchase of foreign bills for a sufficient number of hours to multiply the uneasiness that was spreading throughout the country. If there had never been a refusal or hesitation on the part of any banker in the country to purchase drafts drawn against cotton, grain, meat, etc., the great congestion that occurred in the credits drawn against such commodities would never have happened. If we had had a central bank in the United States at that time empowered to do a foreign-exchange business and purchase gold and bullion and 2 978 B A N K IN G AND C U R E E N C Y . rediscount for bankers, the panic would unquestionably never have developed. In the first place, the banks themselves would not have been afraid to purchase the exchange, as they would have known that they could sell it to the central bank if unable to use it, or, in the case of domes tic shipments, that they could have rediscounted the bills at the cen tral bank. In the second place, the central bank itself would have been in active operation making purchases of bills either from the banks, if it had only had power to buy biJLls from them, or otherwise in the market, and from the banks. The strained conditions that were developing could have been recognized and anticipated, and there would never have been one moment during which any dealer in our commodities would have been at a loss to know whether he was going to be able to finance his sales. With a system of 12 regional banks, such as are contemplated in the present bill under consideration, there is considerable doubt as to whether conditions would not have been worse rather than better, for the expansion would undoubtedly have gone further before a break came, and it is doubtful whether divided regional banks could operate with any greater certainty and security in the foreign market than the regular banks which were then dealing in foreign exchange. If, instead of 12 regional banks there had been 4, it is also doubtful whether they could have accomplished anything more than was done by the foreign exchange banks which imported the $107,000,000. There is a possibility, however, that the momentary hesitation in the purchase of bills which vitalized the under current of fear might have been avoided. One reason why four regional banks would not have been as effective as a central institution would lie in the fact that there would of necessity be competition between them, and ques tions of profit and loss would inevitably come up when it came to the point of buying gold. Supposing these four regional banks were situated in New York, Chicago, New Orleans, and San Francisco, we should probably find that the New York regional bank would purchase foreign exchange in the New York market, which "would cover commodities of many descriptions; wTe should find that the New Orleans regional bank would purchase cotton bills; that the Chicago regional bank would purchase meat bills; and that the San Francisco regional bank would purchase Oriental exchange. The New York institution, because of its situation in the principal import and export city of the country, would be the natural one to import gold. In order to be effective in its undertaking, it might be necessary to take off of the hands of the New Orleans and Chicago regional banks the exchange that they were carrying. If this were true the question of rate might become a cause of considerable friction between them. For instance, if the New Orleans and Chicago regional banks pur chased, say, GO-day sight bills on London at 4.844, and carried them for, say, for 80 days, and the market demand exchange dropped in the meantime, because of the conditions that had developed to, say, 4.84, the New Orleans and Chicago banks would meet Avith a heavy loss if they turned their 60-dav sight bills purchased under such circum- B A N K IN G AND CU RBEN CY . 2 979 stances over to the New York regional banks at the market rate of the day. This would have represented a rate of 4.84, less 30 days’ interest at the prevailing London rate, which might easily have made the value of the bills only 4.81-J. If therefore the New Orleans and Chicago banks turned their bills over to the New York regional bank, they would have lost the use of the money for 30 days, and in addi tion 3 cents a pound, or $3,000 for every £100,000 delivered by them. They might argue that if they could hold these bills until maturity, the demand rate might recover and that consequently they might re ceive a proper interest on their investment. The New York regional bank would not, of course, be willing to pay any more for the bills than the market warranted, and if the Federal reserve board in Washington attempted to straighten out the squabble, valuable time would be lost that might endanger the whole position. If the Federal bank ruled against the New Orleans and Chicago banks and forced them to sell their exchange at a loss, it would un questionably make them feel as though the New York regional bank had been favored, which might prevent a proper desire to cooperate in the future. If the New York institution were forced to pay a higher rate for the bills than the market warranted, it would nat urally feel abused, and its managers could properly say that there was no reason why the New York bank should bear the burden.of bringing in gold, which was of value and necessary for the good of the whole country. In the case of a central bank, the purchase of foreign exchange could be made anywhere in the United States and could be handled as the needs of the moment seemed to require. The credits for all bills purchased could be passed through the New York branch of the central bank at once. This institution would then be in a position to operate as the market seemed to require and would undoubtedly be able to protect itself from being caught with quantities of bills that would represent a large loss if turned into gold. The same conditions would be true in the case of balances held abroad. If four separate regional institutions carried their own balances, they would not be worth as much to any one of them in case of necessity, and if the gold operations were to be carried on bv the New York bank and it re quired the balances of the other three regional banks in order to properly protect the country, friction might again develop, as the regional banks outside of New York might refuse to sell their ex change at the low rates that might prevail, unless forced to do so. In the case of one central bank such balances would all be under the control of one manager and could be used to the best advantage. Balances in account with foreign banks might at times be the principal asset that the regional banks in this country would have to purchase gold, for they could not carrv sufficient time bills in their portfolio at all times of the year to give them very much power if trouble should develop at certain seasons. This is true because a very large percentage of the exports from this country from, say, the mid dle of August on to, say, the middle of February are in 60 and 90 day sight bills, whereas the balance of the year the percentage is very much smaller. The lightest months of export are those of May, June, July, and August, and practically the only 60 and 90 day sight bills that are purchaseable during those months are finance bills issued 2980 B A N K IN G AND CURREN CY . by bankers who expect to cover them with shipments against grain and cotton which mature in the fall. The same reasons which would cause the issue of the finance bills by other bankers might make them unprofitable for regional banks to purchase and carry to maturity. If the regional banks pay no interest on deposits, they could well afford to carry large balances with European banks and accept the rates of interest that such banks pay upon balances. These rates would probably vary from 1 per cent to, say, 4 per cent at different periods of the year in different years. Such balances could be used to buy bills of exchange in the foreign bill markets, when the return could be improved by so doing. Buying of this nature would not in any way compete or conflict with the business of the ordinary Amer ican foreign exchange bank. If we had had a central bank in 1907, we unquestionably could have borrowed gold of the Bank of France against the deposits of bills or other security in the same manner that the Bank of England did, and so have directly relieved our situation, and much sooner than was otherwise possible. Foreign interests at that time would have been very glad, indeed, to have advanced gold under such circum stances, if they had had any bank of great responsibility to deal with that represented this country. The individual banks all did their part, but they could not operate with the same effectiveness that a central bank could have done had it been in existence, as their power was divided, and each proposition had to be based largely on the question of profit, even though it is true that the banks of New York paid out at that time many thousands of dollars in order to obtain gold and currency which they shipped to country institutions without such costs. If we have 12 regional banks, no one of them could have sufficient capital and power to command the credit that would be necessary in order to have direct dealing with the European central banks, whereas in the case of a central bank it would command such respect that it could take part with the great European banks in protecting each other. Even one of four regional banks might not be large enough to meet the requirements. This might be true even if such bank were larger in capital and deposits than the European central banks, for those managing the foreign institutions would always recognize the fact that the four regional banks were only as strong as the power of the Federal board to hold them together, because they would know that in case of crisis in this country such board would require the New York regional bank, for instance, to loan to any of the other regional banks, and if this were done because of inflation in some other portion of this country, the foreign banks would be the first to take fright. With a great central bank, properly managed, the United States, in being able to take part with the great European banks in relieving strained situations that might occur in different localities, would be in position to command help for this country when it might need it and other countries did not. In the case of world stringency every country would, of course, have to look out for itself, and the question of where gold went would depend largely on trade balances and relative financial conditions. It would seem wiser for this country to maintain the free-gold posi tion that prevails in England rather than the close position of France or Germany. I B A N K IN G AND CURBEN CY . 2981 Senator H itc h c o c k . Will you explain what you mean by th e “ free-gold position ” in England and the contrary position in France? Mr. K e n t . Banks throughout the world and investors realize that when the Bank of England rate goes up high enough for it to make it profitable for them to invest in bills on the English market, if it is necessary for them to ship gold in order to obtain credits to use for that purpose, they can get it back whenever they may wish. In the case of France, they could not do so, because the Bank of France might pay out in silver instead of in gold. And in Germany that would not be true, because if the Keichsbank should give the hint to the other German banks that it did not desire to have gold shipped out of Germany it would be almost impossible to get it. Senator H itc h c o c k . And for that reason, then, they are more ready to respond to an increased rate of discount in England and ship their gold in there, because they know it can be secured back again ? Mr. K e n t . Yes. Senator H itch co ck . Upon proper commercial action. Mr. K e n t . Exactly. And I think this country should be on the same basis. Senator H itc h c o c k . I want to get you to put in the record that process which results in bringing additional gold to England as soon as the rate is raised. Now, suppose the Bank of England raises its rate from 4 per cent to 4£ per cent, does that mean that a large capital ist on the Continent can get a better return on his money in Lonodn than he could before the action of the Bank of England ? Mr. K e n t . Yes; and I have that explained a little further on in my statement in a way that I think will answer your question. Senator H itch co ck . Let me put this further question : Then, if he has a credit in a London bank, all he has to do is to notify them to buy paper for him? Mr. K e n t . Yes. Senator H itch co ck . But if he has not a credit there he must ship gold to London in order to make the loan? Mr. K e n t . Yes; unless exchange can be purchased in his country. Senator H itch co ck . Yes. M r. K e n t . At b e tte r ra te s th a n it w o u ld cost to sh ip gold. Senator H itc h c o c k . And that is the method by which the Bank of England attracts gold to the country, is it? Mr. K e n t . Yes. Senator H itc h c o c k . N ow , can that same proceeding be made pos sible in this country? Mr. K e n t . I t can; and I will endeavor to explain how. England profits through its position because it can command gold from all parts of the world when required, as those who ship it know that they can get it back when occasion demands; whereas, in France and Germany there is no such freedom. We do not wish to place ourselves in a position where gold can not be obtained from us if others have the right to it, for it is one that carries essential weaknesses. We could not, of course, do this in any event without default, if the exchanges were going against us. Senator H itch co ck . Let m e interrupt you once more. Never theless, the fact is that the rate of the Bank of France is lower than the rate of the Bank of England, and more steadily maintained. S. Doc. 232, 63-1—vol 3----- 67 2982 B A N K IN G AND CU RREN CY . Mr. K e n t . Oh, it is only taken advantage of in France. Senator H itc h c o c k . But borrowers get money at a lower rate in France than they do in England. Mr. K e n t . Yes; that is true. But it applies more to the com mercial business of France; it does not attract gold. If the Bank of France wanted to attract gold it would either have to raise its rate or pay for gold as it has done in the past. Senator H itch co ck . Well, the Bank of France has more gold than the Bank of England. Mr. K e n t . Yes. But it is probably considered that it has enough gold or it would raise its rate. But of course it can maintain its gold reserve, because it can pay out in silver. There might be times that it would be advisable to delay such ship ments when we could not do so without injury to our credit, but there might be other times when we might prefer not to ship gold, that it would be most inadvisable not to do so. In other words, we should not establish a central bank or regional banks with any expectation of fighting for gold, but more with the idea of being in position to co operate with the other nations and to use our own resources to the best advantage. It must not be expected that our bank rate will be as effective in ternationally when our new banking system is established, nor for many years after, as is the case at present with that of the Bank of England. One reason for this is because our exports and imports, as well as those of many other countries, are financed by drawings upon English banks. For example, take our exports. We will say that $10,000,000 in 60 and 90 day sight bills are purchased by the foreign exchange banks in New York during a certain day; that the Bank of England rate is 4 per cent, and that the rate for money in New York is 4 per cent, and for the purpose of explanation will consider the demand rate of English exchange at a low enough point to justify the proposition. Now, if the Bank of England raises its rate from 4 to 5 per cent, and the private rate of discount, which is the one that would be applied to the $10,000,000 in export bi 11s referred to, followed the Bank of England rate and was raised from 3f to 4f per cent, the banks which purchased the bills instead of discounting them at 4§ per cent might prefer to hold them until maturity, as they could expect a better interest earning than would be possible if the money were invested in this country. Senator H itc h c o c k . Well, now, just explain that a little further, will you please? What bank would purchase those bill—New York banks? M r. K e n t . New York banks, Chicago banks, New Orleans banks, Philadelphia banks, one or two banks in Pittsburgh----Senator H itchcock (interposing). Those bills consist o f credits in London, do they? Senator N elson . N o. Mr. K e n t . I can describe it better, possibly, by telling you of an actual bill. Suppose a seller of cotton in Dallas, Tex., has a credit opened by a buyer in Liverpool for cotton the equivalent of about £ 10,000. The Liverpool buyer authorizes the seller in Dallas to draw upon, say, the Bank of Liverpool (Ltd.), at 60 days sight to cover the cost B A N K IN G AND CURREN CY . 2 983 of the cotton. The Dallas seller draws such a bill, takes it to the bank in Dallas, and attaches to it bills of lading for the cotton and such other papers as are necessary. Now that seller of the cotton becomes also a seller of foreign ex change, because he has his bills drawn at 60 days’ sight on the Bank of Liverpool (Ltd.) for £10,000. Senator N elso n . With a bill of lading attached? Mr. K e n t . With a bill of lading attached. Senator N elson . A commercial bill? Mr. K e n t . Yes. He wishes to obtain his money at once. In order to get the best rate he usually applies to brokers. Those brokers go to all the New York banks, the Philadelphia, Chicago, or New Or leans banks, possibly, that are buyers of exchange and ask them for the best rate that they will pay for this £10,000 bill of exchange drawn at 60 days’ sight on the Bank of Liverpool (Ltd.). The seller of the exchange will accept the best rate. Nowj this bill might be a part of this parcel of $10,000,000 that I am speaking of. The bank that purchases that bill wants to make all it can out of it, naturally. It has two operations before it—it can either discount that bill in London at the rate of discount prevailing there and obtain demand exchange, which it can sell, and in that way bring its money back into New York, or it can hold the bill to maturity and then sell the exchange. Senator H itc h c o c k . Well, then, the lower the rate of interest in London at that time the higher the price they could get for the bill? Mr. K e n t . Of course, it would also depend upon the price of de mand exchange, other things being equal. I think if I go on a little further I can explain it more fully. Senator N elson . Right here I want to ask you this question, if it is not true that there are only three ways in which we can import gold here. One is by commercial bills, another is by finance bills, and the other is by actual shipment. Is not that true ? Mr. K e n t . Well, actual shipments must be p a id for by something. S e n a to r N elson . I k n o w ; b u t I m ean g old is b ro u g h t h ere e ith e r on finance b ills, com m ercial b ills, o r sh ip p e d . Mr. K e n t . Or, you may say, by balances abroad. Senator N elson . Well, that comes through bills o f exchange, u n less the gold is actually shipped. Mr. K e n t . Originally; yes. That is, balances may be built u p by banks in this country with their correspondents abroad by means of commercial bills that they may use to purchase gold. Senator N elson . Yes. Mr. K e n t . And I w ill ta k e th a t q u estio n u p also. Now, if these same banks required demand exchange in order to keep their balances good, it might be profitable for them to ship gold to make such balances rather than discount the bills. Senator H itc h c o c k . That is another reason, then, w h y raising th e discount rate in London draws gold there. Mr. K e n t . Yes. Senator N elson . Let me ask you this question here: Before you can discount that bill that must be accepted by the drawee, must it, not? Mr. K e n t . Yes, sir. Senator N elson . That is, the London bank. 2084 B A N K IN G AND C U B E E N C Y . Mr. K e n t . The bank in Liverpool would have to accept the bill. But you can secure discount upon it before its arrival; that is, the bank which purchases that bill of exchange might arrange with a discount company in London by cable for a rate at which the bill would be discounted upon arrival. Then the bill will be sent for ac ceptance and immediately turned over to the discount company, and they would deposit the proceeds with the London correspondent of the bank that had purchased the bill. Senator N elson . Yes. But where a bill of lading is attached to the bill of exchange it is not necessary to deposit any security. The bill of lading pays for the bill of exchange. Mr. K e n t . Yes. But the bill of lading is given up to the ac ceptor bank. ; Senator N elson . Why, o f course; and that is where it gets the money out o f it. Mr. K e n t . That is its security to protect it from the party for whom it accepts the bill ? Senator N elson . Certainly. Mr. K e n t . Some bills at 60 days sight are drawn upon merchants, and then it is the custom not to deliver the bill of lading upon accept ance, but only upon payment. Senator N elson . Yes. Mr. K e n t . N ow , if the bank rate were raised by a central bank in New York City, foreign bankers would not have any bills drawn upon us at 60 and 90 days that they would be tempted to hold to maturity. The result would be that the rise in our bank rate, in so far as it changed the international situation in our favor, would apply only to stop the withdrawals of bank balances that foreign banks might have in this country, provided their arrangements enabled them to obtain a higher interest rate on such balances in case of a rise in the bank rate and such moneys as they might wish to loan upon securities in this market, if the security rate were affected, or purchase bills in our bill market, should such a market be successfully established. Foreign banks, however, would not be sufficiently conversant with the bills in this market for some time to warrant them in making purchases to any large extent, but they might be glad to buy domestic bills from the central or regional bank with its indorsement, pro vided its standing were sufficiently high to warrant them in doing so. Some of the banks might borrow funds from foreign banks, paying them special rates of interest, because they might be able to use such funds themselves in the purchase of commercial paper, leaving a profit in between. This would be the reverse of some of the transac tions that have been made in Germany, more particularly since French funds were withdrawn from that country after the crisis in Morocco. Under the new bill it is contemplated that American banks will be authorized to accept drafts drawn upon them against import of commodities drawn at 60 or 90 days’ sight. It will unquestionably take some years to change a sufficient amount of drawings from sterling drafts to New York drafts to be of any appreciable value in making our bank rate effective, for foreign shippers will undoubtedly fight it more or less. B A N K IN G AND CUBREN CY . 2985 On the other hand, Germany and France have succeeded in having quite a large total of drafts drawn upon their banks, even though their markets for gold have not the freedom that would be true in this countrv. Such being the case, it will probably depend more upon whether our importers are willing to cooperate and demand New York ac ceptances than upon any real feeling abroad, for the whole proposition wdll come down to one of competition, and the foreign seller will be in clined to take New York acceptances if it means a loss of his sale otherwise. Senator H itc h c o c k . N ow , will you explain what you mean by “ New York acceptances” ? Mr. K e n t . I mean acceptances that might be drawn on New York banks to pay for imports in place of acceptances which are at present drawn on European banks. For instance, suppose we import $10,000 worth of coffee from Brazil. When that coffee is shipped the seller there demands of the buyer in this country that he furnish a letter of credit. That letter of credit is issued in favor of th seller in Brazil, and it is drawn upon a bank in London. The bank in London, in effect, is authorized to accept that bill at 60 days’ sight and pay it out of the funds of the bank in this country which issues the credit for the buyer—that is, at maturity. Now, -a large proportion of our imports are brought in under credits drawn upon London in that manner. Senator H itc h c o c k . And accepted by London banks? Mr. K e n t . Yes; accepted by London banks and charged by the London bank to the American banks when the acceptances mature. Senator H itchcock . How does an American bank come into that? You say the draft is accepted by a London bank ? Mr. K e n t . Yes. Senator LIitcitcock . Well, how do y o u bring the American bank into the transaction? Senator N elson . By the letter of credit. Mr. K e n t . The letter of credit. The American bank authorizes the London bank to accept it and charge it to the account of the American bank at maturity. Senator O’G orman. Right there, will you also indicate why, in this transaction affecting Brazil and the United States, resourse must be had to the aid of the English banking system? Mr. K e n t . The banks in Brazil and the people in Brazil are familiar with the London banks. They have also a use for London exchange. And it is a custom that has grown through a series of years, that is based partly on the fact that the English gold market is a free market and partly on the fact that British trade is the largest trade in the world. And what we wish to accomplish in authorizing American banks to accept is to give them an opportunity to do their part—that is, to take one side of it. At present the English banks finance the ex ports, or they accept against the exports, and they also accept against the imports. We are willing that they should accept against the exports but we think we should be in a position to accept against the imports. Senator H itc h c o c k . When you speak of “ exports ” you mean ex ports from that country? 2986 B A N K IN G AND CU RREN CY . Mr. K e n t . N o ; fro m th is co u n try . Mr. O ’G o rm an . And imports to this country. Senator N elson . N ow , there is a letter in the record from an im porter of coffee at Minneapolis, which I introduced, describing just exactly this thing as Mr. Kent describes it. Senator H itc h c o c k . Is it a fact that there are no banking interests in New York now that give acceptances or sell acceptances? Mr. K e n t . I do not know of any. Senator H itc h c o c k . Well, there are very large banking houses there that have a world-wide reputation. Mr. K e n t . It is rather against the policy of American banks to accept, even ivlien they seem to have the authority, because----Senator O ’G orman (interposing). How about the large private bankers that we have in New York and throughout the country? Do not they do it? Mr. K e n t . They have never been able to work up American ex change to a point where they could do it to any great extent. They would need the cooperation of all the banking interests in this coun try in order to do it. Senator H itc h c o c k . Well, take the London houses that accept. They are not banks of deposit, are they? Mr. K e n t . Some of them are. The Bank of Liverpool is an ac cepting bank; the London City and Midland Bank (Ltd.) is an acceptance bank. Those are both banks of deposit. There are many private banks that accept also. Senator N elson . The joint-stock b an k s there have authority to accept ? Mr. K e n t . Y e s; th e y can accept. Senator H itc h c o c k . But, as a matter of fact, that is not their practice. They buy and sell them; they do not give them. Mr. K e n t . Oh, yes; the London City and Midland Bank (Ltd.) and also the Lloyds bank, and the Parrs Bank and many others do it. Senator N elson . There are three classes of acceptors: These jointstock banks; then merchants accept, and then there are what they call private accepting houses. Mr. K e n t . Yes. Senator H itch co ck . Well, I was told by a London banker, who visited this country recently in connection with the peace movement with Lord Alverstone, that it was not the custom of any bank of de posit in England to sell acceptances or give acceptances. Mr. K e n t . That is a mistake. Senator H itc h c o c k . But that it was largely done by private houses, and by men of known wealth, and that banks of deposit were more apt to give those acceptances than they were to sell them. Mr. K e n t . They buy them and sell them. I have acceptances now in my portfolio, given by all of those banks I have mentioned. Senator H itc h c o c k . Well, are those acceptances a source of con siderable profit? Mr. K e n t . The question of profit does not seem to me to have much bearing upon it. That profit might be on an average of threesixteenths of 1 per cent on the total, taking into consideration those acceptances that are issued for prime concerns, and those that are issued for others. B A N K IN G AND C U E E E N C Y . 2987 Senator H itch co ck . When a bank issues acceptances, does it take security ? Mr. K e n t . Often; that is an arrangement that it has with its own customer; that is based upon the standing of that customer. Senator H itc h c o c k . It may or may not take security ? Mr. K e n t . Yes; in case of drafts drawn against cotton, the bills of lading are delivered to the accepting bank. Now, if the accepting bank wishes to deliver those bills of lading against trust receipts, to the party for whom it is accepted, it can do so if it satisfied to do so. Otherwise it might hold the bills. Senator N elso n . Y ou see when a bill of lading accompanies a draft, that is the security for the draft. Senator H itch co ck . Yes; I understand. I want to get at the fact whether an accepting bank receives security as a rule; whether there is any practice of that kind. Mr. K e n t . N o ; that is all a private arrangement between the foreign bank and its customer; and it undoubtedly is handled both ways, exactly as it is in this country. In this country we have ship ments come in that are delivered to the party for whom the letter of credit is issued, before the draft matures. And those goods are delivered under trust receipt. But in other cases the goods are not delivered before payment. Of course all of those credits at present are drawn upon London banks, and the London banks are the acceptors. Senator O ’G orm an . Mr. Kent, let me ask you a question here: I s the importance of the English banks with respect to foreign exchange promoted largely by the regular mail service between this country and England? Mr.. K e n t . Unquestionably, to a large extent. Of course that commission profit is not so much. But that is not the principal value of being able to accept. The principal value to England in being able to have its banks accept those bills is due to the fact that payment must be made in London for all of those bills. Consequently, they are attracting money to London, and that money will come to London before the bills mature, if the inter est rate is a more profitable one to the banks that have to meet the bills from foreign countries than it is in their own country, and I consider the principal value of that acceptance power to lie in caus ing the money to go toward the centers, rather than the commission charge, which is really small. Senator N elson . Does it not arise, too, from the fact that the party primarily holden on a bill of exchange, the acceptor, resides in that country? The party primarily liable on the bill, in case you have to enforce its collection, resides in England. Is not that of some consequence? Senator O ’G orm an . That is not the case in the coffee proposition that Mr. Kent was telling about. Senator N elson . Oh, yes; the acceptor on the bill resides there. Senator O’G orman. Oh, yes; you are right. Mr. K e n t . Y ou can see what that would mean in the case of this Brazil matter. This draft is drawn in Brazil at 60 days’ sight, on a London bank, for the account of an American bank. The Ameri can bank must arrange to meet that bill at maturity. Consequently 2938 B A N K IN G AND CURBEN CY . it must have funds in London. That makes a demand for London exchange, and that is a help toward making England the great financial market it is. Senator H it c h c o c k . Your judgment is that, no matter what w e do in this country, it will only be by a gradual process that wTe can build up such a system in New York as exists in England? Mr. K e n t . Yes. And, as I say, it would be a matter of compe tition; and the foreign seller would be inclined to take New York acceptances, if it means the loss of a sale otherwise, provided, of course, that the acceptance is drawn upon a bank whose standing is sufficiently high to warrant his banker in negotiating the bill of exchange. That is, an acceptance issued by some small bank in a small town or city that was unknown abroad would probably not be accepted. Senator W ee k s . Could you make an estimate of the amount o f commissions paid by American importers to London banks on ac count of these acceptances which otherwise would not be paid at all or would be paid to American banks? Mr. K e n t . I question if that would be much more than a million dollars. It is a little difficult to get a basis from which to figure, because part of our imports are not handled by commercial letters of credit. Some of them are handled direct. And when it comes to dividing up our total imports of over a billion dollars into those which are accepted and those which are not, and then figure, say, an average percentage that you might think was being charged by London for the whole, it would be merely a guess estimate, you see. But it is not such a large amount. I do not think it is worthy of consideration. Senator W ee k s . H ow much do American banks keep on deposit in London in order to maintain this policy? Mr. K e n t . Their deposits vary according to the interest rates in London and the interest rates in New York, to a certain extent. For instance, take it now: The Bank of England rate is 5 per cent, and the London joint-stock rate that they pay upon balances is 1| per cent under the Bank of England rate. That would mean 3f per cent. Now, if the bank could get 3£ per cent upon its balances in London, and it had money it did not care to loan on time, but wished to have in its control, it would receive more for that money in London than it could on the New York Stock Exchange—for in stance, upon a 3 per cent basis—always providing, of course, that the demand rate of exchange is such that there will be no loss in ex change. For instance, suppose a bank in New York purchased £100,000 at 4.87 to increase its balance in London. That means $487,000. Suppose it has that balance in London for, say, 10 or 15 days, and the demand market drops to 4.86, and then it needs its money back in New York, it will lose $1,000, less the interest it re ceived. So when it comes to putting money on demand interest, the demand rate of exchange must be considered very closely. Senator W eek s . If there were American exchange in South America, so that the South American bank could draw direct on New York, the American importer would be able to save the com mission which he pays to the London bank, would he not ? Mr. K e n t . I hope not. He should pay the New York bank. BANKING AND CURBENCY. 2989 Senator W e e k s . Does not the New York bank charge a commis sion anyway ? Mr. K e n t . Yes. Senator W ee k s . It w o u ld not charge any larger commission, would it? Mr. K e n t . It would if it could, naturally. It would be a question of competition. Senator H itch co ck . Let me ask you. I do not qute understand the case you cited of a New York bank having put $1,000,000 on de posit in a London joint-stock bank. It would receive, you say, 3^ per cent interest on that deposit at the London joint-stock bank, and the London joint-stock bank would be lending that money out at a higher rate? Mr. K e n t . Oh, y e s; u n d o u b te d ly ; i t could n o t be p a y in g 3^ p e r cen t i f i t d id n ot. Senator H itch co ck . At what rate would it lend it ? Mr. K e n t . At present, 4J. Senator H itc h c o c k . And that is based on the Bank of r a te of 5 p e r cent ? Mr. K e n t . Yes; that is the private rate of discount. England It is the rate that is applied to prime bankers’ bills in the London market. 'It follows the Bank of England rate up and down. Sometimes it is a little over the Bank of England rate, but very seldom. Usually it is something under the Bank of England rate. And when it comes down 1 per cent under the Bank of England rate that rate is usually reduced unless the Bank of England feels it is not a safe situation and does not wish to reduce its rate. Then it may go out into the market and borrow itself in order to make its rate good. Senator H itc h c o c k . S o one of the effects, when the Bank of Eng land raises its rate, is to increase the deposits of banks on the Continent and in New York in the various joint-stock banks? Mr. K e n t . Yes. And even if it did not actually increase those deposits, it might be the means of retaining them. Senator H itchcock. Holding them? Mr. K ent . Yes; holding them. One important question that must be decided before the bill is passed is whether the regional bank can go out into the market and purchase foreign bills of exchange or whether it must buy them of member banks with the indorsement of the member banks. If the regional bank is allowed to go into the market, it will have a great advantage over other banks, because its money will not cost it any thing as it will pay no interest on its deposits. This being true, an unfair competitor would be placed in the market that is already drawn too fine for the sake of safety. Competition has reduced the profit to bankers buying foreign bills which bear a contingent lia bility even after they are discounted from nothing to one-sixteenth of 1 per cent. It does not seem a proper transaction for a banker to assume a 60-day liability with an average insurance profit of onethirty-second of 1 per cent and with the possibility of that being turned into a loss if the exchange rate goes against him. The market having been cut in such a manner, the regional bank, if compelled to buy its exchange from member banks, or with their indorsements, could do so with such small difference over what it 2990 B A N K IN G AND C U RREN CY . would have to pay direct in the market that it could more than afford it in order to secure the cooperation of the outside banks, and also to have their indorsement and not to be required to look into the standing of the individuals and firms who were drawing the bills. The value of this cooperation must not be underestimated. There is no doubt whatever that neither the Bank of England, the Bank of France, nor the Bank of Germany could make its discount rate effective if the other banks in those countries did not cooperate with them. For instance, the amount of money in the London market is so many times the resources of the Bank of England that it could not borrow sufficient in the market of itself to make its rate effective, if it did not have the cooperation of the other London banks. As soon as the Bank of England rate is raised, or as soon as other London bankers realize that the Bank of England wishes to obtain control of the market, because the private rate of discount may have dropped too far below the bank rate, they at once raise their rate. Again, take the Reichsbank, in Berlin. It unquestionably could not have increased its gold holding by $100,000,000 during the last few months without the aid of the other German banks. A portion of such increase was undoubtedly obtained through the issuance of small notes (20 and 50 mark notes), but that only took gold out of the pockets of the German people, whereas a large part of the in crease came from importations, mostly from London. There is every possibility that the Ileichsbank purchased finance bills of numbers of German banks, probably indirectly, in order to obtain the credit to purchase the gold, and if it expects to be able to hold gold with the knowledge that the foreign trade of Germany was working around in such manner as to enable them to meet the borrowings at maturity. Senator H itch co ck . Y ou say the Reichsbank undoubtedly pur chased finance bills? Mr. K e n t . Yes; or may have had some other German bank oper ate for it, possibly the Deutsche Bank. Senator H itc h c o c k . Will you explain what vou mean by “ finance bill ” ? Mr. K e n t . A finance bill in this case would be a draft of, say, the Bank for Handel and Industry, in Berlin, drawn upon its London bank, say, at 90 days’ sight, and against the credit the German bank had established with the English bank. If the Deutsche Bank acted for the Reichsbank, and the Reichsbank did not wish to buy this finance bill itself, the Deutsche Bank could go in the market and buy these finance bills from the German banks. Senator H itc h c o c k . What motive would the Reichsbank have in having the Deutsche Bank act as an intermediary? Mr. K e n t . I do not know. They might have preferred to have some other bank handle it for them. Senator H itc h c o c k . The chairman inquires what reason could the Reichsbank possibly have for not desiring to appear in the open market as the purchaser? Mr. K e n t . Well, if they purchased a bill of a German bank drawn upon a London bank, it would be single-name paper until it was accepted by the London bank. Senator H itch co ck . Or until it had indorsement. I see. That is very reasonable. Now, then, when the Reichsbank buys those accept- B A N K IN G AND CU RREN CY . 2991 anees or those finance bills from the Deutsche Bank, what does it pay the Deutsche Bank for it? Mr. K ent . In a credit on its books. Senator H itc h c o c k . What benefit does the Deutsche Bank get from that credit? Mr. K e n t . The Deutsche Bank may use that credit in the market. Senator H itc h c o c k . In procuring notes from the Reichsbank— currency ? Mr. K e n t . They probably would not secure notes, except for such amount as they might desire actual currency. It is the credit they would probably use. Senator H itc h c o c k . Of course they use the credits either in the shape of notes or gold. ' Mr. K ent . Or drafts upon it. Senator H itch co ck . Yes. Now, then, up to that time the Reichs bank has given the credit upon its books and received a draft on Lon don which is due in 90 days. Mr. K e n t . Yes. Senator H itc h c o c k . In what w ay does the Reichsbank use that finance bill or draft? Mr. K e n t . If the Reichsbank used it itself, and I question whether it did—I think very likely it handled it through some other bank—it would use that to build up a credit with its London correspondent. It would send the bill to London and discount it in the London market. Senator H itc h c o c k . F o r g o ld ? Mr. K e n t . Discount it in the London market and have the pro ceeds of that discount credited to the deposit with the correspondent in London until the correspondent had a sufficient cash balance so that it could purchase gold in the market and pay for it from that cash balance. Senator H itc h c o c k . By which it would either enable the Reichs bank to draw gold from London or enable it to avoid sending gold to London if the balance is against it. Mr. K e n t . Yes. Senator H itchcock. I do not see that that brings any more gold to Germany than would be brought to Germany if the Deutsche or the Industril Haendlung Bank, you referred to, had done that same thing. Mr. K e n t . No ; it would not, but the Riechsbank is the protector of the gold reserve, and it takes the initiative when it is considered wise to increase its gold reserve. The manager of the Reichsbank gave notice, I think, something like a year ago, maybe in December, that he was going to increase the gold reserve and he started out to do it in every way he could, but I am not sure that this is one of the ways. Senator N elson . The deposit of g o ld in London to the credit of the Reichsbank in Germany is the same as though the Reichsbank had it in its vault. Senator H itc h c o c k . Yes; but it would not bring any more gold to Germany, than if the Deutsche Bank had done the same thing. Mr. K e n t . The Deutsche Bank does not have to keep gold; it does not have to keep a reserve. Enough reserve is provided by the 2 992 B A N K IN G AND CU RREN CY . Reichsbank. The Deutsche Bank would not care for gold, except as it wanted to have credit in Germany at the Reichsbank. Senator H itc h c o c k . There is cooperation, as I understand, be tween the 30 or 40 banks of Germany and the Reichsbank. Mr. K e n t . Yes. Senator H itc h c o c k . They cooperate with it and acknowledge its leadership. Mr. K e n t . Yes. They have to do it to a certain extent, because if they wish to rediscount their bills they have to go to the Reichs bank for their credit, the same as any London banks take their bills to the Bank of England when they have to have money. Senator O ’G orm an . Mr. Kent, if the London market learned that the Reichsbank was trying to increase its gold reserve, would the London market be able to take advantage of that knowledge and in crease its rates in London ? Mr. K e n t . Why, it did so. The Bank of England raised its rate to 5 per cent just a short time ago, probably to protect itself from Germany. Senator O ’G o rm an . N ow , instead of the Reichsbank indicating its desire to increase its gold reserve, would the London market attach any importance to an apparent effort on the part of some of the smaller German banks to secure gold? Mr. K e n t . The London market would realize at once that gold was being obtained in Germany. Senator O ’G orm an . I do not fully understand, yet, why the Reichs bank undertakes some of these movements to procure gold through what we may describe in an American phrase—through the use of a dummy bank. Mr. K e n t . The Deutsche Bank, for instance, has a London office and is consequently in a much better position to operate in the Lon don market than the Reichsbank’would be. Senator O ’G orm an . I see. And just as soon as the London market ascertained that the Deutsche Bank was trying to get gold----Mr. K e n t (interposing). They would realize it was fo r the Reichsbank in Germany. Senator O ’G orman (continuing). It would realize it was for the Reichsbank? Mr. K e n t . Certainly. So that it is not used to cover it up. The gold purchased in the market, when it comes from South Africa, is sold to the highest bidder. Senator H itch co ck . Mr. Kent, a few moments ago you spoke of French funds being withdrawn from German banks at the time of the trouble in Morocco, and relations between France and Germany were strained. Mr. K e n t . Yes. Senator H itch co ck . Were those French funds on deposit in the German banks at interest? Mr. K e n t . Unquestionably so, to a certain extent. These German banks have a system under which they pay a higher rate for deposits that are placed with them on the last day of the month and left with them until the last day of the following month, or the second or third month following, than they do on deposits that are in use. And the reason is that under their industrial system, they are able to turn those over to the industrial concerns at higher rates than they pay. B A N K IN G AND CUKKENCY. 2993 For instance, just now the German banks are paying about 4T% and 4f per cent for money left with them from the 31st day of October to the 30th day of November, whereas on other deposits they are pay ing probably only about 3 per cent. Senator N elson . Demand deposits? Mr. K e n t . Demand deposits. Senator H itc h c o c k . Y ou are not speaking of the Reichsbank? Mr. K e n t . No ; that has nothing to do with the Reichsbank. Senator H itch co ck . It is the 30 or 40 other banks? Mr. K e n t . Yes. Senator H itc h c o c k . N ow , what French institutions made those deposits ? Mr. K e n t . Probably banks like the Credit Lyonnais and the Comptoir d’Escompte and others of that nature, and it may have been money of the smaller banks. It was all a question of interest, and when the money was withdrawn by France, Switzerland stepped in and loaned and America stepped in and loaned. Senator O ’G orm an . Loaned to whom? Mr. K e n t . Loaned to Germany, and those funds took the p la c e of the funds withdrawn by France. Senator H itch co ck . I remember at that time of hearing that the French institutions when withdrawing those funds did not want to produce a crisis, and so when they withdrew from Germany they deposited in Switzerland with a view of having Switzerland transfer funds to Germany. Mr. K e n t . That might possibly have been done, but I do not know that it was. Of course, the German banks had notice these funds would be withdrawn—that is, in this way: Suppose that about any where from the 19th to the 22d or 23d of the month the German banks had advised the French banks that had deposits with them that they would pay them a certain rate of interest on money that was maturing at the end of that month. If the French banks refused to accept that rate, then the German banks would know that that money would probably be withdrawn on the last day of the month. They would therefore see if they could obtain it from some other source, and in this case they made direct offers to New York. Senator H itch co ck . What would be the method of withdrawal? Mr. K e n t . Checking on the account. Senator H itch co ck . French banks would draw checks on the Ger man banks and then what would they do with them? Mr. K e n t . They might sell them in London. If exchange between Paris and Berlin were such that they could not sell them there, they might sell these checks in London; that is, they would sell marks on Germany to the English banks. Senator H itc h c o c k . Or they probably did sell in Switzerland, v e ry largely ? Mr. K e n t . They may have done so. Probably they sold som e to Holland. Senator H itc h c o c k . But they would n o t send them with a demand for shipment of gold? Mr. K e n t . They did not demand shipment o f the g o ld , because they knew they would not get it. Senator O ’G orm an . Why not? Mr. K ent . Sir? 2994 B A N K IN G AND C U RREN CY . Senator O ’G orm an . Y ou say they knew they could not receive the gold if they asked for its shipment. Why? Mr. K e n t . If the Reichsbank gave the impression to the other German banks that it did not want gold to go out, it would be pretty difficult to get it, and therefore the French banks would not want to insist upon it. Senator O ’G orm an . Let me ask here, Would the German banks repudiate their obligations to the French banks? Mr. K e n t . N o ; they would not, It would not have to go to the point of repudiation. The exchange would be used by France where it could best sell it. For instance, if it could sell part of it in Lon don and part of it in Amsterdam and part in Switzerland at a better rate than it could obtain the gold—that is to say, suppose the Ger man banks say, “ We will ship you gold, but we will charge you 1 per cent for it.” Senator H itc h c o c k . The fact is, then, that the deposits of the French banks with the German banks were withdrawn from Ger many? Mr. K e n t . Yes. Senator H itc h c o c k . And the French banks, in order to get it, had to draw a draft and sell it in the market? Mr. K e n t . Yes. Senator H itc h c o c k . And take whatever discount was involved? Mr. K e n t . Yes. Of course, I do not know exactly the amount that was handled in this way, because the French banks do not give that out, and neither do the German banks. I could see how it could have been done, but I do not know the actual operation in this case. It will be just as necessary in this country for the bankers to co operate with a regional bank in order to make its rate internation ally effective as it is abroad. With a number of regional banks, in stead of a central bank, this feature would also become more diffi cult to control, for the bankers in, sav, Chicago and New Orleans, under circumstances previously recited, might be as much opposed to seeing their local regional bank lose money or be compelled to operate against its will as the managers of the local regional banks themselves. Taking all of these matters into consideration, it would seem, first, that a central bank is what wTe require for every reason in con nection with the protection of our gold supply, and, second, that such bank should purchase foreign exchange only of member banks or with the indorsement of member banks, in order to have their com plete cooperation, which would be necessary. It must be appreciated and understood that the effectiveness of the bank rate and of the operations of the central bank or regional banks can only be gradual and that the height of power for good can not be reached until the banks of the world understand that it is being and will continue to be conservatively managed and that it can be trusted not to endeavor to force its way too strongly against the natural currents of trade. Senator S iia f r o t h . N ow , I would like to ask you a question o r two with relation to this rate of discount that is fixed or is to be fixed by these banks or by the Federal reserve board. As I understand it, in order to get gold into the country they raise the rate of interest? Mr. K e n t . Yes. B A N K IN G AND CU RREN CY . 2995 Senator S h a f r o t ii . N ow, that, of course, does an injury to the people who want to borrow at a low rate, does it not? Mr. K ent . It is always a tax on the trade of the country to have the rate put up. Senator S h a fr o t h . Isn’t there any way by which it would be cheaper to get this gold into our country than by raising the rate of interest ? Mr. K e n t . I think not. Senator S h a fr o t h . We have been getting our full share of gold in the last 40 years, haven’t we? And we have had no bank that can fix the rate of discount. Mr. K e n t . That is true, except that with the system we have at present, or the lack of system, it is impossible for us to look ahead and prevent gold going out, maybe, when we might otherwise be able to. If we had a central bank, the question of the cost to the public, then, would be represented by this: That with a central bank, using this rate to attract the gold when it seemed necessary, the higher interest rates would probably prevail for a shorter time than they have done under our past system. In raising the rate at times jmu may prevent a high rate being carried for a long period. The Bank of England, for instance, raised its rate to 5 per cent recently, ap parently because it was thought in England that that would prevent enough more gold going out so that the bank might not be required to raise its rate to the point where gold would be attracted. That is, if by raising its rate to 5 per cent it stopped the outward flow of gold, it would be cheaper for the country to pay that 5 per cent for a time than to let the gold go and then have the country have to pay 7 per cent to get it back. Senator S h a fr o th . H ow much paper is affected, in your judgment, in this country, or would be affected if we had a raising of the rate of discount? Mr. K e n t . Only the paper that was discounted after the raise of the rate and until it was lowered again. Senator S h a fr o t h . H ow much do you think that would be ? Mr. K ent . Well, it would depend partly on the length of time the rate had to be maintained at the higher point and partly on the time of year. Senator S h a fr o t h . Would it be as much as on a billion of dollars? Mr. K e n t . It might be, but it would depend something on the time of year. At certain periods of the year 60 and 90 day bills are drawn more largely than at other times of the year. Senator S h a fr o t h . Then wouldn’t that make a very expensive method of getting gold into the country? Mr. K ent . It does not if the discount rate is handled properly. Senator S h a fr o t h . That is, if it goes down promptly. Mr. K ent . Yes, sir. Senator S h a fr o t h . I can very easily see how all banks would cooperate with the central bank or central power in raising the rate of discount, but I should think the banks would feel, if the higher authority would say, “ The rate must go down,” that they would begin to try to hold the rate up. It is human nature. Mr. K ent . H ow could they if the central bank were loaning at 4 per cent and had sufficient power, was a large enough' bank, to loan a 2996 B A N K IN G AND C U RREN CY . large amount of money—how could the other banks be loaning at four and one-half? Senator S h a fr o t h . But this operates only when there are dis counts, as I understand—the loaning of money of the Federal reserve bank. But it seems to me that the banks could say, “ Well, now, they have raised this rate, why can not we get our interest at this rate? ” It seems to me it would have a tendency to make them cooperate with each other to prevent a lowering of discounts, all of which would be a detriment to the people who have to borrow money from the various banks in the country. Mr. K e n t . On the other side, if we had a central bank we would become, in time, a world financial power, and our bank rate would have to be based partly on conditions in other parts of the world. If we reduced our bank rate because the managers of the bank were familiar enough with all the conditions in the world to think it was desirable, if the banks in this country endeavored to hold for a higher rate, money would come in from Europe and take the place of the money the banks here would have to loan. Senator S h a fr o t h . D o you think that the power to control the dis count rate would become effective unless the Federal reserve banks had the right to go out in the market and power to deal with the public? Mr. K e n t . I think it could be. It might be possible that it would be better for the Federal reserve bank to be able to go into the market for domestic bills. It would easily develop after the banks were estab lished, and in a very short time, and whatever conditions seemed nec essary could be met. You must always remember, and I want to em phasize what I just said about becoming a world financial power, just as soon as we have a bank that the other banks in foreign coun tries can look to as an institution that has proper power and proper standing that they can deal with, then we are going to be in a posi tion to command foreign money, and if our rates get too high here then foreign money will come in. In time we are going to have ac ceptances outstanding, and foreign banks are going to be in the posi tion then that our banks are now. When they have CO and 90 day acceptances they can discount them or not, as they wish, and foreign banks will hold them when profitable if our acceptance proposition is made effective. Senator S h a fr o t h . The only time I remember when the Govern ment attempted to get gold or prevent the outflow of gold was during the Cleveland administration in 1895 or 1896. Mr. K e n t . Yes. Senator S h a fr o t h . And at that time they sold bonds. Of course there were two objects in view, one was to replenish the deficit in the Treasury and the other was to maintain the gold reserve. Now, do you regard that was more expensive or less expensive to the entire people? Mr. K e n t . It was more expensive for this reason: The gold had gone out of the Treasury through the presentation of greenbacks, and then the greenbacks were put out by the Government again and used once more to withdraw gold, so that the original issue of bonds which brought in $50,000,000 of gold, as I remember it, did not accomplish anything because gold went right out again. And when Mr. Morgan went to New York and conferred with Mr. Cleveland on the matter B A N K IN G AND CU B B E N C Y . 2997 he was able to show conclusively that we must have foreign gold come in to fill up the Treasury rather than to have American gold. Senator N elson . And that bond sale to Morgan & Co. covered not only gold coin but gold bullion? Mr. K e n t . Yes. Senator S h a fe o t h . That contract was made in gold bullion—so many ounces? Mr. K e n t . Yes. And Mr. Morgan, as I understand—I was not in New York at that time—was able to stop shipments that were already tagged for Europe, because he sold some of these bonds to these people at a price that made it more profitable to invest their money in that way than to ship their gold to Europe. Senator S h a fr o t h . I can readily see that is some expense, although this money was taken down to the Federal Treasury. But its prin cipal reason for going out was because the general expenses of the Government had been more than the income. Mr. K e n t . Yes. Senator S h a fr o t h . But the question I want to direct your atten tion to (and your testimony is very enlightening to me), is the relative cost—whether it is better for the Government to stand this expense and thereby save to the people the increased rate that would be established by reason of the decree of the bank or decree of the Government that the rate should be high. Mr. K e n t . The expense to the people was very great at that time, if I recall correctly, and money rates were up very high. Senator N elson . It is estimated J. P. Morgan & Co. cleared be tween $9,000,000 and $10,000,000 on it. Mr. K e n t . S o that the people had a greater expense then than probably would be necessary with a central bank that had the respect of the world. Senator S h a fr o t h . Y ou know that even a little raise in the interest rate on more than a billion dollars would make an enormous amount o f money coming out of the people. Mr. K e n t . That rate would not affect anything that had been already discounted. Senator S h a fr o th . N o ; that is true, but the discounts every day are enormous. Mr. K ent . D o you not think, for instance, if a 5 per cent discount rate held, say, for a month, and by having put the rate up to that point the bank was able to put it down again to 4 | at the end of the month, it would cost the people less than if gold were allowed to go out until the people were paying 6 or 7 per cent for two or three months? Senator S h a fr o t h . But tlTere is no certainty that they would pay 6 or 7 per cent, because that would check enterprise itself. Mr. K e n t . But that is the way it has worked in the past, as I recall it. Senator S h a fr o t h . Yes. But here is one feature about it that does not seem to me exactly perfect, and that is that there may be a consultation of interests in keeping this rate up instead of down. I can see that the banks want to get just as much interest as they can legitimately and properly, and to loan a person who would pay a higher rate of interest. For that reason, it would seem to me, it is S. Doc. 232, 63-1— vol 3----- 68 2998 B A N K IN G AND CTJBRENCY. not absolutely where the borrower is upon the same footing as the lender. Mr. K e n t . In reply, I repeat again that money would come in from foreign countries if our banks try to make the rate higher than it normally should be. Senator S h a f r o t h . I just wTanted to get a little light on the subject. Senator N elson . Y ou have not finished your statement, have y o u ? Mr. K e n t . Yes; I have finished it. I do not know whether there are any other questions you wrould like to ask. Senator N elson . The international balances of trade have to be settled in gold, do they not? Mr. K ent . I f you w ill include the invisible balance of trade also, they do; yes. Senator N elson . I mean the commercial balance of trade. Mr. K ent . N o ; it does not necessarily have to be settled in gold. Senator N elson . I did not mean in actual coin, but I mean on a gold basis. You understand that? Mr. K e n t . Certainly. Senator N elson . That is the same, isn’t it? Mr. K e n t . Yes. Senator N elson . That is the same thing; that is, what we sell to Europe they pay for on a gold basis. Mr. K e n t . Yes. Senator N elson . And what we buy from Europe we pay for on a gold basis, do we not? Mr. K e n t . Yes, sir. Senator N elson . N ow , then, if the value of an acceptance—the value of an American acceptance either of a central bank or any bank in this country—was, in commercial value, equal to a London accept ance, we would be in this condition, would we not, that drafts drawn on our houses would circulate with as great facility as drafts drawn on London houses? Mr. K e n t . Yes; provided that American exchange was as de sirable as London exchange. Senator N elson . N ow , let us look at the question: Suppose our New York acceptances were as valuable in the commercial world as London acceptances, the people of Europe, shipping goods to America, would draw on the American banks, would they not? Mr. K e n t . Yes. Senator N elson . And it would be accepted? Mr. K e n t . Yes. Senator N elson . And when we ship our goods to Europe we would draw on the London bank, say, and it ^ould be accepted ? Mr. K e n t . Yes. Senator N elson . S o you have two sets of acceptances—for our im ports you have American acceptances and for our exports you have London acceptances? Mr. K e n t . Yes. Senator N elson . N ow , those acceptances would be like commercial paper in the clearing house, would they not? Mr. K e n t . Yes. Senator N elson . One would offset the other in the gold market? Mr. K e n t . Yes; as far as they were equivalent. B A N K IN G AND CU RREN CY . 2999 Senator N elso n . Yes. Those acceptances, pro and con, one would offset the other? Mr. K e n t . Yes. Senator N elson . S o that the balance of gold to be settled is the difference between those bills of acceptance? Mr. K e n t . Yes. And that balance would be settled in many ways. Senator N elson . And it is that fluctuating balance o f trade that makes the rate of exchange to some extent? Mr. K e n t . Yes; that is true. Senator N elson . If upon that settlement of balances, if upon that clearing of these bills of exchange, pro and con, it turns out they owe us a balance, the exchange is in our favor, is it not? Mr. K e n t . Yes. Of course, you understand, Senator, that there is what is called the invisible balance of trade that sometimes might offset the commercial balance of trade? Senator N elson . Oh, I understand that. But, for the sake of the illustration, I do not refer to the invisible balance. What has made the flow of gold here, given us such a power of gold, is that in all these series of years as a rule the balance of trade has been in our favor. Mr. K e n t . Yes; about $500,000,000 a year. Senator N elso n . And th a t, taken in the whole series of years, has brought the gold here a n d operated to keep it here? Mr. K e n t . It has operated to keep it here, certainly. Senator N elson . S o that we only had to settle with Europe to make up the balance they had against us in gold. Mr. K e n t . Yes. Now that you are only speaking about th e com mercial balances of trade----Senator N elson . The point we have to make in our system by leg islation and practice is to make the value of an American acceptance, I will call it, an acceptance of a central bank or our banks here—make the value of our acceptance as good as the London acceptance? Mr. K e n t . Yes. Senator N elson . That would solve the problem, would it not? Mr. K e n t . That would help very materially. Senator N elson . Would not that be the solution of it? Mr. K e n t . I do not think it would, because those acceptances would not be as good as London acceptances unless other things had been accomplished. Senator N elson . But if a coffee merchant in Brazil knew an accept ance on New York wTas as good as an acceptance on London, he would take it just as quickly on New York? Mr. K e n t . Yes. Senator S iia f r o t h . I want to ask you whether you have any sta tistics showing the amount of this invisible balance of trade? Mr. K e n t . Yes. Those statistics are very hard to get, and various estimates have been made by foreign-exchange men and students. For instance, in the first place we pay Europe a large amount in divi dends and interest. It has been estimated that Europe carries from $2,000,000,000 to $6,000,000,000 in our securities. Say the average is about $4,000,000,000. Now, if you figure the average rate we pay on that $4,000,000,000 as 5 per cent, that would mean $200,000,000 we would have to pay annually. Then, of course, we would undoubtedly be receiving from foreign countries dividends and interest on foreign 3 000 B A N K IN G AND CU RREN CY . securities which our people held, but that would probably be very much less than the payments. Senator S h a f r o t ii . Have you seen any estimate o f what they are? Mr. K e n t . Possibly $50,000,000. Senator S h a fr o t h . Then there is the tourist travel. Mr. K e n t . T h e to u r is t tra v e l h a s been v a rio u sly estim a te d a t $100,000,000 to $500,000,000; I th in k p ro b a b ly it is n e a re r $250,000, 000. Then there is the question of freights. A large portion of our foreign trade is carried in British vessels and also a large portion in German and French vessels. Senator N elson . There, again, is a question that confronts us. The stocks of a good many of these foreign lines are owned by Americans. Mr. K e n t . Yes; b u t p ro b a b ly a v ery sm all percen tag e. Senator N elson . In some lines there is very much. Mr. K e n t . Yes; take the International Mercantile Marine. If you make the proper deductions there I think the total may possibly come to $50,000,000. It has been estimated as being very much higher, but I think it would be about $50,000,000. Then there is the money that is sent abroad by immigrants that come to this country. For several years after they arrive they usually send home money to pajr for land over there or settle debts or send to friends and relatives, and that amount has been estimated vari ously at from $150,000,000 to $400,000,000. I think likely it comes to about $250,000,000 or $300,000,000. Senator O ’G orm an . Within what period? Mr. K e n t . Within a year. Senator H itc h c o c k . H ow can that estimate be correct? That seems to be a tremendous sum. Mr. K e n t . $300,000,000? Senator H itc h c o c k . Yes; that is $1,000,000 a day. Mr. K e n t . We have about a million immigrants come over every year, and if 1,000.000 people are combining to send a very little it mounts up very fast. You must remember that many of them con tinue to send money after they have been here two, three, four, five, six, or seven years. Senator H itc h c o c k . On an average, what amount of money do they bring with them ? Mr. K e n t . That, we know, of course, is at least $30 each, but they send back that $30 ordinarily the first year, I think. Those amounts are really very large. Of course, they are in small remittances, but I think they come very nearly to $300,000,000. Of course, that is an estimate to a certain extent, because the remittances are made in so many different ways. Some go through the United States post office, some through the express companies, some through the national banks, and some through the State banks, and some through private banks. Senator H itc h c o c k . It was $50,000,000 on dividends and interest. Mr. K e n t . That is the other w a y ; that is coming to us, so that would make a net of maybe $150,000,000. Senator S h a f r o t ii . Against us? Mr. K e n t . Yes. You see those figures can not yet be ascertained with any degree of exactitude. Suppose you take the fluctuation of American securities back and forth between Europe and this country B A N K IN G AND C U E R E N C Y . 3001 during a year. There is no one that is able to tell whether Europe holds more of our securities at the end of a given year than at the beginning of that year. Those things change. For instance, I think it was in March, 1907, if I remember correctly, Europe sold us a large amount of securities and we were obliged to remit for them. I think that in the latter part of that year they also sold securities here. That is always a danger in a way. If foreign countries be come afraid of our monetary system and begin to sell their securities to us, we shall have to pay for them. That is another reason, it seems to me, why we must be very, very careful about changing our bank ing system, and be as certain we are right as possible before we do so. If we put in any system here that is going to cause fear on the part of foreign investors, they are going to sell our securities, and there is not any question about it. Senator O’Gorman. Let me ask you this, Mr. Kent. Is not the comment of the foreign financial papers respecting our proposed legislation favorable ? Mr. K ent . I do not know whether you would call it favorable or not, because it is so mixed. They approve some things and others they do not. They all seem to recognize the fact that many changes may take place. The Economist, in London, has been publishing' a series of articles on the proposal, but they are more or less aca demic, and I am not sure but what they are taking the opinions of people on this side. Senator H itc h c o c k . What comment have they made on the decline in value of United States bonds? Mr. K e n t . That has been merely academic. I have noticed articles aPout it in a number of those papers, but they do not seem to con sider it of much moment at the present time. Senator S h a fr o t h . They have not declined n e a rly as m u ch in price as the British consol, from 142 to 76. Mr. K e n t . Yes. Of course, they have not the circulating privilege in connection with them----Senator S hafroth (interposing). Except that $90,000,000 which the Bank of England issues upon uncovered gold. Mr. K e n t . Yes. But the Bank of England is able to use those consols that it holds effectively, because if it wants to make its bank rate effective it will borrow on those consols in the London market, and in that way absorbs the funds that are there. Senator S h a fr o t h . The usual rate in the United States—I do not mean in New York City, but the usual rate throughout the United States—is higher than in Europe generally, is it not? Mr. K ent . Yes. Senator S hafroth. And that always attracts investments from Europe here? Mr. K e n t . Undoubtedly; yes. Senator S h a fr o t h . And consequently that has a tendency to regu late the inflow of gold toward us? Mr. K e n t . Certainly; and that is one reason why Europe has purchased our securities. That is, of course, the rate is higher to a large extent because our country is a newer country and is not as well settled, and the risks are greater in an unsettled country than they are in other countries. Senator S h a f r o t h . And the rate must be higher? 3002 B A N K IN G AND CU RREN CY . Mr. K e n t . Yes; as an insurance against the risk. Now, some of the foreign countries lend money upon land in Argentina, and others are lending it upon land in Canada, but it is very difficult to get any of their money for land in the United States, because our rates are lower than they can obtain in those places. Senator W e e k s . Mr. Kent, can you tell us what we can put in this bill that will create American exchange in South America and enable us to finance our South American business direct through New York? Mr. K e n t . It seems to me that if you established a central bank and authorized national banks, under proper conditions, to accept 60 and 90 day sight drafts, and also authorized the establishment of branches of banks in foreign countries, that it will all right itself naturally. I do not think it is necessary or advisable to include in the bill establishing a bank regulation for the operations that are going to take place. The simpler you can make it the better. Then those that are managing the bank will meet each condition as it arises, and they wfill be in a position to meet each condition as it arises, and they will not have to break any law to do it. We do not want any banking system that will necessitate our breaking a law every once in a while if some condition arises that we must protect. I am therefore in favor of the simplest possible form of a banking law, with as few regulations as is consistent with safety and con servatism, and with full power to the managers of the bank to do their business along conservative lines. I think that situation would be taken care of as it went on. Senator W ee k s . Y ou think the provision in the pending bill which enables national banks to establish branches would be a long step in advance? Mr. K e n t . That would help; but in the case of South America it would take longer, probably, to bring it about than in some other parts of the world, because our shipments to South America are very much less than their shipments to us. You see, we bring in about $80,000,000 or $90,000,000 worth of coffee from Brazil, and an immense amount of rubber from Brazil, and also sugar and other things, whereas they take very little in value in return, compara tively speaking. That is, there is a large difference in our balances of trade. And it is all handled through London and Germany now, partly because the German banks have branches there, and the London banks have branches there, and they are consequently in a position to obtain that business. Senator O ’G orm an . D o you believe that closer banking relations between the United States and South America would inevitably tend to an extension of our commercial relations with South America? Mr. K e n t . O h , unquestionably. There may be little extension for a time. I believe the German banks lost considerable money when they first opened their branches there, and also the English banks, because they had to become familiar with the credits; but I think it would work out very nicely as time went on. Senator O ’G orm an . Have you concluded your observations, Mr. Kent ? Mr. K e n t . Yes, sir. Senator O ’G o r m a n . The committee is very much indebted to you. B A N K IN G AND CUK REN CY. 3003 STATEMENT OF BRADFORD RHODES, PRESIDENT FIRST NATIONAL BANK, MAMARONECK, N. Y. Senator O ’G orm an . Mr. Rhodes, what has been your banking ex perience? Mr. R hodes . Besides being president of the First National Bank, of Mamaroneck, N. Y., I am chairman of the board of trustees of the Union Savings Bank, of Westchester County, and was the organizer and for 25 years president of this institution. T he national bank has a capital and surplus of $150,000. The savings bank is a mutual institution having no capital, the net earnings all belonging to de positors. I was also for many years editor and publisher of Rhodes Journal of Banking, and in i895 purchased the Bankers’ Magazine, consolidating the two publications. Shortly afterwards I disposed of my interest in this field. For three consecutive terms I served as a member of the assembly in the New York Legislature, being chair man of the banking committee each term. Senator O ’G orm an . Have you read the pending bill as it passed the House ? Mr. R hodes . Yes; I have read the bill. Senator O ’G o rm an . Y ou may make any observations you desire .to make respecting it. Mr. R hodes . I wish to say, Mr. Chairman and gentlemen, that these preliminary statements are made solely for the purpose of indi cating my interest in banking matters, embracing both the theoretical and practical sides. With your permission I should like to first present briefly my views on the pending banking bill, and shall then be glad to answer any questions you may wish to ask. That our existing system of banking needs overhauling, I think is too obvious to require discussion; that the bill now before your committee at tempts to meet the problem in a comprehensive and statesmanlike manner is also, I think, equally clear. In Boston, some weeks ago, at the session of the American Bankers’ Association, of which I was New York City’s vice president, I made that statement about the first hour after I arrived there to the editor of a paper, and he thought I must be somewhat of an advanced thinker on banking lines. I said, “ No; I am a country banker, and I believe that the foundation of this Federal reserve system is to our advantage.” The independence of our separate banking units has been one of the most powerful factors aiding in the agricultural, industrial, and com mercial development of the United States. No other system of bank ing, in my judgment, whatever may be its special excellences, tends so strongly to promote the growth of business as does the independent American bank, intensely interested in the upbuilding of the enter prises of its own community and many of whose officers and directors are themselves engaged in carrying on those enterprises. To preserve the independence of our banking units should be one aim of whatever legislation may finally meet the approval of the Congress. But it is not enough to preserve such independence, for we have learned by repeated experience—some of it costly and bitter—that for the separate banking unit as well as for the individual member of society there come times when collective action is indispensable. In 3004 B A N K IN G AND C U RREN CY . society this is an age of wise cooperation, and it must become so in banking if our really admirable financial institutions are to be effi cient servants of American commerce and industry. The familiar story of the bundle of twigs that could not be broken when bound together, but readily snapped when separated, aptly illustrates the vital defect in our banking as conducted for many years. In fact, we have been extricated from the difficulties incident to our financial panics through resort to the principle of cooperative action, but invariably have resorted to it too late to do more than check the final destruction, instead of invoking this remedy in the in cipient stages of the disaster, or employing it in a manner that might have checked at the outset the tendencies that lead to panic. When the conflagration was raging the banks have united, through their clearing-house associations, to stay its ravages, and their action when thus taken has proved beneficial. But we need some method upon which surer reliance may be placed, a cooperative system care fully and deliberately planned and operative at all times. Such a system, I believe, is provided for in the pending bill, which unites all the banks for their own defense in time of danger and for the protection of those wdio deal with them. Banking is a quasipublic function, its operations vitally affecting all business activities. The power of the banks as grantors of credit is so large that sound public policy demands that it be subject to the watchful oversight of the Government and to wise and just control. I t seems to me that bankers who fail to recognize this fact are not sufficiently alive to the tendencies of the times. The adherence to Government bonds as a basis of bank circulation has heretofore rendered it impossible to impart any marked degree of elasticity to the note circulation. The bill now before you wisely departs from this policy. Those familiar with banking problems through long study and ex perience have perceived the substantial identity between a bank note and a bank deposit, agreeing that when a bank grants a credit it is of little moment to the bank whether the person receiving such credit shall receive the evidence of it merely in the form of a credit in a pass book against which checks may be drawn or in the form of obligations of the bank printed as circulating notes, the matter to be determined by the convenience of the person obtaining the credit. The further fact has been perceived by experts, namely, that if all bank credits, including notes, were daily redeemed through the clearings, banks might be freely intrusted with the privilege of issu ing their notes, even without lodged security of any kind, the pre caution of a moderate safety fund, a first lien on assets, and other simple requirements being ample to assure the safety of the notes. Of course, under the modern system of deposits and checks, the volume of bank notes will always be vastly inferior to the volume of checks employed in the transfer of credits. But while the facts just cited in reference to bank circulation are commonplaces to experts, they are unknown to the public at large. For more than 50 years the American people have been familiar with no other kind of currency except that bearing the stamp or guaranty of their Government. They have come to regard this ■ B A N K IN G AND CU RREN CY . 3 005 guaranty as an essential element of the quality of the paper circula tion. Business habits long established are not easily altered by statute. Few calamities would be greater than to have our people suspect the goodness of their currency. It would result in universal dis trust, a feeling equivalent to that which comes during an earth quake, when even the solid earth seems slipping away beneath one’s feet. We can not run the risk of having our currency open to sus picion, and this risk can be avoided in no practical way except by a Government guaranty such as this bill provides. Sentiment may play an important part in popularizing a new cur rency system, and it is often stated that sentiment is simply an expression of the common sense of the common people. But while these notes are obligations of the Government, they are issuable only to the banks, upon the deposit of approved collat eral and the setting aside of an adequate reserve against them. These provisions and others guard against the inflation which often accom panies the free issue of notes by governmental authority, and confer upon the new currency the substantial advantages of a carefully guarded asset bank note, plus the responsibility of the United States Government, thus combining the chief desiderata of a bank-note circulation—safety and flexibility. I would suggest that the notes be made redeemable in gold rather than in lawful money. Since “ lawful money ” is substantially ex changeable for gold, we gain nothing by putting this intermediate step between the notes and gold, and I think we should gain much by declaring the notes themselves to be gold obligations. It is, in fact, an evidence of our good faith and our ability to pay when we put all our circulating medium on a gold basis. The principle of massing our bank reserves in a series of regional banks is bound, I think, to work a vast improvement in our banking situation. That we need reserve banks more adequately equipped than those now existing is strikingly evident. The Federal reserve banks, with large capital, with the power to rediscount and to pro cure notes as needed, will be in a position to render services of vast importance to the banks of the country. By creating a rediscount market this bill releases the banks of the country from restrictions which have frequently rendered it impos sible for them to furnish adequate credit facilities, and have made it necessary for their own protection to curtail loans, thus entailing hardship upon the business community. It should not be forgotten, also, that this bill reverses our present policy of basing our banking system upon stock-and-bond collateral whose value shrinks fright fully in the face of unusual calls for money and links it with com mercial paper whose value is more stable and whose volume more fairly corresponds to the fluctuations of business. The rediscount privilege will make it practically possible for banks to supply all demands for legitimate commercial loans and at the same time will enable a solvent bank always to convert its liquid assets into currency, thus avoiding the necessity of suspending cash payments. Should this bill become a law and be accepted in good faith by the banks, with a determination on the part of the Gov ernment to deal justly with the banks, it is inconceivable that the 3006 B A N K IN G AND CU RREN CY . country should again experience such bank panics as marked the years 1893 and 1907. To avoid the distress which these disturbances occasioned seems to me worthy of the efforts of all the bankers of the United States, even if we have to give up some of our prejudices and long-cherished notions about banking legislation. As a savings-bank officer for a quarter of a century and one to whom the utility and beneficence of the savings banks strongly appeal, I wish to make a special plea in behalf of these institutions. They are the bedrock of our financial system, inculcating habits of thrift among their depositors, who by absolute self-denial not only provide the means of protecting themselves against the encroachment of disease and the oncoming of age, but gradually to take the steps leading from dependence to a competence, if not to affluence. The savings of these depositors, averaging less than $450 each, comprise in the aggregate a sum vast enough to be of immense importance in carrying on that part of the country’s industry which is dependent upon the safe investment of capital in mortgages, public-utility securities, and the obligations of States and municipalities. Savings deposits represent usually the small balances between in come and outgo which individuals are enabled to accumulate by the practice of economy, and justice to these individuals no less than sound state policy should impel us to see that the investments of these savings are religiously safeguarded from the hazards of commercial ventures, and treated as a separate fund, to be carefully invested in accordance with well-defined principles. The savings banks of New York and of the Eastern States gen erally, operated on what is known as the mutual plan, have estab lished a record for safety, economy, and efficiency that gives them a unique position among the financial institutions of the country. There are 630 of them in the United States, with aggregate deposits of $3,608,657,828.11 divided among 7,851,377 depositors, giving them an average of $459.62 each. For many years the losses incurred by these banks have been so small as to be almost negligible, and they have established a record for safety hardly surpassed by banks anywhere. This result has been due to the careful provisions made by the State legislatures respecting the character of the investments and to the further fact that the officers of these banks have complied strictly with the law and have been faithful to their trusts. It is questionable whether the mutual savings bank system is adapt able to all parts of the country. The slow growth of the system west of the Alleghenies leads to the conclusion that it is not; but of one thing there can be no doubt, namely, that the same rules which have been found necessary to the safe handling of savings deposits are universally applicable—indeed, that they are indispensable to the security of this class of deposits. I should like later on to refer to the provision of the bill in regard to savings departments in national banks, contenting myself for the present by expressing the hope that Congress may never consent to the lowering of the standard fixed by the successful mutual savings bank system. I wish to state that I see no objection to the establish ment of savings departments in national banks in those States, or even in the towns not, having savings banks alreadv established, but that in all cases where national banks are permitted to establish sav- B A N K IN G AND CU RREN CY . 3007 ings departments the savings deposits shall be separated from the ordinary commercial deposits and invested in precisely the same man ner as such deposits are now invested by the regularly constituted savings banks. It must not be forgotten that savings deposits m commercial banks, unless surrounded by adequate safeguards, are liable to be a source of grave danger, especially in times when banks are subject to unusual demands, for at such times the savings depositors are apt to show apprehension and demand their money, thus subjecting the bank to a general “ run.” In concluding this general statement, I wish to say that while the pending bill may not be ideal, it does fulfill the reasonable expecta tions of the people for a wise coordination of the banks of the country under such governmental control as will assure the protection of the public without injustice toward the banks. The bill does not attempt to carry out impracticable theories, but takes careful note of condi tions as they are, including the institutions of the country, the habits and predispositions of the people, and mindful of all these complex elements which have made banking legislation so difficult, it seeks to weld our disjointed banking units into a harmonious system, em bracing many of the principles tested by world-wide trial. The en actment of this measure, after such amendment as may be agreed on as a result of wise deliberation, will, in my judgment, immeasurably strengthen our banking system and immensely contribute to the wel fare and prosperity of all our people. I desire, Mr. Chairman, to submit, in connection with this general statement which I have made, a very few suggestions in regard to the bill itself, which I have read with some degree of care. At the outset it may be 'well enough to have the Federal reserve board constituted as now provided for in the b ill; but later on it will probably be found that the duties of their positions will be so onerous that the Secretary of the Treasury, the Secretary of Agri culture, and the Comptroller of the Currency will not have time to attend to their duties as members of the board. I would suggest that after the first year of their existence the Federal reserve banks send to the President a list of 12 names, out of which he shall select three members of the Federal reserve board in place of the two Cabinet officers and the Comptroller of the Currency. The reserve requirements of the Federal reserve banks should call for gold instead of “ gold or lawful money.” Redemption of notes should be in gold. Reserves against the notes should be kept in gold. I would favor making the capital requirements $5,000,000 for banks desiring to establish foreign branches. Generally banks operating abroad have a capital much in excess of $1,000,000. There are also doubts as to the propriety of allowing banks with such small capital to engage in branch banking, particularly in a foreign country. Branches result in expansion, and if the branch is situated abroad it is less easy to keep it under supervision than if located in the country where the parent bank is domiciled. The making of real estate loans by national banks is of doubtful propriety, since it tends to put in fixed form investment funds that 3008 B A N K IN G AND CU RBEN CY . should be kept in liquid shape. Most bank deposits are payable either on demand or after short periods. Farm loans, while good in themselves when carefully selected, even at 12 months hardly ma ture quickly enough to make them a desirable and quick bank asset. If, however, the national banks are permitted to establish savings bank departments, segregating their savings deposits, real estate mortgages would be a highly satisfactory form of investment. This would make it possible for the national banks to perform an addi tional service in communities where there are no regularly consti tuted savings banks. The creation of a department for local invest ments would also tend to keep deposits employed at home instead of sending them away to the large cities for temporary employment. I wish to commend the provision for the separation of the assets of the commercial and savings departments of national banks, and to emphasize the necessity of a high standard of investment of sav ings deposits bein<£ prescribed by the Federal reserve board; also that the creation or savings departments in national banks be limited to those places where savings banks do not already exist. On the ground of comity alone, the Federal Government would perhaps re frain from setting up a new institution to compete with others already operating satisfactorily under State laws and meeting the demands of the people. I feel sure that those who are familiar with the success of the mutual savings banks would regard it as unfortu nate if the national banks should be empowered to compete with them. But a useful purpose would be served b}7 authorizing savings departments in national banks in those communities now lacking adequate savings facilities, with the proviso always that the savings deposits shall be segregated and as carefully invested as are those of the regular savings banks. You gentlemen probably know that only about IT per cent of our people save money. Out of our 90,000,000 people, only about IT per cent save anything, while over in German}7, or even in little Switzer land, they are better savers than we are. And even in debt-ridden Japan their folks are better savers than we are, and a larger number of them save than the people of the United States. That is a matter of record. Refunding of the 2 per cent bonds should be on such basis as will save the banks from loss on their investments. Purchase of the bonds by the banks has been a leading factor in keeping up their prices. Now that the Government is to deprive the bonds of one of their chief advantages—the sole right to be used as a basis of bank-note circulation—it should see that no loss falls upon the banks by this action. The outstanding bank notes should be retired more speedily than is provided for in the bill, so that the country may sooner get the benefit of the elastic note circulation which the bill authorizes. Gentlemen, that is all I have to say in a formal way. I have here some memoranda in regard to banks of all sorts. The number of savings banks in the United States in 1892 was 1.059; in 1902, 1,030; and in 1912, 1,922. The number of depositors in 1892 was 4,781,605; the number of depositors in 1902 was 6,666,672, and the number of depositors in 1912 was 10,010,304. B A N K IN G AND CURREN CY . 3009 The amount of savings deposits in 1892 was $1,712,769,026; the amount of savings deposits in 1902 was $2,750,177,290; and the amount of savings deposits in 1912 was $4,451,818,522. And this is an interesting fact, that the average due each depositor in 1892 was $358.20; in 1902 it was $412.53, and in 1912 it was $444.72. That is the amount which was due each depositor. I have some other figures here, Mr. Chairman, which, with vour permission, I would like to have inserted in the record. Senator O ’G orm an . Without objection, they may be inserted in the record. (The memoranda referred to are as follows:) National banks in the United States (7,488) : Capital________________________________________________ Surplus_______________________________________________ Undivided profits---------------------------------------------------------Circulation----------------- -------------------------------------------------Individual deposits-------------------------------------------------------Total resources ------------------------------------------------------------State banks (13,3s!1) : Capital________________________________________________ Surplus________________________________________________ Undivided profits___________ .___________________________ Individual deposits_____________________________________ Total resources_________________________________ j.---------Mutual savings banks (6301) : Surplus_______________________________________________ Undivided profits----------------------- -----------------------------------Individual deposits_____________________________________ Total resources------------------------------------------------------------Stock savings banks (1,292J) : Capital------------------------------------------------------------------------Surplus----------------------------------------------------------------------Undivided profits______________________________________ Individual deposits____________________________________ Total resources________________________________________ Loan and trust companies (1,410*) : Capital________________________________________________ Surplus_______________________________________________ Undivided profits______________________________________ Individual deposits____________________________________ Total resources________________________________________ Private banks (1,110 \) : Capital________________________________________________ Surplus_______________________________________________ Undivided profits______________________________________ Individual deposits_____________________________________ Total resources________________________________________ State, savings, and private banks, loan and trust companies (17,823') : Capital________________________________________________ Surplus_______________________________________________ Undivided profits______________________________________ Individual deposits________ .____________________________ Total resources___________________________ ____________ All banks (25,3092) : Capital___________________________________ _____________ Surplus_______________________________________________ Undivided profits_______________________________________ Individual deposits_____________________________________ Total resources________________________________________ 1 Comptroller’s report, 1912. $1, 056, 345, 786 725, 333, 629 259, 549,156 724, 459, 849 5, 761, 338, 731 10, 870, S52, 343 459, 067, 206 177, 307, 042 94, 066, 902 2, 919, 977, 897 3, S97, 770, 826 248, 9S3, 429 66, 440, 676 3,608,657,828 3, 929, 091, 9S6 76, 871,811 31,052. 596 23,154. 694 842, 897, 859 993,631, 303 418, 985, 771 424, 313, 939 136, 428. 039 3, 674, 578. 238 5,107, 444. 382 22, 348. 040 9, 333, 6S0 4.250.634 152, 494,618 196, 940, 397 977,272,830 890, 990. 687 324, 340. 946 11,198, 606. 443 14,124, 878, 897 2, 033, 618, 616 1, 616, 324, 316 583, S90,102 17, 959. 945.174 25, 001, 731. 240 2 On dates given. 3010 B A N K I N G AND CUKRENCY. N u m b e r o f s a v in g s ba n k s in t h e U n ite d S ta te s , n u m b e r o f d e p o s ito r s , a m o u n t o f s a v in g s d e p o s its , a n d a v e r a g e a m o u n t d u e e a c h d e p o s ito r , 1892, 1902, a n d 19 12.1 Year. 1892.......................... 1902.......................... 1912.............................. Number of savings banks. Number of depositors. 1,059 1,036 1,922 Amount of savings deposits. 4,781, C05 $1,712,769,026 6,666.672 2,750,177,290 10,010.304 4,451,818,522 Average due each depositor. $358.20 412.53 444. 72 1Comptroller’s report, 1912. Senator N elso n . Y ou must not overlook this fact, Mr. Rhodes, that out in the West the farmers and small merchants have use for their money in the development and improvement of their farms and all that sort of thin". They are not like the people in the East, who are more limited in scope, and they have no opportunity to save their money except by putting it in savings banks. The people in the West put that money in active use in improving their farms, putting up more buildings, and doing all that sort of thing; and that is why we do not make the showing of savings deposits. We save it and realize much more out of it than you do in the savings banks. Mr. R hodes . D o you not think if you had savings banks in Minne sota you would learn to save money ? The school children, the work ing people, the housemaids—would they not learn to save money if they had savings banks to put it in? Senator S hafrotit . They do have banks out there to put it in. Mr. R hodes . Savings banks? Senator S h a f r o t h . Oh, yes; savings banks all over the West. Mr. R hodes . There is only one in Minnesota that I know anything about. Senator N elson . We have one good mutual bank in Minneapolis. Mr. R hodes . I know it well. I knew Mr. Moulton before he died. Senator B ristow . Why should not a boy who wants to save his money save it and buy a calf or a horse? I think he would use more judgment about that. Mr. R hodes . I th in k s o ; m uch d ep en d s on th e boy. Senator N elson . I s it not an ethical question? Is it a wise thing to teach children so much of the spirit of Mammon—get them to feel that this is only a world in which to make money ? Mr. R hodes . I believe the only way to make a good citizen is to make a good saver. If he is a good saver, he will make a better father and a much better citizen than otherwise. Senator N elson . I s there not the danger that he will make Mam mon his only god? Mr. R hodes . I do n o t believe th a t. S e n a t o r S h a fr o t h . Y ou t h i n k t h i s m o n e y s h o u l d a l l b e m a d e re d e e m a b le in g o l d a n d n o t in g o ld o r l a w f u l m o n e y ? Mr. R hodes . That is m y belief. Senator S h a fr o t h . If we should not pass this bill, would you be lieve in our enacting a law requiring the national banks to redeem the bank notes in gold? Mr. R hodes . N o. B A N K I N G AND CURKENCY. 3011 Senator S hafroth. Did you ever hear of a banker who was willing that the national-bank notes should be made redeemable in gold ? Mr. R hodes . That is what they want to do. Senator S h a f r o t ii . N ation al-b an k n otes? Mr. R hodes . They are practically based on a United States bond, which represents gold money. Senator S h a fr o t h . The national-bank notes are redeemable in lawful money, are they not? Mr. R hodes . Yes. Senator S hafroth. The Aldrich bill was perfectly satisfactory to the bankers, was it not? Mr. R hodes . Fairly so. Senator S h a fr o t h . They made their notes redeemable in la w fu l money ? Mr. R hodes . Yes. Senator S h a fr o t h . D o you not think there is a good purpose to be served in having this money redeemable in lawful money when that lawful money is redeemable in gold, less the reserves required, and therefore the greater ability of the Government to maintain the gold standard? Mr. R hodes . It is about as broad as it is long, anyway, because we are all on a gold basis. I recollect that a few years ago there was a Secretary of the Treasury here in Washington who redeemed the silver certificates in gold in the Treasury Department here—paid gold for them over the counter—and technically they are redeemable in gold. Senator N elson . Would it not be so with the currency? The re serve-national-bank note is redeemable in lawful money, and then is not that lawful money redeemable in gold? Does that not keep us on the gold standard? Mr. R hodes . It is an intermediate step. Senator N elson . Is not that intermediate step necessary in order to prevent large gold reserves. If we are going to have 12 competing points, we are going to require three or four times the amount of gold that is to be hoarded. Mr. R hodes . Why not? Senator S h a fr o t h . Because the reserves have g ot to be so much more. Mr. R hodes . Each pool by itself, as it were, in a separate place? Senator S h a fr o t h . That may be. but it is also redeemable at the Treasury, all of it at the Treasury, and when you make this currency redeemable at the bank in gold and then also at the Federal Treasury of the United States, you can readily see that it will take a great deal more money. Then, again, take the Government’s reserve. We have been upholding in gold about $346,000,000 of greenbacks and $740,000.000 of bank notes, and it has only taken $150,000,000 of gold, and if you scattered this gold reserve through these centers you are mak ing a competition against the Government itself. Mr. R hodes . That is possible, but we must remember the sentiment of the people. Everybody in the United States, all of us, think we are on a gold basis. Senator S h a fr o t h . We are. Mr. R h o d e s . W e o u g h t t o k e e p u p o u r g o l d s t a n d a r d i n g o o d f a i t h . 3012 B A N K I N G AND CURRENCY . Senator S h a fr o t h . Why do not the bankers want the same thing when they have a bank currency out? They have a bank currency—that is, $740,000,000 of currency—but none of them would consent that those notes would be redeemable in gold, because they have to keep the gold there to meet them. When the Aldrich bill came in, the bank provided there being a bank of bankers, they provided that it must be paid in lawful money; they did not mention gold. They made it payable in lawful money alone, and they did it, why? Because they know it is easier to maintain the gold standard. They know if you make too much pressure on a limited quantity of gold in this country it is going to have a tendency to keep gold in our vaults. Mr. R hodes . T h at is true, in large m easure; but, as I said before, the best illu stration-----Senator S h a fr o th (in terp o sin g ). L et me ask you th is question: O f course we had no trouble in p a yin g gold, except when there is a run on the T reasury for gold? Mr. R hodes . I do n o t w a n t an y g old in m y pockets. Senator S h a fr o t h . N ow , in case of panic, by the cooperation of these Federal reserve banks and the United States Treasury, can not the redemption take place in such a way that it would be a great ad vantage in having the gold currency redeemable in the other currency and the other redeemable in gold? Suppose I have a Federal reserve note of $1,000, and we find there is a run upon gold, and the Federal reserve board says we must co operate with the reserve banks, and a man comes to a Federal reserve bank in New York and he says, “ I have a Federal reserve note of $1,000, and I want gold.” The board says, “ We have not got gold, or, if wTe have, we do not choose to pay it, because that is payable in lawful money, but we will give you the lawful money, and you can send it to Washington and you can get gold.” So he takes the lawful money, and the bank of New York says, “ If there is going to be a run on gold, we will lock that $1,000 note up in our vaults so we can not get any more on that money.” So the man sends it to Washington, and he demands his gold on that lawful money, and the Government says, “ Certainly, here is your gold.” The Secretary of the Treasury says, “ If we are going to have a run on gold we wfill take that $1,000 in lawful money and lock it up.” You have by means of $1,000 practically redeemed, or at least tem porarily, $2,000, and you could not do that if all of it was made pay able in gold, because the man who had $2,000 would get it, and the man who had $1,000 in lawful money would get it. Is it not an advantage when there is a run for gold in this country to have that means, not of disturbing the gold standard, but of strengthening the gold standard? Mr. R hodes . T he d is c re tio n a ry pow er? Senator S h a fr o t h . Upon the part of the bank. Mr. R hodes . Of course, they exercise the same in principle in some foreign countries. It is an arbitrary matter. It is purely arbi trary on the part of the reserve board in Washington. Senator S h a fr o th . O f course, if they have plenty o f gold they pay gold, and it w ould be only in tim es o f stringency when there is so much hoarding that this w ould be invoked. B A N K IN G AND CURRENCY. 3013 M r . R h o d e s . I t is not very likely. The people o f the country have more money in their pockets than we think—the common people— and this system you are endeavoring so faithfully to perfect here will make banks so popular that the hoarding of money will never be resorted to by any people, no matter how ignorant they may be. Senator H itc h c o c k . The next witness, I suppose, will be Mr. Willis. Senator B ristow . There is one question I want to ask. I want to inquire whether Mr. Conant has yet submitted to the committee his suggestions for a Federal reserve bank? When he appeared before the committee some two or three weeks ago we asked him to submit a plan for a Federal reserve bank, and we also asked Mr. Vanderlip, Prof. Jenks, and Mr. Dawson to submit such a plan. If Mr. Conant has not yet sent the committee his plan in writing, I would like to ask that when it is received it be printed in the hearings along with the plans submitted by Mr. Vanderlip, Prof. Jenks, and Mr. Dawson, so that we may have them all together. I think that would be a great assistance to the committee. Senator H itc h c o c k . That can be done, and I am sure it would be very helpful to the committee to have them all together. Senator B ristow . This question has been handed to me to pro pound to you, Mr. Rhodes: What is the specific new feature of the pending bill that you deem most valuable? Mr. R hodes . Well, Senator, that is a very difficult question to answer. Of course, I am not a big banker. I am a country banker, although I associate much with big bankers in my territory, but I verily believe, from my standpoint, that the meat of this bill to the average country banker is its attempt to allow country bankers to get money quicldy. Senator B ristow . The discount provision ? Mr. R hodes . The discount provision. I think that is about the best of it. I am not afraid of the Government supervision. I say the more supervision the better. A good bank is not afraid of super vision; it wants supervision. Uncle Sam can come to see us every day of the week and charge what he pleases. I am speaking on behalf of my own bank now. Personally, I would like to have a Government bank with the circulating medium. Senator H itch co ck . I think it is so nearly 1 o’clock now that we had better not try to start with Mr. Willis until after recess, and we will meet again at 2 o’clock this afternoon. (Thereupon, at 12.45 o’clock p. m., the committee took a recess until 2 o’clock p. m.) AFTER RECESS. Senator H itch co ck . Mr. W illis, we w ill hear you now. STATEMENT OF HENRY PARKER WILLIS, OF NEW YORK, N. Y. Senator H itch co ck . State for the record, Mr. Willis, your name, occupation, and residence. Mr. W il l is . M y name is H en ry P arker W illis; I am a new spaper 'writer in N ew Y ork City. . Senator H itch co ck . Mr. Willis, you are employed upon a finan- C1al journal, are you not? S. Doc. 232, 6 3 -1 — vol 3----- 60 3014 B A N K I N G AND CURRENCY . Mr. W il l is . Yes, sir; the Journal of Commerce of Yew York. S e n a to r H itc h c o c k . Y ou h av e been a s tu d e n t of b a n k in g a n d c u r ren cy su b jects f o r som e tim e ? Mr. W il l is . Y es, s ir ; f o r a b o u t 15 y e a rs o r so. S e n a to r H itc h c o c k . Y ou h a v e h a d so m eth in g to do w ith th e g enesis o f th is b il l, h a v e you n o t? Mr. W il l is . About 18 months ago, Mr. Chairman, that is to say, about the 1st of April, 1912, a subcommittee of the House Banking and Currency Committee, of which Hon. Carter Glass was chair man, asked me to cooperate with them as an expert adviser, and I was appointed in that capacity. I continued working with them during the last session of Congress, and then was reappointed at this session of Congress in the same relation to the full committee, and am acting in that capacity now. Senator R eed . I did not understand the last part of your state ment. Mr. W il l is . I say I was appointed about 18 months ago in an ad visory capacity to the subcommittee of the House Committee on Banking and Currency and then was reappointed in the same capac ity by the full committee at this session, and am occupying that relation to the House Committee on Banking and Currency at the present time. S e n a to r H itc h c o c k . H a v e you h a d an y p ra c tic a l ex p erience as a b a n k e r, Mr. W illis ? Mr. W il l is . None w h a te v e r. Senator H itc h c o c k . Y ou have not been in business at all? Mr. W il l is . N o, sir. Senator H itc h c o c k . Have you ever held any chair in a college or university? Mr. W il l is . I was some years ago professor of economics in Wash ington and Lee University, later professor of finance in George Washington University, and still later dean of the college of politi cal science there. I did my post-graduate work at the University of Chicago, and took my doctorate at that institution, presenting a thesis on a financial question, “ The history of the Latin monetary union,” which I had prepared after study in European universities. After that I was secretary or expert assistant to the Indianapolis Monetary Commission, and had general charge, in conjunction with Mr. L. Carroll Root, of the preparation of their report and of the bill which they recommended to Congress. Senator H itch co ck . What, in substance, was that bill? Can you briefly outline it? Mr. W il l is . Yes. Senator R eed . Did you say you were secretary to the monetary commission ? Mr. W il l is . I did; yes, sir. Perhaps, Mr. Chairman, I could get at your question better by telling you what this commission was. The Indianapolis Monetary Commission was a voluntary body organized by a convention of boards of trade, which met for the purpose of recommending legisla tion designed to correct the district evils in the currency and banking system, I think, in 1897. That commission was appointed at the instance of this general convention of boards of trade. B A N K IN G AND CURRENCY. 3015 Senator R e e d . Did you mean 1897 or 1907? Mr. W il l is . 1897. This commission was created as a result of this general union of boards of trade, and did its work during 1897 and 1898. It finally recommended a bill to Congress, it having, however, as I have said, no official quality. The substance of that bill was this, I should say: First of all, the creation of an elastic banking cur rency; second, a definite declaration in favor of the gold standard of value; and third, the introduction of certain changes into the Treasury organization, calculated to bring about a segregation of the trust funds which were held behind the greenbacks; that is, to take them out of the general fund of the Treasury; and various other relatively minor modifications. Nothing was done with this bill at the time, as you are aware. Senator R eed . When was that bill reported to Congress? Mr. W il l is . A s I said, the commission was an unofficial body, but the bill was placed before Congress, probably in the autumn of 1898. Senator N elson . Where was it introduced, in the House or the Senate? Mr. W il l is . I think more attention was given to it in the House than in the Senate. Senator H itc h c o c k . Did it provide for a b a n k in g cu rre n c y ? Mr. W il l is . It provided for an elastic-note currency, with p r o vision for getting rid of the bonds, and basing the issues on com mercial paper. Senator H itc h c o c k . I t was an asset currency? Mr. W il l is . An asset c u rre n c y ; yes, sir. Senator R eed . D o you know who introduced that bill in the House of Representatives? Mr. W il l is . My recollection is that it was introduced by Represen tative Jesse Overstreet, of Indiana. Senator R eed . It was known as th e Overstreet bill ? Mr. W il l is . I th in k it was. T h a t is m y recollection. A s I left W ash in gton after the work o f the com m ission was done, I did not follow the leg isla tiv e details. Senator H itc h c o c k . Y ou had something to do with the drafting of that bill ? Mr. W il l is . Y es, sir; I had expert charge of the work. Senator H itc h c o c k . Y ou have had, therefore, considerable ex perience in the work of preparing legislative matters? Mr. W il l is . I th in k I m ig h t f a ir ly say so ; yes, sir. Senator H itc h c o c k . Referring to your present connection with the House Committee on Banking and Currency, you took up your work in 1912, and are still employed by the committee? Mr. W il l is . Just so; yes, sir. Senator H itc h c o c k . H ave you a copy o f the d raft o f the b ill as first m ade by you ? Mr. W il l is . The bill presented by the committee was prepared under the direction of the chairman, Mr. Glass, and such work as I have done has been that of an advisor and investigator, cooperating ut each stage and carrying out the directions that were conveyed to me by the chairman. ' Whatever authentic drafts of the different stages through which the bill passed there are. are in the possession, 3016 B A N K IN G AND CURRENCY . so far as I know, of Mr. Glass. There were a good many successive drafts on various points. Senator H itch co ck . Can you give the com m ittee an idea o f w hat the first d raft provided ? Mr. W il l is . I think, substantially, the same as the present bill, except that many minor details were changed, of course, perfected, as wTe went along. Senator H itch co ck . Were there 12 regional banks? Mr. W il l is . Y es, sir. Senator H itc h c o c k . W ith a Federal board o f control? Mr. W il l is . I am not sure that that name was given to the board. Senator H itch co ck . A board to be appointed by the P resident ? Mr. W il l is . A board o f control; yes. Senator H itc h c o c k . A board that w as a board of public officials, appointed by the P resident? Mr. W il l is . There were also banking representatives in the earlier draft of this bill, some banking representatives. Senator R e e d . On w hat? Mr. W il l is . On the board o f control. Senator H itc h c o c k . H ow many banks were provided for? Mr. W il l is . I do not know that I recall exactly. The first draft of the bill, in any perfected form, became public at some time during last June. It was given out then to the newspapers from some source, and the data are all given there. I think it would be better, proba bly, to refer to that. Senator H itc h c o c k . In th e n ew sp ap ers? Mr. W il l is . It was given out and was printed by them. Senator H itc h c o c k . Some o f the members o f this com m ittee w ant to get an idea o f how this b ill had developed. Mr. W il l is . The bill has been developed, as I have said, Senator, with the cooperation of the Committee on Banking and Currency, by a gradual process of study, extending over about 18 months; and as far as my relation to it is concerned it has been, as I have said, that of an advisor and investigator. I have done what I could to advance the work, doing wrhat ordinarily falls to one acting in that capacity, carrying out the instructions of the chairman at each stage of the process, consulting with him and doing what I was instructed to do. Senator H itc h c o c k . What was the size o f the board, Mr. Willis? Mr. W il l is . It seems to me—I dislike, Senator, to give this data simply from memory, and can speak only subject to the qualification that I am speaking merely from memory, because there have been so many different changes and drafts—that in this draft which be came public, and which was the first perfected draft, there was pro vision for two representatives from each of the regional bunks; that is, a so-called commission was appointed, or elected, rather, and then a given number of Government executive officers were ex officio members of that body. That made a rather large body o f, perhaps, 25 or 30 men. Senator H itc h c o c k . I f there were tw o from each regional bank, there w ould be 24 o f them. Mr. W il l is . Well, in this bill I speak of, I think the number of banks may have been 15. That was the first number hit upon. B A N K I N G AND C U E E E N C Y . 3017 Senator R e e d . That would be, then. 30 men directly representing the banks? Mr. W il l is . Yes. Senator R eed . Then you added to that bank representation of 30 the Secretary of the Treasury and who else? Mr. W il l is . I think the same officers who are mentioned in the present bill, the Comptroller of the Currency and the Secretary of Agriculture. Senator R eed . S o the Government would have three representa tives and the banks would have 30 representatives ? Mr. W il l is . May I continue there? Senator R eed . Yes. Mr. W il l is . This board was merely an advisory or consultative body which elected an executive committee, and that committee was vested with all the powers of the advisory body. In the executive committee, which, I think, consisted of nine members, there were three ex officio Government officers, and I think three who were chosen by the banks, and three who were designated by the President of the United States either from this commission or outside of it. A provision was made, however, that bankers who became members of the executive committee should resign all banking connections. The effort was to get a board which fairly represented the business interests of the country and the Government to act jointly. Senator R eed . Was that the stage in which this bill was before it was submitted to Senator Owen? M r. W il l is . I b eg y o u r p a rd o n ? Senator R eed . Was that the stage in which this bill was when the draft of it was submitted to Senator Owen? Mr. W il l is . I can not recall in detail, as I say, the exact stages through which the bill went. Senator Owen went over different drafts of the measure as we went along, and cooperated in shaping the terms of it. Senator R eed . At one time was there not a discussion or argument between Senator Owen and yourself in regard to the proposition as to whether the Government was to have the ultimate control or whether the banks were to have the ultimate control? Mr. W il l is . I do not recall such a discussion, Senator. Let me say at this point, however, that my feeling at that time was that it would be desirable to have certain banking representation on this board. I thought that by so doing we could get into closer touch with the banks of the country, and would have their advice etc.; that if the membership of the board were partly selected from the best bankers, then called upon to resign their banking connections, their connections with banking institutions, so that they would be come the servants of the public, you would have a stronger board for practical purposes than otherwise you would have. That was the view of Mr. Glass, as I understood it. and was a view in which I concurred. As he worked further on the subject, T think he came to feel that the board should consist entirely of public appointees. When that idea was suggested to me, Mr. Glass and I had some discussion of the matter, I recall. I do not remember in detail what it was. I think I said to him that it seemed to me that the entire elimination 3018 B A N K I N G AND CURRENCY . of bankers from the board would tend to lose us a good deal of sup port for the bill, and might result in weakening the plan in practical operation. That view was not accepted; but the form of the commission or board w’as made what it is. And since then I have devoted a good deal more of study to the thing, particularly in view of the rather extensive public criticism that has been visited upon the mode of control; and I think that the board, as now provided, consisting ex clusively of public officials, as it does, is a good one and one that can be trusted. Senator O ’G o r m a n . Are you still of the opinion that Cabinet officers should be members of the reserve board ? Mr. W il l i s . I think, Senator O’Gorman, that the Secretary of the Treasury, by all means, should be, even if his connection with the board were merely pro forma, in order to give him an active connec tion with this board; for although it is true that the form of the bill as now presented contemplates the taking of the general funds of the Treasury, the commercial funds of the Treasury, out of the Treasury and the placing of them in the banks, it is a fact that the disassociation of the funds from the Treasury would not be com pletely effected for a good while, and the immediate cooperation of the Secretary of the Treasury would be very necessary at every point. I therefore----Senator O ’G o r m a n (interposing). Well, would not the board, con sisting of public officials, always have the cooperation of the Secretary of the Treasury? Mr. W il l i s . Yes. Senator O ’G o r m a n . Even though he were not a member ex officio of the board ? Mr. W il l i s . I think that is perfectly true. At the same time, per haps partly for sentimental reasons, I should prefer myself to see the Secretary of the Treasury a member. As to the other two officers----Senator O ’G o r m a n (interposing). Right there, if you w ill permit me to ask another question: It has been suggested to us at different times, as a reason for the exclusion even of the Secretary of the Treasury, that this board should not be what we describe as a political board, but as far as possible it should be divorced. Mr. W il l i s . Yes. Senator O ’G o r m a n . From partisan suspicion or activity. Mr. W il l i s . Yes. Senator O ’G o r m a n . And it has been said, in that connection, that a President usually selects for Cabinet positions men who have been active politically. Mr. W il l i s . Yes. Senator O ’G o r m a n . And that we may not always have as valuable a Secretary of the Treasury as we have at the present time. Mr. W il l i s . Well, I agree fully with that view in general. But I believe from what I have seen of our Secretaries of the Treasury dur ing a series of some years observation here, that the Secretary of the Treasury is usually able to disassociate himself from purely commer cial considerations; and I do rather strongly feel that he should be a member of this board. I see no reason why the Secretary of Agricul ture should be a member of it. B A N K IN G AND CUBBENCY . 3019 • Senator O ’G orman . Why did you suggest that the Secretary o f Agriculture should be a member in the first place? Mr. W il l i s . Well, I do not k n o w that I did, Senator O’Gorman. Senator O ’G orman . Oh, I beg your pardon. Mr. W il l i s . Senator Hitchcock also spoke of my having suggested various things—as if I had necessarily suggested or favored every point in this bill. Let me say at this point, right here, that I believe it to be a good one, recommend its enactment, and am heartily in sym pathy with i t ; but that there are a good many things in the bill that 1 do not agree with. Senator O ’G orman . Well, now, it is in that connection that I want to ask a few questions. I am not much concerned about the genesis o f this bill. Mr. W il l i s . Yes, sir. Senator O ’G orman . I am not concerned about the authorship of it, but as you are a student of banking and currency I would be glad to know whether you would make any suggestions at this time looking to the modification of the bill? Mr. W il l i s . I sh o u ld be g la d to d o s o ; a n d I h a d in te n d e d to ta k e t h a t u p w h e n I w a s d iv e r te d to th e e a r ly w o rk o n th e b ill, etc. If it be y o u r p le a s u r e a n d t h a t o f th e c h a ir m a n , I w ill ta k e t h a t u p n o w . Senator O ’G orman . Very good. Mr. W il l i s . I said a moment ago that it seemed to me that this bill was a good one, and that I heartily recommended its enactment. I repeat that, and I also repeat that I think there are some serious defects in the bill at the present time, and that there are some tech nical defects in it; and I believe further that there are certain con cessions or changes that might well be made in the measure for the purpose of meeting criticisms that have developed, and for the pur pose of strengthening it before the public without materially inter fering with its general objects. I will now turn, with your permission, to the points that strike me as rather serious defects in the bill. In getting this bill into successful operation I think it will be necessary to have the banks which are engaged in operating the sys tem act harmoniously, and so far as possible, in strong sympathy with the plan. I say, if it be feasible to get that under reasonable conditions. In the second place, I think it is very desirable, in order to get that cooperation from the commercial banks of the country, that they should be in a measure protected to an extent that will enable them to continue as active commercial banks. Now, in this bill as it stands to-dav provision is made for allowing State banks and other banking institutions to become members of the organization upon practically the same terms as national banks. That means that instead of measuring up to the strongest unit in your system you are rather inclined to measure down to the weakest. In other words, the bank which is organized under the least stringent and the least satisfactory laws is the one that can come into the system, get the advantage of what it holds out. and at the same time extend its business broadly under the less stringent laws to which it is subjected. 3020 B A N K I N G AND CURRENCY . Now, the national banking system, as you are all aware, has to-day as its striking characteristic the note-issue function. Under this bill it is to be expected that that note-issue function will be gradually eliminated, and that at the end of 20 years it will disappear. Under those conditions what wrould be the reason why a bank should organize as a national bank, rather than as a State bank ? It seems to me that there will be no such reason, except the mere prestige of the name “ national,” and the somewhat closer relationship, pos sibly, between the national bank and the Treasury and the Govern ment, than wTould exist between the State bank and the Government. It has been stated by not a few critics of this bill that it would probably tend to extinguish the national system, so that in the last analysis you would have a corps of 12 reserve banks, or as many as you decide upon, presiding over groups of member banks organized under the law’s of the States. I think that that, like all extreme or general statements, is probably pretty far from the truth; but I also think that the tendency wmuld be quite strongly in that direc tion. I do not think that should be allowed to occur. Senator O ’G o r m a n . D o I understand you to say that, in your judg ment, the adoption of this bill as it now stands would be likely to induce a number of the national banks to surrender their charters? Mr. W il l i s . N o , sir; I did not say just that. What I meant to say, Senator O’Gorman, was that I thought that new banks—men who were contemplating going into the national banking system— would be more likely under this bill to organize with State charters than they would with national charters; certainly in many parts of the country. Senator O ’G o r m a n . Well, would not the same reasons that would induce men embarking in banking enterprises to take out State char ters also be likely to induce some of those who held national charters to surrender them and change into State banks? Mr. W il l i s . There would be that tendency; but, of course, it would be held in check by the existing situation as to bonds. S e n a t o r O ’G o r m a n . W e l l , w h a t i s y o u r s u g g e s t i o n ? Mr. W il l i s . I will come to that more fully later. Now, to sum u p my first objection, I think that in this bill State banks in order to be eligible for membership in the system ought to conform to the same limitations upon business as national banks. Senator R eed . N o w , let me understand you on that point----Senator N elso n (interposing). Then they would not come in at a ll. Mr. W il l i s . The State banks w o u ld n o t? Senator N e l s o n . N o. Senator R eed . Let me understand this, because it is a matter of very great importance. Would you, then, add to the powers of the national banks a provision making them broad enough so that they could exercise substantially the functions now exercised by State banks and trust companies, or would you let the present national act stand substantially as it does and prescribe the character of business which could be done by the State banks and trust companies upon coming into the system? Mr. W il l i s . I was just coming to that point, Senator Reed. Senator R eed . Very well. B A N K I N G AND CURRENCY . 3021 Mr. W il l i s . That is my second point, I mentioned two very serious defects in the bill. May I just take that up in my own way ? Senator R eed . Certainly. Mr. W il l i s . Secondly, I recommend the entire elimination of the savings-bank section as now given in this bill, so that a national bank would be restricted to its present line of business. Senator R eed . Well, that was not in your bill when it was intro duced ? M r. W il l i s . In what b ill, Senator Reed? Senator R eed . It was not in the b ill when it was first introduced, was it? Mr. W il l i s . The savings section was introduced shortly before the bill was reported to the House. Senator R eed . I say, it was not in the bill when the bill was intro duced in the House? Mr. W il l i s . No ; I think it was not. Senator R e e d . It was added by the caucus, was it not? Mr. W il l i s . My memory, Senator, is that that was done while I was not present. But I am speaking merely from memory. My memory is that it was added in the committee, during the prelimi nary work in the committee, and then ratified by the caucus. Senator R e e d . Yes. Very well. Mr. W i l l i s . N o w , those two changes, I think, should be made in the bill with a view to making this corps of banks a strong body of institutions, organized for the purpose of doing a strictly shortr • term banking business. Senator N e l s o n . Would you limit the statement to that also? Mr. W il l i s . I should make them conform, Senator, in every re spect, so far as it could be legally done, to the restrictions upon the national banks. Senator N e l s o n . Of course we could provide as to that, that they could not come in except under that condition. Mr. W il l i s . That is what I have in mind. Senator N e l s o n . And you think we ought to do that? Mr. W i l l i s . I d o . Senator N e l s o n . Then you would fence them out pretty effectu ally from the system? Mr. W il l i s . Well, I do not undertake to pass judgment on that. I think a good many of them would come in just the same, because the strongest State banks are, of course, to-day just as strong as many of the national banks. But that is a matter of opinion wholly, and I would not attempt to hazard anything more than a conjecture about it. Senator O ’G o r m a n . Let me ask you a question right here. If we are attempting to improve and extend our national banking system why should we attempt to make a provision which will relate to State banks ? Why should we not confine our effort to an im provement of our national banking system—if it be sufficiently at tractive ? And after we accomplish the improvement, it may induce State banks to surrender their State charters and come into the sys tem. I would like to know why we should attempt in this measure, with the constitutional limitations on our power, to legislate for State banks? 3022 B A N K I N G AND CURRENCY . Mr. W il l i s . Well, that is practically the idea that I have sought to express. Senator O ’G o r m a n . Well, do you mean we ought to eliminate what is now in the pending bill with respect to State banks and trust companies coming into the system? Mr. W il l i s . N o ; I think they should be permitted to come in, if they are willing to conform in every reasonable respect to the national banking act. Senator O ’G o r m a n . Well, you encounter the difficulty, then, sug gested by Senator Nelson, that a State bank is permitted, to enjoy functions which you would curtail and limit in the case of a national bank. Mr. W il l i s . I should say to the State banks that they should stay out of the system if they are not willing, in every respect, to come up to the national banking standard. To sum this up, my feeling about the proposed plan is that it should provide a strong, select corps of commercial banks, bound by the most rigid requirements of modern banking practice, to keep their assets in a fluid condition and to live up to stringent examination and investment standards. Senator O ’G o r m a n . Yes. You may proceed. Mr. W il l i s . N o w , I said I thought there were technical defects or blemishes in this bill. Senator O ’G o r m a n . Pardon m e ; before you proceed to technical defects, have you now exhausted what you conceive to be the serious and substantial defects? Mr. W il l i s . Those are, to m y mind, the points in which the bill is seriously at fault; yes, sir. Senator O ’G o r m a n . Well, then, will you briefly recapitulate the serious, substantial defects? Mr. W il l i s . First, the admission of State banks s u b je c t to their existing conditions of law and operation. Second, the weakening of the national system by the introduction of a savings section which would enable the national banks to com pete, in a way, with State banks, and to tie up a considerable part of their capital in other than purely fluid funds. I might add there—and this I do with much less certainty—that it has occurred to me that there might be some purpose served in permitting the organization of national trust companies, the same to be organized by the stockholders of national banks, and by them only, and to be operated for the purpose of taking over such business as did not properly fall within the sphere of a national bank, upon condition----Senator O ’G o r m a n (interposing). You mean that would not fall within the sphere of a commercial bank? Mr. W il l i s . Yes, sir; upon condition that such banks should there upon disassociate themselves from the present relations they bear to State trust companies organized in the same way—a kind of joint ownership of stock plan----Senator N e l so n (interposing). Would you have them related? Mr. W il l is (continuing). Of which there are, I understand, about 300 cases in the country. Senator N e l s o n . Would you have these trust companies, then, as appendages of national banks? B A N K I N G AND CUKKENCY. 8023 Mr. W il l i s . They would be that; yes, sir. Senator N e l s o n . Well, what is the difference between appending a trust company to a national bank and appending a savings bank to it? Mr. W il l i s . The difference is, as I understand it, that in this sav ings question there is no sufficient segregation or differentiation be tween the savings department and the commercial, but they are simply departments of the same corporation. My feeling in the matter is that a banking corporation organized under the national law should be solely devoted to commercial business, and should be organized for the purpose of carrying on that business in such a way as to make it a suitable member of this s}Tstem. Senator N e l s o n . But would you allow the same set o f men that run the national bank to organize a company in the next room to that, or in the building close by, a trust department as an attachment to it? Mr. W il l i s . But organize it under a separate charter, with differ ent liability, and with a different kind of inspection, subject to com plete differentiation of assets and possibly not allowed to have any direct dealings in the way of deposits or discounts with the bank itself. Senator N e l s o n . Would you allow the same set of officers and directors ? Mr. W il l i s . I think I should allow the same set of directors, pos sibly. I would not say with certainty about that. As I stated in the first place, I mean that merely as a means of meeting the apparently widespread demand for a provision enabling national banks to do in some way the business which at present is either driven away from them by the stringent requirements of the national-bank act "or else is carried on by them under the fiction of separate organization of trust companies under State laws. Senator S iia f r o t h . In the State from which I come, Colorado, a savings bank can do a general mercantile business. Mr. W il l i s . Yes. Senator S iia f r o t h . But when the bank fails the savings deposits are reserved in toto, and the depositors have a first lien upon all the assets. Mr. W il l i s . I see. That is, they are preferred creditors. Senator S iia f r o t h . Yes; preferred creditors. That complicates very much the affairs of a failing bank. Mr. W il l i s . Yes; I see. Senator S h a f r o t h . Because one side contends that the giving of interest on their deposits really ought to make them deferred; whereas, upon the other side, they say that these savings depositors are poor people that are putting their money in, and that therefore they should be preferred. I have generally favored segregation, myself. Mr. W i l l is . Well, I believe in that—the complete segregation of liability. Senator H it c h c o c k . Mr. W illis, had you finished your enumera tion of the chief defects of the bill ? M r. W il l i s . I h a v e , sir. 3024 B A N K I N G AND CURRENCY . Senator H it c h c o c k . T hen, I w ant to draw attention to the fact that after this bill was reported in the H ouse there was a very decided change in the m arket for U n ited States 2 per cent bonds. Mr. W il l i s . Y es; I k n o w . Senator H it c h c o c k . A n d I w ant to ask you w hether you think that the b ill adequately provides for our national credit? Mr. W il l i s . Well, Senator Hitchcock, may I reserve that point until later? That is a topic that I thought of taking up fully a little later on. With your permission I should like to deal with that later. Senator H it c h c o c k . B u t I w ould like to ask you at th is tim e w hether you think th at result was due to a defective condition in the bill. Mr. W il l i s . D o you mean the decline in the Governm ent bonds? Senator H it c h c o c k . Yes. Mr. W il l i s . I have thought somewhat upon that question. I do not 1hink that it was. But I do think this, that the 2 per cent bonds are in an artificial condition. Their market is largely artificial, and always has been. I think that any great change in legislation that does not make an absolute, unmistakable, positive provision for the redemp tion of those bonds at par—that is, I mean in the near future—may lead timid holders of those bonds to throw them on the market and thereby bring about a depression in their price; and while I, of course, can only advance an opinion on the subject I think that is what occurred in this instance. Senator H it c h c o c k . W ell, you do not believe, do you, that na tional banks that intended to stay in the system as proposed in this b ill w ould m arket their bonds ? Mr. W il l i s . Very few bonds in actual volume were marketed, Senator Hitchcock. Senator H it c h c o c k . N o. But you believe, certainly, that the only bonds which were marketed were marketed by banks which were going to denationalize themselves, because they could not accept the terms of this bill, do you not? Mr. W il l is . N ot necessarily, I should say. There are alw ays banks th a t are g e ttin g rid o f their bonds, sellin g them ; and it m ight easily have been the case at that tim e that the banks were disposing o f bonds for the purpose o f retirin g circulation. Senator H it c h c o c k . W ell, under the ex istin g law they are not perm itted to retire more than a very sm all proportion of their circu lation. Mr. W il l i s . C e r ta in ly ; that is true. Senator H it c h c o c k . But if they denationalize themselves they will naturally retire it all? Mr. W il l i s . Y es; th ey w ould retire all their circulation, and they w ould sell their bonds if th ey could get a good price for them . I can conceive o f the bonds b eing at a price where it w ould be better w orth their w h ile for the holders o f them to continue to hold them, rather than sell them on the m arket, as an investm ent security. H ave I answered your question ? Senator H it c h c o c k . In part you have. But I wanted to ask whether you felt when you finally approved the House bill—as I believe you did—whether you felt that it took into account the fact that there were some 4,000 national banks in the country which prac- B A N K I N G AND CURRENCY . 3025 tically derived no benefit from this bill at all, although they were required to give up one-tenth of their capital under it. Mr. W il l i s . Well, I did not feel then, and do not feel now, that those banks derive no benefit. . Senator H itchcock. Well, do you know of any bank having less than $100,000 in capital, doing business in a country community, which is not able to get all the rediscounts it desires under the pres ent system ? . . Mr. W il l i s . I s h o u ld n o t lik e to n a m e a n y in d iv i d u a l b a n k o f t h a t k in d . I d o n o t t h i n k I co u ld . Senator H itchcock. No ; but you are aware that throughout the West and the South there are thousands of banks which at certain seasons of the year already rediscount their paper with their reserve agents ? Mr. W il l i s . Certainly. Senator H itchcock. And, of course, this bill gives them nothing they have not already got. Mr. W il l i s . I can not agree with that. Senator S hafrotii. In times of panic it does. Mr. W il l i s . I could not take that view of it. Senator H it c h c o c k . Well, are you familiar with the condition o f these small banks in the country towns as they are at the present time? Mr. W illis. I have devoted as much attention to that as I reason ably could. As I told you, however, I have not had a technical bank ing experience and would not pretend to----Senator N elso n (interposing). Do you know the character of deposits of these small country banks? Mr. W il l i s . I t h in k so. Senator N e l s o n . What are they? Mr. W il l i s . Let me see if I understand your question. Senator N e l s o n . D o you know the character of the deposits of these small country banks in a rural community—the nature of their deposits ? Mr. W il l i s . Well, I presume that they are made there in part by persons who have funds that they want taken care of and in part by local tradesmen and farmers going there to obtain discounts on their notes. Senator N e l s o n . Are you aware o f the fact that the bulk of the deposits in these small country banks are time deposits drawing interest ? Mr. W il l i s . I k n o w a v e r y la r g e v o lu m e o f su c h d e p o s its e x ists. Senator H it c h c o c k . Y ou are familiar with the fact, now, that through the West, at the present time, and in the South there are possibly thousands of national banks which perhaps would dena tionalize in case this bill passes as it has come from the House? Mr. W il l i s . I have heard that stated, Senator, without knowing exactly how much basis there was for it. Personally, I may say at this point that I do not think it would be physically possible for these banks to do that in any considerable number—any large number. Senator H it c h c o c k . Will you state-the reasons? Mr. W il l i s . The reasons why they would not denationalize? Senator H it c h c o c k . Yes. 3026 B A N K I N G AND CURRENCY . Mr. W il l i s . In th e f ir s t p la c e , a n e ffo rt on th e p a r t o f su c h a b a n k to g o o u t o f th e n a tio n a l sy ste m w o u ld c a u se i t a r a t h e r h e a v y lo ss o n it s b o n d s. Senator H it c h c o c k . N o w , is not that fa ct w hat has caused the de of the bonds? Mr. W i l l i s . I do not think so, Senator. I do not think that has been the cause of it; but, of course, I merely am expressing an opinion. Senator H it c h c o c k . Suppose I told you I had received letters from 130 national banks in the State of Nebraska, outside of Omaha, most small national banks, and that TO of them advised me they would denationalize if the bill passed as it came from the House? Mr. W i l l i s . Yes? Senator H it c h c o c k . Taking that as a standard, how many small national banks do you think would denationalize throughout the United States? Mr. W i l l i s . Well, I should say unquestionably that that number of letters represented a very strong disposition on the part of the banks to denationalize. 1 should add, however, to what I said a moment ago, in addition to the question of the loss on bonds, there is this further idea----Senator H it c h c o c k (interposing). Let me stop you right there. Do you assume that Congress will pass a bill which will permit the 2 per cent bonds to go below par? Mr. W il l i s . I d o n o t a ssu m e a n y t h in g a t a ll. preciation Senator H it c h c o c k . D o you think it would be righ t for Congress to do that? Mr. W il l i s . I think it is righ t for the Governm ent to make proper provision for its debts, w hatever that m ay be. Senator H it c h c o c k . Suppose those banks did denationalize a n d retire their currency, w ould not that produce a stringency in the cir cu la tin g m edium ? Mr. W il l is . That is the point I wanted to speak of a moment ago. Senator H it c h c o c k . W as th at danger taken into account in fram in g th is bill? Air. W i l l i s . F u lly . Senator H it c h c o c k . Was it felt any banks would denationalize? Mr. W il l i s . Under this bill, Senator, the bank, of course, which wishes to denationalize is subject to the same conditions as at present; that is, it has to leave currency—lawful money—with the Treasury to the amount of its outstanding circulation. Now, under this bill provision is made for the depositing of those amounts in the Federal reserve banks. The Government, presumably, then would deposit all of those funds now classed as general assets in such banks. Now, let us assume for the sake of the argument that all national banks left the system. Assume, further, that these banks have $750,000,000 of bonds or of currency based on bonds. I think that is a little large, but we may use it as a round number. Senator S iia f r o t h . $735,000,000. Mr. W i l l i s . $735,000,000. It is evident, then, that the banks would have to leave with the Government $735,000,000 of lawful money, except in so far as they might have their own notes, which they would turn in. Now, the banks have to-day, say, in round numbers, $950,000,000 of reserve money. In other words, an effort to do that would BANKING AND CURRENCY. 3027 be out of the question. The banks could not do it, because they would be turning over to the new reserve banks the great bulk of their cash, if it be assumed that any banks at all went into the reserve system, so as to permit the organization of the reserve banks. Answering your question in another way, it was recognized, Senator, when the bill was framed that if it appeared that the banks were not willing to enter the system in large numbers, so as to make it effective and workable, it would practically be necessary to provide for the taking up of the stock of these reserve banks, to some extent at least, by the public at large, in order to get them organized and set them going promptly. Senator H it c h c o c k . That was provided for in the b ill ? Mr. W il l i s . It was not; no, sir. But it was considered—fully considered. You asked me if that was gone over, and I said “ yes.” Senator H it c h c o c k . The matter I wanted to have you discuss was whether any account wTas taken of the effect upon circulation by the denationalization, possibly, of 7,000 banks. Mr. W il l i s . The conclusion we reached, Senator, was if the reserve banks were organized, as it was supposed they would be, on some basis, such retirements of circulation as might be effected by the deposit of lawful money would be offset, as the funds would be put back into circulation immediately through the redeposit of that lawful money in the reserve banks, where it would at once constitute a basis for rediscount. Do I make plain what I mean ? Senator H it c h c o c k . H ow could you have organized 12 reserve systems, with a minimum of $5,000.0*00 capital each, if any consider^ able number of banks denationalize? Mr. W il l i s . A s I said a moment ago, Senator, it was thought then, in case any reason appeared for thinking many national banks would go out of the system—which I personally did not feel and have never been convinced of—that if that did occur it would be necessary to have the stock of the reserve banks thrown open to subscription bv the public in order to do just what you indicate—that is, to get them started with a generous capital Have I covered the point? Senator H it c h c o c k . Y ou have; but I do not see, then, that the retirement of perhaps $100,000,000 of national-bank notes would be provided for. It seems to me there would be a violent shrinkage of the currency and possibly a panic resulting through the refusal of many banks to join the system. Mr. W il l i s . I will say this, Senator: In my opinion it would be an exceedingly unfortunate thing to have a great many banks leave the system. If by any reasonable means that can be avoided it should be avoided, because the success of this system will depend5 in very large measure upon the existing banks, or a considerable num ber of them, joining and loyally helping to put the thing into opera tion. This bill is not a central-bank bill in the ordinary sense of the term, but it is a bill creating a series .of reserve holding agencies That is the distinguishing feature of the bill. Senator N e l s o n . But why do you propose this discrimination in the matter of bank reserves? _In the country banks, as defined here, they must immediately deposit a portion of their reserves with the reserve bank. Mr. W il l i s . Yes. Senator N e l s o n . Country banks? 3028 B A N K IN G AND CURRE NCY . Mr. W il l i s . Yes. Senator N e l s o n . Other banks have 60 days in which to do it. Why do you make that discrimination, that country banks must de posit the reserve immediately in these regional banks, while all the banks in the reserve cities and central reserve cities have 60 days in which to do it? M r. W il l i s . I d o n o t so u n d e r s ta n d th e b ill. Senator N e l s o n . Y ou read it and see. Senator S h a f r o t h . Even in that case, Senator, the bank has a year to determine whether it will come in, and it can be getting ready. Senator N e l s o n . T o come in? Senator S h a f r o t h . Yes; to come in. Mr. W il l i s . May I finish my statement? I was saying that the bill provided for a series of reserve-holding institutions. Now, it will be successful in large measure according to the degree in which it gets the reserves of the bank. If they do not come in, but leave the national system and become State banks, then, of course, there will be no obligation on them to deposit their reserves there. In other words, if you then threw open the subscription of the stock of those banks to the general public you would then be creating a sys tem of Government banks—public banks. Now, I do not think that would be a desirable thing to do, unless you are driven to it. Senator H it c h c o c k . Y ou do not favor the idea of a Government bank? Mr. W il l i s . I do not mean to say that in this connection. If you want me to take that up now—I am getting involved in a good many broad questions—I will; but I was going to defer that until later. May I do that ? Senator H it c h c o c k . Certainly. Mr. W il l i s . I think, then, it is highly desirable to get as many banks as can reasonably be induced to do so to come into this system at the start, in order that the system may begin business with an adequate volume of reserves in the banks, ready for use in coopera tive work for the maintenance of their credit. Senator H it c h c o c k . I had a question or two I wanted to ask you that I omitted formerly. I wanted to ask whether you were the only expert who assisted the committee in framing the bill? Mr. W il l i s . I think 1 am the only man who occupied an official status in that way. We called in before the committee a good many men of very high expert authority, who testified upon different points as they came up, and told what they thought about given subjects. Senator H it c h c o c k . Would you object to telling the committee whether Prof. Laughlin, of Chicago, approved the substance of this bill, in its fundamentals? Mr. W il l i s . I d o n o t k n o w a n y t h i n g a b o u t t h a t . I h a v e n e v e r h e a r d h im sa y . Senator O ’G o r m a n . Were there any hearings before any committee at the time this bill was formulated ? Mr. W il l i s . Not so far as I know, Senator, except those of last winter. You mean in the House? Senator O ’G o r m a n . Yes. The first time hearings were had with regard to this bill, and its provisions, were the hearings before the Senate committee? B A N K I N G AND CUBRENCY . 3029 Mr. W il l i s . I so u n d e r s ta n d it. Senator O ’G o r m a n . During the last five weeks? Mr. W il l i s . I so understand. Senator H it c h c o c k . Y ou do not know that Prof. Laughlin had assisted the committee in any way ? Mr. W il l i s . I am quite sure he did not. At least, if he did so, it was not within my knowledge. Senator N e l s o n . Y ou said you were the only official expert. Who were the nonofficial experts that appeared before you when you were framing the bill? Mr. W il l i s . Their names are given in the hearings. I could hardly give them all, Senator, but some of the principal ones were Mr. A. B. Hepburn, of New York, who I think was chairman of the American Bankers’ Association Commission; Mr. Paul M. Warburg; Prof. Laughlin, of the University of Chicago; Sir Edmund Walker, a Ca nadian banker, from Toronto; and a considerable number of other well-known bankers. Their names are all of record in the hearings. Then, in addition to that, the chairman of the committee sent out a large number of lists of questions and inquiries, and so forth, to ca pable men, and their answers were at his disposal in making up his mind on what ought to go into the bill. So that I think a pretty full attempt was made to find out what the community thought on each important point as the work was done. Senator O ’G o r m a n . In passing, I want to ask if I understand y o u correctly. The bill as prepared, as I understand it, was the result really of a collaboration of a number of people. Did you regard it as the best plan that could be devised at the time it was presented to the House? Mr. W il l i s . Under all the circumstances, Senator, of every kind, I felt then and I feel now, in all sincerity, that this plan is probably as good, subject to reasonable changes and improvements, and so on, as could be obtained. Senator N e l s o n . Y ou adm it it could be im proved? Mr. W il l i s . I have already pointed out, Senator, two or three points which call for change, and I am going to indicate others. Senator O ’G o r m a n . I understood you a while since to say that after further study and consideration, and as a result of the public criticism of the bill as offered in the House, you now see where the bill could be materially improved and you are proceeding to give some of the suggestions along those lines? Mr. W il l i s . N o ; not that, Senator. I think I said that as a result of further study, and so forth, I had come to feel that the placing of the reserve board entirely in the hands of Government appointees was a safe thing to do, and, on the whole, a way of handling the situation that was not open to criticism, all things considered. With reference to these other matters I am mentioning now, a number of them are points that I have felt for years ought to be included in anv such bill. Senator O ’G o r m a n . Were they included in th e bill as offered in the House? Mr. W il l i s . Certainly not, and they are not there now Senator O ’G o r m a n . Did you advise their insertion at that time? Mr. W il l i s . I did; yes, sir. Senator O ’G o r m a n . Your advice was not accepted? S. Doc. 232, 63-1—vol 3-----70 3030 B A N K I N G AN D C U E B E N C Y . Mr. W il l i s . They were not included in the bill. Senator O ’G o r m a n . They were not acted upon ? Mr. W il l i s . They are not in the bill, as a matter of fact. Now, as to the technical detects or blemishes in this bill, while a number of these might be mentioned, the only ones I think pressing are these: First, as to the redemption feature. I have thought all along that redemption should be made in gold, or the equivalent of gold, such as gold certificates, and that the language “ gold or lawful money ” was probably not wise. This country is now on a gold basis, and I think it is best to make the redemption direct in gold or gold cer tificates for those notes. S e n a to r O ’G o r m a n . Y ou w o u ld s tr ik e o u t “ o r la w f u l m o n e y ” ? Mr. W il l i s . I should; yes. That language strikes me as being likely, possibly, to lead to some trouble. In a sense the difficulty is not serious; certainly not under ordinary conditions, because I be lieve that lawful money redemption—which was accepted by the bankers in the monetary commission’s bill, by the way—would ordifiarily be sufficient. Senator O ’G o r m a n . In passing, i f you will permit an interrup tion, it is apparent the bankers have learned something with respect to improving the banking system, even since the recommendations o f the monetary commission. Mr. W il l i s . I always thought that feature of the Aldrich bill, along with many other features, was open to serious objection. Now, if you put that in there, and probably whether you put it in or not, I think the Government should be given the power to get gold for redemption purposes by selling bonds, as it does now in connection with the greenbacks. Senator N e l s o n . There is no such direct power in the bill now ? Mr. W il l i s . There is not; no, sir. Senator N e l s o n . And no other law by which they could sell bonds for this purpose ? Mr. W il l i s . I think that it is a question whether they might not sell them under the existing law. Senator N e l s o n . Under the laiv of 1900? Mr. W il l i s . Yes; because ultimately, Senator, the redemption would fall back on the fund behind the greenbacks, for which they are authorized to sell bonds. Senator N e l s o n . They could sell to redeem them, but not to re deem these? Mr. W il l i s . But these would be redeemed in lawful money, and lawful money means greenbacks. In other words, they would re deem in lawful money, which would be redeemed in gold, which would mean it was redeemed by the $150,000,000 gold fund, which would mean that the Government had power to reconstitute that fund by selling bonds, which would mean, in the last analysis, it had power to provide for the notes under this bill if it had to. Under ordinary circumstances I do not think such a situation would ever come about, but I think it is better to avoid that criticism, since you practically have gold redemption there now, and simplify that provision by requiring their direct redemption in gold. Senator H it c h c o c k . What objection was there to having a simple provision for a gold redemption in the House discussion ? I B A N K I N G AND CUKRENCY. 3031 Mr. W il l i s . I think that was discussed a good deal on the floor, Senator. I do not remember all of the arguments, but as nearly as I remember the only argument that impressed me seriously in that con nection was this, that if you are going to do that, sincerity would dictate that you go further and retire the greenbacks, and it was sup posed that was a thing Congress was not supposed to be ready to do. There was a multitude of arguments on the subject, but I can not recall them all now. Senator H it c h c o c k . Why would it be necessary to go further and redeem the greenbacks if you made an arrangement to redeem these notes in gold? Mr. W il l is . If you will pardon me, I did not say it was, but you asked me what argument was mentioned, and I said that was the one that impressed my mind chiefly. I do not think it is a conclusive argument, as you see from the recommendation I have made. Senator H itchcock. T he present greenbacks are redeem able in gold. Mr. W il l i s . Yes. Senator H it c h c o c k . Why were not these new notes made redeem able in gold ? I am referring now to your consultation on the bill. Mr. W il l i s . I th in k th e y s h o u ld be. Senator H it c h c o c k . Did the bill originally provide for that? Mr. W il l i s . I think not. I would not be positive on that point, but I think the lawful-money redemption was put in there on the ground that it was in the Monetary Commission bill and therefore represented something that had been indorsed by the banking inter ests and to which they certainly would not object. Senator H itchcock. That is one thing I wanted to draw your at tention to. The statement has been made before this committee by one of the witnesses that the banking interests largely influenced the original make-up of that bill. Mr. W il l i s . What b ill d o y o u m e a n ? Senator H it c h c o c k . Of th e bill in the House, with which y o u were connected. Mr. W il l i s . Yes? Senator H it c h c o c k . And that Prof. Laughlin, president of the Citizens’ League, which was composed of bankers, was consulted, along with yourself, and the bill was finally made to his approval. Mr. W il l is . N o w , Senator, may I ask for the name of that witness? Senator H it c h c o c k . Yes; that is Mr. Shibley. Mr. W il l i s . I thought so. And I would like to say something about that. Prof. Laughlin was called before the committee just a s others were called. Senator H it c h c o c k . Let us first get the facts. Is he president of the Citizens’ League? Mr. W il l i s . No; I do not think h e has any connection with it now. He never was president, so far as I know. He wTas a kind of repre sentative, or perhaps had the position of chairman of the executive committee. I do not remember as to that. Senator H it c h c o c k . Y ou mean he represented the Citizens’ League ? Mr. W il l i s . I d o ; yes. Senator H it c h c o c k . And the Citizens’ League was an organiza tion of bankers for the promotion of banking and currency reform? 3032 B A N K I N G AND CU RRE N CY . Mr. W il l i s . It was an organization, nominally at least, of every body who wanted banking and currency reform. Senator H it c h c o c k . The bankers put up the money for it ? Mr. W il l i s . I have heard so a good many times. Senator H it c h c o c k . It was stated they spent some several hun dred thousand dollars in this agitation which resulted in this bill. Mr. W il l i s . I think that was testified to by Prof. Laughlin him self before the Pujo subcommittee. Senator H it c h c o c k . On January 8 of this year Prof. Laughlin appeared before the subcommittee of the Democratic House Commit tee on Banking and Currency? • Mr. W il l i s . Yes. Senator H it c h c o c k . That was the subcommittee for which you were the expert ? Mr. W il l i s . Yes. Senator H it c h c o c k . He described himself as “ at the present time chairman of the Citizens’ League for the Promotion of a Sound Banking System.” Mr. W il i us. Yes? Do you want me to continue that a little fur ther, Senator? Senator H it c h c o c k . If you care to. Inasmuch as it has already been testified to before the committee----Mr. W il l i s . I r e a d t h a t te s tim o n y , a n d I f e lt it w a s v e ry u n f a ir . Senator H it c h c o c k . Unfair to whom? Mr. W il l i s . T o everybody. And, if you will allow me, I will state the facts about that. When the hearings were held, I think it was the wish of the chairman to have as many national groups represented in the hearings as possible; and to that end a good many were invited, but some of them never, I am sorry to say, put in an appearance. That is to say, the presidents of various organizations, manufacturers and so on, were invited to come. Some came and some did not. I remember the president of the Federation of Labor was invited to come, as were others in like position, but did not. Among the organizations that were to be represented was the American Bankers’ Association and the National Citizens’ League. The Na tional Citizens’ League was represented by Prof. Laughlin, I think, and Mr. J. Y. Farwell, if my memory serves me right. Prof. Laugh lin urged a plan of his own, and then subsequently placed in the hands of the committee a draft of a bill which he said represented his views. Now, in order to test the statement of Mr. Shibley, all that is necessary is to take Prof. Laughlin’s testimony and read it and then take the bill that the committee finally reported and com pare it with Prof. Laughlin’s bill—that is, the bill he prepared. I think you will find there was no resemblance whatever between the two, except the same family resemblance there is in all bills on banking reform in their general features. For instance, it has been repeatedly stated that this House bill resembles the Aldrich bill. It does do that, so far as it contains certain fundamental ideas which are found in all these bills. It alsp resembles the Fowler banking bill and various others. Now, as I recall the Laughlin bill, it was a bill of the same general type as all of these others, but, of course, it had its own special features. I do not recall that any of those were adopted or incorporated. The bill has never been made a secret of, B A N K IN G AND CURRENCY. 3033 so far as I know, and I have here a copy of it, which I would be glad to place at your disposal. Senator H it c h c o c k . Would you please place that in the record? Mr. W il l i s . I should prefer'not to do that, if you have no objec tion, Senator. The chairman of the House committee might allow that, but it was filed in the House committee and I do not think I would have the authority to do it. But my copy of it is at your serv ice, if you wish to see it—you and the other members of the com mittee. Senator H it c h c o c k . The reason I sugested that is because of Mr. Shibley’s testimony. Mr. W il l i s . Let me say, most emphatically, that the statements referred to have no foundation whatever, but are unjust to everyone, as I said before. Prof. Laughlin is a known expert and authoritative writer on these subjects. He represented a pretty large organization and was therefore given a suitable hearing before the committee. That was his only connection with it. Senator O ’G o r m a n . Did not he approve of the Aldrich bill? Mr. W il l i s . I think he aproved a great many ideas in it, if I remember correctly. Senator O ’G o r m a n . Did not he give the entire bill approval ? Mr. W il l i s . I s h o u ld n o t sa y so. Senator O ’G o r m a n . I have the impression he did. Mr. W il l i s . It m a y be so. Senator H it c h c o c k . Let me quote Mr. Shibley’s statement in a few lines, as a text for you to discuss. He says, “ he outlined,” that is, Prof. Laughlin, “ a proposal for a currency and banking system that is almost exactly what became the administration bill.” Mr. W il l i s . Right there, Mr. Chairman, may I repeat that the out line of almost any one of these bills is similar to the outline of every other, just as there is a general resemblance between human skeletons. I he differences come in when you begin to deal with the actual cloth ing of them with flesh and blood. Senator O ’G o r m a n . I s it possible Mr. Shibley had in mind that as the Aldrich bill provided for an organization controlled by the bank ers, that your initial bill provided for an organization in which the bankers would have a very substantial representation? Mr. W il l i s . Well, I do not know what was in his mind, of course. What I do know is that it is not a fact that any one organization, or outside individual more than any other, wTas instrumental in outlining or framing this bill, so far as I have any knowledge or belief. Senator O ’G o r m a n . I think it is fair to s a y to you that none of the committee, so far as I am aware, disagrees with you on that proposi tion. Mr. W il l i s . And, in further support of that, I offer to place at the disposal of the committee my own copy of the bill that was suggested by Prof. Laughlin. Senator H it c h c o c k . That will hardly be necessary, and your statement might be enlightening, somewhat. Mr. W il l i s . D o vou care to have me g o on now with the technical defects ? Senator O ’G o r m a n . Yes: we want the benefit of your criticism o f this bill. 3034 B A N K I N G AND CURRENCY . Mr. W il l is . I think the language in this bill relating to the re demption fund for Federal reserve notes, which is to be held in the Treasury, ought to be clarified and strengthened, and I think that the redemption fund should always be held in the Treasury in suffi cient quantity to insure the regular redemption of any notes that may come in there. At present it is 5 per cent. I have been un certain, from the- start, and I should think that everyone would feel more or less uncertain, as to the adequacy of that 5 per cent. Now, to remove that, I believe that the Federal reserve board, if you should enact this bill or something like it—the Federal reserve board should be given power to require reserve banks to maintain such proportion of their 33^ per cent reserve as may be necessary in the Treasury. That is, instead of having it a flat 5 per cent, to have it whatever experience may dictate. It might run as high as 10. Ex perience would be necessary in order to find out, I think, exactly how much of that should be kept in the Treasury. Experience would indicate about how many of these notes came to the Treasury in stead of going straight home. That, I think, is a somewhat im portant matter, in order that the Government might never be em barrassed through unnecessary delay in redeeming these notes. It is the more important in view of the fact that under the bill all com mercial funds of the Government are to go into the reserve banks, so that it is thrown back upon this fund and must have enough of that to make the redemption successfully and promptly. In the next place—a matter I think is probably more important than any of the other defects—the language of section 14, which re lates to rediscounts, is unsatisfactory. It provides that— Upon the indorsement of any member bank any Federal reserve bank may dis count notes and bills of exchange arising out of commercial transactions; that is, notes and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or may be used, for such purposes, etc. I can not help feeling that the language “ or the proceeds of which have been used, or may be used, for such purposes” opens a door of danger that perhaps would not be availed of but might be, and I should like to see that language stricken out and the rediscount section strengthened correspondingly. Senator W e ek s . Let me ask you a question about the rediscount of notes. Why should any of these notes in the ordinary course be presented at the Treasury for redemption? Mr. W il lis . Well, Senator Weeks, I think it is doubtful, as I said. I think it would be a matter of experience to find out how many would be. May I answer that indirectly? Why need any national bank notes be presented to the Treasury for redemption? Senator W e e k s . Because that is the only place you could redeem them. Mr. W il l is . Y ou could send them directly home. Now, I have heard of a bank’s making up a bundle of notes for redemption and, out of “ banking comity,” including in that bundle a number of notes issued by a bank across the street. It sends them to Washington and has them redeemed there, and the Washington authorities send them back to the bank across the street. Of course, I have no personal knowledge of such a case, but I have heard such stories told. B A N K I N G AND CURRENCY . 3035 Senator W e e k s . I do not think that is a remarkable story. There are bundles of bills coming back to the Treasury that have never been opened—new bills. What I wanted to call your attention to was that there will be branches of the reserve bank or reserve banks all over the country. The member banks, if there are such, will do business directly with the branch with which they are connected, or with the bank with which they are connected, and they naturally would send their bills to those banks for redemption. I do not see why they should send them to the Treasury. Mr. W il l is . Senator, I do not see any very serious o r important reason why they should, but I think it is very hard to predict abso lutely the course of commercial events, and I think it would be un fortunate if we should find ourselves with a law that did not provide a definite gold fund there, although there was plenty of gold some where. Senator W e e k s . I think you are quite right about that. Senator P o m e r e n e . I am not sure that I understand. What is the particular vice you complain of in the phrase “ or the proceeds of which have been used, or may be used, for such purposes” ? Mr. W il l i s . Because that introduces, Senator, an element o f doubt or uncertainty into the judging of this paper. Senator N e l s o n . It is pure guesswork, is i t not?, Mr. W il l i s . Yes; I think it is too hazardous. I think the redis- ' counted paper, Senator—in line with my former statement about the necessity of making the banks strictly commercial institutions— should be only the cream of the paper: that is, paper growing out of bona fide commercial transactions. Senator O ’G o r m a n . Would that be a sufficient description of com mercial paper—paper that has grown out of commercial transac tions? Mr. W il l i s . I have had great difficulty, Senator, in framing a de scription of commercial paper, and I suppose everybody recognizes that difficulty. You will notice that in this bill the provision was made that the Federal reserve board shall have the right to determine or define the character of the paper. If you happen to recall, after the Aldrich-Vreeland bill was adopted there was found to be in that bill a provision about two-name paper, I think, the idea being to get the cream of the paper. Expe rience speedily showed that in some parts of the West the best paper was single-name paper, so that Secretary MacVeagh, if I recall, gave out a rule that two-name paper was paper one of whose names was that of an indorsing bank; which I never felt was the real intent of the law, as I understood it. Now, I think that was a country as big as this, and with business interests as variab'e as they are, it is a pretty hazardous thing to try to introduce a definition of commercial paper into a law, and if you do not have that, then one would suppose it should be left to some proper administrative authority to settle. Hence the provision referred to here. Senator H it c h c o c k . Let me ask y o u a question. Suppose a o-eneral merchant in a western town of 4,000 population goes into a bank and borrows $2,000 in order to discount a bill of goods that he is buying and get the cash discount. He draws his note for 90 days 3036 B A N K I N G AND CURRENCY . so that he will be able to make his sales of the merchandise pur chased before the note matures. Is that commercial paper? Mr. W il l i s . Will you kindly state that again? Senator H it c h c o c k . A merchant in a small town, purchasing a bill of goods, desires to get the cash discount. He goes to his bank and borrows $2,000 for 90 days----M r . W il l is ( i n t e r p o s i n g ) . S e c u r in g it h o w ? Senator H it c h c o c k . Without security; it is his note. Mr. W il l i s . Yes. Senator H it c h c o c k . I s that com m ercial paper? Mr. W il l i s . Senator H It is in the ordinary acceptation of the term. it c h c o c k . I s it under the terms o f th is bill ? Mr. W il l i s . I t h i n k th e la n g u a g e as u se d c o u ld be in te r p r e te d to c o v e r th a t. Senator H it c h c o c k . It is intended to cover that kind of paper? Senator N e l s o n . The merchant is substituting the bank in place of the seller of the goods. Mr. W il l i s . Certainly. It is undoubtedly paper that he can use in that way. Senator H it c h c o c k . N o w , suppose a man in a town goes into a bank and borrows $2,000 for five months in order to help pay for some cattle he is buying to fatten. He makes the maturity of his note five months because before that time he will sell his cattle. Is that commercial paper? Mr. W il l i s . That is another question of definition. Senator H it c h c o c k . Did you intend to have that covered by this bill? Mr. W il l i s . I think that the introduction of this language here was intended to cover that, without doubt, and a good many other classes of transactions of even broader scope. Senator P omerene. Senator, allow me to suggest this language here: “ Notes and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes.” Senator H it c h c o c k . Yes. Now then, if that is intended to cover it, why did you limit it to 90 days when many of the transactions out West and down South cover from four to five months? Mr. W il l i s . I think I can say without violation of any confidence that that was a matter of very serious consideration and of a good deal of difference of opinion. After looking over all the data that could be had and consulting with the Treasury Department, I think those who were in charge came to the opinion that there would be an abundant supply of this 90-day paper in the country. Secretary McAdoo sent out certain blanks to banks more recently, asking them how much there would be----Senator H itchcock (interposing). That was not done at that time? Mr. W il l i s . Certainly not; but we did at that time get all the data there were, and the later investigation has borne out our conclusion. Senator H it c h c o c k . Did you call in country bankers to find out what paper they actually handled ? Mr. W il l i s . Country bankers were before the House committee; yes, sir. Senator H it c h c o c k . Who were they? B A N K I N G AND CURRENCY . 3037 Mr. W il l i s . I can not remember their names now. May I add that there was a large correspondence with country bankers? Senator H it c h c o c k . We have had a number of country bankers here, and I have had a large personal correspondence with country banks in my own State, and the almost universal testimony is that the demand they have for rediscounts is at the time they are making five and six months’ loans, and that that paper is unacceptable under the terms of this bill. Mr. W il l i s . May I add one thing right there? As I said a mo ment ago the conclusion was reached that there was a sufficient sup ply of the 90-day paper in the country. For that reason it was believed that enough of a vehicle was provided for letting out the funds of these Federal reserve banks into general use, and the con clusion was reached that if there were a sufficient medium for letting out those funds everybody that was entitled to discount, whether his paper was technically rediscountable at the Federal reserve bank or not, would get the benefit of it. Do you follow what I mean ? Senator H it c h c o c k . H e would get it indirectly from his city cor respondent? Mr. W il l i s . Yes. Senator H it c h c o c k . Does this bill contemplate that a country bank will still have its city correspondents? Mr. W il l i s . It does not distinctly say that it will h a v e its c ity correspondents, but there is nothing in it to prevent that, and m y own opinion is that in some cases that would continue to be the practice. Senator H it c h c o c k . What has developed, as a matter of fact, Mr. Willis, is that the country bankers almost with one voice say that they get no benefit out of this bill, that 10 per cent of their capital is taken and their reserves impounded and taken away from the banks where they can get discounts, and that is the reason they propose to denationalize unless the terms of the bill are changed. Mr. W il l i s . Well, as I said before, Senator, if you reach the con clusion as a positive fact that the terms of this bill are such that the banks can not come in and do their service to the community, then, of course, the bill is not going to perform its work and ought to be altered to such extent as to bring about participation on the part of the banks. Senator S iia f r o t h . D o you not think, however, that many of these statements and declarations are made for the purpose of obtaining concessions in this bill, and that they will come into the system ? Mr. W il l i s . I think that is human nature; just as, in the case of previous legislation, we have had statements and predictions of abso lute panic and disaster contingent upon the adoption of some piece of legislation. In this case—without meaning to be in any way insin cere or unfair—I think the attitude of a man who is going to be sub jected to business inconvenience—and any great measure of this kind is likely to produce a great deal of business inconvenience—is to take a dark view of the situation. Senator S hafroth . And to make threats as to what he will do. Mr. W il l i s . T o look pessimistically at the future. I think anybody is prone to do that—the banker no more than anybody else. Senator H it c h c o c k . Perhaps you had better proceed. Mr. Willis. ' 3038 B A N K I N G AND CURRENCY . Mr. W il l i s . I think those are all the technical defects I care to mention. Of course, scattered through the bill there are places where the language could be improved. Senator M cL e a n . Have you had your attention called to the plan suggested by Mr. Vanderlip before this committee yesterday? Mr. W il l i s . I have only read what the newspapers said this morning. Senator M cL e a n . Have you read enough about it so that you are in a position to criticize it ? Mr. W il l i s . I should not like to do that upon a mere reading of an outline. In a moment, if you will allow me, I shall speak of that general type of plan. Senator M c L e a n . Yes. Mr. W il l i s . N o w , I think there is a third group of changes that might wrell be made in this bill. They are changes that are not necessarily an improvement from an abstract standpoint, in my judgment, but they are changes that are likely to render it easier to get the system started, perhaps, and make it less burdensome. The first is in regard to the subscription to the stock. It seems to me that the present subscription required—that is, 10 per cent paid up—has been complained of quite a good deal. I think perhaps it may be more than is absolutely necessary. If it is desired to make a reduction in that and cut it down somewhat, I think that could reasonably be done. Then the question has been raised whether the subscription to the stock should be absolutely compulsory, and whether it should be con fined to banks. If there is danger of a good many banks leaving the system at first, or not coming into the system, then it seems to me that the public might well be allowed to participate in the subscrip tions. That is, it might be stated that if within a reasonable length of time the total capital stock had not been subscribed—that is, enough to bring it up to the required minimum capital—by banks, the remainder should be open to general public subscription. Senator H it c h c o c k . Mr. Willis, why should these banks own the stock at all? Mr. W il l i s . Why should the member banks own it? Senator H it c h c o c k . Yes. Mr. W il l i s . I think there is no good reason for having them do so, except to interest them in the scheme and get them to take a more active part in running it. Senator H it c h c o c k . The banks are not to be run for profit. Mr. W il l is . Y ou mean these reserve banks? Senator H it c h c o c k . Yes. Mr. W il l i s . N o . Senator H it c h c o c k . Why should these other banks that are or ganized for profit be permitted to take any interest in it? They do not do it in any European country. Mr. W il l i s . I do not think you can give any abstract reason why they should not. Senator H it c h c o c k . Can you give a concrete reason ? Mr. W il l i s . Concretely, i t has been supposed in all these plans, I think, that by letting the banks control their own reserves in this way you would get them to take a more immediate and active interest in B A N K I N G AND CURRE NCY . the starting of the system. reason. t Senator H it c h c o c k . 3039 I might say that was the practical A s a m atter o f fact, w ould there not be a reat advantage to the American system of banking if we could add 100,000,000 to the banking capital of the country, instead of simply taking it off at one place and putting it in at another? Mr. W il l i s . That is a matter I intended to speak of. The private subscribers, of course, would have to get their money somewhere. They will get it by drawing on their deposits in banks, so it will come to about the same thing—the banks will have to provide the money. Senator H it c h c o c k . There is a vast difference between their tak ing their own funds and having their customers withdraw theirs. M r. W i l l is . D o e s it n o t c o m e to a b o u t th e sa m e t h i n g in it s e ffe c t o n th e r e se r v e s o f th e b a n k s? Senator H it c h c o c k . I want to ask you this: Suppose there is a community which has three banks of $1,000,000 capital each and an other bank of $1,000,000 capital is established there. Does not that add $1,000,000 to the banking capital of that community? Mr. W il l i s . It has to be obtained from some source. Senator H it c h c o c k . But does not that add $1,000,000 to the bank ing capital of that community? Mr. W il l i s . It does, if it is drawn from some outside community. Senator H it c h c o c k . Regardless of where it is drawn from. It may be taken out of building operations or safety deposit vaults-----Mr. W il l is (interposing). If that is done it adds to the banking capital. Senator H it c h c o c k . Would it not be a good thing if we could add $100,000,000 to the banking capital of the United States? M r. W il l is . C e r ta in ly , i f y o u c o u ld be a b s o lu te ly su r e o f g e t t in g n e w c a p it a l. Senator W e e k s . Let me suggest this, too, Mr. Willis: If the banks subscribe to the stock themselves they are reducing their capital that amount. If their customers draw money out of the bank and sub scribe for the stock the bank is reducing its liabilities that much. Senator S h a f r o t h . But if you had outside capital come in the directors would have to be changed. It would not be right for the banks to name them. There would have to be a different system of electing directors. Senator W e e k s . That is easy enough. Senator S h a f r o t h . This whole system is intended f o r the benefit of the banks, and that being the case, it seems to me the theory----Senator H it c h c o c k (interposing). We have been led to believe this was not for the benefit of the banks, but for the benefit of the people. Senator S h a f r o t h . It is for the benefit of both, but at the same time there is not any question that the right of a bank to go and cash its paper at any time is a great advantage to the bank, and inas much as it does relieve them in their banking situation and make it more safe for them, and at the same time make it more safe for the people, it seems to me the bankers are the ones that ought to put up the money. 3040 B A N K IN G AND CURRENCY . Mr. W il l is . N ow , there is another suggestion that I make with some hesitation, but in view of all that has been said I believe it would be a desirable change. Under this bill a bank can have a year to decide whether it is going to join or not. In view of the apparent unfriendliness of a good many banks toward the system, I believe that is rather too long. A bank can decide a good deal more quickly than that what it wants to do, and I incline to the opinion that that period—that is, the period in which it must decide— should be shortened a great deal in order to emable those who are charged with the organization of this scheme to know as early as possible how much they can count on. I do not mean I would shorten the time within which a bank has to give up its charter, but I think I should materially shorten the time within which the bank had to reach a conclusion. Just how short that period should be is a matter of opinion. Senator N elso n . Y ou m ean by that that they m ay decide w ithin a short tim e w hether th ey w ill come into the system or not, but they w ill have a year to go into liquidation? Mr. W il l is . A year before they will be compelled to change their charters. These, gentlemen, are the principal changes or concessions, if you call them so, that I thought of suggesting. Senator N elso n . I called your attention a moment, perhaps out of place, to the fact of the discrimination in the deposit of reserves of the member banks with the regional banks. The country banks are required to deposit their proportion of the reserves immediately in the regional reserve bank, while the banks in the reserve cities and central reserve cities have 60 days in which to do it. That is, the country banks must plank down their share immediately, while the other banks, the big banks, have 60 days. Do you not think that is an unjust and unfair discrimination against the country banks? Mr. W il l is . If that is the meaning of it, I do. Senator S iia fr o t ii . I think, Senator, the reason there was a dis crimination made there is because the country banks usually carry a higher percentage of reserves in their own vaults; and the city banks having to be drawn on for such a large amount it was con tended, I think, that they should have a little more time to replace the amounts that are withdrawn. Senator N elso n . I call your attention to paragraph (a) on page 36: If a country bank, as defined by existing law, it shall hold and maintain a reserve equal to 12 per cent of the aggregate amount of its dei>osits, 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, held actually in the bank’s own vaults; and for a period of 14 months from the date aforesaid at least three-twelfths----- I call your attention there to the three-twelfths; for a period of 14 months from the date aforesaid they are to keep that. Mr. W il l is . Yes. Senator N elson . N ow , turn to the next page and you will find in line 22: “After 60 days from the date aforesaid, and for a period of one year, at least three-eighteenths and permanently thereafter,” etc. Mr. W il l is . Yes. B A N K I N G AND CUKRENCY. 3041 Senator N elso n . N ow , you see in the one case the big banks have 60 days in which to deposit three-eighteenths, while the others must deposit three-twelfths immediately. Mr. W il l is . I see what you mean, Senator; I did not understand when you first spoke of it. The idea was this: You notice that the country bank is let down at once from 15 to 12 per cent. You see, its reserve then is released instantly. Senator N elso n . But the city banks are released from 25 per cent. Mr. W il l is . At that time, but they have to provide this 3 per cent; they have to furnish it right away. Senator N elson . That is not true as to all country banks. Mr. W il l is . W h a t is not true? Senator N elso n . That they are assuming they furnish it to the country banks. Mr. W il lis . I think the natural course of events under that pro vision, Senator, would be this: A is a country banker with $100,000 of deposits outstanding. Under existing law he has to keep 15 per cent reserve. Now, we will assume he is down to the legal minimum; he has $6,000 in cash in his vaults, and he has $9,000 on deposit in Pittsburgh, we will say. Now, this bill is passed. Under this law he has to keep 12 per cent, of which 3 per cent has to be in the reserve bank. Now, the natural thing for him to do would be to sit down and draw a check on his Pittsburgh correspondent and forward it to the reserve bank. Senator N elso n . But you overlook the fact that a great many country banks keep most of their reserves at home. You are assum ing that they keep everything above the 6 per cent in other banks. Mr. W il l is . Yes, sir; but the figures show that the great majority of them do do that. I have no doubt, Senator, that in this case and a great many other cases throughout the bill there would be indi vidual instances of hardship and injustice. Senator N elson . Why should not these country banks have 60 days in which to deposit the three-twelfths as well as the big banks have 60 days to deposit their three-eighteenths? Mr. W il l is . You have to make a start in your shifting of funds at some time. Senator N elso n . But you should not make a start by making the little banks the victims. Mr. W il l is . A s I said before, Senator, if that is true in any con siderable number of cases----Senator N elson (interrupting). Did you observe this when you framed the bill? Mr. W il l is . This section was changed more or less in committee, and I think there is no harm in saying that the language here used is not precisely the language that I myself would have used. I do honestly say, however, that there is, so far as I can see, no o-eneral hardship inflicted on the country banks that is not inflicted on*others. S e n a to r R eed . N o w , le t u s s a y th e c o u n tr y b a n k , h a v in g a lr e a d y a p o r tio n o f its f u n d s in th e re s e rv e b a n k , w ill d r a w th o s e f u n d s o u t. T h a t w ill im p o s e a b u r d e n u p o n th e re s e rv e b a n k , a n d th e r e f o r e th e re s e rv e b a n k o u g h t to be a llo w e d a n a d d itio n a l tim e in w h ic h to p a y its o w n re se rv e s? Mr. W il l is . Yes, sir. 3042 B A N K I N G AND CURRENCY . Senator R eed. Did it ever occur to you that if you required the country banks to deposit at once, that that simply hastens the hour when the reserve bank would have to produce that money, and, therefore, that you did not help the reserve bank a bit by that process ? Mr. W il l is . Y ou m ean w hen th e p re se n t co rre sp o n d e n ts w ould h av e to p ro d u c e th e m oney? Senator R eed. Yes. In other words, to use an illustration, it is going to be required that you contribute $50,000 to a certain fund, and that I shall contribute $25,000, and I have $10,000 of my $25,000 with you. Mr. W il l is . Yes. Senator R eed. Therefore, the assumption is that I will draw on you immediately. Now, if you say to me I must contribute that immediately, I must therefore demand from you immediately? Mr. W il l is . Yes. Senator R eed. And just in proportion as you make me pay quick, I make you pay quick. I do not see what you gain. Mr. W il l is . I see what you mean. I t is quite possible that the language there is not satisfactory. Senator R eed. It is true that the country banks do deposit, in the aggregate, a considerable portion of their reserves with the ordinary reserve banks of reserve cities, is it not? Mr. W il l is . Yes. Senator R eed. And it is true that the reserve banks in the reserve cities keep large deposits in the central reserve cities? Mr. W il l is . Yes. Senator R eed. This bill—it is also true that each dollar of bank money—money that is in banks, carries, on the average, about $8 of credits, is it not? M r. W il l is . I th in k so ; yes, sir. Senator R eed. N ow, if the country national banks have in their vaults $1,160,000,000 of the money of other banks, which is largely the reserves of other banks, and they are required to suddenly re move those moneys from those banks, where are the banks going to get that vast sum of money ? Mr. W il l is . Senator, that is a very pertinent question, and I think if there is one thing in a great piece of legislation like this which is more important than another, it is this—that this is probably the most important question in the whole bill. If you have looked into the report made by the House Committee on Banking and Currency on this subject, under the head of re serves, you may have noticed there the computations which are made there. To sum those up briefly, it seems to me that the whole prob lem comes down to this: Is the total amount of cash needed under the new legislation greater or less than the total amount of cash needed to-day ? The cash has got to come from somewhere, and if it is not available, it would have to be imported or else drawn out of ordinary circulation. The computations there seem to me to show that, allow ing for the release of Government funds which would be deposited in the banks, although they are now tied up in the Treasury, the banking community would find itself about where it started, after it is put through. Senator R eed . After it is put through? B A N K I N G AND CUBBENCY . 3 043 Mr. W il l is . Yes. Senator R eed . I am not talking about after it is put through. I undertand perfectly well that if this $1,160,000,000 of money that is now deposited with the national banks was safely transferred to the vaults of the Federal reserve banks there would be just as much banking capital available then as there is now, because after that had been done the banks of the system could rediscount their paper and secure cash. I am talking about the process of formation. Let me illustrate it. I think these figures which I am going to quote are substantially correct, although they may be very far from the exact figures. I may be confused about them in my memory, but I am not going to wait to hunt them up, but they will serve for the purpose of illustration. I think the banks in Kansas City alone have of country bank de posits about $52,000,000. Of that sum, I think, about $35,000,000 represents the reserves of country banks; and of that $35,000,000, under the provisions of this bill, there would have to be transferred about $22,000,000 into the Federal reserve bank by the country ban'ks. That would necessarily imply a withdrawal by the country banks from the banks of Kansas City alone of that $22,000,000, in order that they might be prepared to send it on to the regional reserve banks. Mr. W il l is . Will you allow me to interpose there? Senator R eed . Yes. Mr. W il l is . Your regional bank would probably be located in or close to Kansas City? Senator R eed . The probabilities are—T just guess that there will be one at St. Louis. Mr. W il l is . Yes. Senator R eed . And not closer. Of course, it ought to be in Kansas City, because it is close to Kansas, and because it does more business than any other town of its size in the ivorld. Senator H itch co ck . Except Salina. Ivans. [Laughter.] Mr. W il l is . I quite agree with you, Senator Reed. Senator R eed . Those are the cold features, too. But this $22,000,000 now is loaned out to business men in Kansas City. Mr. W il l is . Yes. Senator R eed . It is loaned to business men in Kansas, in Oklahoma, and in all that section of the country, to cattle men, to merchants, and to every class of people. And it carries, as I understand, this bank ing capital carries a vast amount of credits. Mr. W il l is . Yes. Senator R eed . N ow , if there is no place for the banks of Kansas City to get that money from except two sources, and one is to contract their loans and the other is to withdraw a part of the money from eastern banks, which, of course, bring trouble to them—if that was to go on over the entire country, taking in Cleveland, Cincinnati, Omaha, San Francisco, and Los Angeles—and there is no use naming the list, because your mind will grasp it—what do you think would happen ? Mr. W il l is . Senator, I think the conditions produced in that way would be so inconceivably worse than any business disaster we have ever had in this country that they could not be spoken of in the same breath. 3 044 B A N K I N G AND CURRENCY . Senator S h a f r o t h . If it all had to be done at one time? Mr. W il l is . Precisely. Senator R eed . I am coming to what has to be done. Mr. W il l is . May I make a comment right there? Senator R eed . Yes. Mr. W il l is . I think yon said they could look for aid from two sources, first, the curtailment of loans, and second, by withdrawing it from eastern banks. Senator R eed . Yes. Mr. W il l is . I would suggest a third source, and the one which I believe if one were an active banker he would avail himself of. The banker would probably go to the regional reserve bank, or the Federal reserve bank—I prefer the latter term—and secure from it a redis count of paper in his possession to such an extent as conditions would warrant. He would then retain such cash as he had as a basis for further operations. Senator R eed . Y ou have not made any provisions in this bill for the rediscounting of paper until the bank is organized and ready to do business, and as a condition precedent to the opening of its doors for business you have required the deposit of this money with it. Mr. W il l is . Y ou mean to say that the deposit has to be in hand before the bank can do business? Senator R eed . Y ou require, first, payment of the money. You do not say the payment of the money or deposit of securities? Senator N elson . Your theory would lead to allowing them in depositing their reserves to deposit commercial paper instead of cash? Mr. W il l is . T o such an e x ten t as th e reserve b a n k th o u g h t it wise to p e rm it. Senator N elson . Does the bill permit that? Mr. W il l is . Yes; it does. Senator N elso n . Instead of putting in the cash they can discount paper for that? Mr. W il l is . In so far as the reserve bank chooses to permit that. Senator R eed . Y ou say the bill permits that? Will you cite me to the clause? Mr. W il l is . I can not cite any one clause, but the provisions are these: A bank has to keep a specified amount of reserve—call it 12 per cent in the case of the country bank. That reserve is to consist to the extent of five-twelfths of actual cash, which under existing law may be counted as legal reserve held actually in the bank’s own vault (you will find that provision on page 36. beginning at line 20). Then the bill is specific, and it says: and for a period of 14 months from the date aforesaid at least three-twelfths, and thereafter at least five-twelfths, of such reserve shall consist of a credit balance with the Federal reserve bank of its district. Senator R eed . That is another question. I am talking about the primary organization. Mr. W il l is . May I just finish that? Senator R eed . Certainly. Mr. W il l is . The words “ the date aforesaid ” refer back to the first line or two of section 20, where it says: That from and ofter the date when the Secretary of the Treasury shall have officially announced, in such manner as he may elect, the fact that a Federal B A N K IN G AND CURRENCY. 3045 reserve bank has been established in any designated district, every banking association within said district which shall have subscribed for stock in such Federal reserve bank shall be required— And so forth. My interpretation of that language is this: The banks must first put up the capital necessary to organize this Federal reserve bank. When the capital is in hand and the institution is ready to open its doors the Secretary of the Treasury announces the fact that it is ready to do business. And then, and from that time forward, the country bank must have five-twelfths of its reserve on hand in cash in its own vaults and three-twelfths bn hand in the form of a credit balance on the books of a Federal reserve bank, we will say, at Kansas City. The Federal reserve bank in Kansas City is opened, and the country banker somewhere near has taken stock in the Federal reserve bank. He has received his certificate of stock and has contributed, we will sav, $10,000 to pay for it. On the 1st of October, 1914, let us say, he receives a notice from the Secretary of the Treasury that the Federal reserve bank is ready to do business. It is necessary for him then'to comply with the law. I should think that would mean that by re turn mail, or as soon as reasonably convenient, he would do one of two things—send to the Federal reserve bank a certified or a satis factory check or would otherwise remit, or else he would see the Federal reserve bank and get it to give him a rediscount of satisfac tory paper to the amount he needed. Senator R eed. How would you do it under this bill ? Here is the language, Mr. Willis: That from and after the date when the Secretary of the Treasury shall have officially announced, in such manner as he may elect, the fact that a Federal reserve bank has been established in any designated district, every banking association within said district which shall have subscribed for stock in such Federal reserve bank shall be required to establish and maintain reserves as follow s: ( a ) If a country bank as defined by existing law, it shall hold and maintain a reserve equal to 12 per cent of the aggregate amount of its deposits, not in cluding savings deposits hereinafter provided for. That 12 per cent is certainly the legal reserve now referred to and is of the same character of the legal reserve now referred to, to wit, it must be cash on hand, and that cash must be gold. Senator N elson . Or la w fu l money? Senator R eed. Or lawful money. Now, it says: Five-twelfths of such reserve shall consist of money which national banks may under existing law count as legal reserve, held actually in the bank’s own vaults; and for a period of 14 months from the date aforesaid at least three-twelfths and thereafter at least five-twelfths of such reserve shall consist of a credit balance with the Federal reserve bank of its district. The remainder of the 12 per cent hereinbefore required may, for a period of 36 months from and after the date fixed by the Secretary of the Treasury as hereinbefore nro vided, consist of balances due from national banks in reserve or central re<JrvI cities as now defined by law. c Now, we have a law and it requires the bank to keep a certain per cent of cash in its own vaults, or in the vaults of reserve banks and now it requires the deposit with the Federal reserve bank of a’nor tion of the reserve, which it says must be a credit balance. It also uses the same term credit balance ” with reference to the money now S. Doc. 232, 63-1— vol 3---- 71 3 046 B A N K I N G AND CURKENCY. deposited with other banks, and that has never been construed to mean that they could put up notes. It is also construed to mean that they must have that much cash to their credit, and I do not think there is any question that this has to be cashed. Mr. W il l is . I feel very sure that that latter point is in accord with existing practice. Let us imagine to-day that a bank is notified by the comptroller that it is $10,000 short in its reserve. Let us suppose that bank has the necessary amount of cash in its vaults—that is, 6 per cent—but its reserve balance with its reserve agent is below the necessary amount, so that its return to the comptroller is insufficient. There is nothing to prevent, in my understanding, subject to correction— there is nothing to prevent this bank, under this bill, from getting that reserve in this way if it desires. It goes to its city correspondent and asks for a loan, say of $10,000. The city correspondent asks it to supply satisfactory collateral, which is furnished, and thereupon the correspondent credits it with $10,000 on its books. In that case it has a deposit with its city correspondent, and has filled up its reserve to the required amount. The Federal reserve bank would do just the same thing, as I understand it, that is now done in that way by the city correspondent. You see what I mean? Senator H eed . Of course the city correspondent, being a regular bank for all purposes, can loan to another bank a certain amount of money, but when it has so loaned, the money becomes the money of that other bank, and is held as cash. Mr. W il l is . And the same would be true of these banks. Senator R eed . But you have not gotten past the difficulty at all of the contraction wThich occurs during the primary organization of these banks. Do you not think this bill ought to be amended so that that money is paid in more gradually ? Mr. W il l is . That is a point I have gone over many times with a great deal of care, and here again I think there is no harm in stating that at one time the bill contained a provision for the gradual pay ment of deposits into the Federal reserve banks. It should also be stated, however, that at that time the amount of the total reserves required was larger than it is now. The reserve was released later down to the level where it now stands, and intermediate stages were eliminated. Answering your question specifically, I think there would be no serious harm, and there might be some benefit in spreading this oper ation gradually over a longer period in just the way you suggest; but I do honestly believe, from the computations that have been made, that the reserve provisions as given here now would not cause a con traction, unless the banks became overanxious and attempted to hoard money for some unexplained reason so that there was a short ening of credit. That might occur, Senator, under any condition, if the banks took it into their heads to do that. Senator R eed . We are making a reason for it. We do not want to make one of the conditions. Senator H itch co ck . I would like to ask you, Mr. Wiliis, how the Federal reserve bank would be able to maintain a 33^ per cent reserve if its deposits were paid in paper? Mr. W il l is . Of course, Senator Hitchcock, the bank under this plan would start off with its capital. It has to maintain a 33;\ per B A N K IN G AND CURRENCY . 3047 cent reserve. Assuming that the total capital of all these banks was $100,000,000—and it would be a little more than that if all the national banks went in—then they could grant discounts of $200,000,000. It would also have very shortly Government deposits which would be in cash, and would enable it to extend its discounts some what further. . Of course I do not want to say anything to indicate a belief that all its holdings would simply consist of these rediscounts. I say it might do that, and I think 'it should do it in all those cases where it was necessary to lighten the requirements in any given section in order to enable the banks to comply with the law without contracting the supply of loans in that district. Just how much that would be no one can state absolutely. But what is very important, Senator, is to make absolutely sure that the total amount of money called for at any one time in the process of putting this into effect is not greater than the total amount of money required to comply with the reserve requirements to-day. I have said to Senator Reed that I do believe that that condition is fulfilled by the existing provisions. If, however, on further evi dence or additional study, this committee feels that the period of transfer would cause a hardship in the form of contraction of loans, I am absolutely in accord with what has been suggested—that is, that the process should be spread out over a longer period and be carried through more gradually. Senator R eed . What do you say about 10 per cent of the capital of banks which shall be contributed in order to get a billion dollars of credits? Does not that necessarily involve a contraction on the part of the banks in order to transfer that fund over? Mr. W il l is . Senator Reed, of course every investment of capital involves the application of that capital to a specified purpose. A hundred million dollars, taking the general capital commitments of the country as a whole, is not a large sum. If you take the total capital issues of the country for a year, $100,000,000 is not a great sum, and I think that considering the provisions for the release of reserves it could be effected without any hardship upon the country. I am fully in accord with the statement made by bankers, that they will get less money—that is, their income will be less on the invest ment which they make in this way, even if they get fully’' 6 per cent thereon, than it would be if they were allowed to go on using this money in loans at the rate at which they are now lending. Senator O’Gorman. Would it be practicable to reduce this 10 to 5 per cent? Mr. W il l is . Senator O’Gorman, I suggested a few moments ago_ I think you were out of the rcom----Senator O’G orman (interposing.) I was present, but I did not hear your suggestion. Mr. W il l is . I suggested that while I thought the 10 per cent was not too much, that I did not think it would do serious harm to cut it down somewhat. Senator O’G orman. Let me ask you what would be the objection to having the public furnish the capital for these regional banks? Mr. W il l is . That question was raised before, and I will answer that very frankly. That question is one which has given me a good deal of concern, also. 3048 B A N K I N G AND CURRENCY . These banks are not central banks, in the sense in which that term is rightly used. They are organizations of reserve holders. Now, the more you let the public in and the more you let the banks out, the more these reserve banks approximate to the status of ordinary banks, and the more they get away from the status of reserve-holding associations of banks. In my judgment, it is very desirable, abso lutely desirable, if possible, if you can do it, by any reasonable ar rangement that conforms to public opinion, to get the banks to go in and take up the stock, because they will be, I think, more inter ested in the situation, and will come in more freely and will co operate in the operation of the institution afterwards. Senator O’Gorman. D o you not think it would be more attractive if the banks were able to get the benefits without contributing any thing except the deposit of their reserves? Mr. W il l is . It might be; but the system would lose its purpose in part as a reserve banking system. Senator O’Gorman. Let me suggest this, and I would like to have your opinion on it. We have reason to doubt, in view of evidence that has been presented before us, whether a sufficient number of national banks would in certain regions enter the system in order to enable the regional banks to have a $5,000,000 capital, as required by the pending bills. Suppose the public in those and in all other regions be invited to subscribe to the required stock for each regional bank, and then the benefits of rediscounts will be extended to the national banks, they, on their part, being required to deposit perhaps half of their reserves in the regional banks? Mr. W il l is . Yes. Senator, if that places their reserve in the re gional bank so that it gets the reserve and is a reserve holder, I should see no harm in the plan; but I think it is a very desirable change, and I think it would bring about what has been sought by a good many people who have worked on banking bills—and was sought by the Aldrich bill, although in a very clumsy way—namely, the bringing in of the outside business community as a factor in the control of these banks, so that I am entirely in sympathy with the general sug gestion you make. Senator O'Gorman. Roughly, we will assume that these 12 regional banks might require a capital of $60,000,000 to $70,000,000. What is your judgment as to the probability of the public contributing this money, with a 5 per cent dividend return, without any privilege of voting the stock? Mr. W il l is . May I ask you 1) ere whether you mean what would be the probability of their contributing if they were allowed to borrow at the bank? Senator O’G orman. N o ; I leave that out. Mr. W il l is . Simply as a flat investment, you mean ? Senator O’G orman. Yes. Mr. W il l is . Of course, my opinion on that is not worth much. That is an investment question. From what I have seen of the situ ation, I believe the stock would be promptly taken up. because it would undoubtedly be what is called a gilt-edged investment of the very highest type. My opinion is that it would be taken up without any trouble at all. Senator O’G orman. Then, if I understand you. your judgment is that this bill might be improved by allowing the public to furnish B A N K IN G AND CURRENCY . 3049 the capital of these regional banks rather than requiring the indi vidual national banks to supply it? Mr. W il l is . Provided that the banks were to keep their reserves with the reserve banks. S e n a to r O ’G orm an . Y e s; th a t is p a r t o f th e p ro p o sitio n . Mr. W il l is . I do th in k so. Senator O ’G orm a n . Well, would not the danger of the contraction to which reference has already been made be lessened if the money was furnished by the public rather than by these national banks? Mr. W il l is . I do not feel at all certain of that, because, as I said before, it seems to me that the funds will, in the last analysis, be drawn out of the banks. Senator O ’G orm an . Out o f circulation, in som e way? Mr. W il l is . Yes; although it might be that a good deal would be drawn from State banks that would not come in anyhow. So I will answer your question specifically, by saying that I think there will be a little less danger. Senator O ’G orm a n . Well, now, having your opinion respecting that proposed change, what would be your view regarding a further change in the personnel of the officers of the regional banks, and instead of allowing the member banks within a region to really name six of the nine officers of a regional bank—and that suggestion was based upon the fact that they were to contribute the capital; under the suggestion I now convey to you they do not contribute the capital; that is contributed by the people—instead of having the member banks name those officers, why should not the reserve board here in Washington name the entire number of officers of the regional bank? Mr. W il l is . Name the entire nine directors, so that they would be under complete Government control? Senator O ’G o rm an . Absolutely a Government board. Mr. W il l is . And with the stock largely owned----Senator O ’G orman (interposing). Entirely owned by the people. Mr. W il l is . Entirely owned by the people ? Senator O ’G orm a n . Yes. Mr. W il l is . Well, my feeling in that matter may be founded in part on sentiment, I suppose----Senator O ’G o rm an . What sentiment—charity? Mr. W il l is . I b eg your pardon? Senator O ’G o rm an . What is the sentiment in your mind ? Mr. W il l is . The sentiment that I think a man becomes more in terested when he is responsible for doing something than when the Government does it for him. And I think if the public owned the stock in the Avay you speak of, that it would be very desirable that the public—that is, the stockholders—should directly elect at least a good m a n y of the directors. Senator O ’G orm a n . W ell, they would be, practically, through th e Government naming the entire nine. Mr. W il l is . But the Government is a far distant entity; it is n o t very close to the ordinary man. Senator O ’G orm a n . Well, I hope it is a little closer to him than you seem to think it is. Mr. W il l is . I think the ordinary man would take more interest in these banks, and that the banks would be better run, if he has 3050 B A N K I N G AND CUBBENCY . something to do with the appointment of the directors, than if the Government simply names a set of directors for him. S e n a to r O ’G o rm an . D o y ou n o t th in k th e p u b lic w ill be in d u ced to p la c e g re a te r confidence in th e re g io n a l b a n k if th e G o v ern m en t r e se rv e b o a rd in W a s h in g to n should n am e th e n in e officers o f th e re g io n a l b a n k s? Mr. W il l is . Well, I think that depends entirely upon how the officers manage them. If they do well, it might be so. But I think that is a matter of experience. Senator O ’G o io ia n . Well, you do not see any particular objection to that then, do you ? Mr. W il l is . The objection that I spoke of before, that I would personally rather see the people who own the stock and are directly concerned in the matter elect a due proportion of them—a fair pro portion. Senator N elson. 'Would not that be getting dangerously near to the money power? M r. W il l is . W o u ld w h a t be getting dangerously near to the money pow er ? Senator N elson . T o allow the bankers, or the men who have the stock, to elect the managers of the regional banks? Mr. W il l is . Well, I assume that Senator O’Gorman does not in tend to allow these subscriptions to stock, if there were voting power with them----Senator O ’G orman (interposing). They would have no voting power at all. Mr. W il l is (continuing). To be held in a few hands, but that they should be more or less widely distributed. Senator O ’G orm an . It is the idea that the stock be widely distrib uted throughout the various regions. Mr. W il l is . Yes. S e n a to r O ’G orm an . A n d th a t th e o w n ersh ip of the stock c a rrie s w ith it no v o tin g p o w e r; th a t th e o w n er w ill be confined, p ro b ab ly , to h is 5 p e r cen t c u m u la tiv e d iv id en d . Mr. W il l is . Yes. Well, I like the plan whereunder a man is called on directly to participate in the operation of the thing better. Senator O ’G orm an . Y ou approve now—I do not know whether you have always approved—of the idea that the Federal reserve board should consist exclusively of Government officials? Mr. W il l is . Yes. Senator O ’G orm an . Well, if that be a good plan for the Federal board, why would it not be a good plan for the 12 regional banks? Mr. AYil l is . Well, Senator, that is a very incisive question: and it is one that I want to speak of. Senator O ’G orm an . Then, will you speak of it now? Mr. W il l is . Yes; if I may. It seems to me that the peculiar feature, or one of the peculiar features, of this bill, and one that commends the plan to me especially, is the fact that it keeps the con trol of the broad banking powers in the hands of the Government, while it leaves the actual transaction of banking operations to practi cal bankers in the district. If you had a large central bank, as some have proposed, wholly under Government control, or even largely under Government con- B A N K I N G AND CUBBE NCY . 3 051 trol, then you would have the Government directly “ in the banking business,” as the statement is. Now, I am aware that there are many people who do not look on that idea with any aversion. Personally I do not like it, and it does not seem to me to be in harmony with the general drift of things in this country. I prefer the idea of hav ing the banking operations carried on by bankers, and controlled, within reasonable limits, by the people who have put up the cash with which to carry on the business; and to have the Government exercise such large, general banking powers as are necessary in the public interest to safeguard the welfare of the whole people. The Aldrich plan, so called—the National Monetary Commission plan—would have had a central machinery, as well as the actual banking operations, very largely in the hands of the bankers, with what I thought was a too moderate degree of public control. The proposed Government bank, operated bv Government direc tors, seems to me to go too far in the opposite direction, since it vests the Government with the function of banking—doing actual banking, through its officers of course. I do not like that, and I do not believe that you will get as good results in that way as you will in the other way. This bill has been criticized, I notice, in a good many quarters, as putting the Government into the banking business. It seems to me that it takes the Government out of the banking business. That is, it puts the funds of the Government into commercial use, and then lets the actual process of banking be carried on in these country dis tricts by trained bankers, and it keeps Government supervision in the hands of Government officers. As I stated before, I have felt in the past that a certain representa tion of bankers—perhaps without votes on the Federal board—was not objectionable. But I do think that, however you make up the Federal board, it should be predominantly under the control of the Government. Senator O ’G obm an . Yes. Mr. W il l is . It should be an organization for the exercise o f la rg e powers of supervision and control; while I think that the individual banks should be narrowly confined to business operations, going ahead on their own initiative, so far as that does not conflict with the general welfare. That strikes me as the distinguishing feature of this bill. Senator O ’G o rm an . D o you not think that the people in a regional district who contribute the money under the plan I suggest to supply the capital for the regional bank would have the right to have the President of their country, or his representatives in the reserve board, select the managers for the regional bank? Mr. W il l is . Y ou use the word “ right ”----Senator O ’G orm an . Well, would not it be a fair expectation? Mr. W il l is . It is not an arrangement that I----Senator O ’G orm an (interposing). Heretofore—if you will pardon nie for completing my question—one reason principally, if not exclu sively, given for having a banking representation in the regional in stitutions, was that the bankers would furnish all the capital, and that they were entitled to representation in its control----M r. W il l is ( i n t e r p o s i n g ) . Y e s . 3 052 B A N K I N G AND CURRE NCY . Senator O ’G orm a n . And for that reason, under the pending bill, they would receive a two-thirds control. Mr. W il l is . Yes. Senator O ’G orm a n . N ow , if the other plan should be adopted, that the bankers will not furnish the money, and therefore they will be relieved from that embarrassment—and as I view it this would make ihe whole plan more popular with them than if it was the other way —the only people furnishing the money being the public, it would seem to be a very consistent and reasonable expectation that public officials should be in charge of such banks? Mr. W il l is . Well, the public officials would represent in that case the whole public. Senator O ’G orm an . Yes. Mr. W il l is . Whereas the stock w ould be owned only by a part o f the public. My feeling about that is that it is fairer and better to have the directors elected by that part of the public which owns the stock— that is to say, to have the work of technical banking carried on by men representing that part of the public which owns the stock. And if you ask me wh}T, then I can only answer that that question is a broad matter of point of view, which runs through a great many things, and is not peculiar to this at all. I believe, myself, that you get better results through private enterprise. Senator O ’G orm an . Then what excuse is there for this reserve board, organized as the bill organizes it? Mr. W il l is . The same excuse, it seems to me, that there is else where, that unrestrained private enterprise goes to excess. I do not regard the reserve board provided in the bill, as many people do, as an organization vested with enormous powers that are likely to be constantly used. It seems to me that the reserve board is little more, in ordinary times, than a sort of expanded or glorified Comptroller of the Currency. It has larger powers than he has. But this scheme is larger; and the scheme involves a good many activi ties that the national banks can not now engage in. In my conception of the reserve board, when once it has been organ ized and put into operation, its activities would be very largely those of supervision, routine, comparison of conditions of credit here and there, and consultation with bankers from different parts of the country—and especially from the reserve banks—and the general working out of policies, smoothing out of wrinkles and securing a unification of work. In times of panic or special stress, the reserve board has some reserved powers of a large nature, such as are given by the com pulsory rediscount feature. But of course that is surrounded by so many restrictions in this bill that it could not be used, and would not be used except under very stern pressure, so that the reserve board, in time of panic or stringency, would be a very different organization from what it wTould be ordinarily. Senator O ’G orm an . D o you not think, if the public furnished all the capital to regional banks, that the country banks, particularly, would be likely to be thoroughly satisfied with the system, instead of objecting as they do now? B A N K I N G AND CU BRE N CY . 3053 Mr. W illis. Well, 1 think it is awfully difficult to find out what a country bank will be satisfied with. [Laughter.] I have given it up. S e n a to r O ’G orm an . D o you n o t th in k th e p la n w ould be m ore p o p u la r w ith th e c o u n try b a n k s th a n th e p la n in th e p e n d in g b ill? Mr. W illis. Honestly, I do not know. I suppose, when this bill was formulated—seriously, I suppose that the fact that the banks had to come in, and that when they got in had control of their oivn funds and reserves, was going to appeal to them. But now, as a matter of fact----Senator O ’G orman (interposing). Well, you understand, Mr. AVillis, that the country banks lay great stress on two objections, which they urge very strongly: First, that because of the long maturities of the paper which they handle in their business, they will have but a modified advantage under the rediscount feature of this system. Mr. AVillis. Yes. Senator O ’G orman. And, in the second place, that you are going to deprive them of their right to exact exchange charges. Mr. AATl l is . Yes. Senator O ’G o rm an . And those exchange charges, according to the testimony before us, amount in some cases to one-half of their net earnings? Mr. W illis. With reference to that, I understand, first, what you say; I think that is a very concise and pointed statement of their objections. But, with all due respect to the country banks, and with all due allowance to the business inconvenience which this bill will inflict upon them, and which, in my judgment, any large plan of banking reform will inflict—we can not get any great thing with out suffering—in spite of that, I do not believe that those two con siderations are very good ones. The exchange feature of the bill we have not mentioned before----Senator O ’G orm an . AArell, the relieving of the country banks, and incidentally of other national banks, of the necessity of supplying the capital, will it not, to that extent, relieve the country banks of some of the burdens which this particular plan is intended to place upon them? Mr. AATl l is . AArell, that may be. I think you will find, however— this is merely an opinion, you understand, and I do not intend it in any invidious sense at ail—but I do think that by the time you formulated that plan and got it before the country, there would be a new crop of objections to it springing up, and there would be some fearful flaw in it that would be found when you began to discuss it. Senator H eed. Let me ask you another question: You have never had any practical banking experience, have you ? Mr. W il l is . I n th e sense o f a c tu a lly e n g a g in g in b a n k in g , no. Senator R eed. And among the men that were connected with the committee that made the draft of the bill was there an actual, prac tical banker? Mr. W illis . AVas there such? Senator R eed. Yes. 3054 B A N K I N G AND CU RRE N CY . Mr. W illis. Some of the members of the committee were bank directors. Senator R eed . Well, I mean a real banker? Mr. W illis. What is a real banker ? Senator R eed . When I say a “ real banker I mean a man that goes into a bank and manages that bank or helps to manage that bank. Mr. W illis. The actual daily business? Senator R eed . Yes. Mr. W il l is . There w as no m an o f th a t k in d on th e com m ittee, so far as I know . Senator R eed . Has it occurred to you that these complaints of the bankers, which you say spring up constantly, may have sprung up not because of the stubbornness or meanness of the bankers but be cause the shoe that had been made for a No. 7 foot was required to be put upon a No. 10 foot, for instance, and therefore pinched? Mr. W il l is . With reference to that----Senator R eed (interposing). Now, I do not say that to reflect on you at all; but you say there is no wav to satisfy them. Mr. W illis. And nothing I say is intended to reflect; very far from it. But with reference to the work of the committee, Senator, let me say this: As we worked along—as the chairman of the com mittee worked along on this bill, technical points came up, you un derstand, from time to time. And I sincerely think that no technical point was acted upon without solving all reasonable doubts, so far as that could be done, by communicating with practical men. I can say to you, perfectly honestly, Senator, that I would not have been will ing to be connected with this bill and with the work of getting it up, and wTould not have done so if I had not felt that the greatest care was being exercised at every point in getting it into as good shape as possible, and harmonizing it, so far as possible, with the views of practical men. When practical questions came up of exchange, etc., the chairman of the committee did not hesitate to get the best advice that he could to the given provisions and as to howTthey would work: the views of the practical banker, then, were not ignored in getting this up. As to the attitude of the banks toward it. vou use a striking figure of speech. There are a great many feet in this country; some of them are sevens, and some other sizes. We can not fit them all; and yet we have to pass legislation that is uniform. And T do think that any great bill that is passed in this way will pinch some feet and let others have more room than they need. The question is whether, on the average, the great bulk of the feet will be comfortable. Senator R eed . Oh, no; I do not think so. I think that if I was in the shoe business I would try to make a shoe that would fit everything from babies to giants; or else I would advertise myself as limiting myself to one class of people. I do not think that we have any right to draw a banking bill here for the purpose of benefiting a banking system and the country at the same time which will crush out of existence any class of banks. Mr. W il l is . Neither do T. Senator R eed . Y ou say that the chairman of the committee, or somebody on the committee, obtained the views of practical bankers upon different phases of the measure. I have no doubt that was done. B A N K I N G AND CURRE NCY . 8055 Mr. W il l is . Yes. Senator R e e d . And I am criticizing nobody. Mr. W il l is . I understand that perfectly. Senator R eed . But I am asking you now this question: Whether you got the views of the distinctly country banker—by which I mean the man running a very small bank in a small community—and if so, which one of those bankers said that the bank could live and thrive and get along without any exchange? Mr. W il l is . Well, Senator, that question was gone into fully, and ] know there was a large correspondence about it. If you want me to discuss the working of that exchange feature of the bill, I will do the best I can in showing how it would operate. That is a point we have not touched upon thus far. Senator N elso n . Over half of our banks—yes; two-thirds of them—are banks with a capital of $100,000 and less. Mr. W illis. Yes, sir. Senator N elson . And we have over 2,000 banks of $25,000 capital. Mr. W il l is . Yes. Senator P o m er en e . H ow many banks of $25,000 capital? Senator N elso n . We have over 2,000 with $25,000 capital, and those little banks are pinched worse than anybody else under this law; and they are the ones that have brought the banking facilities near to the people and gathered up the money from the stockings and bureaus, and everywhere else, and got into those little reservoirs. And they are the little reservoirs that have furnished capital for the big reservoirs. And yet a good many of the features of this bill—and I call your attention here to the reserves—are a discrimination against them. It is a king of a “ freeze out.” And I do not wonder at it; you are not to blame; you have never been among those country banks; you do not even know the character of their deposits. Mr. W illis. Senator Nelson, may I assure you that very special attention was given to the needs of the country banks and that every effort was made to get at their views and, so far as possible, to con sider them? You have been kind enough to say that you do not blame me for it. Well, I am not responsible for it in any case. But those who were----Senator N elson (interposing). Oh, no; I do not blame you. Mr. W illis (continuing). But those who were—the chairman of the committee and his coworkers—I do know gave very earnest thought to the needs of the country banker. I believe that this bill, as I said" before, is not going to be an easy thing altogether for all banks to put into effect, and there will be some hardship, I think. And I think the sa >e thing is true of any other bill of similar scope. I do not believe you can get one that will change our somewhat antiquated and unsatisfactory system with out doing that. The question is whether in so doing you are inflict ing an unmerited hardship upon the banks; whether you are doing something you have no right to do and are taking away from them property rights which they have honestly and legitimately acquired and in which they ought to be protected. 3056 B A N K I N G AND CURRENCY . Senator N elson . D o you know, Mr. Willis, as a matter of fact, that in the panic of 1907 a large proportion of these little country banks kept open shop and never suspended for a minute? Mr. W il l is . Yes; I do know th a t. Senator N elso n . It was the big banks that suspended. Mr. W il l is . Yes; I know. Senator N elson . The little country banks kept open shop. And why did they keep open shop? Because they dealt with the people in their community; they had their money and they patronized the people that furnished them the money. Now, you are inflicting great hardships on them in this bill. And you do it for what you call the general good. You make those country banks a sort of sacrifice for your system. Mr. W il l is . Well, of course I do not think that. I do not mean to be dogmatic in the n after or to adhere too strongly to my views, but I honestly do not think that is the case. I have been trying to showTyou why I do not think so. Senator O 'G orm an . Mr. Willis, have you expressed your individual views—your view as a student of banking and currency—as to whether the notes should be issued by the Government or by the banks ? Mr. W il l is . I have not spoken of that yet, but if you desire it 1 shall be very glad to do so. Senator O ’G o rm an . We will be very glad to have your views upon that question. Mr. W il l is . My fe e lin g ab o u t th a t is th a t as th e bill is now framed----Senator O ’G orman (interposing). Oh, no; I am not asking about the bill as drawn, and I do not wish you to be influenced—if I may make a suggestion—by any part you may have had in its formation. I am only asking your judgment upon the question as a student of banking and currency. Mr. W il l is . Yes; In everything I have said I am speaking as an individual. T could not act, under the circumstances, in any other way. Senator O ’G o rm an . D o you think the Government should issue the notes? Mr. W il l is . I f I w ere s p e a k in g in m y co n fid en tial re la tio n to th e b ill, I could n o t h av e m ad e a n y critic ism on th is b ill, b u t I assum e you w a n t me to say w h a t I th in k as an in d iv id u a l. Senator O ’G orm an . Yes: entirely. Mr. W il l is . And, speaking in that way, I do honestly think it is better to have the notes issued on the sole responsibility of the banks and without the Government participating in them, provided the notes are so amply and unmistakably protected that there can be no question whatever about their goodness. In other words, I think the functions of the Government in con nection with these notes, or with any other notes, is to make it abso lutely sure, so far as it is humanly possible, that a note which is issued and goes into the hands of the public shall be good. If there is no other way to do that except by having the Government guaran tee it. very well. But I think there are plenty of other ways. 1 r B BANKING AND CURRENCY. 3057 think these notes, for example, would stand just as high in credit without the Government guaranty. Senator O ’G orm an . Well, relatively, should the Government per form any greater function with respect to these things than it per forms with respect to the pure-food law? Mr. W il l is . Well, that is a pretty broad statement. I mean that T do not think it ought to perform any greater----Senator O ’G orman (interposing). I understood you to say a mo ment ago—and T rather was disposed to accept the statement as sub stantially correct—that a government’s function ought to be limited to seeing that the notes that are circulated are going to be paid— represent good security. Mr. W il l is . I will put it this way: I do not think its function is any greater than it is in connection with a properly administered pure-food law. Senator R eed . What would you do with the Constitution of the United States? Mr. W il l is . I w ould leave it w h ere it is. Senator R eed . What do you do with it under the statement you have just made? There is something said in the Constitution of the United States about----Mr. W il l is (interposing). Coining money and regulating the value thereof? Senator R eed . Yes; and it does not sav anything about the Gov ernment manufacturing food. Senator O ’G orm an . Congress regulates that under other provi sions of the Constitution: otherwise it could not do it at all. S e n a to r R eed . Y e s; u n d e r th e “ g e n e r a l-w e lfa re ” clause. Mr. W il l is . Y ou come down to a general question now of “money ” as distinguished from “ currency.” My feeling is that the notes are not money, but that they are one form of bank credit; and inasmuch as the notes are a form of bank credit, they should be manufactured and put out by banks under absolutely guaranteed and known conditions, with the most stringent kind of protection for those con ditions and the most absolute guaranty that legislation can give that those provisions are honestly lived up to. Senator N elson . Would you not think 40 or 50 per cent reserves for the notes would be better than 33£ per cent—for the circulating notes? M r. W il l is . Y ou a re a sk in g m e fro m an a b stra c t s ta n d p o in t? Senator N elso n . Certainly. Mr. W il l is . Well, from a purely abstract standpoint, I think a well-managed bank ought to be left “to regulate its own reserves. Senator N elso n . T mean reserves for the notes; T do not mean for the discounted paper. Mr. W il l is . T think that if these banks are what we hope they will be and expect them to be, the amount of reserves they will hold will be greatly larger than 33^ per cent. But as human nature is fallible, and as the people of this country are accustomed to fixed reserves, I think 33$ per cent is a good minimum requirement. Senator N elso n . That is for the deposits; but I am speaking of the reserves for the redemption of the notes—the gold redemption. 305b B A N K I N G AND CU RRE N CY . Mr. W il l is . S o am I . I think in practice, on a good many oc casions, it will get to be much higher than that, probably 50 per cent. I think the kind of men you are going to have in charge of these reserve banks will be men of such conservative nature that they will put the brakes on, just as the Bank of France does, and that the reserves will be larger than required. Senator O ’G o rm an . Then you do not approve of the Governmentnote provisions of this bill ? Mr. W il l is . Well, Senator, I do not know that I would like to answer the question in just that form. Senator O ’G orm an . Well, you need not do so. You have stated your preference for the banks issuing the notes. Mr. W il l is . Yes. Senator H itc h c o c k . Some time ago, when Senator O’Gorman was asking you some questions concerning a plan to have the Govern ment operate and control a great reserve bank, you objected to it upon the idea that that was the function of private enterprise. Do you think it is properly a function of private enterprise to care for and control the reserves of the banking system of a country, and to control the volume of currency of a country ? Mr. W il l is . Well, I look on those as funds that are held in trust for the country. That is, the use of wealth, like the use of other things, is to be fulfilled and carried on in a way that is up to prevail ing standards. If it is not good, some change should be made. Senator H itc h c o c k . Well, agreeing that an individual bank is a private enterprise, subject to regulation----Mr. W il l is (interposing). I will say this, that that is a question of good results. If human experience and the operations of banking elsewhere give reasonable ground for thinking that you will have better results in the way that you speak of, then I think that ought to be done. Senator H itch co ck . Well, that is not my question. We have in this country 25,000 banks and trust companies. Mr. W il l is . Yes. Senator H itc h c o c k . Some are State banks; some are national banks. They are all organized under law, and they are private enterprises. We find by experience that it is necessary to in some way provide a system and compel those banks to keep their reserves in a certain way, under certain circumstances, and to connect with the care of those reserves the discount of paper for those banks, and the issuance of currency against that paper. Mr. W il l is . Yes. Senator H itc h c o c k . D o you really think that that is a private en terprise which should be farmed out to private individuals and placed under their control; or is not that very act a governmental function ? Mr. W il l is . No; I do not think so. in the way in which you put it. Put it that way and I shall have to answer no. Senator H itc h c o c k . Yes. M r. W il l is . P u t it in th e w ay I hav e expressed it— a n d it is m y way o f lo o k in g a t it, w h e th e r c o rrect o r n o t— an d I ta k e a d ifferen t p o in t o f view w ith re sp e c t to it. B A N K I N G AND CURRENCY . 3059 Senator H itc h c o c k . Well, I stated the fact merely. Take these banks; they will have their reserves, and they all have the need of placing somewhere those reserves and issuing against them the loans to the banks in time of need for the public benefit. Now, it certainly can not be denied that that is a public function. It can not be as serted that it is a private enterprise that should be farmed out to indi viduals to make money out of. Mr. W il l is . I would not farm it out to them, and this bill does not do so. In fact, it limits the amount of earnings which they can make in that way. Senator H itc h c o c k . It creates 12 great corporations. Mr. W il l is . It is not right to criticize this bill on the ground, on the one hand, that it is so very severe on the banks and then, on the other hand, that it farms out to them a tremendous privilege out of which they are going to profit. Senator R eed . Nobody has said the bill was severe on the banks as a whole. They have spoken about it reaching certain banks; and then the question has been, in the formation, whether there was not a hardship to the country growing out of the formation. Mr. W il l is . I may have misstated that condition. My feeling is that that is a question of the best way to do things, the best way to get results. I believe you can get them best by having the technical operations carried on in the several districts by bankers. Senator H itc h c o c k . It has been said, for instance, that the busi ness of the Post Office Department could be carried on more econom ically and efficiently under private enterprise than under Government operation; but you would not think of giving up that function to private enterprise, would you? Mr. W il l is . That is a special thing, provided for in the Consti tution. Senator H itch co ck . There is not any doubt about this under the constitutional powers; the question is whether it is a public or pri vate enterprise, and I understood you to say that in your opinion it is a private enterprise. Mr. W il l is . Not quite that. Senator Hitchcock, if I may modify the idea. I mean that the best results in the performance of the function may be obtained by committing the details to private indi viduals, which is, I think, a somewhat different point. Senator N elson . Mr. Willis, would not this system, in the case of an emergency—this reserve system of the bill in the case of a finan cial stringency or emergency—absolutely break down if you did not give the central board the power to compel one regional bank to discount for another? Mr. W il l is . Absolutely break dow n. Senator N elson . It would? Then, after all, have you not a single central system by virtue of that? Mr. W il l is . No, sir; I do not think so. What you have in that case is the exceptional use of certain essential powers of the central system when they are specially needed, as distinguished from the continual use, the regular use. of those powers as a matter of every day business right along. 3060 B A N K I N G AND CURRENCY . Senator N elso n . There is another question I want to ask you. As I understood you a while ago, you intimated substantially, in answer to questions, that you thought that when it came to the matter of paying in these reserves by the banks who entered the system, in stead of pa}ring the cash they could come there and discount their paper and do it in that way? Mr. W il l is . T o some extent, yes. Senator N elson . Yes; and you said the bank was completely organized when the stock had been subscribed? Mr. W il l is . Ready fo r business. Senator N elson . Yes. But how would the bank with that stock subscription have any gold to start with, unless you made a part of that subscription payable in gold? The banks might pay it in any kind of lawful money. Mr. W il l is . And that would be immediately convertible into gold. That is a very pertinent question; and I would like to say that, in my opinion, the contribution of capital for this stock will constitute a direct draft on the lawful money of the country and, if they choose to make it so, a direct draft on the gold of the country. Senator N elson . Well, then, if the banks—we will assume now that all of the subscribing banks pay in their stock subscriptions in Treasury notes, in what we call “ greenbacks ”----Mr. W il l is . Yes, sir. Senator N elson . H ow , then, could the bank have any gold to start with? It would have to turn around to Uncle Sam’s Treasury and say, “ I want the gold on these.” Mr. W il l is . That is theoretically possible; not practically. I do not believe any such thing would occur. Senator N elson . Why? Mr. W il l is . Because the reserve banks w ould get their cash fro m existing banks. Senator N elso n . Well, how would they pay it in? In what cur rency would they pay it in? Mr. W il l is . Under the bill now they could pay it in lawful money. Senator N elson . They could p ay it in silver dollars, could they not? Mr. W il l is . I h a d n o t th o u g h t o f t h a t ; b u t I sh o u ld th in k th ey could. Senator N elso n . They could pay it in silver dollars, or in green backs. And they could not even pay it in gold certificates, could they? Mr. W il l is . Well, it may be that theoretically they could not, but in practice they would get it in in the same kind of money as any other enterprise. Senator N elson . Gold certificates are not money; they are not legal tender in the sense that greenbacks are. Senator R eed . Have you finished, Senator Nelson? Senator N elson . Yes. Senator R eed . Then I w^ant to ask Mr. Willis a question. Mr. Willis, you recognize the fact, do you not, that this entire plan is somewhat theoretical; it has never been put into practice, in just B A N K I N G AND CURRE NCY . 3061 this shape, at least, in any country, and therefore there is some chance for difficulties to arise that can not be anticipated? Mr. W il l is . I will answer that by saying that I do not think that anybody, or all the bankers of the country, could get up a plan whose actual working could be absolutely forecast. And let me add that, in my opinion, this plan contains no element that has not been tested in experience and indorsed by the best judgment of bankers— experienced bankers—and found to be both theoretically and prac tically applicable. Senator R eed. Well, I do not care to argue that. I just wanted to ask that one question. I was only asking it preliminary to another question. Now, I will take your answer as far as it has gone—and I do not mean to cut you off, but we are getting along toward adjourning time. Mr. W il l is . Yes; that is all right. Senator R eed. It being true that no such system has ever been established—there are kindred systems? Mr. W il l is . Yes. S e n a t o r R e e d . T h e r e a re s im ila r s y s te m s . B u t n o k in d r e d s y s te m h a s e v e r b een e s t a b lis h e d u p o n a b a s is su c h a s w e h a v e in t h is c o u n tr y . Mr. W il l is . Yes; I understand. Senator R eed. D o you think there would be any impropriety in starting with two or three banks instead of the whole twelve? Mr. W il l is . Well, I have thought a good deal about that, and that is one point I wanted to speak of—the number of the reserve banks. I think the essential thing there is to have the number flexible, so that it can be increased or diminished as experience dictates. In. the bill as it now stands a provision is contained that there may be an increase of banks whenever a certain number of member banks apply for it. If you could cut down the number considerably below its present level, I think that provision ought to be made a little more flexible, so that if the banks of this country desired, they could, without any material difficulty, upon manifesting a real disposition for it. secure the creation of another of these reserve banks in any part of the country. I will go further than that, Senator: While this number of 12 was put in here after very careful consideration, after the drawing of maps covering the whole of the country and dividing it tentatively into districts, and after the compilation of careful statistics to see how it would work, I fully agree with you that the number is more or less a matter of judgment, and that time will be required to show whether it is the correct number or not. Senator R eed. There is nothing magic about the number 12, is there ? Mr. W il l is . Not at all. I have thought this, that it might be fair to leave the number blank; that is to say* leave it to the organization committee to find out, after careful study and investigation, just what the number ought to be. That is a matter I have been working <»n for some time. S. Doc. 232. 63-1—vol 3-----72 3062 B A N K I N G AND CURRE NCY . Senator N elson . Just one question here before you go o n : Would it not be safer to start in in a small way, with a very few banks, and then work up to a greater number than to start with a large number and have to work down ? Mr. W il l is . I should not like to agree to that in such a broad form, Senator. But may I just finish that statement of mine? Senator R eed . Certainly. Mr. W il l is . A s to this number, I would go further than that and say I believe the banks of the country, taking them as a whole and ascertaining really the general banking sentiment, can be trusted as to the number of these banks that are actually desired—taking the banking and business sentiment of the country as a whole. Now, this organization committee which is provided for in the bill has a tremendously important function. There are no statistics now—no data—upon which these districts can be reasonably laid off. Of course, the problem of laying them off is essentially a problem of finding out the exchange relations between the several banks now existing and putting them into the same district in direct relation with one another, so that there will be as little break in the business conditions as possible. Senator N elson . I s it not a question of ascertaining th e seasonal demands for currency? Mr. W il l is . That is one of the elements in it. Senator N elson . Is not that the most important? Mr. W il l is . Only in one way. Now, this organization committee has that function to perform, and it is an exceedingly difficult one, calling for very careful scientific work, and it is one that has to be done, unfortunately, rather rapidly. It would have to be done in any case. I believe that a strong, capable organization committee, properly advised by skilled exchange experts, could best do that. Senator O ’G orm an . Let me ask, are you contemplating an organi sation committee outside of the reserve board ? Mr. W il l is . That is provided for in the bill. Senator O ’G orm a n . Is that outside of the reserve board? Mr. W il l is . Entirely so; yes. Senator O ’G orm an . Why should not the members o f the reserve board be all that is necessary to create this? Senator S h a fr o t h . Three o f them are the same. Mr. W il l is . Senator Shafroth reminds me th a t th re e o f th em are the same. Senator S h a fr o t h . The Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency. Senator O ’G orm an . D o you see any objection to having authority to create the regional banks vested in the reserve board of seven men. whoever they may be? Mr. W il l is . It is vested there now. Senator O ’G orm an . I gathered from your statement that a part of the committee on organization----Mr. W il l is (interposing). No; I am recommending that it should be allowed to----Senator N elson . The committee is to be composed of those three officials of the reserve board. B A N K I N G AND CURRE NCY . 8063 Mr. W il l is . Yes. I would like to get that connected thought out, if I might. May I go ahead? Senator O ’G orm an . Yes. Mr. W il l is . This organization committee will have an exceedingly important piece of investigation and work to do. Now, in the course of that work, laying off the districts, it would be desirable, if you had a perfectly unbiased scientific judgment at your service, that it should be left to that organization committee, on the strength of the information it gets, to say just how many of these banks are actually needed by the country—just how many of them can be properly pro vided for. Whether Congress would want to leave so great a power as that in the hands of this organization committee is not for me to attempt to conjecture. I think, personally, it would be safe to do that if a way were open for subsequent increases or decreases of the number of banks, upon suitable and proper application. I firmly believe that the best judges of the number of banks that are needed are the business and banking communities throughout the country, and I think that when their sentiment has been properly and thor oughly ascertained—by the way, it never can be thus ascertained through resolutions that are passed in a hurry and in the course of an afternoon by some organization—but when it has been ascertained I think it will be the ultimate criterion as to just how many of these are wanted. And I believe you will find that the business and bank ing interests in the different sections of the country will want to have a reserve bank of their own in every district within which there is enough banking capital and enough banking reserve to give the requisite strength. Do I make that fairly clear? Senator R eed . I think your idea is perfectly clear as you have expressed it. Mr. W il l is . Yes. Senator R eed . I take it, then, it is a matter to be worked out and to be developed in your mind if we are to get the best results? Mr. W il l is . That would be the ideal thing. But because it was deemed necessary to put in the bill some number of reserve banks, that number was set at 12, after the most fair consideration that we could give to it. Senator R eed . 1 understand. Now, why not, Mr. Willis, provide that a system of reserve banks shall be established and start out by creating a reserve bank, and when you have that job done, or well under way, and have developed the situation, to start another re serve bank? In other words, if you are going to build a number of houses and do not know just how many you need, and do not know whether you need 1, 2, or 8, or 25 or 30. why not build 2 or 3 at a time and add to it? Mr. W il l is . Yes; I think that is a good idea, but T think a better one is to find out exactly how many are needed, how many there are demands for, after a careful survey, and then buy the material in wholesale lots and build all at once. Senator R eed . That is all right if you know how many we are going to have. But the first thing we have to do is to find hiow many are coming in. You have an indefinite number of banks. Is it not 3004 B A N K IN G AN D CURRE NCY . necessary to vest the power in this organization committee to work that problem out, and, as sensible and reasonable men. to proceed conservatively in the construction of this system instead of trying to do it all at once? Mr. W il l is . Y ou have asked for an expression of opinion or judg ment, Senator, on a legislative matter, which is outside of my ken. Senator R eed . N o, it is not a legislative matter, but an opinion as to how that system could be best worked out. I am asking you, in justice to the present condition, would you then undertake to start 12 banks at once, or start in a different way ? Mr. W il l is . I will answer your question by saying I think it wTould be safe to have this organization committee report to Congress the result of its finding within such length of time as necessary, say 60 or 90 days, and then for Congress to decide. Senator N elson . That could be done easily if we remain in per petual session. [Laughter.] Senator R eed . We will undoubtedly be here for 60 or 90 days anyhow. Mr. W il l is . Undoubtedly, and Congress could pass upon th e exact number of these reserve banks. Senator W e e k s . What would you say to start one, with the hope that there never would be any more? Mr. W il l is . I should not like it, Senator, to be perfectly frank; no, sir. Senator W e e k s . D o you know a first-class banker in the United States wTho is in favor of more than one reserve bank ? Mr. W il l is . You say “ first-class banker.” That draws an in vidious distinction. Senator W e e k s . Can you name a single man, whose judgment is worth anything, who is a practical banker, who is in favor of more than one bank? Mr. W il l is . I should not like to do it offhand, Senator, and not unless I had permission to quote men: but I know there are. Senator W e e k s . This committee has not been able to find any such man, and if you know of a man I wish you would give his name to the chairman. Mr. W il l is . I will say this now, Senator: I believe it is true that all kinds of production, theoretically, could best be carried on by a great central association. I say that if we had one bank for the whole world, for the economy of the reserves and looking at credits, and to do everything in due proportion, it would be best; but that is like getting universal money and general peace. Senator O ’G orm a n . Y ou do not think universal peace improb able? Mr. W il l is . I am afraid I shall have to confess I do. Senator N elson . We could settle it at The Hague. [Laughter.] Mr. W il l is . I will go as far as this: I say I think in banking, as in everything else, the ideal thing would be to have one single central bank, assuming it was properly controlled and carried on in the best way for the public welfare, just as it should be. I think it would be well if we could have one single central bank for the whole world. B A N K I N G AND CURRENCY . 3065 Senator W e e k s . Let us talk about the United States. Senator P o m eren e . And one railway system for the United States! Mr. W il l is . Yes. Senator P o m eren e . And one telegraph system and one steel com pany. [Laughter.] Senator O ’G orm a n . Speaking o f your last suggestion, regarding your central bank—and we hear some reference to a central bank oc casionally—Senator McLean, I think, some time ago asked your opinion as to the central bank proposed here yesterday. Mr. W il l is . As I said. Senator, anything I say on that must be said with extreme hesitation, because I have not read the plan fully. I would rather turn in a memorandum on that. Senator O ’G orm a n . What would be vour general impression about it? Mr. W il l is . My general impression is adverse to it, for the same reason I have been discussing with Senator Weeks and some of the members of the committee. It ultimately all comes back to my feel ing that is not a good way to do things. Senator W e e k s . I do not know how many banks we will have when we get through with this bill, but if vTe could start with one bank, my judgment is the people of the United States would never tolerate another, and you would wonder that you had ever expressed such an opinion. Mr. W il l is . In th e past, Senator, I have felt the greatest deference for your opinion and valued it most highly, sir. I say that not as a matter of compliment but because it is a fact. But I do not quite agree with that view. S e n a to r N elso n . Y ou sa id a w h ile ago th e p la n o f th is b ill c o rre sp o n d ed in m a n y resp ects w ith th e system s o f o th e r co u n tries. Mr. W il l is . Yes. Senator N elson . D o you know a system there where they have 12 regional banks? Mr. W il l is . Yes; I do. Senator N elson . Banks established under one head? Mr. W il l is . We have in Europe a central bank for each of the countries there. Senator N elson . Yes; each country; but I mean in any one coun try, any one Government. M r. W il l is . There is no country in the world that has the extent of territory and breadth of business interests that ours has. Senator W e e k s . H ow about Russia ? Mr. W il l is . I do not want to put this country on a Russian basis, Senator. [Laughter.] Senator H itchcock . We have been trying to put the bill on a Russian basis. Mr. W il l is . That is beyond me. [Laughter.] Senator R eed . Y ou would not hardly like to put it on a German basis either, would you ? Mr. W il l is . I do not think I would, Senator. There is one th in g I would like to sav about this central-bank matter. While everybody admits in a general sort of a way that a central bank is a spiendid 3066 B A N K I N G AND CURRE NCY . thing, and so forth, I would answer Senator Weeks in this way: There is no argument in favor of a central bank that can not be adduced with just the same force in favor of any other centralized bank that covers enough territory and capital to furnish the necessary strength that grows out of cooperation. Senator W e e k s . Absolutely; and that is just our trouble, too. Our laws have brought about a centralized system which is concentrated in New York. It is under private ownership and private control, and that is what we are trying to get rid of. Mr. W il l is . But now you want Government control. Senator W e e k s . It is not that our present system has ahvays worked badly, but we are trying to change that centralized system in New York. Mr. W il l is . Yes, sir; I believe that this system will do that. I may be wrong about it. Senator B ristow . Mr. Willis, as I understood, your principal ob jection to a bank owned by the people of the United States by volun tary purchase of stock and controlled by the Government was that it put the Government in the banking business ? Mr. W il l is . Yes. Senator B ristow . And you objected to the Government engaging in business? Mr. W il l is . I do not like it. Senator B ristow . In that connection you have been, in my opin ion, confusing the central-bank idea with the idea that has been ad vanced here in the committee and which was indorsed yesterday by Mr. Vanderlip of a Federal reserve bank. Mr. W il l is . Yes. Senator B ristow . N ow , a Federal reserve bank, as some members of the committee have ben advocating, is not a central bank that is operated and owned and controlled by the banks of the United States. Mr. W il l is . I think that is a very excellent point. Senator, and I quite agree with you. Senator B ristow . It is a Federal reserve bank that is to supplement the banking system of the United States. Mr. W il l is . That is absolutely true. I m ade that sam e point awhile ago, if you remember, in conversation with one of the other members of the committee. I agree with you. Senator B ristow . It is to aid the banking business o f the United States. Mr. W il l is . It is; yes. Senator B ristow , it is not to absorb the banks themselves----Mr. W il l is . Not at all. Senator B ristow . It is to be a reserve bank, a great reservoir, where any bank, whether the stock is $25,000 or $25,000,000, if it complies with the legal requirements, may come and secure help when it needs it. Mr. W il l is . Yes; but in doing that it has to carry on banking operations—it has to judge the paper. Senator H itchcock . The Treasury Department is doing that now, you realize. B A N K I N G AND CURRE NCY . 3067 Senator B ristow . Yes; it is taking commercial paper now for deposits. Senator H itc h c o c k . And not only that, but it is sending experts in every one of those national banks to judge of their commercial paper—to say whether it is good. Senator W eeks. Yes; not only doing that, but sending men who are not experts. [Laughter.] Mr. W il l is . Senator, I think those prints are well taken, but I do not think that necessarily means the process is one we want to continue and perpetuate. Senator B ristow . N ow , I want to call your attention to the fact, and tell me if it is not somewhat a parallel: The Government owns a railroad—the Panama Railroad; the Government owns and oper ates it, and it is a Government institution. Do you not think it was necessary for the construction of the canal that the Government should own and control that railroad and steamship line ? Mr. W il l is . Yor are an expert on the Panama Canal; I am not. I have heard it said it was. Senator B ristow . In the connection with the operation of this rail road company and steamship line, the Government is running a steam laundry and an ice-cream factory, 30 eating houses, and 3 or 4 big hotels, as big as the Raleigh down here, and it is also running 40 or 50 grocery stores. Now, that has been found necessary in the construction of the Panama Canal. Mr. W il l is . My answer to that, Senator, is that if that is neces sary, and there is no other way to do it, then I am prepared to sub scribe to it. But I believe there is another and better way. Senator B ristow . Won’t you modify that by saying: “ If this is the better way to do it ? ” Mr. W il l is . N o, sir; I can not believe that. Senator B ristow . Y ou said there is no other way. Now, there are other ways. Senator R eed . There is no other way to do it down there. Senator N elso n . Yes; they could have done it on the regional plan. [Laughter.] Senator S hafroth. As a matter of fact, because of the cost and the probable losses, you would find that private enterprise never would have undertaken that. Senator B ristow . N o ; I beg your pardon. The Government did that because it was afraid that private enterprise, in control of its construction, without any competitor, would take advantage of that and charge the people excessive rates. Now, it is proposed here, in order to break up the monopoly of the credit of the country, which this bill is undertaking to do, to let the Government establish a bank of a hundred million capital, invite the people of the United States to buy the stock and operate that bank, so as to preserve the inde pendence of this democratic system we now have. Senator R eed . A s soon as the argument between the Senator from Kansas and the Senator from Colorado is over, I move that we ad journ until to-morrow morning. 3 068 B A N K I N G AND CURRENCY . Mr. W i l l i s . I would like very much to be permitted to conclude this. Senator R e e d . So far as I am concerned, I would be forced to leave at this time. Mr. W i l l i s . May I c o n t i n u e t h i s ? Senator O ’G o r m a n . Yes. Mr. W i l l i s . Gentlemen, I will add this one point, if I may: A great deal has been said about the necessity of having the banks take up the Government bonds, refund them into 3 per cents or into shorttime notes, and then use those notes for the purpose of getting gold on occasion. In my opinion, there is no necessity for any such plan as that, and I do not think it is a courageous way of dealing with the bond question. It would have the effect of tying up the funds of a regional or central bank, if the latter were organized, and keeping them from being placed in commercial loans. I think that is not in the bill now, and I think it would not be a good thing to do. Senator O ’G o r m a n . What would be your suggestion? Mr. W i l l i s . Well, sir, my suggestion would be, if the committee does not think the banks have been sufficiently generously treated under this bill,—that is, if they do not think justice has been done them—then to do justice by having the Treasury get whatever money is necessary in refunding and refund at such a rate as may be de sired. 1 do not like the roundabout *way of dealing with such ques tions. Senator O ’G o r m a n . I think earlier during the day you stated those 2 per cent bonds should be refunded at par at a reasonably early date. Mr. W i l l i s . I d i d n o t s a y t h e y s h o u l d . S e n a t o r O ’G o r m a n . Y ou t h o u g h t i t w o u ld b e j u s t ? Mr. W i l l i s . I think I said that that was about the only thing I felt would absolutely certainly maintain them at par. That is what I think I said. Senator H i t c h c o c k . I want to say right here I think it is not the idea of members of this committee that the bonds must be maintained at par as a mater of justice or generosity to the banks, but as a matter of protection of the national credit. Mr. W i l l i s . I think that is a very reasonable distinction. Senator O’Gorman asked me awhile ago, I believe, whether I ap proved of the note features in this bill, and then that question was withdrawn. I would like to say with further reference to that, Sen ator, that I think in the form in which the note section is now stated any objection that might come to us from those who hold the ideas that I have expressed is largely a theoretical objection and has not very much practical force, although personally I hold the theory of note issue that I explained. That is all. Senator H i t c h c o c k . We will now adjourn until to-morrow morn ing at 10.30 o’clock. (Thereupon, at 5.22 o’clock p. m., the committee adjourned until to-morrow, Saturday, October 25, 1913, at 10.30 o’clock a. m.) B A N K I N G AND CURRE NCY . 3 069 SATURDAY, OCTOBER 25, 1913. C o m m it t e e on B a n k in g U and n it e d C urrency, S tates S e n a t e , Washing ton, D. G. The committee met at 10.55 o’clock a. m. Present: Senators Hitchcock, O’Gorman, Pomerene (presiding), Shafroth, Hollis, Nelson, Bristow, Crawford, McLean, and Weeks. Senator B r is t o w . I have a letter here from Mr. Larrabee, who ap peared before the committee, and I would like to read it so as to have it incorporated in the record. Senator P o m e r e n e . Was he a former witness? Senator B r is t o w . Yes; he appeared here, and this is a letter to sup plement his statement, which he wrote after he arrived home, written from Stafford, Ivans. He says, “ I have been home several days,” etc., and speaks of his enjoyable trip, and adds: I am afraid that I did not make a strong enough impression on the com mittee in respect to the open-market operations of the regional banks. In the morning of the day I was there you will remember that a banker from Denver testified that he increased the reserve of his bank 12 i>er cent during the panic of 1907 by collecting outside commercial paper; and unless the new banks are permitted to go in the open market the business interests will be up against a violent liquidation in the event of financial disturbance. This was what happened in the panic of 1907, and concerns which sold their paper through brokers were compelled to liquidate heavily. Bankers will not buy paper when they have to discount it at once, and during the panic of 1907, owing to forced liquidation, wheat declined 10 cents a bushel, and there was a heavy decline in all lines of production. I have a suggested method to offer in handling the 2 per cent bonds. It is this: It amounts little to the Government who holds these bonds, whether it is the national banks or whether it is the new reserve banks, and I believe the national banks should be permitted to present their bonds to the reserve banks and receive in payment therefor the notes of the reserve banks, retiring their note circulation. This, of course, can be made optional to the present holders. You can provide that the Federal reserve bank need keep no gold reserve for the notes then outstanding secured by 2 per cent bonds, which they should be obliged to deposit with the Secretary of the Treasury. There is no gold reserve behind these notes now, so there would be no more occasion, it seems to me, for the regional banks keeping a gold reserve behind national-bank notes that are based on United States bonds than there is of the national bank, under the present law, keeping a gold reserve behind such bonds. They should, however, be required as are the present banks to keep a 5 per cent fund with the Treasury Department. With the bonds with the reserve banks the Government could refund them at the rate of 5 per cent annually, retiring that amount of bank notes. The only difference there would be is the reserve banks would issue the circulation instead of the national banks as at present. The Government would be left in the same position as though the national banks were compelled to keep the bonds. If additional currency at the reserve banks was issued above the amount secured by the 2 per cent bonds, they should be required to hold a gold reserve as the bill now provides. In relation to the savings-bank section I notice—now, Senator Nelson, this point I would like your attention to to see if you think there is anything to it— In relation to the savings bank section I notice the law makes an establishment in the savings section optional, and if it is left optional in the bill the 3070 B A N K I N G AND CU RRE N CY . objection passed by Mr. Tilton, of Pell City. Ala., falls to the ground. And if such section is made optional with each individual bank, it can not be objec tionable and may be of some benefit to some banks. That is all he says in regard to this. Now, is it optional, and if optional and the bank did not see fit to establish a savings depart ment, could they go ahead with the time certificates as they do now or would they be forbidden? Senator N e l s o n . I think they could go on unless we changed the law. There is nothing in the law that directly prohibits it. and it is a practice that has grown up. Senator B ristow. Suppose the Comptroller of the Currency should decide that was a savings bank—that is, a savings account. Senator N e l s o n . Then it might lead to trouble, but i t i s a practice that has been universal for years. Senator P o m e r e n e . My thought about that matter had been this: It seemed to be some question as to whether or not, under the na tional-banking law there was an authority to establish these savings departments, but it has been done by leave of the Comptroller of the Currency. Now, if you wanted to make certain that provision we could simply incorporate a section in this bill legalizing that which they had been doing. Senator N e l s o n . Simply a provision in the bill that they shall continue to do as they have been doing. Senator P o m e r e n e . Yes. S e n a t o r N e l s o n . A n d t h e y o u g h t to h a v e th e r ig h t . Senator P o m e r e n e . I think so. Senator C r a w f o r d . Mr. Bristow, in what w a y w i l l his scheme for having these 2 per cents deposited with the regional reserve bank make matters either better or worse? Senator B r isto w 7. Why, it would save a contraction of the cur rency. Senator C rawtf o r d . But, supposing you leave these national-bank notes out just as they are, and not touch them at all. Why would not that accomplish just the same thing? Senator B r isto w 7. Oh, yes; certainly. But this bill proposes to retire them and then if the national bank does not come in under the provisions of the bill, there is a forced retirement. Senator C raw7ford. Yes; but we could change the b ill so as to permit them to remain out. That would amount to the same thing. Senator B r isto w 7. Oh, yes; that would amount to the same thing; but this gentleman does not intend to come in unless the bill is very materially changed, and of course he wants to get rid of his bonds, but he won’t sell them at a sacrifice. He said to me after he testified here he intended to keep his bonds. He says: I will hold them. The United States Government, I do not believe, will repudiate its obligations, and I do not intend to sell below par, but I am going out of the system. Senator N e l s o n . A s the plan is, as I understand it, Senator Bris tow, it is to have the new banks, the regional banks, take over these bonds bodily and issue this new currency on them? Senator B r isto w 7. Whenever a bank wants to get rid of its bonds, the regional bank, his idea is, shall take those bonds and issue to the banks----- B A N K I N G AND CURRENCY . 3071 Senator N e l s o n (interposing). These new notes. Senator B r is t o w (continuing). Currency. Senator N e l s o n . That w o u l d still make that currency bond-secured currency. Senator B r is t o w . It would still make the currency bond-secured currency, except it would be carried to the regional bank. Senator W e e k s . Mr. Chairman, may I suggest to these gentlemen who are discussing this matter, that this is a matter they can discuss during the month of November, and that we take up these witnesses here who are 'waiting. Senator B r is t o w . That is a good suggestion. I have a letter here from Senator Catron. He has written out to a number of bankers in his State, and sent them a copy of the bill and asked their views, and he writes and asks me if I will not have their views incorporated in the record. He sends me the replies of four banks. I do not know what they are, but I have them here. (The letters referred to will be found at the end of the day’s proceedings.) Senator P o m e r e n e . I presume there would not be any objection, and it is so ordered unless there is objection. Senator W e e k s . Mr. Chairman. I have a letter from a Massachu setts banker making some suggestions. 1 have not been over them, and T do not know whether they should be included in the record, but if I find some new suggestions. I would like to have his letter incorporated in the record. Senator P o m e r e n e . If there is no objection, that will be granted. Senator N e l s o n . I was going to suggest. Mr. Chairman, that inasmuch as Mr. Willis was asked to remain over for the benefit of Senator Reed, we take up some other witness until the Senator arrives. Senator P o m e r e n e . Have you any additional statement. Mr. Wil lis, that you wanted to make? Mr. W il l is . I have nothing. Senator, that I think is absolutely necessary. It did occur to me that before closing I would give the committee, with its permission, a brief statement of the points in this bill that I think should be absolutely retained in any bill that the committee, in its wisdom, may determine upon, if you care for them. I do not care to volunteer them. Senator P o m e r e n e . Yes. The witness will proceed. STATEMENT OF PROF. H. PARKER WILLIS—Resumed. Mr. W il l is . This bill, gentlemen, as other bills of the same kind. a bill which may be changed in a great many details, and good argu ment can be put up on either side; that is. in favor of one set of de tails as against another. That is largely a matter of business judg ment and of adjustment to conditions. As 1 said yesterday, the effort was earnestly made in the House to get what seemed like the best arrangement, but if subsequent develop ments or additional evidence which is adduced show that what wras done was not the best, and that in certain particulars alterations should be introduced, then obviously those alterations it is the duty of the committee to make. There are. however, certain fundamental is 3072 B A N K IN G AND CURRENCY . ideas in the bill that it seems to me should be held firmly in mind in the process of acting upon it, if it be acted upon, and that these can be stated pretty simply as a series of brief propositions. I think the first one is the idea that was elaborated upon yesterday to a consider able extent, namely, that of providing for a number of these banks. Senator N e l s o n . Why is that fundamental? Instead of having one reservoir for reserves and for the issuance of bills, why is that funda mental? You did not explain that yesterday. Mr. W i l l i s . I tried to do so, Senator. Senator N e l s o n . I do not recall any reason you gave for that. Mr. W i l l i s . I may not have done it perfectly. My discussion was broken a good deal by question, but my feeling about that is this----Senator N e l s o n (interrupting). Before you go into that I want to call your attention to this: The two fundamental things, I think, in the bill are the conservation of the reserves, gathering those together, instead of having them in the condition they are now, and making them available, and the other is the issuance of currency based upon the commercial needs of the country founded on commercial paper with a sufficient gold reserve for their redemption. Now. those are the two fundamental propositions. Mr. W i l l i s . Yes. Senator N e l s o n . The other proposition of regional banks or whether you make this a compound currency make it absolutely a promise of the banks with or without the guaranty of the Govern ment I regard as nonessentials. Mr. W i l l i s . Yes. Senator N e l s o n . The other two, the gathering up of the r e s e r v e s and utilizing them, and the issuance of currency on the commercial needs of the country—they are the two fundamentals. Now, I would like to hear why 12 regional banks are fundamental. Mr. W i l l i s . May I first say, Senator, that 1 did not intend to say and do not go on record now as having said that I thought 12 were fundamental. I tried to insist yesterday and I do say now, with the greatest strength that I am capable of, that I think the number to be established is a matter that is worthy of very careful investigation and that while we did give—the House committee did give—as full and thoughtful study to that as it was capable of, did have maps drawn dividing the country into tentative districts, did compile statistics----Senator N e l s o n (interposing). But that does not go to the root of the matter. Mr. W i l l i s . May I be permitted, Senator, just to finish that matter, with your permission? Senator N e l s o n . Go on. Mr. W i l l i s . While the committee did do all that and did, as a result, come to the opinion that so far as it could reasonably and humanly conclude, 12 was about the right number, if additional in formation showing that is not the right number is in the possession of the committee, then the number should be changed. In other words, as I said yesterday, there is nothing sacrosanct or positive about the number 12. Senator N e l s o n . But don’t you see, Mr. Willis, you have not gotten at the fundamental reason? B A N K I N G AND C U R R E N C Y . 3073 Mr. W i l l i s . Because I have not been allowed to develop my state ment. Senator N e l s o n . It is not the question o f numbers but why should it be a regional system instead of a single system, that you have not touched upon yet. Mr. W i l l i s . I tried to just a moment ago. I went over that yes terday. The question in the last analysis comes to th is: What is the desirable unit of banking concentration ? That is the real problem. Now, if it can be shown that it takes a country of just about the size of the United States and of just about the total amount of capital our banks have to provide the United States a desirable quantity of banking concentration or degree of banking concentration, then we ought to have only one bank. If, on the other hand, the evidence shows that such a bank as that would be unwieldy, overcentralized, in danger of subordinating the interests of one part of the country, possibly, to the interests of another, or, if it be found that in any area over which such a bank presides there are a number of business dis tricts reasonably separate one from the other in their affiliations, in their type of credits, in their seasonal variations of crops and the like, then the argument is strong for giving each of those districts a separate banking organization which shall manage its affairs and provide the necessary cooperation to guard against depressions and panics and provide banks regularly with rediscounts. Now, do I make that a sufficiently plain statement, Senator? Senator N e l s o n . N o ; I do not think you reach the fundamentals. Mr. W i l l i s . Then tell me where I fail and I will try to do better. Senator N e l s o n . The point is this: Why is a regional system safer and better than a main, central reservoir ? I do not care what you call it, but why not have one reservoir instead of having 12? The1bill admits that 12 is not good because it provides, as Mr. Vanderlip ex pressed it, for the piping of funds from one reserve to the other. Without that you admit your system would break down. You ad mitted yesterday without that provision compelling one regional bank to discount for another, your system would break down. Mr. W i l l i s . N o , Senator. Some one asked me if I did not admit that, and I said that “ With due regard to everybody else’s opinion, T could not admit that,” and I can not now admit it. Senator N e l s o n . Then we might eliminate that from the bill with safety to the system? Senator R e e d . Y o u did put in, you or somebody put in the bill for some reason, a provision that the central board could order one bank to come to the rescue of another. Mr. W il l is . I think that is desirable. Senator, as an emergency proposition. Senator R e e d . N o w , let us see: If the system will stand without it, it certainly is a very radical thing to do. If we have 12 separate cor porations, each owning their own capital, every dollar of their assets being their own, and you put in a requirement that without their volition or consent they may be compelled each to transfer their funds to the other, that of course is a very tremendous power and a very radical power. Now, is there anv justification for it except necessity ? 3074 B A N K IN G AND CU R R E N C Y . Mr. W il l i s . I will answer perfectly frankly as to that, Senator. The justification for it is the same as the justification for the use of the police power, the same as the justification that gives the Gov ernment power to seize private property in time of war, the same as creates eminent domain on the part of the Government, the same as enables human society, as organized, to do any of the things which violate or run counter to the ordinary course of affairs for the safety of the whole of the community. It is the same thing that has led the clearing house, a purely private organization, in time of panic to get together and pool reserves, practically putting pressure—I do not say in any illegitimate way—but practically putting pressure upon every member of the organization to join with the others. Senator R eed . Your illustrations admit the whole of the argu ment—the right of eminent domain. Mr. W il l i s . That is an analogy, Senator, of course. Senator R e e d . The right of eminent domain is the greatest power the Government has. Mr. W il l i s . Yes. Senator R eed . It is a life and death power, in fact. Mr. W il l i s . Yes. Senator R eed . It has no justification, except supreme necessity. Mr. W il l i s . Yes. Senator R e e d . And never has been justified by a court except upon the ground of public necessity. Now, if you admit, therefore, that this provision is analogous to the right of eminent domain, you bottom it upon necessity; and when you bottom it upon necessity you admit Senator Nelson’s hypothesis. Senator N e l s o n . My hypothesis is that that very fact admits that under certain financial stress these regional banks can not stand alone. That is, each one of these regional banks is helpless; they must hie to the others to get help. Mr. W il l i s . It would likewise be a fact if you had a central bank in this country—one single central bank. In time of stress condi tions might become such, and indeed have become such, that such a bank is obliged to look to others unless the financial system is to break down and go to pieces. That has beeri the case in European countries—the banks of France and England have been friendly to one another and have stood together and have aided one another, although there was no power that could force it. Now, in this case, I do not like to speak of myself as admitting that such conditions are probable. I do not object to stating that they may exist. I say frankly that I think this is an emergency power, and I think the bill makes it evident it is to be used and can be used only in emergency. I fully agree with Senator Nelson that there are conditions which this was intended to meet under which difficulty might arise in some one part of the country, serious difficulty, in which it would be de sirable to get help from other parts of the country. But I believe that with this power in the bill that help will come voluntarily. Senator R eed . Very well. I do not tnink we are very far apart. The amount of it is, you think, one of these regional banks might be weakened and might need help, and therefore you have put in the power to give that help; and you admit, of course, that necessity may arise (and we all hope it will arise very seldom and may even B A N K IN G AND CU BBEN CY . 3075 hope it will never arise), and the fact you put the power in is an admission of a possible danger. Mr. W il l i s . Yes. Senator R eed . N o w , I want to ask you this question: I wish you would tell us the difference there is, after all, between 12 separate banks tied together by a central organization and united by a power of that central organization to compel each to transfer its funds to the other and calling that central organization a bank and giving it 12 branches. What is the real difference? Mr. W il l i s . That is a very pertinent question and goes to the heart of the matter. The difference I conceive would be simply like that between a centralized empire like Russia and, on the other hand, a nation like our own, in which local powers are lodged in local governments. The difference now, coming down to a business analy sis, lies in the fact that whereas under a central bank plan the cen tral body ordinarily normally and constantly interferes in, shares in. and directs the ordinary banking business operations of each one of its branches, under a plan such as is proposed in this bill, each busi ness unit carries on its own affairs, provides for the conservation of its own reserves, and directs its own interests, referring to the others only- in case of exceptional necessity and being governed by the cen tral power only in those broader and more general ways that are deemed necessary to bring about a certain general unity in policy. To sum up that answer, then, in a word, the difference is that be tween central and local control, in either case there being a general unity of policies. Senator R eed . N o w , nobody can go farther than I will go for the right of local self-government in all these matters that can be con trolled by the people locally; but when you come to establishing a think like a post office, locai control would be ruinous. Mr. W il l i s . Yes. Senator R eed . And it is conceded here that it is o u r d u ty to pro vide a currency not for each State, but in the exercise of the Federal function to provide a currency and banking system for the entire country. Mr. W il l i s . May I interrupt there? Senator R eed . Yes; just when I finish my question. Don’t you weaken that system, that plan, when you interpose and mix up with it the idea of local self-government ? Mr. W il l i s . Answering that directly, Senator, I do not think so. Further, you notice we have provided with some elaborate care in this bill for exactly that unification of currency as distinct from the purely banking operations which involve the passing upon paper. The chief idea in this bill, the main idea, is just that of keeping within every district the power of passing upon its own paper-de ciding what shall consttute the basis of credit—instead of having that decided somewhere else. Under a central bank plan, as I understand such plans, the central bank would have the power to withdraw funds from one part of the country or to dispatch them there, and through its appointees to impose the stringent requirements of one part of the country as to commercial paper upon another. Now, we all know that human nature is about the same everywhere, and. in the last analysis, the 3076 B A N K IN G AND CU R R E N C Y . goodness of our commercial system depends upon the goodness and reliability of the men who are behind it. Senator N e l s o n . May I ask a question right there—I want to ask right here, in order to bring it to your attention: Under the cur rency provided for .in this act, it is not issued on the order of the regional bank, it is only issued on the order of the central board. The regional bank must apply to the central board, to this central board here, and it says whether the currency can issue or not. Senator R e e d . And whether the securities are satisfactory? Senator N e l s o n . Yes. Mr. W i l l i s . The central board passes upon the question whether the securities that have been O. K.’d by the district authority—that is, have been examined by it, approved bv it—are or are not worthy to stand behind a national currency to which the Government gives its indorsement and the central board further reserves to itself the power, if absolutely necessary, to say to a bank, “ No more of this currency shall come out,” and this currency, under the bill, issues only on the request of the regional bank, and that implies that it will issue only on the request of member banks and their customers who make application to it. Senator C r a w f o r d . Right there: I do not want to break in on’vour thought, but is it not sound that the issuing of currency should be controlled by the Federal board rather than by these banks that are engaged in discounting paper? Mr. W il l i s . For the sake. Senator, of getting uniform currency. Senator C rawtford . And f o r the purpose of controlling the volume and preventing inflation should not this Federal board control that issue ? Mr. W il i .is. It is desirable to prevent inflation; and to have that done by every means and at every point in the whole process here, has been earnestly sought. I believe this bill is infinitely ahead of the monetary commission’s bill in its safeguards against inflation, and I believe it fully and thoroughly prevents such inflation, while, at the same time, enabling the business community to get what it needs when it has the backing for it. Senator R e e d . N o w , Mr. Willis, we are drifting away from the one thing I want to talk about for a moment. Mr. W il l i s . Yes. Senator R eed . Y ou believe, I take it, that the nearer w e h a v e lo c al control and yet have a strong system, the better. Mr. W il l i s . I do. Senator R eed . N o w , let us see. Here is a system proposed by which there is a regional bank organized, and every bank within that district must become a member, and then that bank can get no relief until it has secured the approval of that regional board. Mr. W il l i s . Yes. Senator R eed . And after it has the approval of the regional board the regional board must get an approval from the central board. Thus each bank’s fate is made to rest not upon the security it is able to offer, but upon the volition of the bankers who happen to control the regional bank. Now, is that not a much less degree of inde pendence in each bank than it would be if each bank had the right, under the law, to have discounted its paper, provided it came up to a standard and acted as an independent thing—not as an adjunct? B A N K IN G AND C U E B E N C Y . 3077 Mr. W il l i s . Senator, answering the main point of your question first, which is the last point—that question has been discussed a good deal in the House committee, and I have devoted a good deal of attention to it. I think there is argument for giving the bank the right to have a certain amount of its paper discounted under limited conditions. I think, also, that the putting of that into the bill would create another outcry ot opposition to it from bankers; and as I believe that all reasonable discounts will be granted under this bill, for the reason that it is to the interest of the banks to do it, and they themselves are operating the regional banks, I think it is not necessary, or on the whole wise, to put that in ; although, if there were danger that any bank would be discriminated against and its life endangered in that way, I should want to see it in. Now, then, I do not believe there is any such danger as that, but I believe that the business interests of the banking community are strongly in favor of seeing to it that every bank that has good paper shall get accom modation and that there shall be no friction in the working of the plan. That situation has existed already under our very imperfect system and would exist in a much higher degree here, where, if there was the slightest injustice done to a bank, that bank could bring it to the attention of the Federal authorities and an immediate rebuke would result. Senator N e l s o n . I want to call your attention to this fact, in the matter of discounts: Do these regional banks act as a sort of middle man ? There has got to be a double discount. Mr. W il l i s . Yes. Senator N e l s o n . I come to you, a regional bank, and want to make a loan. Mr. W il l i s . Yes. Senator N e l s o n . Y ou discount m y paper. Mr. W il l i s . Yes. Senator N e l s o n . N o w , you have to go, i f you are short of funds, to the reserve bank ? Mr. W il l i s . Yes. Senator N e l s o n . And you have to discount, so there are tw o s te p s in the operation. M r. W il l is . Y e s ; t h a t is tr u e . Senator N e l s o n . And each of those systems has to have a rake-off. Mr. W il l i s . Yes. Senator N e l s o n . That is, instead of the borrower getting the whole thing through his local bank, he gets it through the local bank as an intermediary of the regional bank. So there are two steps in the discount program. Your member bank borrows it from the regional aiK ^ en member bank loans it to the individual. Air. W i l l i s . Y es; your point is very forceful and well taken, Senator. Senator N e l s o n . N ow you have a middleman. Would it not b e etter to abolish that middleman in the matter of discount and let the °A/r ^le business direct—to get discounts direct? 1 ll‘* ,1LL*S- ^ wonM rather put it the other way. If you can inuce the bankers to have the regional bank deal direct with the public, iF. as compete with them right along every day, it would be well, -mere is a great deal of argument for that. s. Doc. 232, 63-1— vol 3----- 73 3078 B A N K IN G AND C U R R E N C Y . Now, as to this question of profit or “ rake-off,” what you sa}7 is absolutely true. My own opinion about it is, however, that the com bined payment of profit or “ rake-off ” will, by competition, be kept down to the ordinary level for the use of capital, and that the mem ber bank which makes a loan, knowing it has to meet that loan itself or go to the regional bank, will simply charge enough for its indorse ment (for that is what it amounts to) to cover its expenses and the risk of loss in performing the transactions. I think the competition, which is to be perfect under this bill, because any new bank that organizes can come in, will keep that rate of interest down to a fair return upon capital, and I am firm in that belief because of the fact that under the existing system our banks, on the whole, have not had an unreasonable rate of return. The comptroller places it, I believe, at less than 10 per cent as the average rate of return on capital, which is not an unfair return, as such things go, allowing for business hazard and failure and all that sort of thing. That is my answer. I do not think it would be unreasonable, and I believe competition would keep it down. At the same time, I do think if you could per suade the banks and business interests, which have sprung up and are opposed to doing that, to let those regional banks do some business, at their discretion, with the public, thereby giving a very powerful whip hand over the member banks, you will tend to keep the rate of interest down. To get them to do that, I think, would be a difficult thing, and I doubt whether it could be accomplished. Senator R eed . N o w . Mr. Willis, I want to get your idea about this matter: Suppose we were to organize this system along this line, that we are to provide 12 regional banks----Mr. W il l is (interposing). Or some other number. Senator R e e d . I will take 12 as an arbitrary number. Mr. W il l i s . Yes. Senator R eed (continuing). We would require the banks in these districts to underwrite the stock and then sell the stock of each of these regional banks to whomsoever would buy it, the Government of the United States taking a portion, so that the banks in the end would not necessarily have the capital invested. Then require the banks to keep their reserves either in their own vaults or in these banks ? Mr. W il l i s . At their own discretion? Senator R e e d . Well, leaving a discretion, b u t p e r h a p s n o t as to the entire fund. And then provide that these 12 b a n k s s h o u ld be governed by a board of directors selected, n o t b y the b a n k s b u t b y the Federal Government? Mr. W il l i s . Yes, sir. Senator R e e d . S o that there was no selfish interest controlling those 12 banks. What would be the objection to that system? Mr. W il l i s . Well, that w a s the q u e s tio n t h a t w a s a s k e d m e la s t night—I think by Senator O’Gorman. I t h i n k p e r h a p s y o u w e re not here at the time. Senator R e e d . If so, I did not hear it. Mr. W il l i s . My answer to it was this: I firmly believe, perhaps wrongly, but I believe that the use of selfish interests under proper control in human life, in business relations, is a pretty desirable thing; and I think you will get better results in the operation of these banks by having them carried on subject to proper Govern- B A N K IN G AND C U RREN CY . 3079 ment control in the interest of the public by the people who own them—who own the stock in them—and who are directly concerned in their operation, then you would in having it done entirely by public officials. You may say----Senator R eed (interposing). Well, suppose we were to have the banks have a minority representation on account of their deposits, the Government maintaining the majority; what would you think of that? Mr. W il l i s . That would be less objectionable to me than the other. Senator R e e d . I just want to get your opinion, because you want to get away and I do not want to keep you here very long. Mr. Willis, have you any idea that the banks to-day—the great banks of the country—exercise a somewhat dominating influence over the financial market? Mr. W il l i s . I do, of course, t h i n k so. Senator R e e d . Have you any idea that that influence extends out throughout the country and reaches the large banks of the country? Mr. W il l i s . I can not help thinking so. Senator R e e d . Well, have you any remote or nebulous notion in your head that the banks are not going to control this system ? Mr. W il l i s . T h is sy s te m w e h a v e n o w ? Senator R e e d . Absolutely. Mr. W il l i s . I h a v e n o t o n ly a re m o te a n d n e b u lo u s n o tio n b u t a v e ry d is t in c t c o n v ic tio n , w h ic h m a y b e n o th in g m o re t h a n a c o n v ic tio n , b u t w h ic h I h o ld ju s t as f irm ly a s a m a n c a n h o ld a c o n v ic tio n b a s e d e n tir e ly on s tu d y , a n d so o n , t h a t u n d e r t h i s s y s te m th e b a n k s o f th e s e v e ra l d is t r ic ts w ill be a b le to c o n tr o l t h e i r r e s e rv e f u n d s a n d to k e e p th e m in v e s te d in th e flu id s e c u r itie s o f t h e i r o w n d is t r ic t, a n d n o t in sto c k s a n d b o n d s iss u e d a t a g r e a t d is ta n c e f r o m th e m , d o u b tle s s u n d e r p r o p e r c o n tr o l in m a n y cases, b u t w h o se f lu id ity a n d s o u n d n e s s is in n o w a y r e la te d to th e f lu id ity a n d s o u n d n ess o f th e p a p e r o f th e d i s t r i c t to w h ic h th e s e r e s e rv e s b e lo n g . Senator R e e d . That, to my mind, is an utterly different question, and it is one that can be reached in an entirely different wav. Mr. W il l i s . Very likely. Senator R e e d . They have got the right in this bill to prescribe the kind of securities that can be used by these banks or can be invested in—all of them. Mr. W il l i s . Yes, sir. Senator R e e d . And that is a different question. But I am talking now just about control. I will take, for illustration, the district in which I live. There is one bank in the district that is the banker for 720 other banks. Mr. W il l i s . Yes. Senator R e e d . There is another bank that I know of that is the banker for 000 other banks. Both of those happen to be in my town. In the city of St. Louis there are various large banks and trust companies that probably do business for and are the depositaries of more country banks than those I have named. Senator C r a w f o r d . Well, those are trust companies and State uanks, as well as national banks? Senator R e e d . Yes. Now, when these men come to a banker— Yhen these bankers come to a great bank in a city—they come to 3080 B A N K IN G AND CU R R E N C Y . him, first, because they have confidence in him as a banker; they come to him, second, because he is able to render them certain aid. We have been told that there was a convention of bankers in Chi cago that a few men absolutely dominated. We have been told that there was a convention of 2,000 or 3,000 bankers in Boston and that a few men mapped out the program for that convention and carried it through. And everywhere power and influence works its way to success. I do not know what you think; but I have not the slightest doubt that I could pick out 12 men in the district that is to be established in the section in which I live and that 6 of those men at least will con stitute the directors of the regional bank. Mr. W il l i s . Well, I think, Senator----Senator R e e d (interposing). And if that is true, who are they? They are going to be the great bankers of that district; they are going to be the very men that you say are now under the influence of the great financial powers. Mr. W il l i s . May be, Senator, under that influence. Senator R e e d . Well, men t h a t you say are now probably under it. Mr. W il l i s . Probably; yes. Senator R e e d . Then, have you not made a machinery or devised a plan by which all of the bankers are to be united into 12 banks; so that it is therefore easier to control 12 banks than it was originally to control 7,000 banks? Mr. W il l i s . With reference to that, I can only say that I do not think so and that I think the machinery of public control—the Federal board and the arrangement for Government participation in the directorates of these banks—is enough to prevent. But as I am perfectly free to admit, that is a question that is open to dis cussion. It is not really a banking question at all. It is the kind of question that you have so clearly outlined; and if, in your opinion, not enough has been done to guard against that danger of control then more should be done. Senator R eed . If we are not to require the banks to put up any capital: if we simply require them to aid in forming this system, then the Government would be perfectly justified in retaining the control of these regional banks, would it not? Mr. W il l i s . I think, with J ition—because I think anything is justified results for the public welfare—that the best results—business results—are obtained either in the way indicated in this bill, or in some similar way. Understand me clearly; I am not a bigoted advocate of the details of this bill. As I tried to convince you yesterday, I think there are many places at which it can be improved, and I have indicated some of the most important ones on m;y own responsibility. Senator R e e d . Well, do you think the plan I suggested would be workable? I will not ask you whether it is as good as this one. Mr. W illis. Theoretically, I think it would be workable. Senator R eed . D o you know of any reason why it would not be practically workable? Mr. W il l i s . Practically—that means the kind of men you get to operate it? B A N K IN G AND C U BREN CY . 3081 Senator R e e d . N o ; I mean the formation of it. So far as running it is concerned, I can dismiss from my mind, because I think that can be accomplished. Mr. W il l i s . Equally frankly, then, I think practically the success of it would depend a good deal on the way in which it was worked out, and the skill with which the details of the plan are developed. Senator R eed. Please let me ask you one further question. You have provided in this bill for the retirement, gradually, of the national-bank notes. Will you tell me how we now get the gold into our Treasury, which we have been enabled to pile up here as a re serve back of the----Mr. W il l is (interposing). The way in which the country g e ts g o ld ------- Senator R eed (interposing). Well, how do w e get that into th e Treasury ? Mr. W il l i s . Just in this way, I think—of course, that is a large theoretical question of international balance of trader----Senator R eed (interposing). No; I mean the practical way it gets into the Treasury. Mr. W il l i s . Well, the way it gets in, I should say, is that the use of the paper currency, the certificates, is a good deal more convenient to people with our habits of using money, than the use of the gold----Senator R eed , (interposing). But we have to get the gold in th e Treasury before we use the certificates, how do we get that gold in there ? Mr. W il l i s . A man takes the gold out of the ground. He takes it to the assay office, and then it goes to the Treasury to be coined. The man who is going to use it would rather have paper currency than gold. He therefore asks the Government to take the gold and give him paper currency for it. They hand out the gold certificates to him and the gold stays in the Treasury, and the gold certificates go into circulation. Senator R e e d . Well, that is not the sole source of the gold s u p p ly of the Treasury. Mr. W il l i s . Of course, we import gold from abroad, and w e d o not want to use it as money, as the English and the French do, and w e get certificates for it. Senator R eed. Who im ports it? Mr. W il l i s . Anybody who has a claim----Senator R eed. Of course, we all know that that is one of the sources by which money gets into the Treasury. The miner goes to the assay office and says I want this gold coined; and then he takes the gold and says I want to get gold certificates for this instead of the coin. Mr. W i l l i s . Yes. Senator R e e d . We understand that. But there is another source of it. Mr. W il l t s . We get it through international balances of trade. Senator R e e d . But how does that get into the Treasury? . Mr. W il l i s . Just in this way, I should say: The balance of trade in favor of this country is created through the purchase and sale of goods. 3082 B A N K IN G AND C U RREN CY . Senator R e e d . But I am just assuming that gold is in this country. How does it get into the Treasury? Mr. W il l i s . Just as I say: A bank or an individual has posses sion of the gold, and prefers the currency to the gold, takes the gold to the Treasury, leaves it there, and gets the currency for it. Senator R e e d . N o w , has that ever been done? Mr. W il l i s . D o you mean an actual transaction? Senator R eed . Yes. Mr. W il l i s . I could not point to an actual specific transaction, of course. Senator R eed . Well, Mr. Willis, is not this the way it is done: The Government collects vast sums of money at its ports; and it col lects an excise tax ? Mr. W il l i s . Yes. Senator R e e d . And that tax can not be paid in national-bank notes. The national-bank notes, therefore, are forced out of that use, and something must take their place; and, therefore, it must be gold or the equivalent of gold. So that there is being poured into the Fed eral Treasury because of that fact a stream of gold. Mr. W il l i s . Yes. Senator R e e d . And when it once reaches there it can be laid aside and gold certificates issued. Is not that the way it gets there? Mr. W il l i s . Well, gold undoubtedly gets into the Treasury in that way; but I do not think that accounts for the bulk of the increase in the trust funds behind the gold certificates. Senator R eed . Would not that flow of gold be greatly retarded i f we were to retire the national-bank issue of $700.000,000----Mr. W il l i s . I do not think so; not in the slightest degree. Senator R e e d . And we were to issue a Treasury note that was pay able for duties and imposts? Mr. W il l i s . I honestly do not think so. Senator R e e d . Have you ever gone to ascertain the practical work ings of this system we are now living under? One of the great sources of our gold supply has been due to the circulation of the bank notes. Mr. W il l i s . Why, certainly, it is undoubtedly true that the bank notes circulate as they do because we have not cared for gold in stead of them. We have had to supply the place of the pure gold currency which we would have had had bank notes been entirely absent; and we have supplied that by the use of the bank notes. That is certainly the case. Senator R e e d . And the bank notes—is not this the practical op eration of it: A banker, knowing that the gold has certain uses that the bank note does not have, in paying the money out over his counter will pay out the bank notes, and they circulate in the pockets of the people very largely ? M r. W il l i s . Y es. Senator R eed . Consequently, when you want to pay the United States $10,000 in the way of duties, you go down to the bank. The bank has already gathered up the gold, and you say you want $10,000 in gold, and you carry that over to the customhouse, and you pay it into the customhouse, and the customhouse sends it into the Treasury and the Treasurer takes it and puts it over here in a pile and issues against it $10,000 of gold certificates; and thus we im- B A N K IN G AND C U B E E N C Y . 3083 pound the actual gold. Now, is not that one great function that has been performed by the national-bank note? Mr. W il l i s . I should not be inclined to attribute that function to the national-bank notes. Indeed, my feeling has been that the na tional-bank notes have driven gold out of the country. I feel that very strongly—that they have been at times very redundant in cir culation—and that they have actually prevented the gold from being paid to the Government, when it otherwise would have been and should have been paid to the Government. S e n a t o r R eed . W h a t d o y o u th i n k th e c ir c u la tio n p e r c a p ita o u g h t to be in th is c o u n tr y ? Mr. W il l i s . That is a question I do not think anyone can reason ably pass upon. It varies a good deal, and because it varies we need elasticity in the currency. Senator R eed . Would you think that in 1896 it was too little, or too much ? Mr. W il l i s . Well, that is a good while ago. I do not know what I thought at that time. Senator N e l s o n . Y ou mean 1906, do you not, Senator Reed? Senator R e e d . N o; I mean 1896. Mr. W il l i s . I do n o t k n o w w h a t I t h o u g h t a t t h a t tim e . Senator R e e d . Did you at that time advocate the theory—the quan titative theory of money? Mr. W il l i s . I never have believed in the quantitative theory of money. S e n a to r R eed . Y ou d o n o t b e lie v e t h a t th e a m o u n t o f m o n e y has a n y t h i n g to do w ith p ric e s ? Mr. W il l i s . That is a little too strong a statement. It has some thing to do with it, but I do not believe it to be the sole regulatol* of prices. Senator R e e d . Not the sole regulator, but is it not a great factor? Mr. W il l i s . It is doubtless an important factor, but not th e greatest. Senator R e e d . I s it not the greatest single factor ? Mr. W il l i s . I do not think so. That is a very much controverted scientific question, Senator Reed. Senator R eed . Well, did you ever follow the fluctuation of p r ic e s and compare them with the amount of money in circulation? Mr. W il l i s . Yes; I have made, I think, a pretty elaborate s tu d y of that. Senator R e e d . Well, is it not true, as a matter of financial law, that, taking prices in the aggregate and not picking out a particular year, but taking a period of time great enough so that you can strike a fair general average, that the rise of prices has always followed the increase of per capita circulation? Mr. W il l i s . I honestly do not think so. You ask me for an opinion, and it is my duty to tell you just what I think. Senator R e e d . Certainly. Mr. W il l i s . I do not think so. But I also add to that there is scientific opinion in favor of the view that you have expressed, but that, in my judgment, the weight of scientific opinion is against it—closing, then, with the statement that, while there is a great deal of evidence on behalf of both sides, my own studies of the 3084 B A N K IN G AND CU RBEN CY . subject have led me personally to the conclusion that the quantitative theory of money is not a sound, is not a tenable, one. Senator R e e d . Then, i f that is true, it will not make any difference how much per capita circulation we have out; as long as it is good money it will not affect prices. Mr. W il l i s . Provided it is good money, and instantly redeemable, I do not think the mere quantity in circulation makes any difference. Senator R e e d . One further question and I am through. Why do you provide in this bill that the Secretary of the Treasury must turn over all the money in the Federal Treasury, except the 5 per cent, and the moneys held on special deposit and must hereafter turn over all moneys acquired, to this system of privately owned, privately controlled banks? Mr. W il l i s . Well, eliminating the latter part of that question, which I do not think is quite fair—that is, it would commit me, you know, to the belief that it was a privately operated system, which I do not think I can admit----Senator R eed (interposing). Well, not entirely; there is some con trol of it. Mr. W il l i s . But answering the main branch of your question about the Government deposits I would say this: I believe that there is really no feature of our existing system that is so open to criticism and is so unique among the fiscal systems of the world as that by which the Government segregates its current receipts in money and withdraws them from use. And I believe that in times past very serious hardships and wrong have been done to the country by withdrawing large sums in that way and then depositing them back in banks at other points. For, even with the best intentions in the world, under the most favorable possible conditions, it is not practicable to put the funds back ex actly where they came from. So that for those reasons I think it is better to have the funds re main steadily in commercial use instead of being drawn out. Senator R eed . Well, now, do you not argue too much on that? Mr. W il l i s . Perhaps so. Senator R eed . Y ou have a bill here that provides that these re gional banks, under the direction of the central power of the Govern ment, shall do identically that thing not only with the Government money but with the private moneys of the banks? Mr. W il l i s . Certainly it was not believed that it would do that. Senator R e e d . Well, the Federal Treasurer has collected the money that is due to the Government and belongs to the Government. He sees fit, because he believes it ought to be done, to deposit $10,000,000 with the banks of Chicago, and recently $50,000,000 with the banks of the West. It is his money—or it is our money; it is the people’s money, and he deposits it. It is an arbitrary transfer of one’s own funds from one place to another. And you say that is bad, because the money does not go back to the place where it originated ? Mr. W il l i s . Yes. Senator R eed . Very well, let us take this 12-bank system. The banks of New York, we will say, pay into the Federal Treasury a large sum of money. There is $100,000,000 there. There is a bank— a western regional bank, somewhere out in the West, that is in need B A N K IN G AND C U R R E N C Y . 3085 of funds. A Government board orders the bank in New York to send $50,000,000 to that bank. Will you tell me why that does not have every single vice that is in the system that now exists? Mr. W il l i s . I will answer that perfectly frankly----Senator R eed (continuing). With the additional vice that you are taking private money against the will of the owners of that private rnon£y, whereas under the present system you are only taking Fed eral moneys and depositing them, exercising the right of a pro prietor to put his money wherever he pleases ? Mr. W il l i s . I will answer that perfectly frankly, Senator Reed. In one view of the case I think your criticism is an absolutely just one; and I would be inclined to defend that power just as I did de fend it before on the ground that it is an exceptional power, to be used only under exceptional and unusual conditions when all else has failed. But I would make this one limitation, if you will permit, upon your statement, that the withdrawal that occurs in the latter case, you understand, under this bill is from commercial use and from one commercial district to another commercial use and to another commercial district, the funds being in continuous use at the service of the business community all the time, whereas now the funds are paid to the Government, a noncommercial body, are segregated in the Treasury, oftentimes to the extent of hundreds of millions of dollars, the surplus within recent years, I think, having run as high as $260,000,000, and they are held out of use there for indefinite periods. Senator R eed. Has there ever been a time when $262,000,000 has been in the Treasury ? Has it not been in the banks of the country ? Mr. W il l i s . Under the Shaw administration, I think, the surplus ran up to about that figure, the funds being distributed between the Treasury and the various subtreasuries, but being out of commercial use. That is, the total surplus; but there was, of course, a certain part of it in the banks. Senator R eed. Yes; the major part of it was in banks, was it not? Mr. W il l i s . I do not think so; not at one time, Senator Reed. Senator B r is t o w . Excuse me for interrupting you; but did not Secretary Shaw distribute that surplus all over the country ? Mr. W illis . He kept distributing it, and calling it back again. Senator B r is t o w . Well, h e called i t back as h e needed it, did h e not? Mr. W il l i s . N o; he often called it back when he did not need it; that is a matter of opinion, of course; I am not criticising anybody. But I think he often called it back when he did not need it. Senator B r is t o w . T o my certain knowledge, he sent thousands and hundreds of thousands of dollars out to the small country banks. Mr. W il l i s . Oh, certainly he did that; and a good many of those banks deposited it in New York and other centers. But that is an°ther question. I think, Senator Reed, in all frankness, that your criticism of that power is a perfectly fair one, with the limitation I have made. Senator R eed. N ow, I have in mind another thing. I have in mind the stability of this Government. I am going to assume, for the sake 3086 B A N K IN G AND CU R R E N C Y . of argument, that we came to a crisis when we were threatened with a great war. I am utterly opposed to passing any law under which the Federal Treasurer can not conserve in the vaults of the Govern ment any money, no matter what the emergency is ; no matter if this whole chain of banks was tottering to its fa ll; no matter what the con dition that he must put that money in the banks; do you not think that power is too broad? Mr. W illis . That is the matter that you mentioned yesterday. I am glad you recalled that to my memory. I think we might very well modify that so as to leave it discretionary wdth the Secretary of the Treasury. I see no objection to that. Senator R e e d . Would you draw the provision, then, something like this? Would you express it—not in this language, but substantially like this: That it is the policy of the Government to keep these moneys in the hanks--- Mr. W illis (interposing). Certainty, that is right. Senator R eed (continuing) : But with a discretion vested in the Secretary of the Treasury, whenever for the public good he desires to retain it in the vaults? Mr. W illis . Exactly so. Senator R eed . I do not mean that that would be written in the law in that way. Mr. W illis . I understand; that is the thought. Senator C raw fo rd . Then you would repeal the Independent Treas ury act? Mr. W illis . This bill does not repeal that. Senator R e e d . I a m obliged to go, now, Mr. Willis; but I a m very much obliged to you. Mr. W illis . I thank you, Senator Reed, for your courtesy. Senator C raw fo rd . But it practically destroys it, does i t not? Mr. W il l i s . It d e s tro y s th e w o r k in g o f i t in o r d i n a r y b u sin e ss o p e r a tio n s ; yes. Senator C ra w fo rd . Mr. Willis, the member banks who subscribe to stock in the regional reserve bank and who want to rediscount paper, it is not contemplated that in all cases that they shall get currency for this paper, is it? Will they not, in a great many cases, take their assets over there and get a credit in that bank? Mr. W illis . Certainty; yes. Senator C ra w fo r d . Well, unless this Federal reserve board has this absolute control over the issuing of currency, how in the world can the temptation be withstood of getting currency on all the commercial assets that these member banks want to lug over there, and in that way inflate the currency of the country? Mr. W illis . Well, in a great many cases the banks would not want currency; they would rather have the credit and would draw checks. Senator C ra w fo r d . Well, there is a temptation, always, to get cur rency when there is any chance to loan it out and get interest on it. Mr. W illis . The bank would just as soon loan out its credit. Senator C ra w fo r d . Then you think it is not necessary to have this check in the hands of the Federal reserve board on the tendency to issue too much currency? Mr. W illis . Personalty, as I explained yesterday afternoon, m y theory is that the issue of currency, if it is amply protected, and if B A N K IN G AND CU RREN CY . 3087 it is absolutely and unquestionably solvent and good, will take care of itself. But, for the sake of safeguarding it still further, be cause it is so important a matter, we ought to make assurance doubly sure; and I think it is well to leave a general oversight in the hands of the Federal reserve board. Senator C ra w fo r d . Well, the volume of this prime commercial paper, these liquid assets, is so enormous that if they could lug it to the reserve bank and get currency for it without limit it certainly would inflate the currency, under certain circumstances. Mr. W il l is . I do not think that is a danger. Senator H it c h c o c k . Mr. Chairman, is there anything further? Senator P o m e r e n e . I think there is nothing further. Mr. W il l i s . May I be excused, then? Senator P o m e r e n e . Have the Senators any further questions to ask? If not, Mr. Willis will be excused. Mr. W il l i s . I thank the committee for its courtesy to me. Senator P o m e r e n e . We are obliged to y o u . Senator H it c h c o c k . Yes; the committee is obliged to you. Mr. W il l i s . If I can serve the committee in any way in passing upon any further point of doubt I will be glad to do so by letter. Have I the privilege of reading my testimony and correcting formal errors ? Senator P o m e r e n e . Yes: v o u can arrange with the reporter about that. Mr. W il l i s . In closing. I should like to add to my testimony a very brief statement of the points in which I believe that the bill should not be changed, no matter what alterations of detail may be introduced into it. When I began my testimony this morning' I suggested that such a condensed review might be worth while by way of completing what I had to say, but since then the discussion has taken a wide range, and I have not been able to furnish the enumeration of the essential points spoken of. May I say in con clusion. then, that I believe the vital points to be retained in the legislation are as follows: (1) First of all, it is necessary to have a number of reserve banks, and, above all else, to keep the way clear for increasing this number if necessary as different sections of the country desire. As I have said, I do not feel a positive certainty as to any given number, but I am positive that the number should be a reasonable one, corre sponding to the general business and commercial division of the country. (2) Secondly, I am earnestly desirous to see the autonomy and independence of each of these banks absolutely maintained, and to that end I think that extensive business between them, involving the keeping of large funds with one another, should not be permitted, and that the general course of their operations with one another should be closely supervised by the Federal reserve board. (3) Thirdly, I esteem it absolutely essential to retain in the bill the provisions for open market operations upon at least their present scale of development. Otherwise the banks will not be able to make their rate of discount effective. (4) Fourthly, it is absolute^ and fundamentally essential that the banks shall keep their reserves either in cash in their own vaults 3088 B A N K IN G AND CU R R E N C Y . or else in the form of credits with the Federal reserve banks in whose districts they are situated. The present system of pyramiding re serves, keeping balances with other banks which are counted as a part of the reserves of the banks to which they belong is wholly vicious, and should be terminated at as early a date as conditions will permit. (5) Fifthly, the Federal reserve board should have enough power to make it a genuine force, particularly in cases of emergencies, and should always be in position to exercise within reasonable limits a powerful control over broad banking policy. (6) Sixthly, the bill should provide for a uniform system of do mestic exchange without any question or doubt. If possible, to effect this without undue hardship it should be based upon par collec tion of checks within reasonable limits. (T) Seventhly, there should be no provision tending to overload the Federal reserve banks with Government bonds through any system of purchase or absorption or transfer. Such a provision would inevitably result in tying up the funds of the banks to a cor responding degree, thereby crippling them and preventing them from furnishing sufficiently effective or active assistance in the granting of rediscounts. There are other essential and highly important provisions which should appear in any bill, but I regard the foregoing as so pre ponderating in importance that I have thought it worth while to seg regate them for special attention. Senator H it c h c o c k . I would like to read this telegram into the record; it is addressed to Hon. Robert L. Owen, the chairman of this committee, and it is signed by some 30 of the leading wholesale houses of Omaha, Nebr. It is as follows: O m a h a , N ebk., O c to b e r 2-}, 1913. Hon. R obt . L. O w e n , C h a ir m a n S e n a t e C o m m it t e e o n B a t i k i n g a n d C u r r e n c y , W a s h i n g t o n , D . C .: The leading business of Omaha, in a called meeting here to-day, expressed their alarm at some of the provisions of the Glass-Owen currency bill, believing that it will have a blighting effect upon the business of jobbers, manufacturers, packers, stockmen, grain men, retailers, other lines of business, and farmers. They are actuated in making this earnest protest by the absolute certainty that the bill if enacted will bring about a very serious contraction of credits, not only in the West, but throughout the whole country. This is a vital effect of the bill, which can not fail to work hardships upon business concerns large and small. For instance, the banks of Omaha, under the operation of the pro posed law, will lose from $7,000,000 to $8,000,000 of their deposits. In order to make up for this loss they must ask for a corresponding reduction in their loans, say about $5,000,000. This means that the business men of this section must reduce their lines of credit in their local banks all the way from 20 to 30 per cent. It is well known that the large business houses of the West carry lines of credit in Chicago, St Louis, Boston, New York, and in other large financial centers. Under the operation of the pending bill these lines of credit will be reduced for the same reasons that will impel their local banks to reduce such lines of credit. In all this vast region probably we would have but two regional reserve banks, leaving this section of the country very much handi capped for banking facilities. In the territory outlined there are now 17 reserve cities, which have been created by the Comptroller of Currency. In response to the actual needs of business in the midwest the proposed law would seriously disturb the trade relations which have been built up through the natural growth and evolution of trade and traffic, a result which the West could not tolerate. These ill effects would, in the very nature of the case, have a secondary effect upon the retail merchants as well as stock growers, farmers, mechanics, and others. The wholesale contraction of credits which the bill would entail will inevitably work a hardship to the business men of all grades B A N K IN G AND CU R R E N C Y . 3089 and the widespread retrenchment which must follow in consequence will also affect interests of the mechanic and laborer to a very serious degree. Kindly have clerk read this telegram to the committee. F. Colpetzer, Geo. H. Kelly, J. B. Rahm, Glen C. Wharton, W. M. Burgess, W. D. Hosford, Geo. Brandeis, J. A. Sunderland, B. F. Marshall, C. W. Hull, T. C. Byrne, O. D. Kiplinger, II. S. Weller, C. H. Walratli, R. J. Dinning. G. C. Cunningham, T. S. Windheim, C. S. Hayward, F. M. Andreesen, F. L. Haller, F. J. Hoel, E. E. Bruce, David Cole, A. J. Vierling, It. B. Busch, J. B. Blanchard, W. L. Burgess, William Newton, F. E. Beiler, F. S. Cowgill. Senator H i t c h c o c k (continuing). I will say that those men who signed that telegram are the leading business men of the city of Omaha and represent very large interests. Senator P o m e r e n e . There has been given to me a letter from a com mittee of the New York Credit Men’s Association, under date of Oc tober 23, 1913, voicing certain criticisms of the bill, and if there is no objection I will ask that this be incorporated in the hearings. Senator N e l s o n . That is all right. (The letter referred to is as follows:) T h e N ew Y ork C redit M e n ’s A s s o c ia t io n , N e w Y o r k , O c to b e r 2b, 1918. Hon. R obert L. O w e n , C h a i r m a n C o m m it t e e o n F in a n c e a n d C u r r e n c y , U n ite d S t a t e s S e n a te , W a s h i n g t o n , D . C. y D ear S ir : Inclosed herewith I hand you copy of certain suggestions M form ulated by the banking and currency committee of this association with respect to “ the Federal reserve act ” now pending before your committee. I commend the same to the thoughtful consideration of the Senate Committee on Finance and Currency. Respectfully, yours, A . H. A l e x a n d e r , S e c r e t a r y , [Inclosure.] To the C o m m it t e e of t h e T h e N e w Y ork C redit M e n ’s A s s o c ia t io n , N e w Y o r k , O c to b e r 2 3 ,1 9 1 3 . U n it e d S t a t e s S e n a t e on B a n k in g a n d C u r r e n c y . G e n t l e m e n : The committee on banking and currency of the New York Credit Men’s Association, which association comprises 1,400 of the leading merchants, manufacturers, and bankers of New York City, expresses its conviction that the Federal reserve act now in the hands of the Senate Committee, when perfected, will prove of great value to the country. The committee takes the liberty of suggesting some modifications of several of the provisions of the bill, which it believes would not impair its efficiency but would render it more popular and useful. First. The committee would be glad to see a smaller number of Federal re serve banks than 12, as named in the bill. W e believe that a smaller number, with necessarily larger capital, would be quite adequate to properly carry out the objects of the act, and that the greater concentration of reserves would better meet the needs of the country. Second. W e see no unfairness in the request of the banks who furnish the capital of the reserve banks, that they should have some representation on the Federal reserve board or a voice in the selection of the members of the board, and recommend that the powers of the advisory committee should be enlarged. Third. The notes of the Federal reserve banks, secured by a gold reserve of 33$ per cent and by good commercial paper, we believe will be an acceptable currency without the Government guaranty, and further believe that they should be payable in gold and not as provided— in gold or lawful money. Fourth. If interest is paid by Federal reserve banks to any depositors it should be paid at the same rate to all depositors. The committee commends to the favorable consideration of the Senate Com mittee on Banking and Currency the above suggestions. It further approves the report of the committee on finance and currency of the Chamber of Com- 3090 B A N K IN G AND CU R R E N C Y . merce of the State of New York, and the brief submitted by the committee on banking and currency of the National Association of Credit Men, both of which documents we believe are in the hands of the Senate committee. Respectfully submitted. R ic h a r d P. M e s s i t e b , J. H erbert C a s e , W. E. T h a t c h e r , B. S. H a s k i n s , O t is E verett , C o m m itte e . Attest: A . H . A l e x a n d e r , S e c r e ta r y . Senator P o m e r e n e . I also have here some resolutions passed by the Richmond Chamber of Commerce, and, if there is no objection, I will have them incorporated in the record. (The resolutions referred to are as follows:) C o py of P re am b l e a n d R e s o l u t io n s A dopted b y t h e B oard of D irectors t h e R ic h m o n d C h a m b e r of C o m m er c e , O ctober 21, 1913. of T h e R ic h m o n d C h a m b e r of C o m m erce , R ic h m o n d , V a ., O c t o b e r 22. 1913. Whereas the Richmond Chamber of Commerce has for some time past urged upon Congress the necessity for a revision of the currency and banking system of the country, it wishes to express its recognition of the importance of the recent action of Congress in formulating the pending bill, believing that the commercial and manufacturing interests are more directly interested in this measure than any other class of the people; and further, that the prosperity of the banks, not only in their soundness and strength, but also in their pro nounced success, is a most important factor in the development of every industrial interest. It is, however, confidently thought that the bill now proposed will meet the requirements sought by the commercial and manu facturing interests much more efficiently if certain amendments or changes could be incorporated. The effect, in its opinion, of these amendments or changes will be that the banks would see their way clear to most heartily take advantage of all the good features of this bill, with the result that the country will be helped, especially in the South, which is so rapidly developing and must have more elasticity in its banking facilities to meet its requirements: Therefore be it R e s o lv e d , b y t h e R ic h m o n d C h a m b e r o f C o m m e r c e , That it most earnestly requests the Congress to adopt the following amendments or changes in the bill now under consideration: First. That the number of the Federal reserve board shall be seven, three of whom shall be proposed by the reserve or regional banks. Second. That the amount of stock that each bank shall subscribe to its respective regional bank shall be reduced from 20 to 10 per cent, and that the number of regional banks be reduced to not more than five. Third. That the currency issued by the reserve or regional banks should be under Government supervision, but should be the obligation only of the reserve bank issuing the same and the member bank to which it is issued, and not a Government obligation or guarantee by the Government; also, that this cur rency, namely, the notes issued by the regional banks, should be redeemable in gold alone. Finally, it is suggested that the provision for the segregation of savings-bank deposits and the use of these funds in certain specified forms of investment, might work a great hardship upon the commercial interests of this section, and for that reason this provision of the bill should be made optional or entirely eliminated. W. T. R eed,F i r s t V ic e P r e s id e n t. Attest: R. A. D u n l o p , S e c r e t a r y . Senator P o m e r e n e . I will also say, in a preliminary way, that one week ago to-day Senators Martin and Swanson, of Virginia, were waited upon by a delegation of bankers from Virginia, and the B A N K IN G AND CU RREN CY . 3091 Senators got in touch with Senator Hitchcock and Senator Weeks and myself, and they were informally heard before us; and it was suggested to them that they present any objections they might have, or any amendments they might propose, in the form of a brief to the committee. I have that brief here and if there is no objection that will be incorporated in the record of this day. (The papers referred to are as follows:) W a s h in g t o n , D. C., O c to b e r 18, 1918. The S e n a t e 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 . G e n t l e m e n : Pursuant to a suggestion made at an informal conference to day between Senators Hitchcock, Pomerene, and Weeks of your committee, and Senators Martin and Swanson, of Virginia, and a committee representing the Virginia Bankers’ Association, we respectfully submit for your consideration the accompanying memorandum of the amendments and modifications of the pending currency bill which we believe to be desirable. In making these recommendations we have not endeavored to cover every section of the bill, our idea being to emphasize those portions of the measure that we feel especially affect our Virginia institutions. Yours, respectfully, G eo . It. B . M i c h i e , S e c r e t a r y . A B r ie f S u m m a r y of M o d if ic a t io n s i n t h e C u r r e n c y B il l S uggested C o m m it t e e of t h e V ir g in ia B a n k in g A ss o c ia t io n . by the S t o c k s u b s c r ip t i o n s . — The stock requirements should not exceed 10 per cent of the capital of member banks. A larger subscription would, in the case of many small banks, cause embarrassment and injuriously restrict their opera tions. A suspended stock liability would create a feeling of uneasiness and anxiety. U n ite d S t a t e s b o n d s . — The Government created a market for low-rate bonda by giving them the currency privilege. Nearly all national banks purchased the 2 percents at a considerable premium on account of this privilege. A change in the currency system, which contemplates the withdrawal of this privilege, should carry a provision which will substitute for these bonds some security that will sell for 100 cents on the dollar. The credit of the nation requires it. Good faith demands it. S a v in g s d e p a r t m e n ts . — The provision in the pending bill for the segregation of the savings deposits would lead to enormous contraction in commercial loans in sections like Virginia, besides placing on the banks the burden of heavy addi tional expenses, incident to the proposed segregation of capital, deposits, funds, and investments. These requirements, fraught with so much peril to our com mercial, industrial, and agricultural interests, should be eliminated or so modified as to apply only to such banks as may elect to avail themselves of the 5 per cent reserve requirement for savings departments. D i v id e n d s . — The first charge on the earnings of the regional reserve banks should be a fair dividend on the capital stock. The member banks furnish all the capital and are further liable for a sum equal to said capital. A reasonable dividend on this capital should not be jeopardized by interest on deposits by the Government or member banks. D i v is io n o f e a r n in g s . — On the basis of fair dealing, it would be difficult to defend any division of earnings, after the payment of dividends and the accu mulation of the desired surplus, other than by apportionment among member banks and the Government, in proportion to the average credit balance main tained by each with the regional reserve banks. Any other plan would, in a measure, defeat the purposes of the bill, for while the earning capacity of the regional reserve banks should be secondary to the important functions to be performed by them, the active support and cooperation of the member banks are essential to the highest degree of efficiency; and member banks will certainly fimit their deposits in regional reserve banks to the minimum legal reserves, unless they receive an equitable proportion of the profits. Conditions vary in different sections. While member banks, in some localities, will require redis counts at certain periods, other member banks will, at the same periods, have funds in excess of the legal reserves. They should be encouraged to deposit 3092 B A N K IN G AND CU K REN CY . this idle money in the regional reserve banks, enabling the latter to meet de mands for rediscounts. M a x i m u m l i m i t n e c e s s a r y . — If the principle of paying no interest on deposits should not prevail, it is most important that there be a fixed maximum limit to the interest that may be paid. An abuse of the discretion given the Federal re serve board in this particular might be disastrous. Excessive interest on Govern ment deposits would tend to increase the rates of rediscount or might, to take an extreme view, amount to confiscation of the earnings and even the assets of the regional reserve banks. P o w e r 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 . — The functions of the Federal reserve board should be well defined and its discretionary powers reduced to the narrow limits requisite for safety in emergencies and unforeseen conditions. Respectfully submitted. Caldwell Hardy, president Norfolk National Bank, Norfolk; Hugh M. Kerr, cashier National Bank of Commerce, Norfolk; Thos. B. McAdams, cashier Merchants’ National Bank, Richmond; E. B. White, president Peoples’ National Bank, Leesburg; Thos. P. Beery, cashier Peoples’ Bank. Harrisonburg; Henry Easley, president Planters & Merchants’ National Bank, South Boston; J. B. Fishburn. president National Exchange Bank, Roanoke; Nelson S. Groome, cashier Bank of Hampton, Hampton; Oliver J. Sands, president American National Bank. Richmond; Jos. M. Hurt, cashier Citizens’Bank, Blackstone;C. E. Tiffany, president Fauquier National Bank, Warrenton; J. F. Rison, president Commercial Bank, Danville; J. Wm. Miller, cashier Peoples’ Bank, Pulaski; J. W. Bell, president First National Bank. Abing don ; Geo. R. B. Michie, president Peoples’ National Bank, Char lottesville. Senator P o m e r e n e . I believe Mr. Edward E. Shields, representing a group of Pennsylvania bankers, is to be heard. Senator R e e d . I have here a telegram from Mr. Festus J. Wade, president of the Mercantile Trust Co., of St. Louis, which I should like to read to the committee. Senator B r i s t o w . I think it ought to be printed in the record. Senator R e e d . It will be remembered that Mr. Wade is one of the bankers who came here from the Chicago conference of bankers. It is addressed to the chairman, and not to me. It is as follows: S t . L o u j s , Mo.. O c to b e r 25, 1913 Senator R. L. O w e n , W a s h i n g t o n , D . C .: Serious consideration of any new bill at this late date will, in my judgment, be fatal mistake and injure banking and currency reform for years to come. I am quite certain, after the exhaustive inquiry of your committee and the ad vice and counsel that have been given you by various business men and bankers who appeared before your committee, you can amend Glass-Owen bill in such a way as to make it workable and practicable as well as acceptable to great majority of banks and trust companies throughout the United States. If you desire to delay banking and currency reform until another panic, I know of no better way you can do so than by advocating a new measure at this late date. I sincerely hope you will rapidly bring in a unanimous report recommending proper amendments to Owen-Glass bill, and pass same as amended at present session. F e s t u s J. W ade . STATEMENT OF EDWARD E. SHIELDS, SECRETARY GROUP 2, PENNSYLVANIA BANKERS’ ASSOCIATION, WEST CHESTER, PA. Senator P o m e r e n e . Will you give your full name, address, and business ? Mr. S h i e l d s . Edward E. Shields, secretary group 2, Pennsylvania Bankers’ Association, West Chester, Pa. ' Senator P o m e r e n e . With what bank are you connected? — BANKING AND CURRENCY. 3093 Mr. S h ie l d s . I am one of the officers of the Franklin National Bank, of Philadelphia; I am an assistant cashier of the Franklin National Bank, of Philadelphia; most of my adult life was spent with the First National Bank of West Chester. Senator P o m e r e n e . Will you please give the capital stock, surplus, and deposits of your bank ? Mr. S h ie l d s . My present bank ? Senator P o m e r e n e . The one you are now connected with. Mr. S h ie l d s . The capital stock is $1,000,000, the surplus is $3,000,000, and the deposits approximate $38,000,000. Senator P o m e r e n e . H ow long have you been actively in the bank ing business? Mr. S h ie l d s . By “ actively,” do you mean as an officer ? My whole adult life has been spent in the banking business. Senator P o m e r e n e . That answers the question sufficiently. You may proceed. Mr. S h ie l d s . I thank you, gentlemen, for the opportunity of ap pearing before you. It is not my purpose to give you my own views as to the proposed Federal reserve act. I have no thought of doing that, and I am not expected to do it. My position is that of secretary to group 2 of the Pennsylvania Bankers’ Association. I will explain about that association in just a word. The Pennsylvania Bankers’ Association is divided into eight groups. Group 2 is composed of six counties in the southeastern part of the State, and, perhaps, is typical of the whole State, because of the diversified interests in its territory. It has commercial .in terests, as the city of Chester, being a city of much commerce. It has mining industries, such as the coal industries in Schuylkill County. It has large manufacturing industries, such as the iron industries of Coatsville, Pottsville, Reading, and Pottstown, and it has large farming interests, so that its activities are typical of the whole State. I am sure you will want to know just why I am here and why I say to you what I am to say. There came to me as secretary of group 2 an appeal to have a meeting of the members of the group, so that the members might have recorded their expressions in regard to this proposed act. The re quest came too late to have a meeting, and so the executive com mittee met and authorized me to issue the following telegram, which I did, night before last, in the shape of a night letter, to the members of the group, the total number of which is 138, I think. The tele gram was as follows: Executive committee, group 2, Pennsylvania Bankers’ Association, instructs me to ask prepaid telegraphic reply Friday from an officer of your bank to following: “ Do you approve or disapprove proposed currency bill? Name principal objection, if any. Dependent upon answer committee may have hearing at Washington Saturday before Committee on Banking and Currency.” C. E . S h i e l d s , S e c r e t a r y . ,Now, I have here a number of telegrams in answer to that telegram, which I would like to read. I will read as many of them as you may desire. They are from trust companies and national banks. oenator P o m e r e n e . Let me ask you what was your reason for asking for the objections to the bill and not asking for an expression ol opinion as to the merits of the bill ? S. Doc. 232, 63-1— vol 3-----74 3094 B A N K IN G AND C U R R E N C Y . Mr. S h ie l d s . The executive committee of the association instructed me to send this telegram. I had no option in the matter. It says, “ Do you approve or disapprove proposed currency bill?” Senator P o m e r e n e . I know; but later on you ask them to name their principal objections to the bill. Why would it not have been fairer if you had asked them to designate the merits of the bill as well as to state their objections? Mr. S h ie l d s . It m ig h t h a v e b e e n so, b u t I b e lie v e n o h a r m h a s b e e n d o n e th e b ill b e c a u se o f th e f a c t t h a t th e y e x p r e s s in th e te le g r a m s b o th t h e i r a p p r o v a l a n d d is a p p r o v a l. Senator W e e k s . Is it not fair to assume that they approve of those features to which they do not offer objections? Senator P o m e r e n e . That is possibly true. Mr. S h ie l d s . I am awaiting your pleasure in the matter of reading these, gentlemen. Senator S h a f r o t h . We have heretofore in cases of this kind, in stead of encumbering the record with full copies of all telegrams, let the gentlemen select a few and put them in. and then state that you have so many more of the same tenor. I think we had one case in which a gentleman said that there were 315 who disapproved of the bill and the same number who practically approved of it, but the exact language of each one of those telegrams would, I think, unnec essarily encumber the record. Can you not classify them? Mr. S h ie l d s . I have them classified, and I can read a few which will be typical of all. Senator B r is t o w . Let us hear some of them. Senator P o m e r e n e . I suggest you read those which are typical and not take the time of the committee to read them all. Senator B r is t o w . Where they contain practically the same la n guage, it would not be necessary to read them. Mr. S h ie l d s . They are much the same. I hope I will not do any injustice to any of them in making the selections. I have 13 telegrams from trust companies and 57 from national banks. Of the trust com pany telegrams, 2 give unqualified approval of the bill and 11 name their objections to the bill. Of the 57 telegrams from national banks----Senator P o m e r e n e (interposing). While dwelling on th e trust company telegrams will you not read us two or three of them, in order to give us the objections which they raise? Mr. S h ie l d s . Here is one from the Chester County Trust Co.: W e st C h e s t e r , P a ., O c to b e r 2$, 1918. E. E. S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h ila d e lp h ia , P a .: W e are opposed to Glass-Owen bill for various reasons; our two main reasons because it segregates savings deposits and does not provide one central bank with branches. Regard favorably Vanderlip Senate bill. J. E. R a m s e y , P r e s i d e n t C h e s te r C o u n t y T r u s t Co. Here is a telegram from the Lansdowne & Darby Saving Fund & Trust Co.: L a n s d o w n e , P a ., O c to b e r 21f, 1918. E. E. S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h ila d e lp h ia , P a .: This company is not fully in favor of the proposed banking law. T h e L a n s d o w n e & D arby S a v in g F u n d & T r u s t Co. B A N K IN G AND CU K REN CY . 3095 The Merion Title and Trust Co., of Ardmore, Pa., through its president, says: A rdmore , P a ., O c t o b e r 24 , 1913. E. E. S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y lv a n ia B a n k e r s ' A s s o c ia ti o n , P h ila d e lp h ia , P a .: Disapprove any bill tending to increase Government control of everything. T h e M e rio n T it l e & T r u s t C o. J o s ia h S. P earce , P r e s i d e n t . of A rdm ore , This is a short telegram from the Phoenixville Trust Co.: P h o e n ix v il l e , P a ., O c t o b e r 24, 1913. E. E . S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y lv a n ia B a n k e r s ' A s s o c ia ti o n , P h ila d e lp h ia , P a .: We disapprove proposed currency bill in its present form. P h o e n ix v il l e T r u s t C o. The treasurer of the Bristol Trust Co., of Bristol, Pa., telegraphed as follows: B r ist o l , P a ., O c t o b e r 24, 1913. E. E. S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y lv a n ia B a n k e r s ' A s s o c ia ti o n , P h ila d e lp h ia , P a .: We disapprove of proposed currency bill unless amended in several par ticulars. T h e B risto l T r u s t C o ., W m . P . M cC o y , T r e a s u r e r . Then I have here a telegram from the president of the Shenan doah Trust Co., of Shenandoah, Pa.: S h e n a n d o a h , P a ., O c t o b e r 24, 1913. E . E . S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y lv a n ia B a n k e r s ' A s s o c ia ti o n , P h ila d e lp h ia , P a .: We disapprove proposed currency b ill; favor Yanderlip’s new plan. H . M. B r a d e g a n , P r e s id e n t S h e n a n d o a h T r u s t Go. The next is from the president of the Quakertown Trust Co.: Q u a k e r t o w n , P a ., O c t o b e r 24, 1913. E. E . S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y lv a n ia B a n k e r s ' A s s o c ia ti o n , P h ila d e lp h ia , P a . : I foresee great danger should present currency bill pass. J . S. H a r l e y , P r e s id e n t Q u a k e r t o w n T r u s t Co. The treasurer of the Bucks County Trust Co., of Doylestown, Pa., says: „ ^ „ E. E. S h i e l d s , D o y l e s t o w n , P a ., O c t o b e r 24, 1913. S e c r e t a r y G r o u p 2, P e n n s y lv a n ia B a n k e r s ' A s s o c ia ti o n , P h ila d e lp h ia , P a . : T his company disapproves the proposed currency b ill; w e disapprove of it gen erally; it is not a thoroughly well-considered bill. B u c k s Co u n t y T r u s t C o., T . O. A t k i n s o n , T r e a s u r e r . 3096 B A N K IN G AND CU R R E N C Y . From the treasurer of the Ivennett Trust Co., of Kennett Square, Pa., I received the following: K e n n e t t S q u a b e , P a ., O c to b e r 24, 1913. E . E . S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , i P h il a d e lp h i a , P a .: W e disapprove the proposed currency bill. Principal objection compulsory subscription to regional banks; would favor the Vanderlip plan. T h e K e n n e t t T r u s t C o ., J . W. J e f f e b is , T r e a s u r e r . The Delaware County Trust Co., of Chester, Pa., sent the follow ing: C h e s t e r , P a ., O c to b e r 24, 1913. E . E . S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: W e approve of currency legislation; we object to the small number of bankers in the management. Men of financial experience should have a majority repre sentation. D e la w a r e C o u n t y T r u st Co. This one is from the Cambridge Trust Co., also of Chester: C h e s t e r , P a ., O c to b e r 24, 1913. E . E . S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: Object to currency bill principally because it places absolute control of finances in hands of seven men, five of same politicians— only one of whom need be banker or business man. C am bridg e T r u s t C o. From the secretary-treasurer of the Coatesville Trust Co. I received the following: C o a t esv il l e , P a ., O c to b e r 24, 1913. E. E. S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Difficult to speak for the company; higher officers absent and subject not been discussed; personally I favor bill; think, however, any new legislation should be subject to liberal initiative and referendum provisions to insure genuine popular control, and Federal board should be subject to recall. A r t h u r H oopes , S e c r e t a r y - t r e a s u r e r C o a te s v ille T r u s t Co. Senator H it c h c o c k . I s that from Pennsylvania? Mr. S h ie l d s . That is from Pennsylvania; yes, sir. Senator W e e k s . Where is that company located? Mr. S h ie l d s . At Coatesville. Senator W e e k s . Where is Coatesville? Mr. S h ie l d s . In Chester County, sir. Senator C ra w fo r d . I s that from a banker? Mr. S h ie l d s . He signs himself secretary-treasurer of the Coates ville Trust Co. Senator N e l s o n . He is certainly a progressive. Mr. S h ie l d s . It s o u n d s v e r y m u c h lik e it. 3097 B A N K IN G AND C U R R E N C Y . The last of the trust company telegrams is from the secretary of the Schuylkill Trust Co., and says: P ot t sv il l e , P a ., O c to b e r 24, 1918. E. E. S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Approve, but generally we prefer one outlined yesterday by Yanderlip. N. S. F a r q u h a k , S e c r e t a r y S c h u y l k i l l T r u s t Co. Now, I come to the replies from the national banks. I have a num ber of telegrams and some letters from the national banks in our group of the Pennsylvania Bankers’ Association. Here is a telegram from the Citizens Bank, of St. Clair, Pa.: S t . C l a ir , P a ., O c to b e r 24, 1913, E . E . S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: W e disapprove as it stands. Objections: Do not believe Government should assume absolute control without giving members contributing capital represen tation on the Federal reserve board; do not believe it wise and safe to place such vast powers in the hands of the appointed Federal reserve board where the personnel need not necessarily be composed of either bankers or business m e n ; not satisfied with the rediscount provision, the time limit being too short for country bankers; not satisfied with the provision that all reserve be carried in regional banks as it would work a hardship to the country bankers. C it iz e n s B a n k . I have also a telegram from the cashier of the Chester National Bank, which says: C h e s t e r , P a ., O c to b e r 24, 1913. E . E . S h ie l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Disapprove currency bill in present shape as to requirement of banks to sub scribe to capital stock; also character of securities permitted for rediscount; think supervising control should be in hands of experienced bankers. S. H. S e e d s , C a s h ie r C h e s t e r N a t io n a l B a n k . From the Merchants National Bank of Quakertown I have this: Q u a k e r t o w n , P a ., O c to b e r 24, 1918. E. E . S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: W e oppose compulsory subscription to stock of regional banks. W e oppose limiting dividend to 5 per cent. W e oppose the reserve requirements. W e oppose alternating examiners. W e oppose the intention of segregating savings accounts with investments in specific securities. M e r c h a n t s N a t io n a l B a n k of Qu a k e r t o w n . This telegram is from the cashier of the Grange National Bank, at Downingtown: D o w n in g t o w n , P a ., O c to b e r 24, 1918. E. E . S h i e l d s , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Have prospered with present system and under now existing national-bank act; we are decidedly opposed to the Glass-Owen currency bill. G rang e N a t io n a l B a n k , U. S. B roadt , C a s h ie r . 3098 B A N K IN G AND CU R R E N C Y . I received this letter from the cashier of the National Bank of Malvern: Malvern, P a ., O c to b e r 24, 191S. Mr. E. E. S hields . S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a . D ear S ir : Answering, w e disapprove of the proposed currency bill. We believe that, should it become a law, among many objections which w ill arise w ill be the fact that banks in accommodating their patrons and in working for good w elfare of the community, will be more handicapped in this mutually good line, because o f the investigations a n d ‘criticism s as to local accommoda tion s; and also in the fact o f the proposed necessity of separating the savingfund deposits assets from the general assets, thus taking practically the saving fund part out of the loans made in general accommodations of customers— thus perhaps crippling them and im pairing the bank’s profits. We fear a political central reserve bank and the evil of its control. Our present currency system Is good. Most respectfully, Ch a s . C. H ighley . I also received the following telegram from the cashier of the Downingtown National Bank: D owningtown , O c to b e r 24, 1918. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We disapprove Owen-Glass currency bill generally; particularly segregation of savings deposits and collecting item s w ithout exchange. Approve Vanderlip plan. T. W. T owning , C a s h ie r D o w n i n g t o w n N a t io n a l B a n k . This telegram is from the cashier of the Union National Bank at Minersville, P a .: M in e r s v il l e , P a ., O c to b e r 24, 1918. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Opposed to new currency bill because no provision for redemption 2 per cent bonds at par, compulsory membership regional banks, and reserve requirements. C h a s . E. S teel, C a s h ie r M i n e r s v il l e N a t io n a l B a n k . From the cashier of the Yardlev National Bank I received this telegram: Yardley, P a ., O c to b e r 24, 1918. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: Urge comm ittee to oppose proposed currency bill. Avoid radical legislation affecting credits. Favor Vanderlip plan. J esse E. H arper, C a s h ie r Y a r d l e y N a t io n a l B a n k . The next telegram is from the cashier of the Wernersville Na tional Bank: W e r n e r s v il l e , P a ., O c to b e r 24, 1918. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B o n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Opposed to currency bill, especially nature of Federal reserve board. L eonard M. R u t h , C a s h ie r W e r n e r s v i l l e N a t io n a l B a n k . B A N K IN G AND CU RREN CY . 3099 The Pine Grove National Bank telegraphed as follows: P ine Grove, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: The Hon. E. A. H ayes’s address; see Pennsylvania bankers’ convention 1913. Book shows how w e stand on currency. P ine Grove N ational B a n k . The president of the First National Bank of Darby sent the fol lowing telegram: D arby, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: The F irst National Bank of Darby disapproves of the proposed currency bill now pending at Washington. W. L ane Verlenden, P r e s i d e n t . This telegram is from the cashier of the National Bank of Avon dale : A vondale, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Approve general purposes of b ill; object to savings-department clause. J. H oward B rosius , C a s h ie r N a t io n a l B a n k o f A v o n d a le . Kobert Fussell, cashier of the First National Bank of Media, Pa., sent the following telegram: Media, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: We do not approve proposed currency b ill; too much power if concentrated in a few , possibly politically controlled, hands. R obert F ussell . C a s h ie r F i r s t N a t io n a l B a n k . The First National Bank of Birdsboro sent the following response to my inquiry: B irdsboro, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: W e object to the proposed currency bill for the follow ing rea so n s: Central reserve bank should be owned by United States Government; the segregation of bank deposits should not be compulsory. F irst N ational B ank of B irdsboro, W m . L incoln, C a s h ie r . This telegram is from the First National Bank of Auburn, Pa.: A uburn , P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: Do not approve proposed currency bill, especially clauses concerning circula tion and Federal reserve board; would prefer Vanderlip plan in morning paper. F. J. V ess . C a s h ie r F i r s t N a t io n a l B a n k , A u b u r n , P a . 3100 B A N K IN G AND CU R R E N C Y . Then I received this telegram from the Bridgeport National Bank: B ridgeport, P a., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: We disapprove currency bill, believing it means ruination for country banks. W. H. K needler, C a s h ie r B r i d g e p o r t N a t io n a l B a n k . The First National Bank of Mahanoy City telegraphed as follows: Mahanoy City , P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: D isapprove b ill; opposed to make-up of Federal reserve board, refunding of twos, and proposed compulsory rediscounting, and some more. F irst N ational B an k . From the First National Bank of Perkasie I received the following: P erkasie , P a ., O c to b e r 24 , 1913. E. E. S hields , S e c r e t a r y G r o u p 2. P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: Opposed to reserve and board o f control features of bill. W alter K. T erry, C a s h ie r F i r s t N a t io n a l B a n k . The Parkesburg National Bank telegraphed as follows: P arkesburg, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: W e disapprove proposed currency bill. M. F. H am ill, C a s h ie r P a r k e s b u r g N a t io n a l B a n k . I received the following from the First National Bank of Newtown: N ewtown, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: We disapprove o f the proposed currency bill in general, as it has many objec tionable features. B elieve it would be a serious thing for the country if passed. H. B. H ogeland, C a s h ie r F i r s t N a t io n a l B a n k . The following telegram was received from the Swarthmore Na tional Bank: S warthmore. P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: W e are opposed to the Glass-Owen bill for various reasons. Our main reason is because it segregates savings deposits. C. P ercy W ebster, C a h ie r S w a r t h m o r e N a t io n a l B a n k , The First National Bank of Frackville sent the following: F rackville, P a., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h ila d e lp h ia , P a .: Do not approve bill as a w hole; commission should be appointed to draft necessary currency legislation. If present bill passes, would not care to con tinue as national bank. R obert G. Garrett, C a s h ie r F i r s t N a t io n a l B a n k . B A N K IN G AND CUK KENCY. 3101 The president of the National Bank of Oxford sent this telegram: Oxford, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: Disapprove proposed bill. Too many reasons to specify in telegram. S. R. D ickey , P r e s i d e n t N a t io n a l B a n k o f O x fo r d . From the First National Bank of West Chester I received the fol lowing : W est Chester, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: We are opposed to new currency bill. It is too radical and w ill make the re adjustment of present methods too disturbing. F irst N ational B a n k , S. P. Cloud, A s s i s t a n t C a s h ie r . This telegram is from the First National Bank of Cressona: Cressona, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Disapprove compulsory subscription to stock constitution Federal reserve board segregation savings departments. E. D. Meixell, C a s h ie r F i r s t N a t io n a l B a n k . The following telegram is from the Farmers & Mechanics’ National Bank, of Phoenixville: P heonixville, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: Opposed to bill in present form. F armers & Mechanics ’ N ational B a n k . From the Tower City National Bank, I received the following: T ower City , P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: We approve plan opposing the currency bill. T ower City N ational B a n k . I received this letter from the cashier of the Hatboro National Bank: H atboro N ational B a n k , H a tb o r o , P a ., O c to b e r 24, 1913. Mr. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n . D ear S i r : We disapprove of the follow ing features o f the proposed currency b ill: R ate of dividends to be paid stockholders by the Federal reserve banks. Elim ination of exchange charges on country checks. Five per cent reserve required w ith Federal reserve banks w ithout interest. Yours, truly, H atboro N ational B an k , W m . F. W ilson , C a s h ie r . 3102 B A N K IN G AND CU B R E N C Y . This telegram came from the Peoples’ National Bank, of Langhorne, P a .: L anghorne, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h ila d e lp h ia , P a .: We are opposed to present currency b ill; one of several objections is the segregation o f our savings deposits. T he P eoples’ N ational B ank of Langhorne, H orace G. Mitchell, C a s h ie r . The First National Bank of Reading telegraphed as follows: R eading, P a , O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h ila d e lp h ia , P a .: Do not approve. Principal objection segregation savings deposits. F irst N ational B a n k . The Atglen National Bank sent the following: A tglen, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: D isapprove currency b ill; political features are objectionable; opposed to refunding 2 per cent bonds w ith 3 per cent; circulation privilege should be extended until bonds are paid; reserves should be withdrawn from depositories gradually, covering a period of, say, five years. H orace L. S kiles , C a s h ie r t h e A t g l e n N a t io n a l B a n k . The Farmers’ Bank of Kutztown sent the following: K utztown, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We favor proposed currency bill modified to some extent. F armers’ B a n k , A. A. F ister, C a s h ie r . From the Reading National Bank I received this telegram: R eading, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , ’ P h il a d e lp h i a , P a .: ^ur principal objection to bill is segregation of savings deposits. R eading N ational B a n k , H enry J. H arrison. ' The First National Bank of Honeybrook sent the following: H oneybrook, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We approve of the present currency bill now before Congress. T he F irst N ational B a n k , P. G. H artman , C a s h ie r . The First National Bank of Coaldale sent the following: Coaldale, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We approve of proposed currency bill. H. F. B laney, C a s h ie r F i r s t N a t io n a l B a n k . B A N K IN G AND CU K REN CY . 3103 I also received the following telegram from the president of the Chester Clearing House Association: E. E. S hields , Chester, P a., O c to b e r 2 k , 1918. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: The Chester Clearing House Association th is day unanim ously adopted resolution disapproving currency bill in its present shape. J. H oward R oop, P r e s i d e n t . The Farmers’ National Bank of Bucks County, Bristol, telegraphed as follows: E. E. S hields , B ristol, P a ., O c to b e r 23, 1913. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: This bank resents compulsion to subscribe to Federal reserve bank under con ditions imposed, and if compelled to segregate assets for savings department, constituting two-thirds our deposits, will be forced to relinquish national charter as m eans of self-preservation and serving community properly. The proposed bill aim s death blow at country banks that have prospered for 50 years under the old system, and is menace to safe banking everywhere. C harles E. S cott, C a s h ie r F a r m e r s ' N a t io n a l B a n k o f B u c k s C o u n ty , B r i s t o l , P a . This telegram came from the National Bank of Chester County: ~ E. E. S hields , W est Chester, P a ., O c to b e r 2k, 1918. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: Disapprove of present b ill; more time needed to thoroughly digest Stock holders of reserve should have representation. Refunding of tw os and threes should be optional. Object to saving-fund section. T he N ational B ank of C hester County . From the Delaware County National Bank I received the followE e " S hields , C hested, P a ., O c t o t e r U . 1»1S. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: We are opposed to currency bill in present form, particularly compulsory feature of section 2 and segregation of saving-bank deposits. T he D elaware County N ational B a n k . From the National Bank of West Grove, Pa., I received the follow ing telegram: E E S hields W est Grove, P a., O c to b e r 2 k , 1913. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h ila d e lp h ia , P a .: The present bill with the changes recommended by the conference of country bankers at Boston on October 2, 1913. would be agreeable to us. though Vanderlip’s latest plan of a central bank w ith branches would probably work out. better. Milton C. P yle. V ic e P r e s i d e n t W e s t G r o v e N a t io n a l B a n k . The following telegram came from the Charter National Bank of Media, P a.: E. E. S hields , Media, P a ., O c to b e r 2 k , 1918. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We object to many features o f the currency bill, especially to latter part of section 8, part of section 11, relating to Federal reserve board, and all of sec tion 27. J. L ord R igby, V ic e P r e s i d e n t C h a r t e r N a t io n a l B a n k , M e d ia , P a . 3104 B A N K IN G AND CU K REN CY . I received the following telegram from the Farmers’ National Bank of Beading: R eading, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: U rge reduction of regional banks to five if central bank w ith brances is unattainable. Curtail powers o f Federal reserve board, especially its power to require one reserve bank to rediscount another’s papers. Provide a fixed tax on note issues. Change compulsory subscription of 20 per cent to voluntary subscription of 10 per cent. Change section which describes note issues as obligations of the United States incurred for the purpose of making advances to Federal reserve banks. Drop savings bank section, enlarge powers o f advisory council. Reserve against notes must be gold, not gold or law ful money. T he F armers N ational B a n k . The Jenkintown National Bank telegraphed as follows: Ogontz ( via P hiladelphia , P a .), O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: W e are opposed to currency bill in its present shape, principally on account of political control reserve requirement and segregation o f saving-fund deposit. J enkintow n N ational B a n k . The Telford National Bank sent the following: T elfobd, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: I disapprove of the proposed currency b ill; principal objections, locking up a portion o f our funds in reserve banks; the unfair treatm ent of United States twos, which we w ere obliged to buy above p a r ; segregation of savings d ep o sits; the great amount of securities now held by banks which w ill be forced upon the market. V incent B. K tjlp, C a s h ie r , T e l f o r d N a t io n a l B a n k . I received the following telegram from the National Bank of Coatesville: Coatesville, P a ., O c to b e r 2 4 , 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: T his bank most em phatically disapproves of the currency bill now before the Senate. We are opposed to Government control feature, and section 27, pertaining to savings deposits, should be stricken out. M. W. POWNALL, C a s h ie r , N a t io n a l B a n k o f C o a te s v ille . I received the following telegram from the Sellersville National Bank: E. E. S hields , S ellersville, P a ., O c to b e r 24 , 1913. S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Our principal objections to the currency bill are the follow ing: Failing to protect the 2 per cent bonds under all conditions, segregation of savings-fund deposits, setting apart 20 per cent of capital and surplus o f savings-fund depart ment, and the transfer of all reserve held in reserve city to regional b a n k ; a reasonable part should be continued in present reserve city banks. S ellersville N ational B an k . B A N K IN G AND CU R R E N C Y . 3105 This letter came from the president of the National Bank of Chester Valley, Pa., located at Coatesville, P a.: T he N ational B ank of Chester Valley, Mr E. E. S hields S e c r e t a r y G r o u p 2, P e n n s y l v a n i a C o a te s v ille , P a ., O c to b e r 24, 1913. B a n k e r s ' A s s o c i a ti o n , P h il a d e lp h i a , P a .: D ear S ir : Replying to your telegram of the 23d instant relative to my approval or disapproval of the proposed currency bill, have to say that I dis approve and think that there should be no action taken until the new adm inis tration at W ashington takes tim e to exam ine into the proposed changes thoroughly so that there may be no mistake. This can only be done by in telligent investigation. My idea as a country banker is that our present law is good enough. It has stood the trial of h alf a century, and w e think w e know its defects. Why not remedy them w ithout changing it for a system that changes everything and w ill have to be tried out before anyone can tell what the result w ill be? We w ant an elastic currency on special occasions, which is the most vital defect. Yours, very truly, H . J. B ranson , P r e s i d e n t . The president of the Perkiomen National Bank sent the following telegram: E ast Greenville, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: W e strongly disapprove proposed currency bill. F . L. F ltjck , P r e s i d e n t P e r k i o m e n N a t io n a l B a n k . I received the following telegram from the First National Bank of Orwigsburg: Orwigsburg, P a., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: T his bank disapproves proposed currency b ill; objections against proposed compulsory subscription to regional banks, segregation of savings deposits, ex change and reserve features. F irst N ational B ank of Orwigsburg. From the Keystone National Bank of Reading, Pa., I received this telegram: R eading, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Do not approve currency bill a s drawn at present. Objections, political con trol, furnishing excessive capital, and sm all remuneration, and authorizing re gional reserves to lend our hard-earned money to other parts o f the country not so w ell off. J no. H. Maltzberger, C a s h ie r K e y s t o n e N a t io n a l B a n k . The following telegram came from the president of the Union National Bank of Souderton: S oudebton, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Do not favor se g reg a tio n of refunding 2 per Pay interest on bill as it now stands; should be amended; principal objections funds, to place vast powers in hands o f Federal reserve board, cent bonds w ithout circulating privileges; reserve banks should deposits. Q Reiff> P r e s i d e n t U n io n N a t io n a l B a n k . 3106 B A N K I N G AND CU RRE N CY . The cashier of the Farmers’ National Bank of Boyertown, Pa., sent this telegram: B oyebtown, P a., O c to b e r 24, 1918. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Disapprove any currency legislation at this time. W m . D. D choenly, C a s h ie r F a r m e r s ' N a t io n a l B a n k . The National Bank of Boyertown sent the following telegram: B oyertown, P a., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: Disapprove currency bill. Reasons, compulsory membership regional bank, method retiring 2 per cent bonds, segregation savings in national banks. M . H . SCH EALE B, N a t io n a l B a n k o f B o y e r t o w n . The president of the National Bank of Ivennett Square telegraphed as follows: K ennett S quare, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We disapprove the proposed currency bill. E. B. D arlington, P r e s i d e n t N a t io n a l B a n k o f K e n n e t t S q u a r e , P a. From the Farmers’ National of Oxford, Pa., I received this tele gram: Oxford, P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We disapprove of proposed currency bill as it now stands. R. A. W alker, P r e s i d e n t F a r m e r s ' N a t io n a l B a n k . This is a telegram received from the cashier of the Ashland Na tional Bank: A shland . P a ., O c to b e r 24, 1918. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h ila d e lp h ia , P a .: Opposed to currency bill. Principal objection, board of managers rediscount privileges and carrying of reserves. Geo. F. R entz, C a s h ie r A s h l a n d N a t io n a l B a n k . The last of the national-bank telegrams is from the First National Bank of Hegins, and is as follows: H egins , P a . ( via T ower City , P a .), O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c ia tio n , P h il a d e lp h i a , P a .: We disapprove. Government will be charging us out of our premium on bonds even though no guaranty will get par; we furnish capital and no voice. V alentine W. Quigel, F i r s t N a t io n a l B a n k . 3107 B A N K I N G AND CU K REN CY . (The witness at a later date filed the following additional tele grams for insertion in the record:) R eading, P a ., O c to b e r 24, 1913. Mr. E. E. S hields , S e c r e t a r y , c a r e F r a n k l i n N a t io n a l B a n k , P h il a d e lp h i a : The Penn National Bank, at Reading, Pa., disapproves of the currency bill in general. We disapprove of the segregation of savings and commercial de posits. We disapprove of banks being coerced to owning stock in a reserve bank. We suggest the Vanderlip plan. A. J. B rttmbach, P r e s i d e n t P e n n N a t io n a l B a n k . L ansdale , P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y : Principal objections to currency b ill: Opposed to segregation of savings de partment; opposed to reserve funds being placed with regional reserve banks without interest; opposed to subscribe up to 20 per cent of our capital. E. R. Musselm an , C a s h ie r F i r s t N a t io n a l B a n k . October 24, 1913. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a ti o n : Disapprove of the Government having whole control of regional banks, the circulation change, and restricting investments as to savings deposits. B yrn Mawr N ational B a n k . J. W. Matlack, C a s h ie r . S henandoah , P a ., O c to b e r 24E. E. S hields , S e c r e t a r y G r o u p 2 : Disapprove currency bill in present form for following reasons: Exchange two 2 per cent bonds for three 3 per cent bonds with no circulation privilege. Banks are not allowed enough return for the money they are compelled to fur nish to capitalize reserve bonds. Banks are not allowed to draw from reserve banks below a minimum reserve amount. They should be allowed to draw all their reserve when they need it, as they can do now from reserve agents. Banks have not enough representation on the boards of reserve banks. Political ap pointments on the reserve boards should be cut down. One district can compel another district to rediscount paper. This should be optional with each district to a certain extent. J. S. K istler, P r e s i d e n t M e r c h a n ts ' N a t io n a l B a n k . T he A tglen N ational B a n k , A t g l e n , P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e t a r y G r o u p N o . 2. D ear S ir : Small local bank like ours is not interested in many of the features affecting a reserve bank. But we are unalterably opposed to surrendering the circulation privilege and exchanging United States twos, 1930. unless they be for 4 per cent or selling at par. We favor central reserve bank with branches. Stock owned by the public. It would seem fair to the reserve banks that their reserve accounts should be withdrawn gradually, say, a limit of three or four years. Yours, very respectfully, T. J. P h il ips . T he N ational B an k of T opton, T o p to n , P a ., O c to b e r 24, 1913. Mr. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e ? 's ' A s s o c ia tio n , P h il a d e lp h i a , P a . My D ear S ir : Complying with your request for an opinion regarding the proposed currency law now before Congress, I beg to sa y : I am in favor of the bill now under consideration not because of its obviously objectionable features, but in spite of them. I believe the small country banks— 3108 B A N K I N G AND CU RRE N CY . the kind you find in small cities, country towns, and villages—would fare better under a law such as this than they would under the Aldrich plan, which, with its process of elimination in the election of officers for the central reserve board, would be more responsive to the requirements of Wall Street than to banking interests and the needs of business generally. It seems apparent that if we do not accept the Owen-Glass plan we will some day be obliged to accept the AldricL plan or something similar, and, as for me, I prefer the one now before Congress. Very respectfully, A. H. S m ith , C a s h i e r . Merchants ’ N ational B ank of P ottsville, P a ., P o tt s v i l l e , P a ., O c to b e r 24, 1913. E. E. S hields , S e c r e ta ry B a n k ers' A ssociation . P h ila d elp h ia , Pa. D ear S i r : In answer to telegram received asking to approve or disapprove the currency bill. In reply will s a y : We object to the currency bill for the following reasons: We do not approve of the feature, requiring or compelling national banks to purchase a certain amount of stock; it should be optional. We do not approve of the feature limiting the holders of such stock to a 5 per cent dividend. We are opposed to requiring the deposit of a certain portion of the reserve without interest. We favor 1 bank instead of 12, and think a fair representation on the board of directors should be given the stockholders. We beg to remain, yours, truly, Merchants ’ N ational B a n k , C. H. Marshall , C a s h ie r . T he F irst N ational B a n k , F l e e tw o o d , P a ., O c to b e r 24, 1913. Mr. E. E. S hields , S e c r e t a r y G r o u p 2, P e n n s y l v a n i a B a n k e r s ' A s s o c i a t i o n . D ear S irs We are in receipt of your telegram, and in reply would state that we disapprove of the proposed currency bill as it stands to-day. One of the most objectionable features that we think is not just is that the banks should hold those United States Government bonds, 2 per cent, without the circulation priv ilege. The Government should redeem those bonds at par if they want to re move that privilege. There are other objectionable features which have been referred to so often that we suppose you have. Hoping this bill may be amended so as to meet the approval of all concerned, we remain, respectfully, yours, W. G. H artman , C a s h ie r . , P enn T rust Co., ' N o r r i s t o w n , P a . , O c t o b e r 2 4, 1 9 1 3 . Mr. E. E. S hields , S e c r e ta ry F ra n k lin N a tio n a l B a n k, P h ila d elp h ia , P a. D ear S ir : In reply to your telegram wish to say that being a State institu tion we have no decided objection to the currency bill, and have therefore no particular suggestion to offer whereby it should be amended. It does seem on the face of it as if the banking interests would not be bene fited by it and some suffer an injury if this bill should be passed, but we be lieve that the general purpose of the bill will be such a benefit to the com mercial interests of the country at large, that it should be passed and any defects corrected later, rather than insisting upon certain desirable amendments being added at the risk of the bill not passing. Yours, very truly, C. H. A lderfer, V i c e P r e s i d e n t . Senator N elso n . H ow many telegrams did you say were from banks and how many from trust companies? Senator P o m er en e . He stated that at the beginning of his tes timony. B A N K I N G AN D CURRE NCY . 310 9 Mr. S h ie l d s . I think I have 70 of them altogether. I classified them when I began my statement. I have no further desire to take up your time, Mr. Chairman. Senator P o m er en e . Have you anything further you desire to say ? Mr. S h ie l d s . I h a v e n o t, sir. Senator W e e k s . Did you say that only two of the 70 replies were in favor of the bill ? Mr. S h ie l d s . I said there were 2 favorable replies from trust companies and 2 favorable replies from the national banks out of a total of 70. Senator H itc h c o c k . Are those country banks, so-called? Mr. S h ie l d s . Yes, sir. Senator H itc h c o c k . Of what average size ? Mr. S h ie l d s . I presume the average capital would be $200,000, and the average deposits would be, approximately, $1,000,000. Senator N elso n . I call the attention of the committee to the fact that these telegrams disclose that these banks are doing what our banks are doing—a savings bank business. Mr. S h ie l d s . I recently took a trip in western Pennsylvania and ob served the banking conditions very carefully, and I find that in nearly all the banks and trust companies they have savings accounts, on which they pay 4 per cent interest, while the banks and trust com panies of eastern Pennsylvania have savings accounts on which they pay 3 per cent interest. It has been a matter of surmise to me as to what would happen to them if this bill should become a law, for I assume that the in vestments which would be designated by the board would be highclass investments, yielding a low return in normal times. I was very much interested in noting the conditions in the western and eastern parts of the State. Senator N elso n . D o they do this savings bank business through bank books or do they give certificates of deposits? Mr. S h ie l d s . Largely through bank books, I believe. That is the custom in eastern Pennsylvania. In some of the towns in eastern Pennsylvania and in many of the towns of western Pennsylvaia the entire loanable funds in the banks do not at times supply the local requirements; and if more than 50 per cent of their available funds— that is, the approximate percentage of savings funds in these banks— if more than 50 per cent are segregated, just what the local condi tions will be is rather a guess, because the savings funds will not be available under the law for commercial local requirements. Senator N elso n . Under your present system, while you do a savings bank business in these banks, you are all governed by the same reserves, and the funds are all pooled in the bank, are they not? Mr. S h ie l d s . Yes, sir. Senator N elso n . And used for commercial purposes? Mr. S h ie l d s . Yes, sir. Senator N elson . Whether you get them in the shape of saving deposits or call deposits or check deposits? Mr. S h ie l d s . Just the same, sir. ?;r na^or ■^ELS0N- So that they all become one general fund? Mr. S h ie l d s . Yes, sir. Senator N elso n . We have the same thing out West; only I think we llse more certificates of deposit. s. Doc. 232, 63-1—vol 3-----75 3110 B A N K I N G AN D CUKRENCY. Mr. S h ie l d s . Those are used to some extent in Pennsylvania. Senator R eed . What do you mean by a savings department? Do you simply refer to money that is put in on time, or do you refer to the conduct of the ordinary savings bank business? Mr. S h ie l d s . What I had in mind was the discrimination that some country banks make between their checking accounts on which they pay 2 per cent and the other accounts on which they pay 3 per cent? Senator R eed . N ow , assuming that a bank has gone no further than to receive the deposits of customers on time, and is paying interest upon those deposits, but is not conducting a regular savings bank business as distinguished from the other, if this bill were to provide that banks should have a right to receive time deposits----S e n a to r N elson ( in te r p o s in g ). A n d p a y in te re st? Senator R eed . And pay interest thereon, would that injure these banks? Would the bill injure the banks 3Tou refer to? Mr. S h ie l d s . Well, I presume it would; if you will allow m e to assume that the trust companies are going to continue in the sam e community with the privilege of giving to the local requirements their savings funds, where the national banks would be denied the same privilege----Senator R eed (interposing). What do you mean b y local require ments ? Mr. S h ie l d s . The loans to manufacturer, merchant, and the farmer. Senator R eed . Y ou did not understand my question. Mr. S h ie l d s . Perhaps not, sir. Senator R eed . Of course, you have such things as regular savings banks ? Mr. S h ie l d s . Certainly. Senator R eed . They take in money, agree to pay it back at some period of time in the future. They loan it upon real estate; they invest it in a great many ways in which savings banks may and do invest their money. That is a savings bank, as I am using the term in this question. Mr. S h ie l d s . Certainly; you do not mean a trust company? Senator R eed . A trust company may do the same thing. Mr. S h ie l d s . I t does. Senator R eed . In other words, the trust company conducts a regu lar savings bank business in some of its departments, frequently. But these national banks you have been talking about have been doing nothing more, as I understand you, than to receive money on time deposits. If we were to provide in this bill that banks could continue to re ceive money upon time deposits, paying interest thereon, and permit them to use it as they use demand deposits, would that avoid the dif ficulty you speak of? Mr. S h ie l d s , Would that still permit them to use any part of their savings funds? Senator N elson . Permit you to do what you are doing now. Mr. S h ie l d s . If it will permit us to do what we are doing now, I can not see how it would change the conditions very materially. Senator R eed . What you are doing now is this: Say I take $f,000 to you; you agree to pay it back in 90 davs and pay me interest, B A N K I N G AND CU RRE N CY . 3111 and you would pay me a larger rate of interest for six months, and you use that money just the same as you use $1,000 Senator Nelson might put in on demand? Mr. S h ie l d s . Yes, sir. Sentor N elson . Subject to check? Mr. S h ie l d s . Subject to check; yes, sir. Senator R eed . Y ou are not loaning it upon real estate, are you ? Mr. S h ie l d s . No ; the national banking act does not permit that. Senator R eed . I understand that. If you are permitted to go on and do that, you will not have any complaint ? Mr. S h ie l d s . I can not see that the conditions would be changed at all. I have entirely assumed that that was not going to be per missible. Senator N elson . I think the bill is not compulsory in regard to establishing a savings department. You may do it; that is my recollection. Mr. S h ie l d s . It says: That any national banking association may, subsequent to a date one year after the organization of the Federal reserve board, make application to the Comptroller of the Currency for permission to open a savings department. Senator N elson . So that unless you make application for it, if we allow you to keep on doing what you are doing now you would not suffer? Mr. S h ie l d s . I can not see how it would change the conditions at all. Senator N elso n . What struck me was this: We h a d the impres sion that the banks in the East were not doing it, at least to any extent. But it seems they are doing the same business which our banks in the West are doing. Senator P o m eren e . I have here a letter presented by Hon. Howard Sutherland, a Member of the House of Representatives from West Virginia, written by Mr. George M. Jacobs, president of the Peoples National Bank, of Fairmont, W. Va., relating to the bill under con sideration, which he would like to have incorporated in the record. If there is no objection, it will be so ordered. (The letter referred to is as follows:) T he P eoples N ational B ank of F airmont, Hon. H oward S utherland , F a ir m o n t , IF. V a ., O c to b e r 15, 1913. Washington, D. C. My D ear S i r : We are writing you to give our opinion of the effect tlie pro posed currency bill will have upon the national banks of this State and to ask your advice and support in their behalf. We believe that there are three very damaging provisions in this bill which will be detrimental, not only to the banks but to the business interests of this State. First. The requirement to set aside 20 per cent of our capital for the savings department would very seriously impair or tie up the capital of the banks, as the profits on savings accounts will not justify the extra expense of conduct ing a separate department by an additional organization which will be re quired. Second. The national banks will also entail a very heavy loss in being re quired to deposit their reserve fund in the reserve bank without interest. Third. Also the requirement of the national banks to invest 20 per cent of their stock in the reserve banks at a dividend of 5 per cent, as we pay 4 per cent interest on a very large amount of deposits, and could not afford to take stock in another bank paying only 5 per cent. 3112 B A N K I N G AND CU RRE N CY . We believe that these three features of the proposed law would very seriously handicap the national banks of this community. They would not only sustain a very heavy loss in earnings but their usefulness to the business interest of the community would be very seriously curtailed. The result of such legislation would no doubt compel many of the national banks to surrender their charters and revert to State banks, and if the national banks would take this step and surrender their United States bonds, for which they paid above par, at the present market price, which is 94J per cent, you can readily see that a direct loss of many thousand dollars would be sustained by the banks of this State. Frankly speaking, it is my opinion that the passage of this bill will practically ruin the national banks of this State. If we are forced to revert back to State banks, it means that the banks of every State will be operated under such divergent State laws as to make the banking business a very haphazard affair. Every State would have its own peculiar form of banking laws. We think a national uniform system of banking would be much hiore preferable if a law could be passed which would not be so disastrous in its effects. Yours, very truly, Geo. M. J acobs. Senator P o m er en e . Mr. Starek, I believe, is the next witness on the calendar. Senator H itc h c o c k . Mr. Chairman, Mr. Starek tells me that he feels there are some very important questions which may be asked him which he feels had better be discussed in executive session. It is now 20 minutes to 1 o’clock, and I want to suggest a recess until 2 o’clock. Senator R eed . I suggest that it would be better to hear Mr. Starek in executive session. There are no facts which he may have which I can imagine this committee is not entitled to hear in executive session. Senator P o m er en e . Shall we recess until 2 o’clock? Senator R eed . I move that, if there is no other witness to be heard, with the hearing of Mr. Starek’s testimony these hearings do close. Senator S h a f r o t h . There is one more witness here. Senator R eed . Then let us hear him now and take u p Mr. Starek’s testimony this afternoon. Senator P o m er en e . Who is the other witness? Senator S h a fr o t h . Mr. Lassen. STATEMENT 0E ALEX. C. LASSEN, PRESIDENT OF THE LASSEN REALTY CO., OF NEW YORK. Senator S h a fr o t h . Will jrou please state your name and business? Mr. L assen . I am president of the Lassen Realty Co., of New York. Formerly I was in the banking business, having entered it as early as 1879 as exchange clerk of the Bank of San Francisco. Since then I have been for 20 years editor and publisher of the Daily Financial News, of New York. Yesterday I heard some queries addressed to Mr. Kent, and I thought I would give a little information along the same line that might be of use to the committee. Mr. Kent explained foreign ex change, but I think he failed to state the real reason why South American countries transact their business through London and not through the United States. Exchange operations, as a rule, are based on the rate of money. European markets are steady and low. The greatest of all industries abroad is the trade in money. The general rate abroad has averaged for some hundred years about 3 per cent. As soon as the United States can supply a money steadily at a B A N K I N G AND CU RRE N CY . 3113 rate as low as a foreign exchange will provide it, then we can get the trade of all of South America or any other country in competition with European countries. The raising of the Bank of England interest rate is a lever to bring gold from abroad and also increase the income of English capitalists. England, France, Belgium, and Holland are all creditor nations—they have vast sums due them. The United States is a debtor nation. If the bank rate is raised abroad or in this country it tends to increase the cost of money. The commerce of the United States is increasing at a tremendous rate. The value of property in the United States is estimated to represent a value of from 120 to 140 billions of dollars. The corpo rate 1 per cent income tax in the district of Newr York last year showed an increase of 31 per cent over the former year and the tax for the entire country showed an increase of 21 per cent. If the development of the general country w^as at this same rate, the value of property increased 25 billions of dollars. This increase in one year wras over one-third of all the value of property in the United States in 1865. The development and increase of business in the United States has been far more rapid than abroad. Clearances of London banks and branches in 1890 aggregated £8,960,170,000, and in 1909 £13,525,446,000, equal to an increase of about 63 per cent. In the same period clearances in the banks of the United States in creased 272 per cent. Taxes and the many other uses for money have been increasing. Money is the dish that carries produce. It is a great measure of value. As a merchant’s business grows he provides more measures. If he does not, his business is retarded, embarrassed, and his measures are worked overtime. The dollars of this country are worked over time. The American dollars are as good or better than any other dollars in any other part of the world, but there are not enough. The experts, as a rule, that come here before you represent a special interest, who want to substitute a new form of money to be issued to them without cost and vdiich they can loan at interest to the people of the United States. These special-interest bankers want to have impounded or retired the greenbacks, the best, the cheapest money ever issued. The greenback has saved the people of the United States, since it wras issued some 50 years ago, as compared with the cost of national-bank notes, $4,000,000,000. The issue is plain: Does this Congress want a money that wTill save the people as availed of not alone $4,000,000,000 but $40,000,000,000 the coming 50 years, or a Federal reserve money that is going to cost the Nation $40,000,000,000? The value of money is in the stamp of the Government. Gold, silver, and paper have value as products, but the stamp of the Gov ernment gives them value as money. Centuries ago shells and wam pum were used as money, but have since been relegated to the rear. England has shown what can be done by simple legislation. It demonetized silver, and it has to a certain extent also been relegated to the rear. England has legislated against silver to her great ad vantage. The United States can legislate against gold to nqual ad vantage. The most of the men who have come before your committee have recommended a new money system. Where is there a single new, 3114 B A N K I N G AND CU RRE N CY . good proposition in the entire measure that can not be made in a more direct and better manner by simply adding to—amending—the present national-bank act ? If, though, you deem you need a new sys tem, then build on a good foundation. You need additional accom modations for the housing of growing departments of the Govern ment. If an architect would come before you and say, “ I can give you a splendid plan; will build a new system, an ideal Government building, a splendid section for each Government department. Each Senator will have a magnificent suite of apartments. We will tear down the present Government buildings in Washington. All presentestablished Government business will be housed in the new building. The Government will supply the money to do it, and when the build ing is done the Government will pay us rent for the building.” Such a proposition would not be any more absurd than the plan offered in the Glass-0 wen measure. The cost to the Nation would not begin to represent a fraction of the cost to the people of the United States if you approve a measure like the Federal reserve bill recently passed by the House. The foundation of a fiscal measure should rest upon a right prin ciple. The Glass-Owen bill is wrong in principle. The Government should not enter any partnership with a baker, a lawyer, or a banker. No Government partnerships, especially a bank partnership. Don’t let the tiniest seed of a Government partnership get into any measure that passes from the Senate. If you do it will grow, and awful rapidly. The bankers have a remarkable way of making people see just as they want them to see. Some people who claim to be great champions of the people have come before you and told you the principle of this bill was good. It is bad, and would be so even if ten times as many said it was good. There are many claims made by friends of the proposed GlassOwen measure, such as holding out promises of “ gigantic benefit to the country,” “ commercial stability,” “ preventing possibility of panic,” “ uniform low rate of interest,” serving equally well the people of the country and the banks.” Such statements sound well, but I challenge anyone to show a sin gle good proposal in the measure that can not be made by amending the present national-bank act. The promises held out will not stand analysis; as a rule they are based upon a false premise. The present fiscal ills—if they may be called ills—are due to an inadequacy of the currency. We have not enough money. It will destroy the good market for United States 2 per cent bonds and other United States bonds. The bill proposes to exempt all na tional bank property except real estate from taxation. It will build up a partisan institution; a system of favor rather than of rig h t; subserviency instead of independence. The national banks of the country are to be forced to provide capital for the reserve banks, which in time are predestined to fall under the control of the great influential powers that have sponsored the Aldrich bill and are now back—concealed—behind the present measure. The great influence and audacity of these people is indi cated when a Government partnership measure like the Glass-Owen reserve act is brought forward in the face of a positive declaration against such a measure by the people at the last presidential election. B A N K I N G AND CURRE NCY . 3115 In addition to the gift, or, in modern vernacular, graft, heretofore mentioned, the Federal reserve act would lose 40 per cent of the tax upon present circulation and the benefit of a legitimate percentage upon future money issues, which should be secured without any partnership appendage. The statements reflecting upon the national-bank system have, I believe, been made for the purpose of creating a sentiment against our present system, and to educate the people to the idea that it is bad and that a new measure is necessary. I challenge anyone to show me a banking system that in any way equals that of our national bank. The system is magnificent; it can be amplified, improved, and made still more useful. Some of the national bank laws have become obsolete and the banking act should be amended, but properly and in the real interest of the people. Many new independent national banks would then be organized and groAv up with the country, and State banks would rush to avail of its charter privileges. . Every desirable feature that is proposed m the Glass-Owen bill can be adopted in the national-bank act—in a simple, direct manner. Senator R eed . Are you going to tell us how ? Mr. L assen . Yes, sir. Senator R eed . Very well. Mr. L a ssen . The need of the hour is a safe, ample currency. The first requisite is to determine how much it should reasonably be in creased, and then how much should it be reasonably increased per year. . . Then how to do it with the least disturbance to business m-the most advantageous manner to the people of the United States—the best and cheapest manner. At present our money consists of gold, silver, Treasury, green backs, gold and silver certificates, and national-bank notes. We coin all the gold we can secure; free coinage, beyond increase of money from this source, we are dependent upon national banks taking out circulation. The only way they can emit it is to deposit United States bonds against issues. The banks have availed of all bonds they could procure, therefore the field has to be extended or a new base of money provided. The Glass-Owen measure proposes a “ commercial paper ” instead of a bond-secured currency. This translated simply means that the banks are to use the notes, etc., discounted by them for their customers as collateral for loans of money from the Government and deposits of United States bonds dispensed with. If this collateral is considered good, the Government can loan the money directly to present national banks----Senator N elson (interposing). You mean by that that we can authorize national banks, in addition to the currency they have now— bond-secured currency—to issue currency on paper money as this bill proposes? M r . L a s s e n . Y e s , s ir . Senator N elson . I -want to say there is a bill before the committee now that I introduced, carrying out your idea. Mr. L assen . If this collateral is considered good, the Government can loan the money directly to present national banks, banks to guar- 3116 B A N K I N G AN D CU RRE N CY . antee paper discounted and all the advantages and safety as is now proposed and absolutely in the control of the Government. The Government to charge a regular fixed tax upon such circulation— lawful money loaned. The Secretary of the Treasury is doing practically this at present. He deposits money with the banks against collateral loans, United States bonds, and commercial paper, etc., and a fair interest charge is made for such “ deposits.” This character of depositing might be extended. A Federal treasury board, maintained as part of United States Treasury, as proposed in article 11 of the Glass-Owen bill, could probably serve the Government profitably. That is the one good thing you can use out of the Glass-Owen bill, gentlemen—that and some of the amendments. What legitimate reason is there why the present mode of securing circulation by deposit of United States bonds should be discon tinued ? Certainly United States bonds are a better basis than com mercial paper, acceptances, etc. Senator P o m er en e . Will the witness kindly suspend for a mo ment ? It is now the hour for recess. Senator S h a fr o t h . I think we had better adjourn until 2 o’clock. Mr. Lassen, how much longer will it take you to finish ? Mr. L assen . About 10 minutes. Senator C rawford . Let us give Mr. Lassen time to conclude. Mr. L assen . Why should the present national-bank notes be re tired or the present banks in any way disturbed? The present na tional banking system, with a few changes, simple enactments, can be made the best in the world. United States band-secured currency should not be discontinued. In the first place, money issued therefor is based upon the honor and integrity of the Government. There can be no question of its safety. The Government collects a tax of one-half of 1 per cent per annum upon such circulation. If the right to deposit United States bonds for circulation is taken away, the United States 2 per cent bonds, unless redeemed or otherwise cared for, will decline to 50 cents on the dollar. Without the circulation right, it would be impracticable for the United States to float new bonds on less than a 4 per cent basis. This would mean the loss of hundreds of millions of dollars to the United States. Instead of retiring United States bonds as a basis for circulation, why should not the field be extended and State, county, municipal, and other public securities which have been approved on a high standard as savings-bank investments and which have also been ap proved and recorded by the Secretary of the Treasury, or, say, a Federal Treasury board, be made the basis for national-bank circu lation ? There are some billions of dollars of such good bonds. They are an excellent basis for a national-bank circulation. With such privileges such securities w’ould advance in price and the present interest costs could be cut in half. Good public securities would soon be placed on a 2 | to 3 per cent per annum basis instead of 44 to 7 per cent as at present. The general country would benefit and then enjoy a safe currency, predicated on a sound foundation. Commercial paper should only be taken at emergency periods, and then only as the basis for Government deposits. Commercial paper B A N K I N G AND CUKRENCY. 3117 is far different from a properly issued bond. A note may be “ giltedged ” to-day and worthless to-morrow. To authorize a “ lawful money,” as is proposed in the Glass-Owen measure, for hundreds of millions of dollars is the wildest money legislation ever heard of. Every dollar of our present legal-tender money can be put in as a basis for two additional dollars and it means $6,000,000,000 additional money. Senator R eed . What do you say it ought to be? Gold? If this were to be adopted, would changing the phraseology so that nothing but gold could be treated as reserve be a strengthening feature ? Mr. L assen . Senator, if you will allow me to take up gold after I am through with this, I shall take pleasure in treating that separately. Senator R eed . Very well. Mr. L assen . Just think. But this act proposes to issue billions— practically the only limit is six or seven billion dollars of this “ butter-and-egg secured money.” Just think, this is to be “ lawful money,” and to be issued, but is not to inflate? To be guaranteed by the United States and redeemable in gold. This money is to be a new kind of money. The banks are going to issue this money just as they issue the present moneys, but when we get a million dollars in the bank it is not going to inflate. Just think of it. It is a new style of money. If it is issued by the United States it is going to inflate, but if it is issued by the banks it is not going to inflate. Rediscount money—generally representing an inadequate bank capital—is the most dangerous character of money inflation. , In other words, if I were in New York and I heard a bank was redis counting its paper, I should say it was overtrading upon its capital, that it was doing too big a business with too small an amount of capital, and I should want to withdraw any money I had in that bank, or put in a very small amount. But the whole scheme of a Federal reserve bank, with its com mercial paper basis money, is an impractical, cumbersome ma chinery, is simply a cover, to find a way to secure the privilege of issuing money and evade payment of as much tax upon circulation as possible, and then control the issue and maintain, instead of re duce, interest rates. It is a system that if inaugurated will prove to the advantage of the few and the detriment of the people of the United States. It will mean continued shortage of actual money and further ex tension of credits; for when there is a lack of real money people have to borrow credit to their cost. It is not a good measure; it is a bad measure. It is said that it will avert panics. But if it is enacted the “ big interests ” can get up a panic with less preparation than ever before. Senator R eed . D o you think the 44big interests ” have ever gotten up a panic? Mr. L assen . I have a copy of one of the last editorials I ever wrote for my daily paper, which I sent to President Roosevelt, with the request that he take some steps toward admonishing the national banks and the interests in the East, which I thought were then com bining for bringing about that very panic which they did afterwards bring about. 3118 B A N K I N G AND CU RBE N CY . The new Federal reserve money is to be based on 33£ per cent of gold or lawful money. The Federal banks to have the right to issue three for one against present issues of gold and silver and legal tender notes. Say there is issued $3,000,000,000 additional lawful money and the “ big interests ” want to have another 1907; they will simply withdraw gold and legal tenders, and the reserve banks will have to call in circulation three for one. They will not be able to renew commercial notes, and the “ crop failure ” will be duly harvested. The Federal reserve plan holds out many promises of the things it is to accomplish, but they are made without warrant. Primarily, it is based upon a false premise. A firm foundation is the first essential for a banking measure. Then you can build a structure, put in your rooms, partition them off to suit the needs of the situation. Some of the amendments proposed, mostly defeated, are good, but the measure as originally proposed is simply an impracticable, theo retical plan, seemingly devised to conceal the feature of Governmentbank partnership in the issue of money. There is no doubt that there is need of a great increase in the per manent money of the country. It has been the great need for 20 years. Had it been adequately and properly increased there would have been no panic in 1893 or 1897. The great immense fortunes that have been piled up, not as a matter of industry, but largely as profits from “ reorganizing ” wrecked corporations and manipu lating the stock and other markets, would never have been brought to the proportions that now exist. At the present time the deposits in the national banks aggregate about $7,000,000,000 and in State and private banks and trust com panies $13,000,000,000, making an aggregate of $20,000,000,000. The national banks have to keep on hand in reserve cities 25 per cent, country banks 15 per cent, and State banks and trust companies have generally some similar regulation. If all banks and trust com panies only kept a reserve of 10 per cent it would equal $2,000,000,000. If they kept on hand an additional amount to do general business with of 5 per cent it would equal $1,000,000,000. This would make a total of $3,000,000,000. There is in the country of all kinds of money only $3,700,000,000, and of this there is tied up in the United States Treasury some $350,000,000. Deducting this and the $3,000,000,000 the banks have to keep as reserve and to do business with and there remains only $350,000,000—equal to $3.50 per capita—for the people of this country to do business with. Owing to the scarcity of money, money is doing 20 times as much work at present, relatively, in this country as it is in any other -country in the world. Money naturally flows like water, it is liquid; it flows where it can do the most work, Tbe safest, and get the best pay. In New York it does the general business of the country. The money Texas sends to New York is working for its Texas owners carrying the products of Texas. In New Tork it representatively does 10 times as much work caring for Texas cotton and other prod ucts as if simply held and loaned in Galveston or other cities. It pays for the merchandise going to Texas. B A N K I N G AND CU RRE N CY . 3 119 I t is tlie same with the balance of the country. New York is a vast clearing house for merchandise. As you restrict it you restrict the ability of New York to help the country. The percentage of speculative stock business and its bad effects are exaggerated. There may be some five or six hundred brokers interested in speculative stock business. There are 30,000 brokers in New York interested in caring for the purchase and sale of investment securities, cotton, wheat, corn, copper, silks, oils, gums, paper, fruits, nuts, exchange money, and the thousand other products and things that the people of the United States have to sell or want to have bought for them. Handicap these men, and the great sufferers thereby will be the South and West. The great thing, the important thing, in the United States is to have more money. Utilize what has been proved good. The country needs a fair in crease in its currency—an ample currency issued on a safe, good security. It does not want a deluge of money resting upon the indi vidual notes—promises to pay—of its citizens. The present national-bank system is good. Continue to utilize United States bonds as a basis; amend, the national-bank act so that approved savings-bank investments can also be deposited to, say, 75 per cent of their market values, not to exceed par. This will leave a margin of 25 per cent as safety. There are many billions of dol lars of good State, county, and municipal bonds, and it is reasonable to believe that an adequate number would be gradually registered, approved, and deposited for circulation. With the right to issue circulation on such bonds, many national banks would avail of' it. With proper basis, circulation issued by a small bank is as good as that issued by a large bank. A combination of large banks in no wise improves the situation. Reserve associations should not be necessary with an adequate measure. Not alone is there basis for a good, ample currency which can be profitably taken out and circulated by the banks, but a large, sub stantial income made by the Government bv a graduated charge of 1, 2, and 3 per cent per annum upon such circulation. National banks at present pay 2 per cent upon deposits of Government money, which are secured by deposit of approved bonds. Is it not reason able to believe they will take out circulation when they can secure it upon even more advantageous terms? The 7,300 national banks would compete and improve the market for public bond offerings. A demand would then be assured for all the Panama Canal bonds the Government desires to offer upon a 2 per cent basis. The Government on June 3, 1913, held $176,097,700.95 to be placed upon the market. In the United States there are some 25,000 banks. Every one of these banks can be made rela tively as valuable and useful in its territory as the Bank of France is to France. , We need independent banks conducted on behalf of good business interests; no chain of banks; no “ unification.” The more independ ent a bank is, the less dependent upon another bank, the better it is; the more able it is to serve its constituency. None of the present United States bond issues and legal-tender notes, silver and gold certificates, national-bank notes, need be in- 3120 B A N K I N G AN D CU R R E N C Y . terfered with; all continued as at present, without change. Further more, there is assurance that the rate of money will continue reason able and stable. If the rate advances the banks can even take out circulation at a cost of up to 3 per cent. It can be retired as demand declines—elastic. The present commercial-money rate of 5 or 6 per cent would probably soon drop to a steady 3 per cent rate, the same as in France. Do you representatives of the people understand what this means? Do you knowT that it will cut the great burden that bears down on enterprise and industry? Do you appreciate what this white man’s burden is? It is in terest. The yearly interest paid by the people of the United States is over five times the value of all the gold produced in the world in the same period. This interest, calculated at only 5 per cent per annum, is equal in value to all the wheat and corn and other grains raised in the country each year. It is one of the great factors in the high cost of living. The Glass-Owen bill meaps a perpetuation—an extension of this burden. Amend the present national-bank act properly and United States bonds will immediately go above par again. Good State and county and city bonds will sell on a 2 to 3 per cent basis instead of as at present, 44 to 8 per cent. Industry and enterprise will thrive. The measure will be for all, not for the benefit of a special few. Do not inflict the Glass-Owen measure upon the country. If this terrible Government-bank partnership is once inocculated into our system it will first disorganize, then inflate, then ruin, then subjugate. Does any Senator desire to ask me any question about the sub ject of which I have spoke? Senator R e e d . Well, I suggest it is 20 minutes past adjourning time. Senator C rawford . Have you concluded your statement? Mr. L assen . One of the Senators desired to ask me a question concerning gold. I have prepared a paper on that subject, and I shall be glad to answer any questions you may ask me. Senator C rawford . What is the pleasure o f the committee? Senator N elso n . Let us adjourn until 2.30 o’clock. (Thereupon, at 1.20 o’clock p. m. the committee took a recess until 2.30 o’clock p. m.) AFTER RECESS. Senator H itc h c o c k . Y ou may resume your statement, Mr. Lassen. STATEMENT OF ALEXANDER C. LASSEN—Resumed. Mr. L assen . Mr. Chairman, a little over 100 years ago, English capitalists who had due them large sums, payable in pounds sterling, decided they could enhance the value of their obligations by demonet izing silver and make such obligations rest upon gold alone. In 1873 they had a similar law enacted in the United States which demonetized silver then quoted at $1.32 per ounce, which was prac tically on a basis of 15^ ounces of silver to one of gold. Silver from that time until about 1897 declined and relatively gold advanced, to the great advantage of English capitalists and to the cost of the people of the United States, India, and other debtor countries. It was good for creditors, bad for debtors. = BANKING AND CURRENCY. 3121 Senator H it c h c o c k . I s this matter in reference to pending leg islation ? Mr. L assen . I think it covers about the most important feature you have in your present measure. Senator H it c h c o c k . I do not know how it is with other members of the committee, but I feel very anxious that we should confine ourselves distinctly to the pending legislation. Senator C rawford . What are you steering toward—the demoneti zation of gold ? Mr. L assen . I am steering toward the most important point in this bill. Senator N elso n . We had better let him go on. Senator H it c h c o c k . Y ou may proceed, but make it as brief as possible. Mr. L a ssen . England, it is estimated, has over $30,000,000,000 (£6,000,000,000) loaned out all over the world. The scarcer and dearer gold the better interest rates, tribute, or the more produce she can get for a pound sterling. The United States owes, including investments, to Europe,- in cluding England, upward of $5,000,000,000. As England’s policy is to multiply use of gold, ours is to minimize. England’s plan to enhance gold by demonetizing silver has re dounded to her great advantage. Our true policy is to use as little gold as possible, get as independent of gold as possible. England has shown us what great results can be secured by simple legislation. Let us benefit by her gieat lesson. England has minimized the use of silver; the United States should minimize the use of gold. The world owes England pounds sterling, which means gold. The world is in an English gold trap. There is due England directly over four times all the money gold in the world, and it is impossible for the debtors to pay the interest, not alone the principal, which, continues to mount steadily upward, to her great commercial advan tage and profit. Europe’s and the world’s moneys have to a certain extent been made redeemable in gold. Notes, mortgages, bonds likewise, as far as pos sible, also have been made payable in gold. Each country that adopts the gold standard and each additional contract that calls for payment in gold tends to enhance the value of gold and ultimately benefit the owners thereof. Governmental bonds issued by European countries are estimated to aggregate over $30,000,000,000. The interest at 5 per cent alone is $1,500,000,000 per year. Only a portion is being paid, balance re funded, and the principal is steadily increasing at a tremendous rate. The total amount of money gold in the world is estimated at $10,000,000,000. The total world’s production is estimated at $480,000,000 per year. Of this amount nearly four-fifths is used in arts, etc. It is estimated that less than $100,000,000 is available for coinage into money. ' It should therefore be understood that England has the world short ®f S°ld, that it is in a gold trap, and that all legislation or promises to pay in gold tend to enslave the obligators. 3 1 22 B A N K I N G AND CU RRE N CY . Senator C rawford . What is the reason, if there is $480,000,000 of gold stock, and increasing every year, and is worth so much in the form of money, that four-fifths of it goes into other channels? Mr. L assen . Two-fifths goes to India every year. Senator C rawford . Why dees it not go where it is most profitable ? Mr. L assen . It does. Senator C rawford . If it is so profitable to use it for money, why is it not all coined into money instead of so much of it going into something else? Mr. L assen . India’s people have a religious desire to acquire gold and they absorb $200,000,000 of it a year. If you doubt my figures in regard to this----Senator C rawford (interposing). Oh, I do not doubt them at all. Mr. L a ssen . I would refer you to Mr. Blumenthal’s testimony in your record. He is one of the best authorities in the United States. You have his testimony in one of your earlier hearings. Senator C rawford . The fact that four-fifths of it goes into other channels must be evidence of the fact that it is worth more for these other uses than for money. Mr. L assen . Yes; it is very valuable to fill teeth and an enormous quantity of it is used in that direction, and a great deal of it is used in the fine arts. So, finally, you have only $100,000,000 left for money. Senator H itc h c o c k . I s it not a fact that money is becoming cheaper every year? Mr. L assen . Pardon me? Senator H it c h c o c k . I s it not a fact that money is becoming cheaper every year and prices are rising every year? It takes more money to buy the same thing. Mr. L a ssen . That is not the result of your having more money, but that comes from a number of other reasons. Your taxation is a great deal larger and that is one of the great points. Your interest rates are very large. In this country you are paying to-day the highest rates you have paid in 20 years. I was in California last spring, and the State of California has $5,000,000 worth of bonds which it can not sell; $5,000,000 for public improvements. Senator H it c h c o c k . Y ou may proceed, Mr. Lassen. Mr. L assen . The people of the United States at present have a means to cut away the net that would further bind them in this gold trap. Their obligations as a rule are payable in dollars and not in pounds sterling. We can legitimately legislate ourselves into free dom. We can go back to the same position we had in 1900, make all our legal-tender notes redeemable in gold or silver, or suspend pay ment in either when deemed to the interest of the Government. France and Germany have similar rights. The outlook is that with this provision all classes of our outstanding moneys will continue as heretofore. All interchangeable; notes into gold or silver as desired, but the Government protected against raids upon gold reserves. Many hundred years ago shells and wampum were used as money, and there is equally as good reason, with a clear insight, why both gold and silver should also be relegated, as they have been, and money simply based, as our greenbacks, as legal tender, token, or “ lawful money,” irredeemable. “ Greenback ” money when good for custom house duties and full legal tender passed currently with gold. I t is B A N K I N G AND CURKENCY. 312a the “ legal tender ” quality that gives value, and resting without be ing redeemable in gold or silver would prove as valuable in the future as a money as in the past 50 years. During this period the $346,000,000 legal tenders or greenbacks have saved the people (computed at 5 per cent per annum, which is far less than the cost of nationalbank notes), the enormous sum of nearly $4,000,000,000, which i& equal to probably nearly half the money gold in the world. There is no advantage, commercial or otherwise, in making our money redeemable. It would rest as honorably and safely simply as token, “ legal tender,” or “ lawful money.” Notes redeemable in gold when not backed up by actual gold place the issuer in the same position as the short seller of stocks or any other cornered commodity. A-person that would knowingly sell or promise to deliver a stock or commodity that was already sold short to a far greater amount than existed would be generally looked upon as a reckless, irresponsible individual. It is far more idiotic for a nation to legislate, promise to pay in gold, when it is understood that that commodity has been cornered not alone to five times the an ount in existence but to many times five times. In fact, the prin cipal of the obligation is so great that the annual interest alone would absorb all the actual $10,000,000,000 monev gold of the world; o f course, this interest is not being paid off, but is mostly being refunded, added to the principal of the debt. It may be claimed that our contract calls for us to redeem our out standing moneys in gold. With a clause “ redeemable in either gold or silver ” or suspended at the discretion of the Secretary of the Treasury, all legitimate business requirements can be served the same as in France and Germany and we can keep faith and maintain parity of all our moneys. Our gold when taken abroad simply goes as bullion. Should the United States adopt the above suggestion, France and Germany would probably soon awake to the great advantage of such a course and endeavor to unload their gold holdings, instead of hoard ing as at present, with the result that England would have to absorb it to her personal cost; gold would naturally depreciate as silver has through demonetization. While population, taxes, and commerce of the United States are increasing by leaps and bounds, the production of gold is relatively very small. There is a common error in the belief that the produc tion of gold is increasing at a greater ratio than population and wealth. The entire yearly production of the world, if it could be secured to the people of the United States and was all converted into money, would only amount to $4.80 per capita. The entire product of the United States does not amount to 90 cents per capita. There is little prospect of any material increase. Therefore it can be readily understood that it is unreasonable to base any calculation or predicate an increase of currency upon gold coinage or paper money based upon gold reserve. Such enactment would result in a sub sidence of development until gold production relatively increased. Our per capita circulation, which is about $34, should be increased gradually in accordance with national development. Last year United States corporate income tax increased 21 per cent. It is not unreasonable to believe that this development has likewise extended m all lines of business throughout the country. If our money has 3124 B A N K I N G AND CU RRE N CY . increased proportionately, it should have increased $600,000,000. In stead of this there was really a decrease in the money per capita the last year. Values largely depend upon quantity of money in circulation. In creased circulation, as a rule, means expansion and development; contraction, uncertainty and depression. The lack of money at present is causing a terrible strain upon all business, except where credit or money is loaned at interest. The estimated property wealth of the United States is $120,000,000,000. The great handicap of the Nation has been an inadequate supply of money; it has resulted in a great Nation of debtors, tribute-interest payers. There is owed by the people of the United States to bankers the gigantic sum of upward of $30,000,000,000. The interest upon this amount at only 5 per cent aggregates upward of $1,500,000,000, or equal to twice the value of all the wheat raised in the United States within the same period—a year—or over three times the value of all the gold produced in the world the past year. The lack of an adequate currency entails fearful tribute on com mercial business and labor. The great prosperity of France is based upon a liberal currency, it having the equivalent of $30 gold, $11 silver, etc., equal to $41 per capita. This has resulted in practically a steady 3 per cent per annum interest rate for almost 100 years. Sovereign money never hurt any nation; it has proved financial blood. We can secure it safely and honorably by reversing England’s policy. Senator H itc h c o c k . If that is all----Senator R eed (interposing). I just want to ask one question, Mr. Lassen, and that is in regard to your figures concerning the amount of deposits in the banks and the amount of reserves required by this bill. I would like to have you state that again. And I would add to my question the amount of money which you say would remain to circulate among the people. Mr. L assen . The amount of deposits in the national banks is $7,000,000,000; the amount of deposits in the outside banks is esti mated to be $13,000,000,000 more. That makes $20,000,000,000. Senator R eed . Whose-estimate is that? Mr. L a ssen . That is an estimate of Alexander Delmar. I have since read it in reports before your commission. Senator N elso n . Y ou are referring to deposits? Mr. L assen . Yes. Senator N elso n . Which do not represent actual money? Mr. L assen . Oh, no; they are only deposits; they are payable in money, but they are only credits. Senator R eed . Y ou stated the amount of money which is on de posit in the national banks and the amount of money which is on de posit in other banks. You did not state the amount of money, but the amount of deposits? Mr. L assen . Yes, sir. Senator R eed . Of course, that money may have been deposited sev eral times and represent credits. Mr. L assen . When the national banks’ total deposits call for $7,000,000,000, they are supposed to keep in cities 25 per cent reserve, and country banks 15 ner cent reserve. Senator R eed . I understand. B A N K I N G AND CURRENCY . 3125 Mr. L a ssen . If you have only 10 per cent of it—that is, $700,000,000 and then you take an additional 5 per cent—you have $1,500,000,000. If you do the same thing with the State savings banks and trust com panies, you relatively get an aggregate of $2,000,000,000. That is, the State banks and trust companies and the ether institutions have to have at least 10 per cent cash on hand, whether they keep it as reserve or not, to provide for a contingency in the case of a call. Now, they have to have on hand, in addition to that, about 5 per cent, which fluctuates in the towns they are in, and it comes back to them at 3 o’clock every day. Senator R eed . That makes an aggregate of how much actual money to be consumed by the reserves and by this additional 5 per cent which you say they keep? How much actual money does that make? Mr. L assen . $3,000,000,000. Senator R eed . What is the present currency ? Mr. L a ssen . $3,700,000,000, not including $350,000,000 held in the United States Treasury which is not in circulation. Senator R eed . Your argument is, then, that if all the banks came into this system and all of them complied with the conditions of this bill it would lock up in the reserves practically all of the money of the United States? Mr. L assen . Y ou could not begin to bring about your banking system at all. Before you have even inaugurated it, you would have broken half the banks of the United States. Senator R eed . I wanted simply to get your point. Would it relieve against that any if this was done gradually and rediscounting per mitted so as to allow the money that would be held in the way of re serves to be reloaned to the banks? Mr. L a s s e n . I would say this, that unless you adequately increase your permanent money you are absolutely in such a strained condition now that your southern bankers, who w^ere here a few days ago almost begging upon their knees to get help—and your western bankers were in the same position----Senator N elson . Oh, no. They were not in a bad position. Mr. L assen . They Avere b e g g in g f o r m oney. Senator N elson . Oh, no. Minnesota Avas assigned $3,000,000 out of that amount. They took only $500,000. They did not ask for any, but they were assigned $3,000,000. Mr. L assen . Owing to the very Avise act of the Secretary of the Treasury in stating that he Avould give them relief, it relieved them from the need of calling this money, but had it not been for the wise provision of the Secretary of the Treasury there Avould have been a scramble among them for the little money furnished, and you Avould have had very hard times. Senator N elso n . We Avould have taken care of ourselves out in the West. Senator C raavford. I think the bank examiner has been waiting here for some time. Mr. L a ssen . I am th ro u g h . Senator B ristoav. Before the committee goes into executive session, I bRve a letter here from Prof. Jenks, which I desire to read | reading]: N ew York City , October 2J/, 1!)13. My D ear S enator : I have been at work on the amendments to the currency 1 Providing for a central bank. Inasmuch as this involves to a considerable S. Doc. 232, 63-1—vol 3-----76 3126 B A N K I N G AN D CU RRE N CY . extent the rewriting of the whole bill, and I have had my university work on hand, it is not quite completed. But I shall be able to complete these amend ments so as to get them into the hands of Senator Owen not later than Tues day, quite probably on Monday. I notice in the morning papers that Mr. Vanderlip has presented a bill along somewhat similar lines. A number of points, judging from the sketch in the paper, will be in agreement, but a number are quite materially different. When I first saw the announcement of this bill I had thought it might not be worth while for me to complete this work, but I think the points of difference are essential, enough so that it may be suggestive. Very sincerely, yours, J. W. J en k s . Hon. J oseph L. B bistow , U n i t e d S t a t e s S e n a te , W a s h i n g t o n , D . C. I have this in mind, that on Monday or Tuesday we will have these proposed amendments of Prof. Jenks, and I thought we could prob ably have him come before us and explain the provisions in his amendments and the relation of these provisions to other suggestions that have been made, and while we close the hearings to-day, I do not think we ought to forbid ourselves from talking with him. Senator R eed . I think the committee can at any time call for any expert it desires to call for, and I move, with that understanding, that the hearings be now closed, except to hear from Mr. Starek, the bank examiner, and that he be heard in executive session this after noon. (The motion was carried.) Senator H itc h c o c k . Without objection, I desire to insert in the record a telegram addressed to the chairman from Mr. Charles N. Dietz, of Omaha, Nebr. (The telegram referred to is as follows:) O m aha , N ebr.. O c to b e r 25, 1913. Hon. R obert L. O w en , U n ite d S t a t e s S e n a te , W a s h i n g t o n , D . C .: Noting newspaper account of meeting in Omaha and telegram sent you by 30 Omaha men, it was a case of the fox having charge of the chicken coop. Your currency bill is all right, and with it the greater good will come to the greater number of people. We hope you can put it through. ‘ Ch a s . N. D ietz. (The letters offered for the record by Senator Bristow are as follows:) T he F irst N ational B a n k , L a s V egas, V. M e x .. O c to b e r 2, 1913. Hon. T. B. Catron, U n ite d S t a t e s S e n a te , W a s h i n g t o n , D . C. (H. R. 7837), and for your request for my opinion as to its merits. Well, my dear friend, in all seriousness. I do not believe our friends of the Democratic Party are capable of handling this country’s business. While every one feels that the so-called “ interests,” as generally expressed under the head of Wall Street, should be'curbed in some way, it does not appeal to me that the whole business of the country should be upset in doing so. As to the currency bill, it seems to me that to make the regional reserve banks a success, all of the national banks should come into it in a friendly way rather than be forced to do so. which may cause the whole thing to fall flat of its own weight. One central reserve bank, rightly constructed, could do the business between the Government and the people, in my opinion. The present bill makes it illegal to issue clearing-house certificates. This seems wrong to me as, in event the change does cause financial troubles, a provision granting this privilege for at least one year should be included in the present bill. D ear Mr. Catron : Thanks for a copy of the currency bill 3 127 B A N K I N G AND CURRE NCY . It must be recognized that every crossroads, village, town, aud city from Maine to California and- from Duluth to New Orleans is obliged to keep a New York City account for the accommodation of its business. This naturaly makes a large accumulation of funds in New York that grows in proportion to the increasing development of the country’s business, and to attempt to legislate these conditions out of existence is fundamentally wrong and impossible. Yours, very truly, J efferson R eynolds. S an Miguel N ational B a n k , L a s V e g a s , N . M c x ., O c to b e r 1, 1313. Hon. T. B. Catron, W a s h i n g t o n , D . C. M y D ear S enator : I received from you an act to provide for the establish ment of Federal reserve banks, etc., which I have carefully read. In my opinion State banks, before being allowed to join and take stock in a Federal reserve bank, should be examined by a national-bank examiner with the same care that national banks are examined. State-bank examiners are fre quently incompetent for the position that they hold, often being appointed on account of their political pull. It would hardly be fair to force a national bank to take stock in n Federal reserve bank, as this bill does, with a State bank which has been improperly examined and allowed to come in at their own dis cretion without any danger of losing their charter unless they do so. This pos sibly may be covered by the section on State banks as members, but I hardly think it is explicit enough. It might be a very unfair and unjust partnership. Furthermore, the western banks are forced to join in the organization of the Federal reserve banks and are to receive no more than 5 per cent on the stock unless—in a very remote contingency provided for in the bill—when it is a wellknown fact that they can get a higher rate of interest for all the money they have to loan in their own locality. In all fairness this should be 6 per cent instead of 5 per cent. Why should a national bank, operating under a charter from the Government, be forced to do this; and being forced to do so, should they not have more say in the management of this Federal reserve bank than this law gives them? The powers and duties of a Federal reserve bank should be more restricted, else national banks in the vicinity of the Federal reserve bank will be handicapped in the community in which they are doing business by the prestige that the Federal reserve bank may have. If allowed to do even a limited amount of general business they should pay taxes as a national bank does. The board should be composed of bankers and business men of the high est character and ability. The Secretary of the Treasury and the Comptroller of the Currency may be good selections, but why the Secretary of Agriculture, who may know nothing of finance? All other large business is, as a rule, man aged by men selected for their knowledge of the duties required in their special line. If managed by men selected on account of their political pull, this power at times might be used to further the interests of some of the political bosses. In the final analysis, what the country needs is an elastic currency, something that will legally do what, in the panic of 1907, was illegally done but acquiesced in on account of the great urgency to prevent nation-wide disaster, viz, the issuing of clearing-house certificates. No matter what kind of a cur rency bill is passed it will meet the objection of a great many people, and whether it is good. bad. or indifferent, until the business community has become accustomed to its workings the careful and conservative banker will feel his way and be more careful in his loans. This probably in the end will result in great good. In the meantime we must all go slow. Thanking you for sending me this bill, and with kindest regards, I am, Very truly, yours, J. M. Cu n nin g h am . McK inley County B a n k , G a llu p , N . M c x ., O c to b e r 8, 1313. Hon. T. B. Catron, W a s h i n g t o n , D . C. D ear S i r : AYe wish to thank you for sending us copy of the currency bill as passed the House. While the bill is not the best bill possible, still we can get along under it aud think it much better than our present system. 3128 B A N K I N G AN D CURRE NCY . It appears to us that the greatest hardship imposed on the hanks of New Mexico will he the elimination of exchange charges. Jn a small bank the size of ours—and our bank is a fair average—the exchange account is an important source of income. We would appreciate your efforts to try to have our present exchange arrangements undisturbed by the currency bill when passed. I am also quite sure that the other New Mexico bankers feel the same on this subject. Very truly, yours, T. M. Quebedeaxtx, V ic e P r e s id e n t. F irst N ational B an k , S a n t a F e , y . H e r ., S e p te m b e r 24, 1913. Hon. T. B. Catron. U n ited S ta te s S en ate. W a s h i n g t o n , D . C. My D ear S enator : I have the copy of the currency bill, and in accordance with the request contained in your note I submit the following: As to the organization of the Federal reserve bank's and the Federal reserve board, I hardly feel equal to offering any suggestions on those sections beyond noting the possibility of political control of the latter under the provisions of the bill, which might cause an improper exercise of its extensive functions. I think the existing national banks should be permitted to join the Federal reserve district organizations, and not be compelled to do'so. Their action should be voluntary, not compulsory. It occurs to me that the authority to the Federal reserve banks to establish branches within their districts to the possible number of 10 might be inimical to the interests of the member banks in the district, inasmuch as the powers of such branches do not appear to be defined in the act. unless it be held that they can not have any greater powers than the parent bank. It seems to me that inasmuch as the member banks contribute the entire capital of the Federal reserve banks that instead of being limited to a 5 per cent cumulative dividend on their stock and 40 per cent of the net profits after the accumulation of a 20 per cent surplus they should be entitled^ to the entire net profits thought advisable to distribute instead of having 60 per cent of such net profits go to the Government to be used in the extinction of its bonded debt. This seems to me to be calling on the member banks for too large a contribution to the payment of the Government debt proportionately. The Federal advisory council does not appear to me to have such powers or functions aS to make it desirable for bankers of great ability and experience to serve thereon. Its powers should be enlarged or the provision cut out. The class of paper discountable by the Federal reserve banks for the member banks is not found to any large extent in this State, and in order for the banks here to be in position to avail themselves of this rediscount privilege they would have to buy this kind of paper from note brokers or from correspondents. This would pro tanto lessen their loanable funds for local borrowers, and the funds derived from such rediscounts would be practically offset by such pur chases. In this connection it seems to me that “ commercial paper ” as defined in the act can hardly be considered such. The commercial paper largely purchased by the banks at present is. in fact, the direct borrowings of indi viduals. firms, and corporations, whereas genuine commercial paper is the notes or acceptances taken by manufacturers and dealers for sales of goods and mate rials, running 30, GO, or 5)0 days, to be paid off on the turning of such materials and goods by sale and payment. The funds of the Government are to be de posited in the Federal reserve banks apparently without other security than their general capital and credit. The note issues, in my opinion, should be the obligations of the issuing Fed eral reserve banks and not of the United States, and their redemption should be in gold and not in “ gold or lawful money,” and the reserve for their redemp tion should also be in gold alone. The provision that “ no two successive examinations should be made by the same examiner ” if interpreted to have a change of examiners at every ex amination would be a mistake, in my opinion, as an examiner making repeated examinations of a bank becomes much more familiar with the character and strength or weakness of its assets than from a single examination at long in tervals. There seems to me to be possible under this bill altogether too fre quent examinations. I 3129 B A N K I N G AND CURRENCY . The shareholders’ liability " at the par value thereof in addition to the amount invested in such stock ”—section 25. This seems to me somewhat ambiguous. Does it mean by the amount invested the price paid by a shareholder? If so, in many cases this might create a quadruple liability instead of what is now a double liability. I do not approve of the proposed loans on farm lands by national banking associations. I believe another distinct and separate bank organization should be intrusted with this class of loans. I do not approve of savings departments for these banks. A national bank could hardly set a period of notice for the withdrawal of savings deposits with out exciting the apprehension of its regular deihand depositors. I have given a few suggestions herein. It is quite a profound subject and I hardly feel that my own experience is quite equal to throwing much light on just what would be the most desirable substitute for the bill. I must acquiesce in large measure in the recommendations of the bankers’ conference, held at Chicago last month, and formulated in a pamphlet and widely distributed. It seems to me that the measure should be made acceptable to the reasonable requirements of the banks, as without their acceptance of the bill and organiza tion under it the act will be merely a shell without any body, a skeleton without any flesh. Yours, very truly, R. J. P a l e n , P r e s i d e n t . (The chairman of the committee presented the following, with the request that they be placed in the record:) T he N a t io n a l S iia w m u t B an k , B o s t o n , O c t o b e r 2 3 , 1913. Hon. R o iie h t I,. O w en , B o s t o n C i t y C lu b, B o s to n , M a ss. D e a r S e n a t o r O w e n : Confirming our verbal conversation to-day, I beg to give you the following figures regarding the Boston Clearing House as reported to me by Mr. Ruggles. the manager: The annual total cost of operation is $60,000, and the number of employees 18. The foreign department handles $600,000,000 of business a year, and the city department $8,S00,000,000. The foreign department is charged out of the total of $60,000 with two-thirds, or $40,000, which makes the cost something under 7 cents a thousand. The city being charged with the balance of $20,000, making the city items cost 2 i mills a thousand. You will see from the above that the cost of handling the foreign or out-ofthe-city business is 30 times the cost of handling the usual clearing-house exchanges. Of course, these figures are, as I understand it, an approximate average*, but they form a very fair estimate of the cost of our doing business under the Boston system. Yours, very truly, B e n j a m in J oy, C a sh ier. O f f ic e Hon. R obert L. of T r ea su r y D Com ptroller of epartm ent, the Currency. W a s h i n g t o n , O c t o b e r 2 5 , 1913. Ow en . U n ite d S ta te s S en ate. W a s h i n g t o n . I). C. D ear S i r : In compliance with your request of September 26, transmitted through the clerk of the Committee on Ranking and Currency, there are enclosed a computation by the Government actuary relating to the probable gain or loss in earning power of banks, as indicated, under the proposed currency bill com puted with existing law. and a table indicating probable changes in reserves, including the additional information requested in letter of September 26 Respectfully, T. P. K (Inclosures.) ane , A c tin g C o m p tro lle r 3130 B A N K IN G AND CURRENCY . [Inclosure.] C o m p a r is o n o f a t y p i c a l c e n t r a l r e s e r v e c i t y b a n k a s to e a r n in g c a p a c i t y u n d e r th e p re se n t la w a n d u n d e r th e p ro v isio n s o f H . R. 7887 a f te r th ese p ro v isio n s a r e in f u ll effect. [Item s that will differ alone are here shown.] Item. Under pres ent law. Net deposits................................................................................................................... $28,110,000 7,027,500 Roserve, with Federal r iserve hanVc......................................................................... United States deposits................................................................................................ Bonds deposited with United States....................................................................... Under pro posed law. $23,770,000 2.139.300 2.139.300 120.000 37,500 470,000 100,000 The above changes would have the following effect: Decrease. Increase. Upon loanable funds: $4,340,000 $2,748,900 120,000 37,500 470,000 100,000 4,597,500 1,378,600 3,218,900 Upon income: 1,890 64,179 5,000 1,890 69,179 67,289 Net change in earning power: In 4 per cent locality, $12,145 gain; in 6 per cent locality, $15,427 loss; in 8 per cent locality, $42,999 loss. The cause of the loss in earning power is the large decrease in deposits by the withdrawal of the reserves deposited by other national banks with this bank. The total amount of reserve deposited, as required by law, which will be withdrawn from all the central reserve city banks will be about $243,000,000. These banks now have net deposits of about $1,568,000,000. This bank has net deposits of about $28,000,000; therefore its proportionate loss in deposits caused by the withdrawal of this reserve will be something over $4,000,000. The probabilities are, although not provided for in the bill, that this bank will be able to obtain all the funds that it can profitably use from its Federal reserve bank in the shape of Federal reserve notes at no greater interest charge than it now pays for its deposits of reserve. The amount of these n<ytes to be issued will be measured by the amount that can be profitably used as modified by the opinion of the Federal reserve board. Thus a bank could obtain these notes from its Federal reserve bank when needed upon the deposit of collateral security and upon the payment of interest, the rate of which should depend upon the rate paid by the reserve bank to the Government, and which probably would have to be fixed by the Federal reserve board. When the use of these notes ceased to be profitable they could readily be retired. B A N K I N G AND CURRENCY . 3131 C o m p a r is o n o f a ty p i c a l r e s e r v e c i t y b a n k a s to e a r n in g c a p a c i t y u n d e r th e p re sen t la w a n d u n d e r th e p ro v isio n s o f H. R. 7837 a f te r th ese p ro v isio n s a re in fu ll force. [Item s of differences alone shown.] Items. Under pres ent law. $23,088,000 2,886,000 2,886,000 600,000 835,000 Under pro posed law. $19,247,000 1,732,000 1,732,000 100,000 The above changes will have the following effect: Decrease. Upon loanable funds: Increase. $3,841,000 $2,308,000 600,000 835,000 100,000 4.541.000 1.398.000 Upon income: 3,143,000 ______ 7,200 Profit on balance with Federal reserve bank, about 3 per cent on $1 732 000 ........................................................................... Loss on deposits withdrawn from reserve agents, about 2 per cent on $2 886 000 .................................................................................... 51,960 57,720 5,000 Total ........................................................................................... 64,920 7,960 56,960 Net change in earning power: In a 4 per cent locality, $63,880 loss; in a 6 per cent locality, 891,840 loss; in an 8 per cent locality, $119,800 loss. The net deposits of all the reserve city banks is now about $1,946,000,000; the deposit of reserves with them by other national banks is about $325,000,000. This bank’s deposits are about $23,000,000; therefore it is probable that its pro portionate part of the reserves withdrawn will be about $3,840,000. The remarks made in connection with the Federal reserve notes and the central reserve city banks and the Federal reserve banks apply also to these banks. I C o m p a riso n o f th e ea rn in g c a p a c ity o f a c o u n tr y ba n k u n d e r th e p re se n t la w a n d u n d e r th e p ro v is io n s o f H . R . 7837 a f te r th e s e p ro v isio n s a r e in fu ll effect. [Items of differences alone are noted.] Items. Present law. Proposed law. Net deposits, ordinary................................................................................................. Net deposits' savings.................................................................................................. Reserve in own vaults................................................................................................ Reserve with reserve agents....................................................................................... $1,154,000 110,000 75,800 113,800 N ational-bank notes outstanding.............................................................................. ^nited States deposits................”. .............................................................................. nonds deposited with United States....................................................................... capital stock of Federal reserve bank...................................................................... 200,000 20,000 232,000 $1,154,000 110,000 63,200 80,780 25,000 3132 B A C K I N G AND CU RRE N CY . The above changes would have the following effect: Decrease. Increase. Upon loanable funds: $45,620 $200,000 20,000 234,500 25.000 245.000 280.120 35,120 Upon income: 2,400 Profit oh balance with Federal reserve bank, about 3 per cent.................. Loss on deposits with reserve agents, about 2 per cent................................ 2,423 2,276 1,250 4.676 1,003 3,673 Net gain in earning power: In a 4 per cent locality, $402 gain; in a 6 per cent locality, $1,104 gain; in an 8 per cent locality, $1,807 gain. The above would be increased by the use of Federal reserve notes, as shown above. E s t i m a t e d e f fe c t o f t h e p r o v i s i o n s o f II. R . 7 8 3 7 u p o n t h e h a n k i n g i n t e r e s t s o f th e U n ite d S ta te s. On June 4, 1913, the condition of the national banks was as follows: [All dollars in millions.] Reserve required. Banks. Net de posits. Capital stock. Cash in own vaults. Credit balance with reserve agent. $243 325 Free net deposits. $1,176 1,460 3,069 52 central reserve city banks.......................................... 315 reserve city banks....................................................... 6,806 country banks.......................................................... $1,568 1,946 3,611 $183 264 610 $392 243 217 7,173 national banks......................................................... 7,125 2,860 3,630 1,057 459 419 852 242 282 568 1,410 loan and trust companies....................................... 5,705 2,618 3,348 Total, 21,964 banks................................................. 13,615 1,935 1,376 ' 568 11,671 N ote .—The above data for State banks and for loan and trust companies is as of June 14,1912, the latest available. B A N K I N G AND CURRENCY . 3133 Under the provisions of the proposed law, the conditions will be, upon a per centage basis, as follows: Reserve required. Banks. Last 60 days: Central reserve city banks.. Reserve city banks............... Country banks. . . ' ................. After 60 days to 1 year: Central reserve city banks.. Reserve city banks............... Country banks....................... After 14 months to 36 months: Central reserve city banks.. Reserve city banks............... Country banks...................... After 36 months: Central reserve city banks.. Reserve city banks............... Country banks...................... Free net deposits. In own vaults. With reserve agent. With federal reserve bank. P e r c e n t. P e r c e n t. P e r c e n t. 20 10 5 10 4 3 P e r c e n t. 80 80 88 9 9 5 6 4 9 3 3 82 82 88 9 9 0 4 2 9 5 5 82 88 9 9 7 82 82 88 9 9 5 82 Upon million-dollar basis (first 60 days) : The country banks would with draw from the reserve city banks $181 during this period, their required reserve being that much reduced. This would reduce the net deposits of the reserve city banks to $1,765. These banks would in turn withdraw $67 from the central reserve city banks, leaving only 10 per cent of their net deposit there. This would leave only $1,501 for the net deposits of these banks, as shown below : Banks. Reserve in own vaults, cash. Required Federal reserve reserve bank agents, cash. credit. Free net deposits. Federal reserve bank.. Reserve. Central reserve city banks. Reserve city banks............ . Country banks.................... $300 176.5 181 $176.5 144 $108 $1,201 1,412 3,178 Total national banks. 657.5 320.5 108 5,791 $36 Total reserves in vaults: Cash................................................................................................................................................................. Credits............................................................................................................................................................. Total. Total free. . , Free. $72 $693.5 320.5 1,014 5,863 After 60 days to 1 year: The reserve city banks would during this period reduce their deposits with the central reserve city banks to 6 per cent, thua reducing the deposits of the latter banks by $71 to $1,430. 31*34 B A N K IN G AND CU RRE N CY . Reserve required. Banks. % Own vaults. Federal reserve bank. Reserve agents. Federal reserve bank. Free net deposits. Free. Central reserve city banks............................. Reserve city banks.......................................... Country banks.................................................. $129 159 181 $106 144 $129 53 108 $1,172 1,447 3,178 Total national banks............................ 469 250 290 5,797 $193 Total reserve in vaults: Cash..................................................................................................................................................................... Credits................................................................................................................................................................ $566 250 816 Total................................................................................................................................................. *............. Total free........................................................................................................................................................ 5,990 After 14 and to 36 m onths: The country banks reduce their reserve with the reserve city banks to 2 per cent. This reduces the deposits of those banks $72 or to $1,693. These banks in turn reduce their reserve with the central reserve city banks to 4 per cent. This results in a reduction of the deposits of these banks $38 or to $1,392. Federal reserve banks. Reserve required. Banks. In own vaults. Central reserve city banks........................... With reserve agents. With Federal reserve banks Free net deposits. Reserve. $125 152 181 $68 72 $125 85 181 $1,142 1,388 3,177 458 140 391 5,707 Free. $130 $261 Total reserve in vaults: Cash..................................................................................................................................................................... Credits................................................................................................................................................................ $590 140 Total................................................................................................................................................................ 730 Total free...................................................................................................................................................................5,968 After 36 m onths: The country banks withdraw the remainder of their deposits from the reserve city banks, $72, reducing the deposits of these banks to $1,621. The reserve city banks in turn withdraw their balance of reserve from the central reserve city banks, $68, reducing the deposits of these latter banks to $1,324. Federal reserve banks. Reserve required. Banks. In own vaults. Central reserve city banks....... Reserve city banks........................ Country banks................................... Total national banks.................... Total reserve in vaults (cash) Total free................................... With reserve agents. With Federal reserve banks. Free net deposits. Reserve. $119 146 181 $119 146 253 $1,086 1.329 3.177 446 518 5,592 $173 Free. $345 B A N K I N G AND CU RRE N CY . 3135 The State banks had $657, and the loan and trust companies $911 in savings deposits included in their total deposits as shown above. Against these deposits the new law requires only 5 per cent reserve. Treating these institutions as country banks, the following would be the resu lt: For the first 60 days, and afterwards: Reserve required. Banks. Own vaults. $110 33 136 46 Total ............................................. 325 With Federal reserve banks. Free net deposits. $154 $2,563 190 3,258 344 5,821 Federal reserve. $115 Reserve banks, free. $229 — «---------Total reserve in vaults (cash)................................................................................................................................ $440 Total free.......................................................*........................................................................................................... 6, OfO For the first 60 days (treated as a reserve city bank) : Federal reserve banks. Reserve required. Banks. Own vaults. With Federal reserve bank. Free net deposits. Reserve. State banks___ (Savings).. Loan and trust (Savings).. $440 33 544 46 $2,387 Total___ 1,063 5,427 Free. 3,040 Totalreserve in vaults (cash).............................................................................................................................. $1,063 Total free................................................................................................................................................................. 5 427 After 60 days: Federal reserve banks. Reserve required. Banks. Own vaults. State banks............................................. Savings......................... Loan and trust............................ Savings............ Total............................................................ Total reserve (cash) Total f r e e . . . . . . . . . . With Federal reserve banks. Free net deposits. Reserve. $198 33 245 46 $198 $2,431 245 3,094 522 443 5,525 $14& Free. $295 $670 6,820 3136 B A N K I N G AND CU RRE N CY . Taking the average of the above—that is, by treating one-half of these institu tions as country banks and the other half as reserve city banks—the following will be the result: First 60 days: Total reserve in vaults, cash, $752; total free. $5,738. After 60 days: Total reserve in vaults, cash. $555; total free, $5,935. After 60 days: Reserve in own vaults, $424; with Federal reserve bank, $393; free, $5,673. Federal reserve banks:. Reserve in vaults. $131; free, $262. By summarizing all the above, we have the table below, which shows at a glance the total reserves and free net deposits as required by the present law and by H. R. 7837 for all the national banks and State banks and loan and trust companies of the United States: Reserve required. Free net deposits. Period. Present. After 60 days to 1 year.......................................................... After 14 months to 36 months.............. * ........................... *1,944 1.944 1.944 1.944 Proposed. $1,766 1,371 1,283 1,174 Present. Proposed. *11,601 11,925 11,903 11,872 *11,671 11.671 11.671 11.671 The deposit of the currency carried in the general fund of the United States with the Federal reserve banks will increase the deposits held by these banks by about $125. The savings deposits held by the national banks as of June 4, 1913, were $829. Making allowances for these items, after the first 36 months, the above table would be modified so as to show the following results: Present total reserve required in banks______________________________ $1, 944 Proposed total reserve required in banks____________________________ 1,158 Reduction in required reserve_________________________________ 786 Present allowable free net deposits-------------------------------------------------- 11. 671 Proposed allowable free net deposits------------------------------------------------- 12,013 Increase in allowable free net deposits________________________ 342 C ash r e s e r v e re q u ired . Reserve cash. First 60 days: Under present law........................................................................................................ Free cash. *1,376 1,445.5 Contraction................................................................................................................. After 60 days to 1 year: *69.5 1,376 1,121 255 After 14 to 36 months: 1,376 1,143 Expansion.................................................................................................................. After 36 months: Under present law....................................................................................................... Under proposed law.................................................................................................... Expansion.................. 232 1,376 1,174 202 The only contraction shown in the above table is for the first 60 days. This is caused by the fact that the State banks and the loan and trust companies will be required to add materially to their cash reserves. This contraction, however, is more than met by the $83 of free cash deposited with the Federal reserve banks by the United States and by the $58 reduction of reserves re quired because of the savings deposits of the national banks. From this it B A N K I N G AND CURRENCY . 3137 Is evident that th ere,can be no contraction of currency even in the transition period when the new law is going into force and while the member banks are purchasing the capital stock of the Federal reserve banks. After the first 36 months the net expansion in currency, because of the cash reserve released under the provisions of the new law, will be about $343. GENERAL D ISC USSIO N . The capital stock of the Federal reserve banks that is to be purchased by the member banks is as follows: An amount equal to 5 per cent of the capital stock of said member bank, payable in cash at once, and another 5 per cent, payable in cash within 60 days. This stock should not be purchased with the deposits of the banks, but with their surplus or other funds. The Federal reserve bank can loan these amounts immediately upon their receipt. From this fact it is evident that this provision of the new law will not affect the net reserves nor the loanable funds. It will, however, modify the location of these funds. The purchase of this 10 per cent in value of their own capital stock is in the nature of a reserve deposit of cash with the Federal reserve banks, for this stock can not be transferred nor hypothecated and is to be refunded at the withdrawal of the member bank, for any cause, from the national-banking system. The amount of these de facto deposits is as follows: Central reserve city banks---------------------------------------------------------------$18 Reserve city banks________________________________________________ 26 Country banks_______________________________ Total national banks_______________________________________ State banks___________________________ _________________________ Loan and trust companies------------------------------------------------------------- $105 46 42 Total other banks________________________________ >-------------------1 88 Total of all banks— ___________________________________________ 193 This means a total reserve for the banks, after 36 months, of $S71 in their own vaults, $911 with the Federal reserve banks, and $193 of capital stock reserve with said Federal reserve banks, a total reserve of $1,974. Of this reserve the Federal reserve banks can use $800, holding $301 in its vaults. This shows a total reserve in vaults as shown before, of $1,174. as against $1,944 as now required. The location of the savings deposits with the national banks is not known to me. so they are treated as being with country banks, thus freeing 7 per cent of the required reserve. If they were with reserve city banks, 13 per cent of their required deposits would be released; that is, of the reserve required for their savings deposits. Making allowance for this reduction in reserve re quired, $58. and for the free United States deposits, $83, we will have, as shown above, a total net decrease in reserve of $786 and a total net increase in free deposits of $342. In all the above computations no allowance has been made for the with drawal of the national-bank notes from circulation nor of the probable issue of the Federal reserve notes. The proposed law provides for the annual retire ment of the 2 per cent bonds of the United Stales deposited with the Govern ment by any national-banking corporation, by refunding them with 3 per cent bonds without the circulation privilege. This is. however, optional upon the part of these associations. At the end of 20 years all the 2 per cent bonds out standing, of the present issues, will be retired at par. All the national-bank notes then still outstanding will also lie retired. The amount of Federal reserve notes to be issued will depend upon the demand for currency, as modified by the opinion of the Federal reserve board. M ith the consent of this board, the Federal reserve banks can have as much or as little of these notes as they will find profitable to use. This they can have by depositing with the Federal reserve agent collateral security, as determined and defined by the Federal reserve board, equal in value to "the notes issued to them, and by paying interest to the Government upon said notes as fixed by the Federal reserve board, but not less than one-half per cent per annum. As soon as the profitable demand for these notes shall have passed, any federal reserve bank can reduce its liability for said notes then in circulation 61 3138 B A N K I N G AND CU RRE N CY . at pleasure. This is the feature that makes for the element of elasticity in the proposed law and why no allowance was made in the foregoing computations for the retirement of the present national-bank notes. G o v e rn m e n t A c tu a ry . T r ea su r y D O c to b e r 17, 1913. epartm ent, (The following additional statement of Edmund D. Fisher, of New York, was filed with the committee for insertion in the record:) In response to the request of the committee to frame a section covering re funding bonds and their conversion into short-term obligations of the United States, I herewith submit my suggestions, which are premised upon the follow ing general principles: (1) That so far as practicable section 19 of the Owen-Glass bill remain as it stands. (2) That the Federal reserve banks buy gradually a sufficient number of 2 per cent bonds for conversion later into 3 per cent bonds to provide the desired element of flexibility in the present inert volume of circulation of the national banks; to make additional purchases of 2 per cent bonds now held to secure Government deposits or held by the public, all such purchases in the aggregate, however, not to be of so great a volume as to weaken the banking »power of the Federal reserve banks. (3) That such purchases will maintain the 2 per cent bonds at par, which should be done as a matter of good faith to the banks and the public on the part of the Government. (4) That all of the 2 per cent bonds purchased be converted into 3 per cent bonds. (5) That the 2 per cent bonds thus purchased and converted be in an amount equal to 35 per cent of the bonds now held for circulation, and, with those ex changed through other purchases, be interchangeable with 3 per cent notes of the United States. All of these will approximate $150,000,000. Notes are more# salable, for banking purposes, than bonds, having shorter maturities, and may* be used to protect the position of Federal reserve banks in the open money market and in international relations. (6) That the purchases by Federal reserve banks provided for in No. 5 hereof be compulsory during a 3-year period on the part of the Federal reserve bank if offered. That any further purchases by Federal reserve banks be op tional, and if purchased, be convertible into 3 per cent bonds or notes. (7) That purchases under the provisions of No. 5 hereof bear the privilege of being used to secure Federal reserve notes for a period of 10 years, with a gradual reduction after the tenth year of 10 per cent annually. That use as such security should be secondary to the use of commercial paper, which means, in effect, that it is not likely to be used at all, but may be used in emergencies. That any additional purchases should not have the circulation privilege. (8) That the Government should make some progressive attempt to redeem short-term notes and Government bonds, as from the surplus earnings of Federal reserve banks, to be paid into the Treasury, or from the action of sinking funds. S uggested A m e n d m e n t s H . It. 7837, M a in l y C overing Q u e s t io n S ta tes 2 P er C en t B o nds . to of U n ited Amend section 7 (p. 13. line 13) : Insert, after the words “ United States,” the words “ or notes into which bonds may have been converted as provided in section 19a of this act,” and eliminating, in lines 13 and 14, the following phrase: “ Said reduction to be accomplished under regulations to be prescribed by the Secretary of the Treasury.” Amend section 12: The following should be incorporated among the powers of the Federal reserve board: “ To supervise and regulate the purchase, sale, and conversion of the obligations of the United States as provided in sections 35 and 19a of this act.” Amend section 17, page 30, line 10, by inserting after the word “ act ” the fol lowing: “ or obligations of the United States bearing the circulation privilege, as provided by section 19a of this act.” By inserting on page 31. lines 3 and 4. in B A N K I N G AND CU RRE N CY . 3139 place of the words “ notes so paid out ” the follow ing: “ all Federal reserve notes.” By inserting on the same page, line 10, after the word “ notes,” the words: “ except such as may be secured by the obligations of the United. States, as provided in section 19a of this act.” Amend section 19 by inserting on page 35, line 5, after the word “ purposes,” the w ords: “ such 5 per cent to include such bonds previously deposited by such bank as may have been purchased by a Federal reserve bank under the pro visions of section 19a of this act.” Insert a new section to be known as “ 19a ” or “ 20,” if renumbered, worded as follows: S ec . 19a. I n v e st m e n t s in O blig a tio n s of t h e U n ited S ta t e s .—In consider ation of the privileges granted to them under this act all Federal reserve banks under direction of the Federal reserve board and in proportion to their capital shall offer to purchase from national banks 2 per cent bonds of the United States, except as may have been funded, as provided in section 19 of this act, as follow s: “ During the first year following the establishment of any Federal reserve bank any of the Federal reserve banks that may have been organized under this act shall offer to purchase under direction of the Federal reserve board from national banks at par an amount of 2 per cent bonds of the United States de posited by said national banks as security for circulating notes equal to 5 per cent of the total amount of bonds on deposit with the Treasurer of the United States by said banks for circulation purposes. Such Federal reserve banks shall in like manner offer to purchase an equal amount of said bonds, successively, during the second and third years following until an amount equal to 15 per cent shall have been purchased: P r o v i d e d , h o i c e v e r , That to the extent that the total volume of bonds provided to be purchased shall not have been offered, and to the extent that national banks, because of the conversion of 2 per cent bonds into 3 per cent bonds, shall be unable to supply the full 5 per cent each year the said purchases shall be extended from year to year until the full 15 per cent shall have been purchased. “After the full 15 per cent of 2 per cent bonds of the United States shall have been purchased, as hereinbefore provided, the Federal reserve banks may purchase, from time to time, under the direction and with the consent of the Federal reserve board, such 2 per cent bonds as may seem desirable at a price not exceeding par, but national banks shall not be compelled in any event to sell bonds unless they shall so desire. Such additional bonds as may be purchased in such manner shall in no event be used as security for circulating notes, but may be exchanged for 3 per cent obligations of the United States, as hereinafter provided. “ It shall also be the duty of all Federal reserve banks, under the direction of the Federal reserve board, to purchase in proportion to their capital, at such times and in such amounts as said board may direct, 2 per cent bonds of the United States not deposited by any national bank to secure circulating notes upon tenders and at a price not to exceed par. The total amount of such purchases, however, shall in no event exceed the aggregate amount of bonds not deposited to secure circulating notes at the time of the passage of this act. “All 2 per cent bonds of the United States, purchased by any Federal reserve bank from any national bank under the 15 per cent limitation, or from other holders without regard to said limit, as hereinbefore provided, or notes of the United States into which said bonds may have been exchanged, as hereinafter provided, shall be received at par as security for the issue of Federal reserve notes when presented by a Federal reserve bank for a period of 10 years after the establishment of any Federal reserve bank. After the expiration of such period such bonds or notes of the United States shall be received as security for Federal reserve notes on a basis of 10 per cent less each year until the 20th year, after which they shall no longer be accepted as such security: P r o v i d e d , h o w e v e r , That for a period not to exceed 90 days and upon a threequarter vote of the Federal reserve board on the application of any Federal reserve bank, the obligations of the United States shall be taken to secure the issue of Federal reserve notes; and further provided that when issued and secured in such manner the amount of such notes in circulation shall bear an charKe of 6 Per cent per annum, to be paid into the Treasury of the united States. slmiTh>e fore£°inK Provisions under which the obligations of the United States thoi« >e accePte(l from any Federal reserve bank as collateral security for ssue of Federal reserve notes shall be limited to the extent that, so long as 3140 B A N K I N G AND CU RRE N CY . they may be available, preference shall be given to notes and bills accepted for rediscount under the provisions of section 14 of this act. “ The Treasurer of the United States, upon application of any Federal reserve bank and under the direction of the Federal reserve board, shall ex change all 2 per cent bonds purchased, as hereinbefore provided, for 3 per cent bonds or notes of the United States of such maturities not exceeding one year, as may be determined upon by the Federal reserve board. The Treasurer shall also exchange 3 per cent notes for 3 per cent bonds, and 3 per cent bonds for 3 per cent notes, upon the application of any Federal reserve bank, and by and with the consent of the Federal reserve board. Any surplus earnings of Federal reserve banks, payable into the Treasury of the United States, as provided in section 7 of this act, shall be used, as available, to retire notes or bonds of the United States, or both, as may be determined by the Federal reserve board. Any or all of the 3 per cent notes of the United States, created by the conversion of bonds, as hereinbefore provided, shall be renewed by Federal reserve banks at their respective maturities for a period of 20 years after the organization of any Federal reserve bank. All such notes which may be outstanding at the expiration of said 20-year period, and which shall there after mature, shall be paid by the United States, when due, at par and accrued interest. “All Federal reserve banks shall, under direction of the Federal reserve board, buy or sell from or to each other, as may from time to time be necessary, obligations of the United States for the purpose of equalizing their holdings of such obligations in proportion to their capital.” In addition to the foregoing, and pursuant to the request of the committee, the following suggestions covering State and municipal investments are sub mitted : Amend section 15. page 27, lines 14 and 15. by eliminating the phrase “ and bonds issued by any State, county, district, or municipality ” and substituting therefor the following: “ and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipa tion of the collection of taxes or in anticipation of the receipt of assured reve nues by any State, county, district, or municipality of the United States; such purchases to be made in accordance with the rules and regulations prescribed by the Federal reserve boai'd.” It is important that the power of Federal reserve banks under subdivision B to invest in United States bonds and other securities be subject to the super vision and regulation of the Federal reserve board. It is important to have a check on the aggregate volume of such investments and a plan for their correla tion with the provisions of section 19a. (The following additional statement of Mr. T. Cushing Daniel, of Virginia, was filed with the committee for insertion in the record:) Mr. Chairman, before giving a digest of the testimony presented to your committee upon the pending bill I deem it only proper to state my qualifications for so doing. I am the author of Daniel on Real Money, published in 1911. and The Higli Cost of Living—Cause; Remedy, published in 1913. rThe author brings to the solution of this important economic subject years of experience in com mercial life, the study of law, familiarity with all the financial legislation of Congress on money, the debates and records of all international conferences on money since 1867, and the study of the leading economists on the subject, supplementing these advantages in recent years by a personal investigation of the monetary systems of foreign countries. The question of money is approached in two ways—by the banker on the one side as the loaner of money and creator of debts earning interest and by the much larger class of borrowers and users of money as a circulating medium with which they transact business. The latter class are the real workers and producers, that build up the national wealth of the country. Money to circulate and not money to Joan is what the industrial well-being of the world needs. The people are always at a great disadvantage when legislation on money is being considered and testimony being taken before the Banking and Currency Committee of Congress, as they are entirely unorganized and therefore not properly represented. On the other hand, the banking interests of the country are thoroughly organ ized, having back of them the power of money and all that that means as an B A N K I N G AND CURRENCY . 3 141 intelligent force to influence legislation. It will be readily seen from the records of the Banking and Currency Committee of the Senate that 95 per cent of the testimony has been presented from the standpoint, directly or indirectly, of the banking interests. It will also be seen from a careful review of all legis lation on money in this country that the banking interests have successfully opposed the issuing of real money by the Government in order that they could loan a substitute created by themselves. They all want the gold basis, for this wall always restrict real money to gold only and enables banking corporations to loan their credit substitutes for money to the people and thereby manufacture debts upon the borrowers upon which they draw interest, and require the principal paid back in money. I will now take up the testimony of the committee appointed by the American Bankers’ Association in Chicago, August 22 and 23, 1913, to represent said asso ciation before the Banking and Currency Committee of the United States Senate. I will first refer to the statement made by Mr. James B. Forgan, president of the First National Bank of Chicago, 111., page 26: “ Hence, as the chosen representatives of the banks, we claim that in a very real sense we represent the interests of all whose patronage the banks rely on for success, and especially the interests of the innumerable hosts of thrifty and desirable citizens who manifest their confidence in the banks by trusting them with deposits aggregating more than $20,000,000,000. Individually bankers do not experience the much-talked-of distrust of the banks. Rather they duly ap preciate the confidence evinced by the public by placing such an enormous line of deposits with the banks under their management, and they are keenly im pressed with the responsibility such a trust imposes upon them.” This statement is altogether misleading, as most of this amount is made up of debts created by the loaning of the banks’ credit to the borrowers, the amount being put to their credit as if it was actual cash deposited in the banks, when as a matter of fact they are debts owed by the borrowers to the banks. In other words, over $15,000,000,000 of these bank deposits were created by loans, with out the deposit of any cash. The total amount of cash held by the 25,195 banks June 14, 1912, was only $1,572,953,479. It is therefore plain that while the people have a comparatively small amount of money deposited in the banks, they are really hopelessly in debt to the banks for over $15,000,000,000. Mr. F organ . Mr. Wexler and Mr. Wade were the main spokesmen, and rep resented the 114 clearing-house associations and the 50 State bankers’ associa tions at the conference of the currency commission, American Bankers’ Associa tion. As Mr. Wexler was designated to give most of the testimony, as is shown by the following statem ent: “ Mr. R ey n o ld s . Mr. Wexler, who is going to remain here, can answer these questions as well or better than any of the rest of us.” It is therefore only necessary to give a digest of the testimony of Mr. Wexler, as the rest would only be a repetition, he having covered all the points and stated in detail the position of the banking interests. I quote as follows from the statements of Mr. Wexler: “ Mr. F organ . All I desired to do was to make the suggestion on behalf of ourselves that you ask the men who have prepared themselves to answer on these special topics, because we do not wish to give our own individual opin ions. I want you to understand that we are here, appointed by the conference held in Chicago and under the resolutions adopted by that conference. “ Mr. W ex ler . Might I be permitted to say a word? There are a number of gentlemen who have been designated to study and speak upon the points which Senator Reed and others are asking me about, and I feel that I am monopo lizing the opportunity, and I feel very much as if I might be excused. There are others present who can answer these questions as well or better than I can, and who have written and studied a great deal upon the very point you are raising now. “ Senator H it c h c o c k . One trouble is that we do not know in advance what subjects are—if they could be given to us we would know. “ Senator P o m e r en e . Mr. Chairman, I want to suggest that it is possible there a difference of opinion among these gentlemen on the different subjects. Mr. W ex ler . I am glad to say we are a unit.” It will be seen that the main object of the banking interests is to restrict r“'eJ*ssue Government money to gold. This enables them to issue and loan i tv their cheap credit substitutes for money. And as they can con trol the gold through the credit substitutes for money issued by the GovernS. Doc. 232, 63-1—vol 3 - — 77 3142 B A N K I N G AN D C U R R E N C Y . ment, redeemable in gold, the official management of the proposed banking and currency system when established wTill be merely nominal. Those familiar with the working of any banking system know that the men who own and control the money eventually manage the system. This has been well known by all lenders of money, even before the House of Rothschild reduced it to the broad maxim, “ Let us control the money of a country and we care not who makes the laws.” “ Senator N e l so n . I notice in the bill that provision is made for the redemp tion of these notes in gold or lawful money. That would mean, under our present system of currency, silver and greenbacks as well as gold, would it not? “ Mr. W ex leb . Yes. “ Senator N e l so n . D o you think they ought to be redeemable in anything but gold? “ Mr. W ex leb . I do not. I think that we should maintain religiously the gold standard that has been established in this country. “ Senator N e l so n . And then y o u would have these reserve banks provide fo r a gold redemption? “ Mr. W exleb . Gold reserve. “ Senator N e l so n . Gold reserve. Well, do you think 33 per cent is sufficient? “ Mr. W ex leb . I think 33 per cent would be sufficient; yes. We have sug gested that there should be 40 per cent. “ Senator N e l so n . Yes. “ Mr. W ex leb . We have raised it, because we believe that it would be better to make the notes so absolutely good and impregnable that we would rather err on the side of too much reserve than too little reserve.” “ Mr. W exleb (interposing). Well, Senator, there have been some accurate •calculations made on that particular subject by some of the gentlemen who are going to follow me, from which you may be astonished to see that there will not be any expansion at a ll; in fact, we are in considerable doubt, and we rather lean to the belief that it is going to bring about contraction if we do not have considerable amendment to this bill. In other words, we have not been able to find where we are going to get gold enough to carry the reserves that are necessary.” “ Mr. W ex leb . You can have all the power granted to you by law that you want, but when it comes to the exercise of that power the man you put the exercising of it upon has got something to say. Suppose that you had been required to sell $100.000,000 of bonds in the last six months for the purpose of bringing gold into this country. You could not have sold them in any civil ized country in the world, except at a tremendous discount, because all of the commercial nations of the world were begging each other for gold.” “ Senator R eed . Yes; I understand that. “ M r. W ex leb . Y ou co u ld n o t ta k e a s ilv e r n o te, fo r in sta n c e , a n d do it. “ Senator R eed . I want to know how y o u can get that g old into the central bank; that is what I want to find out; how it gets there. “ Mr. W ex leb . I will tell you how it gets there: The circulating medium that would be carried around in the pockets of the people, and so on, would be these bank notes; and the gold would gradually find its way into the vault of the central bank, because it would never pay out any gold. Nobody would ever pay out a gold note. We would never pay out any, nor would any bank anywhere, nor would the Federal reserve bank ever pay it out, except in the circumstance where a note holder came and said. “ I want this note paid in gold.’ He might have some particular reason for wanting gold in that case.” “ Senator R eed . N ow . if the faith and credit of this big institution ever be came seriously impaird, it might have to get up gold very quickly, might it not? “ Mr. W ex leb . Well, of course, if the people lost confidence in the note issue and everybody came to the window and demanded the amount in gold, it would require a general liquidation of credit of all the notes of everybody which the bank had, and the system would break down.” “ Senator H it c h c o c k . I am asking for enlightenment on a different line. You propose to inject perhaps $100,000,000 of credit currency into the money of the country. Is there any danger that the injection of that debased currency would tend to drive gold abroad? “ Mr. W ex leb . Just the contrary.” “ Senator H it c h c o c k . Y ou propose using these bank notes which you want to issue for the purpose of withdrawing the gold from the people and getting that gold into the banks? ” B A N K I N G AND C U R R E N C Y . 3143 “ Mr. W ex ler . Exactly. I think that with this system in vogue you would not see any more gold certificates and very few greenbacks. They would be the basis upon which th e‘credit would rest.” “ Mr. W ex ler . Senator, can you suggest a single individual outside of the Halls of Congress and the Senate—I ask you, is there one in Europe or Amer ica—who believes that a Government note is better for the purposes of the people than a bank note? “ Senator R eed . A single individual? “ Mr. W ex ler . Yes. “ Senator R eed . My dear friend, I would like to make a wager, if we could test it, that if you submitted it to a vote of the American people to-morrow, that 90 per cent of them would vote for the Government note. “ Mr. S iia f r o t h . 99 per cent. “ Senator R eed . And take it every time.” Mr. W ex ler . “ It is fundamentally unsound for the Government to issue a circulating medium.” Restricting money to gold is the only hope of the banks to continue to loan their credit substitutes for money—hence their firm and un alterable belief in gold. As further evidence of the opposition of the banking interest to the Govern ment issuing the currency of the country, I quote the following: “ Senator N elso n . This Government in paying out money—the only way the Government pays out any of its money it pays out for running expenses, its liabilities, and its interest, whether in greenbacks or anything else. In no other way can the Government put its money into circulation, can it? “ Mr. W ex ler . None that I know of. “ Senator N e l so n . If the Government wants to issue its money and get its money out into circuation, beyond what is necessary to pay its current expenses, it can only be done by allowing borrowers to deposit their commercial paper with the Government. “ M r. W ex ler . Yes; a n d get c u rre n c y f o r it. “ Senator N e l so n . And the moment they do that has the Government not gone into the banking business? “ Mr. W e x l e r . Absolutely. “ Senator N el so n . And you c a n not get the Government’s money in to circula tion any other way? “ Mr. W ex ler . N o, s ir ; none in the world. “ Senator N e l so n . I s it not also true that the Government can issue any amount of legal paper money, but the question will always arise, How are you going to get that money into circulation? “ Mr. W ex ler . Yes, sir. “ Senator N e l s o n . And the only way the Government can legitimately put its money into circulation is by the payment of its current expenses, of its running expenses and obligations; if anything more is paid out by the Government it has to be done by a system of credits, by banking. I can go to the Government and get my salary paid every month—that money goes into circulation—so can every other employee of the Government; so does the bondholder get his interest. But if any more Government money is wanted in circulation it can only come by application of the borrower to get that currency, and he must put up some security for it. “ Mr. W ex ler . It can be done in no other way. “ Senator N e l so n . Because i t stands to reason that the Government would not issue its currency without some consideration; and the moment it does that—-the moment the Government does that—it would perform one of the functions that is implied in this regional reserve bill. “ Mr. W ex ler . Absolutely.” Mr. W ex ler . Y ou have put out $700,000,000 of this *fiat ’ money and taken back your bonds and retired $700,000,000 of bank-note circulation. The next questions are: What kind of a note have you given me, how are you going to when are you going to meet it, are you going to pay it in gold, will we set it when we want it? If you will say what you are to pay for it, can you pay it? You have to I,r®v'<Ie all that kind of machinery.” Senator H it c h c o c k . Well, it im p re s s e s m e that there is some powerful eason why the banks of the country want to own this bank. 3 144 B A N K I N G AND CU RRE N CY . “ Mr. W ex ler . The only reason is because they believe that they are the proper people to own it. They believe they are the proper people to manage it. “ Senator H it c h c o c k . Certainly they can not be attracted by the 5 or 6 per cent interest. “ Mr. W ex ler . N o. T h e o n ly th in g t h a t a t t r a c t s th e m is th e se n se o f s a fe ty in h a v in g a c e n tr a l re s e rv o ir o f c re d it. “ The C h a ir m a n . Y ou mean giving stability to the banking sy ste m ? “ Mr. W ex ler . Yes. “ I want to say this to yo u : That the banking business of to-day is one of the hardest, most trying businesses that a man can be engaged in, for the reason that the banker has a tremendous demand liability with absolutely nothing to meet it with except 25 cents on the dollar. All that the banker wants is the opportunity, the privilege of being able to go somewhere with these time obligations he has and rediscount them so that he can meet the de mand obligations when the public wants their money. “ Senator N e l so n . He wants a reservoir of credit to go to? “ Mr. W ex ler . That is a ll we ask. “ Senator H itchcock . But he does not want to go to the Treasury? “ Mr. W exler . We do not care; but why don’t you go into the meat-packing business or the farming business? It would be just as legitimate as going into the banking business. “ Senator N e l so n . Allow me to make another suggestion to you right there. You bankers are nothing but middlemen; you do not add anything to the capital of the country. All additions to the capital of the country come from the farmers, who produce the crops, and from the manufacturers, who take the raw products, the material, and increase its value. That is the only way In which capital is increased, and you are simply the instrument to place that capital. “ Mr. W ex ler . We are merchants; dealers in credit. “ Senator N e l so n . It is the farmers and manufacturers who make the capital of the country, who add to it, and increase it. The bankers themselves do not add a single dollar to the capital.” “ Mr. W ex ler . Senator, let us see if we can not get this thought directly in the minds of the committee: It is recognized that the gold is the standard of ultimate redemption and the yardstick of measurement for the whole world. It is recognized that that is the best money. “ Senator R eed . Yes. “ Mr. W ex ler . And i t is th e b a s is o f c re d it. “ Senator R eed . Yes. “ Mr. W ex ler . If i t is th e b a s is o f c re d it, th e n c re d it c a n e x is t o n ly so f a r as t h a t gold -rests in a c e r ta in m a s s in a c e r ta in p lac e, s u s ta in in g t h a t c re d it. “ Senator R eed . I s that correct? “ Mr. W ex ler . Yes, sir. “ Silver ought to be a subsidiary coin. If you have this bank note your silver certificates would not be necessary at all. This bank note can supply the place of the silver certificate and of the greenback, and then you have nothing but gold, the ultimate money of redemption, and that would be ideal.” Under the operation of section 29, the parity clause, this condition would be brought about: The banks, by controlling the gold money and creating artificial currency—“ bank credits”—would not only control the so-called Government banks, but by controlling the credits of the country would have control of all its affairs. J. P. Morgan stated the whole case in a few words. He said, “ Credit is an evidence of banking, but it is not the money itse lf; money is gold, and nothing else.” “ Question. If a man controls the credit of a country, he would have control of all its affairs?” “ M r. M organ . He might have that, but he would not have the money. If he had the credit and I had the money—the gold—his customers would be badly off.” Under operation of the bill that passed the House of Representatives and now being considered by the committee, the banks would control both the gold and the credits. The people would be the customers, and, as Morgan admits, would be badly off. The bankers would control not only the foundation—gold— but the superstructure of credit and own the system. Banks desire all Government notes retired in order that they may be replaced by the cheap substitutes of bank credits which the people are compelled to borrow. 3 145 B A N K I N G AND CU RRE N CY . “ Mr. W e x l e r . If the bill is so amended that it will strike favorably that great number of banks throughout the country, it may never become necessary to call for more than the original 5 per cent, which would be a distinct advantage, as it would enable the bank to accumulate much more rapidly the 20 per cent surplus required under the b ill; it would enable them to make a distribution of the sur plus earnings of the various contributing banks over and above the dividends which you have named to be paid upon the stock, which in itself is not deemed to be adequate, but it would enable a larger distribution to the Government as its share of the profits to be applied to the retirement of the greenbacks.” “ Senator R e e d . I am speaking about fixing that part of it, assuming that it can be fixed. “ Mr. W ex ler . A number of experienced bankers might be able to set down a figure exactly by which some system could be evolved of that kind, but it is so contrary, in our opinion, to sound finance, that we never conceived the idea of having the Government in any way mixed up in the banking business. We have no other machinery for helping ourselves. I will state our case right now. We borrowed such money as the law allows us, and we are using it to move our cotton crops, our rice and our corn and the various business that comes through our port. I can not get any more; I have not the right. “ Senator R e e d . Suppose you were given the right. I do not want you, i n answering my questions, to answer whether you think that the present system just as it stands would be adequate, but whether, since you gentlemen all, thus far, seem to want a central bank—one power—how would you like to have the Government of the United States, under a plan similar to the one now existing, simply to furnish money when it was needed to the groups of banks? “ Mr. W e x l e r . I would be very much opposed to it, Senator.” * * * * * * * “ S e n a to r R eed . Y ou w a n t to issu e th e m o n ey ? “ Mr. W e x l e r . Surely. We want to issue the paper, the circulating medium; we do not want to issue money. “ Senator R e e d . Y o u want t o issue p a p e r . Commei'cially we c a l l it money and it goes as money. “ Mr. W e x l e r . Certainly. It is highly advantageous.” * * * * * * * “ Mr. W e x l e r . Absolutely. The Government has absolutely no money except what it takes away from the people; and under the principles of our party they ought not to take one cent more than they actually need. That is the principle of the Democratic Party, with which I am affiliated. Consequently the Govern ment has no business with a lot of money to be scattered around. If it takes any more by taxation than is just and proper for running the Government, it is a wrong principle. But we have gone along many years without any trouble. You can have a war any time that will cost this country a thousand million dol lars. Where will you get the money? You would have to go around and get the bankers to buy your bonds. Do you want to be behind another thousand million of notes, with the possibility of having to sell a thousand million of bonds? Would you bring the “-hole structure down at one time? You must look to the future’’ “ S e n a to r R eed . B u t I th in k t h a t is a sid e . I f you h a d t h is g r e a t c e n tr a l bank a n d th e G o v e rn m e n t w a s lia b le to go dow n, d o you th in k t h a t b a n k w o u ld s ta n d ? “ M r. W ex ler . A b so lu te ly , lik e a rock. “ Senator R e e d . But you think now, if the banks were to put this money into the hands of the Government, that both banks and the Government would go down together? “ Mr. W e x l e r . I do, emphatically; just as certain as that the sun rises. “ Senator R e e d . What do you think about the creation of these enormous financial powers outside of the Government, in times of peace? “ Mr. W e x l e r . That is all right. We should dominate the financial business of the world. “ Senator R e e d . Would not they f ix the discount and the rates of interest for the entire country? “ Mr. W e x l e r . Yes, sir. “ Senator R e e d . Would not that be a powerful factor? “ Mr. W ex ler . Yes; to t h a t e x te n t. “ Senator R eed . A n d you think that ought to be the c a s e in the R e p u b lic ? “ Mr. W ex ler . Yes, sir. “ Senator R eed . If it put its power in behind a great railroad------ 3146 B A N K I N G AND CUK REN CY. “ Mr. W exler (interrupting). If the business of the country was going too fast, and everybody was expending too much, and buying too many automobiles, and every man wanted to buy his neighbor’s land and build houses, then, they raise the discount rate and cause a slowing up. On the other hand, if business got dormant and dull and needed stimulation put the rate down and stimulate business. “ Senator R eed. In other words, they would be the great regulator of all the commerce of the country? “ Mr. W ex leb . Absolutely. “ Senator R eed . They could make business prosperous, or they could shut down on it? “ Mr. W ex ler . They c ould, yes, to some extent they could do that. “ Senator H it c h c o c k . Y ou c a m e h e re to -d a y p ra c tic a lly w ith th e b a n k in g interests of the United States u n ite d , re p re s e n te d by a sm a ll b o d y ? “ Mr. W ex leb . Precisely.” As these gentlemen, when asked by members of the committee for reasons to substantiate the banking system that they advocated, would invariably refer to the European banking systems as a precedent, in order that the committee may fairly weigh these statements, I will refer to page 103 of the hearings, where Mr. Wexler stated: “ However, I have not made a study of the European systems lately, and I am hardly in a position to make any definite statements in regard to them.” Also the statement of Mr. Reynolds, on page 314: “ We gen tlemen who have appeared here before you appear more in the attitude of bank ers than we do in the attitude of experts from the standpoint of currency or of money.” BANKS WILL CONTROL ADMITTED. “ Senator R eed . D o you mean to tell me that you or any other man, not more selfish than the average man, but just using the ordinary business sense, will not get’three men that are going to side with the banks rather than with the Government in these matters? “ Mr. W ex leb . I certainly do not, unless the Government were endeavoring to impose something that we did not believe was right. “ Senator R eed . I do not mean that they are going to be bad men, but I am talking about who is going to control in that board of directors. Who is going to control? “ Mr. W ex ler . The people that have put the money in the bank, who have in vested their money, are going to control, and they ought to control. “ S e n a to r R eed . T h e b a n k s a r e go in g to c o n tro l? “ Mr. W ex leb . Yes, sir; there is no question about tliar.” GOVERNMENT NOTE NOT AS GOOD AS A BANK NOTE. Showing the mental attitude of these men and their want of a proper appreci ation of the sovereign power of this Government, not realizing that money is a creation of law-----“ Senator S h a f r o t h . Oh, yes; you had an enormous amount issued, and they had been issued during war times, and the stability of the Government was then questioned—a good many reasons. “ Mr. W ex ler . Senator, that can happen again. What has happened can happen; and, Senator, a Government note, however strong the Government may be, and however confident the public may be that the note will ultimately be paid, it is not as good as a bank note. Why? Because the holder of the note wants to know, not that the man is good and can ultimately pay, but that he can pay upon demand; that is the fundamental thing.” Mr. Chairman, if a digest of the hundreds of pages of testimony presented by those directly or indirectly representing the bankers of this country before your committee were made, no more correct summing up of their position could be had than here given by the men representing practically every bank of any size in the United States. Most of the time of your committee has been occupied and the attention of its members diverted by the discussion of the relative merits of a regional or a central bank and who shall control them. This does not really concern them. They know full well by owning and controlling the money they will eventually control the management and consolidate these regional banks into a central bank by bringing about conditions that will make it necessary. I therefore consider 90 per cent of this testimony a cloak of concealment of their real purpose and plan to control the money system. First of all, they demand the so-called gold standard shall be maintained. B A N K I N G AND CURRENCY . 3147 Second, the issuing of an asset currency redeemable in gold. Upon this basis the bankers can force their credit substitutes for money on the people and control the currency system. They will have little trouble in getting the officials of these so-called Government banks to fall in line with their policies. It is therefore useless to discuss the relative merits of a regional or a central bank, or who shall appoint their officers. The issue now joined is whether the Government will exex-cise its sovereign power and issue real money or a credit currency redeemable in gold. If it issues full legal-tender money, it can regulate the quantity thereof in the interest of all the people and absolutely control the money system of this country. If it issues debts redeemable in gold as a currency to be loaned banks at one rate of interest in order that banks may charge a higher rate to the people, it becomes an indefensible outrage, and the voters will soon repudiate the whole system. In the name of the people I desire to enter a protest against an asset cur rency of any kind. Under this system a bank can create a debt against a bor rower by simply loaning the bank’s credit. It can then take this debt and redis count it for another credit substitute for money issued by the Government; and there has not been one real dollar created in which the debts can be paid. Under the operation of this so-called gold standard and the loaning of bank credits as a substitute for money 90 per cent of the people are now in debt, and as soon as they realize a system has been established still further pyramid ing debt upon them by the loaning of another credit substitute for money fur nished by themselves—the Government—it will become a political issue, and the people will soon settle it. The following section of the bill turns dollars into debts, restricts real money to gold, and puts the money system of the United States absolutely in the power of the banks, money lenders, and manufacturers of debts. This last section in the bill was offered as an amendment on the floor of the ' House of Representatives and a large majority voted for it and attempted thereby to pledge the 96.000,000 people of this country to a pernicious economic fallacy and a thing that does not exist—the so-called gold standard of value. I quote section 29 (H. It. 7S37), passed the House of Representatives Sep tember 18, 1913: “ S ec. 29. That all provisions of law inconsistent with or superseded by any of the provisions of this act be, and the same are hereby, repealed: P r o v i d e d , That nothing in this act contained shall be construed to repeal the parity pro vision or provisions contained in an act approved March fourteenth, nineteen hundred, entitled ‘ An act to define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes.’ ” PARITY FRAUD THE LAST ATTEMPT TO FOOL THE PEOPLE. In the careful investigation I have made for 30 years of the money question I find that the people have been imposed upon by those constructing and de veloping the money system by assuming false premises and clothing them in technical words and sophistry, and then having them indorsed by men in high official positions and with the prestige of so-called financial authorities. There is no more conspicuous example of this than is found in the injection of the metal gold into our money unit or dollar, trying to make the people believe that gold, the metal, is the unit of value instead of the dollar. The 25.8 grains of gold is not the money unit of the United States, nor is it in any sense the standard of value of the purchasing power of our money unit, the dollar. This false assumption is based upon the exploded theory that there is intrinsic value in gold, and denies the universally recognized fact that the value of the dollar, like everything else, is regulated by the law of demand and supply. There fore it is the number of dollars or money units in the monetary system that fixes the value or purchasing power of each unit and constitutes the standard of value. The United States mint was established by the act of Congress April 2. 1792, arul it provides in section 9 “ That there shall be from time to time struck and coined at the said mint coins of gold, silver, and copper of the following de nominations. values, and descriptions, viz, eagle, each to be of the value of 10 dollars or units and to contain 247 4/8 grains of pure standard gold. 3 148 B A N K I N G AND CU RRE N CY . “ Dollars or units each to be of the value of a Spanish mill dollar as the same as now current. “ S ec . 20. A n d b e i t f u r t h e r e n a c t e d , That the money of account of the United States shall be expressed in dollars or units, dimes or tenths, cents or hun dredths, and mills or thousandths.” The dollar or money unit is the creation of the sovereign power of the people and binds them and their property to protect its value and to redeem it at par. In other words, it is a legal tender for all things on sale, all services for hire, and all debts, public and private. This means that 94.000,000 people in the United States stand ready to receive it and redeem it at 100 cents on the dollar. In fact, its money value, which is its purchasing and debt-paying power, would be the same if it did not have one grain of gold in it. To say that the equality, validity, or purchasing power of the full legaltender dollar of the United States redeemable all alike in $134,000,000,000 of the national wealth, including all the gold and silver that we now have in the United States or will ever have, and the service of 94,000,000 of the most enter prising and productive people in the world, depends for its equality or parity upon the gold in the dollar is an absurdity only surpassed by the miserable subterfuge that $150,000,000 held as a reserve in the United States Treasury maintains the parity or equality of all our dollars. So long as it is a money unit or dollar the value (purchasing power) must necessarily be the same. It is equivalent to saying if these $150,000,000 set aside in the Treasury were to go into circulation and take the place of bank notes there would be a different purchasing power in our money units or dollars. Is the 25.8 grains of gold or the dollar the unit of value? A simple answer uncovers and exposes their sophistry and deceit. In order to annihilate this parity fraud, which has exploited the people of this country out of untold millions and is now being used by the promoters of the Money Trust to fasten upon the United States the most infamous money sys tem ever conceived to ruin this Republic, and to expose this damnable heresy, it is only necessary to ask, “ What constitutes the standard?” Is it the 25.8 grains of gold that constitutes the dollar, or money unit, or the act of sov ereignty which creates the money, and says $1 is the unit of value? If our mints were closed to the coining of gold you could weigh out 25.8 grains of gold and six months later it would not be worth 50 cents; yet the purchasing power or value of the dollar, or money unit, would be unchanged. But when the sovereign power of the United States says this is $1, the money unit of the United States, and pledges $134,000,000,000 of national wealth and the re sources of 94,000,000 people for its redemption at par, or 100 cents in the dollar, you have the best and soundest money unit in the world without one grain of gold in it. These money schemers would make this country continue to believe that the 25.8 grains of gold was the money unit and standard of value in order to make permanent their gold-basis scheme and use their credit substitutes for money. To make it more explicit and so plain that no man can refute it: The lawful money of the United States is created by the sovereign power of its people, each dollar, or unit, is complete in itself, each has the same value, the same purchasing and debt-paying power—their equality or parity is neces sarily the same, as each has its redemption in all the property and service of the people without discrimination. The parity or equality is cemented together by an unlimited and universal demand for dollars, because they do the work of dollars. How can there be any difference between the lawful dollars of the United States, all doing the same work, and having the same purchasing and debt-pay ing power? The demand for the dollar of the United States is the greatest ever known in the world, bringing a premium over gold in Europe. Ninety-four million people in this country place an incessant and unending demand upon them for their services and support. Over GO.OOO.OOO.OOO of debts demand them for payment. The perpetual call for interest demands them with out end. Twenty-five billions of internal commerce demands their services. Europe demands hundreds of millions of our dollars to settle her balance of trade with the United States. I would ask these jugglers of words, “ Is not this demand sufficient to preserve the parity or equality of our dollars?” For men of average intelligence, claiming to be the representatives of the people, to deal in such unmeaning nonsense and transparent sophistry upon this vital question, hoping that their high official positions will induce the B A N K I N G AND CURRENCY . 3 149 honest credulity of the people to accept it, is nothing short of criminal. There is no such thing as intrinsic value of gold, and the value of gold, like every thing else, depends upon its quality and the demand for it, which, under economic laws and conditions, should be a legitimate demand. There is to-day nothing which is so supported in, its artificial and unjustifiable value as gold. There is a legitimate demand in the arts for only one-third of the supply of gold. This leaves an annual surplus of two-thirds, the value of which, when demonetized, would shrink 50 per cent of its present value. In addition to this, there is an accumulated stock of over $7,000,000,000 of gold held stored awey in the vaults and banking institutions of the world, a dead and useless economic waste and burden upon the people. It is about time for the people of the United States to have a lucid interval and close the mints of this country, forever destroying the metallic basis of redemption for credit money—the economic curse of this Republic. Section 29 is the most consummate fraud in the bill. It is an attempt on the part of this incorporated Money Trust to perpetuate in its own interest the attempt to establish the so-called gold standard in the act of February 12, 1873, to which this act of March 14, 1900, referred. Since the words “ intrinsic value of gold ” and the “ ratio of gold and silver ” can no longer be used to divert and mislead the people; the advocates of “ banks of issue ” have made their last play to protect the false basis of gold redemption by the misuse of the work “ parity.” I therefore hope the reader will see the vital importance of exposing this attempted fraud upon the people. It should be first impressed upon the mind that a dollar is not a debt, but a redeemer of debt, or that one dollar should not be redeemed in another dollar. This idea is an invention of the money lender—a reversal of all sound ideas of finance that ever existed. It is based upon the absurdity that a dollar is a debt. “A dollar has never been a debt. It is not made for redemption, but is made to be a redeemer.” It has been well said, “ If the paper dollar is treated as a debt, then also the gold dollar must be treated as a debt, else, the one dollar is not at a parity of function with the other dollars, then one has a quality that the other does not possess, and the two dollars are not treated on equal terms. Then, there is no sound and stable money unless every unit is legally equiva lent to every other unit. A perfect money unit or dollar can be created only by an act of sovereignty impressing upon it the great law of a legal tender. Gold bullion, when denied the right of coinage and legal tender, will be mere useless property unless used in the arts. I ask the people of the United States how much longer will they allow themselves to be fooled and impoverished by this money power making them believe that dollars are debts, redeemable and convertible into each other? When the money power is herein spoken of, it means the European moneyed interests as led by the Bank of England, the Rothschilds and their American agents, August Belmont & Co., J. P. Morgan & Co., et al., and their Hebrew associates in the United States, the Clearing House Association of New York, established in 1S53, and the American Bankers’ Association, an organization of practically every bank of any size in the United States. This is the money power that controls the circulating medium and money system of this country and the business future of the American people. This money power dominates the United States Treasury, influences the appointment of its most important officials, and those who are efficient rarely fail to receive more lucrative appointments in banking corporations. Senator John T. Morgan, of Alabama, after many years of honorable service in the United States Senate, made the following statem ent: “ Never in the history of any government has such treatment of laws been found as in the despotism of the Secretaries of the Treasury, in conjunction with the national banks to trample out every law that stood in the way of their peculiar and pet theories and their peculiar monopolistic advantage. * * * ” They pay no regard to the statutes. Construction will do anything with the rights of any man who will submit to it. The worst tyrannies that have ever been in this world were the results of false construction, eating, like a cancer, from point to point and step by step, sapping nerve after nerve of vitality, until it finally attacks the citadel and destroys the victim. Let us have the truth, the honest truth. If constructions to be made, let them be made in favor of the people and not against them ; in favor of right and life and liberty, and not in the direction of tyranny. 3 150 B A N K I N G AND CUK REN CY. TTJBNING DOLLABS INTO DEBTS. Up to this time all legislation on money had been dominated by the banking interest, but the money interest realized that there was a large majority in Congress which was opposed to discontinuing entirely the further use of silver by the Government as money; so they determined to make the Democratic Party their scapegoat and tool in order to put over the next financial conspiracy upon the people of the United States and still further strengthen the hold and control of banks of issue over the circulating medium of the country. There never was a more comprehensive plan put in operation by the banking associations to coerce Congress to pass this bill. In this fight for the unconditional repeal of the silver act the organized bank ing interests made a direct attack on the silver and silver certificates in order to discredit them, the object of the bankers being to stop any further addition of money issued by the Government in order that banks of issue might substi tute their notes and strengthen their monopoly over the money system of the United States. Space will not permit me to describe the loss and suffering brought upon the people, which covered a period of about six years. I will now come to the next step taken by this association of the banking interests to absolutely discredit and convert into debts $350,000,000 of money that had already been issued by the Government. In order to do this I would call attention to the law of 1890, which provides: “ S ectio n 1. That the Secretary of the Treasury is hereby directed to pur chase, from time to time, silver bullion to the aggregate amount of 4,500,000 ovjnces, at the market price thereof * * * and to issue, in payment for such purchases of silver bullion Treasury notes of the United States. “ S ec . 2. That the Treasury notes issued in accordance with the provisions of this act shall be redeemable on demand, in coin, at the Treasury of the United States, and when so redeemed may be reissued.” After forcing through Congress the act stopping the coinage of silver, they put into operation what has been aptly termed “ the endless-chain process.” John G. Carlisle, who had been Speaker of the House of Representatives and a life-long opponent of the so-called gold standard, had stated (I quote him) : “According to my views of the subject, the conspiracy which seems to have been formed here and in Europe to destroy by legislation and otherwise from three-sevenths to one-half the metallic money of the world is the most gigantic crime of this or any other age. The consummation of such a scheme would ultimately entail more misery upon the human race than all the wars, pesti lences, and famines that ever occurred in the history of the world.” Cleveland appointed Carlisle Secretary of the Treasury, and the administra tion, through influence brought to bear by the money interest, determined to increase the public debt by the issue of bonds, and simultaneously to discredit and turn into debts $350,000,000 of United States Treasury notes and silver cer tificates, and use them to force a bond issue for the benefit of the banks as a basis for the increased issue of national-bank notes. The writer has in his possession conclusive evidence of the following statement: Although the law provided that Treasury notes should be redeemed in coin at the discretion of the Secretary of the Treasury, the whole object of the law being that the Secretary should use the option in the interest of the people and redeem the Treasury notes in either gold or silver, using that which was most convenient at the time, the Bank of France without exception has so exercised this option. President Cleveland used his influence over Carlisle to get him to construe the law so that he should redeem these United States Treasury notes in gold. Carlisle was an able lawyer and familiar with all the statutes bearing on the subject of money, was also aware of the motives of those who were demanding such an illegal construction of this law; he was so much exercised and con cerned in the importance of such action that he requested two United States Senators, his closest friends, to confer wirh him. One was Senator Blackburn, of Kentucky; the other Senator Daniel, of Virginia. The conference was held at Secretary Carlisle’s K Street residence, he having an apiniintment to see President Cleveland at the White House that night. These two Senators urged Carlisle to adhere to the law that plainly stated that the Treasury notes issued in payment ?or silver bullion should be redeemed in coin, either silver or gold, at the option of the Secretary of the Treasury, and that for him to do other wise would leave the United States Treasury, the fiduciary department intrusted with the people’s money, at the mercy of the moneyed interest. Carlisle left B A N K I N G AND CU RRE N CY . 3151 the house, saying that he would not relinquish the option to redeem tnese Treas ury notes as provided in the law and allow the holder of these notes to demand gold in payment for them, which would leave the treasury of the United States in an absolutely defenseless condition and enable the holders of these notes to raid the gold reserve of the Treasury. Senators Blackburn and Daniel waited for him to return from his interview with Cleveland at the White House. He had evidently had a long and trying conference, and it was midnight before he returned. He met his friends, evidencing the greatest humiliation, and said that Cleveland had induced him against his own convictions to redeem these Treasury notes in gold. Carlisle looked as if he had sold his birthright. The unthinking can not realize the far-reaching significance of this decision. It was the first time in the history of the money of the world that a dollar was decided to be a debt redeemable in another dollar. The direct result was the conversion of 350,000,000 Treasury notes, or dollars, into debts redeemable in gold. It opened the door of the United States Treasury to the planned attack on its gold reserve and forced an issue of 262,000,000 of bonds on the taxpayers in a time of profound peace. I would impress upon this committee the vital importance of this action, as it is the absolutely false and indefensible premise upon which the banking interest of this country, in section 29 of this bill (H. R. 7837), that passed the House of Representatives September 18, 1913, predecates the baseless and fraudulent assumption that it is necessary, in order to maintain the equality, or, as they term it, the parity of our dollars, that we should construe all other dollars in our currency system to be debts redeemable in gold. and. in order to deceive the people, they have created a gold reserve of $150,000,000 in Treasury to be used in maintaining, as they claim, the equality or parity of our dollars. Is there a sane, honest man who will contend for one moment that the in tegrity of our currency system and the equality, parity, or purchasing power of the American dollar are maintained in their value by $150,000,000 of gold (ostensibly held as a reserve, yet which can be raided and withdrawn by the money interest at any time), and not by the $134,000,000,000 of national wealth and the services of 96,000,000 people in the United States pledged for its re demption. Apply the universal law of demand and supply to gold as a test and the socalled “ gold standard” of value is destroyed. The tables of the Report of the Director of the Mint, 1912, show for the gold in the world an annual increase from 1900 to 1912 of only 6 per cent, while the demand created by the in crease of population and wealth in the world has run far ahead of this percent age, that of the United States being 17 per cent for population and 42 per cent in wealth. This demonstrates that although the demand has so greatly increased the value of gold itself, as measured by other things, has decreased 40 per cent to 50 per cent in value or purchasing power. ISSUING OF CREDIT SUBSTITUTES FOR MONEY AND THE RTSE TN PRICES. Up to a very recent period the leading economists in the great endowed col leges of the country were holding that the increase of gold was the cause of the rise in prices. President Taft was misled by the statement, and said in his speech before the Republican club in New York, February, 1910: “ The reason for the rise in the cost of necessities can easily be traced to the increase in our measure of value, the precious metal gold.” The advocates of the so-called gold standard of value can no longer conceal or deny the fact that the enormous inflation of bank credits has caused a much greater rise in the general level of prices. This inflation is conclusively shown in the report of the Comptroller of the Currency, 1912. The so-called banking power of the United States, chiefly loans of bank credit, shows an inflation of $19,000,000,000 of bank credits since 1890, while the total increase of all kinds of money, including gold, in our monetary system has increased only $1,200,000,000. It is now estimated that the banking corporations of the world have issued about $60,000,000,000 of these bank credits as a substitute for money. With only $7,000,000,000 of gold in the Monetary systems of the world, the absurdity of contending that gold is the standard of value is now too apparent to be concealed any longer from the People. 3 152 B A N K I N G AND CU RRE N CY . “ I would ask these gentlemen who say they believe that 25.8 grains of gold fixes the purchasing power of the dollar and constitutes the standard of value in the United States to answer the following questions: “ First. If the $750,523,267 of nonlegal-tender bank notes—credit money— were withdrawn from the money system of the United States, what would be the effect upon values? There is only one answer: Any man of average intelli gence knows there would be a great contraction of the circulating medium, a consequent fall in prices, a tremendous increase in the purchasing power of the dollar, ending in a money panic. “ Second. If the $727,886,731 of silver currency now debts redeemable in gold, and the $344,221,741 of nonlegal-tender greenbacks were withdrawn, what would be the result? A money panic would follow sufficient to create financial ruin and repudiation throughout the country and the present standard of values would be absolutely destroyed. “ Is there a man who still believes that if the silver currency, greenbacks, national-bank notes, all nonlegal-tender currency, were taken out of the money system of the United States there would be no fall in prices of other things, and that 25.8 grains of gold would still fix the purchasing power of the dollar or money unit? If so, no other term would describe him than a ‘ gold mono maniac.’ ” It is conclusively shown in Daniel on Real Money that gold is an extra bur den and a handicap on international trade and is not necessary in the settlement of trade balances. Lord Goschen admits it, and sta tes: “ Trade balances and exports are not paid for in gold, but the money of the country adjusted to the currency of the debtor country, or settled by the interest-bearing securities of same.” Present condition of the gold supply (Report Director of Mint, 1912. p. 689) : “ THE MOVEMENT TO INDIA. “ The persistent absorption of gold by India which began to occasion com ment in the early part of 1911 has become decidedly the largest factor in the Question of future banking reserves. The annual production in the world has increased since 1908 from approximately $442,500,000 in that year to perhaps $470,000,000 in 1912, or somewhat less than $30,000,000. The economists of the world have been busy tracing the effects of these increasing supplies upon prices and forecasting the influence of future suppliea Meanwhile the net imports of gold by India have risen from $56,346,699 during the British fiscal year ended March 30, 1908, to $134,409,087 during the fiscal year ended March 30, 1912. For five years they have been as follows: 1907-8_________________ $56,346,699 1910-11______________ $90,270,816 1908-9______________ 14,130,583 1911-12______________ 134,409,087 1909-10______________ 81,017, 584 • • * * * • • “ The importations of India last year plus the world’s industrial consumption equaled fully one-half of the world’s production, leaving perhaps $210,000,000 or $220,000,000 for monetary use. At that rate bank reserves would scarcely gain more than 50 per cent in the next 10 years.” The annual increase of gold during the last three years has been only $9,688,400 for the whole world. Pyramiding more debts and currency issues redeemable in gold as the money of ultimate redemption is the monumental fraud and absurdity of the century. (Thereupon, at 3 o’clock p. m., the committee adjourned its hear ings sine die, and proceeded in executive session.) SUPPLEM ENTAL H E AR IN G . MONDAY, OCTOBER 27, 1913. C ommittee on B a n k in g and C urrency , U nited S tates S enate , Washington, D. G. The committee assembled at 11.40 a. m. Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed, Pomerene, Shafroth, Nelson, Bristow, Crawford, McLean, and Weeks. The C h a ir m a n . Prof. Jenks, the committee desire you to explain the principles of the proposals that you have concerning a banking and currency measure. Senator N elson . A n d you m igh t g iv e us a synopsis o f each section o f your proposed bill. FURTHER STATEMENT OF PROF. JEREMIAH W. JENKS, OF NfeW YORK UNIVERSITY. Prof. J e n k s . That is, the changes that I had suggested ? Senator N elson . Yes; and you may go on in your own way. The C h a ir m a n . Senator Bristow, you might suggest what you had in mind with reference to Prof. Jenks. Senator B ristow . Yes. As I understood, Prof. Jenks, from the conversation I had with you this morning, you have, in compliance with our request to submit your suggestions as to a Federal reserve bank with branches, taken the pending bill and amended it so as to conform to your notion. P ro f. J e n k s . Y es; that is it. Senator B ristow . Instead of submitting a separate and independ ent bill. P ro f. J e n k s . Yes. Senator B ristow . And I think it would be well for you to first pro ceed to explain the changes you recommend, and then make whatever comment you think would be desirable upon them. Senator N elson . Would it not be better for Prof. Jenks to give an outline of his plan first, and then go into the details ? Senator R eed. By all means; that will give it to us in plainer form. Senator N elson . Yes; give us your plan in outline first. ■ P r°f- J e n k s . It seems to me that there are two or three principles that ought to be considered as fundamental in preparing legislation lor any type of a monetary system of the United States. If we are going to have anything like a system, it is essential that there should 3153 3 15 4 B A N K I N G AND CUK REN CY. be a unified interest of the different banks that make up the system, in order that there should not be competitive bidding for business, one against the other, and competitive bidding for reserves in times of emergency, such as we have had under our present system. It has ordinarily been supposed that the chief weakness of our present system is the fact that there is no unified interest, but that there is this continual bidding against one another. On that account I have thought it wise to provide for a central bank. Furthermore, if we are going to have this central interest, we need some unified management of the reserves; at any rate, these two provisions—a unified interest and unified management of the re serves. Then, on the other hand, if the system is to do its work well throughout the country, there ought to be as wide a distribution as possible of loans and of credits, and in order that those credits may be granted wisely and that the loans may be issued to those that really need them and at the same time can give good security, the persons that have the immediate oversight of those loans ought to be persons who have lived and have done business in the different localities. So that, on the whole, it has seemed wise that there should be one central bank, or, at any rate, one central power, with sufficient control to handle the reserves practically as one, and also that the different Federal reserve banks, if we are going to follow the system of the bill [indicating], should have their interests unified, so that there would not be any competitive bidding; furthermore, that the Federal reserve banks situated in different parts of the country should have full control of the making of the loans, subject to the general rules that would be laid down by a central Federal bank or by a Federal reserve board. One should take into consideration also the fact that any bill of this kind must of necessity before it becomes a law be a matter of considerable compromise of different opinions. Inasmuch as this bill as it has been passed by the House forms a basis, I have tried to make just as few changes in it as I could and at the same time give to the central bank that was suggested the other day, especially by Senator Bristow, but by others also, sufficient control. With this preliminary statement I may call attention to the main changes. The first change, and the one that really involves practically all of the others, is in the second section of the bill, where, instead of pro viding for the Federal reserve districts, I have made a provision for a somewhat changed Federal reserve board and for the organization under that Federal reserve board of a Federal reserve bank—one central bank. Perhaps I had better read this change. Senator N elson . Yes; we will be glad to hear that. Prof. J en k s (reading) : S ec. 2. That within 30 days after the passage of this act, or as soon------ Senator C rawford (interposing). Are you now reading the sec tion as you have changed it? Prof. J e n k s . Yes; as amended. Perhaps I should also say as pre liminary that, in accord with the statement made the other day, I have provided in this bill that the Federal reserve board drop off B A N K I N G AND C U E B E N C Y . 3 155 from its membership the ex-officio members; that it should consist of nine members, six to be appointed without any restriction what ever by the President, subject to the confirmation of the Senate, and the other three to be appointed by the President, subject to the con firmation of the Senate, from a list furnished, one from each one of the various Federal reserve districts, by the people that choose the directors of the Federal reserve banks. That I speak of now, be cause that will come out in this section. Senator C rawford. Before you commence to read your proposed amendment, would you prefer at this time to give a reason for this last suggestion? Prof. J e n k s . I t w ould be just as w ell; yes. Senator O ’G orman . In other words, that gives a method by which there may be some banking representation upon the reserve board ? Prof. J e n k s . There are two things to be said, the first with ref erence to the dropping of the ex-officio members. It does not seem to me that either the Secretary of the Treasury or the Secretary of Agriculture have any time which they could give, in any efficient way, to the management of a monetary system such as this. In the second place, there is no reason to think that the Secretary of Agriculture, anyway, and quite possibly also the Secretary of the Treasury, would be experts in banking; but the essential point is that they could not possibly have time to devote to it. As regards the Comptroller of the Currency, he also has a great deal to do in his present position; his work would not be lessened by this bill—I mean his present functions—and there might be qonflict between his new duties and his present duties. If he still re mains as the Comptroller of the Currency and then becomes also a member of this board, he is in quite a different position from any other member of this board, and his relations to the national banks are such that it seems to me it would not be wise to have him a member. Senator O ’G orman . Suppose you provide, Prof. Jenks, in this connection, that the knowledge that the Secretary of the Treasury may possess regarding the financial conditions, or the knowledge that may be possessed by the Comptroller of the Currency will always be available to the board? Prof. J e n k s . Surely. Senator O ’G orman (continuing). Because they will both be public bodies working in coordination and cooperation? Prof. J e n k s . Surely. And I should expect that the Federal re serve board would need to call upon both of them frequently for in formation ; and, of course, it would be given by them. Senator O Gorman. Yes. I did not intend, really, to invite your views with respect to that particular suggestion, but rather with respect to the other one, which seemed to contemplate a modified rep resentation by the bankers, or the banking interests, in the Federal reserve board. Prof. J e n k s . Yes. The special reason for that is this: I t has -eemed to me, on the whole, wise that the capital for this Federal eserve bank should be furnished, as under this bill, by the national a^as and the other banks that would be admitted to the system. ^ enator O ’G orman . W h y w ould that be preferable to h a v in g the public furn ish the m oney? 3156 B A N K I N G AND CU RRE N CY . Prof. J e n k s . Because I do not believe at the present time it is desirable to have this Federal reserve bank go into competition in the banking business with the national banks throughout the country. If this is to be a bank for banks, instead of a bank competing with the other banks for service to the corporations and to the individuals throughout the country—to be a bank for banks and in their inter est—I think they should put up the capital. Senator O ’G orman . Well, if the public subscribes $50,000,000 or $100,000,000, as might be required, for this central institution, would it necessarily follow that the people contributing that money would put this Federal institution in competition with the national banks? Prof. J e n k s . Not necessarily. But it might well be expected that, if the capital is to be provided by private individuals, the banks should do as does the Bank of Germany, the Reichsbank, or the Bank of France—i. e., it should do business directly with individuals and corporations, and not solely with banks. Situated as we are, it seems preferable that this be a bank for banks, and for banks alone. Now, I have made provision in this bill that, in case the banks do not subscribe a sufficient amount, then subscriptions should be opened to private individuals to supply what is necessary. Senator C rawford. Prof. Jenks, right there may I ask you a question----Senator R eed (interposing). I will make the suggestion here----Senator C rawford (interposing). Just let me finish this, will you please, Senator Reed? I want to get this in the record here, because, to my mind, it is a very vital point. Prof. J e n k s . Yes. Senator C raavford. I s it your theory that this is to be a reserve bank exclusively for the member banks and in their interests, as you put it? Prof. J e n k s . Well, no----Senator C rawford (interposing). Because I think there is a very great question before the American public as to whether this really should not be a system to promote the general welfare of the Ameri can people, rather than a system for the benefit of the banks and, as you put it, in their interests. Prof. J e n k s . Well, I would like to say----Senator C rawford (interposing). N ow, if we are simply creating a law here for the banks and in their interests, and on that grounds alone, we are coming far short of extending the scope of this bill as I think the public mind believes it ought to be extended. Prof. J e n k s . I should not like to be understood as advocating any bill in the interests of the banks regardless of the public inter ests; and I probably misspoke myself or spoke hastily in using that expression. I think that the bill should guard very particularly against the measure being used, or this central bank being used, against the interests of the people. It should be so organized that it will be used in the interests of the people. Notwithstanding, I think that can be secured better by having this bank do its business with the banks of the country, and with the banks only. Senator R eed. N ow, Mr. Chairman, I would like to get into my mind Prof. Jenks’s theory, and I think I will get it much better if he is allowed to proceed without interruption: and as he has full memoranda there I suggest that he take that up first and give us his B A N K I N G AND CU RRE N CY . 3157 suggestions, and we can ask him questions afterwards. That is not said in the way of criticism of anybody. I have been guilty of this thing as much as anybody else. Senator W eeks. Mr. Chairman, what time will the committee ad journ to? I want to be over in the Senate at the opening to-day, and I will have to leave the committee very soon. Senator H itchcock. I move that at noon we take a recess until 2 o’clock. Will that be time enough? Senator B ristow. I think so. Senator W eeks. Yes; I think so. Senator H itchcock. At 2 o’clock. I think that would be the best time. The Chairman. Then it is so ordered. Prof. J enks. I think I can probably give the substantial changes which I suggest, Mr. Chairman, in 15 or 20 minutes. The Chairman. Shall the Professor proceed without interruption ? Senator B ristow. J think he should. Senator H itchcock. I think we ought to have him start with his suggestions when we reassemble at 2 o’clock. Senator S hafroth. I move that Prof. Jenks be permitted to pro ceed at 2 o’clock without interruption. The Chairman. I s that the wish of the committee ? Senator H itchcock. Yes. Senator B ristow. I think that would be well. The Chairman. Then it is so ordered. (Thereupon, at 11.55 a. m., the committee took a recess until 2 o’clock p. m.) AFTER RECESS. The Chairman. Prof. Jenks, will you resume your statement? Prof. J enks. Perhaps it would be best if I simply read the main provisions, wherein this bill differs from the bill as it passed the House. Section 2 I have headed “ The Federal reserve board.” It includes the powers also to organize the Federal reserve bank instead of the Federal reserve districts, and the section as amended would read in this Avay: That within 30 days after the passage of this act, or as soon thereafter as may be practicable, the President of the United States shall appoint, by and with the advice and consent of the Senate, six persons who, with three additional persons to be appointed later by the President from a list of names submitted by member banks in the manner hereinafter provided, shall constitute the Federal reserve board. Until these three members last named shall have been duly appointed and shall have taken the constitutional oath of office the six members first ap pointed by the President shall constitute the Federal reserve board and shall have all the rights and powers conferred upon the Federal reserve board by this It had seemed to me that it was wise to have this system organized and incorporated by the same people that are going to administer it, ami I see no reason why there should be a separate organization com mittee, because if the board is to be constituted and appointed by the president, he can appoint, at any rate, a quorum and a sufficient numoer to organize at the beginning. S. Doc. 232, 63-1— vol 3------ 78 3158 B A N K I N G AND CU RRE N CY . Now, with reference to the bank [reading] : The Federal reserve board within 30 days after its appointment shall proceed to organize the Federal reserve bank, with head offices in Washington, by offer ing to the national banking associations and to such banks and trust companies as '.hall be eligible for membership under the regulations hereinafter specified, to the amount of 10 per cent of their paid-up and unimpaired capital, shares of stock in the Federal bank, at par, payable in gold or gold certificates. If at the expiration of 60 days after the offer by the Federal reserve board $100,000,000 of stock has not been subscribed by the above-named banks and trust com panies— Senator C rawford. H ow many days ? Prof. J enks . Sixty days after the offer. [Continues reading:] $3.00,000,000 of stock has not been subscribed by the above-named banks and trust companies, the Federal reserve board shall extend the offer to the public to an amount equal to the difference between the amount actually subscribed by the banks and $300,000,000. No individual shall be allotted more than $10,000. Twenty-five per cent of the subscriptions, par value, shall be paid in gold or gold certificates by the subscriber within 10 days after the allotment has been made, and thereafter not less than 10 per cent per month until the entire sub scription shall have been paid. On completion of the subscription of $100,000,000 the said Federal reserve bank shall be duly incorporated under Federal law, in accordance with the usual legal procedure. As soon as incorporated the Federal reserve bank shall have power to perform such acts, to enjoy such privileges, and to exercise all those powers prescribed in section 5136 of the Revised Statutes, save in so far as the same shall be limited by the provisions of this act. It is authorized to commence business wheu there shall have been paid in $25,000,000 in gold on its stock subscription. The Federal reserve bank so incorporated shall have succession for a period of 20 years from its organization, and for further periods of 20 years, unless sooner dissolved by act of Congress. Just a word of comment on this. It is desirable, if we are going to admit State banks and trust companies to this system, that they should be allowed to come in at the beginning, and so they are authorized to subscribe, under the rules that are laid down here and that may be prepared by the Federal reserve board when it offers the stock. It may be worth while to say also that I think it politically inexpedient to have the charter of the corporation automatically expire at the end of 20 years and require affirmative action by Con gress to carry it on. Any bank that is established now, or any system that is established now, ought to be established on the assumption that it is to be permanent, and that provision should be made for its charter to be renewed automatically at the end of 20 years, unless previously stopped by Congress. Of course, if anything should make it desirable to change the system or to re peal the charter, that can be done, naturally. But it should be necessary that affirmative action should be taken to stop the bank, rather than to continue it, because no matter how good the system may be, it is perfectly certain that if at the end of 20 years the ques tion comes up of renewing its charter it will be made more or less a political issue, and that would be unfortunate. Senator C rawford. That w as true o f the First and Second United States Banks. Prof. J e n k s . Yes. We may expect that to be true in this case. We are in the position, if we make the provision here, to abrogate B A N K I N G AND CU RRE N CY . 3159 the charter of the bank if there is any need of doing so; but other wise let it go on; I think it should be planned on the assumption that it is to go on. All of the rest of the bill is practically shaped, so tar as changes are made, with reference to this first change. There are only two or three other unrelated provisions. I may pass over, perhaps, the sections that remain the same. The next important change is this regarding the stock issue: The capital stock shall be divided into shares of $100 eadh, as now. It may be increased from time to time as member banks increase their capital stock or as additional banks become members, and shall be decreased as member banks reduce their stock or cease to be members. I see no reason why we should not follow the plan of the present bill in that respect. As regards the separate banks and their branch offices, I have stricken that provision out, because that power would be given to the central bank instead. Section 4 is also largely rewritten, in this way: The Federal reserve board shall divide the continental United States into not less than 12 districts, which 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, different districts may be consolidated, and new districts may from time to time be created by the Federal reserve board. The Federal reserve board shall establish a branch of the Federal reserve bank in the chief com mercial center in each of the Federal reserve districts so created: P r o v i d e d , That the total number of branches shall not exceed one for each $1,000,000 of capital stock of said reserve bank. There is a material difference between that provision and the cor responding provision of the pending bill, and it is a difference that seemed to me might appeal to those who were inclined to emphasize the idea that the locality should have a good deal of control, and that there should be a large number of member banks. The chief objection—and I consider it a vital objection to the bill as it stands—is that there are 12 of these Federal reserve banks. If we consolidate them into one, then I should say that it is perfectly practicable and on the whole rather desirable that instead of 12 dis tricts the number be two or three times that from the beginning, because the banks are simply branches of the central bank, and it is desirable that the directors of the branches in the different localities be made up of local men who will understand local business condi tions, local credit conditions, and things of that kind. Those who are opposed to a central bank may well feel that there is a fair equiva lent offered them by providing, instead of 12 branches to begin with, 25 branches to begin with, and perhaps more. Then, you will notice the provision that was made that the total branches could not exceed one for each $1,000,000 capital; that is, you can have a branch for every $1,000,000 stock instead of having each regional reserve bank have a capital of $5,000,000. So that we might begin with 100 branch banks, if that seemed desirable. With reference to the boards of directors of these branch banks it seemed desirable to make as few changes as possible, and I have left the provision as to the boards of directors of the branch banks just 3160 B A N K I N G AND CU RRE N CY . as they are with reference to the local Federal reserve banks, with one exception, and that exception is this: If the Federal reserve board, as the head of the Federal reserve bank, has really the absolute disposal of the reserves, it would be desirable in the different localities for the boards of directors of the local branches to be so constituted that they would be pretty sure to work harmoniously. So I suggest that the chairman of the board of directors of the branch, instead of being appointed bv the Federal reserve board, be elected by the board of directors of the Federal reserve branches from class C; that is, the Federal reserve board would have the right to appoint the three members of class C, as you will recall it is now, and from those three the board of directors should elect the chair man. The Federal reserve board would be sure that all of those three were thoroughly competent men. men whom they could trust, any one of whom they would be glad to have act as Federal reserve agent. There might be a considerable difference in the feeling of the local district board as to which man they wanted as the chair man and as the Federal reserve agent. That is the only change there. The next change is with reference to the increase and decrease of the capital, and there is only one slight amendment. [Reading:] That the shares of the capital stock of the Federal reserve bank shall not be transferred nor be hypothecated— That is the way it reads now. And then I continue— when such stock is registered in the name of a regularly incorporated banking association, bank, or trust company. Nothing herein contained shall prohibit shareholders other than banking associations, banks, and trust companies from transferring or hypothecating their shares; but when such shares shall become the property of banks they shall no longer be transferred or hypothecated. If we are going to have the national banks, in the main, supply this stock; it is desirable that they hold their 10 per cent, and that the regulations be as provided in the House bill. But if an individual, who would have no say in the management of the banks, puts up his money for the stock with the idea of getting 5 or 6 per cent interest in return, and perhaps also for patriotic reasons, there is no reason why he should not transfer his stock to somebody else. Senator N elson . Would you not have a provision in connection with that containing a limitation as to the amount that anyone could own of that stock? Prof. J e n k s . I had a $10,000 limitation in it. Senator N elson . But that applied to the individual subscriptions? Prof. J e n k s . Yes; that applies to individual subscriptions. Senator N elson . Would you not have a similar provision there as to the banks? Prof. J e n k s . Yes; they are limited to 10 per cent of their capital stock. Senator P omerene . The individuals are without voting power? Prof. J e n k s . Yes; they are without voting power; there is no rea son why they should vote under the bill as it is. With reference to the division of earnings, I had left that the same as in the House bill, with the exception that the wording is changed a little. When it comes to the division of the surplus above 5 per cent, B A N K I N G AND C U R R E N C Y . 3 161 40 per cent shall be paid to the shareholders as extra dividends. Then some is stricken out, and then comes this: All earnings derived by the United States from the Federal reserve bank shall constitute a sinking fund to be held for the redemption of the outstanding indebtedness of the United States. I struck out the word “ bonded.’ I t seems to me to be desirable to leave some discretion there. . . With reference to the national banking associations, also, 1 hacr suggested this change in the latter part of section 8: That any national banking association now organized which shall not, within one year after the passage of this act, become a national banking association under the provisions hereinabove stated, or which shall fail to comply with any of the provisions of this act applicable thereto Now, the bill says: “ Shall be dissolved,” and so on. And I put it as follows: shall be allowed to continue business as under present law, but shall not be allowed to enjoy any of the privileges conferred by this act upon member banks. I am inclined to think that if there is a central bank created with the provisions that are incorporated in the proposed bill, the national banks will almost all of them want to join; but in case they should not—and there is a good deal of conscientious objection on the part of some of them, who claim that they have the right to hold their present bonds—I should let them do business under the present law, without making any fuss. This would take away, at any rate, every excuse that they have for attacking the bill. You can say to them: “ You may either stay out or come in, just as you please.” The more that stay outj the more private subscriptions will come in. I see no objection to it. Senator C rawford. That removes the coercion? Prof. J e n k s . That removes it entirely. Now, as regards the Federal reserve board, and this applies par ticularly to the last three members, of course— That there shall be created a Federal reserve board, which shall consist of nine members, appointed by the President of the United States, by and with the advice and consent of the Senate, of whom six shall be selected with due regard to a fair representation of different geographical divisions of the country. The other three members of the Federal reserve board shall be selected by the President from among the candidates chosen by the member banks, in the same manner as the members of boards of directors of class A are chosen. Each Federal reserve district shall name one candidate upon the list, and the Presi dent shall appoint three for terms of two. five, and eight years, respectively, not more than one of whom shall reside in any one Federal reserve district. That is, I think, clear on the face of it. The banks have the choice of a list of anywhere from 12 to 50 or 100. from whom the President shall select 3 at his will. It seems to me that will give the banks all of the power that they ought to have under the circumstances. They can be perfectly sure, then, that three men put on the board will be bankers, and especially skilled men. and at the same time it does not give them control, as i think they should not have control. And if I may add a word further with reference to that, objection p m.ade very strongly to having any interference at all with the 1 resident in making these appointments—any further, at any rate, than that one shall be a banker. And the case of the Interstate Com merce Commission and other commissions is cited. But it seems to me 3162 B A N K I N G AN D CURRE NCY . that the situation is quite different. In the case of the Interstate Commerce Commission, until very lately, it had no real administra tive functions at all. It was simply a supervisory board, though it did have power to declare that rates were unreasonable. Later, of course, it was given power to declare what rates were reasonable, and even to take the initiative. But this board is distinctly an adminis trative body, this Federal reserve board. It is really going to manage the banking business of the country; and it makes the situation quite different if you are appointing an administrative board from the case that you have when you appoint a merely supervisory board. I think, also, that not merely the bankers but the people of the country at large would not object to that; in fact, I think they would be glad to be assured beforehand in the law that there was a minority that was sure to be trained men in the special field of business that is under consideration. I should not favor their having any controlling voice. With reference to the powers granted the Federal reserve board: Naturally, if the Federal reserve board is controlling a Federal re serve bank, as a matter of course it will examine the books and accounts of all of its branches. So that section is simply superfluous, and I have stricken it out. So with reference to the permitting or requiring of a Federal re serve bank to rediscount paper. Of course, as they are all branches of a single bank, this discounting of paper in different sections of the country is absolutely under their control, and we do not need to say so. So with reference to requiring one bank to rediscount the prime paper of another. That is understood. That goes out. With reference to the suspension of the reserve requirement, I had provided for that in a different way, and that also goes out. And with reference to the supervision and regulation of the issue and retirement of Federal reserve notes, and to prescribe the form and tenor of such notes, to add to or reclassify the reserve and central reserve cities, and performing the general duties and functions pro vided by the act, and making reports, all of that remains. That is to say, I have stricken out only the provisions that would be understood, as a matter of course, from the Federal reserve board being in control of the central bank and of these other banks being simply branches. Everything else remains. So, also, if this provision, or a similar one, with reference to the ap pointment of the Federal reserve board, is followed you do not need any Federal advisory council, and I have stricken that section out entirely. With reference to the powers of the Federal reserve banks, with respect to the open-market operations, there is one amendment that seems to me important. The earlier parts of the section all remain, but paragraph d would read in this way: To establish each week, or as much oftener as required, subject to review and determination of the Federal reserve board, a rate of discount to be charged by such bank for each class of paper— and so on. I have changed that to read in this way: The Federal reserve bank (the central one) has power to establish each week, or as much oftener as required, a rate of discount to be charged by the central bank and its branches for each class of paper, which shall be fixed with a view of aiding the commerce and business of the country. B A N K I N G AND CURRENCY . .3163 Then, I add this: It may upon special request of the board of directors of any branch permit such branch, for special reasons, to fix a rate of discount different from the general rate. The intention of that is, that under ordinary circumstances this central bank shall have a uniform rate of discount fixed for the coun try as a whole, but that in case of special need in certain localities, upon request of the local branch, it may change it temporarily for that local branch. It is, on the whole, extremely desirable that there should be as nearly a uniform rate as the business of the country will permit, a uniform rate of discount throughout the country. I am inclined to think that any provision of this kind, without doing any damage in all ordinary times and under ordinary circumstances, would tend to lower rather decidedly the rate of interest through the West and South; and, on the other hand, it would tend, probably, to raise slightly the general rate of interest—I am not speaking of call loans, of course—but the general rate of interest and of discount in the East. I think that unless that rise were very considerable the uniformity would more than offset any danger that could come. And provision is made for exception in certain special cases. As regards the section on note issues there are two rather important changes. One is that the notes shall be redeemed in gold or gold certificates, which I assume are equivalent to gold, and the provision regarding lawful money is stricken out. That this redemption shall be at the main office of the Federal reserve bank, at any branch of the Federal reserve bank, or at other redemption agencies which the Federal reserve board may, at its discretion, establish. I think it is extremely desirable that the redemption of notes be made pretty easy, and that every effort be made to have them re deemed. If you abolish the separate reserve banks and have only one bank, you almost of necessity have only one kind of notes, and on that account I think measures should be taken to make the redemp tion easy. Now, the second important change is with reference to the reserve against these notes. Whenever any Federal reserve branch shall pay out or disburse Federal reserve notes issued to it as hereinbefore provided, it shall carry a reserve in gold or gold certificates equal in amount to 35 per cent of the reserve notes so paid out by it, such reserve to be used for the redemption of such reserve notes as are presented. And then this is added: If at any time the reserve of gold and gold certificates falls below 35 per cent face value of the notes issued, for each 1 per cent or fraction threof that the reserve falls below 35 per cent there shall be a 1 per cent tax levied until the reserve has reached 30 per cent of the amount of the notes issued; for each 1 per cent deficiency of reserve below 30 per cent a tax of 2 per cent shall be levied. That means, of course, that it will not be necessary to say there shall be a reserve of 33 J per cent, and that the Federal reserve board may suspend that provision in case of need; but wTe put the amount of reserve at 35 per cent and then the bank will be able to accommo date people without any interference on the part of the Federal 3 164 B A N K I N G AND CU RRE N CY . reserve board by paying the tax. The tax will amount, as you see, to 5 per cent when the reserves get down to 30 per cent; and when the reserve comes down to 29 per cent, the tax will be 7 per cent; and when the reserve is 28 per cent, the tax will be 9 per cent; at 27 per cent it will be 11 per cent; and the pressure would become so severe before there was any danger of the exhaustion of the reserve that there would be no doubt at all about the reserve always being suffi cient to meet any demands. Then another point in connection with that is th is: That when the pressure was real, as it is likely to be from time to time, the local borrowers can afford to pay and ought to pay and wrould be willing to pay a good rate of interest for the notes that are issued to them. There is no question that in 1907 and other times of crisis borrowers, in order to save their business, could easily have afforded to pay even as high as 20 per cent rather than not get the money. It is a temporary matter for a short time, and this provision puts the pres sure on, and at the same times does not require that there shall be any suspension of the law, which, I think, is in itself decidedly wrong in principle. All the provisions with reference to changing collateral and mat ters of that kind to remain the same. With reference to bank reserves, I had put in the same provision that there is with reference to the reserve against circulating notes, excepting that instead of the reserve of necessity be held in gold it may be held in gold or lawful money. But with reference to the per centage tax which should be levied the provision is the same. The provision with reference to bank examinations is the same. There is one slight change with reference to the loans on farm lands near the close of the section: Any such bank may make such loans in an aggregate sum equal to 25 per cent of its capital and surplus— And then I add this: But in no case in excess of 50 per cent of its time deposits. It seems to me that loans that are made on mortgage ought to be made solely with reference to time deposits and not with reference to call loans----Senator B ristow . Call deposits you mean, do you not? Prof. J e n k s . Call deposits, I should say; yes. So also with reference to the savings-bank provision. If that is to stay in at all, and I have no serious objection to it that I know of, I think that should remain practically as it is. The banks that are doing business of that kind, I see no particular objection to their continuing to do so; although, as I said the other day, with reference to many of these provisions, I think it would be better to confine this bill pretty largely to the one special topic and take care of those matters under separate bills. That covers the main points, Mr. Chairman, and I should be glad to do what I can in the way of answering questions and explaining any particular provisions of the bill. Senator R e e d . Prof. Jenks, you spoke about having banks nomi nate three members of the central board. Now. let us assume this case, that when we come to organize this bank the national banks or B A N K I N G AND CU RRE N CY . 3 165 other banks all combine to take only a part of this stock, or after having taken it dispose of a large part of it to private parties. Prof. J e n k s . They are not allowed to do that under th is bill. Senator R e e d . Well, there would be no objection to permitting them to do it, in my opinion, if you allow private parties to hold the stock. But suppose when you went to organize the bank the banks took one-third of it and the outside people took two-thirds. Do you think, in that event, the banks ought to be allowed this same repre sentation, or should there be a provision made to allow the holders of the stock outside of the banks some representation on the board ? Prof. J e n k s . I should be entirely willing to have it changed in such a way that if the banks did not take, we will saj^, as much as half or more than half of the stock, their representation shall be in proportion cut down. I think that will be fair. Might I add just one word? Senator R eed. Yes. Prof. J e n k s . My impression is that under the provisions of the bill as it stands with the central bank, there would not be much question that the banks and the trust companies would subscribe all of this $100,000,000, and it was practically upon that assumption that I had made this provision. Senator R eed. Y ou changed one of the clauses of one section. The substance of it was, as you changed it, that the rate of discount should be such as to accommodate “ the commerce of the country.’’ I think I am correct on that. It is back some distance in your manuscript. Prof. J e n k s . I will look for it in a moment. I will read the words in this bill as regards that. Senator R eed. Well, I want to suggest to you that if your plan was adopted here as the basis of legislation it would be well to put in something besides “ to accommodate the commerce of the country.” I think the business of the country, “ the business and the commerce of the country,” would be better. In other words, the bank ought not to exist alone for the commercial classes. Prof. J e n k s . Oh, I quite agree with that. Unless it is here in some general form, I quite agree with you. Senator R eed. With regard to your interest rate, where the re serve falls below a given point, you provide there for an interest rate of, first, 1 per cent----Prof. J en k s (interposing). I said 1 per cent for each 1 per cent deficiency. Senator R eed. And, of course, it might get to be 20 per cent, and your suggestion was that the bank could recoup itself by charging its borrowers. Now, it might charge a borrowing bank, possibly, but the borrowing bank could not recoup itself from its borrowers, because of the usury laws of the various States. What would you do about that? For instance, in my State, if they took a note with more than 8 per cent it would be a void note; the whole note is void. Prof. J e n k s . I suppose, Senator Reed, that under present con ditions in many of our States where there are usury laws, which I Relieve in, there is such a thing as charging a commission for the loan, which is different from the interest, is there not? Senator N elson . The courts have decided, o f course, that with respect to national banks the usury laws of the States do not apply. 3166 B A N K I N G AND C U R R E N C Y . It is the usury law that is contained in the national banking act which applies. Senator R e e d . Have they held that if, for instance, I go to a bank in my State and want to borrow money and the bank charges me more than the legal rate there, that that is not usury ? Senator N elson . Yes; a national bank is governed by the usury law contained in the national-bank act. Senator R eed. That settles the whole question, then, Senator Nel son, if you are correct. Senator N elson . Oh, yes; that has has been decided time and again. Senator R eed. Well, it entirely escaped me. Senator N elson . We have a usury law by which they forfeit the principal and interest; the national banking act, as I recall it, pro vides only for the forfeiture of three times the interest in certain cases; that is all. And the courts have decided that that law applies to a national bank, and not the State law; so that we would have a right to regulate that under this law. Senator R eed. I have never looked that up. Senator O ’G orman . Then, again, Senator Reed, I have always understood that it was always easy in all the States to circumvent the usury law with respect to banking transactions, because the usury law only applies to the persons immediately concerned with the transaction; as between the maker of the note and the person to whom it is delivered, there could be usury up to that point. A bank or any individual, however, can thereafter buy that paper at anything they can procure it for without usury. Senator R eed. That can be done, unless it is merely a subterfuge. Senator O ’G orman . They can buy it for 60 per cent, 90 per cent, or even 25 per cent of its par value. Senator R eed. That is a question of fact in my State. I think the decision Senator Nelson speaks of, if he is correct—and I have no doubt of his correctness—would end the matter. Senator N elson . Yes; it is true; there are a great many decisions as to that. I had occasion to look up the question while I was in practice, and I know it is true. The C h a ir m a n . That is the law; and the banks get around it by simply buying paper. Senator S hafroth . Y ou can contract for $100 for 100 per cent a month, if you want to. Senator B ristow . N owt, Professor, this plan of yours is a modifica tion of the present bill so as, in substance, to authorize this central board to administer a bank and regulate the operations and activi ties of the branch banks through a central bank instead of through executive orders. That is the substance of it? Prof. J e n k s . Yes; that is the substance. Senator B ristow . While it seems to me that that would be an im provement from the administrative point of view, my objection is fundamental. First I should like to see, and I want to know what objections you see to it, a Federal bank, the stock of which is owned by the people of the United States and not by the banks; the sub scription to the stock to be as widely disseminated as possible, so that when the invitation for subscriptions is issued, in the accepting of these bids those bidding for the smaller amounts would be first B A N K I N G AND C U B R E N C Y . 3 167 accepted, thereby guaranteeing a very wide distribution of the stock. Let that bank be administered by a Federal board appointed by the President; let its purpose be to fortify the present banking sys tem of the country, not to change or demoralize or break up or take from the capital stock of the present banking system of the country, but to create this independent Federal reserve bank, which shall be a bank of reserve, a bank of discount, a bank of deposit, possibly, and a bank of issue. Now, what objection have you to the organization of a bank with such a stockholding and such a control? Prof. J e n k s . May I ask also whether the bank, as you have it in mind, would engage in discounting or making loans to private parties ? Senator B ristow . Personally, I think, yes; but there is some objec tion to that from other people that believe in this general system, and I have left that open. I see no reason why it should not, for the purpose of establishing its rate, go into the open market, as this bill provides, but I do not think it is desirable or necessary in this country for it to go into the general banking business. Senator Crawford. I should like to have the professor state what objection there is to it. I understand the Bank of England and the Bank of France deal with the public, and the Reichsbank deals with the public; what is the objection to this bank doing the same? That is, Professor, when you get ready to discuss the proposition of Sen ator Bristow’s, I should like to hear you on that line also. Senator N elson . I suppose one of the main objections would be that it would be a competitor of the other banks. Senator Crawford. S o are those banks over there. Senator B ristow. I should be glad for you to advise the committee what objection there is to such ownership of stock and such con trol of a bank; and, first, have it a bank for the purpose of fortifying the banking system, and not for the purpose of doing a general bank ing business, and then discuss the suggestion of Senator Crawford later. Prof. J e n k s . T o be perfectly frank about the matter, the chief reason why this was put in as it is was really that it was considered a matter of expediency to make as few changes as possible in the present bill. But I think there are other good reasons. I do not think that at the present time there is any need of increasing the banking capital of the country along the line you have suggested and to the extent you suggest/ I think that if the present national banks and State banks and trust companies are getting the advantages o f the rediscount, of the management of the reserves, etc., that will be provided under this system, they can very well afford and will be glad to furnish the capital, and we had better leave the capital o f private individuals for other investments unless it is needed. I do not see that it is. I hen, in the second place, it is desirable that the banks as such e directly interested in the ownership and the management of this ank. The banks now, in my judgment, taking them as a whole, are doing their business to the great advantage of the people of the country; they are rendering them good service—a verv great service, 3 168 B A N K I N G AND CU RRE N CY . in fact—and it seems to me what we wish to do is to put them in a position to render a still greater service; and we do not need to fear as long as we have them under proper control. If they furnish the capital stock, and if they, by furnishing the capital stock, have the right to choose these local boards of directors, it will, after all, be giving us continually in this new system the skilled management that we should expect to get. Moreover, I think the people would be more certain they were getting skilled management and would there fore have greater confidence in the system. Then, if we were to have the money subscribed by individuals, if we were to have a board appointed by the President, and that board to appoint all the local managers throughout the country, there would be a third objection, which, I think, is really a very serious one. If we were to have this central board, appointed by the President, given all that power of appointing individually all of the branch managers throughout the country, there would be a good deal more danger of politics in the bad sense of the word than if we leave the appoint ment under the present system where the local boards of control are practically chosen, to a very great extent, by the managers of the local banks. Does that cover the points you raised ? Senator B ristow\ That covers the points. Prof. J e n k s . I do not mean to ask if you agree with me. Senator B ristow . I disagree very much. Senator R e e d . I want to challenge your thought and the thought of the Senator from Kansas and all the members of the committee on one proposition. It was suggested here the other day by Mr. Vanderlip that we organize a bank along the lines which have been desig nated by the Senator from Kansas; that is, a bank to have a gold reserve of 50 per cent back of all its issues, and to be charged prac tically with the business of maintaining the gold reserve. Now, no bank was necessarily to have any stock in it; it was to be an institu tion set up by the people of the United States and managed by the Government, charged with the duty of maintaining the gold reserve, $2 being out against each dollar of gold. Now, it occurred to me, and I am suggesting it to you for your con sideration, that it would be a very delightful situation for the banks to find themselves in. If, then, Mr. Vanderlip wanted $100,000,000 of gold or $50,000,000 or any other amount, he could gather up these notes of this bank and come over to Washington and say, “ I want that much gold; I want to ship it to Europe.” And it would be t h e business of that bank to furnish that gold, and in failing to do so it would be defaulting in the chief obligation it was created to fulfill. If, on the other hand, the bank itself and all other banks were t h e owners and themselves charged, as owners, with the maintenance of that gold reserve, a very different condition would be presented. Now, I am not sure I am correct, but I should like to know what you think about it. Prof. J e n k s . That is rather a big question for an offhand answer, but I should say this: Barring completely the implication of any intention that might be an evil one on the part of the individual bank, I should be glad to agree in the main with your statement. Senator R eed . I expressly repudiate any thought of reflecting upon anyone. I am talking about the possibilities of the system. B A N K I N G AND CU RRE N CY . 3169 Prof. J e n k s . I should be inclined to agree with your suggestion. Let me say, in the first place, I do not think the calling in of indi vidual capital is necessary; and, in the second place, as I said before. 1 think if we have the responsibility of the banks in the system it would be better for the management of the system. I think your suggestion simply emphasizes my thought, that if they are interested and must take the responsibilities, they would take the responsibilities, and it would remove the danger of any one of them that might be in a critical position really threatening the stability of the system. Senator R eed. It occurred to me this way: If I were running a great bank, frequently finding that I was endangered in some way, as through a lack of gold, it would be a most desirable thing for me if the Government of the United States or the people of the United States had to give it to me every time I wanted it. I think I should be in a very different position if I had to go to myself and other men similarly situated and really injure myself when I asked for gold that could not be given. Senator B ristow . But, Senator, what is to hinder the banks from doing that now ? Senator R eed. Under the system that is proposed—answering you myself—the banks own—assume the banks own the central bank----Senator B ristow . I mean the present banking system. Why can not you do it to-day? Senator R eed. Well, there is no way for them to do it, except by bringing in national-bank notes, and the minute they bring in the na tional-bank notes, of course they curtail the currency issued by the banks. I am not sure I am right. Senator B ristow . They do the same in the other case, Senator, ex actly. Professor, suppose that Mr. Vanderlip should get a million dollars’ worth of national-bank notes and go to the Treasury and say, “ I want the gold on this,” he could do it. Senator S hafroth . They do not usually do it unless they have a genuine order from Europe for gold. Senator R eed. Then comes the question of the bonds only drawing 2 per cent. Prof. J e n k s . There is this other point, I think, in Senator Reed’s statement that is worthy of consideration. If the banks themselves are stockholders, charged to a large degree with the administration of the system, they will take a more direct daily interest in the suc cess of the system all the way through, and that is quite worth while. I think. Senator R eed. Let me apply that. There is a regional reserve bank established at New York, or will be under this bill. All the banks of New York City will be members of it. They will be the people who contribute the capital. Their reserves will be in there. They have thereby given hostages for good behavior and not to make a run on their own bank; and any bank that tried it, if it did it for selfish or improper purposes, would meet with the condemnation of the other banks. Take Mr. Vanderlip—and I use his name respectfully. The fom ent his bank came in and made a demand of that kind he would a hornet’s nest around his own ears; whereas if he came over to Washington to a wholly independent concern, it would present an entirely different situation. 3170 B A N K IN G AND C U R R E N C Y . Senator O ’G o r m a n . Will you allow me to make an observation here bearing on that whole situation ? Senator R e e d . Yes. Senator O ’G o r m a n . If an individual banker felt greater liberty in drawing out gold reserves from a bank operated with the people’s money than he would from a bank operated in part by his own money and the money of other bankers, do you not think the conse quences in the one case would be just as serious as in the other to the stability of the banking interests generally of the country? In other words, if, without any restraint, he availed himself up to the limit, or a number of bankers did, of the opportunity to deplete the Government Treasury or the reserve national bank of its gold re serve, and thereby menaced the stability of the banking interests of the country, would not he bring down upon his own head the same condemnation as if he had taken it from a bank in which he had a personal interest? In other words, to answer my own question, it seems to me that the same influences would restrain him in the one case as in the other. Senator S h a f r o t h . The banks have always been very loyal to the gold reserve. Denver gave to the United States Treasury more than $1,000,000 of gold coin in the panic of 1893. Senator R eed . Not impugning the motives of anybody, I have no patience with those who picture bankers as a selfish class and as a dishonest class any more than other men are selfish or dishonest, but it seems to me that a very different proposition would be presented to a man who wanted gold who could come over to an independent institution at Washington, for which the Government was entirely responsible, and get it, than would be if he had to go to a bank in the city of New York that was composed practically altogether of the banks of New York, that had to have its capital maintained by the banks of New York, and that if it fell would crush the banks of New York directly, including the man who brought about the dis turbance; that that presents a different question to that man’s mind than it would if he were going to get it from the Government at Wash ington, as if he might send to the Bank of England to get it. I agree there is great force in the suggestion of Senator O’Gorman, but is it not a different question? Senator W e e k s . Let me make another suggestion about that. Why would the bank want the gold ? Senator M c L e a n . That is the point? Senator W e e k s . What is it going to do? You suggest that gold is going to be withdrawn for purposes of export. Now, if you are going to export the gold there must be a demand for gold, or we must be owing the other side some gold, and it must be exported, or the debt has to be paid in some other way. The C h a i r m a n . And pay freight on it. Senator S h a f r o t h . And th e loss from abrasion. Senator W e e k s . If you are going to withdraw the gold and ship it, it must be profitable to do it. But suppose it is ; what are we going to do under this plan? We are presumably going to establish a bank or system which will at once take cognizance of the fact that gold is being shipped out and change the interest rate, or take some other means of replenishing its gold supply. B A N K IN G AND CU B B E N C Y . 3171 Senator O ’G o r m a n . Let me ask you a question, Professor, to get your view. Suppose the general features of the pending bill were observed with regard to the creation of a system, namely, that you have a reserve board and five or more regional banks, and you pro vide, as the pending bill does provide, in part at least, that the national banks within the several regions will contribute the capital for that regional bank by a 10 or 5 per cent contribution of their capital stock, with a provision such as you now suggest that if within 60 days the national banks within those regions do not subscribe or contribute the requisite capital the public may be invited to sub scribe the remainder. Would you confine the “ public” to people residing within the territory covered by that regional bank, or would you invite the public of the country, giving preference to the resi dents of the particular region? Prof. J e n k s . I do not see any reason why there should be any restriction as regards residence at all, as long as the people are citi zens of the United States, giving preference simply to those who come in first, or possibly, as the Senator suggested, the smallest sub scribers first. I do not see any reason why, because these people would not have any particular* voice—would have no voice, in ac cordance with the provision made here—in the management of the bank; they would simply be drawing their dividends. I do not see any reason why there should be a restriction. Senator W e e k s . Let me ask you one more question——Senator O ’G o r m a n (interposing). Pardon me; just one question more. Coupling with this last suggestion of mine a similar obser vation of your own, previously given, I see how one of the two ob jections tendered by the country banks may be obviated. In passing, I have been more concerned in this entire hearing about the attitude of the country banks than about the so-called large banks, because I look upon the two particular objections the country banks make as objections quite well founded. The second objection they offer relates to the diminution of their return from exchange charges. Have you made any suggestion re garding the feature of the pending bill on that subject? Prof. J e n k s . I think this amendment that was made in the bill itself just before it came over from the House—that they may make charges covering their actual expenses—covers part of that. I think, however, there is still more that might be said. At the present time when collections are made by country banks there is very frequently a sending of the check and the collections through three or four or five different banks; it is a circular, irregular process. Under the plan proposed in this bill, so far as I can see, every national bank would have only two transfers. It would go direct to the regional bank and back again. It seems to me that that saving in the actual expense of collection is going to offset the objection to a considerable extent. On the other hand, I think this should be said: Unless I am de cidedly misinformed—I have made some inquiry, but I wanted to make more, from country bankers in whom I have confidence—a con siderable part of the profits the banks make now in collecting checks on their own banks is a profit they ought not really to be allowed to make. Take, for example, an illustration that I think I used the other day. Suppose when I was living at Ithaca, in order to pay