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244

BANKING AND CURRENCY.

The Chairm an . Before the President of the United States also ?
Mr. R eynolds . I referred to your committee. I think every utter­
ance I have made, publicly or privately, has attributed to every man
who is trying to solve this problem the best of motives, and I would
like to have it go into the record here that way. I am only trying to
show that the ramifications of this great problem are so many and so
varied and so great that we must be pretty careful that we make no
mistake in what we do.
Allow me to go on with my illustration. W e have $100,000,000 of
balances. If you get a currency law that is going to be effective and
accomplish what you want, you are going to have to make a law that
will bring in the State banks. If you bring into it the State banks
and National banks------Senator B ristow . May I interrupt you there a moment ?
Mr. R eynolds . Certainly.
Senator B ristow . I have been listening with very great interest,
but it seems to me that this discussion is a question of banking and
not of currency. There is no criticism here as to the present
currency condition, except what we heard the other day as to
currency as a base of credit, but the complaint that we hear refers
to the matters of banking as to the stability or desirability of our
currency.
Mr. R eynolds . I am trying to discuss the banking end of it right
now, and to show what happened-------*
Senator B ristow . Y ou referred to currency legislation.
Mr. R eynolds . I mean banking legislation.
Senator B ristow . I s not there quite a distinction between legis­
lation affecting the banks such as we have been listening to here
this morning and a general question of a currency for the country ?
Mr. R eynolds . Let the record show that I mean in every instance
banking and currency.
Senator B ristow . Excuse me for interrupting. It seems to me
there is a very great distinction.
Mr. R eynolds . I do not want you to have any misconception
yourself.
If the rule of taking the reserves of banks from the centers were
followed to its finality, it would mean that our institution would
have to give up over $100,000,000 of bank balances. Since we
carry 40 per cent of cash agamst our deposits it would mean
that we would have to reduce our loans $60,000,000, less dif­
ferences in reserves required, difference in amounts of money that
we might have to carry in other centers, and for a more expeditious
and economic handling of whatever part of our items now in transit
would be handled through these banks, all of which are important
factors; but the point I want to make is this: If by giving up our
reserves we must reduce our loans so largely, where will the large
borrower go for his money. I can not conceive where the man who
borrows $1,000,000 from us now is going to go to get that money
when we must make him pay it, for he can not go to the Federal
reserve banks and get discounts.
The Chairm an . Just a moment, Mr. Reynolds. Do not these
big concerns now, when they want a large volume of money, divide
their notes up into notes of $1,000 and $5,000 and $10,000?
Mr. R eynolds . Yes.




BANKING AND CURRENCY.

245

The C h a i r m a n . And send them through your bank to other
banks for discount?
Mr. R eynolds . Well, they do not quite send them through them­
selves. They sell them in the open market. Note brokers handle
such notes. There is a very large business already done, and I think
it would augment that business, but when you take into consideration
many big concerns must borrow $30,000,000 to $50,000,000, I think
you will readily see that it will be a physical impossibility for those
people to finance their entire needs in that way. That is the point
I want to make. I am not making it in captious criticism at all; I
am making it because I can not see how that class of business, that
is now so important to our country, is going to be accommodated;
I can not figure it out.
The Chairm an . The point you seemed to be making was that these
men, notwithstanding big business might not be able to stand a
change, they would withdraw so large a volume of deposits it would
result that way. I do not really think it will result that way.
Mr. R eynolds . I do not mean that.
The Chairm an . I was trying to point out to you the means by
which at present they were using the resources of the country banks
from one end of this country to tne other, and was trying to ascertain
from you as a witness if that was not true.
Mr. R eynolds . Yes.
Senator W eeks . A s a matter of fact, when they get money from
small banks in the country they get it very largely through your
recommendations, do they not ?
Mr. R eynolds . Almost wholly.
Senator W eeks . In other words, the country bank which does
business with you asks you to recommend ?
Mr. R eynolds . Absolutely.
Senator W eeks . And they do not make the loan unless you do ?
Air. R eynolds . W ith rare exceptions. They ask us about it and
do not make the loan unless we O. K . the paper. The note brokers,
of which we have a dozen, come to our office every day, and it is a
part of our daily routine to assemble letters where we have orders
from purchasers, and we try to divide that business as evenly as we
can among the various brokers and as fairly among the different
lines of paper which they have to sell as possible, keeping in mind,
of course, safety and its ultimate payment.
Senator Crawford . These deposits which might be withdrawn
from that bank, nevertheless, are not absolutely obliterated. The
money is somewhere. These people could borrow it from the people
who have it ?
Mr. R eynolds . Would it be practical for some large concern that
needs to borrow $40,000,000 or $50,000,000 to write to a thousand
banks in the Dakotas and see how much of surplus money in the
Dakotas they could borrow ?
Senator Crawford . Of course not. The question is this------Air. R eynolds . I am only putting it to you as a matter to think
over. I want to get it into the record, and I want you to give care­
ful consideration to it. In our city and all over this country there are
industrial enterprises that have been assisted in their development
and growth very largely by the dependence on these lines of credit
received through the larger banks throughout the country, and if we are




246

BANKING AND CURRENCY.

left in a condition that we must discontinue that, then it is a matter
for you to decide how best to solve the problem so that they can go
ahead with their business. I know you want to solve it for them. I
am only bringing this point up as one that I have not seen any solu­
tion for in the bill. I have no doubt but it can be worked out.
Senator H itchcock . D o you mean to take the position, Mr.
Reynolds, that this would be a permanent embarrassment to the
banks and to the borrowers or only a temporary embarassment
while the new system is being put into operation ?
Mr. R eynolds . I did not describe it by the words “ permanent
embarrassment.” I hope you will not get it in the record as putting
me quite in that light. It will be no embarrassment to the banks,
because the banks will very quickly adjust themselves to changed
conditions, if they are a party to this plan. Then the public itself
will have to adjust itself to the new conditions. If those people who
have had to borrow $50,000,000 under the new order of things, are
only able to borrow a part of that amount they will have to restrict
their business. If that is best, that will be satisfactory to me. But,
as I say, it is a matter that will have to work itself out, and it gets
back to the public, as I have said two or three times before. W hat­
ever you do, the bankers are going to be all right, because they are
going to adjust their affairs to conditions, but I hope general business
will be protected.
Senator H itchcock . Let me ask you some serious questions for the
purpose of developing this thought.
Mr. R eynolds . Yes, sir.
Senator H itchcock . The Treasury statement shows there are at
the present time about $400,000,000 of country-bank deposits in the
city reserve bank. A large portion of this would be withdrawn, under
the terms of this bill, in the 12 reserve banks. Where would the
reserve city banks get the $100,000,000 or $200,000,000 which they
would be compelled to turn over to the reserve banks ?
Mr. R eynolds . I think I can anticipate all of the questions along
that line. I intended to go ahead a few words and sit down, but
Mr. Hill urged me to go ahead.
I will say that, in the consideration of this matter, I have prepared
some figures which I want to put into the record, containing my esti­
mates as to just what the effect of putting this bill into operation
would be, after the full transitory period had passed.
Senator H itchcock . The bill without amendment ?
Mr. R eynolds . Yes. W e have in the banks of the country as of
date June 4, 1913------Senator N elson . D o you mean the city banks ?
Mr. R eynolds . N o ; national banks only.
The deposits on June 4, 1913, are divided as follows----- Senator N elson . D o you mean State banks?
Mr. R eynolds . N o ; national banks only. Country banks,
$3,610,000,000.
Senator N elson . That is in the reserve banks or regional banks ?
Mr. R eynolds . I beg your pardon.
Senator N elson . Y ou mean the deposits in the regional banks?
Mr. R eynolds . N o ; I am talking about our present system now
for the purpose of making a comparison.




247

BANKING AND CURRENCY.

Reserve city banks........................................................................................ $1, 945,000,000
Central reserve city banks............................................................................ 1, 569,000,000
7,124, 000,000
Reserves carried.............................................................................................

1,455, 700,000

Of which—
Lawful money was..........................................................................
Amount due from banks................................................................

913, 000, 000
542, 700,000

Total..............................................................................................

1,455,700,000

Detailed statement.
Country banks, 15 per cent:
Cash...........................................................................................................
Due from banks......................................................................................

$266,000,000
310,000,000
576,000,000

Reserve city banks, 25 per cent:
Cash...........................................................................................................
Due from banks.......................................................................................

242,000,000
232, 700,000
474, 700, 000

Total reserve, city banks, 25 per cent, cash.................................

405,000, 000

Total.
Cash in vault.

Due from banks.

$266, 000, 000
242.000, 000
405, 000, 000
— --------------913.000, 000
542, 700, 000

$310,000, 000
232, 700, 000
-----------------------542, 700, 000

1, 455, 700,000
This amount equals 20.95 per cent.
Actual lawful money reserve, 12$ per cent.
Assuming deposits with our present banks would continue the same as
they now are and deducting amount to meet the changed conditions
on account of change in reserve requirements when the plan would
be fully operative, three years after the passage of the bill, deposits
would b e..................................................................................................., . $6, 581,000,000
Divided as follows:
Country banks..................................................................................
Reserve city banks.........................................................................
Central reserve city banks............................................................

3, 610, 000, 000
1, 635, 000,000
1,336, 000, 000
6,

581, 000,000

Now, I am taking present figures as to volume of business, with
only such changes as the law would make, and I only offer them as
my belief as to the condition that will exist at that time.
Reserve that would be required......................................................................$968, 220, 000
As follows:
Lawful money in vault......................................................................
Credits with Federal reserve banks................................................

447, 890, 000
520, 330,000

Total..................................................................................................

968, 220, 000




248

BANKING AND CURKENCY.

Detailed statement:
Country banks, 12 per cent—
Cash....................................................................................................... $180,500,000
Federal reserve banks........................................................................ 252, 700,000
Total..................................................................................................

433,200,000

Reserve city banks, 18 per cent—
Cash.......................................................................................................
Federal reserve banks........................................................................

147,150,000
147,150, 000

T ota l.................................................................................................

294, 300,000

Central reserve city banks, 18 per cent—
Cash.......................................................................................................
Federal reserve banks........................................................................

120, 240, 000
120, 240,000

Total..................................................................................................

240,480,000

Totals.
Cash in vault.

Credit in
Federal reserve
banks.

$180, 500, 000
147,150, 000
120, 240, 000

$252, 700, 000
147, 150, 000
120, 480, 000

Cash.....................................
Federal reserve banks___

447, 890, 000
520,330,000

520, 330, 000

Total.........................

968,220,000

Reserve required in lawful money, 6.8 per cent.

Senator H itchcock . That is a loss of $650,000,000 in reserves ?
Mr. R eynolds . It is not a loss of that much— $465,000,000 actual
money. I will come to that here. Counting reserve of 33J per cent
in lawful money, which Federal reserve banks would be obliged to
carry, against the $520,330,000 that banks would carry with them, the
reserve in lawful money against deposits in both classes of banks
would have to be $621,300,000, or 8.7 per cent. As a minimum, it will
be seen that the amount of lawful money banks would then have on
hand would be $447,900,000, as compared to $913,000,000 under
r
existing laws.
Senator H itchcock . That is, the banks instead of turning over
cash would turn over new paper ?
Mr. R eynolds . Customers’ notes to that extent.
Senator H itchcock . Under their endorsement ?
Mr. R eynolds . Yes, sir.
This would release $465,100,000 in lawful money, which banks
could use in depositing their reserves in Federal reserve banks.
Assuming that all the national banks would go into the systems, they
would be obliged to place with those banks the following amounts:
On account of subscriptions to capital in Federal reserve banks,
$105,000,000; reserves, $520,330,000; total amount to be controlled,
$625,330,000.
Now, in addition to this amount we will assume the Government
would have on deposit with national banks an additional $75,000,000,
which they would no doubt have to give up, since it is estimated there
would be $200,000,000 of Government funds deposited in the Federal
reserve banks. The total amount necessary for national banks to




BANKING AND CUKRENCY.

249

furnish by time plans would become fully operative would be
1700,330,000.
Just bow such a vast sum could be paid into the Federal reserve
bank and the effect it would have on business has been the cause of
much speculation. It seems to me that the most natural as well as
practical way would be as follows:
Inasmuch as under the new requirements for reserves that will
have been made effective, the amount of lawful money now carried
by banks in excess of amount that will then be required, or
$465,100,000, can be turned over to the Federal reserve banks without
inconvenience, and the balance of the amount necessary to furnish
the $700,330,000 required can be rediscounts of $235,230,000. A t
that point the Federal reserve banks would have $465,100,000 in
lawful money against which they would have loaned to national
banks $235,230,000.
The Government in completing its deposit of $200,000,000 will pay
into the Federal reserve banks an additional $125,000,000 in gold.
That will make the holding of gold, or lawful money, by the Federal
reserve banks $590,100,000, and the combined statements of those
banks would be about as follows:
Liabilities:
Capital....................................................................................................
$105, 000, 000
Deposits—
Banks....................................................................................................... 520,000, 000
United States Government................................................................. 200,000, 000
825,330, 000
Resources:
Loans.............................................................................................................
Cash...............................................................................................................

235,230,000
590,100, 000
825,330, 000

This would give the Federal reserve banks a lawful money reserve
of 81 per cent, and with a reserve requirement of 33$ per cent would
give it an ability to extend credits to banks on rediscounts of
$810,000,000 in addition to the $235,200,000 above referred to.
That is my deduction of the result as to how this bill would work
out in actual practice.
Senator H itchcock . That is, providing for the issue of no notes ?
Mr. R eynolds . I do not care anything about the issuing of the
notes; that has nothing to do with the statement. I give the figures
I want to draw my facts against.
Senator H itchcock . It would make a difference in reserves if you
figure 80 per cent there.
Mr. R eynolds . For $200,000,000 or $300,000,000 it would be left
with that percentage— 81 per cent reserve over all liabilities to that
point. If it issues $300,000,000 of notes, it would have less of
reserves.
Gentlemen, I have been delegated to ask you to make a modifica­
tion in the section of the bill relating to these reserves, and our com­
mittee adopted the resolution authorizing us to present it to you for
the reason that the claim was so insistently made by the bankers
from country towns that it would have to be done to make the plan
fair to them, and I appear before you for that purpose.




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BANKING AND CURRENCY.

Fearing that the withdrawal of such a large sum from the banks
will seriously disturb the credit relations between them and their
customers, and believing there is no necessity for the Federal reserve
banks to lock up so much money at the start, thereby impounding it
and rendering it not available for public service, except through
indirection of rediscounting by the banks, and with a view of making
the plan less onerous to the banks in the country towns and ordinary
reserve cities, the conference recommended that section 20 be stricken
out and a new section be substituted providing that reserves shall be
held against net deposits according to the present system and against
time deposits maturing in 45 days, according to the following system:
Country banks: Reserves of 12 per cent, 4 per cent in vault, 4 per
cent with Federal reserve banks, and 4 per cent with approved
reserve agents, as at present.
Reserve city banks: Reserves of 18 per cent, 6 per cent in vault,
6 per cent with Federal reserve banks, and 6 per cent with approved
reserve agents.
Central reserve cities: Reserves of 20 per cent, 10 per cent in vault,
and 10 per cent with Federal reserve banks. The changing over of
reserves to be accomplished gradually as follows: One-third in 60
days, one-third in 14 months, and one-third in 26 months. Under
this plan the following would be the result:
W e recommend that reserves in central reserve cities be increased
2 per cent, for the reason that if you adopt our recommendation, we
would still act as reserve depositary for a considerable amount of
money, and we felt that in justice to the situation that our own
requirement in central reserve cities should be increased 2 per cent.
If you do not grant our petition in this respect, then we do not see
any necessity for making any distinction between the ordinary and
the central reserve cities. The distinguishing difference between
our recommendation and the plan as it is provided here is that we
have asked that you allow one-third of the 12 per cent of country
banks, and one-third of the 18 per cent of ordinary reserve city banks
to be continued as reserve balances for those institutions rather than
to require that it should be held in their own vaults and in the vaults
of the Federal reserve banks.
Senator N elson . May I ask you a question right there ?
Mr. R eynolds . Yes, sir.
Senator N elson . W hy would it not be better to limit the reserves,
making it a good deal smaller and to have each bank retain its own
reserves— make it a small amount, and not have a reserve in other
banks ?
Mr. R eynolds . Divide the efficiency, or rather you impair the
efficiency of money when you do that. You get closer and closer to
the old practices when you paid a hundred cents on a dollar in actual
money m every transaction.
Senator N elson . Suppose you only require country banks to
keep 5 per cent reserve and to keep it in their own vaults, and sup­
pose you let banks in the central reserve cities keep only 10 per cent
and keep it in their own vaults ?
Mr. R eynolds . That wrnuld overcome that objection.
Senator N elson . Suppose you had at the central reserve banks
15 or 20 per cent, as you might say. If you reduced it you would




BANKING AND CURRENCY.

251

have a real reserve; each, bank would carry its own reserve and would
not have to be dependent on any other bank. There would not be
any interlocking of reserves.
Mr. R eynolds . Y ou mean by that, then, not to provide some sys­
tem to which they could go in emergencies for additional help ?
Senator N elson . If country banks were depositing with city banks,
and city banks were depositing with central reserve city banks, there
would be no impediment; they would have to keep exchange moneys
just the same, but why not, if you want a reserve, make it an actual
reserve in the bank?
Mr. R eynolds . Senator, will you let me finish, and I will try to
answer your question ? It conforms to an idea that I want to express
along this line anyway.
I have made a sketch of the plan as I believe it will be, so far as
the banking condition would be concerned, at the end of three years
after this system would become entirely operative, to show what con­
ditions would be at that time, and without going into details I would
say that it would result as follows:
Deposits would b e ........................................................................................
As follows:
Country banks.......................................................... $3,610,000,000
Reserve city banks.................................................. 1, 800, 000, 000
Central reserve c ity ................................................. 1, 390, 000, 000
Reserve required..........................................................................................
As follows:
Lawful money in vaults.........................................
391, 200,000
Due from Federal reserve banks...........................
391, 200, 000
Due from national banks........................................
252, 300, 000

$6, 800, 000,000

6,800,000,000
1, 034, 700, 000

1,034, 700,000
Detailed statement:
Country banks, 12 per cent—
4 per cent cash................................................
4 per cent Federal reserve bank...............
4 per cent national banks..............................

144, 300, 000
144, 300, 000
144, 300,000
432,900, 000

Reserve cities, 18 per cent—
6 per cent cash..................................................
6 per cent Federal reserve bank...................
6 per cent national bank................................

108, 000, 000
108, 000, 000
108, 000, 000
324, 000, 000

Central reserve cities—
10 per cent cash................................................
10 per cent Federal reserve bank.................

138,900,000
138, 900, 000
277,800, 000

Total cash.

Federal reserve
banks.

National
banks.

0144,300,000
108,000,000
138,900,000

$144,300,000
108,000,000
138,900,000

$144,300,000
108,000,000

391,200,000

391,200,000

252,300,000

The lawful money required as reserves for national banks wcnild
be $391,300,000, which would release $521,800,000 of the $913,000,000
lawful money now carried.
0328°— S. Doc. 232, 63-1— vol 1------17




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BANKING AND CURRENCY.

National banks would be required to furnish funds as follows:
Capital stock........................................................................................................ $105, 000, 000
Reserves at Federal reserve banks.................................................................. 391, 200, 000
Assume Government deposits..........................................................................
75, 000, 000
571, 200, 000

Turning in lawful money of $521,800,000 would require rediscounts
of $49,400,000, add to cash of $521,800,000 the amount of Govern­
ment deposits in gold, $125,000,000, and the Federal reserve banks
will have $646,800,000, and the statement of the Federal reserve
banks would be about as follows:
Liability:
Capital.......................................................................................................... $105,000,000
Deposits........................................................................................................ 591, 200, 000
696, 200, 000
Resources:
—
■ —
Loans.............................................................................................................
49, 400, 000
Cash.............................................................................................................. 646,800,000
696, 800, 000

Thus being able to expand credit $1,291,000,000.
This plan differs from that covered by the bill in that under it
banks in country towns and reserve cities would have the right to
count as reserve $252,000,000, upon which they would get 2 per cent
interest or $5,040,000 per annum.
Senator N elson . I s not that really the result of adopting the
present system ?
Mr. R eynolds . Yes; it reduces pyramiding of reserves, and I say
‘ “pyramiding” to conform to the general phraseology, because people
discuss it in that way— about $290,000,000, or about 55 per cent.
Senator N elson . Still it keeps up the system ?
Mr. R eynolds . Yes; to a certain extent. My theory and the
theory of the people who made this recommendation was that while
we might agree with you in principle that the pyramiding of reserves
was not a proper banking principle, still we have a condition and not
a theory, and our theory in asking for this change is that we may be
given more time to comply with the change which is being provided
for in this bill as it now stands.
Answering your question about the concentration of these balances
at central points I want to diverge a little and say what I had not
intended to say, namely, that I believe the reason for the greatest
measure of efficiency that we have had under this national banking
system, which was organized with a dual purpose of providing a
banking system on the one hand and a market for the Government
bonds on the other, has been because of the growing use of what we
call “ country checks,” which are instruments of credit in our business.
The tendency for the use of checks rather than money has grown to
such an extent that we are to-day doing our business on 95 per cent
of credit and the use of less than 5 per cent of actual money. In
practice that has worked about as follows:
Formerly in the movement of the wheat crop from the Dakotas
and the Northwest, or the cotton crops of the Soutn or the wheat of the
Southwest, it was necessary to send to those sections through central
reserve banks, large sums of money to be paid out when those crops




BANKING AND CURRENCY.

253

were brought into the market. As the growing use of checks was
adopted in the communities where a development was taking place
all the time and where more land was being brought under cultiva­
tion, the local people organized little banks all through those sections
of the Dakotas, Kansas, Missouri, Iowa, Nebraska, and you will find
scattered all over those States a large number of small banks. Those
banks number among their stockholders the doctors, merchants,
and also the farmers of their communities. The result is that almost
every farmer of any consequence in those neighborhoods is a stock­
holder in some of those banks, and through the process of evolution
in the handling of our business, through which credit instruments
have taken the place of the use of actual money, the farmer in Dakota
who sells his wheat to-day goes to the bank in Senator Crawford’s
town and exchanges it, not for money, but for credit. He accepts
a check on a bank for his wheat. The farmer in turn takes the
check and deposits it to his credit at the bank, and pays his bills by
checking against it. The value of his account in that bank to him at
least depends upon whether or not his check will pass current where
he wants to use it.
The natural tendency has been that the banker has gone into an
active, energetic campaign to make those checks circulate just as
widely as he can, thereby encouraging and increasing nondeposits and
encouraging every farmer that he could to come in and open an
account. In undertaking to do that he has tried to have his checks
cover the whole area of the country, and through this process we
are now handling hundreds of millions and billions of dollars worth
of products of the soil of this country entirely by the use of these in­
struments of credit. The country banker believes that if you take
away from him the right to make these checks available as readily
as they are to-day for reserve and other purposes, that you are going
to hurt him in the conduct of his business in his community and in
his relations with the farmer.
As I have said before, we come to you and ask you to make these
modifications very largely at the request of the country banker
himself.
Senator N elson . Mr. Reynolds, let me interrupt you.
Mr. R eynolds . Yes.
Senator N elson . The country banker can not check against the
reserve money. He must have other deposits in the bank to check
against.
Mr. R eynolds . I wish that were true, because if it were we would
not have any trouble.
Senator N elson . I s not that a matter of law— can he check against
reserve money and withdraw his reserves ?
Mr. R eynolds . Yes------Senator N elson . Suppose this country banker has all his re­
sources, except what he is required to keep in his own vault, in your
bank and that was all he had on deposit, and he should draw that
out by check.
Mr. R eynolds . Y es; he would do it in this way.
Senator N elson . He would be violating the law, would he not?
Mr. R eynolds . I agree with you— technically but not literally. I
think I can explain that to your satisfaction. Here is what would be
done: He would go to the bank and say, “ I want a $10,000 Chicago




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BANKING AND CURRENCY.

draft.” The banker would have $10,000 or $12,000 at Chicago, and it
might be $2,000 or $3,000 more than the legal requirement would
make it necessary for him to carry, but he would have to carry a
reserve of $2,000 or $3,000 in order to give you that check. He goes
to the grain merchant that night and he says:
I have got to have some Chicago exchange, and you are owing me some money, and
I am carrying that grain. I will have to realize against your note. You must load
up two or three cars of grain and send it into Chicago and draw your draft against the
commission merchant, attach bill of lading, and make some exchange for me.

The minute he gets that draft attached to that bill of lading it is
entered on his books, and in the meantime the cars of grain are started
on their way to Chicago, which may be from one to four days’ distance
from the shipping point, and it is a reserve, under the law, the moment
he enters it on his books.
Senator N elson . But does it not after all amount to this in the
long run, that in order to have a permanent checking account he must
have some more deposit than his mere reserve ?
Mr. R eynolds . A s I say, it is a question of efficiency of reserve.
If you can maintain through the enactment of law or through the
establishment of some policy in business, which will establish a
greater source of confidence in the community and in our business
institutions, why, yes; but, on the other hand, you can not reduce
your reserve, Senator Nelson, to a point that will be dangerous
without taking chances.
Senator N elson . Let me put you a case there. Take a country
bank. Suppose he requires a country bank to have 5 per cent
reserve, and no more, but keep it in his own vaults. All the other
funds of the bank would be at his command, and it could keep as big
an account with the bank as it saw fit— checking account. If, in
addition to that, you required a country bank to put 7 per cent
moie, in addition to the 5 per cent, with that bank, as a reserve fund,
that is tied up, if the law is complied with; that is now available;
it is only a benefit to your bank, but it is not a benefit to the country
bank. Would it not be better for the country bank to say to it:
All but 5 per cent of your liability you can use freely; deposit it wherever you like
and check against, but whatever little reserve you have you must keep it in your
own vaults.

Mr. R eynolds . I think you will recall that I made the statement
that in my belief the scientific method of handling those reserves
was to make no requirement. I would accept your amendment as
not requiring that amount, because I think that every country bank
should keep 5 per cent reserve in its own vaults.
Senator Crawford . Would not Senator Nelson be assuming just
directly the opposite of the whole theory of this proposed legislation,
where it is claimed that all the reserves of the country could be in
one central reservoir, mobilized so that they could be used to
strengthen the weak spots here and there?
Mr. R eynolds . Yes, sir.
Senator Crawford . So that you could concentrate all of them ?
Mr. R eynolds . Yes, sir.
Senator Crawford . If Senator Nelson’s idea was carried out, that
each bank’s reserve should be kept in its vaults and held there alone,
would not that be just the opposite of this theory of mobilizing all of
these reserves in one big central reservoir ?




BANKING AND CURRENCY.

255

Mr. R e y n o l d s . It would; but in m y opinion that would materially
contract the amount of credit that could be extended safely. Any
system that does not have some outlet for expansions of credit in
times of need will be deficient.
Senator N elson . Mr. Reynolds, you are objecting, and rightly I
think, to two features of this bill: One is the compulsory feature
requiring the banks to enter the system; the other is the compulsory
feature requiring the central reserve banks to supply the demand
for money. Is there not some compulsion in this system of reserves
in requiring a country bank to deposit this money with your city
banks for the purpose of giving you a larger loanable fund and a larger
workable capital? Is not that a compulsory law in principle as
against the country bank?
Mr. R e y n o l d s . There is no such law.

They m ay do it.

Senator N elson . Would they not do it?
Mr. R eynolds . They may do it, if a man is conservative and
applies your theory of maintaining reserves.
Senator N elson . Y ou do not come to the point. Under the law
when you require a country banker to keep a certain amount of his
reserves with you or some other bank, when you require the bank to
do that whether it is willing or not, to enable you to gather up more
funds to run your big banks and make your big million-dollar loans,
is it not a species of compulsion as against the country bank ?
Mr. R eynolds . N o ; because he does not have to do it to-day.
There is no law that makes him keep it with the reserve correspondent,
but he has the right.
Senator N elson . He can keep it in his own vault?
Mr. R eynolds . Absolutely; if he pleases, he can do so to-day.
The bill under consideration is compulsory in that respect, so far as
our deposits of these reserves go.
I must cease here, because Mr. Hill wants to be heard, and we want
him to be heard, but before doing so I want to touch one phase of
this matter that has not been taken up, and I want to make a sug­
gestion for the consideration of the committee. It is this: Whether
or not some of these questions— I don’t want to be understood as
saying I could pretend to settle them— but whether or not some of
these auestions might not be minimized through the adoption of
something along this line, namely, that the national banks in taking
stock in these Federal reserve banks, instead of taking all of their
subscription of stock in the Federal reserve bank in the community
in which it would be situated, or in the zone in which it would be
situated, that they take a proportionate interest in all of the Federal
reserve banks, wherever they are located.
In the first place, would it not take away something at least of
the sting in not being allowed representation; would it not also do
away to a certain extent with the onus of one Federal reserve bank
being obliged to rediscount for another? For instance, if I own or
my institution owns stock in all the Federal reserve banks in propor­
tion to my holdings of $105,000,000 of the entire capital of all and
a condition would exist in this man’s section at New Orleans where
they needed more money, 1 would feel the need of protecting that
just as much as the local man would; on the other hand, in Chicago
or New York, where we would have a plethora of money which we
would be glad to put out if it were safe to do it, would feel the same




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BANKING AND CURRENCY.

anxiety to loan that money to the Federal reserve bank voluntarily
that I would if I was dealing with these banks on an individual
basis. I only offer that as a suggestion. I would like you to think
it over. I have nothing more to say now in favor of it.
Senator N elson . That is a very good suggestion, Mr. Reynolds,
but you overlook the fact that it would neutralize that theory to
keep away from Wall Street and a central bank. If you allowed the
big banks of New York to subscribe in these other regional banks of
the country, there would be great danger that Wall Street might
dominate it.
Mr. R eynolds . Of course, I have a pair of glasses that can not
give me a focus of that viewpoint, I am sorry to say, and I have been
33 years in banking, and I have the first time------Senator N elson . Y ou must take this in a Christian spirit.
Mr. R eynolds . Certainly I will. [Laughter.] W e will do that as
far as we are able, but I have yet the first time to have anybody to try
to influence me in the conduct of my business in its relations to some
one else. I know that is a much-discussed question, and it is probably
not best for me to try to discuss it here.
Senator N elson . I do not want you to understand that that idea
is bothering me.
Mr. R eynolds . I understand. In the organization, we will say,
5 of these Federal reserve banks which we have discussed and the
problem of control, but if there was a general ownership, every bank
that would go into the system would have a little ownership in each
one of these banks, and the Federal reserve board should be made up
of 11 instead of 7, of which the Federal reserve banks, 5 in number,
should elect 5, the President appoint 5, and the Secretary of the
Treasury should be a member ex officio.
I just wanted to put that in the record and have you think about it.
I have nothing more to say on it.
Senator N elson . Y ou could modify your plan so as to have each
bank have one representative ?
Mr. R eynolds . Yes; That would be a good idea. I feel I have
already taken up a groat deal more time than I should. You gentle­
men have been very patient this week.
Senator N elson . Y ou have been more patient with us.
Mr. R eynolds . It has been a pleasure for us to be with you, I am
sure, because we recognize the immenseness of the problem which
you are trying to solve, and we behove you are doing, and we hope
you will believe we are, the best we can to help work out something
which will be absolutely just and fair in all respects, and which will
be workable and which will reflect credit upon not only the adminis­
tration, but upon the American people, and which will insure a con­
tinuation of the prosperity that this great country enjoys. Possess­
ing as we do to-aay 40 per cent of the banking power of the world,
we are not beginning to wield the influence or exercise the prestige
that we should in the world’s business, and with the modification of our
tariff law, which, if I interpret it correctly, will mean we must depend
more upon our ability to do a world business than we have ever done
before, it seems to me that we ought to correct our system of banking
and currency so as to put us in a position where we could compete




BANKING AND CURRENCY.

257

with the world financially. We ought not to pay tribute to England
on every pound of coffee, tea, every pound of wool, and everything
else that we import into this country.
Senator H itchcock . If this bill is passed in anything like its present
form, should there continue to be the distinction made between cen­
tral reserve cities and reserve cities ?
Mr. R eynolds . There should be none if this bill passed in its
present form.
Senator H itchcock . If it is passed in its present form, a bank will
be allowed to count in its reserve four-eighteenths of what is required
in Chicago, St. Louis, or New York?
Mr. R eynolds . That is, after 36 months. My figures are based
on the ultimate period.
Senator H itchcock . W hat is the ultimate period ?
Mr. R eynolds . Thirty-six months.
Senator H itchcock . After 36 months, then, all of the reserve of
the bank must either be in its own vault or with its central reserve
bank ?
Mr. R eynolds . That is my understanding— regional reserve banks.
Senator B ristow . It is about lunch time, and we will want to ask
Mr. Reynolds a good many more questions.
Mr. R eynolds . I-am very anxious, if I can, to get away at 3.10.
I do not know what the prospect will be. I should be very much
disappointed if I do not. I have checked my baggage.
Senator B ristow . Y ou never ought to do that wnen you are attend­
ing a hearing, until after the hearing is over.
The Ch airm an . I am sure the members of the committee, Mr.
Reynolds, will not be here, on account of the conference which is to
take place, and we particularly wish to hear you.
Mr. R eynolds . Of course I will remain if you wish. I am not
generally regarded by my friends as being a quitter; so, if I am
wanted, I will remain.
Senator N elson . Y ou are giving us much valuable information,
and I feel very much obliged to you. and I hope you will stay with us.
Senator H itchcock . In view of the fact that the Senate is to meet
at 2 o’clock, and there will probably be some debate on Senator
Weeks ’ 3 resolution, I move that we adjourn the hearing of this com­
mittee until 3 o’clock, with the possibility that we might not convene
until 3.30.
(The motion was carried.)
The Chairm an . The committee will now take a recess until the
hour stated in the motion.
(Thereupon, at 1.35 p. m., the committee took a recess until 3
o’clock or 3.30 o’clock this afternoon.)
after recess .

The Chairman . The committee will come to order. Mr. Forgan, I
understand that Mr. Hill will be the next witness. Mr. Reynolds
will be heard after Mr. Hill gets through. It will only take a few
moments, and then he will be open to cross-examination.




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BANKING AND CUBKENCY.

STA TE M EN T OF EON. E. J. H i l l , VICE PR ESIDENT NATIONAL
BA N K OF NORW ALK, NORW ALK, CONN.

Mr. H ill . Mr. Chairman and gentlemen of the committee, the two
topics which I have been requested to present to you are different
in character, yet having some relation to each other. The first refers
purely to the mechanical part of the bill. It is found in section
16, and again referred to in the bill in section 21, the two provisions
being somewhat in conflict with each other. The committee desir­
ing to assist in the preparation of this bill in every way that it
could, thought it was their duty to point out this inconsistency. I
will be but a moment or two in doing it.
The law was changed in 1874. It now provides that the 5 per cent
redemption fund for national-bank notes, which previously had been
held as an entirely separate fund, should be put into the general funds
of the Treasury. This section 16 which you propose provides that
all of the funds of the Treasury which are now classed as general
funds shall be transferred as deposits to these reserve banks which,
of course, would take the 5 per cent redemption fund, it now being a
part of the general funds of the Treasury.
It is true that this redemption could be carried on by some one of
the Federal reserve banks acting as the fiscal agent of the Govern­
ment. I will give you the statistical position of the fund in a moment,
and without any argument submit the proposition on the statistics of
the fund, that it would have to be by the Federal reserve bank, which
is to be located in the city of Washington, or, much better still,
continued as now by the Treasury Department with the present
organization.
The Chairm an . Mr. Hill, in fact the demands on the Treasury at
times exceed $35,000,000, do they not?
Mr. H ill . That is just what I am going to show. I am satisfied
that your judgment will be that conditions make it impossible to
divide up this fund among the banks, and have the work done with
the economy and satisfaction which now characterize it. The pro­
posed bill distributes the fund but provides no new plan of redemp­
tion. The makers of this bill admit the necessity of its continuance
when they require precisely the course of procedure for the redemp­
tion of the Federal reserve bank notes which is now going on with
regard to the national-bank notes. But in the same bill they take
out of the Treasury the machinery for carrying on national bank
note redemption which they insist upon being put in operation by the
Treasury with reference to the new notes. The two things are in
conflict with each other.
The condition of that fund during the past year has been as fol­
lows— and I quote from the report of the Secretary of the Treasury:
The average amount of national-bank notes in circulation during the fiscal year was
$739,940,744, and the amount of such notes presented for redemption was $649,954,710,
or 87.84 per cent of the average amount outstanding. The national-bank notes assorted
and delivered during the year amounted to $645,011,311, of which $198,550,800, or
30.78 per cent, were returned to the respective banks of issue for further circulation.
Redemptions of national-bank notes during the year have been constantly in excess of
the 5 per cent fund required under section 3 of the act of June 20, 1874, to be kept by
the banks on deposit in the Treasury of the United States for the redemption of their
notes. Consequently that fund has been overdrawn during the whole year and the
Treasury has had to advance payment for notes as they were presented out of the
general fund. The largest overdraft was $26,927,389.52, on February 3, 1912.

Senator H itc h c o c k . This overdrawing is something new, is it not ?




BANKING AND CURRENCY.

259

Mr. H ill . N o, sir. It has been overdrawn 12 years out of the past
21. It is utterly inadequate to meet the requirements for the re­
demption of national bank circulation. I am going to show that.
Senator P om erene . W hat do you mean by that statement, “ dur­
ing 12 years out of 21 years it was overdrawn’' ?
Mr. H il l . Yes, sir. If the gentleman desires to see the figures------Senator P om erene . Oh, no; I do not ask that.
Mr. H ill . I have the report of the Treasurer here, showing that
for 12 years out of 21 years this fund has been overdrawn.
The Chairm an . Fifteen millions has been overdrawn, has it not?
Mr. H il l . Oh, yes; twenty-six millions.
Senator Shafroth . The large amount that you have specified
there as having been presented to the Treasury for redemption; was
that presented to the Treasurer for the purpose of retiring the cir­
culation ?
Mr. H ill . I will give you exactly what was given to the owners
as a substitute for that circulation. I have it all here.
Senator H itchcock . Before you leave that point I would like to
ask what per cent would be adequate if 5 per cent is inadequate?
Mr. H il l . I will take that up, too, under the new note provision,
which will be my next subject.
There is to-day— or was a month ago— $43,889,222 of nationalbank notes down here in the Treasur}7 to be paid for by the banks,
and I presume the condition is the same to-day.
Senator N elson . W hat Mr. Hill means, Mr. Chairman, is with
reference to notes of banks which have gone out of existence.
Mr. H ill . N o ; the notes of such banks are carried in what is
known as the national bank note redemption fund. I am referring
only to the 5 per cent redemption fund.
The Chairman . Yes; I understand.
Mr. H ill . It is an important part of this to show where these
redemptions come from. Three hundred and twenty-seven million
and a little more have come from New York City, 47 million from
Boston, 43 million from Philadelphia, 13 million from Baltimore,
71 million from Chicago, 14 million from Cincinnati, 29 million from
St. Louis, 6 million from New Orleans, and 95 million from all other
places.
Senator H itchcock . D o you mean they represented the notes of
banks ?
Mr. H ill . Presented by those banks.
Senator H itchcock . Were they the notes of those banks ?
Mr. H ill . Oh, not at all; there is no distinction made until the
notes get down here. That would be one of the troubles in connec­
tion with the 12 reserve banks.
Senator H itchcock . They send in indiscriminately notes from all
over the country?
Mr. H ill . Yes, sir. With more than 7,000 national banks and
with the enormous transactions shown, it is manifest that all redemp­
tions must be in one place. Each bank when national-bank notes
are received over the counter separates its own and bulks all others
for exchange for reserve credit with its reserve agent, and the reserve
agent forwards them in bulk for redemption and exchange for legal
tender. That is your process, is it not, Mr. Forgan?
Mr. F organ . Yes, sir.
Mr. H ill . And yours, Mr. Reynolds ?




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BANKING AND CUEEENCY.

Mr. R eynolds . Yes, sir.
Mr. H ill . T o distribute tbis 5 per cent fund among the Federal
reserve banks and require them to make redemptions would enor­
mously increase the redemption charges. Of the 645 millions
assorted during the year less than 200 millions were in good condition;
417 millions were destroyed and reissued. The reissued notes
were taken from the stock printed here and kept on hand at the
Bureau of Engraving and Printing, and the supplementary process
completed in the Treasury Department and the record made.
Twenty-eight millions destroyed and finally retired. It shows the
necessity for the retention of the necessary funds for doing this work
by the Government or some one central agency. Indeed, as stated,
in providing for the redemption of the new Federal reserve notes,
this bill calls for a 5 per cent redemption fund to be kept in the
Treasury. The necessity for its continuance in the case of the present
national-bank notes during the remainder of their life is manifestly
far greater.
I want to call your attention to one other thing. The Senator
from Minnesota (Mr. Nelson), so far as I can judge, during these
hearings has advocated the reduction of the reserve, and I think the
Chicago conference advocated the reduction of the reserve, and the
bill itself advocates the reduction of the reserve. To the New
England banks it does not make any difference whether you reduce
it or not. You are looking at the question from one standpoint and
we look at it from another. W e have got to keep a larger reserve
than is provided for in the bill. You can not say to a New England
bank in a manufacturing community with its pay rolls made up
every week that that bank can allow itself to run down to 10 or 12
per cent. It has got to keep 20. or 25 per cent in a country bank
m a manufacturing town with pay rolls weekly. The situation is
entirely different from what it is in a farming community.
Senator H itchcock . I want to ask you a question before you get
away from that point. I want to ask you whether the presentation
for redemption during 12 months of 87 per cent of this bank currency
does not indicate that it is an inferior currency?
Mr. H ill . It indicates that it is a rigid currency, not elastic. The
first thing I ever had to do with a bank was when I was a boy. I
had to sweep the bank out and count redemptions. Our redemptions
averaged------Senator H itchcock (interrupting). And under this bill we could
naturally expect that the redemptions would run up to about 87 per
cent ?
Mr. H ill . Oh, they would be once in six weeks.
Senator H itchcock . Would be what ?
Mr. H ill . About once in six weeks.
Senator H itchcock . So that they would be constantly presented
for redemption?
Mr. H ill . Yes. Without redemption you have a perfectly rigid
currency.
Senator H itchcock . It simply goes in and comes right out again,
I understand?
Mr. H ill . It comes in and goes out again to perform a new trans­
action. It might perform a transaction in Kansas and the next day
perform a transaction in North Dakota.




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261

Senator H itchcock . But all through the year we still have about
$700,000,000 of national-bank notes ?
Mr. H ill . Oh, yes; either in use or idle in the vault of the bank.
Senator H itchcock . Because the banks do not want them and
want to get rid of them and want reserve money?
Mr. H ill . Y es; they want to keep their own notes in use and ex­
change the notes of other banks for reserve money. Mutilated cur­
rency also must be exchanged for new notes.
Senator H itchcock . Does not that argue in favor of providing an
increase of the reserve money instead of providing an increase in
inferior currency?
Mr. H ill . That is another matter. I am merely giving the statis­
tical position of the 5 per cent fund now, and leave its disposition
to the judgment of the committee. The facts will show as they are
submitted here and you will find them in full detail in the Treas­
urer’s report. I thmk you will find that it will be impossible to
make the change in the national-bank redemption business called
for under the terms of this bill. I doubt the wisdom of changing
the present plan.
Senator H itchcock . The reason they are sent in for redemption
so rapidly is because they are not legal tender?
Mr. H ill . N o. That is only one reason.
Senator H itchcock . What is the reason ?
Mr. H ill . They are not sent in fast enough. They go in to get
legal tender and to keep their reserve credit at their reserve bank.
Senator H itchcock . Yes. Now, if you provide legal tender------Mr. H ill (interrupting). That is only one reason. The other rea­
son is this: Each national bank, of course, wants to keep its own notes
in circulation, and one of the inspiring causes for sending others in,
aside from legal tender, is that if they can get rid of the other bank’s
circulation it makes a gap to insert others.
Senator H itchcock . But there has not been any increase in the
legal tender; it is a nominal increase during the year. The banks can
easily put out more legal tender, if they desire. All they have to do
is to buy more bank notes, if they desire.
Mr. H ill . I do not want to exhaust my time on the 5 per cent
redemption fund which I consider a comparatively unimportant
topic; but let me call your attention to the terms of this bill, which
I am sure you will amend in some way, where you propose to cut
down the reserve of the country bank from 15 to 12 per cent.
As a matter of fact, in most country banks you actually increase
it, notwithstanding your proposed reduction from 15 to 12 per cent.
Take a bank of $100,000 capital and deposits around $150,000
to $200,000— certainly $150,000 would be fair for most New England
country banks. You take away the privilege of counting this
redemption fund as a part of our reserve, and yet we have got to
keep it in lawful money.
Senator N elson . But that is only 5 per cent on circulation.
Mr. H ill . But I have made the calculation on the basis of a bank
with $100,000 capital.
Senator N elson . The country banks have not taken out their
circulation.
Mr. H il l . Most of the banks have. The city banks have not.
Senator N elson . The country banks have?




262

BANKING AND CURRENCY.

Mr. H ill . But the city banks have not. The country banks, most
of them, have taken out the circulation to the full amount of their
capital; and it depends entirely on the ratio of their deposits to their
capital as to whether you reduce the reserve or not, notwithstanding
you have cut down the required amount from 15 to 12 per cent.
Senator H i t c h c o c k . This redemption of their notes would be enor­
mously increased, would it not, it it were not for the fact that the
State banks can hold them as reserves ?
Mr. H ill . Y es; the State banks do that. The trust companies can
hold them. I do not think there are many States in the Union that
rescribe that the reserve of State banks and trust companies shall
e in legal tender. I do not think our law requires that New Eng­
land savmgs banks shall have legal-tender reserves. I think there are
three savings banks in the town in which I live, a town of 26,000
people, and their deposits will run up to five or six millions. I
think they are required by law to keep a 3 per cent reserve, but I do
not think it specifies that it shall be in either gold, silver, green­
backs, or bank notes. That law has been enacted within five years.
They were not required by law to keep any, formerly; but, of course,
they are not institutions organized for profit; they are purely mutual,
without any stock, the depositors owning them.
The Chairm an . D o you happen to know what percentage of these
national banks’ currency is sent in for redemption in a mutilated
condition ?
Mr. H ill . Yes, sir. I think 28 millions out of that lot was destroyed
as unfit for circulation last year.
Senator S hafroth . H ow much was sent in for retirement ?
Mr. H il l . There is now, I think, something like $20,000,000 of
lawful money which could go into the Federal reserve banks with
perfect propriety. Still, I think it would be better to keep it where
it is. Twenty million dollars of lawful money reported in this
statement of July 1, which represents retired national-bank circula­
tion paid for in lawful money, and the fund is held here as a trust
fund waiting for it to come in. A good deal of it never will come in,
and the Government will get the profit of the loss or destruction.
Whatever went down on the Titanic will be profit to the Government.
The money has been held as another trust fund under the name of
“ The national bank note redemption fund” .
The Chairm an . Under the Suffolk plan, which required this con­
stant redemption, to which you referred as the New England plan,
there was no way provided for the redemption except sending it back
to the bank and having it redeemed ?
Mr. H ill . It did not go to the bank at all direct. It all went to
the Suffolk Bank in Boston. There it was assorted, made up in
bundles once a week and the notes of each bank sent home. It was
my business to count these, and take out the soiled and torn notes,
and do them up again according to the denominations ready to be
paid out again over the counter.
The Chairman . Under this bill, it being provided that the volume
of the currency issued as Treasury reserve notes shall be limited to
the commercial paper of like volume transferred, and that when
that commercial paper is retired, like money, it shall be restored,
would not that automatically retire such notes ?
Mr. H ill . Absolutely, unless other commercial paper was substi­
tuted, as the bill provides may be done.

E




BANKING AND CURRENCY.

263

The Oitairm an . Therefore that system would also serve to retire
such outstanding notes, would it not— the system of retiring this
commercial paper ?
Mr. H ill . Yes; unless substitution was made as stated. I am
going to talk along that line now.
My second subject is:
Why the notes should be issued by, and be in fact the obligations of, the Federal re­
serve banks instead of the Government.

I tried to boil this argument down to 15 minutes. It ought to
take 30 days. [Laughter.]
In my judgment, the Government has no right to issue them in the
form and manner which the bill proposes.
Under its sovereign power it can, through Congress, borrow money
on the credit of the United States, coin money, regulate the value
thereof and of foreign coin, and provide for the punishment of counter­
feiting the securities and coin of the United States.
These new notes are not money, not legal tender; they are to be
loans of the credit of the whole people, for a usage charge paid by
12 or more specific banks which are to be created.
Senator W eeks . They can be made legal tender by act of Congress.
Mr. H ill . I do not think that would alter the situation materially
if the same use was made of them; but under the terms of the bill—
and I am discussing this proposition from the basis of the terms of the
bill— they are obligations of the Government for which the United
States has received nothing and for the payment of which at any
time it assumes the responsibility looking to the Federal reserve bank
to recoup itself. The notes, under the terms of the bill, would be
unquestionably good if issued by the banks alone. W hy should the
burden of current redemption be placed on the Government and the
banks also and the cost to the people greatly increased for both the
loan and its responsibilities ? Irredeemable Government demand
notes are robbery and redeemable ones are dangerous and expensive.
The nations with which we will have to compete in the future have
long since stripped themselves of the very burdens which we propose
to assume needlessly. WT
hy should we not profit by their experi­
ence? Great Britain coins gold as full legal tender, silver as sub­
sidiary coin, and stops there. The Bank of England issues its notes
and is bound, by redemption in gold, to maintain their parity.
Germany, with true German persistence and thoroughness, has dug
herself out of the morass of the different State system of fiat money
and, like England, is now coining full tender gold and limited tender
silver, and the Imperial Bank issues bank notes and maintains their
parity by gold redemption.
The Bank of France issues the circulating notes, and redeems them
in the coin of the realm.
They stand on solid ground, stripped to the waist for the keen con­
test which is sure to come under our new revenue policy, throwing
upon the banks the burden of securing and maintaining a sufficient
supply of the world’s redemption money— gold.
What we ought to do, in my judgment, and do it now, is to adopt a
like policy here, and so meet them face to face with a footing as sure
as their own.
This bill puts the Government squarely into the banking business,
as a business for profit, and every cent of the cost of the business and




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profit as well will in the end be paid by the consumer of foreign and
domestic products.
A bank is organized to loan credits. A government is not. A
bank has convertible assets to meet its liabilities. A government has
nothing but its taxing power. A bank note is in effect a check at
sight upon the bank reserve, and in practice is exchanged as a demand
credit instrument for the promissory notes of its customers, payable
at fixed dates.
A wise adjustment of due dates of loans, coupled with long expe­
rience as to the life of the bank note, fixes the amount of reserve
necessary to be held against them. The security for their payment
is the reserve, the distributed payment of customers’ time notes, and
the capital and surplus of the bank as a margin.
A government possesses no such margin of safety in the form of
capital and surplus. It has no constantly inflowing stream of assets,
except its revenues, which have, by appropriations, been pledged in
advance to other uses. It possesses none of the functions of a bank,
and there is no reason why it should have them, for it deals with past
expenditures of its own, while banks handle future commercial trans­
actions of its customers.
The authors of this bill, evidently desiring to put the general credit
of the Government behind the credit instruments which the Federal
reserve banks may use, have invested the Federal reserve board with
all the note-issuing power of a central bank and made them the judges
of the pledged collateral security for the issues, and with the first lien
on all the assets of the Federal reserve banks which the law gives the
final payment of the Government notes will be unquestionably secure,
for aside from the pledged security and capital and surplus of the
Federal reserve banks every dollar of the reserve deposits of all the
member banks becomes by that lien an additional guaranty of the
skill, ability, good judgment, and banking experience of the Federal
reserve board and of their intimate knowledge of the credit of the
pledged collateral.
The final payment of the Government obligations will be certain,
but it would seem to me that in an honest effort to reform our cur­
rency system and to make it more elastic and responsive to trade
requirements the bill tends to a complete control by the Government
of the individual credit of the people. Our people in New England
look at it in that way.
Personally, I do not think this is necessary or wise, or that it is a
proper function of Government under our system. In my judgment,
the machinery by which the bill proposes to do this will not work
in actual practice. The note issue must either be by the banks or by
the Government. It can not be by both and maintain current
redemption except at enormous cost; and without such current
redemption a credit instrument put out to circulate as money but
without the legal tender quality is of little use, regardless of the
certainty of its final payment and retirement.
In effect, as originally prepared and as last published in the papers,
the currency note which the bill contemplates is a joint and several
note of the General Government and 12 Federal reserve banks
redeemable at the Treasury in Washington and by all of the Federal
reserve banks in gold, on demand. It is a legal tender to any of them,
by any individual and by all of the 25,000 banks of the country.




BANKING AND CURRENCY.

265

The amount of the issue is unlimited except in the judgment of the
Federal reserve board.
Is it not clear that each one of these parties to this obligation,
regardless of their final responsibility to each other, must be ready at
all times to currently redeem whatever portion of the entire issues may
be presented in the ordinary course of business, and in times of
stress and emergency to redeem in verjr much larger amounts ?
I think every one of you will admit that.
Under these circumstances the reserve provisions and redemption
power of each of the parties becomes all important. What are they ?
First, the Federal reserve bank. The notes are loaned to it by the
Federal reserve board on an interest charge fixed by them. Col­
lateral is segregated in the vaults of the bank itself, and no reserve
is required until the notes are actually paid out, and then only to
the amount of one-third of the notes paid out by it.
In those parts of the country where bank capital is superabundant
and deposits are large, by reason of business being conducted on
actual investment, rather than being based on future contingencies,
it is fair to assume that the Federal reserve bank so located may see
neither profit nor necessity for taking out notes, and consequently
will have no need whatever for a note reserve in the performance of
its duty toward its locality. And yet its responsibility in law for
current redemption of notes issued by other banks is just as great as
is that of the Federal Treasury, which compels all of the issuing
banks to maintain a redemption fund of 5 per cent with it.
Second, no matter where located, each Federal reserve bank is
only required to maintain a redemption reserve of one-third of its own
actual note issues, but assumes the burden of responsibility of re­
demption of the notes of all the other banks. Would not such a
redemption system break down in the first approach of panic, or
general liquidation of foreign and domestic credits?
Third, the Federal Treasury is also responsible for the payment in
gold on demand of all of the notes which the Federal reserve board
may have authorized, reserving to itself the right to require a deposit
in the Federal Treasury of 5 per cent of the amount so authorized,
whether the notes have actually been paid out or not by the Federal
reserve banks, or even if they are stored in their own vaults for
future use.
I do not want to misrepresent anything. This bill as first brought
out, gentlemen, was a straight gold-redemption bill and announced
in the papers as an administration measure, and I held up both
hands in joy. The redemption machinery was not satisfactory. The
reserve provisions were changed and the new bill published in the
Journal of Commerce in its issue of the 25th of July, and then changed
again and published in the New York Evening Post of August 11,
providing for redemption in lawful money, which means gold, silver,
or greenbacks. I do not know why these changes have been made
four times since the bill was drafted. I am simply discussing now
the basis on which I hope this committee will finally put the bill
through as it started, as an administration measure, with the notes
redeemable in gold.
Senator H itchcock . W hat does “ lawful money” mean?
Mr. H ill . Gold, greenbacks, or silver— nothing else.
Senator H itchcock . Of course, greenbacks are as good as gold,
are they not ?




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Mr. H ill . Silver dollars are also the equivalent of gold if their
parity is maintained by exchangeability for gold under a Treasury
order, to which I shall refer before I get through.
Is 5 per cent enough? If so, why is the bank required to keep
intact a 33J per cent reserve? W ith these notes made the direct
obligation of the Government, instead of the banks, and redeemable
on demand in gold by the Treasury, no man can point to any differ­
ence in the redemption responsibilities of the Treasury between this
new greenback and the old one, of which we have 346 millions still
outstanding.
Understand me, I am referring to current redemption.
The bitter experience of the past has taught us that a $100,000,000
fund, or 29 per cent of the whole, was not su ftcient to maintain their
parity when the demand for gold became urgent, and $250,000,000
of bonds marketed at great cost are a monument to the unwisdom
of issues of Government demand obligations.
Senator N elson . But that was chargeable to the silver-purchasing
clause.
Mr. H ill . Y es; and the deficiency in the revenues. Who knows
whether there will be a deficiency again ?
Senator N elson . Y ou could not charge them to the greenbacks.
Mr. H ill . I am saying that the current redemption responsibilities
of these two classes of notes, so far as current redemption is concerned,
is indistinguishable. By the gold standard act of March 14, 1900,
the reserve against the 346 millions of the old greenbacks was in­
creased to 150 millions, or 43 per cent, and with it authority given
for an unlimited bond issue besides. With identical responsibility
for redemption at the Treasury, and with the Treasury stripped of all
other current funds by compulsory deposit of them in the banks, who
can justify pinning the credit of the Nation to a 5 per cent redemption
fund, for the one issue, and the maintenance of 43 per cent reserve
for the other? The 5 per cent redemption fund for national-bank
notes is cited as such justification. The argument is not a good one.
The conditions of that fund for the past year have been explained.
There has not been a minute when it has not been overdrawn, the
overdraft running as high as 26 millions in February and ending the
year with an 8-million deficit.
The statements of August 1 shows almost 44 millions of nationalbank notes in the Treasury to be redeemed by the banks, and only
26 millions to the credit of the 5 per cent redemption fund. And this
is in a normal business year.
Soon after the panic of 1907 and when currency had again become
redundant, when studying the provisions of the Yreeland-Aldrich
bill, I visited the redemption bureau of the Treasury and saw there
a room full of national-bank notes, piled against the walls to the
ceiling, sent back for redemption. My recollection is that there were
more than $40,000,000, unassorted, paid for by the Treasury, waiting
to be separated and charged up in tne respective amounts, for which
each of the 7,000 national banks was liable.
There is one trouble. They have got to assort them and separate
them, and it may be weeks and weeks afterwards before they get their
remittances from the banks.
Senator N elson . Suppose the notes are retired when redeemed,
like the Bank of England notes ?




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267

Mr. H ill . They have got to be assorted. There are 7,000 national
banks, and it takes time to do it when they come in in bundles.
Why, Mr. Chairman, I saw bundles of notes down there in the
original packages in which they were shipped, with the strings uncut,
and with the Treasury seal on them, sent out in the latter part of the
panic of 1907, and when the panic was over immediately returned for
redemption, unused.
From the report of the Treasurer for 1912 I imagine the conditions
are not very different now, for he strongly urges the necessity for
increasing the fund. But the difference in the character of the two
issues is very great. The national bank circulation is practically a
loan on the Government bonds, by which they are secured and to
carry the profit of more than 1 per cent above the normal discount
rate. No reserve is required against it, and it has become a fixed
and rigid part of our circulating medium. Its average life last year
was 7 months. The issue under this bill is taxed at its source, and
the redemption forced under the provisions of the bill. It is practi­
cally an emergency circulation, securing its elasticity by frequent
redemption and retirement and reissue.
The gold standard act of March 14, 1900, made a dollar consisting
of 25.8 grains of gold, nine-tenths fine, the standard unit of value,
and declared that all forms of money issued or coined by the United
States should be maintained at a parity of value with this standard,
and that it should be the duty of the Secretary of the Treasury to
maintain such parity.
No backward step should now be taken.
The requirements of trade will send the great bulk of these notes,
as in the case of national-bank circulation, but with accelerated speed,
T
through New York City into the Federal Treasury, and unless the
gold-standard act is to be in effect repealed, they must there be
redeemed by the Treasury in gold, and the burden of securing and
maintaining the gold supply of the country, now borne by the Treas­
ury, very materially increased.
By making the note issues the obligations of the Federal reserve
banks, and each one responsible for the gold redemption of its own
issue, the burden would be placed where it belongs, upon the banks
which receive the benefit and where the facilities for carrying that
burden exist.
W e have now, as Treasury obligations, in round numbers, green­
backs, $346,000,000, redeemable in gold; national-bank notes, $725,000,000, redeemable in legal tender; silver dollars, $565,000,000, ex­
changeable for gold; making a total of $1,636,000,000.
Immediately after the passage of the gold-standard act, making
it the duty of the Secretary of the Treasury to maintain the parity
of all forms of money issued or coined, Mr. Gage was asked the
question:
How do you propose to perform your duty with reference to the silver dollars?

His reply was that there was only one way in which it could be
performed, and that was to make them exchangeable for gold on the
demand of any citizen of the United States; and the order was issued,
and my recollection is, or my impression is— and I would be glad to
have the committee ascertain the fact— that it is still in existence in
the Treasury Department, and the Treasury Department is per­
forming that function. That is responsible for 565 millions.
9328°— S. Doc. 232, 63-1— vol 1------18




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Senator N elson . I s there any record of silver dollars presented
for redemption in gold ?
Mr. H ill . Are there any such cases ?
Senator N elson . Yes, sir.
Mr. H il l . I do not know. I do not know whether any records
have been kept by the Treasury Department. That could be ascer­
tained
I would be very glad if the committee would ascertain that
from the Treasury Department.
This bill proposes an unlimited issue of further Government demand
obligations to be superimposed on such a foundation as this.
The Bankers’ Association proposes that the Federal reserve banks
make their own obligations, secured bv the same collateral, with a
reserve of 40 per cent in gold instead of 33$, and bear all the burden
and cost of redemption.
These men ask it, not for profit to themselves, for not a dollar
of these notes will be issued by them, but all will be the obligations of
the one or more Federal reserve banks which the bill creates.
The existing banks ask it for the common good, and in the honest
belief that the world’s experience and our own for the past 50 years
should not be ignored.
That is all I have to say, gentlemen.
Senator H itchcock . The question w as asked whether or not silver
T
was sent to the Treasury for exchange in gold.
Mr. H il l . I do not know. But I will state to you, in my judgment,
that with an unlimited issue of paper money, redeemable in silver or
greenbacks, the first tendency or the gold now in the United States
would be to leave the country, and silver dollars would very soon be
presented for exchange for gold, if they are not now.
Senator H itchcock . Do you think that any quantity of bank notes
would be injected into the currency wdiich would result in driving
gold out of the country ?
Mr. H il l . Not under the terms of the bill proposed by the Bankers’
Association, for this reason: Under the terms of the bill proposed by
the Bankers’ Association there is no more profit to the Federal reserve
bank in discounting paper and paying notes over than there is in
giving a book credit. Indeed, not quite as much. The only reason
for issuing a note at all, Senator Hitchcock, is that there are times
in the different seasons when a man can not pay off his cotton pickers
and his orange pickers and his harvest hands in checks. He has got
to have actual money or a substitute for it. This bill provides that
you may take those substitutes in the form of currency, and if they
are made absolutely safe, there is no difference to the bank or the
borrower so far as the discount transaction is concerned. They would
give him credit on it. Instead of his drawing his checks, they could
give him bank notes if he preferred.
Senator H itchcock . I want to ask you under what circumstances
the Gresham law operates to drive gold out of the country ?
Mr. H il l . Simply that it is the most valuable thing as the world’s
medium of exchange, and a man will want to hide it.
Senator H itchcock . Let me ask you whether a gold certificate is
not more valuable than a bank note?
Mr. H ill . N o ; not if the bank note is absolutely redeemable in
gold. A Bank of England note is as good as our gold certificate
anywhere in the w'orld.




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269

Senator H itchcock . Does not gold go out of the country if the cur­
rency becomes redundant ?
Mr. H ill . Yes, of course; if the currency becomes redundant.
Senator H itchcock . W hat is to prevent the currency becoming
redundant under the system where there is an unlimited bank issue
of notes?
Mr. H ill . It simply can not,, because they can not issue any except
they have a 40 per cent reserve, under the terms of this bill. They
have got to pay gold, and the whole thing has got to respect the busi­
ness activities of the country, and be gauged by the supply of gold.
Senator H itchcock . Not under the terms of the bill------Mr. H ill . I am talking about the amendments which these gentle­
men propose, which I hope from the bottom of my heart will be
accepted. That is my hope as a country banker, from a State that
has not a reserve bank in it. When this bill came before the Asso­
ciation of Bankers of the State of Connecticut I think it was unani­
mously voted not to be accepted by them. The same thing has
occurred in Vermont, I think. They are willing, under any safe and
sane plan, to make the sacrifice for the general good, of uniting in
massing the reserves of this country to meet the emergencies of the
future. That is the sum of the whole business; that is all there is to
it, if it can be done on a perfectly safe basis.
Senator H itchcock . I want you to state specifically whether, if
the currency became redundant by an excessive issue of credit money,
gold would leave the country ?
Mr. H ill . I do not see how currency could become redundant
under the bankers’ plan.
Senator H itchcock . I am not saying that. I am asking you to
suppose it.
Mr. H il l . Oh, I think it would. That is the reason I voted against
the Vreeland-Aldrich bill. I thought it would be inflation.
Senator H itchcock . This bill provides no limit, and your measure
provides no limit to the volume of credit currency which it is proposed
to issue.
Mr. H il l . Oh, I do not think that this bill, even if drawn on the
basis of the redemption features which are contained in your bill,
would prove an inflation measure. I think it would be scientifically
wrong. I think the trouble about the bill Is that while it would not
be an inflation measure it would break down in operation and would
break the Treasury of the United States or else compel them at their
expense to furnish the gold as the basis for redemption.
Senator H itchcock . I quite agree with you that the failure to
provide a redemption from the gold in the Treasury is a vital one in
the bill; but I think, also, your scheme is defective, because you pro­
vide no limit upon the issue of a credit currency; and the result might
be an inflation or a redundancy.
Mr. H ill . There is a limit of 40 per cent reserve. It can not go
beyond two and a half times that reserve in gold.
There was a new feature which came to me at Chicago. I had
never ^thought of it before. I had always believed that a perfectly
safe measure would be a 50 per cent reserve in gold and the balance
covered by good commercial paper— which, if i am not mistaken, is
the German policv, is it not, Mr. Forgan?
Mr. F organ . Yes, sir.




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BANKING AND CURRENCY.

Mr. H ill . Y ou have 33^- per cent in gold. The banks’ suggestion
is 40 per cent, and both of you cover the entire amount of the paper
by acceptable commercial credits.
Mr. W e x l e r . Accruing in 90 days.
Mr. H ill . Accruing in 90 days.
Senator H itchcock . Y ou spoke of 40 per cent gold reserve, and
yet every bank of issue in Europe carries a much larger reserve.
Mr. Htll . Yes, sir; as a matter of choice.
Senator N elson . But, gentlemen, will you allow me to state in
this connection that the volume of currency should be measured, not
by the gold reserve, but should be measured by the amount of com­
mercial loans that are made ?
Mr. H ill . Both.
Senator N elson . N o, no. This currency is issued on commercial
loans, such loans as provided in the bill.
Mr. H ill . Let me ask you this question, Senator Nelson: How
can the volume of currency with a 40 per cent gold reserve exceed
two and a half times the reserve ?
Senator H itchcock . That is another condition.
Mr. W e x l e r . Your statement is erroneous in this respect: The
credit is covered by the amoimt of commercial credit, and the amount
of notes is regulated by the amount of gold against it.
Mr. H ill . These gentlemen have great interests, which they have
to look after. My time is my own. I will be glad at any time next
week or after, if you desire to cross-examine me, to come down and
submit myself for your examination, and I hope some word that I
have said has had some influence upon your determination of this
matter.
I want to say to the gentlemen of the committee that the reason
I am here is that I went to that conference in Chicago as a delegate
from the State Association of Bankers in Connecticut. These gentle­
men were strangers to me, most of them, at that time. I was ap­
pointed on the committee by which these resolutions were made. I
do not know the politics of these gentlemen. There is not any
political consideration in any recommendation that is given to you.
There has not been during that Chicago conference any mention of
politics.
The Chairman . I do not think, Mr. Hill, that any intimation of
that nature has been suggested by the committee.
Mr. H ill . N o ; but I want to refer to the fair way in which this
whole thing has been done.
There was one motion made on that committee, and I made it
myself. When they said, “ W e recommend one central national
bank or, if for political considerations that can not be obtained” —
and I moved to strike out “ for political considerations,” and it was
stricken out. That is the only political reference that has been
made in this conference, all the way through, straight down to the
present time. And I believe, Mr. Chairman, that no man ever
came before a committee of this kind with purer motives or clearer
intentions to act for the best interests ana welfare of this whole
country than these gentlemen here to-day.
The Chairm an . You think that a redundant currency would
retire gold or cause gold to go in hiding ?
Mr. H il l . I think that has been the experience of all mankind
for the last 50 years, since the Gresham law was enunciated.




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271

The Ch airm an . Y ou thought that the Yreeland-Aldrich bill
would make a redundant currency, did you not ?
Mr. H il l . And I voted against it— 1 of 16.
The Ch airm an . Can you tell me how much redundant currency
there would be under that bill?
Mr. H il l . I prophesied at the time, if the bill was carried out
authorizing the issue of notes on the basis of existing debts without
any reserve, that it was bound to result in inflation. Besides, the
Vreeland part of that bill made a general partnership of all the banks
of each district.
The Chairm an . That would have been impossible.
Mr. H il l . Absolutely impossible.
Senator H itchcock . D o you not propose to have the banks go
into partnership ?
Mr. H ill . Only to the extent of a limited joint partnership; not a
general partnership.
1 want to correct another statement made here. That bill did not
pass as a result of a Republican caucus. There never was a Repub­
lican caucus on that, or any other legislative question during the 18
years I was in Congress.
Every man stood as an independent
representative to vote as he saw fit, and 16 of us voted agamst the
Vreeland-Aldrich bill.
The Chairm an . Will you not sit down and let me ask you a few
questions ?
Mr. H ill . Certainly. I thought you were through with me and
wanted to let these other gentlemen take my place.
The Chairm an . N o ; I want to ask you a few questions, if you will
permit me to do so.
Mr. H ill . I would be glad to.
The Ch airm an . I s it not a fact that the Bank of England, whose
stock is owned by private persons, that the Bank of Germany— the
Reichsbank, so called— whose stock is owned by private persons,
that the Bank of France, whose stock is owned by private persons,
issue legal-tender notes ?
Mr. H ill . Yes, sir.
The Chairm an . I s it not a fact that the Supreme Court of the
United States has declared that Congress has the right to issue
legal-tender notes ?
Mr. H ill . Yes, sir; as a war measure.
Senator N elson . Oh, no.
Mr. H il l . I differ with you.

Senator N elson . That was the case at first, and then, afterwards,
it was given as a peace measure.
Mr. H il l . But the Government would not get value received for
this legal tender, and they would not get a cent except for the use
of it. You can not loan our credit as individuals to 12 banks. That
is a legal proposition that I do not care to discuss, however.
The Ch airm an . I am not discussing it; I am merely asking for
your evidence as a witness. I am not asking you for the reasons, but
for the facts, desiring that the facts show on tiffs record from you.
Mr. H ill . I will answer that, so far as the German bank is con­
cerned, it is organized in no such way as this is.
The Ch airm an . That is not the question. Do they issue legaltender notes ?




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BANKING AND CUBRENCY.

Mr. H ill . They have the right to issue legal-tender notes.
The Chairman . Does the Bank of France ?
Mr. H ill . Yes, sir.
The Chairman . I s not that true, then, of the Bank of England and
Germany and France?
Mr. H ill . Yes, sir.
The Chairman . That is the point I wished to have in the record.
Mr. H ill . These notes would be legal tender for the banks char­
tered by the United States Government, but I do not believe the
Government would ever attempt to make them legal tender between
individuals. They have the right absolutely to make them legal
tender between their own creatures.
The Chairman . I am not speaking of the right, I am speaking of
the fact.
Mr. H ill . Somebody will raise the question of right before this
matter is finished.
The Chairman . Probably; and I have no objection to your raising
it before you get through. I would like to ask you if it is not also a
fact that nineteen-twentieths of the redemption of the national-bank
notes is due to the fact that these notes in gold get legal-tender
money ?
Mr. H ill . N o, sir; I do not think so at all. I think you are en­
tirely mistaken. I think the bulk of the redemptions is shown by
the statements here that the banks send their notes through the New
York, Chicago, and other reserve centers, to get reserve credit on
them, and they send them to Washington to get reserve money.
The Chairman . W hat is reserve money ?
Mr. H ill . Reserve money, under the law, for a national-bank note,
is a greenback. In fact, it is now gold, silver, and greenbacks.
The Chairman . Then you have answered my question affirma­
tively ?
Mr. H ill . Yes, sir. The Government has an absolute right to
make any requirement that it sees fit concerning its own creatures.
But you do not for a moment think they could make regulations
concerning the operations of State banks and trust companies, which
constitute two-thirds of the banks of the United States ?
The Chairman. I am trying to elicit certain facts from you, as a
witness.
Mr. H ill. Yes, sir.
The Chairman. Y ou said a few moments ago that 28 millions out
of 600 millions of national-bank notes were redeemed on account of
their being mutilated currency ?
Mr. H ill. I said that as a matter of memory.
The Chairman. That is near enough to serve the purpose of my
inquiry.
Mr. H ill. I think it was 28 millions destroyed and retired.
The Chairman. So that, out of 600 millions, 28 millions were re­
deemed and canceled because mutilated ?
Mr. H ill. Yes.
The Chairman. That is less than 5 per cent, is it not ?
Mr. H ill. Yes, sir; less than 5 per cent. Let us be correct. That
was simply because it was destroyed and mutilated. Four hundred
millions were destroyed and canceled because of their condition and
reissued. But the 28 millions which I have referred to were mutilated




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273

notes sent in by the Subtreasuries whose duty it is to select them
out whenever they come into the Sub treasury; and they were destroyed
and retired. The business of the Subtreasury is to clean up the note
condition, so far as it comes to them.
The Chairman. Y ou spoke of these notes as being unlimited.
Are not these Federal reserve notes proposed by this bill really limited
in volume to the amount of a certain commercial paper, or the
qualified notes turned over to the Federal agents ?
Mr. H ill . Some people disagree in regard to that.
The Chairman. So that it does not go beyond that limit ?
Mr. H ill . Oh, not at all.
The Chairman . And when that commercial paper is retired,
these notes can be returned to the Federal agent for retirement from
circulation ?
Mr. H ill . Yes, sir. I said in the beginning that the notes under
this bill are absolutely good. I started with the proposition that they
were absolutely good, just as good as the proposition submitted by
the Bankers’ Association.
Senator N elson. There is one thing that is not clear to my mind.
Where are these Federal reserve banks to get the gold ? W hat provi­
sion is there for them to secure the gold ?
Mr. H ill. That is their business. Do not shove it onto the United
States Treasury. They have got to get it.
Senator N elson. N o ; but whether it is the United States or the
banks, in either case what provision is there in here for it ?
Mr. H ill . The gentleman from New Orleans will buy bills of
exchange on cotton, if it is to his advantage to do it. The gentleman
from Chicago will buy bills of exchange on some other commodity.
It is the business of the banks, just as it is the business of the Bank of
England to get its gold from us or elsewhere. And why shove it
onto the United States Treasury, already having 1,636 millions to be
responsible for ?
Senator N elson. How many of these reserve banks will be trading
only in secondhand-------Mr. H ill (interrupting). Oh, they will trade in first hand, the
principal banks. The reserve banks have it as a part of their
business.
Senator N elson. But they do not trade in these products they
bring in from abroad ?
Mr. H ill . They trade in the paper that represents the products,
and in so doing practically trade in the products.
Senator Crawford. W ill these notes have to be redeemed in gold
when they are presented to the Treasury of the United States ?
Mr. H ill . Absolutely, under the terms of this bill.
Senator Crawford. Where is the United States to get it?
Mr. H ill . That is where the machinery will break down.
Senator Crawford. The bill does not specifically provide a
method by which the Treasurer is to keep the gold there to redeem
them when they are presented there.
Mr. H ill . That is precisely the point that I am presenting to you.
You have a 43 per cent reserve now for the old greenback, and this
bill provides for a 5 per cent reserve for the new one, with the same
redemption responsibilities.




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BAN KIN G AND CURRENCY.

Senator Crawford. Apparently that is a weak link or a missing
link, in the bill.
Mr. H ill . I think that in operation it would prove a breaking link.
Senator N elson. W hat do you make out of this provision ? I
will read it:
Whenever the Federal reserve notes issued through one Federal reserve bank be
received by another Federal reserve bank, they shall be ret' rned for redemption to
the Federal reserve bank through which they were originally issued.

Now, listen to this:
Or shall be charged off against Government deposits and returned to the Treasury.

They are charged off against the deposits that the Government
has in these banks ?
Mr. H ill . They may be.
Senator N elson. Without regard to the 5 per cent?
Mr. H ill . Yes, sir. I have looked at that with a great deal of
care, and have said to myself:
How on earth will the Treasury at Washington, which is keeping these accounts
by book accounts, know whether they can draw on a Federal reserve bank, when
possibly two days before a million reserve notes have been charged up against their
balance of a half a million and they are overdrawn already?

I have not attempted to solve that part of it.

Senator N elson (reading):
Or shall be presented to the Treasury for redemption.

In other words, when a reserve bank gets those notes, if they are
the notes of another bank, they can do one of two things: Either
charge it off against the Government deposits or forward it to the
Treasury for redemption ?
Mr. H ill . Senator, you will find it all full of just such difficult
problems for solution; and it all comes right down to this, that that
note is a joint and several note of 13 persons or artificial persons.
Senator N elson. I should put it in another form: It is the note of
the United States guaranteed by the original reserve bank.
Mr. H ill . I am speaking of the redemption responsibilities only—
the machinery part of it— that can not be carried out in the form in
which it is proposed.
The Chairman. W hat is the difficulty, Mr. Hill, if this note is to
be charged against the Government deposit of a reserve bank?
Suppose that the Government has no deposit there; then it has the
option of sending it in for redemption. What is the difficulty about
that ?
Mr. H ill. Oh, no difficulty, except the Government at Washington,
where the accounts are kept, will not know anything about the con­
dition of their balance. Supposing a million dollars of notes came in
to a Federal reserve bank in San Francisco and they were obliged to
redeem them— or accept them, if you please— accept them at par, and
due to the time consumed in the passing of the notes across the con­
tinent the bank at San Francisco would be overdrawn. If they had
a deposit of a half a million, it would be overdrawn half a million.
The Chairman. Then, you assume that the Government would not
be advised of the matter ?
Mr. H ill . I assume it would be.
The Chairman . They would not know it?




BANKING AND CURRENCY.

275

Mr. H ill . I should think that it was the business of the Federal
reserve bank to notify the Government. I did not pay any attention
to that; I do not call attention to it at all, and I think the other
members of the committee in Chicago did not pay any attention
to it, because they thought it was a matter for your committee
to decide. But that is another weak link, it strikes me.
Senator N elson. H ow do you construe this provision of the bill?
Notes presented for redemption at the Treasury of the United. States shall be paid
and returned to the Federal reserve bank from which they were originally issued.

Mr. H ill . That is all right. They would pay it if they had the
money; and it would be their business to get the money.
Senator N elson. The United States redeems them and sends them
back to the bank from which they were issued. When they come
back to the bank from which they were issued, what becomes of them ?
Mr. H ill . They can retire them if they see fit or reissue them.
The whole trouble comes from the fact that this is a joint and several
note with equal responsibilities, on the part of each one, except on the
final payment.
Senator H itchcock. I want to presume a case. Under the bill as
it is, we will assume a reserve bank located in San Francisco. Supose business is active, and it has been rediscounting paper until it
as its reserve down to 33| per cent, and other paper is presented for
discount, and the reserve bank applies to Washington for, say,
$1,000,000 of notes. How would the reserve bank at San Francisco
place $300,000 reserve against that $1,000,000 of notes when its
reserve is already reduced to 33 per cent ?
Mr. H ill . It can not take out a note, and it could not discount it
under those circumstances.
Senator H itchcock. That is what I would like to understand. I
would like to have any banker answer the question.
Mr. H ill . Just a moment. Pardon me, I want to say this, that
none of these problems have arisen because for the last 20 or 30
years— I remember that far back— we have not had to have a reserve
against note issues.
Senator H itchcock. W hat have you to say about that, Mr.—
I was going to say the Senator from New Orleans, but he is not that
yet. 1 will say the banker from New Orleans.
Mr. W exler . I did not quite catch your question, Senator.
Senator H itchcock. I say, suppose that a San Francisco reserve
bank has been rediscounting paper very actively until its reserve has
been reduced to 33-^ per cent, and there is still a strong demand by
banks in that region for the discounting of paper, and the reserve
bank applies to the Treasury for $1,000,000 of Government notes------Mr. W exler . Government notes ?
Senator H itchcock. Under this bill they would be Government
notes, United States notes, which it desires to loan out to its banker
customers. How can it then place the reserve or segregate the reserve
of $333,000 against those notes without destroying its reserve?
Mr. W exler . It can not do it.
Mr. F organ. It will have to get an authorized loan.
Mr. W exler . It has reached the limit of its loaning capacity, and
it will either have to call on the Federal reserve board to force one
of the other reserve banks to rediscount some of the paper or the
banks would have to stop loaning and begin to call in the loans.

E




276

BANKING AND CURRENCY.

The Chairman . That is another check on these notes ?
Mr. W exler . An absolute check.
The Chairman. And therefore the danger of redundancy is dimin­
ished by that provision ?
Mr. H ill , unquestionably. There is no way in the world that
you can have an inflation of credit if you draw this bill in the man­
ner that has been suggested. It will be beyond human power to ex­
pand the circulation beyond the limitation of the gold reserve required
under the law. The only way you can increase it is if you have a
tremendous era of prosperity, big crops which you will export, and have
a large balance of trade and bring in more gold, circulation based on it
will naturally flow from the banks. You can expand your credit, and
in times like that you will need it.
The Chairman. Suppose that the San Francisco reserve bank
finds itself utterly unable under the terms of this bill to give to its
customers the relief which the bill is supposed to give. Up to this
time it has taken out no notes at all: it has not taken advantage of
that provision of the bill, and yet when it comes to the point where it
needs to do so it has absolutely no ability to do so.
Mr. H ill. But, Senator, you are supposing a perfectly impossible
situation. I can not conceive that all the borrowers in San Fran­
cisco who would have to have discounts on these notes would all
reserve nothing but book credits and none of them would have ever
taken out a note. Your proposition would imply that all of the
banks in San Francisco had taken book credits and none of them
had ever needed these notes for circulating purposes. That condi­
tion could not possibly exist unless they are all dead out there.
Senator H itchcock. Let me show you how it can exist very well.
When this bill goes into effect the reserve banks must begin at once
to use notes. They will have the deposits in their banks. They will
have $500,000,000 of deposits and they will have $100,000,000 of
reserve. Under those circumstances they will loan the cash that
is there.
Senator N elson. But there is nothing, Senator Hitchcock, to
require either that subscription of capital or deposit of reserve to be
in gold. Where does the bank start wdth its gold? The point I
make is, where does this reserve bank start with its gold reserve for
the redemption ? They can pay the subscription in any legal tender
money, and their reserve may be in any legal tender money. How
does the bank get its gold to start business with ? The first business
comes from commercial paper. That commercial paper may or may
not bring gold. Where does the bank get its gold, and how?
Senator H itchcock. Not only that, but when the point is made
that to require 400 banks in central reserve cities to turn over $300,000,000 in cash to these reserve banks to begin business with, it is
said that that would result in a contraction of credit in those reserve
cities, and that in order to avoid that it is proposed to have these
banks, instead of turning over cash to the reserve banks, to take it
from commercial paper. So they will not only have very little in
the way of gold, but they will have very little in the way of any cash.
Mr. F organ. May I say a word on this point?
The Chairman . Certainly, Mr. Forgan.




1

BANKING AND CURRENCY.

277

Mr. F organ. I do not know who is the author of this [exhibiting
a paper], but whoever the author is, he knows this subject. This
was passed to me by some one in this corner.
Mr. W exler . Mr. Roberts.
Mr. F organ. He has cleared up this subject in a way that I would
like to bring before the committee.
Considering the case presented by Senator Hitchcock, the object
that the bank would have in asking for these notes would be to
liquidate its deposit liabilities, to exchange its deposit liabilities, for
the convenience of the public, into notes; and that it could do without
any change in its reserves as against its liabilities. So that what we
have been saying was impossible is perfectly possible and perfectly
practicable.
Mr. H ill . Yes, but this law requires a deposit of 5 per cent reserve
in the Treasury before notes.can be taken out, and the question sug­
gested an exhausted reserve.
The Chairman . The committee will stand adjourned for eight
minutes, until the members have an opportunity to vote, and the
hearing will then be resumed.
(A recess was thereupon taken for eight minutes, after which the
following proceedings were held:)
The Chairman . The committee will come to order.
Senator Shafroth. I would like to ask Mr. Hill a question or two
if I may.
FURTHER S TA TE M E N T OF JAMES B. FORGAN, CHICAGO, ILL.

Mr. F organ. Mr. Chairman, will you allow me to correct a state­
ment I made this morning for the record ?
The Chairman . Certainly.
Mr. F organ. When Mr. Reynolds was speaking he was asked by
one of you gentlemen what the expense to a bank was on bank-deposit
accounts, and as he did not readily answer and did not seem to have
the figures right at his fingers’ ends I volunteered that it was a fraction
more than 3 per cent.
I want to correct my statement and say that when I said that I
had in mind the cost to the First National Bank of Chicago of all
deposits including the commercial deposits and the bank deposits,
and my statement should have been, when it is confined to bank
deposits, 41 per cent.
Senator Shafroth. Mr. Forgan, while you have the floor I would
like for you to make an explanation as to your theory of this bill
creating a contraction of the currency. I understand that your
theory is that a contraction will follow if this bill is passed in its pres­
ent form. Therefore I would like to have you explain to the com­
mittee your reason for believing that.
Mr. F organ. Not a contraction of the currency, but a contraction
of credit in the banks.
Senator Shafroth. Well, a contraction of credit in the banks, then.
The Chairman . Y ou said you had a table in respect to that ?
Mr. F organ. Yes, sir.
The Chairman . W ill you have the table submitted to the stenog­
rapher to put it in the record ?




278

BANKING AND CURRENCY.

Mr. F organ. I will give it that way.

Senator Shafroth. Y ou may give it any way you wish.
Mr. Forgan. I would prefer to make the statement and to give it
with qualifications.
Senator Shafroth. Y ou may proceed in any way you see fit.
Mr. Forgan. It will not take a minute.
The loans and bond investments of the national banks, exclusive
of their Government bonds pledged as security for their note circu­
lation, amount, in round figures, to $7,336,000,000. The aggregate
net deposits of the national banks on which their legal reserve is
figured amount to $7,124,000,000. (See comptroller’s report of June
4, 1913.) Thus the aggregate loans, including bond investments, of
the national banks are practically an offset against the amount of
their aggregate net deposits. In other words, these two items rep­
resent the amount of credits exchanged between the banks and the
public, the amount owed by the banks to the public being practically
offset by the amount owed by the public to the banks. This ex­
change of credits is based on and supported by actual money in the
banks. The established relation between the amount of actual money
held by the banks and the fabric of credits existing between the banks
and the public is therefore in the ratio of $917,000,000 to $7,336,000,000, or 12£ per cent of money to the amount of credits.
If from the amount of money on hand, $917,000,000, the national
banks are required to make the following payments to the Federal re­
serve banks, viz, 10 per cent of their aggregate capital, $105,000,000,
and 3 per cent of their net deposits, $213,000,000, they would have
to turn over more than one-third of their entire holdings, or
$318,000,000, and would have left money on hand amountmg to
$599,000,000.
I might explain that in a very ready way by taking three articles
this way [indicating]. Suppose these three articles represent a total
amount of money m all the national banks, figuring on the net de­
posits and not on the gross deposits. The difference between the
figures I give you and Mr. Reynolds’s figures is that he figures on
the gross deposits and I figure on the net deposits.
Senator N elson. W hat is the difference between gross and net?
Mr. Forgan. My reason for figuring on the net is that when we
are figuring the reserve deposits to be paid into the Federal reserve
banks on the main reserves we will be allowed to figure, I presume,
the same way as we are allowed to figure our legal reserves now. We
are allowed to deduct from gross deposits balance due from banks
against balances due to banks; the clearing-house checks are de­
ducted; all national-bank notes on hand are deducted from the gross
deposits to produce the net deposits. Therefore our deposits are
very largely reduced on which we keep our reserves, and I figure,
there being nothing in the national-bank law to prohibit that method
of figuring reserves and that system having been adopted by the
comptroller’s department, the same practice will be continued in this
case.
Now, if these three items represent $900,000,000 and you take a
third of that away we have two-thirds left. And you have the same
liability as you had before. You have the same fabric of credit in
the banks left when you have $600,000,000 of cash that you had




BANKING AND CURRENCY.

279

before when you had $900,000,000; so that the basis of the fabric
of credit existing between the bank and the public has been changed
from 12^ per cent, as I have shown, which is $8 of credit for $1 of
money. It has been increased to whatever that proportion is. It
would be something like $12 of credit to $1 of money, and in that
way the banks will be very much more expanded.

Senator N elson. Y ou mean inflated.
Mr. F organ. Y es; inflated. I would like to say right here, be­
cause it came up before: In our conference in Chicago there was a
question raised by Mr. Dawes, ex-Comptroller of the Currency and
now president of the Central Trust Co. there------The Chairman . Y ou are speaking of Charles G. Dawes ?
Mr. F organ. Yes, sir; Charles G. Dawes; he made the statement
that this would produce a great inflation and I followed him by say­
ing that it would cause contraction.
The Chairman . H ow much gross do you figure; $1,800,000,000,
according to your estimates ?
Mr. F organ. Yes, sir; $1,800,000,000. My idea— and I want this
to be put clearly before you, and as I show, the contraction was' to
bring the present fabric of credit existing on the banks down to
the present ratio of $8 credit to $1 of money and would require the
calling of loans and the contraction of credits to the public to that
extent. He figured that this contraction would not be enforced and
therefore there would be a great expansion, and he came to me
after he had taken my figures home and said:
You and I are exactly on the same basis. You say that if the thing was put into
effect—which could not be done—it would cause contraction. It would make con­
traction necessary, but the contraction would not take place. Therefore the banks
would be placed in an expanded condition.

Therefore he and I were really on the same track.
As I was saying, taking that one-third of the money, or about
one-third, would leave money on hand amounting to $599,000,000
in the banks.
On the established basis of 12^ per cent of money to existing credits,
which seems little enough, this would provide for credits between the
banks and the public aggregating $4,792,000,000, calling for a com­
pulsory contraction in such credits of $2,544,000,000 from their
present amount of $7,336,000,000. The Federal reserve banks, with
a capital paid in of $105,000,000, and reserve deposits similarly
paid in of $213,000,000, would have in money to start with, $318,000,000, which, on the basis of the 33J per cent cash reserve they are
: 1J
‘ 1
^Dtal demand liabilities would enable
assumed total liabilities of $954,-

000, 000.
Senator Crawford. Y ou can not extend credit to anyone except
to the banks ?
Mr. F organ. N o, sir; as I was saying, that would be $954,000,000,
of which they would have already assumed liability for the reserve
deposits, $213,000,000. Their net expansion capacity would there­
fore be $741,000,000, and this would De the limit of their ability to
rediscount for their member banks, whose compulsory contraction
of credits as shown above if they are to be kept in their present basis
would be $2,544,000,000, showing that their ability to rediscount




280

BANKING AND CURKENCY.

would fall short of the contraction of credits in their member banks
by $1,803,000,000. After 14 months, when the minimum reserve
deposits lequired are to be raised from 3 to 5 per cent, the contraction
would be proportionately greater.
Senator H itchcock . That would be without their issuing any
notes. They could do that from the cash which they received from
deposits ?
Mr. F organ . It would make no difference what form the credit
took; it would not make any difference whether it was deposit
liabilities or note liabilities. They might be all notes or all deposits.
There would not be a particle of difference, as they keep a reserve on
both.
Senator H itchcock . Y ou figure, then, that there would actually
be a contraction of $100,000,000 of actual bank credits of the country ?
Mr. F organ . I have not finished my argument, Senator. Right
there, however, I want to impress upon your minds that I did not
want to give these figures to scare anybody, because it does not mean
the thing can not be worked out. It does not mean that at all. It
means that this $1,800,000,000 is the amount of contraction that
would take place in order to continue the national banks on their
present basis of $8 of credit to $1 of money, which I do not think
necessary, but it produces a condition that has to be faced.
Now I will go on to explain. Such a contraction of the credits, if
enforced, between the national banks and the public could not be
accomplished without a cataclysm in business.
In order that these figures should not overstate the effect on the
credits between the public and the national banks by such a diversion
of money equal to one-third of all the money in the national banks,
from these banks into the Federal reserve banks, the 3 per cent
reserve deposit required on their ‘ ‘ total demand liabilitiesh as been
figured on their net and not on their gross deposits, under the assump­
tion that the same offsets would be allowed them that are now allowed
when figuring their legal reserve requirements.
These figures do not include the Government deposits which
within 12 months are to be transferred to the Federal reserve banks.
With the exception of the free money in the Treasury such deposits
would be transferred from the national banks and would require them
to part with a further amount of money, equal to the amount of the
Government deposits they hold, which would still further proportion­
ately decrease their money reserve and increase the contraction of
their loans necessary to maintain their present credit expansion
basis. These transfers of Government deposits having to be made
within 12 months, would have no effect on the above transactions, all
of which must occur within 60 days.
Senator N elson . Those Government deposits would be a checking
account, would they not ?
Mr. F organ . Yes. I do not wish to be misunderstood here, and
I want you to understand my position. They say figures will not lie.
The Chairm an . Figures lie and then they prove it, as they say.
Mr. F organ . If you rely on them you had better rely upon some­
thing that is fundamentally true.
I do not wish it to be understood that these figures forecast pre­
cisely what would occur were the Federal reserve act passed and were
the national banks to operate under it. I am well aware that no




BANKING AND CUBEENCY.

281

calculation can possibly be made to correctly forecast what would
actually occur in such an event. I am satisfied, however, that the
figures portray as accurately as possible the situation which would
be confronted were the 12 Federal reserve banks organized and
should the national banks undertake to operate under the new law
and maintain their present credit expansion basis of $5 credit to SI
money.
The discrepancy between the loaning capacity of the Federal
reserve banks and the contraction of credits in the national banks
shown in the figures may be further elucidated as follows: It is pro­
posed to transfer bodily from the national banks practically onethird of the actual money now lodged in their vaults and place it
in the vaults of the Federal reserve banks. As we have seen, the
money in the vaults of the national banks forms the basis of a fabric
of credits existing between them and the public in the ratio of 12£
per cent of actual money to the amount of such credits outstanding.
This fabric of credits must be adjusted to the reduced holdings of
actual money by the banks if the established ratio of 12£ per cent
of money to total credits is to be maintained, otherwise to a propor­
tionate extent there will be an overexpansion of credits in the banks.
The credit expansion of the Federal reserve banks is fixed on the
basis of a 33 J per cent money reserve against their total liabilities.
They are therefore restricted in their credit expansion to S3 of credit
against $1 of money, while the national banks have been doing
business on a 12£ per cent money basis, or S8 oi credit against $1
of money. As a basis of credit, therefore, the one-third of the money
now in the national banks when transferred to the Federal reserve
banks would lose nearly two-thirds of its present expansive power.
Senator Shafroth . Mr. Forgan, would it not be true that that
partnership relation, if it might be so termed, between the Govern­
ment and the banks would produce a confidence in the public that
would have a tendency to increase their deposits with the banks
generally ?
Mr. F organ . That is on the assumption that they have any more
to deposit. I think they have deposited most of it now.
Senator S hafroth . Well, a part of the money is held in savings
deposit vaults?
Mr. F organ . But I think it is comparatively a small part.
Senator Shafroth . I s it not a fact also that many of the banks,

especially country banks, keep a very large reserve that they would
not have to keep if they were permitted to discount their paper at
one of the banks, and would not they have a tendency to overcome
some of these objections?
Mr. F organ . Yes, sir; I want that distinction understood. I do
not consider the maintenance of the $8 to $1 basis necessary in the
banks when they have these Federal reserve banks to go to to get
rediscounts. I do not think it is necessary. I only put it before you
as a condition produced by the operation of the plan which is pro­
posed. I do not think there is any doubt about the condition, and
it is for you to consider what the effect of it will be.
Senator Crawford . Well, would it be safe banking to have $12
credit against $1 money?
Mr. F organ Well, it would not, under the present circumstances,
Certainly, because it would affect our reserves.




282

BANKING AND CURRENCY.

Senator Craw ford . Well, under what circumstances would it be
safe ?
Mr. F organ . If we had a Federal reserve bank, established where
we could always depend upon getting a satisfactory circulating medium
to liquidate our deposits with when they were drawn upon, I think
it would be safe at least to materially increase it.
It would not have to go to the full $12 limit, because we would have
some rediscounts; but even if they rediscounted to that extent, it
would be an additional expansion of the credit on the part of the
banks.
Senator Craw ford . Well, you would not want this Federal reserve
bank to do a general business with the public, and do it on a basis of
$1 cash to $8 credit?
Mr. F organ . N o, sir; I would not; and that is one reason why,
if it was a Federal reserve bank, and was running under competition
with the banks and keeping a reserve of that kind, it could not do it.
Senator N elson . N ow , Mr. Forgan, I want to ask you a few ques­
tions bearing on this question of credits. Now, you have in your
banks what I would call two different classes of deposits; what I
would call book, or credit, deposits, and check deposits, have you not?
Mr. F organ . Yes.
Senator N elson . I mean by that, that if I come in and give you
my note for $1,000 and you credit your books with that------Mr. F organ . Yes.
Senator N elson . On one side you have $1,000 of deposits?
Mr. F organ . Yes.
Senator N elson . And on the other side you have my note as an
offset against it ? Now, the bulk of your deposits in the large cities
are of that character, are they not ?
Mr. F organ . I should say yes, largely— or just the same thing
when checks are deposited.
Senator N elson . I want to call your attention to the fact— I ask
you this question both in connection with this subject and in con­
nection with the interrogatories of Senator Hitchcock here to-day,
speaking about the disproportion, or how the capital of the banks has
grown less, as compared with the amount of deposits— and that is,
that the capital and surplus of your banks would be an offset to those
deposits that I call “ cash deposits,” would it not?
Mr. F organ . Yes.
Senator N elson . Well, the notes given for your credit deposits
would be an offset for that, would they not ?
Mr. F organ . Well, you could consider them so.
Senator N elson . So that, as to your credit deposits, which are the
bulk of your deposits, to have, in addition to vour capital and surplus,
you have in addition to that the notes of the depositors, the paper
depositors?
Mr. F organ . Yes, sir; but the depositor’s note does not lie in the
bank concurrently with his deposit which he gives. He gives his note
payable in three months; but he may check the money out the next
dav.
Senator N elson . But that is how you get such enormous deposits
on your books in the large cities— that they are in the shape of credit
deposits, are they not, as distinugished from cash deposits ?




BANKING AND CURRENCY.

283

Mr. F organ . Yes. But I do not distinguish, when you come to
credit deposits; I do not see any distinction between the notes------Senator N elson (interposing). Well, is that not the reason?
Mr. F organ . Will you please wait a minute and let me explain.
I do not think you understand what I was going to say. I do not see
any distinction between the notes discounted which our customers de­
posit and other people’s checks on other banks, which they also
deposit. They are alt credit deposits.
Senator N elson . N o ; but I want to call your attention to one
practical distinction that I have observed, and 1 think you know it.
You take a small country bank, one of the $25,000 national banks in
a rural community. Seventy-five per cent of their deposits consist
of cash actually paid in over the counter. It is only a small bagatelle
that comes in in the form of such credit deposits as you have in the
large cities.
Mr. F organ . Yes.
Senator N elson . S o that there you have a difference between
country banks and large city banks in that respect. In the country
bank it is cash that is deposited. With you it is simply a book
deposit.
Mr. F organ . Well, if you take the other side, Senator, they pay
out cash over the counter for most of the transactions, and we pay
simply a balance to the clearing house, the difference between what
we have against the other banks, every day, and what they have
against us. So that we do not have to pay out nearly as much money
proportionately as they do.
Senator N elson . I know you do not have to pay out the cash,
as the country banks do.
Mr. F organ . I mean that proportionally we do not pay out as
much cash or take in as much cash as the country banks.
Senator N elson . Y ou have the commercial paper, and they have
the money, largely, and against that both you and they have the
surplus and capital ?
Mr. F organ . Y es; in the statement I made just now, the first
statement I made, you take all the banks together and the obligations
of the public to the banks in the shape of loans is practically offset
by what is called their net deposits.
Senator N elson . Yes.
Mr. F organ . And that carries out your theory that the rest of it
is represented by the capital.
Senator N elson . And surplus of the banks?
Mr. F organ . Yes.
Senator W e ek s . Mr. Chairman, I w*ant to ask Mr. Hill a question.
I do not know whether he is going to remain in the city or not.
You have been giving a good deal of attention and study, Mr. Hill,
to the question of issuing bank notes or Treasury notes?
Mr. H il l . I have in years gone by; I have not recently. This whole
thing is a new proposition to me, during the last two weeks.
Senator W eek s . Y ou have been looking up authorities, and all
that sort of thing?
Mr. H il l . Yes.
Senator W e ek s . N ow , have you found any testimony or any
authority which advocates issuing Treasury notes in preference to
issuing bank notes?




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BANKING AND CURRENCY.

Mr. H il l . N o ; I have not.
Senator W e e k s . Have you ever heard of any?
Mr. H il l . And I will state furthermore, that I have seen, within
a month, the statement that even Spain has taken the same course
that Germany took years ago, that England has always pursued,
in throwing the responsibility for the maintenance of the gold basis
of the country, upon the banks. I do not know how correct that is;
but I have seen it in the newspapers— I will not go into the way in
which they did it, because that would raise another question. I do
not know of any country that has adopted the policy of government
paper currency in recent years; and I know the leading countries of
the world are getting away from it as fast as they can, and throwing
the burden of maintaining the gold supply upon the banks, where,
in my judgment, it ought to go, and where only it can safely go.
Senator N elson . W e have an evidence in our experience with the
national-bank notes. They have not been the promises of the Gov­
ernment; they have been the promises of the bank. And yet the
people have accepted them with as much confidence as any other
part of our currency.
Mr. H il l . Because they are secured, dollar for dollar, by Govern­
ment obligations.
Senator N elson . And with that past experience with our notes,
we could not have any more difficulty with these new notes, if they were
issued by the reserve banks instead of by the Federal Government?
Mr. H ill . I think the notes are good under either plan, whether
issued under the plan as it is drawn— I mean with the bill as originally
drawn, with gold redemption, and not as it stands now, with “ lawful
m o n e y red em p tio n . But the note would be good under either
plan. The bankers’ proposition, while it fixes the reserves normally
at 40 per cent, leaves that 40 per cent untaxed. If the reserve falls
below the 40 per cent, under the proposition which they suggest, for
every 2\ per cent which the reserve falls, the bank is taxed on that
decrease of reserve, until it gets down to 33$ per cent, the normal
ratio of the pending bill.
So that, in either case, I think the notes are abundantly protected.
Senator N elson . Y ou would have that reserve in gold ?
Mr. H ill . Yes, sir. Gold is the world’s money. If we were by
ourselves, and had no international trade (and everything points to
an enormous increase in our international trade in the future), wo
might consider some other proposition. But the demand for gold is
bound to be greater in the future against this countrv than it is now
in my judgment; and therefore I think we ought to fortify ourselves
when we can do it without cost to us.
Senator N elson . Y ou believe it is wiser to throw the burden of
maintaining the gold reserve on the banks than to have it rest upon
the Government ?

Mr. H il l . W hy should that not be done ? W hy should that burden
be upon the Government, requiring the Government to tax it back on
the people of the country? These reserve banks are going to make a
profit, or else they would not be incorporated. Why should it not
come out of them? The 25,000 existing banks do not make a cent
out of it, they do not issue any notes under this bill. W hy should not
these reserve banks, whether they consist of but 1 or 12, take upon




BANKING AND CURRENCY.

285

themselves the burden of furnishing the gold supply, as they do in
every competing country in the world ?
Senator M cL e a n . Mr. Chairman, I would like to ask Mr. Hill a
question.
The Ch airm an . The Senator from Connecticut will proceed.
Senator M cL e a n . W e have got $1,000,000,000 in gold which is
represented by certificates.
Mr. H ill . I do not think we have, Senator. I will tell you that
there are------Senator Shafroth (interposing). $1,100,000,000.
Mr. H ill . I do not think we have.
Senator Shafroth . That is the last report of the Treasury.
Senator M cL e a n . But according to the report, there is some
$500,000,000 held in the banks ?
Mr. H ill . Exactly.
Senator M cL ean . Nobody knows where the other $500,000,000
are. Is it not possible that those gold certificates are, many of them,
in Europe ?
Mr. H ill . I have seen them myself there, over and over again.
Senator M cL e a n . Did you ever find any greenbacks there ?
Mr. H ill . Rarely, if ever. I have seen in almost every civilized
country in the north temperate zone American gold certificates,
our people knowing they can travel with them and foreigners know­
ing them to be gold receipts which can be held or transported with­
out loss by abrasion.
I asked Mr. Roberts a few moments ago if the Treasury Depart­
ment had anyway by which they could trace United States gold cer­
tificates in the vaults of the banks of Europe. There is $440,000,000
of them missing somewhere. It may be in the pockets of this
committee— I wish they were [laughter], but who knows where that
money is? Nobody knows where it is.
Senator M cL e a n . A s a matter of fact you do see the gold certifi­
cates abroad ? You do find them abroad ?
Mr. H ill . I have seen many of them abroad, and I have carried
them abroad myself. You will find them in the hotels on every
tourist line of Europe and around the world.
Senator Shafroth . Mr. Hill, you have explained the defects, very
largely, of this bill. Now, I would like to have you state what kind
of currency you think we ought to have ?
Mr. H ill . I will tell you what I think as to these banks that are
to be created. In the first place, I would create one central national
bank with complete supervision by the Government but without
control by the Government, because that control means control of
individual credit, and you can control it from the Federal reserve
board straight down to the farmer who takes his note for discount
to the smallest country bank in the United States.
Senator S hafroth . N ow , then, you would have a great central
bank—-—•
Mr. H ill . I would have a central reserve bank, or a reserve asso­
ciation, or whatever you choose to call it.
My general idea of this whole proposition is this: There is this
great good that is going to come out of this legislation, and I con­
gratulate this committee upon being the parties who will bring it
about, that the one thing to be secured is the massing of the reserves.




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BANKING AND CUBRENCY.

But, gentlemen, it has got to be on a basis that makes it an induce­
ment to the country banks of this country to participate in it as a
patriotic movement. There is nothing in either bill to-day— either
as presented by your committee or by the bankers’ committee (and
this bill is the more liberal). There is nothing in either bill to-day
that would induce a country bank to go into this proposition, com­
pared with the advantages which they would get of home supervision
under their State law, except a patriotic desire for the good of the
whole country and a sacrifice on their part to accomplish it. Now,
that is my judgment.
Now, how are you going to do it? It is a matter of detail for you
to work out. W e must have the massing of the reserves for mutual
support by ail of the weak in times of stress. You do not need
this massing at any other time. You do not need it except when
the emergency is on you, but you have got to have it organized
and ready and doing a fairly profitable business when you do not
need it in order to have it when you do, and your problem is
how to establish it at the least possible cost of maintenance and have
it ready when you want it.
And in my judgment— I do not quite say------The Chairm an . Pardon me, I do not think you have answered the
question proper.
Mr. H ill . W hat is that, Mr. Chairman ?
The Chairm an . It does not specifically answer the question of
Senator Shafroth.
Mr. H ill . In my judgment, it is a mistake to attempt to go beyond
that point. Let it grow by an evolution beyond that point.
Senator Shafroth . Would you have the central bank issue all of
the currency?
Mr. H il l . Absolutely.
Senator Shafroth . W hat limitation would you put upon the cen­
tral bank ?
Mr. H ill . None but the requirements of the business of the
country. W ith prompt redemption, after it has done its first work.
Senator Shafroth . Would you leave that to the board of
directors ?
Air. H ill . W ith the limitations of a gold reserve and the security
of commercial paper.
Senator Shafroth . W hat percentage of gold reserve would you
have ?
Air. H ill . I thought I would make it 50 per cent. These gentle­
men recommend 40 per cent. I concede tneir judgment is better
than mine, for this reason: I stated 50 per cent in my study of this
bill, and had the remainder of the note secured by collateral paper,
accepted paper. They make it 40 per cent and the whole note secured
by collateral. Consequently I think their proposition is better.
Senator Shafroth . Would the board of directors have the power
to retire the currency at any time they wanted to do so ?
Air. H ill . It would retire itself.
Senator Shafroth . Well, but would they, in fact, have that power
under your plan ?
Air. H ill . W hat difference would it make whether they retired it
themselves-------




BANKING AND CURBENCY.

287

Mr. W exler (interposing). They could not retire it themselves.
Senator Shafroth . Your theory is that the central bank would
have the power to issue notes and borrow money ?
Mr. H ill . It would not make any difference whether it had the
ower to issue notes or not. The power to issue notes is a mere bugaoo. There is no difference between the expansive power of a prop­
erly secured note circulation and that expansion put upon the
books of the bank as a credit except in the form which the credit
takes.
Senator N elson (interposing). Mr. Chairman, I would be glad to
hear Mr. Forgan, Mr. Wexler, and Mr. Reynolds on this question of
the character of the bills, whether they ought to be the bills of the
bank or the bills provided in this proposed legislation, the promises
of the Federal Government. I would like to hear each of these gen­
tlemen discuss that question.
Senator P om erene . Well, it is half past 5 o’clock now, and that
would take a long time.
The Ch airm an . It has been suggested to the chairman that we
adjourn now until to-morrow morning at 10 o’clock.
But before adjourning for the day i should like to ask one question
of Mr. Hill.
Mr. H ill . Would you like to have me stay over until to-morrow,
Mr. Chairman ?
The Ch a irm an . N o ; I do not want to keep you, so far as I am
concerned. I just want to ask you this question: You stated, I be­
lieve, that you object to the Government control of this bank?
Mr. H il l . Yes, sir.
The Ch airm an . Because, in reality, it means Government control
of individual credit ?
Mr. H ill . Yes, sir.
The Ch a irm an . Right “ down to the crossroads” ?
Mr. H il l . I think it does.
The Chairm an , Would you prefer to have that control, then,
exercised by private persons ?
Mr. H ill . I would prefer to have that distributed, and you can
not stop it.
The Ch airm an . W hy ?
Mr. H ill . N o; it is not possible. There are 17,000 banks that are
not under the control of the Government. There are private bankers,
some of the largest institutions in the country. I do not believe it is
possible, by legislation, to get such a control. You may control it,
so far as the national banks come into the system.
The Chairm an . I merely wanted to get your point of view, Mr.
Hill.

E

(Thereupon, at 5.30 o’ clock p. m., the committee adjourned until
to-morrow (Saturday) morning, at 10 o’clock.)




288

BANKING AND CURRENCY.
S A T U R D A Y , S E P T E M B E R 6, 19 1 3 .

Committee

B anking and Currency ,
U nited States Sen a te ,
Washington D. 0.
The committee assembled at 10.15 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, Reed, Shafroth,
Hollis, Nelson, and Bristow.
The Chairm an . Mr. Forgan, I understand that you wish Mr.
Reynolds to take the stand and answer questions by members of the
committee ?
Mr. F organ . Mr. Reynolds and Mr. Wexler are both here Mr.
Chairman.
The Chairm an . All right. Mr. Reynolds, will you proceed now.
Senator Shafroth . Mr. Chairman, Mr. Milliken has some ques­
tions here in tabulated form which he would like to ask Mr. Reynolds;
and it concerns a theory which he holds and which he understands
very thoroughly; and I should be glad if you will allow Mr. Milliken
to ask them directly. Is there any objection to that?
The Chairman . I have no objections, if it is agreeable to the com­
mittee.
Senator H itchcock . If he desires simply to ask one or two ques­
tions, I have no objection.
on

,

ADDITIONAL

STA TE M EN T OF GEORGE
CHICAGO, ILL.

M.

REYNOLDS,

OF

Mr. M il lik en . I would like to ask Mr. Reynolds about the Euro­
pean test of solvency, as compared to the American test of solvency.
Mr. R eynolds . Can you not put all of that in one question?
Mr. M illiken . I have got it on one sheet of paper here, Mr. Rey­
nolds.
Suppose we should adopt the European test of bank solvency by
requiring the national banks to state the liquidity of their portfolio
(the portfolio being the portion of their assets which represents their
deposits and other demand obligations) and its ratio to their deposits
and other demand obligations, would that not tend to better banking
in this country ? That is the question.
Mr. R eynolds . Y es; I am inclined to think it would. I think any­
thing that would be in the nature of greater publicity of actual sound
or unsound conditions would be helpful.
Mr. M illik en . The second question is: To illustrate, let me sup­
pose there are two banks reporting under this test, one of which we
will call bank A and the other bank B, and their portfolios should be
as follows:
The portfolios of both banks and the ratios thereof to their deposits
and otner demand obligations would be as follows: Now, the first I
will give you is the amount of gold and other cash items, and then the
the next is the commercial paper maturing.
Bank A has in gold 10 per cent of its deposits, and it has 45 per
cent of commercial paper maturing within 15 days, 25 per cent of
commercial paper maturing within 16 to 30 days, 15 per cent of com­
mercial paper maturing within 31 to 60 days, and 5 per cent of com­
mercial paper maturing in 61 to 90 days, and no commercial paper
maturing after 90 days.




BANKING AND CURKENCY.

289

Bank B has 20 per cent of its deposits in gold, 15 per cent in com­
mercial paper maturing within 15 days, 15 per cent in paper maturing
in 16 to 30 days, 15 per cent of commercial paper maturing within 31
to 60 days, and 35 per cent of commercial paper maturing in 61 to
90 days, and no commercial paper maturing after 90 days.
Now, is it not a fact that bank A is in a better position to meet its
obligations than Jaank B, even though the latter, at the particular
time this statement is made, has 100 per cent more gold in its
vaults than bank A ?
Mr. R eynolds . I would say yes.
Mr. M illik en . Therefore, our test of solvency, which requires the
bank to state the extra liquidity— our test now requiring the bank to
state the extra liquidity of the smallest portion of its assets is a
fallacy, is it not, without stating the liquidity of the balance of its
assests? It is a monetary fallacy, which is not required in any
country of the world but ours; is not that true?
Mr. R eynolds . Y es; that is, practically, I will not say it is not
required in any country, but it is not required in most countries.
That is upon the theory that the question of reserves should be left
to the judgment and skill of the managers.
Mr. M il lik en . The managers of the bank ?
Mr. R eynolds . Yes.
Mr. M illiken . N ow , what other country is there which requires
a legal gold test but ours ?
Mr. R eynolds . I do not know of any, offhand.
Mr. M illik en . There is not a country in the w'orld; ours is the
only one. Not a single European country. The European expert,
Prof. Lazotti, of Italy, the great minister of finance of that country,
the man who gave them the rural credit system, says that is the most
dangerous feature in our whole banking system.
Mr. R eynolds . If I understand you correctly, your whole theory,
or question, is as to whether a very large percentage of your liabil­
ities covered by short-time maturing commercial paper, with a
small cash or gold reserve, is not better than a somewhat larger
gold reserve with a very much smaller percentage of short-time com­
mercial paper ?
Mr. M il lik en . Yes.
Mr. R eynolds . I certainly agree with you.
Senator N elson . But you will admit that, in one respect, their
bills of exchange or commercial paper is different from ours. Ours is
strictly in the form of notes ?
Mr. M illik en . Yes.
Senator N elson . And theirs is mostly in bills or drafts.
Mr. M illik en . Yes, sir.
Senator N elson . With the indorsers and acceptors on it?
Mr. R eynolds . Senator Nelson, the value of their short-time
commercial paper over ours under the present system could be illus­
trated in this way: That those banks, which are joint-stock banks,
discount this paper and turn it into cash at any time; and they are
more liquid by reason of that fact than under our present system;
but no more liquid than we would be under the same conditions, if
these Federal reserve banks were established as now contemplated.
Is that not right?
Mr. M illiken . I believe we could have a better discount bank.




290

BANKING AND CURRENCY.

Mr. R eynolds . Well, I am only trying to illustrate the point.
Mr. M illiken . Yes. But at present the banks have got no place
at which to rediscount their commercial paper?
Mr. R eynolds . The figures of foreign discount institutions show
that the major portion of the discounts taken by them are very short
time. You take in France, they will have an average from 14 days
to 20 days. In London, they will average from 7 -to 15 days, illus­
trating by that that the average joint-stock bank calculates that a
large quantity of liquid commercial paper of such a kind as is eligi­
ble for discount at the central bank is the thing they count upon
most for their reserves.
Mr. M il lik en . Certainly.
Mr. R eynolds . Credits there run for a very short time; a great deal
of money runs over week ends, or from 5 to 7 days. So that if a
joint-stock bank in London wanted to realize £1,000,000 they take
out of their portfolio paper sufficient to get that amount of money.
Mr. M illik en . The shortest time paper?
Mr. R eynolds . The shortest time paper they have. It may run
2 days or 5 days, or 7 days, with the result that the average discount
over there runs from 7 to 14 days.
Mr. M il lik en . Yes.
Mr. R eynolds . That is the real test of it.
Senator N elson . Then, they have in these countries what they call
“ accepting houses” ?
Mr. R eynolds . Yes, sir.
Senator N elson . That makes a business of accepting bills of
exchange ?
Mr. R eynolds . Yes, sir.
The Ch airm an . Mr. Reynolds, we have examined the pending
measure at considerable length, in showing what the objections to it
are. W hat features of the pending measure do you regard as of
value ?
Mr. R eynolds . W ell, there are many advantages. I think the
most important feature of all —and it is an extremely important one—
is that it will provide with proper elasticity in credit ana currency. I
think that it will have a tendency to mobilize reserves, to the extent
that it will give greater efficiency to the use of all lawful money as
reserves in the safeguarding and protection of our credit.
The Chairm an . Might these banks not also serve as a convenient
method of transferring credits from one part of the country to another
if they kept accounts with one another?
Mr. R eynolds . Yes; if they kept accounts with one another. The
difficulty with that is, that at certain seasons of the year, the tendency
is all in one direction, and in certain other seasons of the year it is
all in the other direction.
Now, that may be overcome partly with a common ownership of the
assets in one point, which would make these transfers of funds purely
bookkeeping entries; so far as the institutions would be concerned
there would be no transfer of the money. But they could make these
transfers, as you intimated, through keeping accounts with one
another.
On the other hand, the more money there is tied up in banks carry­
ing balances of one of the Federal reserve banks with another, in
order to meet the exchange requirements of the country, the less




BANKING AND CURRENCY.

291

ability they would have for doing business, and the greater the
contraction of general business would be.
The Ch airm an . Well, might these reserves of the reserve banks
not be kept with each other in cash, and in that way the matter of
exchanges be facilitated?
Mr. R eynolds . Well, I calculate that this bill, if it were put into
effect, would require that the balances due from one Federal reserve
bank to another should require 33$ per cent reserve in the bank to
which it was due; so that the more balances you carry, the more
reserves there would be necessary.
Now, you are getting back to the question of pyramiding. W e can
now run, in the reserve cities, on tne basis of 35 per cent reserve.
Now, if you undertook to bring about pyramiding by requiring them
to keep balances with one another in order to accomplish the same
thing the national banks are now doing, you would reduce the effi­
ciency of the reserve by raising it 25 to 33$ per cent, because it re­
quires a larger amount of money against those balances.
The Ch a irm an . Upon that assumption, that is true.
Mr. R eynolds . Yes, sir.
Senator S hafroth . Have you finished your question, Mr. Chair­
man?
The Ch airm an . Yes, Senator Shafroth.
Senator S hafroth . Mr. Reynolds, the currency which is provided
in this bill consists of Treasury notes, and they are not made legal
tender. In your judgment, would it strengthen the currency to
make those notes legal tender?
Mr. R eynolds . N o, sir; I do not think they should be made legal
tender.
Senator Shafroth . W hy? What objection is there to making
them legal tender?
Mr. R eynolds . Simply because, in my opinion, a bank note should
be created to serve only the purposes which a check would serve.
They are not money; and I think the fundamental point in the con­
sideration of that subject is to keep in mind constantly that they are
not money. They are obligations; they are credit instruments; they
are a means of exchanging a credit into a general form which is
known by everybody and accepted by everybody to such an extent
that they will pass current everywhere, whereas oftentimes an indi­
vidual check or draft would not pass current.
Senator Shafroth . But these notes are notes of the United States,
are they not ?
Mr. R eynolds . Yes. They are the joint obligations of Federal
reserve banks and the Government.
Senator S hafroth . But what is the objection if they are notes
issued by the United States Government; is there any objection to
making them legal tender?
Mr. R eynolds . I think there is a decided objection. What value
would the Government get if it issued these notes under these con­
ditions? Does not the question of the creation of credit follow the
same principles of economics applied to you as an individual, to a
municipality, a commonwealth, or a nation ? Should not credit always,
under all conditions, be created against the receipt of actual assets ?
In other words, if I give an obligation I must get an asset for it.




292

BANKING AND CUBRENCY.

Now, I understand that it is not the purpose of this bill to provide
that the Government gets an asset; but it creates a liability. Would
you gentlemen sign a note which might come back upon you for pay­
ment without getting some asset as against the liability which you
create with which you could liquidate the obligation ? It seems to
me that it is the same principle.
The Ch airm an . D o you think, then, that the principle in use by
the Bank of England is unsound ?
Mr. R eynolds . I did not understand that, Mr. Chairman.
The Ch airm an . D o you think the principle in use by the Bank of
England is unsound; it makes its notes legal tender?
Senator S hafroth . And so does the Bank of PYance.
Mr. R eynolds . N o ; I do not say that, because the Bank of Eng­
land, in a great part, has its notes secured by gold— they are ware­
house receipts.
The Ch airm an . But the Government’s promise to pay is also the
basis of their notes, is it not ?
Senator Shafroth . T o the extent of $90,000,000.
Mr. R eynolds . Well, that is to the extent of the amount of bonds
which they have back of those notes.
The Chairm an . I am speaking of whether you regard it as an erro­
neous system, the principle of the Bank of England— supplementing
the question which the Senator from Colorado asked you ?
Mr. R eynolds . Well, I do not know that I could give a satisfactory
answer to that question offhand.
Senator N elson . In the case of Bank of England notes, you know
that for every bill outside of these ninety millions of debt the Govern­
ment is backed by $1 in gold ?
Senator S hafroth . Yes.
Senator N elson . They simply serve the purposes of our gold cer­
tificates here. The bank of England has $1 in gold for every one of
those notes ?
Mr. R eynolds . N o.
Senator S hafroth . There is a reserve of about 60 per cent in the
Bank of England.
Mr. R eynolds . The larger you make your reserve the more you
minimize the danger against the issuing of those notes.
Mr. M il lik en . Mr. Chairman, will you permit me to make a
statement ?
The Chairm an . If the committee has no objection.
Senator H itchcock . Would it not be better to wait until Mr. Mil­
liken comes on the stand ? I think that ought to be a separate matter.
The Chairm an . Then, you may make your statement later, Mr.
Milliken.
Senator Shafroth . D o you regard the legal-tender character of
the United States greenback notes as being a detriment or a benefit ?
Mr. R eynolds . Well, it is a benefit in that it can be kept in circu­
lation better; but it is a detriment in ever^ other respect, because
it requires the Government to do just exactly what the Bank of
England does— carry an immensely large gold reserve against it—
which must be extremely expensive.
Senator Shafroth . Well, if they were made a legal tender, they
would have to carry a still larger reserve, would they not ?
Mr. R eynolds . I think they would, then.




BANKING AND CURRENCY.

293

Senator Shafroth . Well, then, the legal-tender character which
is attached to the greenback note is really a benefit in the matter of
strengthening the currency?
Mr. R eynolds . Well, it keeps them in circulation better. It en­
ables the banks to carry them in their reserves, and I think if you
will take the statement of the Comptroller of the Currency you will
find that those legal-tender notes are, to a very large extent now­
adays, locked up in the vaults of the national banks and kept there
permanently as their reserves.
The Ch airm an . Well, for that very reason------Mr. R eynolds (interposing). Yes, I think it is for the reason that
they are legal tender. But if you make the notes which it is pro­
posed to have these institutions issue— if you make them legal tender,
then you provide for what I am afraid will be a violent inflation in
credit.
Senator S hafroth . Then you think it would be a detriment to
make these notes legal tender, even if they are Treasury notes of the
United States Government.
Mr. R e y n o l d s . I do. I think it would provide for a greater
inflation than necessary, and in explanation oi that statement I will
say that I think that, for the reason that it is only in rare intervals,
now and then, under existing conditions that we need more credit, or
more money.
I do not believe you want that any more than the bankers do.
Senator S hafroth . D o you think that to make the present nationalbank note full legal tender for the payment of debts would be a detri­
ment or a benefit ?
Mr. R eynolds . N o ; I do not. I differ from a great many of my

colleagues as bankers on that subject, in this respect, that I have
believed for some time that a national bank note issued by an insti­
tution other than my own should, in view of the fact, first, that it is
obliged to pay par or more for the security which secures the note, be
counted as reserves. In other words, I think the note of Mr. Forgan’s
bank, secured as abundantly as it is secured, with the additional
liability of his bank, and also the promise of the Government to pay
it, should be counted as reserve in hand.
And, by way of illustrating how that works under existing condi­
tions, I have in my pocket a statement from our institution, received
three or four days ago, and I find that we have due from the United
States Treasury SI,437,000 against a requirement of 5 per cent of
$450,000, leaving $987,000 as representing the amount of national
bank notes which we have in process of transportation to Washington
and return, in order to present those notes for redemption and get
them into lawful money.
Senator S hafroth . And use that lawful money for reserves?
Mr. R eynolds . Yes. Now, every night we assort our money
received during the day and every bank note of banks other than
our own bank, which we are unable to pay out during the day, is
forwarded to Washington for redemption. And on this statement
which I have, if we had not been obliged to do that, but could have
counted those notes as legal money, we would have had $987,000
greater reserves, which would have been the basis of security for
credit, on the basis we are now running, of 8 to 1 as Mr. Forgan
showed, which would allow for a good deal of expansion.




294

BANKING AND CURBENCY.

Senator Shafroth . Well, you think that if the present bank notes
were made legal tender, that it would create an expansion of credit ?
Mr. R eynolds . Y es; I think it would, to some extent.
Senator S hafroth . In the same way as if this Treasury note was
made so ?
Mr. R eynolds . Yes, sir; I do.
Senator S hafroth . That would be due to the fact that it could
be counted as reserves, and would, therefore, be a safer currency to
build on ?
Mr. R eynolds . Yes, sir. I think the better policy is not to make
either of them legal tender, but to go ahead and legislate along lines
that will provide for proper elasticity in these unusual times that I
have referred to, through a private bank of discount, where an elas­
ticity in credit and an elasticity in note issue, which must be coinci­
dent with each other, can be accomplished.
Senator S hafroth . Mr. Reynolds, do you consider that action of
the European banks— the Bank of Germany, the Bank of France,
and of England— in making their notes legal tender has been a detri­
ment or a benefit ?
Mr. R eynolds . Well, you have a very different system of business
in those countries. I do not know that I am sufficiently posted to
justify me in answering that and standing upon my answer.
But here is the difference as it appears to me at the moment: In
this country banks are obliged to carry now about $1,500,000,000 in
reserve, and it is specified in the law that those reserves— particularly
outside of this $542,000,000 bank balances— must be in lawful money,
or legal tender. Now, there is no such law as that in Europe. There
is no law anywhere requiring joint-stock banks in England and in
other countries to carry reserves, and I think when you take that
into consideration you make the cases so dissimilar that they are not
parallel at all.
Senator N elson . Then there is another consideration, Mr. Rey­
nolds, that in the European country they have only one bank of
issue.
Mr. R eynolds . Yes.
Senator N elson . And at present we have in the national system
of this country over 7,000?
Mr. R eynolds . Y es; but the answer to the question as I meant to
make it is to make the reserves carried entirely apart from the
reserves for circulating notes or reserves against deposits.
W e have to carry that $1,000,000,000 here under the law; and it
ties up an immense amount of money in our vaults that can not go
out— and that requirement does not exist in those countries.
If you were to go to London and ask a joint-stock banker to tell
you how much money he had in his till, or his own safe, he will not
tell you. He will immediately tell you about his cash, and due from
bank— he will tell you that nis till money plus a balance in bank
makes what he calls his “ cash means,” and what we call our reserves
over here.
In 1908, when I was over there, the only question that the London
banker would not answer very frankly was as to the amount of actual
money in his vault. W e made an estimate, however, as best we
could from information gained on other matters and from conversa­
tions, and estimated the amount not to exceed 3£ per cent.




BANKING AND CURRENCY.

295

Senator Shafroth . In actual cash
Mr. R eynolds . In the vaults of the London banks. Now, in
Berlin, some of the joint-stock banks boasted that they kept no
money in their vaults. They claimed that they could do all the
business of Germany safely and efficiently with less than 1 per cent
of money in their till. That represented the other extreme. They
boasted of that as an example of the efficiency of reserve money in
their system, through the mobilization of all of their reserves in the
Reichsbank.
Now, in the passage of this bill as proposed, you, in my opinion,
only go half way toward what they have done in the mobilization of
reserves in Europe.
Do not misunderstand me, for I do not mean to say that I do not
think that what this bill proposes will not do good. I think it will
do great good. Just in proportion as it does mobilize reserves and
make them available for use, it will help the situation.
For example, if we have too much money in New York and too
little money in the South and the West, it is only through the mobiliza­
tion of these reserves, where credit can be changed against them, that
we can get relief. If we have to send the actual money and have the
business done through the payment of money itself, we can not
accomplish fully all that is needed.
Senator S hafroth . Then, your only objection to the legal-tender
character of a United States note, or a Treasury note, such as is issued
here, is not that it weakens currency, but that it has a tendency
to inflate credit.
Mr. R eynolds . Absolutely.
Senator Shafroth . And that is the only objection you see to it?
Mr. R eynolds . Well, from that point of view; yes.
The Ch airm an . D o you mean to say ‘ ‘inflate” the credit or
‘ ‘enlarge ” the credit ?
Mr. R eynolds . Well, either one.
The Ch airm an . Well, one is in a harmful degree and tbe other is
not necessarily harmful.
Mr. R eynolds . I would say “ inflate,” then, because I would
think it would have a tendency to create more notes than there
should be. That, I think, would answer your question.
The Ch airm an . But I was speaking of credits, not notes.
Mr. R eynolds . Yes, sir.
Senator S hafroth (interposing). Will you estimate the extent of
inflation that would be brought about by the making of these notes
legal tender?
Mr. R eynolds . I could not do that offhand. It would be a com­
plex mathematical problem, and this is too important a matter for
me to make a mere guess of that character.
The Chairman . I s it the general practice of the banks to send
these national-bank notes in for redemption when they come into
their hands ?
Mr. R eynolds . I do not imagine it is, Mr. Chairman, with the
smaller banks; but the national-bank examiners in an institution like
ours insist on a separation of the money. Up to about two years ago
they permitted us to count different kinds of money as lawful money.
That is to say, we might have $100,000 in a package of $1,000,000




I

I

296

BANKING AND CURRENCY.

that would be bank notes, and they would pass those notes without
any criticism.
Mr. F organ . Well, they took the percentage into consideration.
Mr. R eynolds . They pretended to take the percentage; but they
did not count it literally.
Mr. F organ . N o .
Mr. R eynolds . But they now require us to separate and segregate
the different kinds of money, and our records show every night what
kind of money we have; and in that way we are every day forwarding
them to the Treasury Department at Washington as the only basis
upon which we can get legal money against those notes. As I say,
we have $987,000 tied up at this moment.
Senator S hafroth . D o you send those notes to the Treasury
Department by express ?
Mr. R eynolds . By express, yes; and it is rather an expensive
proposition. In the first place, it takes about three men in our insti­
tution to assort and count the money, and then we have to pay the
express charges both ways.
The Chairman . If that money was legal tender, it would not be
sent in for redemption, would it ?
Mr. R eynolds . It would not be sent in for redemption; no.
The Chairman . That would at least be an economic advantage in
that particular, would it not ?
Mr. R eynolds . Well, you might save a quarter at one end and
lose a dollar on the other end.
The Chairm an . What is the dollar that you would lose on the
other end ?
Mr. W e x l e r . It might be legal tender and still not legal reserve
money.
The Chairm an . It would under the law; if it were legal tender
it would be lawful money ?
Mr. W e x l e r . It would not necessarily be counted as the national
bank reserves. I think the two are quite different; that is, as to
whether a note is legal tender and whether it is good to count as
reserves.
The Chairm an . The two things need not go together, of course,
but under the present law legal tender, being lawful money, would
come within that rule ?
Mr. F organ . But if they were legal tender you could force any­
body else to take them, so that they would be equal to gold.
Mr. R eynolds . And that is very largely the explanation of the
reason why the banks which issue a large amount of national bank
notes are glad to have State banks take their circulation and lock it
up as a part of their reserves.
The Chairman . Does not the legal-tender quality of the notes of
the Bank of France and of the Bank of Germany relieve to that extent
the need for actual gold?
Mr. R eynolds . N o ; I would not say that.
Mr. S prague . Mr. Chairman, might I be permitted to make a state­
ment at this tme?
The Chairman . Yes. Gentlemen, this is Prof. Sprague, of Har­
vard University.




BANKING AND CURRENCY.

STA TE M EN T

OF PROF. 0 . M. W . SPRAGUE, OF
U N IVER SITY , CAMBRIDGE, MASS.

297
HARVARD

Prof. Sprag ue . The issues of the Reichsbank of Germany were
made legal tender only three years ago, in the last revision of its
charter. They had been accepted quite readily by the other banks,
and the proposition to make them legal tender was in no sense a bank­
ing proposal.
They were made legal tender because it was thought that in case of
war the notes would be more serviceable for the Government, since
in case of war a very large issue of Reichsbank notes will unquestion­
ably be made. It was thought desirable to insure the general accepta­
bility of those notes for that reason and for that reason alone.
Similar is the case of the Bank of France. The notes were made a
legal tender at the time of the Franco-German War, in 1870, in order
to secure their general acceptability throughout the country. The
Government was at that time, through the Bank of France, making
large loans, and the notes were going into circulation in enormous
quantities, and were not, at the moment, redeemable in gold.
Senator Shafroth . That was considered, then, the strengthening
feature to the currency, was it not?
Prof. Sprague . Y es; but not for banking purposes at all.
Senator S hafroth . Yes; purely as a national currency?
Prof. S prague . Yes.
Senator B ristow . I understand you, Mr. Reynolds, from your
remarks, to object to the greenback as a currency?
Mr. R eynolds . Yes, sir.
Senator B ristow . W hat is your objection to it?
Mr. R eynolds . Well, the objection to it is that it is an inflation
through the creation of fictitious credits.
Senator B ristow . W hat is the difference in principle between the
national bank notes and the greenbacks ?
Mr. R eynolds . Just the difference that one is absolutely securedby specific deposit of specific collateral in one form or another, while
the other has nothing but a general promise to pay back of it.
Senator B ristow . Well, that is a Government obligation in both
cases ?
Mr. R eynolds . It is a Government obligation in both cases;
yes, sir.
Senator B ristow . S o that in principle it is the same, is it not ?
Mr. R eynolds . Well, it is entirely different in principle, in that
one is secured and the other is not. If you were to let the national
bank issuo its notes without any collateral deposit, they would be
the same.
Senator B ristow . Mr. Chairman, there is a call for a vote, and
we will have to go to the Senate; so I will continue this line of ques­
tions later.
(Thereupon, at 10.50 a. m., the committee took a recess of 15
minutes, at the conclusion of which the following proceedings were
had:)
The C hairman . Senator Reed, did you desire to ask some ques­
tions ?




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BANKING AND CUBBENCY.

Senator R eed . Mr. Reynolds, you have spoken of bank notes, and
have said that back of every bank note there was security. Now,
just what is back of a bank note?
Mr. R eynolds . I am speaking about the notes that this bill con­
templates issuing. They have back of them, first of all, a gold re­
serve of 33$ per cent. They have, in addition thereto, a specific
deposit of 100 per cent of that in commercial paper; and in addition
thereto they have the entire liability or responsibility of the banking
institution issuing the notes.
Senator R eed . N o w , referring to this bill, there would be 33$ per
cent gold on deposit all the time in the vaults of the reserve banks—
the regional bank. There would be no money issued unless it was
backed by that 33$ per cent, in the first place?
Mr. R eynolds (interposing). There could not be, under the law.
Senator R eed (continuing). And, second, there would be 100 per
cent of notes of customers; and those notes wmuld be indorsed, in
turn, by the member bank— but, of course, these notes do not have
to be indorsed by all the member banks ?
Mr. R eynolds . N o, sir.
Senator R eed . They would only be indorsed by the bank that
wanted to obtain the money ?
Mr. R eynolds . They would be indorsed by the bank that would
rediscount the paper with the Federal reserve bank.
Senator R eed . Yes. The method would, then, be that if the
First National Bank of Oklahoma wanted to get $100,000 of notes
issued to it, it would take $100,000 of securities which would consist
of the promissory notes of A, B, C, etc., and carry them to the regional
bank, and the regional bank would deliver to them $100,000 of
currency. Is that correct?
Mr. R eynolds . Yes, sir. But it might be received by them,
Senator Reed, through another process. Of course, in the natural
transactions of business between banks, the Oklahoma bank might
secure credits— I mean by that checks or drafts upon other member
banks— which it could deposit with the Federal reserve bank, thereby
increasing its balance with that bank to an amount greater than
its required reserve, and whatever amount they would have to
their credit in excess of the amount which they would be required
to carry with that bank as a part of their reserve, they could get
in banK notes by issuing their check upon the Federal reserve bank.
Senator N elson . May I put a question right there, in connection
with that, Senator Reed ?
Senator R eed . Certainly, Senator Nelson.
Senator N elson . N ow , the bank deposits its commercial paper
and takes the currency of the regional bank, which supplies the reserve
of 33$ per cent. Is that supplied by the bank asking for the cur­
rency, or is it supplied by the regional bank ?
Mr. R eynolds . It is supplied by the regional bank.
Senator R eed . N ow , where does the regional bank get its gold?
Mr. R eynolds . The currency ?
Senator R eed . The gold.
Mr. R eynolds . Well, it must get it by assembling gold in its
natural conduct of its business. It will have deposited with it
various forms of credit, and it will have more or less deposited with it
in the natural course of business. For instance, in the transaction




BANKING AND CURRENCY.

299

of business our institution, if it should have a deficiency with the
Federal reserve bank at the close of the day and it would be our duty
to make that good, we might have an excess of reserve money in
our vaults which we could deposit there and make it good.

Senator R eed . T o u would be required to send up gold, would
you not?
Mr. R eynolds . W e would not be required to send up gold. That
duty, or the duty of maintaining the gold reserve, would devolve
upon the management of the Federal reserve bank. They would
have to look out for that in their transactions of business with the
member banks. It could be done in many ways, chief among which
would be by the converting, if it wanted the actual specie, of the
gold certificates which would come into its hands.
Senator R eed . Y ou have come to the very question I was going
to ask. The Government has $1,100,000,000 of gold certificates
outstanding ?
Mr. R eynolds . Yes, sir.
Senator R eed . And back of that, it has the same amount of gold;
and that, I believe, you bankers insist is not entitled to be signified
by the name of money. You say it is a warehouse receipt. It is a
pretty good one, however, is it not?
Mr. R eynolds . Yes, it is.
Mr. W e x i .e r . It comes nearer to being money than anything we
have got.
Senator R eed . N o w , about the first thing the banks would begin
to do under this system would be to lay aside all the gold certificates
they could get, would it not ?

’Mr. R eynolds . That is what they would do, in my opinion.
Senator R e e d . And about the next thing they would do would
be to transfer the present gold that is held back of those certificates
into their own vaults, would it not ?
Mr. R eynolds . Well, they might, or they might not.
Senator R eed . Well, do you not think, Mr. Reynolds, in all
candor— and that, of course, is what we all want to use— that that is
practically inevitable ?
Mr. R eynolds . I do not honestly believe that, Senator Reed.
Senator R eed . D o you not think it is very likely ?
Mr. R eynolds . N o, I do not, and for this reason, that there is a
great abrasion in the use of coins, which ultimately brings a great
loss to large institutions like ours, and so long as certificates will
serve the same purpose as gold will serve, we much prefer the cer­
tificates.
And I might carry the illustration a little further, by stating that
if we, in Chicago, were to fill the order of the ordinary country banker,
or reserve city banker for currency by sending them gold, we would
insult them mortally, because they say that they do not want it;
they want currency, because it is more convenient to handle and to
transport.
Senator R eed . Let us look at it in another way. You would
accumulate these gold certificates, at least, putting them into your
reserves as gold, would you not?
Mr. R eynolds . Not more than the legal reserve requirements would
make it necessary.
U32S°— S. Doc. 232, 63-1—vol 1----- 20




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BANKING AND CURRENCY.

Senator R eed . But the legal requirement would be 33J per cent
of all the money that was issued by the banks. And as you want to
issue enough money to transact the business of the country, how
much will that be ?
Mr. R eynolds . Well, but we need but little more money now
than we have now. It is only at certain seasons of the year, in the
cotton season, or the season when we have an undue activity in
business, that we need much more of a circulating medium.
Senator R eed . N ow , you have to keep 33J per cent of your
deposits------Mr. R eynolds (interposing). I beg your pardon?
Senator R eed . Y ou have to keep now 33 £ of your deposits------Mr. R eynolds (interposing). You are speaking of Federal reserve
banks ?
Senator R eed . Y es; I am speaking now of this plan— this scheme
that is outlined in this bill.
Mr. R eynolds . Yes, sir.
Senator R eed . N ow , what are the aggregate deposits of all the
national banks to-day ?
Mr. R eynolds . $7,100,000,000.
Senator R eed . Well, it is proposed to take into this bill— at least
it has been advocated here— State banks and trust companies ?
Mr. R eynolds . Yes, sir.
Senator R eed . Very well. How much free gold, about, Mr. Rey­
nolds, is there now in the banks available for gold reserves ?
Mr. R eynolds . I have not that at the end of my tongue, but there
is somewhere around 1500,000,000 and $600,000,000, I should say.
Senator R eed . $500,000,000 or $600,000,000 ?
Mr. R eynolds . Y es; I should say that. The report will show.
Senator R eed . Well, there is $600,000,000 of free gold in the banks
to-day. You are going to establish a system now which, without any
emergency currency and without any inflation of any kind, amounts
to $7,000,000,000, in round numbers. You must have 33$ per cent
of that in gold. Now, where are you going to get that gold if you do
not go down to the Treasury of the United States and get this
$ 1, 100,000,000 ?
Mr. R eynolds . Well, Senator Reed, you were not here yesterday,
I believe ?
Senator R eed . N o ; i unfortunately could not be here.
Mr. R eynolds . I submitted then a statement showing what I
believed would be the status of the reserves of the various banks of
the country , and of the Federal reserve bank after this whole plan,
if it is enacted into law as it is now proposed in the bill, should go
into effect, and on the assumption that all the national banks would
come into it; and that statement shows that after the plan should be
put into operation that the requirements for reserves would be
$968,000,000, of which $447,000,000 would have to be in their vaults,
as compared with $913,000,000 at this time.
(Thereupon, at 11.18 a. m., a recess of 10 minutes was taken, after
which the following proceedings were had:)
The Chairm an . Senator Reed, do you desire to continue your
questions ?




BANKING AND CURRENCY.

301

Senator R eed . Yes, Mr. Chairman. Mr. Reynolds, I do not under­
stand how you can have $7,000,000,000 of circulation out, and 33 per
cent of that gold.
Mr. R eynolds . W e have not $7,000,000,000 of circulation out;
we have $7,000,000,000 of deposits.
Senator R eed . I meant to say $7,000,000,000 of deposits, with 33$
per cent back of it, unless you have over $2,000,000,000 of gold in
your reserve.
Mr. R eynolds . W e do not expect to have that in this bill. It
does not provide for that, Senator Reed.
Senator R eed . Y ou do not expect to have what?
Mr. R eynolds . $7,000,000,000, secured by $2,000,000,000 of gold.
As a matter of fact, Senator, if 1 am correct—-—
Senator R eed (interposing). Oh, I am confusing two different
things; I see the difference now.
Mr. R eynolds . I think you are confusing credits and notes.
Senator R eed . I see that very plainly now. I did not have my
mind on this examination just then. Coming, now, to the question of
circulation, what would be the circulation in normal times?
Mr. R eynolds . Well, it would be not a great deal more than we
have outstanding now.
Senator R eed . Y es; how much?
Mr. R eynolds . I should say $700,000,000.
Senator R eed . $700,000,000. Now, you say that a greenback is
not good money------Mr. R eyno ld s (interposing). No; I do not want to say that it is not
good money. The question of the security of it makes for its good­
ness or badness, in my opinion. And I want to say now, with the
cash reserves— gold reserves— of 40 per cent, which is carried against
greenbacks, we do regard that as good money.
Senator R eed . Well, do you not think that the Government of the
United States back of a note is a little higher security than the
promise to pay the same amount by some individuals?
Mr. R eynolds . Well, I think that of the two promises to pay,
the promises of the Government would be stronger, but I do not care
so much for their promises to pay as I do for my belief in their ability
to pay on demand.
Senator R eed . Well, if the Government of the United States has a
gold reserve of 33$ per cent, and then issues its note, back of which is
(he faith and credit and taxing power of the United States, which is
absolutely unlimited to-day for all practical purposes— would you
think that is as high a class of security as a note of a bank with the
same gold reserve and nothing else back of it except the capital of
the bank and the notes of private individuals ?
Mr. R eynolds . Yes; I do. I think a Treasury note with 33$ per
cent of gold reserve back of it creates a fairly stable reserve. I would
not agree in theory, however, that it is better than the other, because
if they both served the same purpose, one would be as good as the
other.
Senator R eed . Well, I am not talking about the question of
whether they serve the purpose, because as a matter of fact, the green­
back, without any reserve at all back of it for many years circulated




302

BANKING AND CURRENCY.

generally and was accepted generally by the people, and in that sense
served the purpose as a gold certificate.
Mr. R eynolds . Well, there came a time when it did not do that,
Senator.
Senator R eed . Well, it has not come since we remonetized gold.
Mr. R eynolds . N o.
Senator R eed . I mean since we demonetized silver.
Mr. R eynolds . We did not have much to do with it.
Senator R eed . N ow , I get the idea from you, then, that if the
Government had a 33 J or a 40 per cent gold reserve and issued the
money itself, that would be reasonably stable money ?
Mr. R eynolds . I think it would; yes, sir.
Senator R eed . It would be what you call safe money, would it not ?
Mr. R eynolds . Yes; I should say it would.
Senator R eed . N ow , what objection is there to the Government
retiring its gold certificates and issuing greenbacks in lieu of them
and utilizing its present gold reserve of $1,100,000,000 back of the
greenbacks, or the Treasury notes, or whatever you call them?
Mr. R eynolds . Well, I think you would find that you would not
have that supply of gold by the time you got to that issue, because
the people have the gold certificates now and they know they are
secured by 100 cents on the dollar, and you would have to have
those certificates surrendered voluntarily in order to enable you to
utilize that gold.
Senator R eed . They circulate regularly, do they, through these
channels ?
Mr. R eynolds . Y es; I think they would, Senator. You wmuld
create the condition to which you referred awhile ago, namely, that
under those conditions the banks would probably cash in their gold
certificates and take the coin itself in lieu of it.
Senator R eed . Y ou do not want me to understand, now, that if
the Government was to embark upon the policy of issuing this money
and have a reserve of 40 per cent in gold, that the banks of this country
would organize a raid upon the notes of the Treasury and block the
Government in that sort of beneficent purpose ?
Mr. R eynolds . N o.
Senator R eed . If you do, I should have to revise my opinion of
the banks.
Mr. R eynolds . N o ; I do not think that. But in addition to the
amount of the notes of that character held by the banks there would
probably be $600,000,000 to $700,000,000 of it in the hands of the
eople. How are you going to get those notes surrendered that are
ela in the pockets and the hands of people individually?
Senator R eed . D o not they all come into the banks, or substantially
all of them, every week in the year?
Mr. R eynolds . They do in the natural course. I can not think
there is any tendency toward discrimination under conditions between
those notes and other kinds of money.
Senator R eed . Y ou bankers want the Government to remodel this
T
currency system, and I think you are asking for some bill, perhaps,
with more eagerness than any other class of people, and for which I
do not at all criticize you. Suppose that the bill that was proposed
by Senator Shafroth should be concluded by us to the best plan, and,
speaking roughly— if I do not state it right Senator Shafroth will

E




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303

correct me— he advances the idea in that bill that the Federal Gov­
ernment, whenever a gold certificate comes into its possession, shall
retire that certificate, when it comes in in the natural channels of
trade, payment of dues, etc., by simply taking it and destroying it,
thus retaining the gold; and then issuing $2 for each gold dollar of
Federal notes, by whatever name they may be known, and back of
these notes retaining one gold dollar; that is, for $2 of paper retain­
ing $1 of gold. If that plan should be determined on, would we not
have the cooperation of the banks ?
Mr. R eynolds . In so far as they would have an ability.
Senator S hafroth . Let me explain it just a little further.
Mr. R eynolds . Yes.
Senator S hafroth . The certificates that come into the Treasury
are canceled; a note takes the place of the certificate— a United States
note, full legal tender— for the payment of all debts; and then another
note is issued with which to retire the national-bank notes when they
come into the Treasury, upon request of the national banks. In
other words, if you want the currency of your national bank retired
you let the United States Government assume the redemption of
them, and they have to retire that quantity and issue in lieu of those
notes the full legal tender. To state it another way, it does not
inflate the currency one particle; it just substitutes for the gold
certificate a like amount of legal tender notes, substitutes for the
bank notes as they come in voluntarily by the bank, dollar for dollar,
those, and leaves a surplus of reserve over 50 per cent of about
$178,000,000 of gold.
Mr. F organ . Does the Government retire the bonds ?
Senator S hafroth . Yes. The Government pays to the banks the
2 per cent bonds in full at par.
Mr. W e x l e r . D o they provide redemption facilities for the notes?
Senator Shafroth . Not except they come into the Treasury. It
is supposed that the inducement for the banks to retire their circula­
tion will be that they will get full legal-tender money for their 2 per
cent bonds.
Mr. W e x l e r . I mean after that operation has taken place, and
you have made retirement of the notes outstanding, with 50 per cent
gold reserve, then what machinery have you for adjusting the quan­
tity of notes outstanding to the requirement of commerce for the
retirement of the excess ?
Senator S hafroth . There is nothing. There is the really inflexi­
ble part of the currency. It does not deal with the question of the
emergency currency; it only deals with the question oi having dollar
for dollar for the gold certificate and dollar for dollar for the bank
notes, and then provides that there shall be a gold reserve main­
tained at 50 per cent, and that in addition to that the Treasurer is
directed to buy gold or to sell bonds for the purpose of maintaining
that reserve at 50 per cent.
Mr. R eynolds . II ow do you provide that you are to maintain this
50 per cent to start with ?
Senator R eed . In the first place, we put it in the vaults and keep
it there, and we do not issue any more money— that is, under this
plan— than 2 for 1. I am not advocating this plan; I am asking for
information.
*
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BANKING AND CURRENCY.

Mr. R eynolds . W e understand your attitude, I think, Senator,
thoroughly.
Senator R eed . In other words, we now have $1,100,000,000 of gold
in the vaults, for which there is a gold certificate, and that is ICO
per cent reserve. W e may use that term. It seems to be conceded
that 40 per cent is enough for banks to have. Instead of retaining
that gold dollar for dollar for these certificates, to transform it into
a 50 per cent reserve. Having a 50 per cent reserve, we would not,
as Senator Shafroth has stated, inflate the currency. If that could
be done, the first question I want to get at is that that would furnish
a reasonably stable and safe money, would it not?
Mr. R eynolds . I think it would, and I think, frankly, that you
could work it out so that it could be done, if you want to put the
Government into the banking business and have it assume that
responsibility.
Senator R eed . That is another question, whether we want to put
it into the banking business. Coming to the question of inflation
on account of emergencies, the getting of more money when you
banks need it— —
Mr. F organ . Let me make a suggestion in regard to what you
have been talking about.
Senator R eed . Yes.
Mr. F organ . Y ou have whatever amount you have out of these
notes secured by 50 per cent gold. You have got, of course, to cal­
culate upon redemption; you can not have the amount fixed. You
may call it the “ staple circulation” and “ rigid circulation,” but the
redemption will go on. You reduce it to a small amount. Suppose
the Government had $2,000,000 of such notes out, secured by a
reserve of $1,000,000. It would only require $1,000,000 to be pre­
sented to use up the whole $1,000,000 of gold, and you have got
$1,000,000 out without any gold reserve behind it.
Senator R eed . I understand that. Let us apply that to the bank.
The reserve bank has got $2,000,000 of paper out and $1,000,000 of
gold. A gentleman walks up some morning with $1,000,000 of this
paper and says, “ I want the gold,” and you pav it to him, and you
are in just the same fix the Government would be, that far in the
transaction.
Mr. F organ . Except-----Senator R eed . “ Except.” Now, you have got, in addition to
that, certain resources. You have notes.
Mr. W e x l e r . Capital.
Senator R eed . And you have some capital. But I want to knowr
if you think the gold reserve in the hands of the Government would
be raided any more than it would be in the hands of the banks ?
Mr. F organ . The Government is not protected as the banks are
in this way, because of the regular operation that takes place in the
banks. While what you say would be profitable, the banks are pro­
T
tected in that, in that when they pay out notes they get something
for them; they get either gold or they get good commercial paper
or bills of exchange. These are being all the time converted, as
it matured into redemption money. The Government has no such
process, and it would resolve itself down to this, that what actually
takes place in the banks is that when notes are presented to the
banks—when they are paid out by the banks, it is generally against a




BANKING AND CURRENCY.

305

deposit, and the deposit liability is changed into a note liability, and
when they come back again they come in the deposit.
Senator R e e d . In other words, there is a stream of money coming
into the bank all the time?
Mr. R eynolds . All the time; yes, sir.
Senator R eed . I s there not a stream of money coming into the
Federal Treasury all the time ?
Mr. R eynolds . N o.
Senator R eed . I think there is. You shake your head, but I
think there is.
Mr. W e x l e r . There is a stream of money coming into the Treasury,
but the stream that is going out by appropriations is as great as the
stream coming in.
Senator R eed . And part of that money must be gold just the same
as part of the money coming to the bank is gold ?
Mr. F organ . Not for that purpose.
Senator R e e d . If we wanted to do it, we could make a percentage
of our dues and customs actually paid in gold. I do not know how
wise that would be, for it seems to me that would attack the value of
the currency or the stability of it.
Mr. F organ . This would require that the Government could keep
its revenues as it receives them, in its own hands, and not go in any
regional banks, as is proposed.
Senator R e e d . If it went into the regional banks under this plan,
the regional bank would have to be ready to respond to the Govern­
ment in the case of demands for gold being too heavy, of course, if
you let it out. I am going to get your mind directed to this, be­
cause—
Senator B ristow . Let me inquire, if the Senator will excuse me,
why is not all the gold that is behind the greenbacks taken out ?
Mr. R eynolds . It is.
Mr. F organ . There is no actual redemption takes place.
Senator B ristow . W e keep money there to do it, if the demand
comes.
Mr. F organ . The greenbacks are being used for the subsidiary
currency. They are all small notes and mostly in the hands of the
people and hands of the banks for the purpose of paying out.
Senator R eed . Could we not have some small notes that would be
in the hands of the people under this plan ?
Mr. R eynolds . W hat would be the mode of protecting your re­
serves, except through the levying of taxes on the one hand or selling
bonds on the other ?
Senator R eed . I do not know that there would be any other except
this, that unless the gold had been absolutely frightened out of the
country, that it would naturally flow into the Treasury, just as it
would naturally flow into these banks. I want to say to you, gentle­
men, with all candor, that I have not made up my mind about a single
letter, line, or syllable of this bill.
Mr. R eynolds . W e are very glad to know that.
Senator R eed . But I want to know what there is about a bank
that enables it to get gold when a Government that is collecting
$2,000,000,000 a year-------Mr. R eynolds . It has many things.
Senator R eed (continuing). Can not get some gold.




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BANKING AND CURRENCY.

Mr. R eynolds . It has many things. First of all, it has assets
maturing every day as we go forward in the transaction of our busi­
ness. It has bills of exchange which are salable immediately; it has
commercial paper maturing every day; it has an ability, through the
exercise of the raising of the rate of interest, to protect its gold,
whereas the Government would not. On the other hand—-—Senator R eed . Let Us take one thing at a time. You are an ex­
pert on this, and I am a farmer on it.
Mr. R eynolds . W e are all farmers.
Senator R eed . Sometimes I think when I hear great financiers
talking and seeing how they differ, I conclude we are all in the realm
of speculation to some extent, although I think you men who have
been in the business ought to be able to draw pretty accurate con­
clusions. The first proposition is, you say you can get gold, because
there is money flowing into the banks; but that money which comes
into the banks is not necessarily gold ?
Mr. R eynolds . N o ; I said because we have assets which we can
readily turn into------Senator R eed . Into what ?
Mr. R eynolds . Cash.
Senator R eed . That is it, into cash; but you can not readily turn
them into gold.
Mr. R eynolds . The sentiment of the public will determine how
readily this can be turned into gold.
Senator R eed . That is true of you, and that would be true of the
Government. The sentiment of the public is an important thing in
all this, is it not? As long as everybody has implicit confidence in
the banks of the country, nearly everybody that has got any sense
puts his money into the bank, and when confidence becomes very
greatly shaken a great many people with sense pull their money out.
Mr. F organ . Lack of it.
Senator R eed . And some from lack of it. [Laughter.] And yet
I heard the other day a banker say that you bankers among your­
selves, when there was a shiver in the financial market, proceeded to
pull your money out of the centers just like the ordinary farmer
does.
Mr. W e x l e r . Exactly. We all do that, but the law makes us do
it; that is the trouble.
Senator R eed . I think I will not pursue that further.
Mr. F organ . I would like to say this, that I think it has not been
brought out sufficiently clearly. One thing that the banks have is
that they are handling all the exportations of merchandise to foreign
countries, and they get bills for that payable in gold. They get gold
balances in all the countries with which they deal, and they draw gold
from practically the whole mass of gold in the world, which the
Government has no possibility of doing, except by selling bonds in
foreign countries, which is a new obligation.
Senator R eed . That is true; and that is a thing that is very
obnoxious, I know, except in emergency.
(Prof. Sprague arose.)
Senator R eed . Did you desire to say something?
The Chairm an . W e will hear Prof. Sprague, of Harvard.
Prof. S prague . There is a certain amount of money that is always
required in any country, for pocket purposes for use outside the banks,




I

BANKING AND CURRENCY.

307

which will never be presented for redemption. That amount of
money a Government can issue with such a reserve only as may be
needed to inspire confidence. W hat amount that may be one can
not say offhand. There are at the present time something like
$1,500,000,000 of money in circulation outside the banks, and about
the same amount in the banks. With changes in the activity of
trade there are changes in the amount of money that is used outside
of the banks. If such a change takes place, tending to lessen the
amount of money that is being used, a certain amount of money will
be presented for redemption. W e can, however, be absolutely cer­
tain that if in normal times $1,500,000,000 is used outside the banks,
that it will never happen that so little as 1,000 million will not be
wanted. I say “ 1,000 millions” will always be wanted. It will
never be presented for redemption; and so we find in fact that the
greenbacks and silver certificates are not presented for redemption.
The Government can perfectly well establish a reserve for the
amount of money which is certain to be wanted in every conceivable
circumstance; but for the variable part of the circulating medium
the Government is not in such good position as the banks, because
its only resource when contraction naturally comes about is the sale
of bonds. Banks can contract their loans; banks can raise the rates
of discount; banks can borrow abroad on short-time obligations; and
for these reasons the fluctuating portion of the circulating medium
can be far more handily managed by banks than by the Government.
In this particular proposal regarding gold certificates and the national
bank notes, if the total issue under this plan would not amount to any
more than we are quite certain would always be required within the
country, then it is a perfectly safe proposition. If this total should
be $100,000,000 or $200,000,000 more than might be needed outside
the banks, then it is not quite so safe a proposition; or at any rate it is
a proposition which would involve the Government from time to
time in sales of bonds to strengthen its reserves. It is a simple ques­
tion to determine how much money in this country will in all circum­
stances be reauired for conducting everyday transactions, no matter
how depressed business may be.
Senator S hafrotii. Let me read this bill— it is short— so that the
exact features of it may be known.
Senator R e e d . I wish you would let me ask a question here, Sen­
ator.
Senator Shafroth . All right.
Senator R e e d . I suppose, Prof. Sprague, that this money that
you say will always stay out in the hands of the people, will do it as well
for the Government as for the banks ?
Prof. S prague . Yes.
Senator R e e d . Credit, the confidence of the people in the circula­
tion, has something to do with the ability to float it ?
Prof. S prague . Somewhat; yes.
Senator R e e d . Has it not a great deal to do with it?
Prof. Sprague . If you should assume a government in which the
people had no confidence whatever------Senator R e e d . I am not speaking about governments. I say the
confidence of the people in a circulating medium, no matter whether
issued by a bank or by the Government, has a great deal to do with




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BANKING AND CURRENCY.

the ability to float it, has it not, either by banks or by the Govern­
ment ?
Prof. Sprague . Yes.
Senator R e e d . D o you think the people of the United States have
not got more confidence in their own Government than they have in
all the banks in Christendom------Prof. Sprague (interposing). W hy------Senator R eed (continuing). An ultimate paymaster, a Govern­
ment with 100,000,000 of people and the right to tax them, a Gov­
ernment that stands in a position that is regarded by every man in the
world as impregnable, so far as the ability to defend itself, and a
Government that has never repudiated its promise in 130 years?
Prof. Sprag ue . Yes; but the causes for redemption are sometimes
other than lack of confidence— inactive business, for example.
Senator R e e d . I am just speaking, Professor, of the matter of con­
fidence.
Prof. Sprague . Yes, so far as that element goes, there is sufficient
confidence.
Senator R eed . I did not mean to interrupt your answer, if you had
something else that you wanted to say about that.
Prof. Sprague . Assuming complete confidence in the currency
issued by a Government, then it still is true that for the fluctuating
portion of the circulating medium, banks can handle it better than
the Government, because they are engaged in short-time operations.
Senator R e e d . That is a question of facilities ?
Prof. Sprag ue . Yes.
Senator R e e d . I want to trace the rest of your answer of a moment
ago just a step further. You say that the banks could get money to
make up their reserve by buying gold in Europe on short-time obli­
gations. Do you know of any reason why the Government of the
United States can not issue a short-time obligation as well as a long­
time obligation, if it saw fit ?
Prof. Sprague . If the Government does that, it does not lessen in
the slightest degree the lending powers of the banks. They may go
on lending under those circumstances, causing prices to continue to
advance or not to go down, so that no check will be imposed on gold
exports.
Senator R eed . Then you think that it is necessary to put into the
hands of the banks the power to control prices, in order that we may
have a safe currencv ?
Prof. Sprague . They will not control prices; they will be con­
trolled by price movements. If prices advance unduly because of
the excessive expansion of credit, gold exports are pretty certain to
take place and the banks in self-defense are required to contract
credits; whereas the Government is entirely responsible for the cir­
culating medium and can not and does not control the banks.
Senator R eed . Does not control credits ?
Prof. S prague . Does not control credits. Its sale of bonds abroad
will simply add to the lending power of the banks by bringing back
to the country the gold which natural forces had caused to be exported.
Senator R eed . I want to get this matter clear in my mind. The
real basis of safety, then, in a currency system controlled by the
banks is that the banks have the ability to control the tides of com­




BANKING AND CURRENCY.

309

merce— the prices— and therefore they ought to have and must have
that power, for that is the power that makes them safe.
Prof. Sprague . I should put it the other way: The currents of
commerce control banks, except for short periods of time. Banks
may borrow for a few months abroad, and so stave off gold exports,
but if the currents of trade and the level of prices is such that we
are upon a foundation which is not solid, banks can not possibly
maintain that position indefinitely. For a short period of time banks
are able to influence the movements of gold between countries, but
fundamentally their operations are determined by commercial con­
ditions.
Senator N elson . Senator Reed, will you allow me to just make
one suggestion in there, to help this along ?
Senator R eed . Yes.
Senator N elson . I want to call your attention, as an illustration
of how gold is imported by the banks: During the panic of 1907, we
imported over $90,000,000 through the banks here upon commercial
bills, based upon cotton, wheat, and flour, and got over $90,000,000
in that way through that source, based upon trade and commerce.
They were not financed bills, but what they call commercial bills.
Am I not correct?
Mr. W e x l e r . Y ou are perfectly correct, sir.
Senator R eed . I want to go back now to the question of inflation.
The Government finds its gold reserve is getting low, and issues
$100,000,000 of bonds, short or long— I do not care anything about
that— and it gets $100,000,000 of gold in Europe and brings it here.
You say that does not help the situation any, Decause trade goes on
just the same?
Prof. S prague . It may make the situation worse.
Senator R eed . But banks issue $100,000,000 of their paper and
send it over to Europe and bring in $100,000,000 of gold. What
is the difference?
Prof. S prague . The difference is this: The banks have utilized
$100,000,000 of their lending power; they are less able to further expand
credit in this assumed undesirable condition of affairs than they were
before, whereas if you should sell $100,000,000 of bonds and get
the same amount of gold, the banks’ lending power is not diminished
one iota.
Mr. W e x l e r . Senator, what guaranty have you------Senator R e e d . Don’t you ask me questions until I get through
with this, because I will get a mile and a half off of the subject I am
trying to follow.
Mr. W e x l e r . It is pertinent to your question about selling the
$100,000,000 of bonds. W e have got to find a purchaser before we
can sell them.
Senator R e e d . The difference between the bank selling them and
the Government is that there is an actual check upon the bank, that
when it has exhausted $100,000,000 of its debt-making ability in
that way it has to begin to put the brakes on ?
Mr. W e x l e r . It may help some little.
Senator R eed . That is the tendency.
I do not mean at
$100,000,000 it would stop, but when they got out a certain amount,
they have to stop because of exhaustion ?
Mr. W e x l e r . Yes, sir.




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BANKING AND CURRENCY.

Senator R eed . Suppose the Government stops because of com­
mon sense, and just did not stop because it had to, but because the
Secretary of the Treasury said:
We have gone about as far as we are going to go on this and we will not go any
further.

Prof. Sprague . When the Secretary of the Treasury does that,
he must sooner or later refuse to redeem these notes in gold. When
the banks adopt this policy you suggest they simply begin to con­
tract credit, which we have assumed was overexpanded, and was
the occasion of this redemption.
Senator R eed . What is to hinder the Government, when it gets
this $100,000,000 of gold, to use it actually to retire its obligations.
It will do that, will it not ?
Prof. S prague . It will do that.
Senator R eed . Just coming down to the plain, ordinary, common
sense of a situation, getting both your head and mine clear out of
the air, getting away from books and theories, do you not think
if the Government of the United States issued a reasonable amount
of money, backed by a 50 per cent gold reserve and the faith and
credit of the United States, that in the absence of some great inter­
national war— I will put that in for the present— would there ever
be any danger of a raid upon the Treasury?
Prof. S prague . The “ reasonable amount of money” to which
you refer is in my mind the permanently required amount of money.
If by “ reasonable amount of money” you mean to include that
variable amount which is required in varying conditions of trade
activity, then I do not agree with you.
Senator R eed . When I said “ reasonble amount of money ” I
meant just what I said. A thing is “ reasonable” when, taking into
consideration all the facts and circumstances and conditions, you
proceed with that judgment which an ordinarily prudent man,
skilled in the business, would exercise under the same or similar
circumstances. That is what I mean by “ reasonable.”
Prof. Sp r a g u e . That, to my mind, would mean the permanently
needed circulation of the country, and no more.
Senator R e e d . I come to the next question— and I thank you,
Professor— which I wanted to ask Mr. Reynolds. Taking the bank
notes that we have out now— the greenbacks and the gold certifi­
cates—
Mr. W e x l e r . And the silver.
Senator R eed . And the silver; that would be a reasonable amount,
would it not?
Mr. W e x l e r . I think it would.
Senator R eed . For ordinary times?
Mr. W e x l e r . And if it were not “ reasonable” this year it would
certainly be reasonable within five years, because of the growth and
population and trade of the country.
senator R e e d . I wanted to ask Mr. Reynolds a question, and
then I am going to yield. Mr. Reynolds, it seems to be conceded
that 33J per cent is a pretty fairly safe gold reserve to be held by the
banks or to be held anywnere. W e have been talking about a 50
per cent gold reserve. Suppose, now, that the Government starts
with the policy of ordinarily maintaining a 50 per cent gold reserve,




BANKING AND CUBBENCY.

311

but there comes a crop-moving time or emergency period, and suppose
that they were then to issue enough money so that their reserves
would go down to 40 per cent or even 33 per cent, temporarily— issuing
this money in some way to provide for its speedy retirement, do you
think that would be a just operation?
Mr. R eynolds . I rather think it would, Senator, for the reason
that if the bank were to follow that practice the public would under­
stand that just in proportion as its reserve would go down it would
receive an asset on the other side.
Senator R eed . The Government must receive an asset. For
instance, the Government has out in circulation to-day approximately
$700,000,000.
Senator Shafroth . In bank notes.
Mr. F organ . $700,000,000 in bank notes alone. The circulation is
a billion and a half.
Senator Shafroth . There are $346,000,000 of greenbacks.
Senator R eed . W hat is the circulation ?
Mr. F organ . A billion and a half dollars.
Senator R eed . That gets it into figures I can handle. I can think
better than I can figure, and I do not know whether I do either one
very well. But we have a billion and a half of money out now.
Suppose that that billion and a half of money was one-half paper and
one-half gold. Say that we have a 50 per cent gold reserve. There
comes an emergency period. You bankers need some more money to
handle the crops or any other purpose, and the Government then
says:
Well, bring us down $500,000,000 of gilt-edged securities, the best you have got, and
we will then issue you $500,000,000 of paper.

That of course reduces our reserves proportionately, but we have
got the paper.
Mr. R eynolds . I do not think that would disturb public confi­
dence.
Senator R eed . It would not disturb it a bit ?
Mr. R eynolds . I do not think it would.
Senator R eed . I thank you.
Senator S hafroth . Mr. Reynolds, I want to read this bill to you
and ask your criticism. The object and purpose of this bill very
largely was due to the fact that the original bill provided that the
bank-note circulation should be retired; 3 per cent bonds should be
substituted for 2 per cent bonds. That, I thought, was something
that would not meet with my approbation, and I began to figure on
this bill by reason of that. This is a bill entitled:
A B IL L Providing for the retirement of the national-bank notes, the gold certificates, and the United
States notes now outstanding b y the issuance of United States notes redeemable in gold, and for the
establishment of a fifty per centum gold redemption fund.

Be it enacted by the Senate and House of Representatives o f the United States of America
m Congress assembled, That as gold certificates are received into the Treasury or any
Subtreasury of the United States they shall be canceled and the gold represented by
such certificates transferred to the reserve fund in the Division of the Redemption of
the Treasury, and in lieu of such canceled gold certificates there shall be issued United
States notes of like denominations, redeemable in gold coin at the Treasury or any
Subtreasury or mint of the United States which may be designated by order of the
Secretary of the Treasury, which notes shall be a legal tender in payment of all debts,
public and private, within the United States and its possessions. And there shall
also be issued at the same time a like amount of such United States notes for sub-




312

BANKING AND CURRENCY.

stitution for all national-bank notes and for cancellation of the bonds of the United
States securing the same until all said national-bank notes are retired.

Mr. R eynolds . Excuse me, if I ask you questions as we go along
for the clarification of my own mind, at least. You say as presented
to the Subtreasury as the notes shall be canceled ?
Senator Shafroth . Yes.
Mr. R eynolds . H ow are you going to have anything presented
at the Subtreasury received, except by payment of gold against
those notes ?
Senator S hafroth . The Government collects its customs duties
and other duties. It is paid into the General Treasury and the
object is that when those gold certificates come into the General
Treasury they shall be canceled.
Mr. R eynolds . You do not mean to apply that to a Subtreasury;
you mean the General Treasury.
Senator S hafroth . I will put it General Treasury.
Mr. R eynolds . All right, that answers my purpose.
Senator S hafroth (reading):
S ec . 2. That upon the request of any national bank the Secretary of the Treasury
is authorized, in his discretion, to assume the redemption of its national-bank notes,
to pay to such national bank in cash the difference between the amount due at that
date on the United States bonds securing said notes, and to cancel said bonds. When
i ational-bank notes, assumed as aforesaid, shall be received into the Treasury or any
Subtreasury of the United States, they shall be canceled and retired, and in lieu
thereof, United States notes authorized by this act to the same amount, and like de­
nominations shall be issued, paid out, and kept in circulation.
S ec . 3. That as the United States notes heretofore issued are received into the
Treasury or any Subtreasury the Secretary of the Treasury is directed to cancel same
and issue in lieu thereof United States notes authorized by this act------

That takes up the greenbacks.
And to transfer to the redemption fund herein created a proper proportion of the
one hundred and fifty million dollars of gold now held to redeem same.
S ec . 4. That a gold reserve of fifty per centum of all United States notes issued and
put in circulation under the provisions of this act shall be maintained in the reserve
fund of the Division of Redemption of the Treasury—

That is a long name, but that is the name used in the statute.
Senator N elson . What do you do with the silver certificates?
Senator S hafroth . We do not pass upon the silver certificates;
they stand upon their own base.
Mr. W e x l e r . Redeemable in gold.
Senator S hafroth . They may be redeemable in gold, but never­
theless they stand as they stand now [continuing reading]:
for the purpose of redeeming the same, and the Secretary of the Treasury is authorized
for that purpose to purchase gold and exercise all of the powers granted to him by sec­
tion two of the act of Congress entitled “ An act to define and fix the standard of values,
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,” approved March fourteenth, nine­
teen hundred, and he is further authorized by general orders to require all national
banks to keep in their vaults as their lawful reserve such kinds of United States money
as he may deem to the best interest of the Government.

Mr. R eynolds . N ow , Senator------Senator R eed . I am greatly interested in that answer, but we have
to go to the Senate.
Senator S hafroth . Suppose you wait. I wish you would look at
this. I would like to know what defects are in it.
(At this point the committee took a recess for 10 minutes, at the
conclusion of which the following proceedings were held:)




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313

Senator Shafroth . Mr. Reynolds, have you looked at the bill that I
read to you, or do you remember its terms as I read it to you ?
Mr. R eynolds . I think the inherent weakness of your bill is the
fact that you do not provide that the reserves of banks must be in
gold coin and not in lawful money. I think the fact that you stipulate
that they must carry them as their reserves is the weakness of the
whole situation. If you will eliminate that and substitute gold
requirements for the reserves of the banks and redemption facilities,
then I do not think there is any criticism that I should make.
Senator Shafroth . I thought your objection to the bank currency
was very largely due to the fact that you have got to bundle up
$1,000,000 or $2,000,000 every once in a while and send it down to
Washington and lose by transmission.
Mr. R eynolds . I am not objecting to that. W e believe in that
redemption, and the free redemption, and we think one of the greatest
difficulties with the bank note is the fact that there has not been
redemption of it.
Senator S hafroth . Y ou, by preference, use the United States
note, commonly called the “ greenback,” now in your reserve?
Mr. R eynolds . T o gold ?
Senator Shafroth . In preference to gold.
Mr. R eynolds . N o ; we do not use it in preference to gold. W e
prefer the gold certificates, because they are the nearest substitute
tor gold— in the most convenient form to handle.
Senator Shafroth . W hat is the reserve composed of now, do you
remember ?
Mr. R eynolds . It is composed of gold coin and gold certificates.
W e have no silver.
Senator Shafroth . In what proportion are those moneys ?
Mr. R eynolds . I can not tell you offhand, but the majority por­
tion of it is gold and gold certificates.
Senator Shafroth . I s much of it gold coin ?
Mr. R eynolds . Well, yes; to a considerable extent. Perhaps I
can make that a little more clear to you bv saying that in Chicago,
for the purposes of convenience between banks, we have a large
deposit of gold in our clearing-house association. W e have$21,000,000
at the present, so that our clearing-house debits, which are pay­
able in gold, can be traded in in certificates for convenience, and
at the same time leave the proper ownership of the gold with which­
ever bank it belongs to, as the result of our transactions, without
having to cart gold through the streets. This is against our reserve
of $100,000,000 of the national banks. W e have one-fourth of that in
gold coin there. In addition thereto, every national bank in Chicago
will carry a large percentage of its reserve in gold certificates, and we
will have some silver, and we will have some legal tenders, but not
many; they do not circulate freely.
Senator Shafroth . Your principal objection to the bill is, however,
you say, that it requires these United States notes issued under this
act to be the legal reserve of the bank ?
Mr. R eynolds . Yes.
Senator S hafroth . That is not required.
Mr. R eynolds . I so understood it.
Senator Shafroth . N o ; it says that the Secretary of the Treasury
may do that.




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BANKING AND CURRENCY.

Mr. R eynolds . I misunderstood. I thought it was required. I
thought that would be enforced circulation.
Senator Shafroth . The object of this was this, that in the event
that there were raids upon the Treasury outside of the legitimate de­
mands for exports for foreign countres (which I think practically is
the only legitimate demand upon the United States Treasury for
gold), that in that event if there came a shortage for that purpose
the Secretary of the Treasury may require these United States notes,
legal tenders redeemable in gold, to be a part of the reserve, not all
but a certain proportion of them, it giving him the discretion en­
tirely; and that would force into the United States Treasury gold
without any expense whatever to the Government.
Mr. R eynolds . It would not necessarily force it there; might it
not force it any other place as well ?
Senator S hafroth . It would put gold certificates or gold out in
circulation, and a certain portion of it would unquestionably be paid
in customs duties and internal-revenue duties and other taxes to the
Government.
Mr. R eynolds . What I fear is that the adoption of that bill would
result in your being unable to get hold of all these gold certificates.
There is a great percentage of them out in the hands of the people.
Banks do not control that. It is not a question of whether or not
banks themselves would handle them, but the public.
Senator Shafroth . Of course it is possible that they might be, and
yet we know now that quite a large quantity of gold certificates come
into the Treasury. You can take the Treasury report at any time
and find that a very large proportion of it is gold certificates.
Mr. R eynolds . I appreciate that.
Senator Shafroth . And the United States Government, owning
and controlling the certificates, have got a right to draw the gold
upon them and got a right to put that gold then to any use they deem
proper, and if it makes gold reserve it becomes proper action.
Mr. R eynolds . They have the same right for those notes’ re­
demption that I have or anybody else.
Senator S hafroth . The United States Government could not pos­
sess the power to compel you to send in those gold certificates; it is
purely voluntary.
Mr. R eynolds . I think the whole discussion of your bill, Senator,
resolves itself into a question of the discussion of money or currency
rather than the discussion of banking.
Senator S hafroth . I think so, too.
Mr. R eynolds . W e gentlemen who have appeared here before you
appear more in the attitude of bankers than we do in the attitude of
experts from the standpoint of currency or of money.
Senator S hafroth . Mr. Reynolds, I want to ask you, in your judg­
ment, whether the national banks want to retire their 2 per cents ?
Mr. R eynolds . I think they would.
Senator Shafroth . Y ou think that they would come in and pre­
sent to the Treasury for redemption, then, a good deal of their circu­
lation gradually ?
Mr. R eynolds . I think on any system of that kind that they could
feel would be workable they would be only too glad to do it.
Senator S hafroth . S o that if it were left voluntary, the question
arose in m y mind whether or not if the Secretary of the Treasury




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315

would call for these notes— that is, should make a call for certain of
these notes that perhaps are falling due------Mr. R eynolds . Y ou mean “ bonds” ?
Senator S hafroth . I mean bonds; yes. But I felt without an
inducement to the bankers to cash their 2 per cent bonds it would
not justify them in presenting them all at once. I believe it would
take a series of years to substitute this currency, but I believe it
would, when it was substituted, relieve the banks of a good deal of
trouble.
Mr. R eynolds . A s I said before, if you make it obligatory upon
the banks to carry their legal reserve in money and coin in their
vaults in gold, I do not see any reason in the world why your plan
could not be worked out.
Senator Shafroth . N ow , what would you think of the Secretary
of the Treasury issuing an order— only in the event and in case there
was plenty of gold they would rather for him to carry gold— if there
is a raid made upon the Treasury, why could he not keep 25 per
cent of his reserve in United States notes, and would not tliat very
demand for that money on the part of the bank naturally gravitate
toward the United States Treasury the gold coin ?
Mr. W e x l e r . I think that as soon as you promulgate that order
gold would go to a premium the moment you gave notice that there
was not sufficient gold for redemption of your notes; then that very
moment gold would go to a premium just as it went to a premium
in 1907 in New York, when we had to pay 4 per cent premium on
gold.
Senator Shafroth . 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 e x l e r . Senator, that can happen again. W hat has hap­
pened 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. W hy? 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.
Senator R eed . Have not banks utterly failed to do that a good
many times in our history ?
Mr. W e x l e r . Not their notes— their deposits.
Senator R eed . They not only failed to pay their notes, but they
failed to pay us back our own money.
Mr. W e x l e r . They never failed to pay their notes.
Senator R eed . Y ou failed to pay your notes when you failed to
pay your obligations.
Mr. W e x l e r . N o , Senator; you are wrong.
Senator R eed . W e could not even get our own money back that the
bank had, and I do not say that criticizing the banks. It seems to
me that is a good deal worse than saying “ W e will not exchange this
foi old.”
* W e x l e r . W e are asking you to give us machinery by which
.
we can convert this bank credit which we were unable to put out at
that time into another instrument of credit which we can pay out;
that is all we are asking.
9328°— s. Doc. 232, 63-1—vol 1----- 21




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BANKING AND CURRENCY.

Senator R eed . In other words, you want national clearing-house
certificates; that is pretty nearly it— like you issued in 1907?
Mr. W e x l e r . Y ou might call it that, only in a simple form where
it can be followed up in the ordinary course of business instead of in
emergency, and thereby attracting the attention of the country and
the whole world to your weakened condition at that time. Senator,
if you require that— if the act should require that the national banks
and State banks, if it could cover the latter, which would be advisa­
ble, but the law would not reach them— their reserves should be car­
ries in gold, then you are going to create a competition between the
banks of the country and the Treasury Department for this reserve
gold; if you do not provide that they shall carry their reserves in
gold, then you are creating an unsound reserve for the banks, you are
superimposing a reserve, based upon 50 per cent upon 100, which in
itself is only an obligation and does not consist of an article of ultimate
redemption. For instance, let me illustrate. Suppose to-day I had
the note of the Standard Oil Co. indorsed by the Rothschilds and the
Rockefellers. You can not conceive of the manufacture of a better
note than that. It is absolutely good.
Senator R eed . Not unless you had the note of the bank?
Senator Shafroth . Or the note of the Government.
Mr. W e x l e r . I do not think the Government would be any better
than the other. That would be like “ gilding the lily” ; it would be
absolutely a good note. Do you think it right to count such a note
as the reserve of the bank ?
Senator S hafroth . Of course, you can not by law establish such
a standard as that.
Mr. W'e x l e r . Would you, in your opinion, approve of the power
of Congress to enact any kind of an arbitrary law that would make
such a note the reserve of a national bank. Would you think that a
note of the Rothschilds and Rockefeller sound reserve for a bank?
I know you do not. If you do not then the note of a Government
that is no better than that note is not a good reserve.
Senator Shafroth . Your objection in the first place, is that imme­
diately if the Government should promulgate an order of that kind,
gold would go to a premium ?
Mr. W e x l e r . Yes, sir.
Senator S hafroth . Because in effect it would be a denial of the
ability to payment of gold for the note ?
Mr. W e x l e r . Yes.
Senator Shafroth . A s a matter of fact, you know that notes are
presented continually at the Bank of France and they refuse to pay
out gold, and vet their paper does not go to a discount. They will
sav, “ Very well, we will pay silver to you.”
Mr. W e x l e r . It does go to a discount.
Senator S hafroth . N o ; it does not go to a discount.
Mr. W e x l e r . The Bank of France has paid higher rates for gold
during the past eight months than it paid during the previous five
years, consequently gold was at a premium— it was not the public,
it was the Bank of France which had to pay a premium.
Senator S hafroth . Perhaps for a certain quantity of work or
goods. You are assuming that that would go to a discount.




BANKING AND CURRENCY.

317

What would you do with this provision here, that the Secretary
of the Treasury is authorized, for that purpose at least, namely,
maintenance of the gold standard, and
for that purpose to purchase gold and exerieise all of the powers granted to him
by section two of the act of Congress entitled “ An act to define and fix the standard
of values, 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,” approved March fourteenth,
nineteen hundred, * * *

Mr. W e x l e k . Purchase gold with what?
Senator Shafroth . It could buy it at a premium, if necessary
under that.
Mr. W e x l e r . Buy it with what?
Senator Shafroth . It could issue bonds for it.
Mr. W e x l e r . All right.
Senator Shafroth . It could take any of its surplus in the Treas­
ury and do it.
Mr. W e x l e r . It has already got that; it is using that.
Senator Shafroth . They have always got a workable surplus of
$250,000,000.
Mr. W e x l e r . They have used that and you still need more.
^
Senator S hafroth . Y ou must remember that when the gold goes
out something equivalent comes back.
Mr. W e x l e r . All right.
Senator Shafroth . If the note comes back you can hold the note
and say, “ we can hold that,” and consequently there is that much
less notes to redeem; or you could issue it again in the course of
trade and you could get its equivalent when you issued it.
Mr. W e x l e r . W e are presuming now, that you want to carry out
^
and put into it a provision under which the Secretary of the Treas­
ury is required to maintain the gold standard and to purchase gold
in the open market and the argument which has just been used by
Senator Reed that the Government should issue $100,000,000 of
bonds and sell them in Europe and bring the gold over.
Senator Shafroth . The conditions with relation to those $346,000,000 are going on right now. WT do not have any difficulty with
e
it. W e have $150,000,000 gold reserve there. They are not selling
any bonds now. It is only when there is a foreign demand for gold
that we have to resort to a measure of that kind, and even then it is
questionable whether it is necessary. It is a question whether or not
there was not a deficiency in the Treasury that required that, instead
of the fact that gold could not be gotten in any other way. I believe
that any little obstacle that would be thrown in the way, such as onefourth of 1 per cent, something of that kind, would have a tendency
to make people say, “ I would prefer this other money,” and therefore
they would not make any run on the Treasury.
Mr. W e x l e r . That would immediately put your gold to a premium
or the other note to a discount.
Senator S hafroth . I do not think it would. That is just a sugges­
tion. The proposition here is that the Treasurer is clothed with
unlimited power to maintain this parity, just like he now maintains
the parity between greenbacks and gold. Gold is not flowing out of
the Treasury; it is flowing into the Treasury.




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BANKING AND CUBBENCY.

Mr. W e x l e r . Y ou 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 civilized country in the world,
except at a tremendous discount, because all of the commercial nations
of the world were begging each other for gold. You are conceding all
kinds of conditions under which this is going to work just like it was
greased.
Senator S hafroth . The United States notes and greenbacks are
working with perfect accord.
Mr. W e xl e r . I have here, in my pocket, a $10 note, that was issued
to the people, and which at the time it was issued was good for $10
and for a year after it was issued it was good for $10. It is a Con­
federate note. During the same period that this was good for $10
the greenback was not worth over 60 or 70 cents on the dollar, the
first year or two they were in circulation, when the fortunes of the
war were running against the North.
Senator Shafroth . Making the note worthless, of course, going to
a discount.
Mr. W e x l e r . This note became a depreciated note, and the green­
back gradually went up; though it did not go back to par. It is
fundamentally unsound for the Government to issue a circulating
medium. You have got to go back, Senator, to the A, B, C of finance,
I know.
Senator R eed . Will you allow me to enter the primer class at this
point?
Mr. W e x l e r . Y es; that is exactly right.
Senator R eed . Y ou have seen fit to illustrate the badness of Gov­
ernment money by producing a $10 Confederate note, issued by the
Government that never existed in the world.
Mr. W e x l e r . It did exist.
Senator R eed . It does illustrate that fact that there can be bad
money issued by the Government. Do you think it is fair to use that
as an illustration, any more fair than it would be if this committee
would produce a $10 wildcat bank note, issued by banks, when they
had laws passed to suit them and issued money? One would be just
as fair as the other.
Mr. W e x l e r . W e have used that illustration here, Senator, that
you can issue just as bad a bank note as you can a Government note,
and we have used that illustration here to prevent you from issuing
a bad bank note just in the same manner tnat I am using this Con­
federate note to illustrate the proposition of issuing a bad Govern­
ment note.
Senator R eed . It all comes down to the proposition that if we arc
are going to consider either system, we ought to consider the condi­
tions as they now exist, governed in the future by rules that are dic­
tated by common sense, good judgment, and experience in both
instances.
Mr. W e x l e r . Yes, sir.
Senator R eed . Then, we parallel the two on the same plan; but if
you are going to put up a Confederate note before this com ittee,
m
illustrating what a Government note is, when, if they are not all gone




BANKING AND CURRENCY.

319

to the paper mill, I could get cord after cord of bad bank notes, so I
do not think we should use that kind of argument. I do not think
it is fair.
Mr. W e x l e r . For 15 years after the United States Government
note was issued, the greenback, it did not sell at par; it fluctuated
from time to time.
Senator R eed . W e know that is true; we know that there are a
multitude of reasons for that that would not necessarily exist now.
Mr. W e x l e r . Not necessarily, but may. Not as long as 50 per
cent was there.
Senator R eed . If you can take that away from the Government,
I simply want to know why you can not take it away from the banks.
Mr. W e x l e r . W e have been very frank in this discussion, and I
want to say to you that it is possible for a body of men, equipped
with a knowledge of this subject, to sit down and work out a sound
Government note. I think it is possible; but it is not nearly as
economic, not nearly as advantageous to the country; it is not as
elastic a note; you have not as good machinery for protecting a gold
reserve through a Government note as you would have through a
bank note. Therefore, taking the experience of all the civilized com­
mercial nations of the world as a guide, and— and we all form our
opinions by experiences of ourselves and others— why should we per­
mit our minds to run in a channel that is fraught with more danger,
greater trouble, more cumbersome, not as efficient, when we have in
our hands a means of creating a bank note and credit system that
will absolutely answer our purposes; that will receive the approval of
the banks, the merchants, the students of political economy, such as
the professor here and every one else ?
Senator R eed . Mr. Wexler, of course, if I grant your premise,
namely, that the bank notes are a better system, I have granted the
whole question, for the premise involves the conclusion; hut what I
am trying to get at are the reasons for your conclusion, because I
might not be willing, so far as 1 am concerned, to surrender my judg­
ment to your conclusion, much as I respect it, or even to Prof.
Sprague’s conclusion.
Mr. W e x l e r . 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 America— 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 e x l e r . 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 iiafroth . 99 per cent.
Senator R eed . And take it every time.
Mr. W e x l e r . They might. But let us exclude the proletariat,
which is not posted on the subject, and let us confine ourselves to
people whose training has been in the direction of finance, and take
the political economists of this country, of Europe— the bankers of
this country and of Europe; the larger merchants, who are in a
position to understand this subject, and the larger manufacturers,




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BANKING AND CURRENCY.

and you will not find that sentiment. I have talked to any number
of them.
Senator R eed . Let us analyze that a minute.
Mr. W e x l e r . Yes.
Senator R eed . In the first place, let us exclude the banker, except
that he can give a reason for the faith that is in him, because he is an
interested party. W e will exclude the proletariat, which, of course,
excludes Congress, because they all belong in that class.
Mr. W e x l e r . Not necessarily. You have bankers in Congress.
Senator R eed . I do not know just who would be left, but we would
have the merchants who have to get their credits from the banks and
allow the banks to do a good deal of their financial thinking. I am
not so sure that we have any right in this Republic to exclude this
proletariat. I have never done it. W e have got to make a system
for them. I do not like to discuss it on that line. I would just like
to discuss it along the lines of what the reasons are.
Mr. W e x l e r . I would be glad to give them to you. Senator.
Senator R eed . The reason I am arguing with you is that I do not
propose to accept your conclusion. I want you to give me the
reason. Your conclusion, however, would have due weight, as a
conclusion.
Senator Shafroth . Let me ask you this: Is it not a fact that the
first United States notes issued by the Government maintained their
parity with gold from the beginning to the end, because they were
full legal tender for the payment of all debts, dues, and receipts
coming to the Government? Were not $90,000,000 of those issued,
and then did not they change the United States note so as to make
it a full legal tender, except as to import duties and the payment of
interest on the public debt, and then the United States notes went
to a discount ?
Mr. W e x l e r . Senator, you are correct, I believe. I have not
those facts before me, but I think that statement is correct. I
have not said at any time, nor do I say now, that it is not possible
to work out a feasible Government note, Treasury note; it can be
done, but it has to embrace many other thoughts than those that are
in this bill.
Senator Shafroth . Give us those facts; we want to put them in
the record.
Mr. W e x l e r . In the first place, it should provide that the reserves
to be carried by all banks be gold, and tne power should not be
given to the Secretary of the Treasury to provide any other money
as temporary or permanent reserve.
Senator Shafroth . N ow , why?
Mr. W e x l e r . W hy should it?
Senator Shafroth . Yes.
Mr. W e x l e r . Because gold is the money of ultimate redemption,
and because a note, however good, is not reserve money.
Senator S hafroth . United States notes now are kept as part of
reserves, are they not ?
Mr. W e x l e r . Y es; and we have contended for many years that
the United States note ought to be retired and paid off.
Senator Shafroth . That is begging the whole question.
Mr. W e x l e r . It is not begging the question at all. It is accepted
because the Government permits us to accept it. If we had our




BANKING AND CURRENCY.

321

own volition in the matter, we would say that the Government ought
to say that this note ought not to count as reserve. I say it is
fundamentally unsound that the note should count as reserve.
Senator R eed . For the reason that it is a note, and not an item of
redemption ?
Mr. W e x l e r . Nothing but the obligation of the Government, with
43 per cent gold behind it, however good it might be.
Senator R eed . Y ou say you do not approve of this present system,
and that we ought to have gold in the banks as reserves and not Gov­
ernment notes ?
Mr. W e x l e r . I think you ought to have gold in the banks as
reserve.
Senator R eed . Y ou say the banks want that?
Mr. W e x l e r . I am not expressing the opinion of other banks.
My own opinion is that our reserves would be sounder if they consisted
entirely of gold than if they consisted of a note of a Government or
anyone else, however good it may be.
Senator R eed . Let us concede the soundness. I am asking you
about the question which I think is suggested by your answer, that
the banks have all along criticized the present system because it does
not require gold reserve. Is that the case, that the banks have
criticized this system because it does not require gold ?
Mr. W e x l e r . Y ou are not stating my proposition.
Senator R eed . I so understood you.
Mr. W e xl e r . I say the banks— and I believe I am correct in so
stating— do not believe the greenbacks are not a proper subject of
reserve money. Let us put it that way.
Senator R eed . The banks want what is proper ?
Mr. W e x l e r . Yes.
Senator R eed . Therefore, the banks want it made gold.
Mr. W e x l e r . Gold.
Senator R eed . Therefore, I take it the banks could change their
reserves and pay gold without injury to the banks or else they would
not want it ?
Mr. W e xl e r . Y es; they could.
Senator R eed . That is what I wanted to clear up and get your
opinion on. W hy do you not do it ? What is to hinder you ?
Mr. W e xl e r . There is not anything.
Senator R eed . It is going to make you better; it is going to make
you stronger; and the gold comes into your vaults, and you could
lay it aside. W hy do you not do it if it is better ?
Mr. W e x l e r . W e do it, as a matter of fact. Whenever we get
hold of a gold note, we keep it and put out a greenback. That is the
practice in our bank, and I believe it is in all other banks.
Senator R eed . Do you get hold of them enough to amount to
25 per cent ?
Mr. W exl er . The greenback is in small denominations, and it
naturally goes out in order to serve the purposes of trade.
Senator R eed . D o you get enough gold certificates so that you
c o ',J '
’’
-cent?
Senator R eed . Could all the banks do that?
Mr. W e x l e r . They all could if they had a banking system, a
central reservoir of credit, through which it could compel these gold




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BANKING AND CURRENCY.

notes to remain in its own vaults instead of the pockets of the people
who supply circulating medium in lieu of it.
Senator R eed . If it could compel these gold notes to remain in its
own vaults instead of in the pockets of the people, of course, it could
do it.
Mr. W e x l e r . Exactly.
Senator R eed . But what is the system that would enable us to do
it?
Mr. W e x l e r . That is the weakness in our system to-day, that we
can not keep the proper reserve money in our vaults, because we
have nothing to substitute for it, and have to pay it out.
Senator R eed . Mr. Wexler, what is the system by which we could
compel it to come there and stay there ?
Mr. W e x l e r . The system is this, to give us another note, a bank
note, that we can give to the public, so that we can keep these notes
and not have to pay them out.
Senator R eed . Suppose the public prefers a legal tender or the
gold they have, what are you going to do about it ?
Mr. W e x l e r . I have absolutely no objection, and Senator------Senator R eed . What would you do ?
Mr. W e x l e r . If the public all wanted it?
Senator R eed . Not all of them.
Mr. W e x l e r . Y ou just simply would not have any facilities for
credit at all; if the public took all the gold in all of the banks and
carried it around in their pockets and safes and till drawers, you would
have no facilities for credit.
Senator R eed . Suppose it went down below 25 per cent ?
Mr. W e x l e r . If it went down below 25 per cent and we have no
means of protecting our credit, our credit would be restricted just to
the extent it falls below 25 per cent.
Senator R eed . Does it not seem that you have just gone right
around and came out the same hole that you went in, on that state­
ment?
Air. W e x l e r . I did not.
Senator R eed . You first say that the proper thing is to have 25 per
cent of gold ?
Mr. W e x l e r . Yes, sir.
Senator R eed . Y ou say you could have that under a proper
system ?
Mr. W e x l e r . Yes, sir.
Senator R eed . I asked you what the proper system was, and you
say a system by which you can issue credit money.
Mr. W e x l e r . Yes, sir.
Senator R eed . And then I asked you, suppose that the people
preferred the gold ?
Mr. W e x l e r . Yes, sir.
Senator R eed . Y ou then say we can not do it?
Mr. W e x l e r . Exactly.
Senator R e e d . That is just the inherent weakness of every one of
these systems, is it not ?
Mr. W e x l e r . N o.
Senator R eed . I s the fact that here is one money bettor than
another and it is limited in amount, and when you get into trouble
the people all want the best money ?




BANKING AND CURRENCY.

323

Mr. W e x l e r . N o, sir; that has not been the experience of any
country in the world, and it will not be our experience here. Our
clearing-house certificates, on the other hand, furnish a basis of
credit; people take them. They were illegal, but used in the panic
of 1907.
Senator R eed . The people did not take them because of choice.
Mr. W e x l e r . N o .
Senator R eed . They took them like a man yields a pocketbook to
a highwayman at the point of a pistol.
Mr. F organ . That is very unfair; that is the most unfair state­
ment I have heard you make.
Senator R eed . I did not say it unpleasantly.
Mr. F organ . Y ou did not say it unpleasantly, nor almost any
statement that you have made.
Senator R eed . They charge me with that all the time.
Mr. F organ . The banks were acting under compulsion of the
laws created by Congress.
Senator R eed . I am not criticizing the banks, but I am dealing
solely with the question of why the people took them. They took
them because they could not do anything else, and the banks gave
them because they could not give anything else, and I have always
said— that you will not think I am talking unpleasantly— that the
banks did a very wise thing and a very proper thing when they
issued those clearing-house certificates, although it was in the teeth
of the law; but I am not dealing with that phase of the thought, I
am dealing with the remark of Mr. Wexler that the clearing-house
certificates were accepted by the people.
Mr. W e x l e r . Yes.
Senator R eed . W e all know why they were accepted. W e had
to pay our grocery bills and we did not have anything else to pay
them with.
Mr. W e x l e r . And they answered the purpose.
Senator R eed . And as far as I was concerned I was glad to take
anything and glad to see the banks get through and open their doors
in a short time and go to paying out any kind of money.
Mr. W e x l e r . 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 measure­
ment for the whole world. It is recognized that that is the best
money.
Senator R eed . Yes.
Mr. W e x l e r . And it is the basis of credit.
Senator R eed . Yes.
Mr. W e xl e r . If it is the basis of credit, then credit can exist only
so far as that gold rests in a certain mass in a certain place, sustaining
that credit.
Senator R eed . I s that correct ?
Mr. W e x l e r . Yes, sir.
Senator R eed . If by the establishment of a bank we can issue a
circulating medium that will protect that gold stock instead of forcing
us to pay it out to the people who have absolutely no use for it, then
we accomplish the one great forward step toward the accomplishment
of a great system credit in currency that will answer our purpose.




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BANKING AND CURRENCY.

Mr. W e x l e r . I had a telegram from our bank this week stating
that the demand for currency was very great, and that they had had
to order $500,000 in currency from New York, Chicago, and St.
Louis. W hat was the effect of that operation? W e first had to
ship out of our own vaults $500,000 of reserve money. For what
purpose ? To pay the cotton pickers and the cane harvesters and the
rice harvesters of the South, who would have been equally as well
satisfied and whose interests would have been equally safeguarded
if we had sent them an instrument of credit— a bank note— and kept
that gold there as a basis of credit. W hat did we do next ? In order
to replenish our reserve we had to wire Mr. Forgan’s bank and Mr.
Reynolds’s bank and our three correspondents in New York, to take
out of their reserve that $500,000 of gold to replenish the reserve.
W e thereby diminished temporarily our own lending facilities to the
extent of that $500,000— four times that on the basis of 25 per cent
resei*ve; and subsequently we restored our credit facilities and
attacked theirs to the same extent.
That is the most uneconomic and expensive proposition for the
people of this country that could possibly take place.
Senator R eed . Y ou are getting away from the point we are
talking about.
Mr. W e x l e r . I am trying to illustrate, Senator, just as clearly as
possible the reason why we must have a bank note instead of reserve
money of any character to circulate among the people.
Senator R eed . W hat is back of your bank note ?
Mr. W e x l e r . In the first place, there is the capital of the bank
which must be lost and exhausted before the note comes impaired;
second, we have a gold reserve, as we have provided here, of 40 per
cent; that is 40 cents on the dollar of every note outstanding will
be there in gold. Then, 100 cents on the dollar of every note out­
standing will be there in a short time, liquid commercial obligation,
resting upon an actual transaction. WRat does an actual transac­
tion mean?
Senator R e e d . I know what you mean. You need not go into
the details. You mean somebody has got some goods there in a
store that he is going to sell you, and he gives you his note, and he
takes that note and he pays his bill with it, etc.
Mr. W e x l e r . Exactly; when he sells his goods, he pays us, and
that is the process.
Senator R eed . Yes.
Mr. W e x l e r . These notes that I refer to maturing in 90 days, are
coming every day, as they mature, and part of the notes that we
have issued, when we have discounted them, must be brought in to
pay the note.
Senator R e e d . Yes.
Mr. W e x l e r . That is going on all the time. There is no other
way to get these notes out except by extending them from the book
credit that has been created by discount of a note or by somebody
bringing me in a whole lot of bullion and saying, “ W e do not want to
be bothered with that; give me notes.” That takes place frequently
as well, at least, in the Treasury. So you have a note protected by
40 cents on the dollar gold, and a note arising from commercial trans­
actions at 90 days, and you have a margin of safety against possible




I

BANKING AND CURRENCY.

325

loss of the capital of the bank. If you believe that note to be good—
that is the only proposition in your mind— is it good ? Whether a
Government note is better or not does not make any difference; you
do not want anything better than what is absolutely good. If that
is good and the Government has saved the expense and the respon­
sibility of maintaining that gold reserve, the cumbersome details of
redemption, and these notes will come in, I do not think they will
circulate more than five days, as in Canada. I can not see the neces­
sity of going beyond using your brains and experience in creating a
system based upon that theory.
Senator H e e d . I was asking you some questions and had a point
in mind, and you have got me so far away from that territory that
I have entirely forgotten what the point was.
Senator H itchcock. While thinking of that, if you will allow me
to ask Mr. Wexler some questions. Suppose yesterday, instead of
telegraphing these banks for money, your officers had gone across
the street to the Subtreasury of the United States, and presented
proper and sufficient security, and obtained $500,000 in Treasury
notes, upon which you would be charged while you had them out­
standing, say 4 per cent interest.
Mr. W exler . That would be securing credit. I did not need
credit; I needed currency. At that time we did not need any credit.
We had money in New York. I needed circulating medium instead
of credit. I had the money to my credit in New York. New York
might have had to do that when I attacked its reserve.
Senator H itchcock. What need would there have been for you
to carry these great balances in New York, and what need would
there be for you to be dependent on New York for meeting this ex­
traordinary demand, if it is possible for you to go across the street
to the Subtreasury and secure the additional currency in the shape
of United States notes ?
Mr. W exler . I will explain that to you. Of course, under the
present law, as you know, we are required to keep our reserve in
New York, Chicago, and St. Louis— one-half of it, where we do now
keep it; but the trend of our business makes almost every dollar of our
money ultimately go to New York and Chicago. Principally to
New York. For instance, the cities of Houston and Galveston sell us
$200,000 or $300,000 worth of foreign exchange daily in the cottonmoving seasons. W e give the Houston bank credit for it in New
Orleans, and supply that currency. What do we do with that for­
eign exchange after we get it? W e send it to England, if it is drawn
on London, and take credit in London. The money we have paid
out to Houston or Galveston has been transferred to London, and
is to our credit in a London bank. I have got to get it back from
London in order to buy more exchange, have I not ? How am I
going to get it back from London ?
There are two ways: I may telegraph to get gold. That takes too
long and is too expensive; so I draw my check on that London bank,
payable at sight, and I sell that check in the only large market in the
country where foreign exchange can be sold, and that is New York.
So I sell it to another banking house in New York, and I get credit
for the proceeds of it in my bank in New York. I have now got the
money back in this country, in New York. I have got to get it back




I

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BANKING AND CURRENCY.

to New Orleans, and I get it back by this very process that I have
just referred to, by having New York ship me the money by express
or depositing it in the subtreasury at New York and transferring it
through the subtreasury at New Orleans to me, which bookkeeping
entry costs me 75 cents per $1,000, or $375 on $500,000. That is the
present expensive, cumbersome method of doing that business. I
can not prevent my money going to New York. If I could sell over
my counter New York or London exchange for cash, by reason of our
merchants importing foreign merchandise, I would not need then that
New Yr
ork operation; but we have not in other parts of the country
this demand for foreign exchange as it exists in the city of New York.
Therefore, no matter what regulation you may make with regard to
the depositing of our reserves, a certain amount of my money will go
anyhow to New York, and I will have New York depositing in my
favor in the regional bank in New York— that will be the process under
the new plan— and the regional bank will transmit it to me through
the regional bank at New Orleans free. That will be the improve­
ment through the operation of this new bill.
Senator H itchcock . Y ou see no objections to dealing with the subtreasury at New Orleans in this instance, except the trade conditions
making it necessary for you to keep certain money in New York
Mr. W e x l e r . It goes there; I can not keep it from it.
Senator H itchcock . But, as a matter of fact, that is the only ob­
jection you can see to a plan under which you could secure additional
currency direct, when you want it, from the subtreasury on the de­
posit of security ?
Mr. W e x l e r . I could only get it on the deposit of security.
Senator H itchcock . Yes.
Mr. W e x l e r . But suppose I did not need the credit?
Senator H itchcock . That is the only way under this bill or under
the bill you propose that a bank can secure money, except by drawing
on its own funds.
Mr. W e x l e r . It has the money. I did not need credit. W hat I
need is something the people can use to pay off. They want to ex­
change book credit they have with us for some notes. I tell them I
have not got the notes.
Senator H itchcock . That is a credit just as much as this is that
you get from the Subtreasury.
Mr. W e x l e r . I can not take that book credit off the books and
take it over to the Subtreasury. This man has credit. I have got to
give him my gold-reserve money to go out and spend among these
darkies for cotton picking when they do not want it. W hy not give
them something that answers the purpose just as well and leaves me
with this reserve upon which I can continue to facilitate commerce
to the extent of that $500,000 that you take away from me to go out
in the country ? I have contracted by credit facilities $200,000,000.
Senator H itchcock . Under my plan you would not, because you
would still have that reserve in the bank. You would simply take
some of your portfolio and deposit it with the Government and get
the additional currency.
Mr. F organ . He does not want to be at that expense.
Senator H itchcock . He has just objected to the fact that he has
been compelled to contract his reserve and thereby contract the
money-lending power.




BACKING AND CURRENCY.

327

Mr. W e x l e r . I have got the money in New York, my own money;
all I want is to draw it.
Senator H itchcock . Y ou have contracted your reserve by sending
some of your ready cash into the country.
Mr. W e x l e r . I see your point.
Senator H itchcock . By the plan you propose you would not con­
tract your reserve at all.
Mr. W e x l e r . The truth of the matter is, when I draw the $500,000
out of New York I restore my reserve, and I do not need any credit.
New York would be the one then which needed the credit.
Senator H itchcock . Y ou contract the reserve of New York.
Mr. W e x l e r . I contract the reserve of New York. I only con­
tracted my own credit for a day, until I could get mine from New
York. New York is in that condition.
Senator H itchcock . I s not that a part of the evil the country is
suffering from, the fact that 20,000 banks have got the power to
contract the reserves in New York at any time, and that to pro­
duce a stringency, and would it not be better if the banks were not
compelled to draw upon New York under those circumstances?
Mr. W e x l e r . That would not be the remedy. The remedy would
be to give New York somewhere to go and restore its reserves, when
it becomes attacked; that is the remedy.
Senator Shafroth . D o I understand if this bill goes through in
its present form that you would rather for us to require all the banks
to keep their reserves in bonds ?
Mr. W e x l e r . N o, Senator. I would want all the banks—-—■
Senator S hafroth . Y ou think that the gold reserve, however, is
the ideal reserve for banks?
Mr. W e x l e r . I do.
Senator S hafroth . And you would also want us to require the
banks to keep their reserves in gold ?
Mr. W e x l e r . It would almost have that effect— I would want
them to keep that part of their reserve which they keep in their
vaults in gold or its equivalent, which, under present Treasury regula­
tions, includes silver notes; and the reserves of the regional reserve
bank or any other reserve agents also would be required to keep it in
gold.
.
Senator S hafroth . Would you want us to limit your reserves to
gold, right now, in this bill ?
Mr. W e x l e r . A t this moment?
Senator S hafroth . Not my bill, but in the bill?
Mr. W e x l e r . I would not.
Senator S hafroth . If my bill took effect, you want that limited
to gold ?
Mr. W e x l e r . Yes, I would; because you are going to have only 50
per cent redemption feature in it.
Senator S hafroth . These reserve notes that you have been issuing
have not got but 33 J, and we only recommend 40.
Mr. W e x Le r . W e do not propose to count them as reserves.
Senator Shafroth . The greenback has got a reserve of only 43 per
cent, and you count that reserve.
Mr. W e x l e r . W e count that reserve.
Senator S h a f r o t h . The silver in the silver dollar is worth 45 cents,
and you count that as a reserve.




328

BANKING AND CURRENCY.

Mr. W e x l e r . That is part of the money we know the people are go­
ing to carry. You have somewhat confused lawful money and reserve.
I say I see no objection to making these bank notes lawful money.
If you sell me some real estate for $10,000 I see no reason why
you should not be compelled to take these notes in payment. You
might make the transaction, and say, “ I will sell you this property for
this much money, but I want gold.” I could take you over to the
bank with the $10,000 and get you the gold. So, they can be made
lawful money without any harm, but do not permit a note, however
good, to be bank reserve.
Senator Shafroth . Not even the greenback now ?
Mr. W e x l e r . Not even the greenback now. The greenback ought
to go out of business.
Senator S hafroth . D o you think silver ought to go out of busi­
ness ?
Mr. W e x l e r . 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.
Senator H itchcock . D o not all banks of Europe except the central
bank count notes reserve ?
Mr. W e x l e r . Notes of the Bank of England, and such notes as
that ?
Senator H itchcock . Yes.
Mr. W e x l e r . They have no reserve requirements.
Senator H itchcock . Whatever reserve they have is more in notes
than in gold.
Mr. W e x l e r . Of late, the banks of England have built up quite
a lar^e gold reserve; it has been increased from 3 to 10 per cent, realiz­
ing they were skating on thin ice by depending entirely upon the
gold reserve of the Bank of England for their reserve.
Senator H itchcock . They take in England notes of the Bank of
England in gold just as in France they take notes of the Bank of
France in gold.
Mr. W e x l e r . They take them over to the Bank of England and
get credit for them.
Senator H itchcock . Y ou object to something in this bill which, as
a matter of fact, is used on the other side.
Mr. W e x l e r . N o ; it is not used on the other side. They have no
mandatory reserve provision. Now, if you wipe out of here entirely
the mandatory gold provision, we will carry the class of reserves
which our business requires, and which we believe to be safe. You
do not need all this provision with regard to reserve as Senator Nelson
wisely said.
Senator H ithcock . I s it best to require banks to carry their re­
serves all in gold?
Mr. W e x l e r . If they carry any.
The Ch airm an . The committee will stand adjourned until half
past 2------Senator B r isto w . Mr. Chairman, I have been waiting several days
to ask some of these gentlemen some questions.
Mr. R eynolds . Mr. Wexler, who is going to remain here, can
answer these questions as well or better than any of the rest of us,




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BANKING AND CURRENCY.

329

and Mr. Forgan and myself have postponed our departure for three
consecutive days, and I feel I ought to get away.
Mr. F organ . Mr. Wexler will be here Monday.
Senator B ristow . Can you gentlemen come back later ?
Mr. R eynolds . Y es; we will come back later. There are several
lines of inquiry I want to make, and I have not had the slightest
opportunity, and I want the opportunity to do it.
The Chairm an . We will not postpone these hearings in that way.
Senator B ristow . Let us have the committee decide whether or
not we will do that.
The Ch airm an . It will be decided by the committee, but we will
not postpone our hearing. W e will be compelled to ask you gentle­
men to remain to give the Senator from Kansas (Mr. Bristow) an
opportunity to cross-examine you.
Mr. R eynolds . I s there any appeal from the decision of the
chairman ?
The Ch airm an . Y es; to the committee and to the Senate itself.
(Thereupon, at 1.25 p. m., the committee adjourned to meet at
2.30 p. m.)
AFTER RECESS.

The Ch airm an . The committee wdll come to order.
Mr. Wexler, Senator Bristow, of Kansas, wanted to ask you some
questions.
Senator B ristow . Mr. Chairman, I of course would be very glad
to get the views of Mr. Wexler on a few matters that I wanted to
bring up, and I should also be glad to have the opportunity, if it can
be had, of interrogating Mr. Reynolds and Mr. Forgan upon the same
matters.
Mr. W e x l e r . Mr. Chairman, Mr. Reynolds and Mr. Forgan asked
me to state that they were compelled to return, and 'that they would
be very glad to answer any questions that any member of the com­
mittee wanted to put to them, by wire or by letter, or to return at
any time that the committee desires them to.
Senator B ristow . Interrogatories by wire or by letter could not
be satisfactory in matters of this kind, in my judgment. I simply
want to state that I wished an opportunity to interrogate Mr. Reyn­
olds or Mr. Forgan upon a general line of inquiry such as I expected
to this morning if the time had not been all taken up with other
matters.
I simply wanted to explain that, Mr. Chairman, because a good
many of the questions that I wanted to ask were brought out by state­
ments made by Mr. Reynolds.
I asked Mr. Wade, I think it was, that if it were determined that a
general revision of the currency law could not be made at this session,
what changes he would suggest in the present Vreeland-Aldrich bill
in order to make it serve the purpose of giving elasticity to currency.
I will ask you the same question, Mr. Wexler.
Mr. W e x l e r . Senator, I have not read the Aldrich-Vreeland bill
over since it was made a law, but my recollection of the bill was that
it was enacted at that tune because the party in power then realized
they could not get out a currency measure, and they thought that




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BANKING AND CURRENCY.

something of that kind ought to be passed or they might not be
very much blamed, and they brought out this Aldrich-Vreeland bill
and printed all this circulation. This circulation required that it be
secured by a certain class of collateral and that it pay interest at the
rate of 5 per cent for certain papers and 6 and 7 per cent for others,
and it goes on up to a prohibitive rate.

Just to take the currency as it is and make it answer the purpose,
is your question, is it not ?
Senator N e l s o n . It provided first for the formation of a currency
association.
Mr. W e x l e r . Yes; it contained first the provision that before a
bank could get any money it would have to go before this currency
association and expose its condition. It should have the right to go
there to the proper authority stipulated in the bill and obtain these
notes by depositing the classes of security which the Government
requires. If the security is of the character that the bank could not
comply with, then it would have to be amended so as to enable the
banks to take out this circulation. Then the rate of interest would
have to be materially reduced because it would only be used in an
extreme emergency. It is a fact that any bill that provides only the
means of relief in emergency is a bad bill, because it attracts the
attention of the whole country and the whole world to your con­
dition, and that accentuates it. In order to have it really effective,
you must be able to put it into force all the time, without any jar
or any friction, so as to call the attention of nobody to the condition.
W e have such a large population and have so many banks, and fear
spreads so rapidly, that everything possible should be done to avoid
exposing any condition requiring assistance, and the assistance should
be made so readily available that if the security is sound it can be
had upon very short notice without any complicated red tape which
is incident to most Government transactions.
Senator B ristow . A s I understand you, then, if provision were
made whereby the bank could go direct to the source without incur­
ring any publicity, and the interest rate were reduced, it would
provide a currency that could be used for emergencies ?
Mr. W e x l e r . Yes, sir.
Senator B ristow'. Satisfactorily ?
Mr. W e x l e r . Well, not ideal by any means, but workable.
Senator B ristowl That would be a currency, then, based upon
assets for temporary use ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . T o relieve a stringency ?
Mr. W e x l e r . Yes, sir; it would be a loan. It would have to have
a fixed maturity; otherwise it w
’ould have to have a gold reserve
behind it. If you simply issued it without any fixed maturity or
without any reserve, it would not no; it would be a disastrous
inflation.
Senator B ristow . Y es; I understand. It would be in the nature
of a loan.
Senator H itchcock . A s I understand, the principal complaint
against the present currency system is its inelasticity. What you
want is a currency that is more elastic, that will contract and expand
with more ease and greater facility?
Mr. W e x l e r . Yes, sir.




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Senator B ristow . Such a currency as you have suggested would
relieve the weakness of our present system, would it not?
Mr. W e x l e r . Such a currency as the Aldrich-Vreeland bill, you
mean?
Senator B ristow . Modified as you suggested.
Mr. W e x l e r . N o , sir; I do not think it would.
Senator B ristow . W hat is the difference between that currency
and the currency that you propose on these assets ?
Mr. W e x l e r . The difference is this, that the currency that I pro­
pose to be issued by the bank would, in the first place, be secured by
a gold reserve. In the second place, it would be put out only for
the rediscounting of paper, not for loans direct to a bank. The
bank would have to have a particular class of paper.
Senator B ristow . If you will excuse me just a moment right there.
That goes to the stability of the currency that is in existence. You
spoke of a gold reserve. Now, there is no complaint as to the sta­
bility of the currency which we have now, as I understand it; it is
good enough.
Mr. W e x l e r . It is good.
Senator B ristow . This currency which you suggest would be no
better currency than what we already have; but what you want is
not a better currency, but a currency that is more elastic in its use ?
Mr. W e x l e r . Yes, sir; one the quantity of which in circulation
adapts itself exactly to the requirements of commerce, and which is
so organized that no power is strong enough to keep it in circulation
one minute longer than the trade requires.
Senator B ristow . That is the point. That is, you want to give it
elasticity. This currency which would be issued under the VreelandAldrich Act, as you suggest, would meet that requirement, would it
not ? Would it not give elasticity ?
Mr. W e x l e r . Not at all.
Senator B ristow . W h y would it not?
Mr. W e x l e r . Because it is not, from my standpoint, currency
at all.
Senator N elson . It is a bond-secured currency.
Mr. W e x l e r . It is nothing but a bond or note secured loan, at a
rate of interest sufficiently high to make it unprofitable for the bank
to keep it any longer than is absolutely necessary. It is not a cur­
rency.
Senator B ristow . I understood you to say that you wanted a cur­
rency that would only be in existence— afloat, if I may use that term—
so long as it would be of use. It would be automatically retired------Mr. W e x l e r . I do not mean actually needed by the banks, but
by the people of the country. W e are merely the instruments of
disseminating credit. W e are dealers in credit. But I mean a cur­
rency that will meet the requirements of the whole people, that no
bank, however powerful, no aggregation of banks, however powerful,
can keep one minute longer than the commerce of the country
requires it. It must have that inherent quality in itself to contract
itself.
Senator H e e d . H o w do you get that inherent quality?
Mr. W e x l e r . Y ou get that inherent quality by the fact that when
the condition that caused the emission of that note passes by, the note
itself comes in of its own accord.
9328°— s. Doc. 232, 63-1— vol 1----- 22




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BANKING AND CURRENCY.

The Ch airm an . W hat you mean is that the cotton pickers, when
they demand money for picking cotton, will put those notes back
into the merchant’s till in exchange for their merchandise, and then
the merchant will retire it?
Mr. W e x l e r . Certainly.
Senator R eed . Suppose you have some issue done by the Treasury
Department, done at the Government Printing Office instead of a
private printing office, and it came back in here, would you not
retire it in the same way?
Mr. W e x l e r . N o , sir; you have no means for retiring it.
Senator R eed . Y ou have the same means exactly that you have
in the other. Here is a note that comes out of this corner of the
room and here is one that comes out of that corner of the room.
Your business is to retire either one of them. You retire them
because they come into your bank through the trade and commerce.
The same streams run through on the same level and in obedience
to the same law.
Mr. W e x l e r . There is no doubt in the world, and there can be no
argument, but what the Government is in a position to establish a
bank it if wants to do it that will be a central bank in effect, and it
ought to have the same kind of machinery for emission and retirement
of credit notes and the same method of lending money. It is just a
question of whether you want to put the Government in that fine of
business or leave it to the banks. You have the power to do it.
Senator R eed . Y ou get away from the question by dissertation.
Mr. W e x l e r . N o , I think not.
Senator R eed . I am dealing with one thing, just one thing. You
said a moment ago, as I understood you, that you could issue the
money through the banks, and it went out in response to the demands
of commerce. Then it came back in, and you could retire it, and
you considered that as an advantage of the bank issue over the Gov­
ernment issue. Now suppose that the bank goes to the Government
and gets the same amount of money. It pays it out over its counter
in tfie same way and for the same purpose, and when the cotton
planter has harvested his crop and got his money he comes and puts
it into the same till in your bank and it goes to the same man. W hy
are not the two systems, as far as that is concerned, parallel ?
Mr. W e x l e r . 1 have told you it can be done; if you provide the
machinery for doing it, you can do it.
Senator R eed . All the machinery that is to be provided is the
method by which you get the money from the Government and the
method by which you pay the Government off.
Mr. W e x l e r . Exactly; and that must be by the establishment
of various branches all over the United States, wherever that may be
necessary— not to have to run up to Washington to do it.
Senator R eed . I understand that.
Mr. W e x l e r . If you give them the same machinery for passing
upon credit, for issuing notes, for retiring notes, the same availability
to the general commerce of the country, there is nothing to prevent
the Government doing it, if it wants to go into that line of business.
There is nothing to prevent the Government going into any line of
business, if it wants to.
Senator B ristow . A s I understand the method that you gentlemen
have suggested, it is that when the bank needs currency, because of




BANKING AND CURRENCY.

333

some pressing condition with a branch bank, or with a central bank
system, or a regional bank system, that bank goes to the regional
bank or the central bank and gets the currency by hypothecating
some of its notes or its assets— commercial paper ?
Mr. W e x l e r . When it gets credit it goes to the bank and hypothe­
cates some of its commercial paper, and gets credit. That is entirely
distinguished from when it needs circulation. Do you catch me up
to that point?
Senator B ristow . Yes. Well, we will take credit.
Mr. W e x l e r . W e get credit.
Senator B ristow . W hat is the nature of this credit which you get ?
Mr. W e x l e r . I will give it to you. W e have loaned all the money
we are permitted to loan under the law, by reason of the fact that
our reserves do not admit of any further loans. Now, we need credit,
and we go to the bank with our portfolio and we rediscount it. It
gives us credit on its books for the note, the amount coming to us
from this rediscount. We have restored our reserve by reason of the
fact that we have a credit— the regional bank.
Senator B ristow . Your reserve had not been disturbed, because
you can not disturb it. You simply go to get money.
Mr. W e x l e r . W e have a surplus reserve.
Senator B ristow . This credit is in the form of bank notes?
Mr. W e xl e r . It is in the form of the credit of that bank.
Senator B ristow . W hat good does that do in paying your cotton
pickers ?
Mr. W e x l e r . I have got a credit in the bank either to check against
or to send out to the cotton pickers. I go over to the bank, present
my check, and they pay me out in the notes of the bank, just the
same as my check calls for. Therefore I have done both things for
which the bank is organized— I have used my credit and I have used
the circulating medium. I have these notes and respond to the
requests that are made upon me by my corresponding banks or by
customers all over the surrounding country, and I ship these to-day
by express or mail, as the case may be, or pay them over my counter.
Senator B ristow . Y ou say you get credit that was in the form of
bank notes?
Mr. W e x l e r . Ultimately. It was not originally. It was in any
form I wanted it in.
Senator B ristow . Are the book credits of any account to the cotton
pickers ?
Mr. W e x l e r . Not to the cotton pickers, but they were to me. I
might have to use part of them for cotton pickers.
Senator B ristow . It was of use to you because you could get notes
for it ?
Mr. W e x l e r . Yes, sir.
Senator B r isto w . Y ou are short on currency in your bank; you
ought to have the circulating medium. Y o u have to get it in order
to supply the demand, and you take a part of your surplus to the
branch bank of any kind, to a regional bank, or whatever you want
to call it, and that bank has authority, under the law, to issue n otes;
and it issues the notes and gives them to you, and you leave with it
your securities ?




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BANKING AND CURRENCY.

Mr. W e x l e r . Yes, sir.
Senator B ristow . A s a guaranty for the payment of these notes,
which ultimately is returned ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . And that relieves the stringency; and that is
what you call elasticity, is it not ?
Mr. W e x l e r . Y ou are confounding the propositions, Senator,
with------Senator B ristow . N o ; I do not think I am. Is not that what
gives elasticity— your ability to get those notes to pay the cotton
pickers ?
Mr. W e x l e r . That does not give the elasticity. The ability to get
the notes saves me from paying my reserve. It would destroy my
lending ability.
The Chairm an . W e will take a short recess for the purpose of a
roll call.
(At this point the committee thereupon took a recess for five
minutes at the conclusion of which the following proceedings were
held:)
Senator B ristow . Mr. Wexler, I was suggesting, as I remember,
when the roll call occurred, that this currency which you secured from
the bank in an emergency was that which was necessary in order to
make our present system more elastic ?
Mr. W e x l e r . That is entirely wrong, Senator. I have not taken
that money out in an emergency. Let me see if I can get the idea
straight to you. I might have a requirement for currency without
the slightest requirement for credit. In other words, I might have
to my credit in the regional bank, on deposit with the regional bank,
a million dollars. That is, on their books our bank would stand in
credit $1,000,000. But I do not want any more credit; I have got
enough. I need notes to send out into the country, so I simply go
over there, draw, mv check against my deposit and get the notes,
you understand, and send those notes out into the country.
Senator B ristow . W hy can you not do that now?
Mr. W e x l e r . Because the notes that I send out now— I do do that
now. If I get a demand, now, for currency, I go into my vault and
take reserve money out.
Senator B ristow . If you have this million dollars credit, why do
you not check against it ?
Mr. W e x l e r . They can not pick cotton on checks. I have to send
the money.
Senator B ristow . The trouble is, Mr. Wexler, that instead of my
confusing this matter, if you will pardon the expression, I think you
are confusing it.
Mr. W e x l e r . Well, perhaps I am, Senator.
Senator B ristow . Y ou say that you do not need credit because
you have credit; what you want is currency ?
Mr. W e x l e r . Yes.
Senator B ristow . And having credit on a reserve bank, you draw
your check on that bank and ask for currency. That bank sends it
to you. That is what you do now ?
Mr. W e x l e r . That is what I do now.




BANKING AND CUBRENCY.

335

Senator B ristow . If you can do that now, then wherein should
there be an embarrassment because of the inelasticity of the currency ?
Mr. W e x l e r . I am glad you asked that. The withdrawal of that
money by my check on my correspondent has taken that much of his
reserve money away and reduced------Senator B r isto w . H ow has it taken that much of his money ?
Mr. W e x l e r . It is his reserve. This gold that he is sending out,
or its equivalent------Senator B r isto w . I am not discussing the proposition from the
standpoint of breaking into your reserve. This is not a reserve ques­
tion. It is a question of elasticity. Now, if you want a less reserve
or no reserve, that is a different question. Suppose you do not have
any reserve.
Mr. W e x l e r . Let us get around to the elasticity, then. The
notes that you now circulate have no elasticity. Our bank notes are
based upon bonds, and when they come back to us we give them out
just as soon as we can, because when we have them on our hands
they do not count as reserves, so we try to get the people to take
them. There is no means of their retirement except by taking them
down to Washington and selling your bonds.
Senator B ristow . That does not answer the proposition.
Mr. W e x l e r . S o that the present note issue is inelastic.
Senator B ristow . It is stationary; that is true.
Mr. W e x l e r . The new note that we propose to have issued will
bo a note that will go out when it is sent; it will be redeposited in a
bank. When it gets back to whatever bank it may get to, that bank
will redeposit it with the regional bank, and the moment it does it
has gone out of business, it is canceled, it is done, it is finished.
Just as much so as if you owed a man $1,000 and you paid him and
you cancel your signature on that note, that note is finished.
The Chairman . I think I can perhaps clear the matter for the
Senator. When you draw your check on a New York correspondent,
and they send you currency for the cotton pickers, although it can
not take their reserve, it will take their amount above the reserve
and bring it down to the reserve point; and the moment they get to
the reserve point they can not respond to your check without im­
pairing the credit system.
Senator B ristow . I understand. W e will get to that. That is
another step. The currency we have is rigid. That is the complaint ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . Y ou want a currency that you can swell at cer­
tain periods of the year because of business demands, etc. ?
Mr. W e x l e r . That the people can swell. W e are simply the
instruments— their intermediaries.
Senator B ristow . Of course I understand that. You want this
currency to be issued when it is demanded, and that currency, v hen
it is no longer demanded, automatically retired ?
Air. W e x l e r . Yes, sir.
Senator B ristow . Congress has provided a law by which that can
be done, but you say that it has certain requirements that make it
impracticable of use ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . I asked what changes were necessary in that law
in order to make it practicable so that that currency which is now in




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BANKING AND

CURRENCY.

existence could be used for the purpose when the business of the
country demanded it, and you say it can not be done, but that if a
bank was organized and the bank could take exactly the same security
which you propose and give you the additional currency on those
securities, and you could use that currency from the bank to relieve
this stringency, as soon as the stringency was over it would auto­
matically retire. W hat I asked was, W hy should not the currency
which we now have be used in the same way and what amendments
to the present law would be necessary in order to make it available ?
You do not seem to think that any amendments should be made.
Mr. W e x l e r . Oh, yes; I said all the time that it is possible for the
Government to go into the banking business and to establish a bank
if it desires to.
Senator B ristow . N ow , just a moment. W e do not propose to
put the Government in the banking business at all.
Mr. W e x l e r . It will stop with these notes— just with these
Aldrich-Vreeland notes.
Senator B ristow . This is a currency question, directed to giving
elasticity to the currency.
Mr. W e x l e r . Yes, sir; I see your point.
Senator B ristow . W hy could not that currency be used for that
purpose; and what amendments in the present law are necessary in
order to meet that requirement without breaking up the present
currency system which we now have ?
Mr. W e x l e r . I say it could be amended in this way: In the first
place you would state that no one should get these notes who did not
give in lieu of them commercial paper maturing not beyond 90 days.
In the second place you would have to put behind them a reasonable
gold reserve, say of 40 per cent, so that if any of the notes were
presented for redemption in gold you would be prepared to redeem
them in gold. In the next place, you have to establish all over the
United States agencies for the carrying on of this business, with a
competent man to pass upon the value of this paper and who would
also furnish at the same time and at the same place redemption
facilities where the notes could be turned back. If you amended
it in those three instances and eliminated this interest-bearing
feature that you have here, you would have an elastic note that
would flow out according to the requirements of credit and would
flow back as the demand for credit receded or expired.
Senator B ristow . I am very much obliged to you.
Mr. W e x l e r . Then you are establishing a central bank with
branches all over the country when you have done that. That is
the effect of it. You can not get away from it. It would be by the
Government instead of stockholders.
Senator H itchcock . It is not receiving any deposits.
Mr. W e xl e r . N o.
Senator H itchcock . Y ou are simply making currency available
for the banks ?
Mr. W exl er . Therefore, the gold that you require against the
notes— the reserve— you have got to get from some other channel.
Under the bank scheme one reserve is provided by the deposits that
are made by the banks. If you do not do that, then you nave a cen­
tral bank that will have to provide the gold by some other means,
either by taxation or appropriation or by selling bonds; so that in




I

BANKING AND CURRENCY.

337

effect you have a central bank providing a gold reserve simply from
other channels than from the much easier and more economical chan­
nel of concentrating reserve for that purpose.
Senator B ristow . Y ou say 1 eliminating this interest-bearing pro­
1
vision.” Do you think that they would retire automatically if the
interest-bearing provision was stricken out ?
Mr. W e x l e r . With the amendments that I have suggested, ab­
solutely— just as freely as they were in the bank.
Senator B ristow . Y ou think they would?
Mr. W e x l e r . Yes, sir.
Senator B ristow . Y ou think there would be no danger of inflation ?
Mr. W e x l e r . Absolutely none, as long as you make the gold re­
serve and the character of paper that could be discounted. There is
not the slightest chance of inflation, except one, and that is if you
should discover in this country an enormous gold mine or a number
of them that would produce a vast additional quantity of gold, or if
the balance of trade would be enormously increased for a number of
years and much gold would come from abroad. Then you could have
inflation, because you have so much more free gold available. But
you would need inflation then because the country would be so
prosperous.
Senator R eed . D o you know any way by which that free avail­
ability of gold could be encouraged ?
Mr. W e x l e r . No.
Senator B ristow . I would like very much to see that myself.
Mr. W e x l e r . It has been going on for the last 50 years.
Senator B ristow . That is exactly what I wanted to get at. You
believe that with this amendment that you have suggested in the
Vreeland-Aldrich bill the individual banks would deal direct with the
governmental agency ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . And secure from the Government the currency
that was necessary ?
Mr. W e x l e r . Yes, sir.
Senator N elson . Upon commercial paper.
Mr. W e x l e r . Upon commercial paper. The Government would
do everything, then, except receive deposits that it has pro­
vided that this central bank or these regional banks may do—
perform every function except the receiving of deposits. If you
had the receiving of deposits to-day you would make it still better
and you would have a very good institution.
Senator R eed . Mr. Wexler, will you be kind enough to put on a
piece of paper the suggestions as to the things necessary to be done
to make the present Aldrich-Vreeland Act workable far the purposes
we have in mind; that is, furnishing currency in times when there
is a demand for it, not simply emergency, but demands ? I would
like to have that in that form if I could have it.
Mr. W e x l e r . I will have to have a copy of the bill to do that.
Senator R eed . I will get that for you.
Mr. W e x l e r . It would be very much better to write it all over
new than it would be to amend the bill. W hy this strong attach­
ment for the Aldrich-Vreeland bill?
Senator R eed . It is the system now in existence.
•*




338

BANKING AND CURRENCY.

Mr. W e x l e r . But it has never been used. It is simply an emer­
gency measure by a party not in power to-day. They admitted it.
They wanted to have an excuse------Senator R eed . I wanted to give you a text to keep you at it.
I am afraid you might get off onto some of these theories------Mr. W e x l e r . Oh, no; I would go right along in the line of a bank.
I am perfectly willing to undertake it, to the best of my ability.
Senator B r isto w . It has been refeired to here that commercial
paper was 60-day paper, or 90-day paper, and I think the bill pro­
vides for 45-day paper, or it did as originally introduced. W hy is it
necessary to confine securities to 60 or 90 days ?
Mr. W e x l e r . Because the commercial transactions of the country
are usually based upon paper running not beyond 90 days. It is
strictly a commercial transaction. I mean to say, where a man ex­
changes his credit for the credit of the bank for his temporary re­
quirements, and then, as you are using bank notes, giving a credit
which may be taken out in bank notes, you should have something
that is very liquid, and that you can calculate upon coming bacK
within a reasonable length of time, a short tim e; by which means you
could, if business is going to quicken, contract if you desire. The
average length of time of these notes that are going to be discounted
in a bank of that character, whether owned by the Government or by
the banks, will be probably very much less than 90 days. Every
bank will naturally discount the greatest number of notes coming due
within the shortest time that it has in its portfolio, because it would be
more profitable.
Senator B ristow . But you have in mind, now, the sale— I use
terms that I am more familiar with, not being a banker— the sale of
quickly maturing paper that, theoretically, could be collected.
Mr. W e x l e r . Yes, sir.
Senator B ristow . S o as to discharge the debt ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . If this currency is to be automatically retired
when its use is no longer demanded, why should the basis of security
upon which it is issued mature before it is retired, or within 30 or 90
days ? W hy would not a bond of the State or of the Government,
or a farm mortgage or any first-class paper, serve the same purpose?
Mr. W e x l e r . For the raison that the paper maturing within 90
days the maker of the paper must meet himself. If you give me
your note for $ 1,000, due in 90 days, I rediscount that note with the
regional bank; I indorse it; I do not pay the note, only in case of
your default. You pay the note. If you come to me with a bond
maturing in 50 years of a State or of a county or of a school board, or
anything of that kind, the maturity of it is so long off that, in the
ordinary operation of the bank, it would be worked out in the ulti­
mate. The note would stay out just as long as the obligation would
stay out; or if the note was presented sooner than the obligation was
presented, you would only have 40 per cent of gold to pay it with,
and you would soon have all that gold taken out.
Senator R eed . If you went to the bank and borrowed money on
Government bonds.as collateral, when your obligation matured you
would have to take part of the money to pay it.
Mr. W e x l e r . Yes, sir.




BANKING AND CURRENCY.

339

Senator R eed . But if you had short-time paper, before it became
due the short-time paper would be paid and you would not have to
pay it ?
Mr. W e x l e r . That is the idea. I will make it a little clearer.
Suppose all the paper that the central or the regional bank dis­
counted was due in five years. Say it was $10,000,000, due in five
years. It issued its notes when it discounted that paper, and those
notes circulated around among the people, and through their transac­
tions got back to the window of the bank. W hat has the bank got
to do it with ? Forty cents on the dollar in gold and 100 per cent of
the paper maturing in five years ? So you have got to sacrifice this
other paper to meet the remaining 60 per cent. There would not be
anybody to go to to get it. Then you have to rediscount it or sell
the security or default.
Senator B ristow . That is theoretically very sound.
Mr. W e x l e r . Y es; and I believe that would work out.
Senator B ristow . But as a matter of fact in the practical business
of the country— I do not know" how it is in the large cities— the
6,000 of the 7,000 national banks do not expect their 90-day paper
to be paid when it is due. They carry it on from 90-day periods for
years, sometimes.
Mr. Wte x l e r . But they expect a sufficient percentage of it to be
paid to meet the natural demand that they are going to have for
money. If they did not, they would be broke. You will find that
the average bank that breaks has got 90 per cent of uncollectible
paper, and perhaps every dollar of it is good ultimately.
Senator B ristow . D o you think that with this other class of
securities hypothecated to this currency there would be any loss of
the short-time paper taken up in the bank than if that was the paper
that was hypothecated?
Mr. W e x l e r . I do not exactly get that.
Senator B ristow . Suppose that the bank gets $100,000 worth of
these notes and puts up, instead of 90-day paper, farm mortgages?
Mr. W e x l e r . The bank puts them up with whom?
Senator B ristow . With the Government or with the regional
reserve bank, or with the central bank, whichever system you might
adopt.
Mr. W e x l e r . Farm mortgages due when?
Senator B ristow . Oh, anv time within a year to five years.
Mr. W e x l e r . They would not be allowed to take it.
Senator B ristow . Suppose they are allowed ?
Mr. W e x l e r . Well, suppose they were.
Senator B ristow . I know they are not now. The fact that that
bank had the farm mortgages paid which were as valuable to it as
any other securities, instead of 90-day paper, that would not result
in less 90-day paper being paid when due than if it did not have the
farm mortgages. The paper would be paid whether it was hypothe­
cated or not ?
Mr. W e x l e r . Yes, sir; if it was due, I presume.
Senator B r isto w . If the Government should issue this currency
under an act similar to the Vreeland-Aldrich Act, would it not be
more convenient for the Government to require bonds or long-time
paper or permit long-time paper and short-time paper ?




340

BANKING AND CURRENCY.

Mr. W e x l e r . It would be more convenient for the Government
in the fact that it would save investigation by the credit system
that it would have to have in order to pass upon notes, but it would
not have a sound circulating medium. The Government might bo
in the same position that the bank would be in if it would have a
vast amount of long-time paper outstanding against a vast amount
of notes due on demand and only 40 cents on the dollar, of gold, to
take it up with. How would the Government provide for the other
60 per cent when these notes came back ?
Senator B ristow . That is upon the theory that the demand of
the short-time paper can always be realized upon ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . Of course, with your wide experience you know
that it can not be realized upon during close times, because the men
that make the notes can not pay them when they are due.
Mr. W e x l e r . Experience showed that during the panic of 1907
nearly every dollar of the short-time commercial paper paid out
through note brokers, which amounted in the aggregate to millions
of dollars of the class of paper which is used by a great many banks
as a secondary reserve— that is, they know it is going to be paid—
was paid at that time. The Federal reserve bank, the central bank,
would get its money in any event, because the bank discounting it,
having indorsed the paper, even though it had to renew the note of
John Smith which had matured in 90 days and was not paid, it
would go over to the central or regional bank and take up that note.
In a week afterwards it might come and bring John Smith’s new 90day note and rediscount it. But in the meantime the Government,
if you have a Government bank, or the central reserve bank, or the
regional bank, would have its money, and there would be nothing to
prevent its getting its money.
Senator B ristow . Take the panic of 1907. The Armour Packing
Co. had a large quantity of this commercial paper— that is what you
call it, is it not ?
Mr. W e x l e r . Yes, sir.
Senator B ristow (continuing). Scattered all over the country.
They were seeking a market for it. I think John Wanamaker had a
great deal of it. Country banks were being solicited to take it.
That is what is called commercial paper ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . WT
hen that is due it is paid, and the money to
pay it is paid out for more paper just like it ?
Mr. W e x l e r . N o ; I will have to differ with you on that. Of
course there are some firms in connection with which that may be
true; but let me tell you that for the last six months there has been
a liquidation of notes and also of commercial paper, without the
ability to float a new paper in lieu of it. That paper has been retired.
I know one city where there has been considerable discrimination on
the part of the bankers all over the country against the paper on
account of the tariff and the fear of the effect it might have upon
that section. They have been unable to rediscount this paper dur­
ing the progress of the tariff bill, and they had to retire it themselves,
and they have retired it. They had to pay it off. And that is what
the solvent merchant can do when he has "to do it. He may have to




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341

make sacrifices, he may have to sell commodities or securities, or
whatever he may have, but he meets it, because his whole future
and commercial standing depends upon his meeting it. He does not
know who holds his note or whom to go to to get extension.
Senator B ristow . I s not the very purpose of securing this elasticity
to give him relief under circumstances of that kind, so that he will not
be forced to meet an abligation which he can not meet without serious
sacrifice ?
Mr. W e x l e r . Yes, sir.
Senator B r isto w . That is what we want elasticity for.
Mr. W e x l e r . That is what we want a credit institution for.
Senator B ristow . Of course, I have always had in mind taxing this
surplus currency so that it would be forced to take up part of this taxa­
tion. If there were a tax put on notes of that kind, then as soon as the
merchant or the business man of whatever nature could get the money
and get out from under the burden of this additional interest he would
do it, and it would then retire as soon as the financial condition was
so that it could be done without a great sacrifice.
Mr. W e x l e r . In a sense the tax would be paid, but it would be
better accomplished by the rate of interest that the Government or
bank would ciiarge upon the discount. That would in one sense be a
tax.
Senator B ristow . It would be the same thing, only getting at it
in a different way.
Mr. W e x l e r . It would be getting at it in a more sensible, business­
like way.
Senator B ristow . I have had in mind that, without discriminating
against long-time paper in favor of the short-time commercial paper,
that the same object could be met and that these notes would be
retired and the obligations would be met by the sale or the contracting
of the line of business that the men are m, in order to get the cash
without too great sacrifice.
Mr. W e x l e r . My testimony, I think, would show the very great
danger of taking long-time paper against demand obligations.
Senator B r isto w . I have heard that.
Mr. W e x l e r . I think that is quite conclusive. Let me call this
thought to your mind, which I know you have considered. You
fear that a great number of people throughout the country who were
not in a position to furnish short-time paper might not have facilities.
Is not that your idea ?
Senator B r isto w . Yes.
Mr. W e x l e r . Tho answer to that is this, that the remainder of
tho resources of tho banks throughout the country would be available
for longer maturing paper, in which all banks are willing to invest
a certain amount. The trust companies, savings banks, and national
banks would take care of a reasonable demand of that sort, as much
as there ought to bo a demand of that sort. There should not be too
much of it. The ovolution of it is this: That section of territory
south of tho Ohio River and west of the Mississippi is in a period of
groat development. Tho section is more or less m a crude state. If
we had an mstrument of credit, such as this bank which we are
endeavoring to have established, where every man knew that he
could got the money that he needed for his growing business require­
ments, he would invest his surplus money and his profits in that




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BANKING AND CURRENCY.

development of his own section; he would feel safe in doing so, because
he would know that the money he needed to carry on his growing
business would always be available to him by reason of this immense
reservoir of credit. If that was used for that particular purpose, and
not for the purpose of long-time investment, it would be a most
desirable condition. In other words, suppose I am a merchant in
business, and this year I have made a considerable amount of money.
I have a certain amount of credit. If I knew that I was certain to
have people to go to to get that credit that I am entitled to, I could
afford to invest that surplus profit in a fixed investment which would
assist in the upbuilding of my section. But without such a reservoir
of credit I must keep this money on hand to take care of the pos­
sibility of my not being able to get the credit when I want it. Such
is the fear that the business man of the United States labors under
to-day, because he can not predict with any degree of certainty
what the financial conditions are going to be for six months ahead.
Senator B ristow . I will give you my impressions, so that you may
correct them if they are wrong. It seems to me that legislation such
as you suggest is in the interest of the concerns that float short-time
paper, like the Armour Packing Co., John Wanamaker, Woodward
& Lothrop, down here in Washington, and other big concerns of that
kind, that put it out on the public in order to get the money that they
need, and they sell it wherever they can find customers, through
brokers, etc.
The business man in a small way, out in the country, deals in a
different kind of security. He has no reputation or a reserve so that
he can borrow money from anybody. He goes to his bank and he
borrows the money, or he gets it in various ways. He may mortgage
his building, or his farm for money that he needs. That security is
as good as any security. It will be paid. Behind a farm mortgage
is the real estate itself, and if the mortgage is conservatively made
there is never any better from the point o f security. A State bond,
where the finances of the State are properly managed, a county bond
or a city bond, where the finances are properly managed, have a fixed
value as much as any other kind of property that we nave. If means
are provided so that these additional notes are to automatically retire
because it is not profitable to keep them out in dull times, when there
is plenty of money, why is not that security, as the basis of ultimate
payment, a sound security, instead of this that floats about in the
hands of brokers?
Senator N elson . Will you let me, in that connection, make one
suggestion ? There are a class of bonds that are listed on the stock
exchange, railroad bonds, utility bonds, and, I think, city and county
bonds, that there is always a market for. There is a public market
where you can always dispose of those securities, and we have no
such stock exchange where we can always market a farm mortgage,
no matter how good it is. If we had such a stock exchange as that,
the case would be a clear one. Then it could always be converted
into money. I merely suggest that.
Mr. W e x l e r . Even then the paper that would be taken, secured by
that class of stock, if the demand note is going to be issued against it,
and no matter what the short period— because you should alwavs
bear in mind that you have a demand obligation against it, with only
40 per cent to pay for it— the demand obligation must be of a liquid




BANKING AND CURRENCY.

343

character. You might take a 90-day note secured bv the bond of
the city of New York, which is listed, and that would be quite as
convertible as a piece of convertible paper, but you do not want to
use the machinery of a bank of issue for investments in fixed securities.
Senator B ristow . But you are speaking of a permanent currency,
it seems to me, or a permanent condition, instead of a temporary
condition. This inflation is to meet an important demand, and if
you press the short-time paper for immediate payment when it is
due you do not relieve the stringency at all, you merely accelerate it.
Mr. W e x l e r . Senator, that is not a fact. You do not press the
short-time paper for payment. The short-time paper— this com­
mercial paper—-pays itself. Everybody meets that hind of paper.
That is the kind of paper that is put out for such purposes as that.
A merchant goes to New York to buy his goods. He brings them to
his local town. By discounting his bills he can make 2 per cent
more than he could borrow the money at. He goes to his bank and
discounts his note for $3,000, buys his exchange, and pays his bill.
Constructively, he is hypothecating or pledging that $3,000 of mer­
chandise he bought with that bank. He does not actually do it; he
constructively follows the operation.
The Ch airm an . And he gets the money out of the pockets of the
people.
Mr. W e x l e r . He gets the money out of the deposits, which are
the people’s money.
Senator N elson . He gets it from the sale of the goods.
The Chairm an . The people really pay his bills in the goods they
buy from him.
Mr. W e x l e r . That is the next operation. Now, he proceeds to
sell, and by the end of 90 days he has sold to the people $3,000 of this
merchandise. He takes those bills and meets that obligation. That
is a current trade transaction. That is the kind of business that you
want to encourage in this country, so that every merchant in the
United States who conducts his business properly can feel that he
can always obtain his reasonable credit requirements.
Senator B ristow . I do not want to carry this to an unreasonable
length at all, but I realize the force of what you say as to a local
merchant when he goes and discounts the 2 per cent for cash. It is
profitable to him to take that discount, because his discounts in the
course of a year will amount to a great deal more than the interest
that he will pay to local banks.
Mr. W e x l e r . Exactly.
Senator B ristow . And he makes the note and discounts it. That
is the way they all do. But the practical truth is, in our section of
the State, that nine-tenths of the merchants use that money that they
borrow as capital; that is, they continue to discount over and over,
and they renew their notes until they have given enough to take up
those notes, and that they will probably enlarge the business and make
some more.
Mr. W e x l e r . I realize there is a good deal of that.
Senator B ristow . My contention is that while theoretically it is
90-day paper, as a matter of fact they can not pay that at all unless
they foreclose-—
Mr. W exler (interrupting). But there is always a sufficient num­
ber of them who do both. They do not all pay them. W e have the




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same condition. Our loans amount to about $15,000,000. W e have
a great many people who constantly renew their notes. While we
do not like it, we do it. But there are a great many who meet their
obligations promptly, and our notes paid off are frequently more than
our new loans. There is nothing inherently wrong in that, so you
need not worry about that.
Senator B ristow . One more question. The chairman of the com­
mittee wants to interrogate another gentleman who is present. But
I think it was Mr. Reynolds or Mr. Forgan, 1 do not remember which,
or it might have been yourself, this forenoon, that said this currency,
these bank notes which you are advocating, might be used as legal
tender for the payment of debts, the purchase of property, land, etc.
Mr. W e x l e r . I said that.
Senator B ristow . The remark was that the law could make a man
take them for the purchase of a piece of land.
Mr. W e x l e r . Yes, sir.
Senator B ristow . D o you think the Government would be justified
in making a citizen take a note as payment for any kind of property
that the Government itself would not guarantee to be good ?
Mr. W e x l e r . I think that the Government has a perfect right to
make these notes legal tender, and that does not prevent two indi­
viduals who are tradmg together from making their own transactions.
You may be selling me a piece of land. You say:
Though these notes are a legal tender, I will sell you this land, but you may pay me
in gold or silver or corn or any other thing.

A great many bonds are payable in gold of the present weight and
fineness. Nearly all of them are. But there can be no legal objection
to the Government making these notes, if they so desire, legal tender.
Suppose that the transaction was not made with gold behind it, and
the notes are legal tender, and when you come in to sign the act the
man will say, “ I want gold.” You say,
All right; come over to the bank with me.
and give you gold.

I will convert these notes into gold

There will be no difficulty about that. There will be no hard­
ship upon anybody if the notes are made legal tender, so long as
they do not become reserve.
Senator B ristow . D o I understand you to advocate that the
Government authorize a bank to issue notes------Mr. W e xl e r . The regional bank.
Senator B ristow . Yes. And that the Government does not
guarantee those notes at all ?
Mr. W e x l e r . I think it would be simply painting the lily.
Senator B ristow . And still the Government says to the citizen:
You have got to take that note for your property when it is tendered.

Mr. W e x l e r . Unless you want something else.
Senator S hafroth . In the absence of a specific contract to the
contrary.
Mr. W e x l e r . Unless in the absence of a specific contract to the
contrary the Government simply declares that its notes are tenderable for all general business purposes.
Senator B ristow . I would not agree to any such proposition as
that. W e have $346,000,000 of greenbacks, theoretically, that are




BANKING AND CURRENCY.

345

outstanding, and we have $150,000,000 in gold that is a redemption
fund to maintain their parity.
Mr. W e x l e r . Yes, sir.
Senator B ristow . H ow much of that $346,000,000 do you think
is in existence ?
Mr. W e x l e r . D o you mean that has been burned up or destroyed?
Senator B ristow . That has not been lost.
Mr. W e x l e r . It would be a pure guess. Your own ideas on that
subject would be just as accurate as mine.
Senator H itchcock . About half of them are in the bank now as
part of the reserve ?
Mr. W e x l e r . Yes. The other half, I do not know where they are.
If I was running this Government, the first thing I would do would
be to put enough gold behind these greenbacks and wipe them out
of existence.
Senator Shafroth . That would contract the currency, would it
not— the difference between $346,000,000 and $150,000,000?
Mr. W exler That is what it would do; but I have in mind that
you are going to pass some sort of an instrument of credit that is
going to take the place of it.
Senator B ristow . Have you ever kept any record to determine
how much or what per cent of your national-bank notes were lost
in the course of a year?
Mr. W e x l e r . N o, sir.
Senator B ristow . Suppose you issued $100,000 of national-bank
notes and they were out a year. What per cent of them would
return ?
Mr. W e x l e r . W e have absolutely no means of knowing, Senator.
Senator B ristow . N o way of determining?
Mr. W e x l e r . N o way of determining. All we can tell is how
many come in; but we can not tell how many are in existence. You
find occasionally an old note circulating in the bank that has been
out of existence for 16 years. It has never happened to get into the
Treasury for redemption. The money is there to pay it with, of
course, but it never happened to have gone there.
Senator B ristow . When a bank goes out of existence, and has
been out of existence for 15 years, presumably there are very few of
its notes that are out?
Mr. W e x l e r . Very few.
Senator B r isto w . Has there ever been to your knowledge any
ientage of national bank notes
d it estimated. The Govern­
ment has quite a large fund. I should judge that any estimate that
might be made would be pure guesswork. I can not conceive how
anyone could make an estimate of how many notes have been burned
up and destroyed in 40 years.
Senator B ristow . W e have out about a billion and 80 millions of
gold certificates.
Mr. W e x l e r . About that— a billion 100 million.
Senator B ristow . Of course you have no idea how much or what
quantity of these certificates have been destroyed, lost, burned up
or gone down in the ocean, etc. ?
Mr. W e x l e r . Absolutely none.




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BANKING AND CUBEENCY.

Senator N elson . Or how many there are in Europe.
Mr. W e x l e k . N o ; I can not tell that.
Senator B ristow . Whatever amount is lost, that gold is there,
then, as a part of the Government asset ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . If the suggestions that you make were in effect
and in operation that gold would belong to the banks instead of the
Government ?
Mr. W e x l e r . N o, sir. That gold would belong to the Govern­
ment just the same, because the bank could never get hold of the
note to withdraw the gold if the note is destroyed. In other words,
you w ill never get that gold without presenting the note.
T
Senator B ristow . Suppose that the banks themselves issue the
notes and get the gold reserves ?
Mr. W e x l e r . Yes, sir.
Senator B ristow . The profits that would come from the losses
would be the bank’s deposits instead of the Government’s, would they
T
not?
Mr. W e x l e r . Y ou mean that if the new banks should issue bills of
credit that would never come back for redemption it would be a
profit to the bank ?
Senator B ristow . Yes.
Mr. W e x l e r . I am inclined to think that it would. It would be
an obligation that it had even though it had never been presented.
W e have in our bank about $35,000 of deposits wdiich have been there
for years and have never been called for; we can not locate the indi­
viduals or the individuals have died or gone away; yet the deposit
remains there for the rest of time. W e can not use it. Of course,
it is earning interest by loaning it out, but it is there and belongs to
them. The same objection would arise in the bank.
Senator B ristow . The objection would be a similar objection,
would it not? You have the gold and would issue a note; the note is
T
lost; it never turns up, so that you never have to pay the note?
Mr. W e x l e r . Y ou simply continue to have the liability. It would
be a constant liability which we would have no means of paying.
Senator B ristow . But still it is only a liability in theory and not
one in fact?
Mr. W e x l e r . They sometimes turn up when you least expect
them. Take a case which happened recently. Some time ago a
party died in Mexico, and they had in an old trunk $5,000 of Louisi­
ana State bonds, perfectly good, of an issue of some 25 years ago.
The money was there to the credit of that $5,000 in bonds, and they
came in. It is a liability.
Senator B ristowl Y ou have, then, no way of estimating, you
say, the percentage of what is lost per annum ?
Mr. W e x l e r . I think it is a comparatively small amount. It is
very small. If a note is torn into small pieces there are experts here
in the department in Washington who are perfectly remarkable in
their ability to decipher them and pay them.
Senator N elson . That is, if you can identify the note?
Mr. W e x l e r . If you can identify the note by any means you get
your money out of it.
Senator N elson . And I imagine that in the case of a gold cer­
tificate, if the holder of it could give satisfactory proof that the cer-




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BANKING AND CURRENCY.

347

tificate was burned and would give the Government an indemnity
bond, as they do in the case of individuals, he would get his gold ?
Mr. W e x l e r . He might; yes, sir.
Senator H itchcock . There are two propositions involved in this
legislation; one banking, and the other currency. As a practical
banker you would have two methods of sec u rin g additional cur­
rency, should the bill, or should your bill become a law. You would
either draw upon your own funcls in your own vault, or you would
draw upon the funds in the reserve bank, or on some other corre­
spondent, or you could call for currency which would be issued either
by the banks or by the Treasury. Now, then, why can not those
two functions be separate ? W hy can not the banking system of the
United States be permitted to remain as it is now, so that you can
still draw upon your correspondent— your reserve agents— for such
credit as you have and apply to the Government instead of to a bank
when you need the additional funds?
Mr. W e x l e r . I have just stated that that can be done by the
establishment of such a system. The Government is going to issue
its own obligations.
Senator H itchcock . The Government is going to issue its own
obligations under this bill.
Mr. W e x l e r . Under your bill it would not. You are going to
issue obligations payable by the bank; consequently you will have a
reserve against it. Taking the same class of collateral we are pro­
viding here you do not need to do any other business with banks
except to provide that currency and extend that credit. If you were
to separate it, how would we get the notes from you? You say you
want to separate the currency from the bank notes. How would I
get it from the Government unless I gave something in lieu of it ?
Senator H itchcock . Well, suppose you exhaust the cash in your
vaults down to the reserve limit ?
Mr. W e x l e r . Yes.
Senator H itchcock . And suppose you exhausted the deposits
which you have with your correspondent’s bank down to the reserve
limit ?
Mr. W e x l e r . Yes.
Senator H itchcock . Then you could apply to the Subtreasurer
in New Orleans to make your deposits of security and get your United
States notes.
Mr. W e x l e r . Then I have to sepaiate the bank from currency.
Senator H itchcock . Y ou then have two strings to your bow. If
you are not able to get what you want from your bank correspondent
or reserves, you can apply to the note-issuing power of the United
States, which is the Government. W hat is the objection to that?
Mr. W e x l e r . Well, now, you are coming back to the original
proposition, and that is that you have gone into the banking business.
You have gone into the lending of your credit in exchange for the
credit of the public.
Senator H itchcock . I am asking you what, in your opinion, would
be the effect if the banks of the country were permitted, either as
individuals or as small clearing-house associations, to apply direct
to the Treasury when additional currency is needed by the business
demands of the country ?
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BANKING AND CURRENCY.

Mr. W e x l e r . A s clearing-house associations I think it would be
fatal.
Senator H itchcock . Suppose we could make the proper conditions
to do that ?
Mr. W e x l e r . I do not think it is possible. No man is going to do
that unless on the very threshold of panic or failure.
Senator H itchcock . Let us see about that. You are running a
national bank. Is there any particular reason why you should not
apply to the Government when you desire additional currency when
you would apply to another bank under the same circumstances?
You certainly would not expose your condition to another bank in
preference to the Treasury, would you ?
Mr. W e x l e r . I have said that if you would allow me to go direct
to the Treasury it can be worked out. . I do not think it would be
feasible if you were to make me go to a clearing house. No bank is
going to put itself into that position unless they absolutely must do
so. Of course when about to fail they do do that now.
Senator H itchcock . Your answer would be, that it would be
feasible for individual banks to go direct to the Treasury, but it
would not be feasible to have the banks go to an association ?
Mr. W e x l e r . Yes, sir.
Senator H itchcock . I s it not a fact that at times the banks do
that very thing— that they have clearing-house meetings and expose
their real conditions there ? And they help them. And is it not a
fact that the clearing houses have examiners who examine those
banks? Therefore, do you not have substantially that condition
now ?
Mr. W e x l e r . But they do not give them all the details of their
business.
Senator H itchcock . It would not be necessary to know the details
if you supplied the clearing house in your town or the national
association with a statement of good paper. Your statement would
be just to the effect that the paper was good, and it seems to me
that any request for more particular information would not be
allowable.
Mr. W e x l e r . Of course it would be none of their business; I
would not give them the information. We do have clearing-house
examiners. There is one employed in New Orleans who examines
all the banks, but he is not allowed to make anv report except to
state the results of his examination of such an<J such a bank has
nothing to be criticized. To do what you want us to do— it is done
occasionally— all the other banks would have to be identically in
the same situation. When they are all in the same boat, like in
1907, they are all willing to throw down the bars and assist each
other, but there is not any one bank that is going to a clearing house
by itself and expose its condition. The information would leak out
in spite of everything that could be done to prevent it, and the next
morning there would be a run on that bank. The scheme is
impracticable.
Senator H itchcock . I s it not generally true that the banks in a
region are in substantially the same condition as the season’s demand
for money comes in. When the time comes for them to pay out
money, as in the case of the cotton crop down South, the banks all




BANKING AND CURRENCY.

349

find the same demands for money, and would they not all cooperate
with each other under those circumstances to overcome the difficulty ?
Mr. W e xl e r . Not at all. In our city there are a number of banks
that do no country banking business at all. They do not care for
that business at all. Their demand for currency is insignificant
compared with ours. W e supply practically as much currency for
moving the crops as two-tnirds of the rest of the banks of that sec­
tion. Consequently our demands are very much greater. Other
banks there do different classes of business. No two banks do iden­
tically the same class of business in a given city.
Senator H itchcock . Y ou make this distinction then, if I under­
stand you correctly: That you would be willing to adopt that sys­
tem and believe it would work satisfactorily provided the individual
bank could go direct to the Treasury instead of to a reserve bank ?
Mr. W e x l e r . I am not saying I would adopt that system. There
are too many systems which I would prefer to that. I was saying,
and reiterate what I have said, that the Government could formulate
a system by which it could furnish the country with a flexible cur­
rency, coupled with credit, provided it established the proper ma­
chinery and placed behind the notes the proper resources and dis­
counted only the same class of paper, made properly safe against
the demand obligations. The Government can do it as well from a
practical standpoint, owning all the stocks, as if the banks owned
all the stock. In other respects, Senator, the banks would have to
have great similarity.
Senator H itchcock . Every three or four months the Government
sends an expert who goes over your books, does it not ?
Mr. W e x l e r . Yes, sir.
Senator H itchcock . He examines your commercial paper and he
reports to the Treasury Department whether the paper is good or
bad?
Mr. W e x l e r . He does not report that, because he does not know
whether the paper is good or bad. He reports upon any excess of
loans.
Senator H itchcock . If he finds paper in your bank and finds it
duplicated in other banks, ho calls attention to that fact, and he says,
“ John Smith is borrowing in too many different banks.”
Mr. W e x l e r . Oh, no.
Senator H itchcock . I have known of cases of that sort, and a good
examiner does that very thing.
Mr. W e x l e r . He might report, ‘ ‘I find John Smith’s paper in these
two banks,” but he could not do anything further.
Senator H itchcock . Therefore the Government already has its
experts employed who examine commercial paper in the national
banks, and there would be no difficulty in having the expert of New
Orleans pass upon any paper submitted to him ?
Mr. W e x l e r . Not at all. The Government can hire experts as
well as the individual.
Senator H itchcock . And you could procure currency to a reason­
able extent from the Subtreasury in New Orleans just as well as from
a central bank or regional bank ?
Mr. W e x l e r . Unquestionably so.




350

BANKING AND CURRENCY.

Senator H itchcock . And that could be done without the creation
of all this new machinery and without this tremendous centralizing
of paper?
Mr. W e xl e r . By adopting your plan you just centralize that much
more. You centralize in the Government.
Senator H itchcock . N o ; you leave the currency-issuing power
with the Government and banking business with the bankers.

Mr. W e x l e r . N o ; you do not. You are taking the banking busi­
ness when you discount the paper the bank brings to you. You are
performing their function, centralizing the banking and centralizing
the deposits.
Senator H itchcock . Well, as I view this thing, it is a new propo­
sition, and instead of adding it to the functions of the bank I want to
keep it away from the banks so as to avoid centralization.
Mr. W e x l e r . Then you would make this a Government bank.
Senator H itchcock . My position is that we are in danger of
entering upon a scheme of centralization. You bankers impress me
as wanting the most centralized scheme possible. wSenator Owen
and Mr. Glass have drawn a bill not so centralized, but which I still
think has features of centralization; and I am asking you whether it
would not be possible to avoid that danger by avoiding incorporating
the currency-providing power to this system, which it is proposed to
create, and allowing that to remain with the Government ?
Mr. W e xl e r . That is perfectly practicable, Senator; but you are
forgetting that when you do that you are also incorporating with it
the discounting privilege and all the functions that we propose for
this bank except the depositing of the reserves.
The Chairm an . Y ou mean the Government will have to discount
these notes ?
Mr. W e xl e r . If we ask them for $100,000 of Government notes,
they are going to ask for something in exchange for them.
The Ch airm an . W hat will you give?
Mr. W e x l e r . My customers’ notes.
The Chairm an . Then the Government would discount those notes
and give you currency for them ?
Mr. W e xl e r . Absolutely.
The Chairm an . And that is what you regard as banking, except
receiving deposits ?
Mr. W e xl e r . Y es; I would regard that as banking, except receiv­
ing the deposits. W hy should not they receive deposits if they go
that far? W hy inaugurate the system and then not receive the
deposits ? W hy stop there ? W hy not go right on ?
The Chairm an . Y ou mean that this gold would be deposited in the
reserve banks ?
Mr. W e x l e r . Exactly.
The Ch airm an . And in that way the banks would furnish the gold
necessary to carry on this scheme ?
Mr. W e xl e r . Yes. You will have in every respect the same kind
of a bank that we would have, except the stock will be owned ex­
clusively by the Government instead of by the bank. There are
certain fundamentals in this proposition which are just like the law
of gravity. You can not get away from that.
Senator N elson . Mr. \v exler, is it not true that under present
conditions the Government has only one or two ways of getting an




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BAN KIN G AND CURRENCY.

351

income of money— one by taxation and the other by sale of its
obligations ?
Mr. W e x l e r . That is all.
Senator N elson . This Government in paying out money— the only
way the Government pays out any of its money it pays out for run­
ning 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 e x l e r . None that I know of.
Senator N elson . If the Government wants to issue its money and
get its money out into circulation, 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.
Mr. W e x l e r . Y es; ana get currency for it.
Senator N elson . And the moment they do that has the Govern­
ment not gone into the banking business ?
Mr. W e x l e r . Absolutely.
Senator N elson . And you can not get the Government’s money
into circulation any other way?
Mr. W e x l e r . N o, sir; none in the world.
Senator N elson . 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 e x l e r . Yes, sir.
Senator N elson . And the only way the Government can legiti­
mately put its money into circulation is by the payment of its current
expenses, of its running expenses and obligations; if anything more is
aid out by the Government it has to be done by a system of credits,
y 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 e x l e r . It can be done in no other way.
Senator N elson . Because it 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 e x l e r . Absolutely.
Senator S hafroth . Y ou do not deny, however, that legal-tender
money could be taken by the Government and substituted for nationalbank notes ?
Senator N elson . That is foreign to the question; you might sub­
stitute and thereby get it into circulation.
Senator Shafroth . When the national-bank note goes into circu­
lation for commercial purposes you substitute United States notes for
it, do you not ?
Senator N elson . That is true; but the only inflow of the Govern­
ment is in the shape of taxes, outside of its bonds, of course; and the
only outflow is paying its obligations.
Senator S hafroth . But its inflow consists of these bank notes now
in existence, and there is a very large percentage of them.

E



I

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352

BANKING AND CURRENCY.

Senator N elson . Y es; but how are the holders going to get their
money from the Government ?
The Ch airm an . A s I understand it, gentlemen, you are not in
conflict at all. W hat you are both saying is true.
Mr. W e x l e r . It is true that if the Government wants to issue a
lot of greenbacks, as it did in 1861, and say, “ Our note is just as good
as our bond /’ and say to the bankers, “ You have 86,000,000 2 per
cent bonds; we will give you $6,000,000 of our noninterest-bearing
notes; will you take it ?” It is true that we gave you our bonds and
you gave us your notes.
Senator S hafroth . And that gets into circulation, but you have
only changed the form of it.
Mr. W e x l e r . Y ou have put out $700,000,000 of this fiat money
and taken back your bonds and retired $700,000,000 bank-note circu­
lation. The next question is, W hat kind of a note have you given me;
how are you going to meet it; when are you going to meet it; are you
going to pay it in gold; will we get it when we want it; if you will
say what you are to pay for it, can you pay it ? You have to provide
all that kind of machinery.
Senator S hafroth . But you will have 50 per cent reserve and
$128,000,000 of gold in addition.
Senator H itchcock . N ow , I would just like to ask you a few
questions on that same line. Suppose we say that the Government
arranges to issue a possible $500,000,000 of notes, which it will lend
to the bankers as they require it from season to season. W e have
a Subtreasury in New Orleans and 40 or 50 subtreasuries throughout
the United States where they come into contact with the banks.
Mr. W e x l e r . W ith or without security?
Senator H itchcock . With security. The banks put up security
with the Subtreasury. Of course, we presume the banks will give
their obligations promptly.
In order to make this issue of
$500,000,000 safe tne Government issues a gold reserve of 40 per
cent, which vmuld require the issuing of $240,000,000 in bonds. The
interest on these bonds at 3 per cent would be $8,200,000 a year.
Therefore, at an annual expense of $8,200,000 a year we would provide
a possible $500,000,000 of Government notes to loan the bankers.
Let us suppose that the notes are only out a third of the year, but
while they are out the Government is deriving an income from the
banks of 4 per cent upon the notes.
Senator Shafroth . Let me understand you; the Government gets
4 per cent ?
Senator H itchcock . Y es; the Government gets 4 per cent.
Senator S hafroth . For what ?
Senator H itchcock . For the notes which it loans to the banks.
Mr. W exl er . And they rediscount the paper.
Senator H itchcock . The Government is loaning me money on the
security of the paper deposits.
Senator S hafroth . I supposed 2 per cent was what they were
getting.
Senator H itchcock. I am proposing that the Government shall
advance this currency to the banks and charge them for the privilege
of using it, and that the charge shall be 4 per cent. If only out four
months it would amount to $7,000,000, and that is almost what the
Government would pay for the whole year. The banks in that way,




BANKING AND CURRENCY.

353

by paying for the use of the notes during part of the year, would pay
to the Government more than the Government has paid in interest
on the bonds. We have a gold redemption fund in the Treasury ready
to meet the notes as they come in, and the banks are paying the whole
expense of the operation. You say that would provide an elastic
fund.
Mr. W e x l e r . I think it would be perfectly feasible. That is, a
central bank owned by the Government.
Senator H itchcock . There would be no expense to it, and there
would be an elastic borrowing fund provided.
Mr. W e x l e r . Yes; for all of them.
Senator H itchcock . There would be no machinery?
Mr. W e x l e r . Y es; there would be a lot of machinery.
Senator H itchcock . Well, what would you have to have?
Mr. W e x l e r . Y ou will have to have a central agency and not less
than 50 branches.

Senator H itchcock . Well, we have nine subtreasuries now, and
we have experts, and it seems to me that we can have other experts
whose only duty would be passing on the paper.
Mr. W e x l e r . Y ou will be organizing a central bank owned by the
Government practically along the provisions we have suggested.
Senator H itchcock . All of the money-lending business of the
country would be done by the banks, would it not ?
Mr. W e x l e r . Yes.
Senator H itchcock . And all of the depositing business would be
done by the banks of the country; and all of the exchange business
of the country would be done by the banks, and all the Government
would have to do would be to furnish to the banks an elastic currency
for which it would charge them enough to cover all the expense.
Mr. W e x l e r . Senator, if that is good— and we say it is— if the
Government owns the bank, I do not know that it makes a lot of
difference. If that is good, why not go on a step further and take
the deposits ? What do you want to go to the expense of selling all
these bonds and incurring these obligations when we have the gold
in our own vaults as reserves against our deposits, and deposited all
over the United States in the various reserve agencies? W hy not
put a large proportion of it into the Government banks ?
Senator H itchcock . Because nothing would be gained by that,
would it ?
Mr. W e x l e r . Y es; it would be much more economic. You would
not have to incur the Government obligation at all.
Senator H itchcock . I do not agree with you there.
Mr. W e x l e r . Well, I think after you consider that a while you will
see that with that exception you are establishing a Government bank.
You might just as well go the whole way; it will be much more
economical. You will have a reservoir of credit which is what we
want, instead of having our reserves in these little piles all over the
United States.
Senator H itchcock . But your reserves would not be necessary if
you could go to the Treasury for this additional currency. You
would not be forced to deplete your reserves in New York, Chicago,
and St. Louis.
Mr. W e x l e r . Not a bit; it could be done; but I think if you went
the whole way you would have a better institution.




354

BANKING AND CURRENCY.

Senator H itchcock . Then, at times when there was not much de­
mand for this money, the gold reserves could be used to buy in these
3 per cent bonds and thus keep them at par. Would not that be
possible ?
Mr. W e x l e r . Yes, sir.
Senator H itchcock . D o you not think that would keep the 3 per
cents at par ?
Mr. W e x l e r . Y es; the Government could buy them in and put
them out again if it could always find purchasers when the man came
for credit, and that demand might come at any time.
Senator H itchcock . But there would always be a margin because
the Government would be charging the bank a higher rate of interest.
Senator N elson . Here is one thing you overlooked: We had a
lesson in respect to that during the last session of the Cleveland
administration. Whenever the value of gold— whenever it is profit­
able or whenever they need the gold in France or Germanv, they send
to this country and buy it. All a man has to do here if lie needs his
gold, as the brokers did in New York, is to take a bundle of the
Treasury notes of the Government and go down there and say, “ I
want the gold.” Then he can ship it to Europe at profit. That was
done time and time again during the last year of Cleveland’s adminis­
tration, and that was one of the reasons why he had to go out and sell
the bonds of the Government for what he could get for them.
Mr. W e x l e r . That is the main objection, Senator, to a Government
bank instead of a bank like that which we suggest. A Government
bank is constantly liable to attack by having the gold taken away
from it, in which event you would have to do just like Mr. Cleveland
did— sell the bonds for what you can get for them. I would let the
banks do that; they have the machinery to do it with.
Senator N elson . And the banks can always replenish their gold
reserve by the purchase of bills of exchange drawn upon the necessa­
ries of life like wheat, cotton, or flour. Europe has to have those
commodities and the banks can always get the gold for them when
the balance of trade is in our favor. In the case of the Government
it can only get the gold by selling its bonds, unless you extend its
banking powers— unless you allow the Government to deal in com­
mercial bills of exchange, you can not get the gold. Am I not right?
Mr. W e x l e r . Yes.
Senator H itchcock . I s it not true that that power to take gold out
of the Treasury exists at the present time ?
Mr. W e x l e r . For your greenbacks, yes.
Senator H itchcock . And for the gold certificates?
Mr. W e x l e r . Y es; for the gold certificates.
Senator H itchcock . W e have $1,000,000,000 of gold certificates
outstanding and the people are at perfect liberty to go to the Treasury
and demand gold for them, are they not?
Mr. W e x l e r . Yes.
Senator H itchcock . Then, that does not change the situation.
Mr. W e x l e r . That is true. It puts you to trouble.
Senator H itchcock . It always will exist.
Mr. W e x l e r . W hy do you want to keep on incurring that trouble ?
Here is another thing that might occur— I do not say that it will
occur, but I simply want to call it to your attention: Suppose five
or six of the very large national banks in New York, Chicago, or New




BANKING AND CURRENCY.

355

Orleans should make up their minds that they wanted to embarrass
the Government. They come to your agency in New York and dis­
count with you an aggregate of $50,000,000 of paper. That is good
and accepted and under the provisions of your organization you
would be perfectly willing to discount that paper. The next day they
turn around, take those notes and present them at you window, and
ask for the whole $50,000,000 in gold. You could not refuse payment.
Senator H itchcock . They can do that now.
Mr. W e x l e r . Y ou would have to pay the whole $50,000,000.
Senator H itchcock . They can do that now.
Mr. W e x l e r . But you are giving them the instrumentality.
Senator H itchcock . Well, the banks of the country have already
got more than half of the gold-demand paper.
Mr. W e x l e r . They could not do that with the gold certificates,
however; the only instrument they could do that with is the green­
backs.
Senator H itchcock . The banks of the country already hold
$190,000,000 of United States notes, and they could simply present
those at the Treasury at any time and demand gold, but they do not
do it because they are always good for the gold.
Mr. W e x l e r . They do not do it because everything is serene.
I am showing that you are giving them the power. It probably
never would happen, but, Senator, I wish I had the power of speech
to impress upon you the futility and the danger of the Government
going into the banking business. W hy go contrary to the experience
of every other country? In olden times the governments undertook
to do all these things. They went so far in Spain as to gild silver
dollars. It is fundamentally wrong and unsafe. You should coin
money, but you should not issue obligations payable on demand.
Senator H itchcock . W e are already departing from European
precedents in this bill.
Mr. W e x l e r . N o.
Senator H itchcock . I s there a single central bank in Europe or in
Germany, France, or England that is owned by the banks?
Mr. W e x l e r . No.
Senator H itchcock . Y ou propose a central bank which is owned
by the banks ?
Mr. W e x l e r . Yes.
Senator H itchcock . And that is contrary to every European ex­
perience. It makes a much more centralized paper than exists any­
where in Europe.
Mr. W e x l e r . But they are not under Government supervision. I
am not saying that we can adopt the system of any European Gov­
ernment any more than we have adopted the system in England for
the purpose of doing business in this country, but I say we can take
the principles of their system and study them and adapt them to our­
selves, taking the best of them.
Senator H itchcock . Let me draw your attention to the fact that
in England, for instance, there are several banks larger than the Bank
of England, so that the centralization of power there is comparatively
insignificant. They have several banks that have more deposits
than the Bank of England has. * That is true in France; it is true
*
in Germany. Those banks have no interest in the Bank of England
at all. They carry on their business independent entirely of the




356

BANKING AND CURRENCY.

Bank of England, but here everything is proposed to be tied up in
one organization.
Mr. W e x l e r . Senator, if you can prevent the banks from dealing
direct with the public I have not any objection to the public owning
the stock. The only fear that I have from the public owning the
stock is that the public will turn around and say, “ We are the stock­
holders in the bank; we want to do business with the bank in which
we have stock,” with the result that you are creating an enormous
monopoly, actually putting all the banks out of business and having
one great big bank monopoly, and it might ultimately result in ail
this stock coming into the hands of half a dozen men, and you would
then have the banking business in the hands of a few men, which you
do not want.
Senator H itchcock . Suppose you provide that no man should
own over a certain percentage of the stock ?
Mr. W e x l e r . It might be feasible; but I see no objection to the
banks owning the stocks, because what are the banks ? The banks
are aggregations of individuals who have associated themselves to­
gether for the purpose of organizing a bank.
Senator H itchcock . Y ou see no objection to it; but you can find
no precedent for it in any European experience.
Senator N elson . Gentlemen, will you permit me to interrupt you?
I do it in a Christian spirit, you understand. W e are handicapped
in one respect, and that is that we have 7,300 banks of issue— all
issuing paper money. That is a condition that is not present in
Europe. The question is whether we should freeze out these banks
and drive them out of business or not. I suppose this plan of mak­
ing them stockholders is to give them a chance to live and do business.
Mr. W e x l e r . That is the idea.
Senator N elson . And to carry on the everyday banking business
of the country and ultimately, if this plan succeeds, to have but one
currency, and that is the currency of the regional banks, but to do
it gradually.
Mr. W e x l e r . That is the idea.
Senator N elson . That is, the regional banks will supply the cur­
rency and create a credit reservoir for the Country, leaving all these
little banks free to do the business. I do not want to freeze them
out.
Mr. W e x l e r . That is the point. If you offer the stock to the
country, whom do you suppose would take it? Would not the
people take it, who now own the stock of the 25,000 banks of the
United States? They have their stock ownership in the banks in
which they are now interested. W e have in our bank 540 stock­
holders with $2,500,000 capital. Who owns that bank? Five hun­
dred and forty individuals own it. The bank is nothing but a corpo­
ration owned by individuals, and as a matter of fact all of the owner­
ship is in the individuals.
Senator H itchcock . One of the objections to this plan as I see it
is that it adds nothing to the bank capital of the United States.
Mr. W e x l e r . It adds more than anything you can possibly do.
Senator H itchcock . I am speaking of bank capital. If you allow
the outside world to subscribe yoirbring in additional capital.
Mr. W e x l e r . This is additional capital. This $1,000,000,000 we
put into this bank is additional capital. In addition to that, take




BAN KIN G AND CURRENCY.

357

these reserves which now might just as well be buried in the bowels
of the earth for all the good they are doing. You make them a
basis of credit. If I buy $250,000 of this stock I do not reduce my
capital.
Senator H itchcock . But you will duplicate your capital.
Mr. W e x l e r . I have contributed $250,000 of my general assets;
not my capital.
Senator H itchcock . But you have not added anything to the
bank capital of the United States, whereas if you permit the public
to subscribe to the stock of these banks, and the public should sub­
scribe, that would come from other sources and would come into the
bank reserves of the United Stages.
Mr. W e x l e r . It would simply be drawn right out of the banks.
The Ch airm an . It would be taken out of the deposits of the banks ?
Mr. W e x l e r . Y es; it would be taken out of the deposits of the
banks.
The Chairm an . That is where you get it?
Mr. W e x l e r . Y es; and it is not needed. If you will let the banks
put this $105,000,000 in, do you know what they will do? They
will look over their investments and say “ Here is $100,000 worth of
bonds; we will sell these and invest the proceeds in this stock. W e
are now permitted to make an investment which we were forbidden to
make under the national-bank law.”
W e are frequently called upon to take stock in banks started around
our country now. W e can not do it under the law; but we have a
trust company which is not forbidden to do that under the State
law and the trust company takes $1,000 or $2,000 of this stock.
Senator H itchcock . W ell, it impresses me that there is some
powerful reason why the banks of the country want to own this
Mr. W e x l e r . 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 itchcock . Certainly they can not be attracted by the
5 or 6 per cent interest.
Mr. W e x l e r . N o. The only thing that attracts them is the
sense of safety in having a central reservoir of credit.
The Chairman . Y ou mean giving stability to the banking sys­
tem?
Mr. W e x l e r . Yes.
I want to say this to you: That the banking business of to-day is
one of the hardest, most trying businesses that a man can be en­
gaged 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 priv­
ilege of being able to go somewhere with these time obligations he
has and rediscount them so that he can meet the demand obligations
when the public wants their money.
Senator N elson . He wants a reservoir of credit to go to?
Mr. W exler . That is all we ask.
Senator H itchcock . But he does not want to go to the Treasury ?
Mr. W e x l e r . W e do not care; but why don’t you go into the meat­
packing business or the farming business. It would be just as legiti­
mate as going into the banking business.




358

BANKING AND CURRENCY.

Senator N elson . 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 e x l e r . W e are merchants; dealers in credit.
Senator N elson . 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 e x l e r . That is true; the more saving and thrifty our people
are the more they add to the capital. The more extravagant they
are the less they add to the capital. It is a plain proposition.
ADDITIONAL STA TE M E N T OF PROF. 0. M. W . SPRAGUE, OF
HARVARD U N IVER SITY , CAMBRIDGE, MASS.

The Ch a irm an . Prof. Sprague, we would like to hear from you
now. W e would be glad to have you give a sketch of this proposi­
tion, your view of the operation of this bill, and such notes as nave
occurred to you from your examination of the questions.
Prof. Spr ag u e . This bill is dasigned to meet certain very serious
defects in our existing banking system. These defects are, first, the
more or less complete breakdown of the machinery for exchanging
checks between different sections of the country in periods of emer­
gency, coupled with partial suspension of payments by the banks;
second, difficulties in meeting reasonable requirements for carrying
business in the autumn; third, a preference for collateral rather than
commercial loans because of their greater real or apparent liquidness,
which gives them a lower rate, and finally no means of checking the
unwise extension of credit on the part of our 20,000 or more banks.
Some of these defects in our system could be met by means of a
Government issue of paper properly secured, subject, of course, to a
discount charge. It would be perfectly possible, by means of a
Government institution, to meet seasonal requirements for cash.
It would also probably be possible by means of such an institution
to escape the suspension of cash payments by banks in emergencies,
though this is less certain. The Government institution, however,
which confines itself to the issuing of notes in exchange for securities
deposited by the banks w'ould have no relation, no connection, w'ith
the checking machinery of the country. It would not be in position
to make certain that the domestic exchanges betwr
een different parts
of the country would be alw'ays kept open.
Something like 90 per cent of the business of the country is carried
on w'ith checks rather than wnth money or currency. The working
of this medium of payment depends altogether upon the maintenance
of continuous exchanges between banks. If a bank in New England
receives a check drawm upon a bank in Indiana, in ordinary course it
will be exchanged in Boston or New York against other checks
probably drawn on New England which have been deposited in In­
diana. When, however, this machinery breaks down, the Indiana
check deposited in New England becomes wffiolly unsatisfactory' as
a medium of payment. The bank in Newr England can only take it




I

BANKING AND CURRENCY.

359

for collection, and payment has been in various crises indefinitely
postponed.
When this happens we endeavor to conduct our business by means
of currency, and naturally there is a dearth of currency, because sud­
denly we attempt to do not 5 or 10 per cent of the business of the
country with currency, but pretty nearly all of the business of the
country with currency.
W e need an institution in this country which is in close touch with
the banks in position to make absolutely certain that in no circum­
stances whatever shall this check machinery break down. This can
only be accomplished in case the banks very generally have depos­
ited balances with some single or group of institutions. Transfers of
balances between the banks will then become the means of settling
checks drawn on banks in one part of the country and deposited in
banks in other parts of the country. The reserve bank or banks
through which this business is done will always be in position to insist
that such settlement be made regularly because if a bank delays unrea­
sonably in making such settlements it can be properly threatened
with deprivation of its rediscount rights.
Senator H itchcock . D o you care to be interrupted?
Prof. S prague . I do not mind it at all.
Senator H itchcock . Y ou spoke of the possibility of the redis­
count bank disciplining another bank. That involves the loss of
some independence that banks now enjoy?
Prof. S prague . Yes. If it is done for a perfectly definite reason—
to insure that the bank shall meet its immediate obligations— I can
not see that that is depriving the bank of any independence which it
ought to exercise.
Senator H itchcock . It is the creation of a new power in the bank­
ing world by which one institution can discipline the other, however.
Prof. S prague . They would be disciplined for that single purpose.
Senator H itchcock . H ow can you limit the purpose?
Prof. S prague . That will be in the statutes of the bank, I should
suppose. I will come to that later on.
This disciplinary power seems to me absolutely necessary if we are
to have any sort of central institution or institutions.
Senator H itchcock . That is really what a central institution
means, does it not?
Prof. S prague . I should prefer to have that one power to all
power of issuing notes. I would prefer to run the institution with
that power rather than with the power to issue notes, if I had to
make the choice.
Senator H itchcock . That is the power to dictate to the ndividual
banks ?
Prof. S prague . T o dictate to the individual banks regarding
making settlements on checks

Mr. W e x l e r . I will tell you how that works: W e sometimes send
checks to a country bank for collection. It may be the only bank in
the town. They keep those checks for a week; we do not hear from
them and sometimes they write that thev have been lost in the mail,
and then there are a few more delays. iBut eventually we get after
them pretty strong and they remit, but they will remit with bills of
exchange on the most remote city in which they have money on
deposit. Then we try to collect through the express agent in that




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BANKING AND CURRENCY.

town; then the bank pays the express agent in silver, all silver, which
costs $3 or $4 to get down. That is the kind of abuse that the pro­
fessor thinks we ought to have the right to correct.
Prof. S prague . That is an abuse in normal times; but I regard as
of far more importance the breakdown more or less complete of ar­
rangements for settlement in emergencies.
This is my first reason for believing that a Government institution
must, if it is to really improve our banking system, engage not only
in the issuing of notes but also in deposit banking; it must act whether
a private institution, a Government controlled mstitution, or a Gov­
ernment institution, as the clearing center between banks. This is
the arrangement in England. Settlements between banks are
entirely made by transfers on the books on the Bank of England and
involve no movement of money whatever. An enormous economy
of cash is thus secured. I think one result with us would be that in
all probability these regional banks would find that during most of
the year they would not have any occasion to issue notes.
Senator H itchcock . I s not the situation in England entirely dif­
ferent, because of the fact that instead of having 25,000 banks you
only have about 20 banks there with from 200 to 400 branches ?
Prof. S prague . Well, perhaps 65 would be more nearly the number.
Senator H itchcock . Well, I do not remember the number.
Prof. S prague . The most essential difference between banking in
this country and all other countries is our large number of banks, due
to the prohibition of branch banking, a prohibition in which I heartily
believe. It does make it more difficult to build up anv central insti­
tution, rediscounting institution, or institutions. It will make it a
more delicate matter to arrange for clearing balances; but I see no
reason to believe that it is not entirely possible in the course of time.
In this connection, perhaps, I might sav a word about the provision
in the bill regarding exchanging and taking of checks at par. I hope
that we shall reach that point sometime; but I think that to place the
burden at the very outset upon these Federal reserve banks of setting
up the necessary machinery for handling all checks may prove alto­
gether too much for the management. I believe that some latitude
ought to be allowed them. I am rather inclined to favor changing
“ m ust” in that paragraph to “ may,” leaving it to the management
of the various Federal boards and to the banks in their districts to
develop gradually the necessary arrangements.
There is another reason why a Government institution must enter
regularly and steadily in the banking business if it is going to remove
serious defects in our banking system. I included at the beginning
of m y statement among the defects in our banking system the ab­
sence of anv means of checking overexpansion of credit. This is a
country ricn in natural resources, with almost innumerable oppor­
tunities for development, in which, consequently, enterprise and the
speculative spirit is stimulated. There are comparatively few men
in business or in the banks who err on the side of caution. Cautious
management of 20,000 banks is far less likely than cautious manage­
ment of 50 or 100 banks. Enterprising management is one of the
advantages that we have through our admirable system of local
banks, but I think our experience shows that in every period of active
business in this country our banks in general have loaned all of the
credit which their reserves would support.




BANKING AND CURRENCY.

361

If you set up an institution with large powers of further expanding
credit in form both of deposits and notes, there will be an enormous
pressure upon that institution in periods of active business to loosen
up, to make discounts freely when there is no emergency whatever.
Plenty of people in the first part of 1907 argued that if banks would
only grant more credit or if the banks had only been in position to
grant more credit and had granted it, no trouble would have de­
veloped. That, I am convinced, is far from being the case. We
were in many directions overexpanded, and further additions to
credit at that time would have made the conditions worse rather than
better. If we are to have an institution or institutions in this country
always in position to come to the assistance of banks, those insti­
tutions ought to be in position to exercise a certain amount of re­
straint upon the other banks in the conduct of their business.
This is accomplished in the European countries very largely
through the discount rate, but that is not always sufficient. When
that does not prove to be sufficient, when the rates of the other
banks do not follow the rates of the central institution, the central
institution takes money off the market, reduces the lending power of
the other banks chiefly by the sale of Government securities in the
open market, all of these institutions having supplios of such securi­
ties available. By such means as these the central institutions are
not only there ready to come to the assistance of the business and the
banking communities in real emergencies— they also exercise a very
considerable restraining influence over the other banks.
This can only be accomplished in two ways, either the banks in
general must be dependent— steadily dependent upon the central
institution or the rediscounting institutions, or the central institution
must manipulate its holdings of gilt-edged securities.
In London it frequently happens that the banks are to no extent
whatever currently dependent upon the Bank of England. Then the
Bank of England is unable simply by raising its discount rate to
restrain the other banks from extendmg credit. Then it is apt to
resort to the devico of selling consols, payment for which in checks
on the other banks lessens the resources of those banks.
In Germany the banks are in general rather more dependent upon
the loans at the Reichsbank, and by simply reducing its rediscounts
it may lessen the lending power of the other banks, though even in
Berlin it sometimes happens that the Reichsbank reduces the lend­
ing power of the other banks by the sale of German Imperial Gov­
ernment securities.
I see no way in which a Government institution simply engaged
in paying out notes could exercise this restraint on the other banks.
I should expect that the other banks would rely to an altogether
undesirable extent upon their ability to go to the Treasury and
get the necessary amount of notes. Accommodation withoftt any
restraining power seems to me most hazardous.
Senator H itchcock . Suppose, now, Professor, that implies that
this central power might be greatly abused. For instance, it might
be used for contraction at one time and thus reduce prices; at
another time it might be used for inflation and thus increase prices.
It might, in short, control the market.
Prof. S prague . That raises a very important point, which I might
otherwise have overlooked. I do not think that the importance of




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BANKING AND CUBBENCY.

ublicity in the
of
is
E the bankers affairshavean institution of this sort therealized either
y
who
urged representation on
board or by
those who insist that the board must be entirely a governmental
board. There is publicity and publicity. Effective publicity is the
publicity that interests the public. There is no institution in the
world the operations of which are watched and studied and criticized
to the extent that is true of the Bank of England. The business
community is interested in every move made by the bank. Its
policy is carefully considered in the financial and even in the general
press. Everybody who has anything to do with business keeps an
eye upon the Bank of England. The same will be the case in this
country. I do not care particularly what sort of a central board we
have. I believe that the board could not go very far wrong working
in the extreme publicity which will surround its every move, and so I
do not believe that the power this institution may have over the
other banks is in any danger of being abused.
Senator H itchcock . Y ou say it is not in any danger of being
abused. There might at one time be a very strong party, a strong
element in favor of higher prices, an element which favored progress
and prosperity and urged an inflation of the currency, and the board
might be subject to that influence.
Prof. S pbagu e . I fear that very much more than I do anything
else, because that is a policy which would probably prove for the time
to be popular with the community in general, and I would add that
the members of the boards of these banks and of the central board
should be chosen primarily with reference to their bumps of caution.
They must be exceedingly conservative, because they will have to
oppose a very general desire for more credit than it is at all desirable
that they should grant. It will be years, I should suppose, before
the management of this institution, or any similar institution, can
tell exactly what it can do with perfect wisdom and safety and what
it can not do. Precedents will in the course of time be established.
After the institution has been going 10 or 15 years it will almost run
itself.
Senator H itchcock . On the other hand, Professor, the board might
for the time being be composed of those who, without any ulterior
motive, or disgraceful motive, might be influenced by the thought
that prices were too high, the cost of living too great, and they might
be of the opinion that by depressing things and contracting credits
seriously they would remedy that fault, and they might use that
power for that purpose.
Prof. S pbagu e . The danger I see is to my mind just the opposite.
Suppose these institutions had been established four years ago. If
properly handled I do not believe that they would have issued any
appreciable amount of notes or would have made any large amount
of rediscounts up to the present time. During nearly all of the last
four years the country has had an entirely adequate supply of credit.
During some of this period I am convinced the business community
has secured more credit than it was properly entitled to, and a good
deal of the proceeds of short-time loans went into bricks and mortar,
equipment of all sorts, and this period of contraction of this year
has to my mind enormously strengthened the business and the
banking situation. It is enforcing a certain amount of liquidation.
If we had had an institution such as is proposed there is the possi­
bility that several hundred million dollars more of credits might have




I

BANKING AND CURRENCY.

363

been available than was available throughout the winter and spring.
I do not believe that that would have made the present situation
stronger than it now is. These are some of the factors that must be
taken into consideration in the management of a rediscounting
institution, and they are to my mind those which could not be
properly judged if we set up an arrangement of Government issues
of notes through an institution which would not be steadily in close
touch with the banking and business community.
These are my reasons for believing, then, that a bank rather than
a quasi bank owned and operated by the Government will serve the
purpose more satisfactoiily.
I wish now to discuss the first of the modifications which I think
it desirable to make in the bill. It refers to the issue of notes.
Senator B ristow . Professor, will you just pardon me a moment.
Prof. Sprague . Y es; certainly.
Senator B ristow . As I understand you so far, you prefer the cen­
tral bank idea to any other ?
Prof. S prague . The central or regional bank. I have made no
distinction between the two so far.
Senator B ristow . D o you think that the s}r
stem suggested in the
bill is as desirable from your point of view as the central bank system ?
Prof. Sprague . With some few modifications, I do.
Senator B ristow . The principle underlying the two you regard as
quite similar ?
Prof. S prague . I think the principle is very similar, but my reason is
rather a practical one and it is this: I do not believe that it would be
possible to secure the passage of a central bank measure which did not
include a very dangerous provision found in the bill of the National
Monetary Commission, namely, that the institution must lend at a
uniform rate throughout the entire country. Conditions are not suf­
ficiently similar throughout this country to make it advisable for an
institution of this sort to lend at a uniform rate. It would be the case
of the tail wagging the dog with a vengeance, and that is my reason
for preferring a number of regional banks to a central institution.
Senator B ristow . Y ou would prefer the central institution, if I
interpret your views properly, if that central institution had dis­
cretionary power to fix different rates of discount for different centers
of the country ?
Prof. Sprague . I am inclined to think so, although I do not feel
very strongly about it one way or the other.
Senator B ristow . That power might be conferred upon the
regional banks; that is, a number of these regional banks, so that
the rate of discount for one bank would not be the same as that for
another bank ?
Prof. Sprague . Quite so.
Senator B ristow . And in that respect you think that this would
be more desirable than the monetary commission’s idea ?
Prof. Sprague . Very much more so, but you can see that it is
hardly a matter of principle, and in 25 or more years it might be
perfectly feasible to lend at uniform rates throughout the country.
Mr. W e x l e r . W hy would you not do so now, Professor?
Prof. Sprague . Rates for loans are now very different in different
parts of the country. The banks in certain sections of the country
have already rather more funds than they can lend locally. If you
m
ake a uniform rate which would be entirely reasonable, in view of
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BANKING AND CURRENCY.

the general level of rates for loans in your section of the country, the
South, no loans could be made in New England or the Middle Atlantic
States in ordinary times. I believe that the bulk of the business of an
institution such as was proposed by the monetary commission would
be in the West and Southwest.
Mr. W e x l e r . W hy should not the minimum rate that it might be
desirable to loan apply to the entire country ?
Prof. Sprague . In order to secure any business in New England
you might have to rediscount at 3 per cent or 4, and you are offering
the same rate to Oklahoma banks which I believe frequently secure
8 per cent on satisfactory security.
Mr. W e x l e r . But they furnish the same class of security. I see
no reason why the people of Oklahoma should not enjoy the same
facilities as the people of New England if the people of New England
do not need the money. If they did not like the security they would
not have to make the loans.
Prof. Sprague . But a rate of rediscount which is so wide a spread
as that does not seem to me to be a healthy arrangement at all.
It might lower the rates slightly in Oklahoma, but it is not to be pre­
sumed that the resources of an institution such as was proposed by the
National Monetary Commission would be sufficiently great to permit
it to grant enough credit to the Oklahoma banks to reduce their rates
to anything like the New England rates. Moreover, it would not be
desirable. It is never desirable or safe to largely and rapidly increase
the credit facilities enjoyed in any community. Increase of credit
facilities should be paralleled by an increase in the permanent wealth
of the community, m improved lands, buildings, actories, etc.
Mr. W e x l e r . Professor, suppose a rate were made for New Eng­
land of 3 per cent and a rate for Oklahoma of 5 per cent, would not
the natural trend of rediscounts of Oklahoma be toward New Eng­
land, and thereby by paying them
per cent they would get a profit
of
per cent by its operation? The money would naturally seek
the lowest money market of the United States. I do not want to
interfere with your argument in any way, but I am of the opinion
that for the same class of paper the same rate should prevail through­
out the United States.
Prof. Sprague . But it does not.
Mr. W e x l e r . Then it should not be taken.
Prof. S prague . Each regional board, knowing its own conditions,
having its own funds, and just what its own local situation is seems
to me would be a more satisfactory arrangement than a single insti­
tution forced to loan at a flat rate throughout this entire country.
Senator B ristow . Professor, you spoke of the disciplinary power of
the central bank. Do you think that that should be conferred upon
the regional banks ?
Prof. S prague . Oh, yes. It is nothing more than a refusal to
make rediscounts. Inasmuch as all of these banks must have balances
if they are going to secure the rediscounts, it would be a perfectly
simple matter for the Federal reserve banks to deduct the amount of
checks from the balance of the banks, and this is doubtless the way it
will ultimately be done, just as is the case very largely in New York
at the present time under what is known as the No. 1 account.
Senator B ristow . The regional bank could refuse to discount the
paper of a member bank ?




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BANKING AND CTJRBENCY.

365

Prof. Sprague . For such a cause as I have mentioned; yes.
Senator B ristow . In refusing to do that what would the member
bank do ? Would it have any recourse ?
Prof. S prague . I do not think, for the reasons that I have men­
tioned, that it should have any recourse. I should think that a pro­
vision of the kind I have mentioned would be inserted in the by-laws of
those institutions. It might very well be inserted into the statutes, but
that might make it a little too rigid and not altogether desirable.
Senator B ristow . I do not know whether I fully understand you
or not. To what extent would this power of discipline be vested in
the regional banks ?
Prof. Sprague . Simply with regard to the making of immediate
remittances on checks drawn upon member banks. That would be
to my mind a proper ground for declining to grant rediscount. That
should be perfectly well understood and well known.
Senator B ristow . Would you have any other power given to this
regional bank to refuse these rediscounts for any other reasons ?
Prof. S prague . Only that which comes in passing upon the paper
which is presented for rediscount. Of course such a power goes
without saying.
I do not know any other ground for refusing or withdrawing redis­
counting privileges, except this most important one, of continuing
remittances. And there will be no trouble about it. The reason that
remittances have been discontinued in the past is that each bank
fears that the other bank will not continue remittances.
Now, in New England, in 1907, under the workings of the country
check department of the Boston Clearing House, remittances con­
tinued throughout the panic. There was no doubt at that time that
a check received by one New England bank on another would be
settled at once, in tne ordinary course of business. And just because
each bank knew the others were doing it, there was no trouble
whatever.
But, just as soon as any moderate number of banks begin to delay
and refuse remittances it spreads like wildfire, the domestic ex­
changes break down, and it becomes exceedingly difficult to move
goods.
The Chairm an . Well, Prof. Sprague, in the panics of 1893 and
1884, did not the exchanges break to 50 per cent of their previous
volume ?
Prof. S prague . Yes, sir.
The Chairm an . That is a fact, is it not ?
Prof. S prague . They were broken also in 1907. In 1873 and in
1893 the exchanges broke, but not in 1884.
Mr. W e x l e r . In 1907 you could not get money out of Pittsburgh
or St. Louis at $10 a thousand.
The Ch airm an . And that made a shrinkage of probably $1,500,000,000 of current exchange, did it not ?
Prof. Sprague . Yes, sir.
The Chairman . What I was about to bring out, was that if this
regional reserve bank refused to discount the paper of a bank, for
whatever reason it might assign— it might say tne paper was not
satisfactory, or anything like that— what would that bank do ? It
would be in a difficult position, would it not ?




I

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BANKING AND CURRENCY.

Prof. Sprague . Yes. The borrower may be confronted by such
a situation. So, he also might be if bis paper was passed upon by a
Treasury board; and I should think that a Treasury board would
set up somewhat more rigid requirements than a group of men in a
Federal reserve bank conversant with the banking business. They
would be able to form a judgment on paper that might be just
slightly doubtful, where the Treasury board would hardly be in
position to gauge exactly.
Senator B ristow . Well, now, Professor, why should not the
security upon which this additional currency could be had be defined
in the law, so that it would not be left to the judgment or the incli­
nation of a regional bank as to whether or not credit should be
extended ?
Prof. Sprague . Y ou can not formulate exact legal rules regarding
proper security for bank loans or for rediscounts, and if you attempt
it you will exclude very much more than would be excluded by any
wrong exercise of judgment or of power by the board of a Federal
reserve bank that is at all likely to occur.
Senator N elson . Senator Bristow, can you not see how difficult
it would be to lay down a hard and fast rule to determine whether
the notes of all tne gentlemen in this room were equally good ? It
is a personal matter that you have to consider in each case; and you
can not lay down any hard and fast rule of the law to govern all
cases.
Senator B ristow . N o . That is the objection I have to the shorttime paper only being used. I think you can describe long-time
securities with sufficient accuracy------Senator N elson (interposing). Real estate securitv and------Senator B ristow . Or bonds, or things of that kind.
Prof. S prague . That could be done; but in that case one of the
purposes of this legislation would be entirely frustrated. Commer­
cial paper would then not be the most liquid asset that banks could
hold. Call loans and bonds would continue to be the best and most
available asset for the banks.
Now, I believe that the primary function of the bank is to facilitate
current short-term operations— to move goods, and to provide funds
for goods in process of manufacture and transportation, and so on.
Senator B ristow . Well, but that is a small part of the functions
which the banks are now performing, is it not ?
Prof. S prague . Y es; but it is a part which occasions variations in
the demand for currency and very largely the variations in business
activity.
I do not see how you can relate the need for currency to bonds
as security, whereas the requirements for currency and credit
should be, in my opinion, related to those needs in connection with
which credit and currency are used. Now, credit and currency
are, in fact, used in moving the crops, and in connection with the
various processes of manufacture and sale of products. Variations
in the volume of goods entering into consumption or the processes of
manufacture naturally call for variations in the volume of credit
and currency. If the two things are related, you have a proper
connection. Otherwise it is a matter, it seems to me, of guesswork.
Senator B ristow . N ow , referring to the suggestion which Senator
Nelson made, that it would be impossible for a bank board to pass




BANKING AND CURRENCY.

367

upon the value of the security of the notes that are given to any
bank; I realize that is true. The notes of a b a n k - the value of
them is known chiefly to the officers of the bank which takes the
notes. Now, the regional bank would have no information as to
the value of that security presented, except the knowledge which it
has of the methods of business of that bank, would it ?
Prof. S prague . N o .
Senator B ristow . Whether or not a note given by John Smith,
or Samuel Jones, at Faribault, Minn., is good, the regional reserve
bank at Kansas City, or at St. Louis, would know more about it------Prof. Sprague (interposing). Quite so.
Senator B ristow (continuing). Would know more about it than
a Government officer, or Treasury establishment somewhere, would
it not?
Prof. Sprague . Oh, it would know, on the whole, very much more
about the condition of the banks and the conditions in the locality.
That is one of the great advantages of the regional board. It is
analogous to the system of our independent local banks. If the
whole institution is run by a central body, there is grave danger that
it will be found necessary to subject managers of branches to exceed­
ingly rigid rides, as is the case in the Dominion of Canada, where the
managers of branches have to refer pretty nearly everything that
requires any exercise of judgment to the head office. This is an
advantage of the regional bank, as it seems to me.
Senator B ristow . Does not the national-bank examiner, if he is a
competent official, know as much about the safety of a bank which he
examines at proper periods as almost anybody else ?
Prof. Sprague . I dislike to express an opinion on that point,
Senator Bristow. But it is not merely the question of safety------Senator B ristow (interposing). Well, he ought to know as much,
ought he not?
P rof . Sprague . He ought to, perhaps, and, with sufficiently
frequent examinations, he might. But it is not merely a question of
safety; it is a question of policy. The question of rediscounts would
have to be determined largely with reference to whether the board
believed the amount of short-time credit to be used in Nebraska was
excessive or not; whether the people were attempting to do too
much development work on the basis of short-time loans; whether
they ought not to go a little more slowly in the matter of short-time
loans until they had accumulated a little more savings to put into
permanent capital form. These are the kinds of problems that will
have to be considered by the managers of the regional banks, and
even more by the Federal board. They will not have to give so much
attention to individual credits, and only a moderate amount of atten­
tion, I fancy, to the standing of the different banks.
Senator II itchcock . Well, if the managers of the regional banks—
say in any one of these western regions— come to the conclusion that
they were going too fast in Nebraska, for example, that they were
buying too many automobiles, that they were doing too much
building in the cities, and that they were doing too much irrigation
work, they would restrict the loans in that region, would they not?
Prof. S prague . They would not grant additional loans. They
would say to these people, “ You are going along rather too fast.”
Or they might grant only a portion of the additional rediscounts
desired.




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BANKING AND CURRENCY.

Senator H itchcock . So that it is contemplated creating a new
force in the United States to exercise, not only a disciplinary in­
fluence on the individual banks, but a restraining influence on whole
regions of country— in the judgment of the comptroller?
Prof. Sprague . Oh, not exactly that if the banks in Nebraska,
after this institution is established, will have just as much lending
power as they have now in the absence of any rediscounts.
Mr. W e x l e r . More.
Prof. S prague . The rediscount will be practically an addition to
the existing volume of credit. Now, that is why I contend that------Senator H itchcock (interposing). Well, that is only attained by
reducing the reserve ?
Prof. S prague . That is true. But the reserves will be reduced,
taking the practical effect of this bill, as I see it.
Senator H itchcock . Well, you may reduce the reserves by making
the banks dependent upon the regional banks, and if the regional
bank draws trie line you can not get what is provided to take the
place of it.
Prof. S prague . Well, that depends upon how you make the cal­
culations as to the contributions to the capital and the reserve------Senator H itchcock (interposing). Well, does it not amount to
this, then, that instead of having it as it is now, so that where the
banks in Nebraska decide, from their resources and the general situa­
tion in their locality, what shall be loaned, that power of deciding is
transferred to some other town, some other region, where a board sits
upon it, and in some secret manner passes upon it and decides it.
Prof. Sprague . That would not be true unless all the lending power
were taken away from the Nebraska bank, so that they would have
no lending power except what they could get from this regional
association.
I have made an estimate, but I have not checked it up since the
last changes made in the reserve provisions in the bill; but I reckoned
that, perhaps, taking the country by and large, it would be necessary
to rediscount about $150,000,000 in order to enable the banks to
maintain their existing volume of loans and credits. The changes
that have been made since I made up that estimate reduces that
amount of rediscounts materially. From my point of view it is
altogether desirable that these institutions should use at the outset
a moderate amount of lending power without making any net addi­
tion to the total volume of credit available in this country. These
institutions need to do regulaily a certain amount of business; then
they will have something that they can use as a means of contraction
when the business situation makes it desirable to contract. Or, to
put it in a way that is probably more accurate, it puts them in a
position to lessen the increase in credits, which would probably other­
wise have taken place.
If you intend to establish an institution of vast lending power with
no restraining influence, then I think you would simply be passing a
measure of inflation. You may decide that you do not wish to set up
any restraining influence of any kind, governmental or otherwise, but
if you so decide, you ought not, in my opinion, to provide an institu­
tion capable of largely adding to the existing volume of credit upon
the existing cash reserves.




BANKING AND CURRENCY.

369

Senator S hafroth . Prof. Sprague, Mr. Forgan, of Chicago, indi­
cated that he thought that the operation of this bill would produce a
contraction of credit. Do you accord with his view ?
Prof. S prague . On the assumption that the banks continue to
maintain the same ratio of cash to deposits, I in part agree. He
failed, however, in his calculation, to take into account the provision
regarding savings deposits, of which I think we would find there would
be very considerably more than SI,000,000,000. For you should take
into account not only the figures in the comptroller’s report of
deposits in savings departments in national banks amounting to
$700,000,000 or $800,000,000, but also a very large amount of deposits
against which the banks have issued time certificates. W ith those
included in the savings department, as I expect they would be, I do
not think that setting up this arrangement would involve anything
like the contraction indicated by Mr. Forgan’s figures.
Senator Shafroth . D o you not believe that the relation of credits
to reserves would be very much increased after these regional banks
are established and the right of discount prevailing?
Prof. Sprague . There would be, I think, a lower ratio of reserves
to credit liabilities of the banks. But the thing I am concerned
about is the amount of short-time credits that is being used in con­
nection with the business operations of this country. And consider­
ing the scale of those operations, and the amount of fixed capital
employed, and so on, I think that an altogether sufficient amount of
short time credit is now being utilized. Take the particular instance
of the last few years: The railroads and other corporations found it
difficult to place long-time securities at satisfactory rates, and most
of them have been putting out short-term notes, the proceeds of
which have gone into fixed investments, and banks have to a very
considerable extent taken those short-term notes. The maturity of
the notes is comparatively short, but the proceeds of this short-time
credit have gone into permanent form.
The Chairman . That is it.
Senator Shafroth . Prof. Sprague, Mr. Dawes, former Comptroller
of the Currency, announced in Chicago the directly opposite view,
namely, that if this bill were enacted there would be a great expan­
sion of credit ?
Prof. S prague . Well, he was referring— well, both of those gentle­
men were referring to exactly the same thing, and not to any increase
in the amount of credit. Ordinarily, when one speaks of an inflation
of credit, I think one has in mind an increase in the total amount of
credit. That is what I understand by that expression. Apparently
Mr. Dawes meant simply that the existing volume of credit would be
supported upon a smaller foundation of cash.
The Chairman . And therefore would be inflationary in character
but not in amount ?
Prof. S prague . Yes, sir.
Senator S hafroth . N ow , Prof. Sprague, you mentioned awhile
ago, while we had under discussion the bill I introduced, that the
legal-tender character of the paper which it was proposed that the
Go'v ernment should issue would be proper, provided a certain quan­
tity only were issued; and if there was a reasonable taking care of the
credit by that kind of a currency there would be nothing out of
the way— no tendency toward excessive discounts and no runs upon
the Treasury or the gold reserves.




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BANKING AND CURRENCY.

Prof. S prague . I did not intend to include in my statement quite
so much as that. I intended to say that the Government could, with
perfect safety, and, in my opinion, with propriety, issue that amount
of currency which experience shows, at all times, will be needed for
use outside of banks tor pocket-money purposes.
But I do not believe that, for the varying requirements of the people
for currency, those which fluctuate with the seasons and those which
vary as between periods of business expansion and periods of business
depression— I did not say that those requirements could be well met
by a Government issue.
Senator S hafroth . N ow , Prof. Sprague, what objection is there to
the issuing of full legal-tender money— for instance, in this very case,
as to these very notes ?
Prof. Sprague . Limited in the amount?
Senator S hafroth . Oh, yes; limited in amount.
Prof. Sprague . N o objection whatever; none whatever.
Senator S hafroth . Well, in the case of the bill which I introduced,
which provides for the issuance of full legal tender to take up the gold
certificates and also to take up the national-bank notes, would you
consider that that would be an excessive amount to issue as full legaltender money ?
Prof. Sprague . Practically you would have to take into considera­
tion the existence of the silver dollars and the silver certificates.
Senator S hafroth . Take into consideration what ?
Prof. S prague . The silver dollars and the silver certificates make
up a part of that portion of the money supply which is constantly
in use outside the banks. There are $500,000,000 or $600,000,000 of it.
Then there are $700,000,000 of bank notes, and the three hundredodd million of greenbacks; and then the gold certificates, part of
which you would secure— making a total of something over two
billions of dollars. That is a larger amount of money than is now
out in circulation, or will probably be out in circulation at any time
during the next 10 years.
Senator Shafroth . Well, that is the amount of money just now
that the Government is issuing in some form or another, is it not,
whether it is out in circulation or not ?
Prof. S prague . Well, but I restricted my statement to that which
is in circulation outside the banks.
Senator Shafroth . Yes.
Prof. Sprague . The reason I did that is that whenever there are
large requirements for gold— and they are usually for export— the
old is not secured in driblets from the people; it is secured from the
anks. It is not secured by taking notes to the banks and asking
them for gold; it is secured through drawing against the balances
with the banks of those who happen to be engaged in the gold export­
ing business.
Senator S hafroth . The amount of gold, however, that has been
imported into this country, while it has varied somewhat, there some­
times being more exports than imports, there has been a net import
into this country, ever since 1878, of over $5,000,000 a year.
Prof. Sprague . Yes, sir.
Senator S hafroth . N ow , it does not seem to me that with the flow
of gold through long periods of time being in our favor, there would
be much of a demand made upon these notes to be redeemed in gold.

f




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AND CURRENCY.

371

Prof. Sprague . W ell, very likely that might prove to be the case,
but------Senator Shafroth (interposing). Now, the reason why the Gov­
ernment can not now— or at least, it does not seem to be practicable
for it to do so— redeem the silver dollars or the silver certificates, is
on account of the fact that the Government would go into a loss right
there. If it attempted to issue full legal tender money, redeemable
in gold, and melt up the silver, there would be a loss to the Govern­
ment of $250,000,000 to $300,000,000. And on that account, I have
not noticed any suggestion made by anybody, because all of the
nations of the world are still using silver money. So that it seems
to me that it would not be fair to count that as money. That had to
be substituted by full legal tender money. But really, the $346,000,000
of greenbacks are now upon a gold standard.
Prof. S prague . Yes, sir.
Senator Shafroth . And upon a less redemption fund, or reserve,
than is proposed in this bill, namely, it is 43 per cent, whereas this
bill proposes 50 per cent.
Prof. Sprague . Yes, sir.
Senator Shafroth . S o that is eliminated to a certain extent?
Prof. Sprague . Yes, sir.
Senator S hafroth . And really the only two features that are met
in the bill are the substitutions for gold certificates of this full legaltender money, redeemable in gold, and also to take up the bank
notes. And they are being used in commerce as money------Prof. Sprague (interposing). Well, after the process had been car­
ried through— if it were carried through in its entirety, the reserves
of the banks would be practically altogether in this new issue of
notes. Then whenever there was an occasion for exporting gold,
notes would be taken to the Treasury and exchanged for gold. Now,
the Treasury could undertake that function.
Senator Shafroth . Well, now, if it took----- Prof. Sprague (interposing). And that is my reason for saying
that it is a very much simpler operation for a government to issue
simply that amount of notes which experience shows is always
required in general circulation. An instance of that is provided by
the Bank of England.
When the present system was established in 1844, an estimate was
made of the amount of bank notes which, in all circumstances, the
people of Great Britain would be using. And that amount of note
issue was secured by Government securities. The remainder was
secured by gold. They argued, and rightly, that at least this 14
millions— it was then "the amount, although it has been since in­
creased— that this 14 millions would always be wanted for making
ordinary payments to individuals and could never in any circum­
stances give any trouble whatever.
Senator S hafroth . Well, have you made an estimate of what the
amount of that demand in the United States would be ?
Prof. Sprague . That demand would probably amount to some­
where between $1,200,000,000 and $1,500,000,000. 1 should say that
it certainly would be as much as $1,200,000,000 and probably more.
Senator N elson . Do you mean by that it would be constantly in
circulation among the people outside the banks ?
Prof. S p r a g u e . Y e s ; although that estimate is made a little un­
certain because our estimates of the total amount of different kinds




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Ba n k in g

and currency .

of money in the country are not exact. Paper money gets destroyed
and gold coin is melted for commercial uses and sometimes we do not
get any records of it. Our Government estimates of the total amount
of money outside the banks are too large, and it may be that my esti­
mate of $1,200,000,000 ought to be dropped by a couple of hundred of
millions. I should feel quite certain that there must be 1,000 millions.
Senator S hafroth . Well, in view of that demand which the people
would have for circulation, the banks are bound to have reserves, and
inasmuch as these gold certificates would have been taken up by the
legal-tender money and inasmuch as the bank notes would be taken
up there would be nothing but gold coin or these notes to act as a
reserve ?
Prof. Sprague . Yes, sir.
Senator S hafroth . And there would be created a demand for an
enormous amount, which would------Prof. S prague (interposing). Oh, that is perfectly true. There
is the banking demand which absorbs all over and above this
$1,200,000,000, that I have mentioned.
Senator Shafroth . Yes.
Prof. S prague . This is simply a question of whether we wish to
have bank reserves made up very largely as gold, so that any foreign
drain of gold will come upon the banks, or whether we wish it to be
made up chiefly of these proposed United States notes, in which case
the demand for gold would be directed toward the Treasury.
Senator S hafroth . Well, in the event that this same amount of
gold remains in the Treasury which is now represented as deposits
for the certificates— gold certificates— there would not be such a
great quantity of gold in the country to go into the banks, would
there, and consequently they would have to use to a certain extent
some of these full lesral-tender notes ?
Prof. S prague . Yes. I think most of their reserves, if the thing
were carried through, would be in the form of notes and— unless they
declined to present gold certificates for exchange, as they, of course,
might do.
Senator S hafroth . W ei1 do you think that the circulation medium
,
as it is now, consisting of the silver and silver certificates and
gold and gold certificates, and the bank notes, and the United States
notes of $346,000,000, is too large a circulation medium for the
United States ?
Prof. Sprague . N o .
Senator S hafroth . Do you think it is ample ?
Prof. Sprague . Yes.
Senator S hafroth . D o you think it is sufficient ?
Prof. S prague . I think it is sufficient, except for seasonal and
extraordinary requirements.
Senator S hafroth . Yes. Then, if all of that currency were taken
up and replaced by a full legal-tender money woidd there be any
inflation ?
Prof. S prague . Oh, it might happen that what is sufficient now
would be rather more than sufficient next year.
Senator Shafroth . Yes; but that might occur also under the pres­
ent state of the currency ?
Prof. S prague Y es; but under the present state— or under the pro­
posed bill— banks are responsible for providing the gold: wher as to
the other case the responsibility would be transferred to the Treasury.




I

BANKING AND CURRENCY.

873

I do not regard your proposal as a matter of fundamental impor­
tance. I think it could be done; but our banking system would be
no stronger. Our banking machinery would be just as likely to break
down in the next period of emergency, with suspension of payments,
the breaking down of the domestic exchanges, and all the rest of it.
Senator Siiafroth . D o you not think that the 50 per cent reserve,
with the powers vested in the Secretary of the Treasury, directing
him to purchase gold, if necessary, and to issue bonds, if necessary,
in order to maintain the parity— do you not think that that would
make a currency that would never go to a discount ?
Prof. Sprag ue . I think that is perfectly true. But is does not
improve or change appreciably the banking situation.
Senator Siiafroth . Yes.
Prof. Sprag ue . It is purely a monetary change.
Mr. W e x l e r . And has no special value.
Prof. S prague . It is nothing more than that.
Mr. W e x l e r . Mr. Chairman, I would like to get something into
the record which the committee of bankers designated for me to take
care of. It will not take over five minutes, if the committee will
permit me to do it.
The Ch a ir m an . D o any of the members of the committee desire
to ask any further questions at this time ?

Senator Siiafroth . No, Mr. Chairman; I have none.
Senator B r isto w . I have some questions which I should like to
ask Prof. Sprague. Will he be here Monday or some other day?
Prof. S prague . I can be here Monday, if the committee desires
my presence.
Senator Siiafroth . W e would be glad to hear you further.
The Ch a irm an . Well, on Monday the committee will be very glad
to have you continue your remarks; they are very interesting.
Senator S hafrotii . Y es; they are.
The Ch a ir m an . There arc many things that I should like to
ask you in regard to this matter, Prof. Sprague, and with regard to
the principles which are involved in this; and if it will suit your con­
venience (it is now nearly 6 o’clock), the committee will hear you
further on Monday. Will it be the pleasure of the committee to meet
at 10 o’clock on Monday mornirg?
Senator S iiafroth . I think it will be better to meet at 10 o’clock.
The Ch airm an . On Monday we will meet across the hall, where
we met the first few days; but this room will be subject to our use
later on.
ADDITIONAL STA TE M EN T OF SOL. W E X L E R , VICE PR ESIDENT
OF THE W H IT N E Y CENTRAL NATIONAL BANK, OF N E W
ORLEANS, LA.

Mr. W e x l e r . Mr. Chairman, there is one of the suggestions made
by the conference of bankers at Chicago, which I was designated to
call to the attention of this committee, which I have not had an
opportunity to present.
That suggestion relates to the manner of giving the Federal reserve
board the right to designate any city as a reserve city or a central
reserve city, or to change any city from a reserve city or central
reserve city, and designate any bank in any such city as a country
bank or a reserve bank, as the case may be.




374

BANKING AND CURRENCY.

And the findings of our committee at Chicago were to the effect
that the present law is entirely adequate, in that it provides that
three-fourths of the banks in a city which may desire to become a
reserve or central reserve city may do so with the consent of the
Comptroller of the Currency and the Secretary of the Treasury.
Now the Federal reserve board should take the same privileges that
the Comptroller and the Secretary of the Treasury now have; but the
cities themselves should certainly have some voice as to whether
or not they should be made reserve or central reserve cities, or as to
whether or not that privilege should be taken away from them. It
would give to the Federal reserve board, as the bill is written now, a
tremendous power to favor its friends and punish its enemies, in indi­
vidual cases of banks.
Senator S hafroth . Mr. Wexler, are you going to be here next
week ?
Mr. W e xl e r . I will be here all day Monday. I will be engaged
upon other matters in the forenoon of that day; but I will be here in
the afternoon.
The Senator from South Dakota was very particular in inquiring
whether, if a small country bank went into the system, it would make
more or less money. I have that worked out for him.
The Chairman . Y ou can put any exhibits into the record that you
desire upon the subject, Mr. Wexler.
Mr. W e x l e r . All right, Mr. Chairman, Thank you very much.
The Senator from South Dakota took particular interest in the re­
sult, from the standpoint of profit, of the country banks coming into
the system under the proposed bill.
A careful calculation shows that there would be no difference in the
net profit of such a bank under the proposed bill from what it is at
the present time; the calculation based upon a bank with a capital
of $25,000 and deposits of $100,000. In reserve cities, based upon a
capital of $1,000,000 and deposits of $5,000,000, such a bank would
earn $6,500 more, or about 0.6 of 1 per cent on its capital than it
earns at the present time.
From both of which calculations it is evident that, from a profit
standpoint, there is neither any special inducement to come into the
system, nor any particular reason to remain out of it.
The American Bankers’ Association, by which this committee was
appointed, is composed of 14,000 members in every State in the
Union; and it is believed that the suggestions made by the com­
mittee directly represent the sentiment of practically all of these banks.
They represent a total capital investment of $15,000,000,000, and
certainly can be recognized as a powerful and influential factor in the
general business of the country; and their experience and standing
should be taken into account in the consideration of the suggestions
that have been made.
The management of the association is under an executive council,
composed of 1 member for each 200 banks, selected by each of the
States, and is therefore thoroughly representative of every State
and every section of every State in the Union.
(Thereupon, at 6 o’clock p. m., the committee adjourned until Mon­
day, September 8, 1913, at 10 o’clock a. m.)




BANKING AND CURRENCY.

375

M O N D A Y , S E P T E M B E R 8, 19 13 .

Committee

B anking and Currency ,
U nited States S e n a te ,
Washington, D. C.
The committee assembled at 10.30 o’clock a. m.
Present: Senators Owen (chairman), Reed, and Shafroth.
The Ch a ir m a n . Mr. Allen, the committee will hear you now.
on

STA TE M EN T OF W ILLIAM H. ALLEN, OF BROOKLYN, N. Y.

Mr. A llen . Mr. Chairman and gentlemen of the committee, I am
here to offer a few remarks upon the subject of this bill, and to ask
that there be a further investigation into the subject.
A t the last meeting of this committee the remark was made that
this currency question was a subject on which bankers and students
of finance only could be expected to have a knowledge and that the
proletariat could hardly be expected to know much about it.
Well, that may be true as regards some features of it. And then
there are other features, not the least important of which one may
with zeal and industry acquire a knowledge, even though he may
belong to the humbler portion of the proletariat— that humbler
portion of which it has sometimes been said that it takes nine of them
to make a man.
The particular object I wish to speak of is in regard to the concen­
tration of money in New York. You are all aware that that is the
main subject. Some think that it ought to be circulated all over
the country. Some think it is a good thing to have it concentrated
in New York. Well, I think it ought not to be concentrated in New
York—-not so much. I think it ought to be scattered all over the
country. However, I am not here to state of— — Senator S hafroth . Mr. Allen, where do you live?
Mr. A lle n . Brooklyn, N. Y .
Senator S hafroth . W hat is your occupation ?
Mr. A lle n . I come from the land of Gaynor.
Senator S hafroth . W hat is that ?
Mr. A lle n . I live in the same town as Mayor Gaynor.
Senator S hafroth . Well, I say what is your business, please.
Mr. A lle n . Well, I was in the clothing business for a number of
years.
Senator S hafroth . And have you lived in New York all of that
time ?
Mr. A lle n . Well, most all the time. Now, I have only half an
hour to speak here and can not enter into family history.
The subject which I propose to speak on is the fact in regard to
the concentration of money in New York. The Aldrich plan, and the
plan of the American Bankers’ Association, is founded upon a certain
theory of this concentration of this money in New York. It assumes
that after the harvest is moved country bankers have a surplus of
monev which they send to New York to invest in 2 per cent call loans,
and then in the following fall of the year about $200,000,000 has to
be recalled to move the harvest, and they assert that it is the recall of
this money which causes high rates for money, upsets business, and




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B A N K IN G A N D C U R R E N C Y .

produces panics. It is alleged that it was the recall of about
$200,000,000 in 1907 that caused the panic of that year. That theory
seems to be universally accepted, not only by the advocates of the
Aldrich bill, but also by those who advocate any other system of
currency reform.
Well, the point is, have you looked into it? Has any man ever
come before this committee and proved to you satisfactorily that
if money rates— that the $600,000,000 sent here in New York, where
it is loaned at 2 per cent, has been sent on from the far W est and
the South, where the rates are 6 per cent ? And who has shown you
that it takes $200,000,000 from New York in August and September
ber to move the harvest ? Has anyone here shown it ?
This $200,000,000 is supposed to be sent to New York in the first
two months, when the harvests are heaviest in average years, and it
is about $18,000,000 a week. Around the first week in September
the movement is supposed to be the heaviest. I have here last
week’s New York Tribune, of September 6. It is an announcement
of the movement between New Tork and the interior. It says:
A loss in cash of $1,500,000 by the New York banks is indicated by the reported
movement of currency this week. The banks received from the interior $11,632,000
and shipped to that point $9,763,000, which included $2,784,000 national bank notes
sent to Washington for redemption.

Well, I do not understand that “ bank notes sent to Washington for
redemption” ------Senator S hafroth (interposing). They are not redeemed; they
are just sent in and full legal-tender money is sent to the banks to
be put in their reserves, and this currency------Mr. A llen (interposing). Well, I am taking the movement as
indicated here.
Mr. W e x l e r . It goes back all over the country, When it comes to
Washington, it is sent to the bank whose name it bears.
Senator S hafroth . Oh, yes.
Mr. A lle n . Well, this money is announced here as sent to Wash­
ington for redemption, and whether it comes back to New York or
not I am simply saying it is not sent from New York to the West.
It is sent to Washington for redemption.
Senator S hafroth . Yes.
Mr. A lle n . N ow , even with that it shows that m place of losing
$18,000,000 a week the past week New York actually gained on the
interior. Furthermore, New York has actually gained in every one
of the last six weeks, right in the harvest season, when the advocates
of this Aldrich theory assert that it was the other w
’ay.
Now, furthermore, last year the banks of New York in those two
harvesting months actually gained $20,000,000 on the interior. In
1911 it was almost the same; they gained $24,000,000. They also
gained in each of the next three months —for October, November, and
December.
So you see the theory is ridiculously false to begin with. The
whole theory of the Aldrich plan is based on the assumption that New
York loses $200,000,000 in currency in August and September.
The report of the monetary commission shows that—
we have allowed $200,000,000 for the natural expansion of currency for seasonal or
crop-moving demands.




I

B A N K IN G

AND

CU RRENCY.

377

Mr. Vreeland estimated the amount sent from New York as be­
tween $200,000,000 and $300,000,000. That is his figure. And it
is supposed to be sent out in August and September. The Aldrich
plan, you might say, is based on the theory that the panic of 1907
resulted from the loss of $200,000,000 to the interior banks in August
and September.
On this point Lyman J. Gage says—
Such a crisis was reached in the early autumn of 1907; it was precipitated by calls
from the interior to remove the crops. Responses to those calls weakened the foun­
dations of the reserves of the New York banks.

There could be no misunderstanding about that.
To the same effect is Hon. William B. Ridgley, Comptroller of the
Currency, in his report to Congress, December, 1907. He says:
Is it any wonder, then, that the demand in the fall for about $200,000,000 in cur­
rency to move the crops always causes a disturbance? It was directly and immedi­
ately due to this that the crisis of October, 1907, assumed the phase of a bank panic,
and spread all over the country.

Well, now the reports of the movement of money here indicated
show that in August and September New York only lost $8,700,000.
That is, including the bank notes sent to Washington for redemption.
After you deduct that, as I think you should, New York actually
gained a little over $1,000,000.
Senator Shafroth . Well, but you know the United States Gov­
ernment immediately sent back to New York the quantity of bank
notes they sent down here, but sent it in legal-tender money.
Mr. A lle n . Well, I understand that part, my dear sir.
Senator Shafroth . Well, then, I want------Mr. A llen (interposing). But I simply say it was not sent West.
Senator Shafroth . Yes.
Mr. A lle n . It was not sent West. If it was sent to Washington
for redemption, it was not sent to the West to move the harvest ?
Senator Shafroth . That is right.
Mr. A lle n . Then, there is no dispute about that. Well, Prof.
Sprague------Senator Shafroth (interposing). For that reason I did not think
that any factor of a redemption of notes should be taken into consider­
ation by you at all in determining the flow of money from W est to
East.
Mr. A lle n . Well, but I am simply reporting the things as they are.
Mr. W e x l e r . Have you taken into consideration subtreasury
transfers from New York?
Mr. A lle n . Well, I am taking into consideration the figures as I see
them. If you can show other figures, all right.
Prof. Sprague in his History of 1907 shows that there was no serious
monetary shortage in New York during August and September, and
the banks in August, 1907, were in slightly better shape than in August,
1906. The surplus reserve was larger in August, 1907, and although
there was a slight loss, it was increased somewhat in the two months
before the beginning of the panic.
Such testimonv, along with the figures of the currency movement,
is of itself enough to show that this whole theory of the cost of our
financial illness in August, 1907, and later years is wholly false.
Now, in relation to inelastic currency, the theory that harvest
movements are the cause of our financial illness forms the basis for




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BANKING AND CURRENCY.

all the talk about inelastic currency.
says:

On this point, Mr. Vreeland

Agricultural crops of this country average about seven or eight billions a year
They are harvested in the late summer and fall. This means tnat we need a very
much larger amount of money in the fall than in the spring. This is why we need
several hundreds of millions more in the harvesting season. There is where we need
elasticity in our currency system.

Another authority, Mr. A. B. Hepburn, speaking of an inelastic
currency, says:
Currency must be provided to move the products of the farm and the factory to the
markets of the world in order that the return prices may meet and extinguish local
demands.

Mr. Hepburn leads us to assume that if we issue, say, $200,000,000
extra currency to move the harvests, after the harvests are moved,
the markets of the world return prices will meet and extinguish local
demands, and the $200,000,000 will be redeemed.
It is a very plausible argument, but it has this fatal defect : After
we have shipped our goods to the markets of the world, we do not
receive the cash in return. There are no return prices, as Mr. Hep­
burn very well knows. Last year we exported— our excess of ex­
ports amounted to $581,000,000. Did we receive that amount of
cash ? No, we did not, and have not for a good many vears. On
the contrary, right at the end of the year we began to ship gold to
the other side; and if you include the silver, as it ought to be—although some will not admit this— if you include silver exports, we
have actually lost more in the last 15 years than we have gained
from Europe.
Senator S hafroth . Well, do you not account for that by the
expenditures of tourists over there in Europe, and also the payment
of interest charges due to the other side ?
Mr. A llen . Yes. Well, if you will allow me, I am coming right to
that point. Here is a great secret that is halfway held back in our
argument for currency reform: They never argue that point that you
have mentioned. You never hear it in arguments about currency
reform.
Now, I want to explain my idea of it, and that is one reason why I
am here. I am not offering a theory; I am simply furnishing you
some facts and showing the need of further investigation.
As between the Aldrich plan, or the American bankers plan, and
the plan that is favored by this committee, I favor their plan, the
plan that is favored by this committee. But, still I think we ought
to have the facts in the case.
My argument is, that the reason we did not receive any cash in
'return was that these debts for interest, dues, expenditures of Ameri­
can tourists abroad, and immigrants’ remittances, the cost of ocean
freights, and other items, offset our debts; offset them, I claim, by
over $500,000,000. The debts are estimated now at between— well,
estimate them as low as $653,000.000, or about that. Others esti­
mate them at $1,000,000,000; oth es estimate them at $1,500,000,000.
Senator Shafroth . Y ou mean the debts which Americans owe
Europe ?
Mr. A llen . Y es; all the debts for all these items every year.

Mr. W exler . Y ou mean the debts that they owe us?




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Senator S iiafroth . N o ; which we owe them.
Mr. W e xl e r . The debts which we owe them?
Senator S iiafroth . Yes.
Mr. A lle n . They do not owe us anything for tourist expenses or
interest dues or immigrant remittances. There are no American
immigrants on the other side.
Well, I claim that the debts are at least over SI,000,000,000. The
money in settlement of these debts, the immigrant remittances,
tourist expenses, and the like, comes to New York from all parts of
the country and finds its way into the foreign banks in New York; or
the international banks that are controlled by Morgan, Kuhn, Locb
& Co. and other international houses
Here is an item from the Wall Street Journal that helps to ex­
plain it:
Exchange with New York is fairly strong, and at most places is at the point which
calls for the shipment of currency to New York. A considerable part of the inquiry
for remittances in the foreign exchange market comes from the interior cities, and cash
has to be sent here for the purpose of exchange.

This money, as I say, goes into the private foreign banks and the
national banks with foreign connections, such as the National City
Bank, the First National Bank, and the Chase National Bank. They
do not ship the gold to Europe. If they did, we would have a panic
every year. They reinvest it, or, rather, they borrow on the other
side, to avert the shipment of gold to Europe. They reinvest part
of it in our securities permanently, and if they can not invest enough
permanently, why, they buy short-time notes on the other side.
I do not profess to understand all the technique of this matter; but
that is the substance of it. W e borrow abroad to avert exports of
gold. Some times, they say, we borrow it to carry on circulation
But the first original cause of it is that we borrow to avert the export
of the gold to Europe.
If we exported half of what we owe in Europe in a year, we would
have panic, and it would hurt the big borrowers more than anybody
else. So they seek to avert the export of gold for their own interest.
I have numerous extracts to that effect, which I can show you if
necessary; but it would occupy too much of your time to read it out.
Now, part of this money that is held in NewYork is reinvested in
loans, loaned out in Wall Street, and in loans to other banks. And I
say that, that is the money that is concentrated in New York. Money
that belongs to foreign bankers, and the West and the South never
owned SI of it. There are the $600,000,000 a year. They say, the
theory is, you know— that they send it on to New York, after the
harvest is over— that is the theory which you hear exploited in the
bankers’ conventions and everywhere else. It is not sent to New
York after the harvests are moved, to be recalled when the harvest
has to be moved again. But, somehow or other, it remains in New
York all the year around. There is no recall of it. There has not
been a recall of any such sum as even $100,000,000 for the Inst 13
years.
And according to the facts, as I understand them, the movement
out from New York is less every year. W hy, even the reports of the
Government admit that much, and if they catch on to anything, why,
other people ought to do so
0328°— S. Doc. 232, G3-1— vol 1----- 25




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BANKING AND CURRENCY.

So far as I see------Mr. W exler (interposing). Do you contend that our net debt to
Europe is over one billion dollars ?
Mr. A lle n . Yes.
Mr. W e x l e r . The records do not show it. The balance of trade is
in our favor. WT
hat becomes of all of our cotton, and wheat, and
corn that we export to them ? What becomes of the money paid for
that ?
Mr. A llen . When you were speaking here last week I allowed
you to proceed without interruption.
Mr. W e x l e r . I beg your pardon; I merely wanted to get light as
to your views on the subject.
Mr. A llen . And I ask the same courtesy from you.
The Chairm an . All right, Mr. Allen. Mr. Wexler thought it
would be better to ask you a question on that point while you were
discussing it.
Senator Siiafroth . Yes; Mr. Wexler doubtless thought it would
bo agreeable to you.
Mr. W e x l e r . Yes; I had no intention of being discourteous; I
thought it would be agreeable to Mr. Allen.
Mr. A llen . When my statement is over, I will be willing to argue
the point with you.
The Chairm an . Mr. Allen, the committee will permit you to sub­
mit any notes or memoranda that you want to, in case you desire to
supplement anything that you have said.
Mr. A lle n . Well, if I can not convinco you by what 1 say that the
subject ought to be investigated, 1 do not know that it would be
worth while for me to submit anything more.
Now, in relation to this 8600,000,000, we are all aware that in the
last seven months there has been a considerable stringency through­
out the country. Some time in April the Secretary of the Treasury
went so far as to lend 88,000,000 or 810,000,000 to the banks, and
offered to put into operation tho emergency currency law.
Can you make head or tail out of that ? At the time that the Gov­
ernment loaned this 88,000,000 or 810,000,000 to the banks, they
made the first reported effort to see that it should not find its way into
Wall Street to be used for speculation; and for that purpose he put
it in the banks of the West and South, and it had hardly got out of
his fingers before it made a bee line to New York; and the first thing
we read of was that it was used to make money easier in Wall Street.
Afterwards it was reported that some of it was shipped to Europe.
It is hard to believe that any western farmer or any western banker
was sending his money on to New York under the conditions that
have existed all over the West and South in the last six months, and
yet in this last five weeks or the last six weeks, right in the midst of
the harvest season, we find that New York has actually gained in
theory about 830,000,000; that is to say, in place of receiving over
8100.000. 000 from New York, the West has actually shipped
830.000. 000 to New York. I do not think that is consistent with the
Aldrich or the Vreeland theory, whichever you call it; and that is
only consistent with the fact that this money comes on here in the
settlement of these foreign debts. I think that that is the only
reasonable explanation, and it is these foreign debts, the absorption
of currency in settlement of these debts, that is the main cause of our
financial stringencies and the panic of 1907.




BANKING AND CURRENCY.

381

I do not want to take up much more of your time.
And lie also announced that, if necessary, he would deposit
$50,000,000; and all this time, mind you, New York is supposed to
have $600,000,000 belonging to the farmers of the West. It is
always supposed to be really the farmers’ money, you know, as
distinguished from money that comes from the banks of the West.
This money has remained here in New York when rates here were as
low as 2 per cent, and I have seen that when rates were as low as 1
per cent, while they were 6 per cent in Chicago and higher still
further west.
A t the conference in Washington here, where the delegates from
the American Bankers’ Association were conferring with the Govern­
ment officials in relation to the loan of $50,000,000, a suggestion
was made that the western banks ought to be made to recall the loans
that they had in New York, and a number of the bankers at the
conference said that if such a rule was enforced they would have to
give up to outside banks some $600,000,000. Well, now, consider
the absurdity of that. If they get $600,000,000 in New York, why
should they be asking the Government to lend them $50,000,000 ?
Where is the sense in it ? W hy should we lend it to them ? W hy
should we not insist that they take at least $50,000,000 from New
York?
About the same time Senator Tillman accused the New York
banks of refusing to loan money to the South, and the New York
banks replied to the effect that they were lending, that they had
been lending all along, and that they were lending more than that
at that time; and yet at that same moment, according to the bankers’
theory, the South has a part of the hundreds of millions loaned in
New York.
The Chairm an . The bell has just rung for a vote, Mr. Allen, and
you have a little more than 30 minutes now.
Mr. A lle n . All right.
In an address to the New York Credit Men’s Association last
January Mr. J. R. Forgan, of Chicago, said that in the last 60 days
the banks of the country had passed through a season of the tightest
money since 1907, and if anything had happened to cause things to
blow up we would have had another panic like that of 1907. In this
period of 60 days there was not a national bank in the country that
kept up to its full legal reserve. Later on the situation was so
serious the Government was forced to lend some $8,000,000 or
$10,000,000 to various banks in the West and South to avert a panic.
It is now generally conceded that the money situation of the past
nine months, which almost terminated in a disastrous panic, was
chiefly due to the exports of gold at a time when we should have been
importing the metal for our exports of merchandise.
This gold went abroad in settlement of these foreign debts, and
these debts are the chief cause of the concentration of money at New
York and the resulting financial ills. It has been shown that the
panic of 1907 was not due to the recall of interior loans. It remains
to be shown that it was due to the absorption of cash and gold exports
in settlement of these foreign debts.
For years prior to 1907 we had been selling and pledging securities
abroad to avert export of gold on this account. In May, 1906, the
London Economist estimated that we then owed Europe alone about




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BANKING AND CURRENCY.

$500,000,000. In October of the same }mar the financial editor of
the New York Times estimated all foreign borrowing at $750,000,000.
A t the beginning of 1907 the Paris correspondent of the Evening
Post claims that we owed about $600,000,000. A t the same time
the banks of Canada reported having $82,000,000 invested in call
loans at New York, and the Bank of Japan had $60,000,000 loaned.
So that our total borrowings footed up to $740,000,000, or about the
same as the financial editor of the Times had estimated them at two
months before.
In an article in the North American Review, Mr. C. A . Conant
stated that in 1907 the monetary system broke down and our banks
suspended currency payments because the gold reserve of the coun­
try, amounting to $701,000,000, was so hopelessly subdivided among
the banks as to be utterly useless.
This is an argument for a central bank, to hold all the reserves of
the country. It aims to show that the panic resulted from the failure
to have this $701,000,000 concentrated in one bank.
Well, in opposition to this view, I hold that every dollar of this
old really belonged to foreign bankers. It was our gold which they
ad received in settlement of these foreign debts, and we had bor­
rowed it back. It was this foreign grip on our gold stock which
resulted from these foreign debts that finally caused the panic.
In concluding this argument I would suggest to the committee the
necessity of further investigation of this matter in order to obtain
more definite information regarding these foreign debts, temporary
and permanent.
The London Economist puts our English investments in this coun­
try at $9,000,000,000, the yearly interest on which is $450,000,000.
Other foreign investments here are placed at $3,000,000,000, the
yearly interest on which is $150,000,000. Our cost of ocean freights
is $150,000,000; total yearly indebtedness, $1,200,000,000. This
would make these debts $200,000,000 more than the amount esti­
mated by James T. Talbert, vice president of the National ( ity Bank
of New York.
I would also suggest the need of locating the real ownership of the
amounts held in New York banks which they report as being “ due
other banks.” Advocates of the bankers’ plan of currency claim
that the $600,000,000 now in New York banks belongs to interior or
country banks, while I hold that it belongs to foreign banks. They
received it in settlement of these foreign debts. It is this drain that
is the main cause of financial disturbances in the United States.
I thank the committee for hearing me.

f

LETTER TO THE CHAIRMAN OF THE COMMITTEE FROM
J. H. DAVIS, OF RICHMOND, VA.

A ugusta , A r k ., September 5, 1913.
Hon. R obert L. O w e n ,
Washington, D. C.
D ear Si r : Your message has just reached me here in Arkansas
inviting me to a hearing before your Finance Committee. The time
named is now so far spent I can not reach Washington, but thanking
you for your kind invitation I write you this letter giving my views.




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383

If it reaches you in time I shall feel grateful if you will read same to
your committee with my respects.
The hope of civilization, permanent peace, and progress depends
on issuing currency on the productive industry and not the debts.
To issue on the debts gives the creditor class a double deal in the
business world, sets a premium on debt, distress, and decay. This
currency issued on the debts of the people in their collective capacity,
Government, State, county, city, and the corporation bonds and
other commercial debts held against the people going to the creditor
class at cost, organized as banks, they reloan to the people, thereby
drawing double interest, and also have power to control all enter­
prise, all employment, all progress, because they control the money—
its life blood.
This is not only un-Democratic but is unscientific, unsound, and a
perversion of every law of justice, and a surrender of governmental
sovereginty to private greed.
When a government issues its currency upon debts, either govern­
mental or commercial, to increase the volume of currency, they must
increase the volume of debt. Thus, like the “ bottled caterpillar,”
they devour themselves. Consult Jefferson, Jackson, Calhoun.
Issue at least half our currency to the States, counties, and solvent
cities for internal improvements, and on productive industry and
agriculture.
Two-thirds of our people have no assets to coin into currency.
They do all our labor and conduct most of our business; they man the
ship of state from pilot house to coal bins in the bottom, but do not
own it. The owners are in a palace on shore.
To issue all money to these owners, is not only injustice but un­
mitigated outrage. God’s “ decree of title to property” was based
upon production. The well belonged to Jacob because “ Jacob digged
it.” But the places to “ dig” are now all chartered, foreclosed, and
shut out from humanity by law, and the privileged few have plastered
the earth with ruinous and enslaving debt, control all money, all
avenues of industry and progress, limited only by that cupidity and
avarice which finally make an intolerable t y r a n y over the masses.
W e get our rights from God and not from governments. “ Govern­
ments are instituted among m en” to secure these rights and not to
destroy them.
It is an undisputed truth that whoever controls the money of a
country controls its destiny. This is fundamental. If this is a
people’s Government the people should control the money. It will
be fatal for the Democratic Party to deny or evade this fact.
Jefferson contended that public debt was a public calamity; a curse giving aristocracy
a power to absorb the labor and wealth of the masses and enslave posterity by a legal
debt made to consume their labor before they were born.

Hamilton said:
Public debt was a public blessing affording a basis for banks, and an ailment for
business to feed on.

Thus the great issue was joined.
If public debt is a public calamity, then to issue the currency to the
debt holders is to double the cruelty of that calamity.
The conviction is settled in America that there is “ a money power”
which, in league with other great corporations, has formed an in­




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BANKING AND CURRENCY.

visible but irresistible tyranny of wealth; that it tramples on law,
custom, decency, and honesty without scruple; and has created a
system of quiet alluring and seductive methods by which it sways
and controls our Government.
The Democratic Party and patriots of all parties have charged this
from 10,000 rostrums. Printers have put it on millions of pages of
our current history. Recent revelations have confirmed its truth.
The average Democrat was taught to believe and believes now that
this mighty and malignant power is the founder and father of the
whole scheme of asset currency. And when they hurled from power
Aldrich, Cannon, and the Republican Party they felt they were free­
ing themselves from the entire “ Aldrich asset currency crowd.”
I look in vain for some pledge, platform, or speech by one of our
leaders that commits the party to the asset plan of currency. I find
10,000 invectives against it by Democrats and not one suggestive
sentence in its favor, and as a plain, common citizen I make bold to
ask your committee to point to some pledge or platform that commits
our party to this system.
Now, Senator, some of your committee may consider this message
as the fulminating fumes of a foul mind, the diatribe of a demagogue.
If so, let me quote from one of the grandest of the sons of earth.
Thomas Jefferson, in writing to Madison, said:
Public debt is a ruinous system, which has armed despots with a means to enslave
and plunder their fellow man.

In writing to William B. Giles, speaking of Hamilton’s money sys­
tem and its devotees, he said:
A government of an aristocracy founded on banking institutions and moneyed in­
corporations riding and ruling over the plundered plowman and beggared yeoman.

Can it be considered by candid men— Democrats— that when our
fathers forbid the sovereign States from emitting bills, issuing cur­
rency, that they expected their posterity to create a lot of commercial
corporations and give them power to emit bills— issue and control our
currency. If so, listen to the following language spoken by Jefferson,
the founder of civil liberty, to Washington soon after Hamilton had
“ steam rolled” his first bank and bank bill through Congress.
My wish was to see Congress cleansed of all persons interested in banks and public
stocks and a pure legislature given us.

Again in writing to R. II. Lee, then in Congress, the great Jefferson
said:
Certainly no nation before ever abandoned to the avarice and jugglings of private
individuals to regulate according to their own interests the quantum of circulating
medium for the nation. * * * yet this is what has been done and will continue
to be done unless stayed by the protecting hand of our legislature. The evil has
been produced by this ruinous machinery of banks, and justice, wisdom, duty, all
require that Congress interpose and arrest it before the schemes of plunder and spolia­
tion desolate our country * * * Without this interdiction we shall have the same
ebbs and flows of medium and the same revolutions of property (panics) to go through
with every 20 or 30 years.

Now Senator, supported and nerved by these quotations and a
thousand more I might give from Jefferson, Jackson, Calhoun,
Benton, Clay and scores of our grandest men, I want to talk freely.
If the present Owen-Glass bill had been published before election
as the Democratic position on the money question we would never
have carried a Western State— Roosevelt would now be President.




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385

Our whole system is inherently wrong and you are building a
pyramid with the little end down. It is doomed to fall at recurring
periods causing untold distress. You are giving the creditor class
through the banks control over the dearest interests of our people—
the money. You throw the gold of our country into idle vaults, and
then turn and coin the misery and misfortunes of our people into
paper money for their creditor masters.
A campaign for increased and inflated debts of every character will
follow the passage of your bill, and bonds for every conceivable enter­
prise^— by States, counties, cities, school districts, road districts, irriga­
tion districts, reclamation districts— will pile into billions, and thou­
sands of corporations will come up like Jonah’s gourds, in a night’s
time, to issue bonds and stocks to be used as “ prime paper” as a basis
for asset currency.
The inherent wrong of an asset currency would be greatly relieved
and the measure as a whole would be a vast improvement on present
conditions if you will divide your total issue into, say, four volumes—
giving the creditor and commercial class one-fourth on their assets,
the States, counties, and solvent cities one-fourth on their bonds for
internal improvements; the agricultural class one-fourth on storage
certificates; the farm and home builders one-fourth on land and home
mortgages— all at the same cost. It would put all our real progress
beyond the control of avarice and sordid speculation and would see
millions invested every year for public internal advancement and not
for private gain and corporate greed.
The much-maligned Henry amendriients lay down a correct prin­
ciple and point you in the right direction, to which should be added
a home and farm loan system for rural farm homes. Not a mortgageplaster skin game, to send them to the banks, to pay usury to the
creditor class; but recognizing that the independent home is the
surest foundation of a free people and that civilization begins and
ends with the plow; make a companion bill enlarging the Agricultural
Department wdth a bureau through which the home builder could get
this money at the same rate the banks get it, by mortgage on a speci­
fied quantity of land with a specified pattern of a house and home on
it, after the manner of building and loan associations.
Banks are public institutions created for public good and not for
private greed. The people who run them being public agents, it is
absurd to say that the Government has no right to control them in
their relation to the public by such laws as will best prevent par­
tiality, plunder, and extortion.
The money power has run riot over our country long enough; they
have plunged us in panics and made millions out of our misfortunes.
They have bound us to a golden chariot in which they ride and rule
in roval splendor. They smudged, burned, and destroyed 600 mil­
lions of greenback dollars, the money that saved the Union and
crushed the Confederacy, and issued bonds to take its place as a
basis for bank currency, and had the shameless audacity to label
this act of perfidy under the libelous term, “ An act to strengthen
the public credit.’ *
Having burned our greenbacks like pirates burn a ship they then
funded all our national debt, which the patriotic Lincoln had written
payable in “ lawful money, ” into a coin debt; then to cajole the people
and conceal their crimes they called this act of treachery “ specie




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resumption.” So fearful were they that they might be overtaken in
this act of infamy they specified that the bonds should be paid in
coin of the then standard weight and fineness, which meant a gold
dollar with 25.8 grains and a silver dollar with 412^ grains.
Still longing for more power to plunder they then came forward in a
cold-blooded conspiracy and struck down, demonetized, and killed
the silver dollar and refunded the debt into a gold contract. This
last act of spoliation they misnamed “ an honest money system.”
Yet after welding this chain of cruel conditions round us, and breeding
and bringing on panics and business bankruptcy to the common man
at regular intervals, bringing us through this serpentine route of
swindle and fraud, telling us all the time that they were the “ Lord’s
annointed saints” and rulers, the guardian angels of our financial
system, the defenders of public credit and public honor, and the
sanctified apostles of “ honest money,” sound banking systems, and
safe and sane currency laws, and that all who opposed them were
visionary dreamers representing inflation, repudiation, and dishonor,
they came forward five years ago with an imperative demand to corn
the untold millions of debts they held against the States, counties,
cities, corporations, institutions, and individuals of our country into
currency— at the people’s mint. This climax in their career of crooked
conduct they in then- pragmatic and pusillanimous effrontery called
“ An act to reform our currency.”
I can not believe— I shudder at the thought of believing— that the
Democratic Party can be made to turn the picture of Jefferson, Jackson, Calhoun, and Benton to the wall, and take up where Aldrich left
off and carry out his scheme.
Senator, millions of our people hold no assets except willing hearts,
willing minds, and willing hands to work, and the product of these
is their assets. An asset currency will give them but scant relief and
will finally intensify their distress.
These people have looked to the Democratic Party as their friends.
If they have looked in vain, then the party will look in vain for their
support in recurring elections.
Let me plead with you people, Democrats, to “ remember thy
creator,” the common people. Kevise your measure along funda­
mental lines as outlined by Henry and his friends, and add a farm
and home provision, and you will leave your names enshrined in
honor and esteem to hand down to a grateful posterity as having
brought to life again the Democracy of Jefferson and Jackson on the
money question.
Take the Henry amendments as a basis with a farm and home
builders’ addition. A home was God’s first gift to man— a home
and some portion of the earth from which to produce comforts, and
where we can rest from toil; a home, around which hangs a halo of
endearment to every human being; a home, the absence of which
tends to make man an alien to his God, an alien to his country, and
an outcast. A home is so essential to human happiness that the
downfall of society, the decay of liberty, and the wreck of civilization
in every country have been measured by the homeless numbers
within her borders.
The love of money is the root of all evil, and the money question is
the vital point in every country. A money system founded in




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387

usury, based upon debt, and conducted through a barricade of toll
gates erected by law between the people and their mints, and often
kept by a lot of licensed looters and franchised freebooters who look
at everything through the curves of a dollar mark, and waylay every
important business transaction, and forbid its passage unless they
can have a rake-off, is the blighting curse and crime of our country
now.
Your pending measure complicates, augments, and aggravates
that situation.
We must not consider society as now existing, the normal or natural
status. W e have been vitiated, bound down by ages of oppression
and plunder and never allowed to develop the good, the sublime in
our race.
We must change our money system so as to invest at least half
for public good and not for private gain. This will mark the way to a
glorious advancement, peace, and prosperity.
Mankind is a creature of environment; his conscience is a pupil
in the school of contact, subject to the evil as well as the good in­
fluences, and money is the most absorbing thought in the human
race, and a just and righteous system of currency will do more to tone
and elevate life than all else statesmen may do. But our present
system is a relic of barbarism coming down from feudal times, and
our country is now filled with Shylocks who still demand their pound
of flesh.
When the men who made our Federal Constitution had finished
their work, in the address they sent out to the people they named
five great questions of sovereignty that had been taken from the
States and vested solely in the Federal Government and “ made
supreme. ”
These powers were “ to make war, conclude peace, form treaties,
coin money, and regulate commerce.”
They said these questions—
and the correspondent executive and judicial authorities should be fully and effec­
tually vested in the General Government.

W e have just as much right to farm out to banks and corporations
the power to declare war and conclude peace and make treaties as
we have to farm out the power to coin money and regulate com­
merce, and would be equally as safe in so doing; yet we have vacated
our sovereignty over our coinage and currency and the regulation
of commerce to a pitiless horde of conscienceless corporations, which
have become cannibals in commerce and merciless maurauders in
our monetary affairs. And led on by inordinate greed are now
demanding that the great majority of our people, the bone and
sinew of our country, the toilers in our industrial world, and the
tillers of our soil, the great debtor class, over whom they have held
sway for a lifetime, shall now be shackled and bound by law, through
an asset currency as sheep to be sheared by them, for another gen­
eration. May God intervene through the clarified conscience of an
honest democracy and prevent this spoliation.
I do not claim to be an expert in financial matters. A lot of the
most consummate freebooters that ever filched humanity have
been called by themselves and their lionizing flunkies as experts.




388

BANKING AND CUBRENCY.

I am just a common man in the common walks of life. I have
spoken in the language that intense earnestness gives to one who
has spent a large part of his life for the freedom of the masses from
the shackles of the classes.
With much respect, I have the honor to be,
Yours, in best wishes,
J. H. D avis .
(The following brief was filed with the chairman of the committee,
with the request that it be printed as a part of the hearings:)
BRIEF OF AN DREW L. RUTTER, OF ENFIELD, N. H.

Before entering upon this vital subject it may not be out of place to state that this
paper was prepared nearly or quite four years ago, and which, from the knowledge of
present conditions, appears to have been forecasted by recent events in the New York
Stock Exchange inquiry, and only serves to give added force to the suggestions here
faintly outlined. 11 is hoped that these statements 'will be received with that respectful
and serious attention that the gravity and importance of this all-absorbing subject de­
mands. Even if the suggestions may be crude and disjointed, yet it is believed you
may be able to glean an idea or two that may present additional facts not already
touched upon by others, and it may interest you to know also that no mere theory or
Utopian scheme is indulged in but reference is made to actual facts patent to anyone
sincerely disposed to make use of them in order to fully substantiate and make clear
the purpose for which the facts, and facts alone, are presented with which to con­
struct a practical and plain common-sense system of banking so much needed at thi.time, and for all time for that matter.
In calling attention to the growing necessity for a more satisfactory and thorough
reorganization of the country’s present financial system and in dealing with the
contemplated change it may not be out of place to refer to the comments made in
relation thereto by the Secretary of the Treasury in his annual report for 1909, which
are at this time unnecessary to quote. But if nothing better can be arrived at than
resulted in the act to amend the national banking laws, approved March 30, 1908,
w hich, taken altogether, is nothing but a miserable makeshift that can serve no other
purpose than to still further complicate the already too complicated and complex con­
dition of our currency system, in adding still further to these futile efforts to properly
and safely adjust our currency, your attention is called to the extremely unwise act
passed by the previous Congress giving the Secretary of the Treasury authority to
ssue emergency currency based solely on the Government’s credit without the means
being provided for its redemption. Now, why should there be occasion for the issue of
irredeemable currency at any time? Has not this always been our great trouble this
patchwork legislation, this Micawber-like system of finance, the results of which
have always proved disastrous to our national credit, adding still further to the spirit
of speculation the country over and fostered for that very purpose by the big, the
Wall Street, interests?
In further confirmation of what is here stated let us call to mind the conditions
that were vital factors which resulted in producing the great panic of 1873, one of wluch
was not so much the destruction of capital by war, as cited by Mr. Charles A. Conant
in his Century article, as diverting it into speculative channels, and really the four
milliards poured into the lap of Germany in the shape of France’s promises to pay
money and after the war of 1870, also like promises of Austria after Padowa. and coupled
with our own abundant promises, not money but promises to pay money at about
the same period representing in the grand aggregate the startling sum of $9,000,000,000
of promises to pay. These combined flotations speedily found their outlet in the
wildest speculation, both in Europe and America. The failure of Jay Cooke & Co.
was simply the one factor which shook this paper house of cards to its very founda­
tions, thus leading, as it always does, to universal disaster. It is simply piling
Pelion upon Ossa in attempting to construct our financial edifice out of paper prom­
ises, which this present bill contemplates, and the results of which from the very nature
of their creation out of airy nothings of which dreams are made and not any more
substantial, can not be otherwise than the source of still further trouble. The effort
must now be made to change the current and break away from our mental bias, which
leads us only too easily to rely alone and solely upon the credit of the Federal Gov­
ernment.
A word also in relation to reserve centers for the storage of currency to meet possible
emergencies arising from the movement of our agricultural and other products during




BANKING AND CURRENCY.

389

the spring and fall. The proposed plan which will be treated further on in this paper
will, it is believed, entirely do away with such a provision, which can only open the
door for opportunity such as already exists in the case of New York City banks and
other large money centers.
It may be stated in the first instance that almost the entire circulation is based on
the credit of the Government as is evidenced by the use of its liabilities in the form
of interest-bearing bonds which on October 31, 1909, as appears from the report of the
Comptroller of the Currency, were deposited with the Treasurer of the United States
together with lawful money, $679,545,740; notes, $25,595,703, which represents the
amount of national-bank note circulation, $705,141,443 at that date; legal-tender
Treasury notes of 1890, $351,000,000; total paper currency, $1,056,141,443. Against
this amount of currency but $150,000,000 in gold has been set aside for the redemption
of legal tender notes only, leaving over $900,000,000 unprovided for which can only
be redeemed by the sale of the Government bonds as aforementioned which in any
case does not involve the use of either gold or silver coin and are redeemable in legal
tenders. All are fully aware that the precious metals constitute the very foundation
of all financial and commercial transactions throughout the entire business world, and
in cases of sudden monetary panics which so frequently occur to unsettle business,
destroy confidence and credit, prove that gold and silver coin are the only panacea for
their cure. Again, we are obliged to acknowledge that since the adoption of the
national banking system in 1863 and 1864 and up to the present time, its success has
been wonderful notwithstanding its serious defects. Its growth has been phenomenal,
starting with 1,513 banks in 1865 with a capital of $393,137,206, and individual de­
posits of $500,000,000 and to October 31, 1909, increased to 7,025 banks with capital
of $964,621,000 and individual deposits of $6,956,502,690, all in 44 years. The very
fact of the tremendous strides thus made during the past 44 years to 1909, chiefly upon
credit, is itself a menace and an encouragement to still further stretch that credit
beyond the bounds justified by sound business methods.
To give you a clearer and more comprehensive view of the tremendous business
transacted mainly on credit of the banks of the United States of all classes, including
national banks, 1 beg to invite your attention to a few figures which in the aggregate
are simply startling in their amount, the assets of said banks being made up of loans
and discounts, overdrafts, bonds, stocks, domestic and foreign securities, real estate,
mortgages, furniture, and fixtures, together with specie, United States notes, legal
tenders, notes, and a lot of miscellaneous items which total the immense sum of
$21,095,054,420. Of this vast sum there is represented as available in gold and silver
and subsidiary coin but $1,044,661,913; the balance of $20,000,000,000 represents
credit in its various forms as above recited—bonds, mortgages, realty, etc. These
figures may be found on page 31 of the Report of the Comptroller of the Currency for
1909 and are approximately correct as per reports also of 22,491 banks, national and
State, received and tabulated by the United States Monetary Commission to April
28, 1909.
To still further exhibit the great amount of business transacted on credit through
the bank clearing-house system, which aggregate 123 associations located in the large
business centers of the country, the aggregate exchanges during the year to Sep­
tember 30, 1909. were $158,559,487,000. On these vast transactions only 4.22 per cent
was paid in money, as reported to the Comptroller of the Currency by Manager William
Sherer of the New York clearing house (see p. 9 of his report, 1909). It would be use­
less to still further startle you with figures running up into the billions of individual
checks and checks of business houses all over the land drawn against their bank
accounts. W hat has already been shown will abundantly serve the purpose in demon­
7
strating to us all the necessity for speedily inaugurating a radical change for the bet­
terment of our finances by placing our circulating medium on a sound specie basis
and at the same time insuring the absolute safety of bank deposits as is already done
in the case of the bill holder, and there can be offered no valid reason why the depositor
should not share in such protection, which, by this means, would add to the confidence
of the public in the banking system as is in contemplation and as will appear in the
suggestions which will be followed in due sequence.
A former governor of the great State of New York, and at present sitting on the
bench of the Supreme Court of the United States, in a speech at that time, and cer­
tainly having in mind his recent experience as an investigator of the big insurance
companies in New York City, stated that there was no reason why the depositor should
be made secure, as Tom, Dick, and Harry were not personally interested in looking
after the deposits of their neighbors. Did he not know and had he quite overlooked or
forgotten the fact that the very essence of insurance was the fact that Tom, Dick, and




390

BANKING AND C U R R E N C Y .

Harry jointly assured the safety of each other in the payment of the premium on the
amount for which they were insured, thus making it possible to secure the safety of
the policy of each and all thus associated?
As a brief retrospective view of conditions that have grown out of past experiences
in our efforts both by individual States, the General Government, and by the business
community, I may here be permitted to hastily refer to Alexander Hamilton, pre­
eminent as a constructive and successful organizer, as instanced in his able work in
the establishment of the system that has been in operation in the United States Treas­
ury for over a century, and also his able work in the constitutional convention and as
a statesman whose labors before and after the adoption of the Constitution and in
Washington’s Cabinet as one of his chief advisers, have marked him as one of the grand­
est figures in our history, and time only adds to the luster of his acknowledged genius.
He drew order out of the chaotic condition in which he found the finances of the coun­
try, reconciling the serious differences between the several young States growing out
of the extraordinary expenses for fitting the volunteers furnished by them during the
Revolution, and also Hamilton and those working in harmony with him saw the neces­
sity for the establishment of a bank under the indirect control of the Treasury to serve
as an aid in giving some measure of stability to the somewhat chaotic and imperfect
financial condition at that time. Such a bank was incorporated by act of Congress in
1791 for 20 years, the Government taking stock in it to the amount of $2,000,000 by
deposits of 6 per cent bonds to that amount, the bank being capitalized at $10,000,000.
In the case of this bank no report of its condition is available until 1809 and 1811. A
statement of its assests and liabilities is appended, and in the case of the second United
States Bank, chartered by Congress in 1816 for 20 years, a statement of its condition
from 1817 to 1840 is given and may be found in Tables X X and X X I I , pages 432 and
434, Annual Report of the Comptroller of the Currency for 1908. Upon an examina­
tion of these brief citations the conclusion may safely be drawn that if the United States
Bank had been permitted to continue, with our growing knowledge and experience
in bank management, it would have proved quite as successful as the Bank of Eng­
land, and, with branches throughout the country as population and business in­
creased, would have greatly assisted in developing commercial enterprise, at the same
time have to a great extent prevented the exotic growth of hundreds of irresponsible
and mismanaged State banks built up on fictitious capital and which culminated in
financial disaster in 1837 and also in 1857, 20 years thereafter.
At this late date we may be permitted to refer to the violent and unreasoning oppo­
sition against continuing the United States bank by many of the people at that tune,
and even well-known business men were ignorant of a practical knowledge of the
banking business at that time, and because of that lack of knowledge were strongly
prejudiced against the system. They were mere children and yet to be schooled by
that relentless teacher, experience, which as aforenamed was taught them by the
financial disasters of 1837 and 1857; and thus ignorance, prejudice, and politics made
it a party cry of the then democracy.
President Jackson, equally unprepared, for like reasons, and fearing its monopolistic
tendencies felt called upon to oppose it in his characteristic and strenuous way.
With all due respect to the hero of the Battle of New Orleans and the vigorous opponent
of nullification, he was not equipped to intelligently oppose the financial policv then
in existence, but was obliged to appeal to ignorance and strong party prejudice in
order to make his opposition to the further extension of the charter of the second
United States bank successful. The Whig Party, with Clay in the leadership, was
not able to cope with the formidable array of the party that advocated for the first
time in our history the Jacksonian doctrine, that to the victor belonged the spoils, and
the advocates of a United States bank sank beneath the blow. With our present
knowledge we feel that the work of the Jackson administration in this particular was
a fatal blunder. The question is thus briefly referred to at this time for the reason
that the proposed reorganization contemplates making the Government one of the
principal stockholders, if not the principal stockholder, in the contemplated central
national bank.
We must not permit unreasoning prejudice to stand in the way of looking squarely
at the facts that at the present time confront us at every hand, as we can not fail to
observe that the National Government has been compelled to assume direct control of
many vital interests that without such control would prove permanently disastrous to
the best interests of the people as a whole. The Interstate Commerce Commission,
the Department of Commerce and Labor, the Agricultural Department, Post Office
Department, with parcel post and savings adjuncts, the conservation of our land and
water, and many other noteworthy objects, in fact, our entire governmental ma­
chinery constitutes one grand gigantic trust. Why should we fear to still intrust the




I

BANKING AND CURRENCY.

391

great, and commanding interests involved in the direct management of our country’s
finances, which present economic conditions really compel us to do? With our pres­
ent knowledge there appears to be no other safe course. Another feature that should
be borne in mind, should the General Government become an active member in
the proposed plan, is that the money in the several Subtreasuries could be used not
only as a working balance as at present, but form part of the common fund for daily
use, and thus actively utilize what has been held these many years past as idle and
dead capital, serving no good purpose whatever. There are other vitalizing influences
that will naturally enter as important factors in the plan suggested by the active
employment of idle capital in hundreds, nay thousands, of banks in our large cities
and commercial centers that our present banking laws prevent them from doing,
where the central bank directorate could find use for it. It is well to bear in mind
that not all of the coin and currency as noted in Treasury circular issued from the office
Loans and Currency Division, in the Treasury Department, is available, is not in cur­
rent use, as much of it is held by the banks, loan and trust companies as reserves.
In the plan proposed every dollar of coin currency can be put into active circulation
in view of the enormous deposits that will be at the disposal of the central and allied
banks, and can be at all times at the disposal of the central directorate for transmis­
sion to any and all points where it may be required. As before stated, no special
reserve will be needed. That feature alone will serve as an efficient means to pre­
vent threatened panics.
The Secretary of the Treasury through the Comptroller of the Currency already
has general supervision, for nearly 50 years, granted by the national bank act and its
amendments, over the entire national banking system. In order to give additional
stability and character to it, the Government should take an active and practical
interest in its management, taking cognizance of its loans and discounts and the kind
of security that may be accepted, and vital matters relating to the circulating medium,
seeing to it that it is sufficiently elastic to meet all contingencies arising from current
business conditions. This does not mean that individual banks should not be under
the direct control of the banks’ officers— the president, cashier, and directors— but
that the directorate of the central bank, which this plan contemplates, should be
careful to see that the general and specific requirements of the bank act should be
strictly adhered to and carried out in every detail. Direct Government control, say,
through its officers, who should be in the directorate, namely, the Secretary of the
Treasury, Comptroller of the Currency, and the Treasurer of the United States, or
their duly authorized representatives, will demand that not only the interest arising
from its large stock investment, but the magnitude of the transactions of the bank
which will inevitably be involved, will require all time, talent, and energy at their
command to see to it that nothing shall be left undone to secure safe and permanent
success in all its departments. As the Government will have the chief interest in the
central bank the matter of proper compensation of the directors and other officers
commensurate with the work and responsibilities attaching thereto, will be the duty
of Congress to fix, and especially so in the cases of the Secretary of the Treasury,
Comptroller of the Currency, and Treasurer of the United States, whose salaries are
already fixed for their present duties, and should be increased in proportion to the
new duties and responsibilities to be assumed by them, governed to a great extent
by the compensation received at present by the officers of the large banking institu­
tions in our large business centers.
Referring to the important matter of security to the depositor as well as to the note
holder it may be noted that several of the Western States, notably Oklahoma, have
taken up the question in earnest and in that State all banks are required to set aside
one-eighth of 1 per cent for that purpose. I know many people may think this action
impracticable by reason of the tax upon bank profits. In defense of the proposition
I beg leave to submit the following statement of the actual losses sustained by the
failure of banks for the entire period of the banking system from 1864 to 1908, over
44 years, on page 391 of the Report of the Comptroller of the Currency for 1908, quite
long enough to demonstrate its actual necessity at this time; that out of the yearly
average of active national banks numbering 3,174, with individual deposits averaging
$1,597,987,400 annually, the annual loss to those is*but 0.074 of 1 per cent, and for the
44 years, with aggregate deposits of $70,311,445,582, the loss is only as before stated,
0.074 of 1 per cent.1 You will see at once that the sum to be set aside annually in the
interest of all of the depositors in the several national banks throughout the country
for the purpose would be exceedingly small as compared with the average annual indi­
vidual deposits and will but slightly affect the annual profit, and this fact bein» clearly
shown the gain in the confidence and credit of the system will far outweigh the cost,
1 Read from pages 6 and 7, Treasury Department Circular No. 62, July 1, 1908, as to profits on capital
invested b y national banks, and also page ~4U, Report Comptroller of Currency for 1907.




392

BANKING AND CURRENCY.

and also reduce to the minimum the danger of a monetary panic; in fact, make it
almost, if not quite impossible. Is not the practical experience of half a century
sufficient evidence for its adoption?
The method to be adopted in bringing about the proposed change may be thus
stated as briefly as possible:
A central national bank with a capital in gold coin and bullion and
silver coin and bullion to the amount o f................................................ $2, 000, 000, 000
The present active national banks to take stock severally in the total
amount of the present capital of each bank which on Oct. 31,
1909, represented 7,025 banks and capital of........................................
The United States Government to the amount of its present outstand­
ing legal-tender and Treasury notes, 1896.............................................
Outstanding.........................................................................................
The public to subscribe for the remainder in sums of $50 and its mul­
tiple, deposit to be made in gold and silver coin to make up the dif­
ference after national banks and Government subscription paid in ..
T o ta l.....................................................................................................

964, 621, 925
351, 000, 000
1,315,621,925
684, 378, 075
2,000, 000, 000

The coin certificates or coin notes should also have the legal-tender quality as the
United States legal tenders have now, as they are based entirely on deposit of gold
and silver for their redemption.
For the amount of gold coin and bullion, about $225,000,000, now held in the Treas­
ury a like amount of legal tenders to be retired as rapidly as they come in and an
equal amount of national coin gold bank notes to take their place in denominations
of $500, $1,000, and $10,000, and for the coin held by the national banks about $225,000,000 gold, as shown by the report of the Comptroller of the Currency, January 30,
1911, and $29,000,000 silver, in same kind of notes as above described and in like
denominations as may be required in current business.
In the case of new subscribers to the stock of the central national bank and for the
amount of gold and silver coin deposited a certificate of the fact should be issued by
the Treasurer of the United States as custodian and director of bank, and in like
manner certificates should issue to each individual bank for the total of its capital
stock, at the same time stating character of said capital stock, and same shall be held
as at present by the Treasurer of the United States as a guaranty for present currency
circulation until such time as securities can be sold for gold or silver coin or their
substitute in certificates, the latter to be used in place and stead of United States
bonds now held for the purpose noted above; similar certificates to issue to each
individual subscriber or stockholder.
Now as to the measure of acquiring the amount of gold coin, bullion, and silver
coin to cover the capital stock of the central national bank, there may be found on
page 325 of the report of the Director of the Mint to June 30, 1909, the following:
The estimated stock of gold at that date in the United States was___$1, 574, 906, 904
Silver coin ........................................................................................................
727, 685, 265
Making a total o f..................................................................................

2, 302, 592, 169

The present stock, June 30, 1911, of gold coin and bullion is...............
Standard silver dollars and subsidiary silver coin ...................................

1, 753,196, 722
724, 640, 731

Making a total o f..................................................................................

2. 477, 837, 453

An increase o f..................................................................................................
Of this sum the United States Government holds of its
own, say (gold).................................................................. $236,000,000
And for depositors.................................... .............................
15,000.000
National banks....................................................................... 224, 080, 000
Private banks and individuals..........................................
375, 000. 000

175, 245, 284




Gold coin and bullion............................................. 1, 640, 080, 000

BANKING AND CURRENCY.
Standard silver dollars held in Treasury for silver
certificates........................................................................
National banks:
Standard silver dollars................................................
Subsidiary c o i n . . . . . ....................................................
Private banks and individuals, standard silver dollars.
Private banks, subsidiary coin .........................................

393

$477,717,324
12, 822, 408
16, 185, 383
59. 165, 492
116, 140, 415
682, 037, 022 $2, 322, 117, 022

Leaving for future investment, when required............................

322,117, 022

Now, gentlemen, here are indisputable facts—solid facts—and with such facts no
excuse can be found to avoid constructing a financial system unexampled in the
world’s history. You have only to assemble these scattered units as is here shown
to make the entire vast si m of gold and silver at once available.
With this substantial evidence, the facts of which are beyond dispute, there can be
no possible doubt as to the ability of the central national bank to secure the required
amount of gold and silver in coin and bullion to furnish the aggregate amount of
capital stock contemplated of, say, $2,000,000,000, or even $2,500,000,000, thus placing
the new organization on a solid and permanent foundation instead of the use of the
United States Government, State, county, and municipal bond liabilities as at present.
It has been shown by the Comptroller of the Currency in his 1909 report (p. 17),
that the profits accruing to the business of the national banks throughout the country
to be slightly over 10 per cent of the capital invested. This fact well known, together
with the knowledge that the General Government will have the principal manage­
ment, there can be no danger of there being more than enough national banks and
individuals to take up the amount of stock required.
Permit me here to refer to the proposition made b y the Hon. Nelson A. Aldrich, late
chairman of the Senate Finance Committee, who also favors the idea of a central national
bank, but with a capital of only $300,000,000. It can not fail to strike any of us that
we can name 10 men who could, without reaching very deeply into their pockets,
quietly control the majority of the stock and thus make it possible to use the central
bank for their own special interest and that of their friends.
As to the proposed use of silver as well as gold in the new organization, it should
not excite surprise or alarm, as standard silver dollars have formed an important part
of our circulation ever since the act of Congress of 1878, 32 years, providing for the
purchase of silver bullion for coinage into United States dollars and which amounts
to nearly $500,000,000 and their substitute silver certificates have become familiar
to us all.
We have also subsidiary silver coin in circulation to the amount of $160,000,000
(and, by the way, 8£ grains less than standard silver dollars), and both have been
accepted without question in daily business at their present parity with gold; and this
is as it should be, as under the Constitution Congress has seen fit at various times in the
past to fix the value of the coins minted of both metals arbitrarily in the common
interest and for the convenience of the public at large. At this point it may not be out
of place to state that in the Annual Report of the New York Clearing House Association
for the year ending September 30, 1911, the sum of $498,775,000 in silver certificates
was used in the settlement of debit balances to the association, demonstrating their
daily use in the current business of that conservative institution without at any time
raising the question of bimetallism, as it was assumed that their possible redemption
might be made in gold coin. The word “ arbitrarily” ? It is vitally important to impress
upon your minds this undeniable fact, that all governments have arbitrarily done the
same thing—that is, fixing the ratios of silver and eold—and the standard of value in the
coin of any country does not always conform to the standard fixed by other countries.
The chief factor that has governed in most cases is the value given to the precious metals
by custom long established in the commercial world from the earliest times of which
recorded history affords us any knowledge. The Chaldeans over 4,000 years ago fixed
the parity between gold and silver as 12 to 1, and we have at this time changed it to
16 to 1, or nearly. In 1786 it was as 1 to 15.25, double standard at that; in 1792, as 1 to
15, with free coinage, and so on. For your further information I crave your indulgence
by glancing as briefly as possible at some of the changes adopted by various nations
as per report in Circular No. 62 of the Treasury Department July 1, 1908. In order
to emphasize the fact that all changes in our monetary standards are made arbitrarily
(I use the word advisedly), and at times I fear in the interests of the few instead of the
many, you will at once perceive the impossibility of depending upon the daily
market value of the bullion which without the official stamp of the mint is simply a




394

BANKING AND CURRENCY.

commodity governed entirely by the law of supply and demand. Once the seal of the
Government is placed upon either metal its value is thus fixed beyond question, and
the responsibility for its redemption and acceptance rests entirely upon the Govern­
ment, and the public receives it because of that fact, and its validity for that reason
can not be questioned.
Referring again to the necessity for direct Government control, it will be necessary
to repeal the act creating the Independent Treasury and the closing of the several
subtreasuries, and also the act of May 31, 1878, prohibiting the redemption of legaltender notes, that all Government funds from all sources 6hall be deposited with the
central national bank or any of the affiliated national banks, and all drafts and checks
drawn by the Treasurer of the United States to be paid by said banks, accurate account
being kept for that purpose, as the Government will have personal supervision, as
before stated, through the Secretary, Comptroller of the Currency, and Treasurer
of the United States on the board of directors.
There can be no doubt but that the repeal of the act creating the Independent
Treasury will result in greatly simplifying the work of the United States Treasurer’s
Office, and result in reducing the cost in running it. In fact, the receipt and disburse­
ment of the public funds by the central national bank and its agencies can be made
without any cost to the Government whatever.
The safety of the public funds will be absolutely as secure as under present condi­
tions, and more so. The preparation of the currency and the redemption of the same
when necessary will be continued in the same manner as at present, excepting that
the National Bank Redemption Agency should form a permanent part of the United
States Treasurer’s Office, as the currency, say in the course of five years at the furthest,
will all be of the same character, resulting from the change of conditions as is in con­
templation. The question of bimetalism has not been raised in these remarks, but
reference is made here to section 14 of the act approved March 14, 1900, which states
that the provisions of this act are not intended to preclude the accomplishment of
international bimetalism whenever conditions shall make it expedient and prac­
ticable, and secure the same by concurrent action of the leading commercial nations
of the world, and that at a ratio which shall assure permanence of relative value
between gold and silver.
Your attention has already been called to the fact, several times repeated, that all
ratios and parities are arbitraly and, as a rule, made in the interests of each nation.
This being undeniably true, it would be entirely proper for us as the principal com­
mercial nation of the world to take the initiative and simply continue the use of the
present metals (gold and silver) at present parity only authorizing the purchase in
the open market of an amount of silver bullion for coinage into standard silver dollars
and subsidiary coin as may be found necessary to meet the yearly increasing demand,
keeping in mind that no greater sum shall be coined than will keep the difference in
the circulation between the two metals as is the case at the present time, i. e., $1 in
silver for $3 in gold. The cheaper metal, we are all aware, remains at home under
present conditions, only gold will be exported as may be required abroad by pur­
chase for circulation or by the result of foreign business demands. In this connec­
tion it may be stated that a possible remedy can be provided to very greatly prevent
the exportation of gold coin already minted by placing a prohibitive tax upon such
exportation and permitting only pure bullion to be exported not already in the pos­
session of the mint for use by the Government as a basis for currency issues. Another
suggestion will appear to be opportune, and that is the fact that the total of the pres­
ent coinage of gold and silver— of present denominations is meant—is amply sufficient
for many years to come to supply current demands. In lieu thereof there could be
minted of both metals, with the present percentage of alloy as 900 pure is to 100 alloy,
there could be substituted ingots in such form as may be found most convenient in
handling, varying in value, in gold from $500, $1,000, and $10,000, and for silver $50,
$100, and $500. and ingot certificates could be issued for them, as is the case at pres­
ent for gold and silver deposits of coin, thus adding convenience of handling as well
as saving the expense of coinage, and at the same time serve the purpose as security
for the issue of national-bank notes as hereinbefore stated.1 For your information it
may be stated that the Director of the Mint, in his report to the Secretary, page 324,
estimates exports of gold abroad last year at about $61,000,000, and the net exports
from 1870 to 1909 total $691,746,700. Our neighbor. Canada, held in its treasury
December 31, 1908, $54,909,076 of our gold coin. What is the significance of these
gold exports, if not for the self-evident purpose of the European nations to safeguard
their credit with gold and silver coin? The gold production of all the mines in our
States and Territories in 1908 was, in gold. $94,560,000; in silver. $28,050,000. coinage
value. Of this sum there was consumed in the industrial arts $14,754,945; in new




1 See page 8, Report

of D
irector oi Mint or 1910,

suggesting coinage of bars for coinage of coin.

BANKING AND CUKRENCY.

395

material of the mines and in silver bullion, market value $3,000,000, or approximately
that amount.
It has also been recently stated by certain alarmists that the greatly increased
production of gold in the United States and also throughout the world has a tendency
to cheapen it and in consequence resulting in the increased cost of living. I have
just this moment given the results of the production of our mines, and after deducting
the amount used in the industrial arts there is but approximately $79,000,000 that
can be utilized for coinage in gold coin and about $25,000,000 in silver. Now, we
have a population of about 95,000,000 people, and the resultant increase is but a paltry
dollar and a small fraction per capita.
It hardly seems necessary to buttress this statement of fact b y the honestly and
earnestly expressed views of others who have given perhaps more serious thought to
the subject than myself; yet in view of the vital interest attaching to the influence
which the production of gold in such vast quantities in recent years is supposed to
have in regulating the price of commodities, I may refer briefly to an interesting
article in the North American Review for July, current year, by Albert S. Bolkes,
on this subject. He comes to the conclusion that instead of gold, or rather the precious
metals, having any influence upon prices, speaking generally, that the trusts are
mainly responsible. He quotes from the eminent French economist, Neymarck,
who states:
“ There is no denying the increase in the production of gold. It has kept up for 100,
for 50, for 20, for 10 years, always progressing. And yet, during the interval in France
and abroad, there have been crises caused b y the going down of prices— a fall in
food products, in the price of land, in mineral products, coal, iron, etc. How did it
happen that the gold production, which they say is the cause of the rise in prices
nowadays, could not stop the fall in prices then?”
David. Ricardo, one of Adam Smith’s brightest followers, refers to M. Say, another
eminent French economist, and also to the Earl of Lauderdale concerning the laws
which are supposed to govern the rise and fall of the prices of commodities, do not
attribute it altogether to the abundance or scarcity of gold, but assign the cause mainly
to the trusts, who are able to control them, because of the fact that they can create
at will a demand b y withholding the output until the necessities of the people make
it possible and then dictate the price. A t the same time they state that the precious
metals, particularly gold, are liable to the least fluctuations as a medium of exchange.
Prof. Fisher, of Yale, has suggested the annual adjustment of the value to be given
to the precious metals, chiefly gold. Let us inquire. Has any nation—have any noted
bankers anywhere made the attempt to perform what to me seems the impossible?
It is not a matter possible of adjustment in any such way, as each nation has already
fixed their value arbitrarily, for in no other way can this be effected. It is com­
mon knowledge that the value of any product is mainly affected by the law of supply
and demand. Pure gold and silver bullion are placed in the same relation with
other products. The Government fiat can alone definitely determine the value of
our gold and silver coin as a medium of exchange, thus leaving pure bullion of the
precious metals a merchantable article.
Just at this point let it be stated in defense of the permanent use of the precious
metals as the foundation for the proposed system, that in the matter of the purchase
of gold and silver, and particularly the latter metal, the difference between the coin­
age value and the bullion value in the open market has always afforded a profit or
seignorage to the Government and has been covered into the Treasury as a miscel­
laneous receipt, and millions of dollars have thus been added thereby. Now, it is
vitally important that it be borne in mind that this gain or profit added to the coinage
value will always, no matter what the condition of the bullion value in the open
market may be, make or rather secure the Government at any and all times against
loss. This fact does not always appear on the surface, but y et is a self-evident prop­
osition that should always be borne in mind that no loss is possible at any time to
the Government and logically none to the people.
I may be pardoned in this connection, as it relates to this all-important question of
the intrinsic value of gold and its relation to other products and also as a measure of
value. I have just cited several weighty authorities on the subject. You are now in­
vited to several statements in an article on “ Taxing the cost of living,” by David Starr
Jordan, president of Leland Stanford University, which appears in Harper’s Weekly
of August 23, 1913. He begins by stating that the high cost of living began about 1897
and is world-wide and greater in high-tariff countries. In general, the rise has been
50 per cent and the fall of the purchasing power of gold has also fallen about 50 per cent,
and he quotes Sauerbeck, who states that an Englishman’s dollar of 1897 is worth
87 cents and an American dollar 70 cents, and in 1913 the American dollar is worth
but 61 cents. Again, he states that the increase of the world’s 6tock of gold is from

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BANKING AND CURRENCY.

$7,500,000,000 to $11,000,000,000, and that this increase has now passed its climax.
Now carefully mark what follows, as in the next breath he states: “ As the amount of
gold at the best is very small for the credit resting on it. The bonded war debt of
civilized countries, exceeding $60,000,000,000, it is believed the importance of the
factor is greatly exaggerated.” After referring to the greatly increased means of gold
jroduction by new processes, he says: “ Its influence is long since spent. It is not
ikely that the gold market will soon be disturbed again by new discoveries of mines or
by new processes.” Now, mark this last: “ So far as it goes it means an actual cheap­
ening of the value of gold.” In making this last statement, 't is presumed he refers to
this metal, as an article of merchandise, or a commodity like all other commodities,
and not as a safe measure of value as the nearest approach to a perfect standard.
The point, the important point, in these rather grave statements of the learned
president appears to have been overlooked, or has been deemed quite unimportant
in his effort to establish the facts he is endeavoring to bring to notice, and that is the
fixing an arbitrary standard for the purchase of all commodities, and, further, the very
facts he cites only serve to prove that it is not the gold as a standard of value, but the
astoundingly stupendous credits of the commercial nations in Europe and also America,
approximating $60,000,000,000, are the chief cause, and not the aggregate sum of gold
which by his own showing is wholly inadequate to safely buttress those promises to
pay; that, indeed, as has been truly said, has mortgaged four coming generations.
Students on the all-important subject of economics may and really do establish
to their own satisfaction certain bases upon which the world’s products are measured.
But not one of them has been able to satisfactorily designate a better, a safer, a surer
substance drawn from the earth, air, or sea than the two metals, gold and silver, called
by all nations the precious metals, and they have been shown over and over again to
be subject to the least variation of anything that has ever been used as a reliable
medium of exchange. It is therefore not the precious metals, but the use and abuse
of the credits based upon them. Why have all commercial nations in the long past
and also to-day founded their credit system on gold and silver, and why are tney
strenuously piling them up in vast sums to-day? Simply for the sole purpose of
establishing, as we should and must do, a permanent basis for a redeemable currency,
and also for placing our credit system on an imperishable foundation. It cannot be
too strongly impressed upon our minds the absolute necessity of at once getting our
minds altogether removed from the impression that we must place our entire depend­
ence upon the credit of the Federal Government, as that credit can be impaired and
has been impaired in times of stress in the not distant past. On the contrary, reliance
must be placed on that basis that has been recognized as the only true and permanent
one by all the commercial nations of theworldfrom time immemorial up to the present.
Let us therefore build our financial edifice as is proposed so that neither time nor
circumstance can ever change or destroy.
The last meeting of a general monetary commission in which our Government took
an active part, after long and wordy efforts discussing all sides of the question, returned
to their respective countries, made a voluminous report, without in any practical way
changing existing conditions at that time, nor has anything been done since, nor can
anything be done only in the manner so frequently stated in this paper.
If we are to successfully carry out the purpose to establish our currency system on
the imperishable foundation of the precious metals, from the knowledge at hand of
the possible output of our mines, it will prove a difficult matter to supply the annual
demand for additional circulation that a constantly increasing population and cumu­
lative industrial needs will require.
The present per capita stock of gold and silver in the United States is but .$18.45
in gold and $8.16 in silver; a total of $26.61. This sum, having in view the proposed
change, is entirely inadequate. Viewing the matter as impartially as is possible
under the circumstances, as ha? already been set forth, we can not safely arrive at
any other conclusion that it is not possible that there can be a much greater output
from the mines even with an increased demand, arising from a greater use of silver.
Such demands will tend to bring a return of the value of silver bullion in the open
market very near what it was in 1890, and thus avoid any necessity for changing the
present parity as in all probability the chief commercial nations in Europe. Asia, and
South America will be led, or rather compelled, to follow our example in order to keep
in step with us. and to meet the new conditions their trade with us will require It
may be a matter of surpr'se to you that the proposition is made that all the national
banks of the country should at once become subscribers to the total amount of their
individual capital, yet if the new organization is to be a perfect suecess, as many of
the people as possible should become personally interested in it and in no other way
could it be made speedily effective than through the tens of thousands of stockholders
already directly associated in our present system, and it could fee brought about

{




BANKING AND CURRENCY.

397

without in the least creating any disturbance in our circulation, and thus permitting
business to be carried on as usual.
The $684,378,075 remaining to be taken by the people— now bear in mind these
millions in gold and silver are actually in their possession—which, under the condi­
tions named, they would respond to with their usual alacrity when assured of Its su­
perior advantages as a profitable and permanent investment, which the direct super­
vision of the Government will give them abundant assurance.
To make quite clear the difference between our present system and the one proposed
it is only necessary to state that our banking business and the business of the country
is done chiefly on credit, and in the case of the national banks on the liabilities of the
Government in the form of bonds and notes as its assets. In the new system the na­
tional banks will have the circulation based entirely on the use of the precious metals,
gold and silver, and the depositor absolutely secured in the amount of his depocits.
The advantage in favor of the proposed new method is so far beyond the present as
to challenge comparison, and no arguments are needed in support of the logic of in­
contestable facts so clear that anyone at all familiar with financial matters will not
fail to be convinced.
Another highly important, factor that will be embodied in the proposed change is
the special supervision to be exercised over loans that may be made for speculative
purposes where the opportunity will present itself for checking and to a great extent
keeping such operations within legitimate bounds by limiting such loans and demand­
ing such security and its amount as to make them almost prohibitive. Large opera­
tions that are proven to be strictly legitimate and for promoting great enterprises,
where their successful prosecution will find their opportunity in the known magnitude
of the vast sums at their command through the medium of the central national bank
where all business involving the use of large sums of money can readily be secured,
should be under the sole control of the central bank.
I desire to refer at this juncture to the danger that already menaces the country in
permitting a few men now representing the gigantic financial interests now virtually
controlling to also control the entire national banking system and particularly if the
central national bank with a nominal capital and with only such supervisory control
by the Government as is now the case it will be quite within the bounds of possibility
for the interests to dictate for their own selfish purposes just what sums shall be loaned
for what object and to whom.
In the November, 1908, issue of the Everybody’s Magazine on this subject I may
be permitted to give a few figures, both startling in their amount and the multiplicity
of their far-reaching influences and world-wide connections, lh a t a small coterie
headed by the men who successfully organized the great steel and other trusts can
dictate to the financial business jest what shall and shall not be done. I may as
well state what the magazine authoritatively published that the grand total aggre­
gates the sum of $10,268,582,000, made up as follows:
Morgan’s own banks....................................................................................... $1, 000, 000, 000
Morgan’s banking interests........................................................................... 6.133, 487, 000
Morgan’s affiliated companies...................................................................... 2, 635, 095, 000
Morgan’s partners...........................................................................................
500, 000, 000
Total.............................................................................................. ..

10,268,582,000

With such evidence as these figures present, is it any wonder that immediate steps
should be taken by Congress to thwart the gigantic financial monster by at once
passing a national banking act such as has been briefly outlined in this paper b y
giving the Government the direct control of the national currency and its finances?
In the face of these stupendous facts and figures here referred to and also in view
of the fact that this monumental accumulation of capital in a few hands in a few short
years, we can not but admit the economical necessity which the development of our
vast commercial and industrial resources have made absolutely imperative for the
requirement of large enterprises, and without such concentrated capital would be
quite impossible. No argument appears to be needed to convince us that such
accumulated capital should be placed in impartial hands to serve in promoting large
and legitimate enterprises and irrespective of sections or of particular individuals.
No prophetic vision of the near future is claimed. Common observation as seen
from present industrial conditions and constantly increasing demands for the means
for promoting their development point unerringly to still greater concentration of
capital as to make the figures named look grotesquely small in comparison, adding still
further, if any other incentive is required, almost and in fact altogether compelling
the Federal Government for the interests of all to assume directive control and thus
insure its impartial disposition, that no set of individuals shall gain any special




398

BANKING AND CURBENCY.

advantages as compared with the business requirements of the business public at
large. It will be seen at a glance that not less than two billions should be the least
sum with which to capitalize the new organization, with the provision that the capital
shall be increased from time to time as rapidly as the increased business of the country
may demand and placing the control of the contemplated system under the direct
supervision of the General Government, as before stated, is imperatively necessary
in order to fully conserve the business interests of the whole country, giving, as it
will, the smaller banks outside of such financial centers as New York and Chicago
and other large cities where capital is already gathered an opportunity to meet the
demand of local interests without dictation of pressure from New York or any other
point and at the same time share in the advantages that will inevitably grow out of
their connection with the central bank as the result, and the necessity for reserve dis­
tricts in a large measure can thus be avoided.
Another feature of the contemplated change will b the practicability of establishing
branches in all the principal business centers in Europe, Asia, Africa, and South ana
Central America, which has been the crying need of our people doing business in
foreign countries and has been and is now a serious drawback in their money trans­
actions. Another feature which looms up largely with railway and all large cor­
porative interests is the fact that they have already borrowed abroad money to the
amount of $6,500,000,000, on which $250,000,000 in gold is drawn annually in interest,
making a continuous drain on our resources. This could be largely prevented when
it will be quite possible to borrow large sums from the central bank and thus keep
the interest as well as principal of such loans at home to add to the cumulative assets
of the country.
It may be well to invite your attention to the fact that these large loans made abroad
by our railroads and other corporate interests could not be secured at home at the
time when required, as our capitalistic interests were widely scattered and it was only
possible to secure large sums by turning to the Rothschilds whose great and concen­
trated holdings I have no doubt proved an object lesson to the late Mr. Morgan and
his associates, and which has but lately, in the past 10 years, say, grown to such large
proportions. I have only to cite a single instance, where the Morgan interests took
over the entire municipal loan of New York City of $170,000,000 at the handsome
figure of 96|, which was quite impossible a few years ago, because of our present sys­
tem. That there was or is any graft in the transaction we may not say, but we can
have certain mental reservations as to the probability of it. This lesson is only a
mere bagatelle that can be practically realized by the contemplated central national
bank for the promotion of big ligitimate enterprises that will inevitably spring up in
the development of our numerous and growing industries.
Now, let it be stated at this point that if present financial conditions are permitted
to prevail, still larger aggregations of capital will be concentrated in the hands of a
few big operators, which naturally follows, will be done in their own individual
interests as in the case of Rothschilds and Morgan, with not the slightest consideration
for the public welfare and only that profits may accrue to themselves alone. Knowing
these facts as we should, what other possible course is advisable or possible to stem
the rapidly and inevitably swelling tide of concentrated wealth unless the General
Government is authorized to step in and take active and advisory control in this way
to prevent our stored-up capital becoming misdirected and taken from its legitimate
channels of usefulness for the good of the whole people.
To more emphatically emphasize the necessity for extending the proposed banking
facilities in foreign countries, reference may profitably be made to the strong state­
ment uttered by the Hon. John Barrett, Director General of the Pan American Union,
who states that there is not one banking institution south of the Isthmus of Panama
which is in any way controlled by United States capital. Having in view the strik­
ing fact that our trade with the South American Republics, of exports and imports,
amounts to the vast sum of $640,000,000, a like statement will also apply to our
large foreign trade in Europe, Asia, Africa, and the islands, only with greater force,
as our commerce in all the countries named runs into the billions.
In the proposed reorganization proper legislation should be enacted that will enable
the central bank to establish agencies in every large city which our foreign trade may
require. It is quite obvious that such agencies once established throughout the com­
mercial world will familiarize our coin-redeemable currency, with its absolute and
permanent value, that in time will be accepted everywhere as our present gold cer­
tificates are to-day, as an always reliable medium of exchange the world over. At
this time we can hardly realize the inestimable value that will attach to the knowledge
that we will thus be enabled to lead the world in our commercial trade facilities in
having a currency that can offer every advantage in facilitating business transactions
with the least friction.




BANKING AND CURRENCY.

399

Another feature suggests itself in relation to foreign loans to Governments as well as
to individuals, and that is all such loans, with their character and agreements and
contracts, should be reported in detail to the State Department when occasions may
arise in cases of failure to fulfill their conditions, that proper action can at once be
taken as the Government will be a party in interest and can thus greatly limit the
danger of loss.
What will also have an important bearing in the successful and safe operation of the
central bank will be the organization of a double system of bank examination, one as
a check against the other, without the possibility of collusion, and doing away entirely
with local bank examiners as permanent residents of the State. A division of the cen­
tral bank having control and directing them at its discretion to such points as will be
deemed safest and best for the work in hand, and no examiner should be permitted to
visit any bank but once in any given year, and then to continue all in like manner, so
that the danger of collusion with the officers of the bank will be reduced to the
minimum.
For the realization of placing these suggestions, which may or may not be deemed
practical, much depends— in fact, it altogether depends—upon Congress as a body that
may be safely depended upon to grasp the magnitude of the financial demand of the
entire county as a whole and its stupendous growth in population and wealth, placing
the benefits of all against the greed of the few.
Again, in alluding to the suggestion that all the national banks at present organized
should at once unite and merge their entire capital, not only a part, but their entire
capital, in the stock of the proposed central national bank, it has been asked with some
show of reason what benefits will accrue therefrom. In reply it may be safely stated
that it at once assures permanency in the entire system, the chief factor in all success­
ful monetary transactions, with the element of uncertainty almost if not entirely elimi­
nated, and again you are at the same time and at once placed upon the solid and
enduring foundation based upon the use of the precious metals for our currency circu­
lation, which is at present in a very precarious condition, dependent alone upon the
credit of the Federal Government, and also the fact that the Government, being the
principal stockholder, the individual banks will share in its credit and without in the
least affecting their individual interests, and at the same time it will add materially to
their efficiency in the confidence every depositor will possess that their general super­
vision by the central bank will serve to secure the safe, conservative management, and
thus the general welfare of all the people, directly and indirectly, will be subserved,
ully illustrating that the benefit of the many will also accrue to the few.
Above and beyond all personal and combined money interests our public spirit, our
patriotic pride and nationalism for the common weal, should impel us to rise above
our selfish desires and unite to use all reasonable means in the effort to justify the
hope that we should generously sacrifice self in some measure for the good of the whole,
which in the final analysis includes the individual as well.
As a final word, it can only be said in defense of these earnest and sincere suggestions
in this paper that many things may have been left unstated, as all human effort in
any direction is lame and lamentably incomplete, yet taken as a whole it is an immense
step to take for the betterment of our present wholly unsatisfactory monetary condi­
tion.
What follows has been suggested by the Aldrich and other plans as reported by the
United States Monetary Commission, and also is a result of later information growing
out of present conditions.
Since this paper was prepared over three years have elapsed, and in the meantime
the present chairman of the United States Monetary Commission, after several years
of very careful study of our financial condition, has presented two reports to the com­
mission for its consideration. In neither report has any special provision been made
or suggested for the actual redemption in gold or silver coin of the notes of national
banks, merely stating that 50 per cent of its demand liabilities shall be covered by
gold or other lawful money; also that one-third in gold or other lawful money shall
be provided for the redemption of the issues of currency, which in no way changes
iresent conditions, thus leaving entirely out of the question the basic principle so
requently stated in this paper, that no notes or currency whatever shall be issued
without an equal sum in gold or silver coin shall be at all times on deposit for their
redemption. The omission is too glaring not to excite alarm, as the proposed legisla­
tion as suggested by the honorable gentleman places our whole financial system in a
much worse muddle than ever before in our financial history.
If any change is made at all, it should be the main purpose to so simplify our bank­
ing system that no opportunity shall ever again occur to complicate or disturb the
business of the country by an undue use of our credit in times of possible financial
distress.

{




400

BANKING AND CURRENCY.

The suggestions of the honorable gentleman, from my point of view, make confusion
worse confounded.
Again, why should the Government take money from one pocket only to place it in
another, with an added expense of 1 per cent as will be the case in disposing of the
$730,000,000—new 3 per cent bonds in exchange for the twos now held by the
national banks. Is it not quite practicable for the banks to dispose of their present
holdings in the open market for gold and silver coin, which can easily be obtained, so
that the question of bonds to secure circulation will be entirely eliminated and thus
avoid any further trouble? It can not too frequently be iterated and reiterated as to
the absolute necessity once and for all time to come as long as our great Government
has an existence among the nations of the earth, that our monetary system shall be
permanently established on a specie basis. T^he credit of our Government and of
the entire business community will have quite enough to do without making it possi­
ble to repeat the experience of the panics of 1837, 1857, 1873, and 1893, and indeed as
late as 1907. The people must have short memories, indeed, not to sadly recall
at least three of such fatal catastrophes. For the future I claim they can and must
be avoided, and itison ly a question of willingness on the part of Congress, moved by
an unselfish and patriotic purpose to enact such legislation as will place us financially
beyond the possibility of repeating the follies just referred to.
If the Government is to actively participate in the manage met of the central bank
and indirectly in the affiliated banks, no tax should be required but for the purpose
of guaranteeing the safety of the funds of all depositors in all of the national banks as
has been clearly indicated previously in this paper.
As the Government is to share in the profits in proportion to the amount of capital
invested therein no other tax could in justice be collected. State banks, trust com)anies, and private banks should be prohibited from issuing currency as is now the
aw.
Concerning the election of the directorate for the central bank as outlined by the
report of the chairman of the commission, there can be no objection to choosing them
from financial districts as already outlined in the annual report, page 101, of the
Treasurer of the United States by dividing the country into six national bank districts,
such districts to be finally in such number as may best serve the common interest.
Such a number of directors to be chosen as will cover the entire country, say as many
as there are States in the Union, and from that number should be chosen the nine
members to constitute the executive board, including those to permanently represent
the Government upon it, namely, the Secretary of the Treasury, the Comptroller of
the Currency, and the Treasurer of the United States or their authorized representa­
tives, and it does not appear for any valid reason why the Secretary of Commerce
and Labor should be a member of the executive board, as the interest of the entire
country must be considered, which logically embraces the interest of Commerce and
Labor and therefore not entitled to special recognition any more than others of the
numerous interests that might just as reasonably receive special recognition. Again
there should be but one permanent president of the executive board, and the Secre­
tary of the Treasury should be that person, as it is proposed that the Government
interest shall at all times be paramount and in that case should always hold the largest
share of the stock in order also to prevent any undue influence in serving any special
interest or section.
In regard to reserving certain authority by the whole board of directors not granted
to the executive board it should be limited almost entirely to fixing the policy and
methods of business from time to time as exigencies may arise demanding the atten­
tion of the entire body. In any event, there should be specified dates fixed for the
meeting of the entire directorate, when matters pertaining to the general interest of
all the national banks could be considered and acted upon. A number of suggestions
have bee* made as to the fairest method of choosing directors in order as much as
possible to avoid favoring any particular section or special interest, and it is almost
impossible to effect any arrangement that will not create more or less friction. It does
not appear to be altogether fair to the banks to choose any person not directly connected
with the banks as stockholders and directors, as it can not be thought that the banking
.nterests in any section or community will not at all times consult the welfare of the
business public in so far as furnishing funds for legitimate private and public enter­
prises. From a strictly business point of view no better plan could well be devised
than to authorize the directors of all the national banks in each section to choose from
their number those required by that section. In that manner they will fairly rep­
resent the business public, as it is reasonably certain men well and favorably known
and of acknowledged ability and integrity will be chosen. The entire board of
directors should be divided into three groups, the first to serve 3 years, the second 6
years, and the third 10 years, all removable for cause. At the expiration of their

J




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and

currency.

401

respective terms the members found to be equipped for the duties of the 3-year group
shall be eligible for election to the 6-year term and those of the second, or 6-year group,
shall in like manner be eligible for election to the 10-year group. By this means the
entire directorate will at all times be composed of men whose abilities have had the
practical test of experience to fit them for the satisfactory performance of the various
duties that will devolve upon them. As the Government will have the chief interest
in the control of the central bank, the matter of proper compensation of the directors
and other officers, as hereinbefore stated, commensurate with the work and respon­
sibilities attaching thereto will be the duty of Congress to fix, and especially so in
the cases of the Secretary of the Treasury, Comptroller of the Currency, and Treasurer
of the United States, whose salaries are already fixed for their present duties and should
be increased in proportion to the new duties and responsibilities to be assumed by
them, governed to a great extent by the compensation received at present by the officers
of our large banking institutions in our large business centers.
In view of the fact that it is contemplated that the depositor as well as the bill
holder shall be absolutely secure, it does not appear why any special provision should
be made as to the reserves to be held by the banks for any other purpose than that
of supplying local business demands. That important matter should be left to the
judgment of the executive board, which should be duly advised of such- deposits
m the chief financial centers of the country in order that the control and disposition
of such deposits shall not serve the purpose of any special interest or locality without
the knowledge of the executive board.
The question of emergency currency will thus be entirely avoided and its elasticity
made possible by constantly shifting it to the different points of the country where
required by current business demands, which as a rule, as at present, is done by
calling upon the Treasurer of the United States for special transfer to be used for the
movement of the crops and other interests—a custom that has prevailed for the past
40 years or more to my personal knowledge— $50,000,000 to $150,000,000 covered into
the Treasury yearly.
It may be again important to call attention to the powers and authority that
should be delegated to the executive board of the directorate. They ought not to
be limited in cases where the vital financial interests of the country demand instant
action in cases of possible crises which may be imminent and requiring instant atten­
tion where it would not be possible to secure the authority of the entire board. In
short, full plenary powers should be vested in the executive board, for without them
such a board would be practically useless, as the real purpose should be to conserve
the best interests of the entire country with a view to checking the constant
assaults of special interests, which, as we all are aware, are at all times working to secure
special advantages.
There are a number of possible contingencies that will arise from time to time which
will demand the constant and watchful care of the executive, who should at all times
be prepared to meet them successfully.
This duty will appear to be the chief concern of the board to so u6e the deposits at
their disposal as will serve the best interests of the country as a whole, seeing to it that
such funds may be placed from time to time in the sections where the exigencies of
business require them. An elastic currency will thus settle itself by the wise
supervision of the executive board and the proper disposition of currency where and
when required.
Too much can not be said in relation to vesting such general powers in the entire
directorate and also to the executive board as will permit their going into such details
in management as may from time to time arise without awaiting a specific grant of
the Congress.
Again, all authority for the suspension of a bank for cause should be vested in the
executive board alone, in order to avoid possible local antagonisms or jealousies.
The act that bank examinations, which will be conducted as hereinbefore mentioned,
should alone determine the necessity for closing the bank for such cause as the law
and regulations growing out of them make it imperative and as the facts shall be re­
ported to the executive board by the examiners. If any bank should be closed for
cause the entire settlement of its affairs should at once be assumed by the central
bank and such bank should again be permitted to resume upon a proper reoiganization satisfactory to the central board and when it is found that local conditions re­
quire it.
In relation to the admission of State banks and trust companies as suggested in the
Aldrich plan, they should be permitted to come into the system only by complying
with requirements demanded by all of the membership subject also to the careful
inspection of their assets and liabilities, as will be done in the case of all national




402

BANKING AND CURRENCY.

banka coming into the organization. Such institutions would cease to be other than
national banks.
The suggestion that savings institutions may be attached to the national banking
system under certain regulations is manifestly unwise, as it would prove to be the means
through which tranasctions not contemplated in the proposed reorganization of our
monetary system and would inevitably lead to complications and temptations to
irregular and unlawful operations favoring special interests that it is proposed to
entirely avoid in the future.
The Government has already adopted a plan now in operation to encourage a class
of our citizens in small savings. I refer to the postal deposit system, which could be
very readily utilized by the central national bank to promote the rapidly increasing
business of the country. Such being the case, it can not be seen why any further
steps should be taken in that direction.
Some objection may reasonably be offered in failing to treat the matter of reorgan­
ization more in detail and also as to penalties to be enforced for failure in the proper
and legitimate performances of the duties devolving upon the officers of the central
national bank and those of the affiliated banks. The reason for the omission is that it
is impossible to reach such a result only after the main features of the proposed legisla­
tion are in a fair way of adoption by your committee. In any event the present
national bank act will enable the committee to formulate such details as the proposed
legislation will require aided by the personal assistance of the Comptroller of the Cur­
rency, whose practical experience will go far toward correcting any defects which
might affect the successful working of the act after its passage and approval.
The all important question of loans by the national and central banks with the
character of collateral to be required has called forth comment even by prominent
Wall Street operators, one of whom prefers the system mainly in daily use by European
bankers of commercial paper arising out of the normal movement of goods from pro­
ducers to consumers. The practice is altogether right as compared with the use of
stock exchange collateral in this country. Yet other factors will enter into the busi­
ness of loaning money when we consider the immense volume that the complex affairs
call forth, the transactions of which embrace not only our own but other countries do­
ing business with us, will compel the use of other securities, particularly when the ques­
tion of extended periods of time forms the chief factor. In such cases, and there are
and will be tens of thousands of them covering the multifarious business of the entire
country, the safeguarding of loans is a vital factor in conducting the vastly increased
business of the new system, and for that reason the character of the collateral must
be determined by the conditions requiring such loans.
In this connection the interest of 6,000,000 farmers whose annual production
reaches $8,000,000,000 should b y no means be overlooked, and, as has just been noted,
provision should be made not alone in their special interest to make it possible to
borrow from local national banks on longer time than is permitted in ordinary current
commercial transactions and on such securities as farm realty and its products can
safely furnish.
The question of guarding the interest of all depositors both great and small has
already been discussed in this paper, and the plan suggested will effectually dispose
of the danger of loss in case of a possible financial panic, so that the working man and
woman as well as the capitalist will rest secure without the fear pressing upon them
of the loss of their means.
The plan if adopted will be in the nature of an insurance for the safety of all de­
posits, as the depositor will have the positive assurance that proper and practical pro­
vision will be made to guard such funds beyond the peradventure of a doubt, as the
danger of a panic will appear to be quite impossible under the new plan, as such a
possibility can be in a large measure anticipated.
Gentlemen, we are come to the parting of the ways, and it devolves upon us which
it shall be, whether to continue in the road that we have trav led during the past
100 years, meeting with many pitfalls on the way by overreaching our credit far
beyond the boundary line of safety and continually struggling under the incubus
of a mixed and irredeemable currency with but slight provision for its final redemp­
tion and constantly menaced with almost the daily prospect of a financial panic,
needing but the slightest unforeseen cause to bring dire disaster upon the entire
country, destroying confidence and credit and involving the industries of every
description, thus bringing distress and suffering to the doors of millions of innocent
people and carrying its blighting influence far beyond the borders of our own country.
We surely ought to be in a condition at this time to profit by the sad experiences
of the recent past and wisely and courageously take the road that invitingly points
to assured safety that has been outlined in this paper, weak as the effort may be and
lacking in many respects perhaps the lucidity of language that should make the




b a n k in g

and

currency.

403

subject clear to tbe commonest understanding; yet, notwithstanding its many defects,
it is to be hoped enough has been said to enable us to fully grasp its purpose and
thus lead us on the solid ground upon which to establish an enduring foundation
and upon which to build a permanent financial structure that will at all times and
,
under every trying condition withstand the assaults of every monetary crisis that
rash and unscrupulous operators may attempt to create for their own selfish ends.
The work thus briefly touched upon and outlined should be taken up at the earliest
moment, because of its vital importance to the entire country, involving as it does its
manifold interests, industrial and commercial, present and future.
Then why should not the present Congress take up the work with a full knowledge
of its great responsibilities involving as it does the welfare of not only this, but of
future generations.
As you are doubtless already familiar with them it is hardly necessary to invite
your attention to hundreds of prominent business men regardless of party affiliations
all over the country and in the leading industries, and commerce, and noted students
of finance, who are strongly urging Congress to take up and perfect a monetary system
that shall endure and stand the test of time and experience and thus avoid the danger
of possible monetary panics in the future.
Just here let me call your attention to certain statements made recently in the
public prints and particularly the press of New York City, to the effect that over half
a million of dollars have been subscribed by the banks there and elsewhere for the
education of the public in spreading broadcast certain financial literature. We
can not fail to draw the inference that the motive is not so much for the better under­
standing of the proposed legislation to conserve the interests of the public at large as
to prejudice our minds in favor of a scheme that will still further bind 11s to the jug­
gernaut car of special interests. As a rule such, apparently, marvelous generosity
does not emanate from the men of big business, without an unseen selfish purpose
lying behind it. We should beware of the Greeks bringing gifts. Why delay the
good work or wait for another financial cataclysm before being thus compelled to
take active steps looking to the creation of a permanent currency system that will
withstand the assaults of time and circumstance, but earnestly and manfully let the
present Congress assume the duties and responsibilities confronting you and to whom
the people of the country are looking hopefully and with confidence for prompt action
in taking up this great work and giving to us a monetary system superior to any either
in this or any other country, and that will excite the admiration of the world and that
the lisping millions in their mothers’ arms and generations yet to come, may rise up
and call you blest?
M o n e y in circu la tion in

U n ited S ta tes coin .

Nov. 1, 1909, gold coin ...................................................................................
Standard silver dollars............................................................................
Subsidiary silver......................................................................................
Gold certificates........................................................................................
................................. .......................................................
Silver............... _
Gold coin held in Treasury for redemption of L. F. notes...............

$598, 773,175
74,383,857
142,324,038
795,205, 489
481,794,889
150,000,000

Silver.......................................................................................................... 2,242,481,448
G old............................................................................................................
698,502,784
1,543,978, 664
See page 60, Secretary’ s Annual Report for 1909.
C ircu la tion M a r . 1, 1 9 0 9 .

I
Form 1028.

Division of Loans and Currency:
Gold coin and silver................................................................................
Gold certificates........................................................................................
Standard silver dollars............................................................................
Silver certificates......................................................................................
Held for redemption L. T. notes...........................................................

$609, 988, 359
812, 642,179
72,158, 899
471,411,392
150, 000, 000

Total........................................................................................................ 2,246,967,969
Silver coin...................................................................................................
674, 337, 431
Gold coin .................................................................................................... 1,572,630,538
Fluctuation in 4, reduction in circulation...................................................
24,165,353




404

BANKING AND CURRENCY.

Amount available for investment in stock of Central National Bank on specie basis.
M o n e y in circu la tion i n U n ited S ta tes M a r. 1 , 1 9 1 0 .

COIN.

Gold coin and bullion in Treasury................................................................
Gold certificates................................................................................................
Standard silver dollars....................................................................................
Silver certificates..............................................................................................
Subsidiary silver coin ......................................................................................
Held for redemption of L. T. notes, gold coin.............................................

$597, 798,938
817, 628, 579
72, 801, 345
479, 237,073
142, 426, 878
150,000,000
2,259,892,813

S to c k o j g o ld co in a n d b u llio n in U n ited S ta tes as p er repor
U n ited S ta tes, J u n e SO, 1911

o f the

7 reasu rtr

of

die

Estimated........................................................... ................ ............................ $1 753,196,722
Silver coin, standard silver dollars and subsidiary coin.........................
724 640, 731
Total gold and s ilv e r .........................................................................
Held as follows:
In Treasury—
Gold bullion.....................................................................................
Gold coin..........................................................................................
In circulation..........................................................................................
In Treasury—
Standard silver dollars...................................................................
Subsidiary silver.............................................................................
In circulation—
Standard silver dollars...................................................................
Subsidiary coin ...............................................................................

2, 477.837,453

124,278.584
1.039.622,600
589, 295, 538
492, 587, 318
21,185,641
72. 446,049
138. 421, 723

Total..............................................................................................

2.477,837,453

Total stock of currency in circulation June 30, 1911.............................
Total of coin and bullion, June 30, 1911...................................................

1, 029, 927, 661
2, 477,837,453

Excess of coin and bullion over circulation..................................

1, 447, 909, 792

Available for investment in stock of central national bank:
Gain since Mar. 1, 1909 ........................................................................

12, 924, 844

Production of gold, calendar year 1908, estimated at.....................
New material used in industrial arts..................................................

94, 560, 000
14, 754, 945
79, 805,055

Population, 87,496,000; about 90 cents per capita.
about $1.10 per capita.

Production of silver, $28,050,000,

A m o u n t o f g o ld co in a n d b u llio n a n d silv er co in (standard silver dollars a n d su b sid ia ry).

[Silver available for capitalization for the formation of a central national bank of the United States.!

Gold coin and bullion................................................................................... $1, 415, 427, 517
Standard silver dollars.................................................................................
552,038, 418
Subsidiary silver.............................................................................................
142, 426. 878
Gold coin held in Treasury for redemption of legal-tender notes..........
150, 000, 000
2,259,892,813
Add present national-bank circulation based on United States bonds
held as security..........................................................................................

6C0,089, 070

Amount capital stock to be authorized....................................................

2,919,981, 883
3,000,000,000




b a n k in g

and

405

cubbency.

Production of gold from United States mines in calendar year 1909 . .
Used..................................................................

$94,560,000
14, 754, 945

Available gold c o in ............................................................................
Available silver...............................................................................................

79, 805,055
20, 000,000
99,805,055

C o n s u m p t io n o f g o ld a n d silver bars in m a n u fa ctu re a n d in the arts, f r o m a n d in clu d in g
1 8 8 0 to include 1 9 0 8 ( 2 8 ye a rs).

Total...................................................................................................................
Deduct old material.........................................................................................

$554,309,375
105, 786,494

Total new gold.......................................................................................
Yearly average in new gold............................................................................

448, 522, 881
16, 018, 674

Silver used as stated for same time:
Total............................................................................................................
Deduct old material....................................................... .........................

315,112,368
37, 590, 827

Yearly average in new silver ...........................................................................................................................

277, 521, 541
, 254,013
1

1

Consumption of world of gold and silver for year 1908:
G old............................................................................................................
113,996,000
Silver....................... . ......... . .................... ................................................
49,122,542
World coinage from and including 1873 to include 1908:
G o l d . . . . ..................................................................................................... 8,011,467,123
Silver.......................................................................................................... 5,177, 695,. 596
Production of gold and silver from mines of the United States, year 1908:
G old........................................................................................................
Industrial arts (new mateiial)................................................................

94,560,000
14, 754, 945

Silver..................................................................................................................

79,805,055
28, 050, 000

(Thereupon, at 11.10 a. m., the committee adjournod to meet
Tuesday, September 10, 1913, at 10 o’clock a. m.)

T U E S D A Y , S E P T E M B E R 16, 1913.

Committee

on

B anking and Currency ,
U nited States S enate ,

Washington, D. C.
The committee assembled at 10 o ’clock a. m.
Present: Senators Owen (chairman), Reed, Pomerene, Shafroth,
and Bristow.
The Chairman . Prof. Sprague, we will be glad to have you give
your views with regard to this matter now.
[Prof. Sprague appeared before the committee. His statement has
been withheld and will be printed at a later date, at p. 497.]
The Chairman . The committee will now take a recess until 2.30
o’clock p. m.
(Thereupon, at 12.50 o’clock p. m., the committee took a recess
until 2.30 o’clock p in.)




406

BANKING AND CURRENCY.

AFTER RECESS.

The C h a i r m a n . Mr. AIJing, while our committee is not fully repre­
sented at this time, we think we should avail ourselves of the time.
Prof. Sprague, we would like to give Mr. Ailing an opportunity to be
heard. This will not interfere with the examination oi yourself at all,
because the record will be kept straight. Mr. Ailing just had the
opportunity to be here, and we would like to hear him in reference to
the subject.
Mr. Ailing, I wish you would give your full name and your banking
connections to the stenographer.
Mr. A l l i n g . My name is Newton D . Ailing, vice president of the
National Nassau Bank, New York.
STATEMENT OF NEWTON D. ALLINO, VICE PRESIDENT
THE NATIONAL NASSAU BANK, NEW YORK CITY.

OF

Mr. A l l i n g . I particularly desire to speak regarding the method
rovidcxl in this bill of carrying a reserve for the Federal reserve notes.
consider it so vital that it seems to me that it overtops all other
things in the bill that might be open to criticism.
Senator I I e e d . What section are you referring to ?
Mr. A l l i n g . Section 17. After providing for the issuing of Fed­
eral reserve notes, it says:

f

They shall be redeemed in gold or lawful money on demand at the Treasury Depart­
ment of the United States, in the city of Washington, D. C., or at any Federal reserve
bank.

Line 17, page 29, says:
Whenever any Federal reserve bank shall pay out or disburse Federal reserve notes
issued to it as hereinbefore provided, it shall segregate in its own vaults and shall
carry to a special reserve account on its books gold or lawful money equal in amount
to 33$ per cent of the reserve notes so paid out by it, such reserve to be used for the
redemption of said reserve notes as presented.

From my point of view, the reserve should be all gold. Besides
that, the reserve should be a large quantity of gold and a certain
quantity of notes issued against it, and the amount of notes to be
increased and diminished as occasion demanded, but the quantity
of the gold not to be increased or diminished excepting as conditions
would allow us to have more gold.
The C h a i r m a n . Have you your remarks in writing ?
Mr. A l l i n g . I have, Senator. I put them in writing because I
thought I could give the matter in more concise form. It will take
me about 15 minutes to read it, instead of taking up more time as I
would if I attempted to say what I have to say as I go along.
The C h a i r m a n . All right. Bead it, Mr. Ailing.
Mr. A l l i n g . In the controversy which has been carried on during
the past few years bearing on our present banking and currency
system, and its necessary reform to meet modern conditions, two
expressions are used which convey a wrong impression to the lay­
man. They are the “ mobilization of reserves” and what a currency
should be “ based on.”




BANKING AND CURRENCY.

407

What is meant by the mobilization of reserves ? Literally, it should
mean the massing of reserves of all banks in one, two, or more piles,
to be used in places of danger, just as an army is used. But is that
what is intended by those who use the term? Are not our bank
reserves pretty well mobilized now in New York, Chicago, and St.
Louis, and is not that a source of danger instead of strength ?
What we want to mobilize is the power of gold. Gold is the corner­
stone of our credit, and we all know that there is not enough to go
around if all, or even one-half, or a quarter of our people loose their
confidence all at once. So what we want to do to strengthen our
banking system, in simple terms, is to make SI of gold do the work of
$5 or $10 if necessary. And, in order to accomplish that, all of the
gold in the country must be brought into one reservoir and a currency
properly issued against it, which currency may be increased or di­
minished, as occasion demands. This currency would, of course, go
into the bank reserves, and through its ability to expand and contract,
would relieve the banking situation of that stringency and surplusage
which occur at different periods. Instead of a hard and fast issue like
our gold certificates are, we should have a gold currency which had
some “ give" to it. Hence, “ mobilization of our reserves” is some­
what of a misnomer. What we need is a quickening of our gold
supply.
The other term is what a proposed issue is “ based on.” A currency
must be based on what it is redeemable in. No other suggestion is
made than to make it redeemable in gold. The press announces that
So-and-so proposed to base the currency on corn or wheat or what
not. And that is a very misleading statement. A currency is based
on what it is redeemable in, and in the case under consideration, that
is gold.
The reserve held is only a certain proportion of the issue, to be sure;
but that reserve is held to redeem any part of the issue which may be
presented. And that issue stays in circulation because of the credit
of the institution or Government which issues it. The amount, over
and above the reserve held, may be invested in discounted notes, or
loans, or bonds, or stocks, or wheat, or corn, or cotton, and the fact
that all of these things may be realized on is due to the management
of the institution which contributes to its credit or good will. When
a man deposits in a bank which makes a specialty of loaning on cotton
drafts, he does not say that his money deposited is based on cotton,
but on the general credit of the bank and its good management.
I go thus at length into the use of these two terms because of the
confusion which arises from their use. When a Congressman sug­
gests or introduces a bill authorizing banks of issue to loan on corn
or potatoes, the term is used by the press that he wants to “ base
the currency” on corn or on potatoes, and the proletariat take it as
meaning that if they present such currency tor redemption they
will get corn or potatoes.
In the study of the subject of cuirencv reserves and an endeavor
to formulate a plan whereby our present financial system may be
made to more readily accommodate itself to varying needs, it is
essential to keep in mind three underlying facts on which I think we
all agree. First, that gold is the standard of value, and our credit
instruments, whether currency or otherwise, are all based on it and.




408

BANKING AND CURRENCY.

subject to ultimate redemption in it. Second, that the retention in
the country of a substantial supply of gold at all times is necessary
to support our credit. Third, that what gold is not needed or does
not find employment will leave the country through the influence of
a surplus money supply on interest and exchange rates. And the
problem immediately presents itself, in view of the last statement,
of how to so arrange our currency and banking system that we shall
at all times have an adequate gold reserve. Such a svstem should
be as nearly as possible automatic, and it can be made so through
the regulation of the interest rate.
A cuirency system must be devised wffiich will expand to meet
the increased demand during certain seasons and during different
periods of years. But it should always have a direct relation to its
gold reserve, and whether the volume be large or small in propor­
tion to that reserve its tendency should be to conserve that reserve
and not to dissipate it. I can only liken such a currency to a rubber
band and the reserve to a bundle of papers wdthin that band. If
necessity demand the stretching of the band, it may be done, but the
papers remain the same and the increasing tendency of the band to
return to its original size as it is stretched further may be likened to
the pressure which may be exerted by an increasing interest rate to
bring the currency back to its original volume. This currency
should be so devised that it represents gold and does not take the
place of gold. I think that it is a universally recognized fact that
any issue which is given power to do what gold can do does not
increase the country’s money supply, but simply liberates so much
gold for export if there is not a sufficient demand for the increased
issue. This is simply an application of Gresham’s law, that an
inferior circulating medium will drive out a superior one.
So notes will release gold by replacing it, and the more secure they
are made by, for instance, having them guaranteed by the Govern­
ment the more readily the}r will accomplish that, because they will
be more acceptable.
Senator P o m e r e n e . That is, you would have these reserve notes
guaranteed by the Government ?
Mr. A l l i n g . N o . What I mean to say there is that these notes,
whatever notes are issued, the better they are the more secure they
are, the more acceptable they are to people by being guaranteed by
the Government, or anvthing like that, the more readily they will
displace gold, because the people wffil accept them in place of gold.
Senator P o m e r e n e . D o I understand from your remark that you
approve the guaranteeing of these notes by the Government ?
Mr. A l l i n g . I am not stating right here whether I do or not. I
do; but this is part of the------Senator P o m e r e n e . That answers the question.
Mr. A l l i n g . This is part of the statement as to the facility with
which acceptable currency will displace gold on account of its accept­
ability; and of course the guaranty of the Government makes it
acceptable, unless it is so arranged and so connected with the gold
reserve behind it that it represents gold instead of takes the place of
gold.
Senator P o m e r e n e . It is always encouraging to me when I see
that bankers differ on these subjects.




BANKING AND CUKKENCY.

409

Mr. A l l i n g . I had just completed the statement regarding gold
being replaced by notes.
So we should exercise the utmost care to be certain that any pro­
posed issue is going to represent gold instead of being a substitute for
gold.
I may illustrate this by the gold certificates which represent gold.
Let us presume that a currency is started with the same amount of
notes outstanding as there is gold reserve behind it, just as our gold
certificates have. The volume of notes could gradually be increased
until the reserve was only 80 or 70 or even 50 per cent, the actual
amount of gold reserve remaining the same, and it would be per­
fectly safe and sound, provided the country’s business required that
increase.
This brings us to the currency requirements of any given country,
our own in particular. In proportion to the business done a certain
amount of the medium of exchange is needed; our citizens carry it in
their pockets, business men in their tills, banks in their vaults, etc.,
and this amount, varying as it does in different seasons and years, is,
of course, outstanding. Take the smallest amount which is outstand­
ing at any one time over a period of years and it is safe to say that
amount will always be in circulation.
This is what the Germans in their Reichsbank call the “ Kontingent,” and it is considered as unnecessary to be covered by a coin
reserve at any time; as, when the currency is reduced to that
minimum volume, it will be at rock-bottom, for there would be such
a scarcity of it for daily use and interest rates would be so high that
none of it would be presented for redemption.
Hence it is perfectly safe to count on this amount being uncov­
ered by coin and invested all the time. Taking the currency scheme
which we considered a moment ago------Senator R e e d . What do you call that— the Kontingent ?
Mr. A l l i n g . In the Reichsbank they call it the Kontingent. I
think that this is figured about $2 per capita. It was in 1873 or
along there when the Reichsbank law was passed.
Taking the currency scheme which we considered a moment ago as
an example, wherein the start was made with the same amount of
currency outstanding as there was gold held in reserve, we have but
to increase the amount of the currency, keeping the gold reserve the
same until the amount of the excess currency over the reserve is equal
to the amount of money which is always needed even at the lowest
ebb, or the Kontingent; and we have the foundation of a scientific
and sound currency.
That is, supposing our contingent currency should be, say, 300
millions over and above the silver certificates that are out— those
are practically always out-— that would make about $700,000,000.
Senator R e e d . Y ou call them contingent?
Mr. A l l i n g . I call them contingent. W e could issue a gold cur­
rency, taking— well, we have about a billion gold certificates. Taking
a billion, which belong to the gold certificate holders, and if this is
paid into the Federal reserve banks, they could hold that billion,
and then issue notes against it up to SI,300,000,000, making 700
millions, which would make that contingent which I spoke of, of
700, added to the 490 millions of silver certificates. Of course, we




410

BANKING AND CUBEENCY.

should disregard the silver certificates, because they have nothing to
do with it.
Senator P omerene . Your position is this: That with a given gold
reserve you could issue practically an unlimited amount of currency,
redeemable in gold, provided it was not in excess of the actual needs
of the country ?
Mr. A lling . I should say so; of course “ unlimited” means a
whole lot.
Senator P omerene . I am expressing an extreme.
Mr. A lling . I mean in reasonable limits; yes.
Senator R eed . In the figures that }r
ou just gave I got confused.
You state that we could take our present gold reserve------Mr. A l l in g . Well, gold certificates.
Senator R eed . Wliich is something over $1,000,000,000; and we
could issue, in addition to that the money which you call this con­
tingent; that is, the money that is in the pockets and the tills, and
which you estimated to be at the present time— how much ? That
is what I did not get.
Mr. A lling . I hardly meant that as an estimate, Senator. I
simply took the amount of the silver certificates which are outstand­
ing and which we must necessarily take, since they are used as part
of our contingent, because they are money. I think they amount to
about $490,000,000. We will say 500 millions. So that with adding
300 millions, it would be an excess issue of notes over the gold reserve,
and it would make 800 millions as a contingent. That would be about
$8 per capita, I think.
Senator R eed . Then, if I get you rightly, you think that with
this gold reserve of a billion dollars we could issue a currency based
upon it of a billion 800 million and be safe ?
Mr. A lling . Yes. You are including the gold certificates; yes.
Senator R eed . Yes, including the gold certificates.
Mr. A lling . Yes, sir.
Senator Pom erene . Let me ask you in that connection this uestion: If I understood you correctly, this so-called Kontingent in the
Reichsbank was $2 per capita?
Mr. A lling . I understood that that was the figure in 1870 or 1872.
I think that there are some gentlemen in the room who could say so
if I am mistaken. I think it was $2 per capita at the time that the
bill which authorized the Reichsbank was started.
Senator P omerene . What is ihe per capita circulation in Ger­
many?
Mr. A lling . I do not know that I could sav.
Senator P omerene . The per capita circulation in America is
about $34 now, is it not?
Mr. A lling . It is. I do not think that in Germany it is that
much.
Senator P omerene . Assuming now that we had substantially this
same financial system that they have in Germany, is there any
reason why this contingent should be higher or lower than the con­
tingent in Germany?
Mr. A lling . Well, I should say there was, because we use moro
money; that is all. The per capita is larger.
Prof. S prague . There is one very obvious reason that the Reichsbank was issuing no notes at that time under 100 marks. I think X
.




BANKING AND CURRENCY.

411

am right in the denomination. They were all large denomination
notes. Consequently, the total that would constantly be required
was comparatively small.
Senator R eed . The ordinary Dutchman never would have that
much money.
Mr. A lling . The $2 per capita was the Kontingent of the Reichsbank currency. For instance, they had silver currency; how much
I could not say; but they still have a silver currency there, and that
would correspond to our silver certificates. So we add that on to $2.
Senator P omerene . I s that a variable quantity?
Mr. A lling . Y ou mean the silver issue ?
Senator P omerene . Yes.
Mr. A lling . I doubt it, because this paper naturally would stay in
circulation.
Senator Shafroth . I have the figures showing the notes in cir­
culation in Germany as 1,735,110,000 marks. A mark is 20 cents.
Mr. A lling . That is, the Reichsbank and other banks as well.
Senator S hafroth . Y es; this is the total circulation. I think
the German Empire has about 50,000,000 people. That would be
37 marks per capita, or, divided into our money, it would make about
$7. But I think it is more than that. I think it is $12.
Senator Shafroth . H ow much is a mark ?
Prof. Sprague . Twenty cents. There are 5 marks to a dollar.
Senator P omerene . I was trying to figure out in my own mind
how much of this so-called contingent currency might be issued as
against our gold.
Mr. A lling . I would not want to state that, because I do not think
at the present time I could say offhand what it would be. It would
have to be followed out.
Senator Shafroth . D o you not think that the bank circulation in
the United States— seven hundred and some odd millions of dollars—■
is all absorbed and necessary in order to comply with this contingent
that you spoke of ?
Mr. A lling . Yes, sir; I think it is. And, further, you must rec­
ollect, gentlemen, that the figures that I have been giving in answer
to questions are more or less examples, to show what I meant; and
the figures are not to be taken as accurate.
The Chairman . W e understand that.
Air. A lling . At the risk of repetition I wfiil read.
It is only necessary to increase the volume of notes outstanding
to meet the demand for more currency at different periods and
accompany the increase with a slightly advancing interest rate, to
have the most effective elastic currency possible, and always safe,
because, as long as the country will absorb the increased issues and
pay a stiffening i terest rate they will not be presented for redemp­
tion. As long as a note issue represents gold and does not take the
place of gold, it will not drive gold out of the country.
If a banking house wishes to export gold it will, of course, have to
draw currency from its bank and present it for redemption for the
gold. But the withdrawal of the currency from circulation, if in
any volume, will naturally shorten all banks’ reserves and stiffen the
interest rate, thus protecting the gold reserve of the currency from
further depletion, as there will be no profit in further shipment.
9328°— S. Doc. 232, 63-1— vol 1-----27




412

BANKING AND CURRENCY.

No more impressive example of the difference between a currency
which represents gold and one vhich takes the place of gold could be
cited than that of the Treasury notes which were issued under the
so-called Sherman Act of July 14, I860. That act provided for the
monthly purchase of 4,500.000 ounces of silver and the payment
therefor in Treasury notes which w'ere redeemable in coin, either gold
or silver. The bill remained in force three years, during which time
$156,000,000 in notes were issued and $160,000,000 net in gold were
exported from the country.
W e now come to a comparison of such a currency issue as we have
been considering with that authorized in the Federal reserve act.
The currency issue to which I have drawn your attention is based in
the beginning in a large proportionate reserve, and the volume of
notes is increased and diminished as needed, without disturbing the
reserve— like a rubber band will stretch out and return to its original
size when released.
The currency proposed by the reserve act is to have a set reserve
of 3 to 1, which is to be found as the currency is issued. The ques­
tion at once arises, M here will it be when not needed, and from
whence will it be obtained when needed ? W hat will be the differ­
ence between this method of carrying a reserve for your currency
and the selfsame method which we have to-day for a reserve for our
national-bank deposits which proves at times so impracticable ?
lh a t is, if their deposits increase through loans they have to find
an increased reserve, do they not? They always strike a period
every so often when they can not do it.
No cash or money is going to lie idle for long. After the Federal
reserve banks are established for a time their funds are going to be
all employed. If we have not sufficient use for them here, gold
will gradually go abroad until an equilibrium is established between
the demand for funds and the supply. W hen that point is reached
one of the Federal reserve banks will apply for a rediscount or a loan
from the Federal reserve board, which will be granted. The bank
will probably be close to its reserve limit. Y here is its 33J per cent
\
reserve coming from for this new issue of notes ? Still more, is it not
an anomaly to make an institution which is borrowing funds carry a
reserve against those funds ?
The bill requires a reserve bank to carry this 33$ per cent reserve
against notes issued in lawful money.
I understood from the reports in the papers that it had been changed
to gold; but I see in the last reprints that it is still “ lawful money.”
I presume that is right.
Senator S hafroth . I think it is “ lawful money.”
The Chairman . That is, the last prints.
Mr. A lling . And this, I might say, still further weakens the cur­
rency issue. It will be a currency which takes the place of gold
instead of representing gold. Every time the notes are presented for
redemption gold will be demanded for shipment to Europe and the
less desirable or baser part of the reserve, as economists put it, will
be left; and the currency based on that remaining reserve will circu­
late freely, with the credit of the United States behind it, and will
take the place of so much gold. After this operation of sorting gold
out has proceeded for a few years, how much gold will have been
exported and how' much will be left ? The case will not be dissimilar




B A N K IN G A N D C U R R E N C Y .

413

to that of the Sherman Act of 1890, as cited before, and I trust we
will not be required to pass through a period similar to that which
succeeded the passage ol that act.
Therefore, let us impress upon you, gentlemen, with the utmost
force the necessity of making this currency redeemable in one metal
or coin. Unless we do so we run all the risks of the “ endless chain”
of 1891, 1892, and 1893, when a note issue which was issuable for
one metal and redeemable in another nearly brought this country to
the verge of bankruptcy; and when you decide to make the reserve
all gold, reverse the method proposed in this bill. That is, instead
of finding your reserve as the notes are issued, start with the largest
gold reserve you can accumulate with an equal amount of notes issued
against it. Then you can increase the issue of notes without disturb­
ing or being disturbed about your reserve. I presume that these notes
are to be counted as part of the lawful-money reserve which national
banks are required to keep; but the bill does not so state.
Am I right on that ? I do not believe that banks are to carry these
excepting by implication ?
Senator Shafroth . I think it is intended that they shall carry
bank notes as lawful reserve.
Mr. A lling . I presume these are to be considered lawful reserve.
Senator S hafroth . I so understood it. I do not know that I can
point to the exact section that describes that.
The Chairman . These are the lawful reserves and it is not intended
to include these notes.
Mr. A lling . That is before the act is in full operation ?
The Chairman . It is not intended that these notes shall be included
in the reserves.
Mr. A lling . It is not ?
The Chairman . N o . I am speaking now of the original draft of
the bill.

Senator Shafroth . W hat section have you there ?
Mr. A lling . I have bank reserves, under section 20:
Five-twelfths of such reserves shall consist of money which national banks may
under existing law count as legal reserve—

That is regarding country banks.
Senator S hafroth . Y ou think that it ought to be made so that it
can act as reserve ?
Mr. A lling . I should say so; yes. That is one method of making
them effective.
Senator S hafroth . By both country banks and national banks?
Mr. A lling . I am not in favor of having national banks carry each
other’s reserves; but these are an institution of the Government.
Senator R eed . D o you think that the reserve should be either gold
or issuance of paper, either one; or do you think that the reserve
ought to be gold ?

Mr. A lling . There are two kinds of reserves that I am talking
about. One is the reserve which ordinary banks carry against their
deposits. But this paper is not leveled at that.
The Chairman . Mr. Ailing’s point is exemplified by the Bank of
England, which has in its treasury department an absolute gold
reserve outside of a limited amount against the notes, and in the
banking department almost entirely the reserves are notes.




414

BANKING AND CURRENCY.

Mr. A lling . Y es; the Bank of England carries its own notes.
Senator P omerene . Y ou would have this reserve fund gold
entirely ?
Mr. A lling . Yes, sir; for the notes.
Senator P omerene . Of what amount ?
Mr. A lling . If you will permit me, I will just read a little further,
Senator, and it will cover that.
Senator S hafroth . The reserve you have been speaking of recently
has been the reserve which is to be held and kept by the banks for
their depositors %
Mr. A lling . Yes, sir. I presume these notes are to be accounted
as part of the lawful money reserve which the national banks will be
required to keep, but the bill does not so state.
Senator R eed . If you put in the words “ deposits reserve/’ it
would make it clearer; and I suggest, as that will be printed, you just
put it in.
Mr. A lling . I have it “ national banks” here.
Senator Shafroth . Reserves for their deposits.
Mr. A lling . I have said here:
Lawful money reserve which national banks are required to keep.

Senator S hafroth . For their depositors.
Mr. A lling . National banks as distinguished from Federal re­
serve banks.
Senator Pom erene . Y ou mean with the member banks under
this bill ?
Mr. A lling . Yes, sir.
Senator Pom erene . Would it not make it clearer if you would say
“ member banks” ?
Mr. A lling . Yes, sir; it would. The word “ member,” I think,
has been put in the bill only recently. I notice quite a number of
places where it is put in in place of some other term.
Senator P om erene . W e will understand it, anyhow. It is more
clear than what you have there.
Mr. A lling . At any rate, they should be so authorized to be effec­
tive as an elastic currency, and also to offset the withdrawing of
$550,000,000 from active use in national-bank reserves, which would
be occasioned by their contributions to the capital stock of the
Federal banks and their reserve deposits with such banks. It will be
necessary for the banks to borrow this money back at once from the
Federal reserve banks to prevent .a serious monetary stringency.
Let me state here that this $550,000,000 which I have taken is from
some statement which was supplied by some official in Washington,
and I can not, right now, tell who. But the result is the same,
whether it is $550,000,000 or $850,000,000. Supposing the reserve
banks are all started inside of a week; $550,000,000 would be paid
to them, provided all the national banks became member banks, and
5 per cent of their total individual deposits. It would bring it up to
about 5 per cent. That would be in the neighborhood of $450,000,000.
Of course, I am leaving out bank deposits, because we do not know
just what the report of the national banks would show in the way of
bank deposits, due to other national banks, after the bill is in effect.
It will be necessary for the banks to borrow this money back at
once from the Federal reserve banks to prevent a serious monetary
stringency. You probably all realize what effect withdrawing half




BANKING AND CURRENCY.

415

that sum from our circulation would have. Here also can be seen
illustrated my contention regarding the method of carrying a reserve
for the Federal reserve notes.
The Federal reserve banks will have paid into them, capital, about
$100,000,000; deposits, say, $450,000,000. It will be necessary for
the national banks to borrow this back at once to prevent a serious
stringency. But the Federal reserve banks must hold $150,000,000
reserve against their deposits which they can not loan back. Now,
they apply for an issue of Federal reserve notes, but where are they
going to get their reserve gold from ? They probably could at first
exchange their reserve notos for gold with the national banks. But
that could not be relied upon at all times. The scheme proposed by
the committee of bankers would be a decided improvement over that
in the bill. That is, 40 per cent reserve, with a sliding scale of an
increasing interest rate down to 331 per cent reserve, as against a flat
reserve of 33$ per cent in the act. But I do not believe that that
would go far enough.
The way to accomplish our purpose would be to make the pay­
ments on account of the capital stock of the Federal banks in gold,
also the initial or first deposits of reserve money in gold, and this
would give us the sum above mentioned, $550,000,000 in gold. A
like amount of the reserve notes should be prepared in advance and
immediately put in circulation by loaning them back to the banks,
in order not to cause a monetary stringency. Then we would have
the first condition required in our ideal or scientific currency pre­
viously described; that is, an equal amount of gold reserve and
notes outstanding.
Senator R e e d . Y ou seem to take the view that it is pretty good
money if you have a gold dollar in your vault, and your vault locked,
and a gold certificate out for it. That makes pretty good money?
Mr. A lling . It makes excellent money ; but it is very inelastic.
Senator R eed . Some of the bankers said that that was not money
at all; it was warehouse certificates.
Mr. A lling . That is a figure of speech.
Senator R eed . I think so, too.
Mr. A lling . I think they consider it money when they go out and
look at it in the teller’s cage.
Five hundred and fifty million dollars gold reserve and $550,000,000
in notes outstanding. The notes which I propose to issue against
$550,000,000 may be held as reserve by the Federal reserve banks
against their deposits, for they will require $150,000,000 for a 3-to-l
reserve against their demand liabilities. A t this proposal most
economists and students of finance are going to throw up their hands.
But why not ? They will be equivalent to gold certificates, will they
not?
Senator R eed . D o you propose to keep that gold locked in those
vaults ?
Mr. A lling . As a reserve fund; yes, sir.
Senator R eed . And redeem those notes ?
Mr. A lling . Yes.
Prof. Sprague . May I inquire about how the deposits of these
banks will be protected if you use up the $550,000,000 which the
banks deposit as reserve for $550,000,000 notes ?




416

i

BANKING AND CTJBBENCY.

Mr. A lling . Y ou would carry the reserve notes just as the Bank
of England does.
Prof. Sprague . Yes, but you have lent them to the banks, and
you still owe the banks $550,000,000; and you have taken their
reserve money and sequestrated it------Mr. A lling . I do not necessarily mean they would loan all that
back, but what I meant was to loan enough back in order to correct
the stringency which would occur, owing to the payment of this
money by reserve banks.
Perhaps if I go on in my paper it will make it a little clearer.
Moreover, this plan contemplates a somewhat larger gold reserve
against the notes than the act does, so that the ultimate result will be
a larger average reserve for the notes and deposits.
That is, the bill now orders them to carry 33 J per cent reserve
against all demand liabilities, notes, and deposits. By this method
we should have at this time, after issuing $550,000,000 reserve notes
against $550,000,000 of gold, 100 per cent against our notes; and
counting the $550,000,000 against the notes and deposits both you
would have 50 per cent. Does that answer your question, Professor ?
Prof. Sprague . N o ; because you have exactly the same amount
without that provision in the law. The question narrows itself down
to this: Is the management of the reserve bank going to fritter away
all of its resources in ordinary times and go down to a 33J per cent
basis so it will have nothing available for emergency, or is it not?
And if it is going to do that, then the thing is mismanaged; and
similarly, it would be the case if you put a 50 per cent requirement in
the bill. If you assume that they are going to get down as our ordi­
nary profit-making banks do, in ordinary times, to the bare limits of
the minimum requirement, they will have nothing left for emergen­
cies. I suppose it occurred to no one that these reserve banks would
in ordinary times get down to this minimum. There is a similar
arrangement in connection with the Reichsbank, and only once in
30 years have they come anywhere near the limit of 33J.
Mr. A lling . They have never come very close to it, I think.
Prof. Sprague . They did once, in 1906.
Senator R eed . In this way at least you would accumulate
$550,000,000 more of gold, and you would get it locked up, which
which would not be a hard thing, would it ?
Mr. A lling . Not to my mind. My method of looking at it, of
course— and in judging a thing like that it depends a goocl deal on a
man’s method of looking at it, on his point of view. It is a good deal
like a picture. It depends a good deal on your imagination how much
you can see in the picture and how much you do.not see. Different
people’s imaginations lead them to see different things in different
ways.
I will continue my paper a little further. It still carries this
question a little further, and I think makes the subject open to dif­
ferent comments anyway.
The reserve for the notes should be kept entirely separate and
distinct from the reserves held for the deposits in the Federal reserve
banks.
That is, it would make the reserve to be held against the notes
always secure against whatever might happen to the Federal reserve
banks.




BANKING AND CURRENCY.

417

In fact, the note reserve should be held by the Federal reserve
agent as an agent of the Federal reserve board, and ultimately of
the Government, just as he is to hold the securities which are pledged
with the Federal reserve board. This would make the reserve
always secure against the vicissitudes of the Federal reserve banks.
I have never believed that the responsibility for or issuing power
of currency should rest with the same institution which accepts
deposits, and especially reserve deposits from banks. The inherent
weakness of such a plan, though it is generally preached to-day, is
obvious to anyone who will contemplate quietly the effect which
this dual responsibility will have on any bank. During a severe
financial crisis a bank which issues notes and accepts reserve deposits
from other banks is subject to a double strain. Its cash reserve
being drawn upon by banks that are endeavoring to replenish their
own reserves and perhaps demanding gold and at the same time
notes may be presented and gold demanded for export.
Mr. Conant, speaking of the Bank of England, and its experience
during the panic of 1847, says:
Both, sides in the discussion of the bill when it was pending in Parliament seemed
to have made the incredible blunder of overlooking the fact that gold could be
obtained by the presentation of checks. * * * The bank, therefore, saw its
bullion decreasing on the one hand and its banking reserve decreasing on the other
hand, while gold and notes poured out of the banking department.

To return to our suggestion regarding the issuing of reserve notes:
The point I wish to illustrate is that we would have $550,000,000 in
notes outstanding, based on a 100 per cent gold reserve, an increase
of $100,000,000 in the issue of notes would only reduce our gold
reserve to 84 per cent, and by a judicious exchange of the Federal
reserve notes for gold with the banks, provided the banks can carry
the notes as reserve money, the Federal reserve banks can eventually
have a gold fund of nearly one and a half billion dollars against
which an issue of $2,000,000,000 in notes will provide an increase of
$500,000,000 in circulating medium and a gold reserve at that extreme
figure of 75 per cent.
The United States notes should be included in this scheme and called
in, and the gold reserves held against them added to the general pile.
The national bank notes, according to the terms of the bill, could
also be absorbed into the general issue if thought advisable, though
I do not personally believe it should be done, as it would result in
adding that much reserve money to our circulation, which would
cause inflation. The bank note circulation should be limited to the
present issue, or $750,000,000, and gradually converted into small
denominations— ones, twos, and fives, thus giving national banks the
opportunity to increase and diminish the supply of small bills, just
as they please, which would be a tremendous advantage. This
would eliminate the uncertainty about the United States bonds now
owned by national banks and remove that much cause for alarm.
Thus, with the silver certificates and bank notes, we would have
about $1,200,000,000, which would always be in circulation. This
is besides the gold.
Senator Reed, I think, asked a question in reference to that when
I was talking about the silver certificates outstanding. He men­
tioned the bank notes which were also outstanding.




418

BANKING AND CURKENCY.

It is now only necessary to increase and diminish the volume of
Federal reserve notes to meet the varying demands of business,
starting with a very low rate for the first 100 million of reserve
notes and raising the rates for every additional issue or raising it
any time to prevent exports if the Federal reserve board deemed it
necessary. Then we would have a scientific gold currency with
sufficient elasticity to it to take up the most aggravated shock which
our banking and commercial interests might experience, besides
being always ready to accommodate itself to the rise and fall of our
seasonal requirements. And why should we not have some such
mechanism as this to increase and facilitate, with perfect safety, the
usefulness of the stock of gold which circumstances allow us to accu­
mulate ? Gold is the measure of value in this country, and it meas­
ures values in a comparative way, depending upon the relation which
its supply has to the demand for it as a circulating medium and as a
basis for the vast credits of our country. W e all know that demand
varies. Who believes that the gold stored away by nature and
reclaimed by man possesses always that fine balance which would
make the amount in hand always requisite for the work which it has
to do ?
Then it is our duty to devise a scheme of currency which shall
represent gold with all its power and which shall possess the attri­
butes of enlarging and diminishing its scope whenever necessary.
Senator R e e d . That embraces the point I thought to elaborate
with another witness, and which perhaps is best expressed in the bill
which Senator Shafroth introduced, independent of this general bill,
which was to retire the gold certificates as fast as they come in and
can be gathered up and issue in lieu of them $2 for each one of gold
and to treat all other moneys, greenbacks and bank notes, in the
same way, so that the Government would have a 50 per cent reserve—
assuming the Government does this. And the question was asked
then whether if 33 per cent would constitute a reasonably safe gold
reserve and we had a 50 per cent reserve we could not increase the
circulation of the country in times of necessity by issuing more
money down to the point of 33 per cent. It embraces the same idea
that you have; that is, of a fixed gold reserve.
Mr. A lling . Yes, sir; a fixed gold reserve, but the circulation
not fixed. Under that bill the circulation would be fixed 2 for 1.
Senator R eed . I said to issue more money if necessary down to a
point where the reserve would only be 33 per cent. It embraces the
same idea that you have expressed, so far as that one feature is con­
cerned— the fixed reserve.
Mr. A lling . Yes, sir.
Senator R eed . N ow , I want to ask you if you deem such a plan as
that practicable?
Mr. A lling . I deem it practicable, if you will organize such a
method of getting the increased currency into circulation in such a
way that it will only go into circulation when needed and be retired
when not needed.
Senator R eed . Let me spend a minute with you on this. The
outlines of this bill I will state as accurately as I can. The proposi­
tion was for the Government of the United States as rapidly as gold
certificates came into the Treasury, to take that one certificate and
issue $2 for $1 against it.




BANKING AND CURRENCY.

419

Mr. A lling . That would make a United States note out of it, with
a reserve.
Senator R eed . Back of which would be a 50 per cent reserve, and to
treat all the other moneys of the Government similarly, using whatever
other gold we had to fortify this reserve, so that at the end of the work­
ing out of the plan we would have a currency back of which was a 50
per cent gold reserve; that then in the event more money was
needed the banks could bring to the Government suitable securities—we will not stop to haggle about what they might be— and that the
Government would then receive those securities and continue to use
paper money having now back of the paper money the gold reserve
and the securities, and that it w
’ould continue or might continue that
process until they had reached a point where the gold reserve equaled
one-third instead of 50 per cent. Would such a plan as that, in your
judgment, be a workable plan?
Mr. A lling . I think your reserve is too low, to start with. If you
reduced it to 50 per cent first., as a permanent currency.
Senator R eed . Well, let us assume that we would make it------Mr. A lling . Seventy-five per cent.
Senator R eed . Say 75 per cent.
Mr. A lling . After you pass 75 you only loan it to banks as they
are willing to borrow it and pay a substantial interest rate for it ?
Senator R eed . Yes.
Mr. A lling . If such a mechanism should be devised it would be
perfectly workable. It would not be an}7 different from a central
bank loaning money, except that the Government would be doing it.
Senator R eed . Except that the Government retains the complete
and absolute control. That would be perfectly safe, in your judg­
ment ?
Mr. A lling . I should say so. I do not see why not. That all
depends, of course, on the detail as to the security that is taken;
but we will leave that out of it.
Senator R eed . W e will assume that the Government receives as
good securities, as carefully safeguarded, as the banks would receive
under a scheme whereby the banks perform this function.
Mr. A lling . A s long as the control of the interest rate was held,
as long as the interest rate was increased at the proper period, I do
not see that it would be any different from a central bank. A Gov­
ernment bank, in simple terms, simply holds a large reserve and
issues notes against it. Of course it has deposits on the side, but the
issuing part of it is that it issues notes against the reserve and dimin­
ishes or increases the amount of the notes outstanding, and of course
decreases the percentage of reserve at the same time. That is the
foundation of a central bank, in my opinion.
Senator R eed . This plan which you suggest differs radically from
the provisions of the Aldrich-Vreeland bill, as I understand it?
Mx. A lling . Oh, yes.
Senator R eed . The Aldrich-Vreeland bill’s check upon the amount
of currency to be issued is that the longer the currency is out the
higher the interest mounts ?
Mr. A lling . Yes.
Senator R eed . Whereas, in this plan of yours, your first issue of
currency, no matter how it would De issued, unlimited in time and
r




420

BANKING AND CUBRENCY.

at a low rate of interest, the second issue of currency would be un­
limited in time and at a higher charge to the banks, so that the inter­
est is fixed upon the volume of currency which is out rather than by
the time that it is out. There is that radical difference. Do you
think that is a better plan ?
Mr. A lling . Yes, sir; that is, provided the hands of the central
authority or reserve board are not tied too tight and they are allowed
to increase the interest rate sooner, if they see fit. It has got to be
left to some one’s judgment.
Senator R eed . I understand.
Mr. A lling . I do not know that it can be arbitrarily fixed. I do
not think that they can.
Senator R eed . But assuming it has a sensible management— I will
not say the wisest or the most foolish, but an ordinary prudent man­
agement— do you think that would be a practicable scheme ?
Mr. A lling . I should think it would.
Senator R eed . I have got an indorsement for your bill now, Sen­
ator Shafroth.
Senator S hafroth . I am glad to hear it.
Senator R eed . I want to pursue this further. I am interested in
your paper, Mr. Ailing. I want to get whatever additional light I
can from it. You spoke about keeping the gold in the country. I do
not know that I fully caught your thought on that. Of course we
will assume, now, for the sake of illustration, that we have $1,000,000,000 of gold and we issue against it $2,000,000,000 of paper money,
and that constitutes the currency. The $1,000,000,000 of gold is
locked u p ; but of course every man having one of these paper dollars
can come and demand it at any time. How are you going to prevent
that ? How are you going to keep the banks ?
Mr. A lling . If there is too much of such money in circulation, you
could not prevent its being demanded and exported.
Senator R eed . That is to sav, if there was $2,000,000,000 of cur­
rency out and $1,000,000,000 of reserve, and your $2,000,000,000 was
too great an amount to be all employed in the business of the country,
then the banks would take that money, of which there was a surplus;
the banks would accumulate $1,000,000 of it. You would go down
to the Treasurer and get $1,000,000 of gold, and because money was
bringing a higher and better rate in England than it was here you
would ship that gold over there. Is that the idea ?
Mr. A lling . That is the idea. I only want to correct you in that
the bank would not do that. The private banks would do the ship­
ping. Of course that is only a matter of custom.
Senator R eed . Some kind of a money changer, whether he is a
banker or a private individual.
Mr. A lling . But the thing of it is, does the interest rate affect that
in the end, ultimately ?
Senator R eed . T o make this method practicable, then, this gold
reserve would make the reserve higher. It would make the margin
of danger less; and, second, when you issued money in excess of the
gold, particularly if the banks came in with their securities and
wanted an additional currency, you would make your rate so high
that they could not afford to take that money at all unless they in
turn were able to charge a rate high enough, so that they could do
business ?




BANKING AND CURRENCY.

421

Mr. A lling . Yes, sir.
Senator R eed . D o you think that would be effective at all times ?
Mr. A lling . W hy, through periods of years it would, yes; but it
might not be effective at one particular time. There might be one
particular time when money was so badly needed in Europe, when the
demands of trade were so heavy that it would be necessary to export
some gold; but through a long period of years and under general
conditions the higher interest rate will protect the gold reserve.
Senator R eed . But will it do it in the hour of emergency? That
is the trouble with the present banking system that is in effect to-day.
Mr. A lling . In the hour of emergency the interest rate is usually
pretty high.
Senator R eed . Y ou really think, if I get you rightly, that it would
be better if we had this currency or money issued by some power
other than the bank itself ?
Mr. A lling . That is my belief; yes.
Senator R eed . In other words, if I get you now------Mr. A lling . I am not speaking for the bankers generally, of course.
Senator R eed . N o ; I want to get your own opinion. I have had
some of these concrete opinions, and I do not know how much they
represent the caucus and I do not know how much they represent
the man’s own judgment. I want to get your judgment. I feel
now that with my usual adroitness I have gotten the Senator from
Kansas half on my side, just by saying “ caucus.” [.Laughter.]
I take it— indeed, I think you made it very clear— that you think
if a bank receives deposits, loans money, and does a general bank­
ing business, and does not do anything else, and an entirely separate
instrumentality, whether it is governmental or banking, is charged
with the duty of keeping a proper gold reserve and with the super­
vision of the issuance of the money, when the bank’s credit may
become doubtful, that still does not under those circumstances
affect the circulation of the currency at all? That is a somewhat
involved question.
Mr. A lling . Yes; but as I understand it you mean the circulation
of currency issued by what ?
Senator R eed . A separate institution. You did not quite catch
what I said.
Mr. A lling . N o.
Senator R eed . If the Government issued all the money and was
charged with maintaining the gold reserve, and did it rightly, all
the banks in the country might go to smash and still the money
would be good ?
Mr. A lling . W hy, certainly.
Senator R eed . Yes. But if you put the issuing of the money and
the maintenance of the gold reserve in the banks, and with also the
banking powers and privileges, and your belief in the banks became
impaired, if credit became shaken in the country, if we had one of
these financial chills, it would be likely to shake the faith of the
people not only in the solvency of the banks, so far as paying out to
their depositors is concerned, but it would shake the faith of the
people in the money itself ?
Mr. A lling . Well, under certain circumstances I should say it
would shake the confidence of the board of governors of the bank.
For instance, let us put it in a concrete form, and we can understand




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BANKING AND CUBRENCY.

it. If a bank is carrying 300 millions in reserve deposits of the banks
of the country, and at the same time it has issued one billion in
notes, and against that it is carrying one reserve as provided in this
bill, and there comes a period Jike in 1907, when banks, in Indiana
and everywhere else, and in New York State outside of the city limits,
wanted to use some money in their own banks for two reasons— one,
they preferred to have it because their community might want it and
they wanted to take care of their depositors— and they began to draw
their reserve money out of the bank: Supposing they drew 200 mil­
lions out of it. There is 200 millions of the gold reserve gone. Just
as I cited the quotation there, the governors of the bank sit there
and see their bank reserve going down and at the same time they
see the reserve of their notes going down.
Senator R e e d . S o you think that the reserve back of the notes
ought to be kept over there under that book [indicating], which I
will use for the sake of illustration, and the reserves that are back
of the deposits ought to be kept over there under that book ?
Mr. A l l in g . I do.
Senator R eed . And the more completely separated those two
places are, the better for both ?
Mr. A lling . That is my belief.
Senator R eed . Would it not be your judgment, when it comes to
issuing money— to issuing this money and conserving this gold
reserve— that the Government of the United States better establish
an agency for that and let the banks go on and conduct the ordinary
business of banking ?
Mr. A lling . I should say so, if we could get the proper machinery
for allowing the increased issue to go into circulation. By proper
machinery I mean not only care as to the investments, but care as
to issuing, so as not to issue too much.
Senator R eed . Very well. Suppose that we go back a moment
to this present plan, to get a starting point. Under the system that
is proposed in this bill we have under consideration— if I do not
weary you.
Mr. A lling . Y ou are not wearying me, if it is in the plan of the
committee. I understood that I was not to occupy too much time.
Senator R eed . Y ou are an interesting sort of a fellow to me. I
like a red-headed man, anyhow. I really mean that in a compli­
mentary way, even though my compliment is poorly stated.
The proposed bill, if carried out, would cause 12 regional banks to
be put in operation. Let us discuss one of them.
Am I interfering with some plan that you have, Mr. Chairman ?
The Chairm an . N o, sir.
Senator R eed . W e are organizing one of those regional banks.
The first thing we put in is an amount equal to 10 per cent of the
capitalization of the member banks, and let us say that it amounts
to $5,000,000. That much money we have got. The next step is
5 per cent of the deposits of the member banks. That is right, is
it not ?
Mr. A lling . Yes, sir.
Senator R eed . The deposits of the member banks are to be capi­
talized at about 8 to 1. Is that correct, approximately ?
Mr. A lling . I think it is.
I do not know just what was stated.




BAN-KING AND CURBENCY.

423

Senator Shafroth . That is the amount Mr. Forgan said.
Mr. A lling . I guess it is right, then.
Senator R e e d . S o that you will put into the member bank a sum
equal to one-twentieth of the deposit— $5 on the $100?

Mr. A lling . Yes, sir.
Senator R eed . And the deposits are eight times as great as the
capitalization. That is correct, I think. So that you have a re­
serve, now, carried into your central bank, which is in the aggregate
only about 6 per cent of the total deposits with these member banks.
That is about where you landed, is it not ?
Mr. A lling . I do not know as I have figured it out just that way.
You mean that the capital of the Federal reserve bank plus the
reserve deposited with it will only be 6 per cent of the total deposits
of that particular region of which it is a reserve bank?
Senator R eed . Yes, sir. My figures may be wrong; I am just
figuring here in my mind.
Mr. A lling . I should say it would be a lot larger, but I never
figured that out. I think it would be more than that.
Senator R eed . H ow much more?
Mr. A lling . Of course, we are taking an arbitrary statement of
8 to 1 that has no meaning in it whatever, any more than the fact
that it may be so all over the United States. The total figures of all
the national banks may be eight of deposits to one of capital; but it
has no meaning; it only happens to be so; that is all.
Senator R eed . But taking the average as it exists to-day, it is
likely to be approximately the average for other times. There is
about $8 of deposits for $1 of capital. W e take that $1 of capital,
one-tenth, and we put it over here to make a new bank.
Mr. A lling . Yes, sir.
Senator R eed . And the relation of that capital to the other is 10 to
1. Then we have got deposits in these banks that are equal to 8 times
the amount of the entire capital of the member banks ?
Mr. A lling . That, we will say, is ?8.
Senator R eed . That is $8. Now you take 5 per cent of that
amount, and what per cent have you in your member bank of actual
reserve ?
Mr. A lling . One-sixteenth. I do not know just what percentage
that will be. One-twentieth would be 5 per cent. One sixteenth
would be larger than that.
Senator B ristow . Between 6 and 7 per cent.
Prof. S prague . Six and two-thirds.
Senator R eed . W hat does it figure there, Professor?
Prof. S prague . Between 6 and 7 per cent.
Senator R eed . Now you have got the regional bank that has
actually paid in in cash an amount which is equal to about 7 per cent
of the total deposits of the banks hi that region, and that consists of
all the resources that bank has, does it not ?
Mr. A lling . The Federal reserve bank, yes.
Senator R eed . Every member bank can, and if I understand your
statement it would almost be forced, as soon as it had paid into this
regional reserve bank the amount required to be paid in, to borrow it
back?
Mr. A lling . Oh, I did not mean to say that every bank would
have to do that; but all of them taken together, that amount would




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B A N K IN G A N D C U R R E N C Y .

have to be turned back. Many banks would be in such a condition
that they can put it in and they will not have to borrow it back.
It would be another form of investment for them. But I do not see
any difference between putting in this, say $50,000,000, in a Federal
reserve bank and putting it into the United States Treasury, which
they call locking it up, unless it is borrowed back.
Senator R e e d . Exactly. So there will be no benefit whatever
springing out of this system unless those reserves deposited with the
regional bank are actually used. If they do not use them, you have
got them locked up, and it is no good ?
Mr. A lling . Y es; I should say so.
Senator R eed . The amount of that is, then, as I understand it,
that while you solemnly declare it to be the law that a bank shall set
aside a certain per cent as a reserve, you add to that:.
Provided, however, That it may deposit that over here with another bank and im­
mediately borrow it back and use it.

That is about where we come out, is it not ?
Mr. A lling . Very close to that.
Senator R eed . In other words, we have dissipated, so far as the
reserve is concerned, that part of the reserve, except that, of course,
there is an added security in the fact that the regional bank represents
a number of other banks ?
Mr. A lling . Yes, sir.
Senator R eed . We have absolutely taken out of the present reserve
system that 5 per cent, so far as it is an actual real reserve on hand.
That is right, is it not ?
Mr. A lling . It is.
Senator R eed . I am very glad to have one man who will just say
“ yes” and “ no,” since I have been criticizing the Professor over
there.
What other resources is this regional bank going to have besides
this money which can be put in and borrowed back and the capital
stock? What other resources has it?
Mr. A lling . It has none except this ability to borrow through the
Federal reserves.
Senator R eed . T o borrow from the Federal Government?
Mr. A lling . There are Government deposits.
Senator R eed . Oh, yes; but the Government deposit is some­
thing that Uncle Sam takes down there and contributes to the sta­
bility and utility of this bank, is it not?
Mr. A lling . Yes, sir; if you wish to put it that way.
Senator R eed . W hat else have you to rely on ?
Mr. A lling . N o further deposits allowed.
Senator R eed . But your final resource— 4 direct your attention to
it by a leading question— in addition to all this is that you can take
those notes which vou have on hand over to the Federal Treasury or
over to the central reserve and get Government notes on it. That
is right, is it not?
Mr. A lling . That is right.
Senator R eed . So that if I understand you correctly in this entire
scheme which is now outlined in the bill that is before us there is not
a single dollar of new money or a single dollar of new security that is
added except— well, there is not a single dollar, because the 10 per




B A N K IN G A N D C U R R E N C Y .

425

cent of its capital stock comes out of the other bank’s assets. It is
not new money ?
Mr. A lling . Yes, sir.
Senator R eed . Y ou have not added a new dollar of actual capital
from any source.
Mr. A lling . I would not say capital. You are using the wrong
term. I should say cash.
Senator R eed . Actual cash ?
Mr. A lling . Cash is simply transferred from the various member
banks into the regional reserve banks to the extent of 7 per cent, we
will say.
Senator R eed . In other words, you take the shell from under one
hat and transfer it to another. You just have one shell but you shift
it. I do not mean to speak in any disrespectful sense. I am simply
trying to illustrate my thought and I have to go back to my early
experience to do that. But you have not added a dollar of capital
to the entire banking system, have you? I mean real capital?
Mr. A lling . N o real capital. Of course, there is a great difference
between cash and capital to the banker which the average outsider
does not realize. I think that everybody sees the point plain enough,
but it does not occur to them frequently; that is all.
Senator R eed . I wanted to keep to the common acceptation of
the terms.
But you do think, of course, I take it, that this system under this
proposed bill would have a good deal of strength if the Government
moneys were put in and the regional banks could distribute those
moneys, and then if the Government would issue money upon such
securities as the regional banks furnish, assuming, of course, that the
business is properly managed. That would give these regional banks
some considerable utility.
Mr. A lling . Yes; you mean there with reserve notes— Govern­
ment notes ?
Senator R eed . And when the Government money was deposited
they could take it and use it.
Mr. A lling . Yes.
Senator R eed . That is what really breathes the breath of life into
that system, is it not ?
Mr. A lling . I should say that it was almost the whole bill in
simple terms, excepting the ability of the Federal reserve banks to
establish branches. I think that is part of it— to establish foreign
agents. That is the only thing outside of what you have stated.
Senator R eed . T o establish foreign agents. Of course, that power
could be conferred upon member banks now if the Government saw
fit to do it.
Mr. A lling . Yes.
The Chairm an . I would like to say that Mr. Marshall, of New York,
is here and he will not be able to be here to-morrow. If we could
give him an hour this evening he would appreciate it.
Senator R eed . I do not want to interfere with the committee, of
course, but I have become very much interested in Mr. Ailing’s state­
ment and I should like very much to ask him some further questions.
Senator S iiafroth . H ow near through are you ?
The Chairman . Mr. Alling has written a very excellent brochure,
which I had printed and sent to the members of the committee. It is




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BANKING AND CUBBENCY.

on this line. W e have copies of it here now and I think it would be
just as well to put it into the record.
Senator S hafroth (T o Mr. Ailing). Is that the same as you have
read?
Mr. A lling . Y es; it is upon the same ideas, only that was written
some time ago and it is quite divided up.
The Chairm an . It is an interesting matter.
Senator R eed . It is very interesting to me.
Senator S hafroth . Are you going to be here to-morrow Mr
Ailing ?
Mr. A lling . N o ; I have to be in Richmond for a convention to­
morrow.
Senator S hafroth . Will you come back this way ?
Mr. A lling . I can do that.
Senator R eed . Let me ask you just one or two more questions.
Mr. A lling . I will be glad to make myself available at any time
for the committee.
Senator B ristow . I feel that we should not curtail our inquiry into
this matter from such men as Mr. Alling. I am free to say tnat I am
very much interested in everything he has said. I was also greatly
interested in the booklet which he furnished the committee— more
than anything I have read on that line. I think we ought to take
what time is necessary to get at the bottom of these matters.
The Chairman . Take for instance Mr. Berry. Mr. Berry is here
and would like to be heard Wednesday. Prof. Sprague came down
from Harvard a week or two ago and he stayed here several days.
He did get to go on the stand but the gentlemen from Chicago took
up so much time that he did not finish and he came back this morning
to present his views to the committee. I should like to accommodate
the gentlemen and let them get away if possible because they have all
been invited here by me. Of course I only want to fit in the testi­
mony as well as I can.
Senator B ristow . I am glad you have invited these gentlemen and
I think we ought to hear them.
Senator R eed . It is the old story of having to compel witnesses to
wait until a long examination is concluded.
(The statement by Mr. Ailing directed to be incorporated in the
record is as follows:)
R

eserve and

|By Newton

C u r r e n c y P r o b l e m s —A S u b s t i t u t e

for a

Central B a n k .

D. Ailing, ex-president of the American Institute of Banking and
National Nassau Bank of New York.]

vice

president of the

o v e r t u r e : is a c e n t r a l o r g o v e r n m e n t b a n k f e a s i b l e ?

In offering to the interested public this little collection of papers on a subject re­
garding w h'ch so many different opinions are held to-day, over which there has been
so much battling in the past, and doubtless for which the future holds an unlimited
supply of nostrums yet unborn, the writer has a twofold purpose. One is to show
where plain reasoning, without reference to past or present accepted premises may
lead us to; and the other is to draw attention to the danger of perfecting a system at
the expense of our ideals.
Finance and credit have ever been at once the glory and power, as well as the curse
and destruction of governments, as of men. The laws controlling, inevitable as they
are, are so delicately poised and so difficult to comprehend that they have been the
despair of philosophers and statesmen of the past, not to mention those of the present.
What is supposed to be a correction of an evil, turns out to be a curse. What is laughed




/

BANKING AND CURRENCY.

•

427

to scorn as a foolish nostrum in one age, is in another heralded as the greatest of bless­
ings. And who have usually been furthest from understanding the underlying laws
of finance and credit in the past but the bankers themselves? It took Horner, an
obscure member of Parliament, to tell the bankers of his day the economical relation
between currency and specie, and they did not believe him.' But Parliament, which
was not composed of bankers, was eventually convinced, passed the necessary legis­
lation, and England was saved from being drained of specie. It took John Sherman,
who was no banker, to say that “ the way to resume is to resume” and thus restore our
currency and save us from a long controversy between bankers, professors, and financial
savants.
It seems as though the study of financial laws and results is the Nemesis of those
who stray into its uncertain precincts Those of our day who have ventured to ex­
plore its confines appear to the observer to be hopelessly enmeshed in the web of thenown logic. They primarily would give us relief from a stringency which occurs in
the fall of the year—perfectly natural under the conditions—and they end by prom­
ising something which will save us from suffering the consequences of our own financial
debauchery, of preventing rotten banks from being found out, and of stopping the
plain people, who do not understand such things, from being scared when they think
they are going to lose their money. Does any thoughtful man need more to convince
him of the foregoing than a careful study of the latest offering, known as the Aldrich
plan, will give him? Here we see a man of a very practical turn of mind, naturally
direct, after two or three years of exploring the intricacies and winding ways of
economic laws and currency and banking problems, finally advocating a system of
reserve holding which is the reverse of direct, and hardly seems practical. And most
of the students of finance, bankers and professors, are falling in line. The only ones
who seem to see its weakness are those who have held aloof and refused to become
absorbed in the fascinating study and thus drifting from their original moorings.
First it was proposed just to change the basis of national bank currency so as to allow
more elasticity. Then it was a sectional gold currency by national banks, as advo­
cated by Congressman Fowler, then a central bank, and now the complicated plan of
Senator Aldrich and his committee. Can anyone imagine or measure the politics
which would develop in such a system? Every ambitious banker would be laying
his pipes to be first on the local board, then on the sectional board, and finally on the
central board. Would there be a possibility of exchange of favors for votes? The
plan would be a cross between a central bank and individual banks, with many of the
inconveniences and drawbacks of both.
To properly consider the subject let us first see what the trouble is. Through
natural expansion and contraction of trade there is a shortage of currency and raising
of interest rates at certain seasons. This is aside from speculation. The principal
cause of this rise in interest rates is that out of town banks draw their reserves from
central cities into their own vaults. That means that $1 drawn from a central reserve
city ceases to do the work of $2 or $3 as reserve money and only does the work of $1.
The abolition of the present reserve system would prevent these violent fluctuations
and would necessitate the carrying of the full supply of reserve by all the banks all the
time. Probably the answer to this is that there would not be reserve money enough
to go around or else there would be a shrinkage in business to match it. So that
eliminates such a move, and the suggestion is only offered to help fix the reader’s
attention on the real issue. It will be noted that the reserves are what are short, hence
it is more reserve money which is needed.
We notice in the arguments of to-day reference to our scattered reserves. Does
this mean that with a central bank the reserve requirements of our various banks are
to be eliminated? Of the actual cash which our banks carry, less than half is gold or
gold certificates. What is needed is to have the gold of the country so held that its
efficiency may be increased in time of need. That means that currency based on gold
should be increased in volume and in proportion to the gold held, and this currency
should be held as reserve by the banks to be effective.
For a fuller understanding of the meaning of this, the reader is commended to the
two papers on that subject herewith.
Violent panics, like that of 1907, may be caused by shortage in reserve and high
interest rates or they may not. The writer thinks not necessarily. Shortage in
reserve and high interest rates certainly accompany violent panics. A panic may be
caused by a bank failing through internal disorders entirely. Then the people are
scared and a currency panic follows naturally. Merchants may allow their credits to
become too much extended; a shortage in bank reserves simply brings the trouble to
a head and a panic follows. One of our public men has characterized credit as “ a
state of mind ” ; then it follows that a panic is a violent state of mind.
9328°— S. Doc. 232, 63-1— vol 1----- 28


A


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BANKING AND CURRENCY.

We have, then, as the principal fault of our banking system, the periodic scarcity of
reserve through currency being drawn from reserve centers and consequent high
interest rates. What remedies are suggested? One is through this complicated
Aldrich system to allow all national banks to issue currency against their pledged
assests. The other is a central bank which would be allowed to issue currency against
its credit.
Of the two the central bank plan is far more direct and probably would correct the
trouble mentioned, but here we are bound to ask if such an institution would not be
productive of evils which would far outweigh its benefits.
We are verging upon times when distrust of anything monopolistic spells its destruc­
tion. In fact, the whole body of the Nation is aroused against what it calls the Money
Trust. Is Congress, then, through its representatives, going to vote this power into the
control of one institution and of a few men? Let its charter be ever so carefully drawn
and hedged about with ever so many safeguards it will still be the central arbiter of
the delicate financial fife of the Nation and will appear to the average man as the
moloch of our industrial life. To those of us who are not so prone to fear it as to see its
benefits it will have its element of possible danger through a false move or through
falling into evil or incompetent hands.
So can we not say with certainty that a charter for such an institution will never
be granted by Congress? The spirit which comes up to Washington from all sections
of the country, fresh from constituencies full of distrust of the money power, is so
imbued with ideas which are the antithesis of a central bank that we are forced to this
conclusion. Then why should time be used in its discussion? Why not turn to some
more favorable plan which will assuage the currency trouble and against which the
foregoing arguments will not prevail?
What other method or principle can we apply to this problem which will solve it and
still comply with this latent command of the electorate? Why not let the Treasury
do it? Let the people do it themselves. Let the profit revert to the National Gov­
ernment instead of flowing into private coffers and avoid the dangers that are
evidenced by this almost universal fear that the money power is falling into the hands
of a few.
As an example of how slow all peoples are to grant absolute control of their finances
to a small group of men it is only necessary to search the records of any country where
any form of popular government exists. The granting of a charter to a central or
Government bank is always attended with more or less opposition, except where
absolutism holds. The two United States Banks were granted their charters only
after considerable discussion, and both were refused an extension. The Bank of
France, so recently as 1897, when its charter granted in 1857 expired, was granted a
renewal only after prolonged debate. A bill was presented in 1889 and reported by a
committee in the Chamber of Deputies in 1891 and was still before the chamber in
1893. The measure was returned with some modification in 1896 and finally became
a law November 17, 1897. The bill only extends the charter to 1920 and reserved the
right of the legislature to revoke it in the year 1912. At this time the Government
bank of Holland, the Nederlandsche Bank, is suing for a renewal of its charter, and
fears are expressed that it will not be granted.
Thus we always find that people are loath to hand their financial well-being over
to a few men on account of the attendant danger of being exploited, and is this an
unreasonable position for them to take, no matter how beneficent may be the in­
tentions of their financial advisers?
W hy should we endeavor, against such a sentiment, to establish an institution
which is bound to be the subject of controversy during its existence and which will
probably be refused a renewal of its charter, as its two predecessors have been?
These conclusions run counter to the accepted doctrines of modern savants of
finance. Their arguments are all for taking the power “ out of politics,” which means
out of control of the representatives of the voters; but that is a policy which should
not be carried too far if we wish to preserve our institutions. Proper safeguards can
be thrown around the issuing of currency to protect it from abuse; in fact, to make it
just as responsive to the demands of trade as though issued by a central bank, and
it will be far more effective, because it can be made reserve money. Do not think,
gentle reader, that this is a legal-tender or “ greenback” issue which is suggested;
emphatically it is not. The writer does not believe in an unregulated issue of cur­
rency or money of any kind. He believes in an issue responsive to trade but not to
speculation. He believes in an issue which is sound and based upon a coin or gold
reserve and which will strengthen and conserve our banking system without destroy­
ing its independence or individuality; an issue which will encourage business, but
not throttle or wreck it; an issue the profit on which will accrue to the National Gov­
ernment and not to private interests.




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All of this is emphasized because sound-money thinkers are prone to push a man
over the line among the harebrains and nostrum doctors if he differs with them in the
slightest.
Also to prepare the reader for the three papers which follow, setting forth the writer’s
views on the currency situation and the simple method of strengthening it in accord­
ance with the lines just laid down.
The reader’s attention is called to the fact that these papers were written during
1907-8 and are published now without change. Therefore, many figures given are
subject to alteration.
Reference is also made to several currency plans which are more or less obsolete
to-day because others have been substituted for them, all of which goes to show the
development of the financial mind.
BANK RESERVES: A THESIS ON THE SCIENCE AND RELATION OF CREDIT TO CASH.

[Delivered before New York chapter of American Institute of Banking, November, 1907.]

Owing to conditions prevailing for the past few years the idea has taken shape and
spread that the banks, especially the national banks, should be allowed to carry less
cash reserve than the law now prescribes, or that the law’s limitation should be re­
moved and the reserve left to the judgment of each individual banker. I believe that
such a step would be unwise— in fact, a step toward national financial disaster. Rather
do I believe that all institutions doing a banking business should be forced by law to
carry a reserve equal to that of our national banks, or of our State banks at least.
I also believe that within reasonable limits our country will have specie or gold
reserve in its banks of such an amount as they are forced to carry and no more, taking
an average over a considerable period of years. That is, if, for the past 40 years the
national banks had been allowed to operate with only a 10 per cent reserve, we would
have no more specie now in the country than that percentage required, whereas, if all
banks had been required in the past to carry 20 per cent, we would have that now and
would have accomplished as much commercially and on a firmer basis. This I think
I can prove by an appeal to your reason without the use of figures.
We must bear in mind first, that this country and practically all of the commercial
countries of the world are upon a gold basis, that every credit instrument which passes
in discharge of a debt is to all intents and purposes so many grains or ounces of gold
whether it be a gold certificate, Government note, silver certificate, bank note, or a
check, the creditor accepts it in perfect faith that if he presents it at the proper place
it will be redeemed in that metal, the intrinsic value of which will be equal to the
debt which he has canceled. From this foundation is credit built, and on this founda­
tion only can it be sustained. And while this foundation or condition holds the abovenamed different forms of demand credit are interchangeable and coequal in their use,
both with each other, and with gold itself except when some specific law or depart­
ment or business rule intervenes. They are so interchangeable that Government
paper will be used more than gold itself, or bank notes will be used more than either of
them, or bank deposits and checks will be used more than any of the others, according
to the needs, necessities, and conveniences of the different communities under obser­
vation. Having this well in mind and also the fact that gold is not only the standard
of value, but always the ultimate basis of credit, and that it must be held somewhere
in some proportion, we are equipped for the consideration of our subject.
In its early stages trade was simply barter, or the exchange of one article for another
without any medium, value for value. The next step was the use of some coin or
metal or trinket which had an intrinsic value as a medium of exchange. The impor­
tant point is that this medium was supposed to always carry value with it. It was
unnecessary to carry the transaction further in order to cash in. And substantially
this rule may be said to have held that each transaction was made with coin of value
or by actual barter. A promise to pay at some future time might be given, but that
promise when it matured would be redeemed with coin, so it amounted to the same
thing. What I am trying to impress upon you is that no form of credit money or
demand credit was used to any extent.
It remained for John Law to discover the great latent power which lay in demand
credit. How it could take the place of coin. How, when it was readily accepted, it
multiplied the actual coin in existence many times.
In the United States this demand credit may take the form of the Government’s
promise to pay on demand, which we call legal tender, or a bank’s promise when it is
bank currency, or bank credits payable on demand, which are deposits. Of these is
demand credit built up when the people are in the state of mind to accept them in
lieu of gold or of anything of value.




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Please bear in mind that demand credit and time credit are two entirely different
things. One is capital invested; the other is liquid capital and is used as currency or
money, be it deposits or legal tender. Any use of the term credit hereafter please
construe as demand.
Now credit, which we have considered at such length, besides doing the work of
gold, has done more. It has builded on to the skies a structure and a sphere of use­
fulness that metallic money could never accomplish. There is not enough, and its
physical difficulties of weight and wear rule it out. But we must never lose sight of
the fact that it is the foundation. Credit takes the form of either a government’s or a
bank’s promise to pay, and the bank’s promise may be either currency or deposits.
There is a legal distinction between the two, but I doubt if there is very much scientific
difference between them as volumes of credit or their effect upon prices and interest
rates.
A word as to the growth of this credit and the tremendous volume which it may
assume. I presume that our Government instead of only $350,000,000 notes or legal
tender might have $1,000,000,000 outstanding if it were so minded; also the banks
could increase their currency by as much, provided the country would absorb it all.
I am simply giving an example of the growth of demand credit; of wealth, if you
please, which does not exist. For no man can obtain them except for value, and he
parts with them on the same terms, yet they are but a promise.
I know that you have received my proposition to increase greenbacks and bank
currency to such proportions not only as a fable but as a dangerous proposition, yet
the very same thing has actually been accomplished by deposits in banks.
There were by the last report of the comptroller 1 in the national banks of the
country gross deposits of $6,000,000,000 and $4,300,000,000 of individual deposits. In
State institutions there were $8,000,000,000, making a total of $14,000,000,000, which
is subject to payment at any time, at least presumably so.
I call your attention to these forms of credit to impress upon you the volume to
which they may grow, and on what a slender foundation they may be built, and not
because I am in any manner opposed to them or do not recognize their usefulness
and necessity when properly controlled.
How the first two may be increased— that is, the Grovernment credit or legals
and bank currency—is simple and familiar to you all. But how deposits may be in­
creased is a little more intricate, and I will endeavor to show my view of it.
Recollect, please, that I am speaking of the total deposits of all of the banks of the
country and not of any one bank. I am not here as an expert on building up a bank’s
business. The first and natural cause of increase is the profits of the business of the
country, of the merchant, the manufacturer, and the farmer. The wage earner and man
on salary and professional man all contribute whatever they have left over and above
their expenses if deposited in bank. Then there is another form of increase to which
the first is a bagatelle, namely, the increase which comes from loans and discounts,
and I shall divide this latter form of deposit increase into two classes, namely, the
commercial and the speculative. I don’t suppose it is necessary for me to explain
that when a depositor gets a discount or a loan he increases the deposits of his or
another bank by that much. The increase arising from this source when the loans
are made to business men who need the proceeds in the regular course of their busi­
ness enterprise I call a commercial increase. A discount is an advance by a bank
upon a deferred payment. The payment presumably will be made anyway at its
maturity, and the bank is simply advancing the money to the payee and holding the
promise of the payor as security. Just so with a loan to a business man for business
purposes, even though a bond or bonds be put up as security. The proceeds will
find their way into the regular channels of trade i f borrowed for a commercial enterrise, as we are presuming they are. and, moreover, the security is something which
as existed for several years and which has been held by the borrower or another for
a value equal to if not exceeding the loan.
Now, the other form of increase in deposits arising from loans I call a speculative
increase because the loan is made upon a new and perhaps presumptive value which
did not exist before. For instance, a stock is selling at 50 on January 1, and a bank
will loan, say, up to 40 per cent on its par value. On August 1 that stock may be sell­
ing at 150, and banks will loan 140 per cent on the same stock. In other words, the
loans and deposits of all banks are increased b y 100 per cent of that particular stock.
Of course, this is exaggerated. Banks do not loan much on one stock, but when it is
mixed in several different loans the result is the same. Here is where the fault of
maintaining a fixed margin on collateral loans lies. A banker decides to keep a
15 per cent margin, then if the general security market advances 50 per cent he will

E




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loan just that much more on the same collateral. He is doing the very thing which
aids a speculative boom. He is increasing credit currency by increasing his loans and
deposits. This credit currency or deposit currency is just the same as money, or
rather, has the same effect as long as it is accepted. If the same result were produced
by printing more money it would be called inflation.
Another form of speculative increase in deposits is the absorption by the banks into
their loans of brand new securities. Digestion, I think one of our financiers terms it.
These securities are issued by all manner of corporations, railroad, industrial, etc.
We will take an example: A man owns a steel plant, we will say, for which he would
take two or three millions if he could sell to an individual only. But no, he will
capitalize it and sell it, and still own it, which is better. He will bond it and common
stock it and preferred stock it to the extent of ten millions, which is modest. He has
created seven or eight millions which did not exist before, and this extra is sold and
finds its way into the banks as collateral, and what does it do? It swells the loans
and deposits. In other words, it has increased our credit currency. But you say that
property was worth what he sold it for on a 5 per cent basis. Suppose it was? Suppose
it was worth $10,000,000 on a 10 or a 20 per cent basis? The argument is the same.
Before it was owned by an individual or individuals. If it was mortgaged it was an
old-fashioned bond and mortgage, and there it stopped. But now, by this operation
it has been turned into securities and injected into our credit currency, which it swells
by so much, and which it never affected before.
This has been going on for the past 10 years, as you know, to a tremendous extent.
Take the buying of a railroad for $40,000,000 and increasing its capitalization to
$122,000,000, as was but recently confessed by a financier. Suppose most of these
securities are hypothecated. The loans and deposits 9f all banks are that much larger.
Created where they did not exist before. The deposits of the banks are increased by
these new securities and the speculative price of these securities is bolstered up by
that same increase in deposits. Is it any wonder that the deposits of all our banks
have grown so much in the past 10 years that there is apparently not enough cash to
afford an adequate reserve? Deposits made from loans on value that did not exist
before and which may be merely speculative, and deposits created from loans which
are on value which may have existed before but which was not in sufficiently liquid
form to be used as collateral. This same argument applies to the produce of the
country, which more and more finds its way to the banks as collateral, but in these
articles there is some standard of value which may be correctly appraised, nor can the
most astute financier make one bushel of wheat appear to be two bushels nor one bale
of cotton two bales.
Now we come to the question, do we want to lessen the cash reserves which are held
by national banks to support these rapidly increasing deposits? These reserves are
25 per cent in central reserve cities, of which there are 3, 12£ per cent in 40 other
cities, and 6 per cent in all other sections of the country. State banks are required to
carry a reserve varying from, say, 5 to 15 per cent in different States and sections
of a State.
We must not be unmindful of the fact that Government credit figures in this reserve
as cash. And let me call your attention to the great growth in the past few years of the
deposits of trust companies who carry little or no cash reserve, but who depend upon a
balance carried in a national bank to support their deposits. Also other classes of de­
mand deposit institutions, also the intricate system of national banks carrying each
other’s reserve, which is no reserve at all in time of panic, when all banks are hustling
for actual cash. We must bear in mind that when the pinch comes there are but two
places where actual cash may be found in any quantity; one is in the vaults of reserve­
carrying banks and the other is in the United States Treasury. And the Treasury
only has it at such times as it has a surplus income, which it did not have in 1890-1893,
and we all know the result. During the prosperous times since 1896 a certain class of
banking institutions have built up a tremendous volume of demand deposits while
carrying little or no cash reserve, and I hesitate to predict what would happen if there
should come a period of financial unrest when the Treasury did not have a surplus.
What would be the effect of abolishing all restrictions upon reserves? Why, every
banker would be thinking about dividends, of course; so he would loan all except
what he actually needed or what the particular class of business of his bank demanded.
We have but to study the reports of institutions doing business without a reserve
requirement to realize this or to refresh our memories of the result of its absence during
the early history of our country. In Canada, where there are no restrictions, the banks
carry less than 8 per cent reserve. What would be the result? Why this increase in
deposits from speculation would be carried just that much farther and when the pinch
came the banks of New York would find themselves with only 8 instead of 25 per cent.
I referred to Canada carrying 8 per cent, and I know some one is going to say, If they




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can get along with that why can’t we? Canada is nothing but a banking province of
the United States. She uses our own denomination of currency. She actually uses
our gold,1 having no gold mints of her own, and I have repeatedly maintained, and so
state again, that if it were not for her proximity to a country which has kept a sub­
stantial cash reserve Canada could not for long have continued on so slender a basis.
Only in the past year (October, 1906), when the Ontario Bank failed, $5,000,000 in
gold were shipped from New York to Toronto for need. I submit, what would she
have done if New York were not so handy?
If reserve requirements are lowered or abolished, deposits may increase until a
stringency is felt at the lower level of reserve. Or suppose that bankers having more
liberty can not loan all their available funds and there is a little competition and
interest rates go down. What is going to happen? Why, some of that reserve will be
shipped away; gold will leave the country, and it will continue to go until the reserve
gets down to what the average banker considers a working balance, and then when
the squeeze comes where will we be?
The question will arise here, What will the average banker consider a good percentage
for reserves? I think that it would be pretty low for himself and high for others
when the sailing was smooth and the reverse when it was rough. I think that my
contention that gold would leave the country is sound, as all maintain that a plethora
of loanable funds results in gold shipments. So we come ultimately to the proposi­
tion that the country will carry such a specie reserve as it is forced to, and no more.
This brings us to the parting of the ways between individual gain and public policy.
On one side we have those who argue that it is not right for the business prosperity
to be interfered with by a set cash reserve, which results in a high interest rate when
the limit is reached; on the other side we have those who contend that it is absolutely
necessary that a certain stock of gold be kept in the country to support the credit of
the banks and ultimately that of the Government; that this growing credit, which
does the work of gold so much better than gold itself could do it, would gradually
encroach upon it more and more until we would suddenly awake to the knowledge
that our stock had been so depleted that it was impossible to retrieve without going
through the throes of a most disastrous panic.
We have but to look back a few months ago, while Mr. Shaw was Secretary, when
New York banks were bidding in London against the Bank of England for the float­
ing gold in that market, to realize that this is true. Why were the New York banks
so anxious to get that gold? It was because they were at the limit of their reserve
allowed by law and they had to replenish it or cut down their loans and deposits.
So there is gold now in the reserves of the country which would not be here if it were
not for the reserve requirement. Can you imagine the result if the reserve require­
ment had suddenly been abolished at that time? Would not some of our gold have
been possibly shipped abroad as the result of the bidding on the part of the Bank
of England? And why was the Bank of England bidding for gold to replenish her
reserve when it is subject to no reserve requirement? The answer is to explain the
difference between the banking and financial situation in this country and in England
and France and Germany. Whereas we have over 6,000 individual national banks
and as many more State banks, each with the first motive to earn as large dividends
as possible, in those countries there is one central bank, which is a quasi-Government
institution and which is responsible for the reserve of the country.
And their first motive is not the paying of dividends but the public weal and they
have on their boards of directors the most accomplished and experinced bankers
the realm, who are- continually feeling the pulse of their country’s business and who
at the slightest sign of approaching danger prepare to meet it regardless of cost and
dividends, not only for themselves, but for all bankers in their Kingdom. So they
perform a sort of paternal office, and the carrying of a reserve is left to them without
a hard and fast rule, but the result is the same, for they never hesitate to raise the
interest rate if they want to stop gold from going out of the country or bring it in.
With our 6,000 national banks we have to attain the same object, only with a fixed
rule; that is, for the privilege of existence and of issuing circulation they are to carry
the necessary reserve of the country.
Panics as a phenomenon are the result of the growth of credit Without credit
there would be no panics. I think that is a self-evident proposition. Any condition
which will lead to a loss of confidence in ultimate payment will lead to a panic. The
panic will be checked at once if all demands are promptly met and confidence restored.
Secretary Sherman said at the time of resumption of specie payments that “ the
way to resume is to resume.” And at once when that was done the Government’s
promises went to par with gold.*




* Canada has begun coining her own gold only since 1910.

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There is a great difference between the time when an individual bank is in difficul­
ties and when all the banks of the country are short of funds. I have heard a great
many arguments in favor of a financial institution carrying some good bonds as a
part of its reserve, and that is very sound if you contemplate a time when only one
particular bank is short of funds, as the bank may readily sell or hypothecate them,
and thereby strengthen its cash reserve at very short notice. But at a time when
every bank is husbanding its cash reserve they can only be sold at a great sacrifice
and probably not hypothecated at all, and in either case the proceeds must come
from the vaults of another bank, so that the general situation is not helped at all.
The same may be said for the proposition to carry reserve as a deposit in another
bank. The suggestion to use clearing-house certificates at a time when interest rates
are going up is simply fostering a bad condition. It is right to use clearing-house
certificates if perfectly sound institutions find it impossible to meet their obligations
otherwise. But it is wrong to use them before such a condition arrives. In other
words, let us use any good method of stretching credit to help us out of a panic, but
not to help us into one.
It needs little imagination to see that the further credit is stretched the worse will
be the break when it does come.
Another thing which should be noted is that it may not serve one particular bank
to maintain a very large cash reserve if all of its neighbors carry a small one, for at the
time of need it may find its reserve melting away to appear in other vaults as the result
of the calling of loans.
Now a word as to interest rates. We hear a great deal of the fluctuation of interest
rates in this country as compared with those of Europe. First, we must recollect
that America is not Europe; that the conditions are different here. This is a new
country and its development has been very rapid. We are building where there
has never been any building before, whereas Europe has been populated for centu­
ries. Improvements there mean reconstruction, while here they mean new enter­
prises. This is all focused in New York, where the remarkable interest fluctuations
occur, owing to the reserve system of the national banks.
Then again, the great State banks of England and Europe, overseeing the banking
business of their respective countries, as they do, in a paternal sort of way, are enabled
to guard the reserve and steady the interest rate as we do not and can not. I have
heard it stated and believe it to be true that the banks of England and France
make a practice of borrowing money in the open market when rates are very low.
These same funds they loan out again when the rate goes beyond what they consider
a reasonable figure. The result is, of course, a steadying of the rate, but that is not
altogether the reason for doing it. The ulterior object is two-fold: First, to discourage
speculation; second, to protect their reserves by checking gold shipments, both of
which are encouraged by a low interest rate. In this country a low rate may prevail
for a considerable period; then when speculation is at high tide the rate goes up and
checks it, and the rate goes up because the reserve limit has been reached. If our
friends who propose abolishing a reserve requirement had their way the speculation
would go on until there was comparatively no reserve, and then the rates would go up
just the same.
That our present reserve requirement is too rigid is not true, because it does not
deny a bank the privilege of using its reserve, but does deny the privilege of making
any new loans, though it may renew until its position is regained. That there is
an element of weakness in carrying part of the reserve in another bank I w ill admit,
and that is all the more reason why we should be very jealous of any proposition to
lessen the actual cash reserve now required.
Now, I have endeavored to prove that, with our banking system, deposits— and,
so, credit currency—could go on increasing indefinitely through the loans made on
the increasing values of securities and on new securities and values which were not
previously available as collateral, unless there were some check, such as our reserve
requirement; that without this requirement the speculative growth would proceed
until the same predicament obtained only at a lower level of reserve, which would
be fraught with great danger.
I have endeavored to prove that it is to the interest of the country and the bank­
ing system as a whole, mind you, and not for an individual bank, and that we could
not rely upon banks as individuals to maintain it on account of competition and
dividends; that without this requirement speculation would go unchecked or gold
would be exported—in either case the reserve would be lowered; that under present
conditions a country will have such a reserve as it is forced to have, and no more.
It is not necessary for me to prove that this is a great country, that it has seen
an era of wonderful prosperity, and that the soundness of this amazing growth is
beyond question. I firmly believe that one of the contributing causes which


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has enabled us in the past 40 years to meet the most trying times without a serious
setback was this same hard-and-fast rule which, though it may have caused us to
slow up a bit at times, kept in the vault of every national bank, at least, throughout
the country a reasonable amount of actual reserve.
A SUBSTITUTE FOR A CENTRAL BAN K: HOW ELASTICITY IN OUR CURRENCY CAN BE
OBTAINED WITHOUT SACRIFICING OUR INDEPENDENCE.

[Address before New York Chapter, American Institute of Banking, March, 1908.]

In the consideration of currency changes or any other proposals to alter the laws
existent governing demand credit and its relation to the metal in which it is redeem­
able, or the business of the country in which it plays an important part by either
increasing its volume or by altering its method of ’ ssue or granting new powers to the
institutions which are authorized to issue it, there are certain laws generally recog­
nized and elemental which should ever be kept before the mind. One of the first and
simplest of these which applies to coin alone and to credit and coin combined is
that an inferior coin or money will always drive out a superior one. This rule extends
itself into the realms of credit in that credit instruments and bank credits will dis*
place coin if encouraged to do so by law because they are not so costly. For instance,
banking institutions will as a general proposition endeavor to conduct their busi­
ness during good times on the lowest reserve that the law will allow down to a
certain point. This means that all the natural expansion of trade is being accommo­
dated by credit instead of specie and if there is not enough expansion of business to
use the credit, gold shipments are encouraged by a low rate of interest. The over­
issue of bank notes under our present bond-secured system has the same effect. The
free coinage of silver at 16 to 1 would have had the same effect. This general rule
may be summarized by the statement that our country will have such a coin reserve
as it is forced to have and no more.
This rule applies not alone to the relation which bank deposits bear to bank reserve,
but far more does it apply to the relation which any currency issue may have to the
specie reserve. By specie I, of course, mean gold coin. Any currency issued in great
quantity which is not directly and solely redeemable in gold and the quantity of
which is not in some way regulated by the volume of coin in hand is dangerous and
will ultimately lead to trouble by displacing that coin. In other words, a sound
currency in a country which only recognizes the gold standard, and that is what
we are considering, is one which represents gold and not one that displaces gold or
can be used instead of gold. A currency redeemable in lawful money instead of
gold and whose volume is not regulated by a gold reserve the better secured it is
and the more acceptable it is as money, will the more readily displace gold. Such
a conclusion is arrived at by application of the before-mentioned axiom that an infe­
rior and cheaper form of money will always displace a superior and more expensive
one if it is accepted. And the more secure it is made and hence the more accept­
able it is the more readily it will displace gold.
This danger is at once eliminated if the currency is made the representative of
gold and its volume regulated by the supply of gold reserve back of it. Thus the
advocate of a bond-secured emergency currency is defeating his own ends. If he
makes it redeemable in any lawful money the more secure it is and hence more accept­
able the more dangerous it is. It is not necessary that a currency should be issued
dollar for dollar as our gold certificates are. It may be allowed to exceed the gold
by such a percentage as the country will absorb and needs, but there' should be a
limit, either fixed as in the case of the Bank of England, or with a heavy interest tax
beyond a certain limit.
In all the discussions which are heard in reference to currency plans we hear little
relative to the gold redemption and the effect it will have upon our specie reserve
and quantities of type have been used about the security which would be compara­
tively valueless if our gold is all encouraged to leave the country. At the risk of
repetition we will review the accepted economic theory of the natural laws which
govern a country’s medium of exchange or money and its relation to business. First,
the proportion of money in circulation to the demand for it for the needs of commerce
has its effect upon prices. If the volume of currency is increased prices go up; if
decreased prices go down. The former causes what is popularly known as good times
and the latter hard times.
I do not mean to say that changes in the amount of currency are accountable for the
whole of business prosperity or the reverse, but other things being equal a constant
increase in the volume of currency will cause prices of all commodities to go up because
the relative value of the currency is going down. Simply a question of supply and




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demand. It induces a false idea of prosperity, and all think they are getting rich.
It is commonly called inflation.
When the inflation is corrected the supply of currency is lessened, its value or pur­
chasing power increases, and prices of general commodities go down, and all complain
of hard times. This accounts for the popularity of all schemes in the past for increas­
ing the currency supply, such as the State banking system of note issue, the greenback
craze, and later, in our own times, the free coinage of silver.
It really is curious, when one looks at it in this light, to see the very men who fought so
valiantly 10 years ago against that latter proposition now lined up for a cure-all which
is not so very much different. As I understand it, silver if coined at 16 to 1 was to be
backed by the Government’s credit,and so is the proposed currency. Of course, the
question of the standard came in the former, which we are not considering in this paper,
although I am not so sure that it does not enter into the question.
In considering this question of the increase of currency and its effect upon prices, let
us decide what we shall call currency. The economists split a great many hairs over
the words “ currency” and “ m oney,” but I do not intend to. 1 shall say anything in
the form of demand credit which is used for the purchase of goods or the payment of
debts affects prices of commodities in general as its volume increases or diminishes.
Thus, we include all forms of so-called money, and bank deposits as well. I believe
that a great many of our financial writers have allowed this to escape them, for while
they have accepted the rule of increase and decrease in supply affecting prices as
applied to money proper, they have failed to include bank deposits, but have set them
over in a class by themselves. When we admit this proposition we have a ready
explanation for the tremendous increase in prices all along the line in the past 10
years, for we have but to turn to the reports of the banking departments in this country
to see a steady increase in the bank deposits in the same period. And in this rise
in prices and increase in deposits we see some explanation for the overprosperity
from which we have suffered.
Now, as to this increase in deposits, has it been a legitimate growth or has it been
too much fostered by our laws and therefore unnatural? 1 think that it is unnatural,
because for one reason the banks of the country as a whole have not been required
to carry a sufficient reserve against those deposits. Not every individual banking
institution, but a great many of them, so that the average for the whole is too low.
Please bear in mind my statement earlier in this paper that the whole country would
have such a cash reserve as it was forced to carry and no more. So that if all the bank­
ing institutions had as a whole been required to carry a little more reserve one of two
things would have come to pass either there would be more reserve in the country
or the total of the deposits would have been smaller.
I think that it would have been a little of each, just sufficient to have prevented
the most acute phase of the panic of October last, which in the fewest words was a
scramble on the part of institutions which had been carrying little or no reserve to get
it and a counter scramble on the part of banks which had been carrying a fair reserve
to keep what they had. In order to make my position clear let us analyze the reserve
situation in this country as it is. In the national-banking system the banks in the
three central reserve cities carry 25 per cent of their net deposits in cash. In 40
reserve cities the national banks carry 12£ per cent in cash and another 12£ per cent
in central reserve cities. All national banks outside of those 43 cities carry 6 per cent
in cash and 9 per cent in reserve cities. Naturally every country banker looks upon
his funds in the reserve cities which go to make his 9 per cent so-called reserve as so
much cash, and during good times goes the even tenor of his way and conducts his
bank accordingly.
But when the situation becomes uncertain and he finds that his depositors are
uneasy and may draw their balances—and when they draw he knows that they will
want cash and not a New York draft— what is more natural than for him to gradu­
ally reduce his 9 per cent in a distant city and increase his real reserve in his own
vault. What banker is there in New York who would not do the same under similar
conditions? The fault lies with the system and not with our country correspondents.
The fault lies with the system, I say, of making a statutory reserve of something
which is only a bank credit. It would be far better to require the country banks to
carry only 10 per cent in cash and stop there. For aside from the psychological effect
of a banker and the whole community resting in the assurance for years that something
was cash which was not and suddenly waking up to the fact, the banks as individuals
would be conducted different and would provide for contingencies instead of expect­
ing some other bank to do it for them. As far as each individual bank is concerned,
what is the difference, as reserve, between a balance in another bank and a call loan
with collateral margined up to 25 per cent? And if there are any odds, are they not




436

BAH KING AND CURRENCY.

in favor of the latter? What else is responsible for the skyrocketing of interest rates
in New York but this reserve system? When, on account of the crop movement or
some other period of activity, 6,000 national banks in the country decide to convert
some of their phantom reserve into real reserve in their own vaults, it certainly will
cause a shortage if only 50 banks have to supply their wants. You can figure it for
yourselves. If they draw only $1,000 each, it makes $6,000,000. Reversing this
procedure, we readily see the effect of 6,000 banks suddenly returning their reserves
to New York and causing an abundance of loanable funds and low interest rates, and
probably gold shipments.
The national banks are by no means alone responsible for this condition, as the same
privileges are granted to State banks. Trust companies have been allowed to go with
no reserve at all up to within two years ago in this State, and though I am not familiar
with the laws in other States I understand that they are very liberal the wrong way.
Right in New York City, State banks have been allowed to carry a balance in a trust
company which carried less than 2 per cent cash reserve and call that balance a reserve.
I am repeating all these facts to impress upon you the seriousness of this system of
calling something a reserve by law which is not a reserve, and in order that you may
see how gross deposits have been increased or our actual cash reserve diminished by
too lenient laws and customs, and also to draw attention to the causes of some of our
financial ills, which perhaps are not all traceable to a defective currency system.
After this brief review of conditions we come to the salient questions in regard to
any proposed currency plan. What power and what limitations should it have and
what is the want which it is to supply? As to power, should it have legal-tender value?
Should it be available as bank reserve? Should it be redeemable in gold alone with
a certain gold reserve back of it or redeemable in any lawful money? As to the
need for it, is it for bank reserve that it is really needed, or is it for hand-to-hand
money? Many may think this last is a senseless question because a currency issued
for the purpose of hand-to-hand money would release a certain amount of reserve
money to be held by the banks, but I do not think it is so and therefore I shall answer
that question first. I feel very strongly that we could not safely have much more
nonreserve money in circulation than we have now in the form of our present bank
circulation and if there is any increase it should be reserve money. The amount of
such money in our circulation now is very noticeable even after the very slight increase
of last fall and would impose a very heavy burden on our national banks which are forced
to receive it for the credit of their depositors if the law requiring it to be thrown out
of their reserve money was strictly enforced. What would be the condition now if
300 or 500 millions extra had been issued according to the terms of the Aldrich bill?
The talk about “ hand-to-hand” money and the demand for it strikes me as illogical.
What bank in the interior is going to pay expressage on any quantity of currency
which will be charged up against its legal reserve in New York or Chicago and will be
useless as reserve when it arrives in its own vaults? Suppose such so-called “ handto-hand ” money is paid out to the unsuspecting farmer and mechanic, it soon finds its
way back to the banks and yet is useless as reserve.
The need is for both ‘ ‘ hand-to-hand ” money and for reserve money. The periodical
shortage of small bills— that is, tens and smaller bills—is recognized by all bankmen in
this city and especially the paying tellers. I shall refer to that later. The necessity
for more reserve money for the banks has also been pretty forcibly impressed upon
bankers during the past autumn, and, in fact, is so demonstrated to a more or less
degree every autumn. The importation of gold is by way of satisfying this demand.
And let me say here, and impress upon you the care with which this phase of the sub­
ject should be approached: Would it be a sound proposition to issue a reserve money
which would relieve the banks of the strain which comes upon them when their reserves
are too low because of the growth of credit? This strain results in the importation of
gold through the effect it has upon the rates of exchange, and any plan which is going
to relieve us entirely of that necessity is going to result in our demand credit growing
as the country grows, without the natural increase of specie reserve which should go
with it. In other words, our demand credit as it grows will be more and more based
upon a fictitious reserve until we go beyond the point of safety. I can only liken this
situation in our country to a rapidly growing boy who is subject to growing pains,
which are nature’s relays to resupply his reserve force on the road to new strength.
Our country is a rapidly growing one. The system of banking, and hence of credit,
is developed here in its highest and most potent form, but the growth can not go on
forever without the reserve on which it is based growing in proportion. And
the tightening of money rates is the signal that it is due. We are having our
financial growing pains. And the person who would recommend any scheme which
will entirely remove that very natural phenomenon I can only liken to the quack




BANKING AND CURRENCY.

437

who would give that boy whisky for his troubles. He would probably forget the
pains, but how about his reserve force?
This is illustrated by the method of calculating how large a volume of emergency
currency should be issued under the Aldrich bill. The total is taken of all the clear­
ing-house certificates recently issued, which is perhaps proper, but to this is added the
total gold importations during October and November. Verily, do these people expect
never to have any more gold importations, but to issue paper money instead?
Gold importations are popularly supposed to represent the balance of trade, but
exchange dealers and those who have studied the statistics of exports and imports will
tell you they do not. It is the interest rate prevailing which does the business. Take
the reports of the Secretary of the Treasury from 1896 to date. See the great increase
of our gold holdings up to 1900. Then see them almost stand still from there on.
What is the cause of the change? _ In 1900 a law went into effect allowing national
banks of $25,000 capital to be organized, also allowing national banks to issue currency
up to par of the bonds deposited. That was sufficient to give an impetus to the issue
of national-bank notes. Since then, instead of adding to our gold reserve we have been
adding to our bank circulation. And let me say here that though national banks can
not figure bank notes in their reserve, I believe that it is done a great deal. Not inten­
tionally, but because it is a physical impossibility in the rush of business to sort differ­
ent bills of the same denomination.
We hear it stated again and again that we do not make the full use of our gold.
That is, that we hold entirely too much in proportion to the amount of credit which it
supports. With this statement I take issue. If the total of gold coin held by the
banks and Treasury is compared to the vast superstructure of credit reared upon it,
consisting of bank deposits, bank notes, and the Government’s own credit instruments,
I think it will be found that the percentage will compare very favorably or unfavora­
bly, rather, to that of European countries. The tendency seems to be, because of the
excellent credit of our National Government, to look upon its promises to pay as
good as gold, or rather, as the same as gold. If the Government will guarantee any
bank circulation, or even deposits, the impression seems to be that that settles it
There is no need to pursue the subject further. A cautious business man thinks many
times before adding his name as guarantor to any obligation, no matter how remote the
possibility of his ever being forced to pay. Why should our Government rush into
any such tremendous liability as guaranteeing an asset currency, or, as some propose,
bank deposits, which is ludicrous, both because of the possibility of the Government’s
being forced into bankruptcy, and because such a guaranty would remove all care
and safeguards which a depositor takes in selecting his bank, and therefore give the
rogues in the business a free hand, and ultimately result in the wildest era of specula
tion we have ever known. If the Government should assume any such tremendous
obligation what would be the result if we had a period of heavy gold exportation, such
as took place from 1889-1893, when the effort to support less than $100,000,000 of its
own obligations in the form of Treasury coin notes snook its credit to the very founda­
tion? Paper is not gold. A promise is not gold, however high the credit of the prom­
isor; and until so-called economists realize this in considering any measures affect­
ing demand credit they are going astray.
A currency to be sound should, if we are going to remain upon a gold basis, first, be
based upon gold, redeemable in gold only, never allowed to go beyond a certain per­
centage without a heavy interest rate, which will either bring gold into the country
or reduce the volume of the currency. The credit of the Government is only good so
far as our belief in its ability to produce the gold to redeem the currency goes. And if
through ill-advised legislation our country’s reserve is depleted and credit money sub­
stituted, we shall have to experience a similar, if not a worse, trial than that of 1893,
and we shall not have the satisfaction of laying it to the free sil verites or tariff reformers.
The sound currency of which I speak could, of course, most conveniently be issued
by a central bank. Such currency would be redeemable in gold on demand, not less
than 50 per cent of which should be held as a reserve against the issue of notes, but
usually a much higher percentage. Such a currency should be carried as a reserve
by other banks.
It is easy to see how such a currency would protect its own reserve automatically.
If gold is shipped abroad, the shipper must draw some of these central-bank notes from
his own bank, in order to get the specie. This results at once in a lowering of the
reserve of the bank from which he draws the notes, and a stiffening of the interest rate,
which helps to check further shipments. The reverse is true of gold imports. This
rule applies now, for we have much the same results from the Government’s gold
certificates and legal tender only because of the diversity of our currency; other forms
of money, especially national-bank notes, slide in and take the place of the gold certifi­
cates and the effect of its withdrawal from circulation is not so ap aient. Also, the




438

BANKING AND CURRENCY.

alternate withdrawal and returning b y country banks of their reserve deposits in New
York destroys the effect.
The action, benefits, and arguments in favor of a central bank are diametrically
opposed to those to be applied to a currency issue on the part of our present national
banks. Yet, curiously enough, we hear all currency reformers start off as in favor of
a central bank first, and next of an increased issue by our national banks. They cite
the Government banks of England, France, and Germany in support of their argu­
ments; yet the currency issues of those banks bear no resemblance to the proposed
issues in this country in their fundamental qualities First, it has been the unified
policy of those countries to do away with all banks of issue but the one central bank,
and that is practically an accomplished fact in all three countries. Here it is proposed
to grant the privilege to 7,000 banks and as many more as come into existence. Sec­
ond, their issues are held as legal reserve b y all other banks. Here they are not to be.
Third, those issues are made against a very large coin reserve, amounting sometimes
to 80 per cent, are solely redeemable in coin, and are for large amounts only in Ger­
many and England. Here the partisans differ, a few wanting them redeemable in
gold, most in money, and as to reserve some go so far as to want them to be held as such.
Eourth, as to the emergency feature which is supposed to be copied after that of the
Reichsbank of Germany; that is, turned upside aown. The Reichsbank is granted
the privilege of issuing a certain volume of notes, the limit of which has never been
reached. A certain percentage of the notes issued may be invested in Government
funds or first-class bills; the remainder must be covered by coin. You will note that
they reverse our method of making a reserve. We make the reserve a percentage of
the total; they make the investment a percentage of the total. At first, one would
think that would amount to the same thing, but it does not when it comes to the
emergency issue. The emergency issue comes about in this way: If the percentage
of the issue which is invested is greater than the law allows, that is an emergency
issue. In other words, the emergency issue begins when the volume of notes falls
below that amount of which the investments held would make just the legal per­
centage.
The effect of this is that when the bank increases its coin reserve by importation
the emergency issue disappears, although the volume of notes has not been lessened
but increased, nor the amount of investments cut down. The further effect is to tax
the bank for having a short reserve, a very cunning way of making the bank take good
care of it. I will not carry the comparison further, but if anyone can find in any
of the proposed emergency issues on this side of the water any semblance of a feature
calculated to really protect our gold reserve instead of dissipate it, we want to hear it.
A proper currency issue should therefore be based directly upon gold with a sub­
stantial coin reserve, and the relation between the volume of notes outstanding and
the actual coin reserve held against it so regulated that a rise in the interest rate will
increase the percentage of reserve either by decreasing the volume of notes or increas­
ing the coin holdings through importations. For instance, if we had $1,000,000,000
of such notes outstanding and $600,000,000 of coin reserve against them, which would
be 60 per cent, and that percentage was considered too small a rise in the interest
rates, would, through curtailing of loans, decrease the volume of notes or increase the
coin reserve through importation. This can not be accomplished through the medium
of 6,000 or 7,000 separate institutions. It can only be done by one central institution,
and that may be either a central bank or the National Treasury. And as I recognize,
along with other currency doctors, that the central bank, for political reasons, is not
practical now, I advocate accomplishing the same result under slightly different
auspices. Other currency doctors turn from the central bank to something radically
different. They turn to the very system which they denounce as unsound, ill ad­
vised and a political expedient, and in the same breath tell us that with a slight change
it will produce results directly opposite to those it has produced in the past. I turn
to our National Treasury as a substitute for the central bank, and by a slight change in
the present issues we can have a currency based upon gold slightly elastic or more so
if desired, sound and stable, because guaranteed and regulated by our Government
and a central authority.
I would take our total issue of gold certificates, of which there are approximately
$800,000,000,1 the issue of legal tender, of which there are approximately $350,000,000,
and make them one issue, of which there would be $1,150,000,000. Against these I
would hold the $800-,000,000 of gold coin represented b y the gold certificates or yellow
backs and the $150,000,000 now held as reserve for the legal tender or greenbacks,
giving $950,000,000 of actual gold reserve against $1,150,000,000 of notes issued, or a
reserve of 0.826 per cent. We would here have a note issue based directly upon the




1In 1908. Gold certificates are now over $1,000,000,000,

BANKING AND CURRENCY.

439

gold reserve redeemable only in gold, with a very slight margin of difference between
the actual coin held and the issue outstanding. Suppose more money is needed in
the country, we have but to increase the volume of notes $100,000,000, always under
the proper restrictions, of course, and there you are. No noise, no red fire, no emer­
gency issue to frighten the timid, to sound the warning that our finances are rotten,
no newspaper scare headlines. And that is a great argument against all proposed
emergency issues, aside from their very bad economical features.
This issue which I propose would all be uniform, both in its engraving and its life
and its retirement. The first $100 bill would be the same as the last. They would
all be Treasury notes, legal tender, available for bank reserve, which is the real thing
needed, with no complications about their legal status, as such. Suppose this extra
$100,000,000 is issued as previously suggested, and we still have 76 per cent reserve,
another $100,000,000 and we have 70 per cent, and so on, though I should never be in
favor of going much below the last figure. But if we did, owing to some extraordinary
emergency, like last October, we could soon recoup by importations of gold or an
early reduction of the issue. As to its practical operation: First, let a separate issue
department be established in the Treasury as in the Bank of England. Let it be
distinctly understood that this issuing of notes is never to be confused or entangled
with the regular receipts and expenditures of the Government. Not a dollar of diis
issue is to go out of the issue department except for gold, deposited or under such
circumstances as I shall describe later. And let me say here that those notes are to be
acceptable for all taxes, duties, and customs, and thus do away with that anomaly of
a government refusing to accept its own promises for taxes or any other debt.
In order to get the increase issues, when needed, into circulation, some scheme
must be devised, such as loaning it to banks upon the deposit of approved collateral
and charging not less than 5 per cent, or loaning to the banks without collateral and
with the same charges and making the loan a prior lien upon the bank’s assets. Per­
sonally, I am in favor of the latter scheme. That is, taking no collateral ana making
it a first lien. That gives the bank a freer hand to use the funds for the benefit of its
depositors, and those funds will go to the merchant and business man instead of into
the security market as in the case of a bond deposit being required.
Moreover, the great danger of a favored security list and the wirepulling to get
securities upon that list will be obviated. Many will make the point that it will not
be fair to the depositors in the banks to make the Government a prior creditor, but I
fail to see it. The Government only comes to the aid of the banks for the benefit of
the depositors; why should it not be guaranteed against loss? As against a bond
deposit a prior lien is no different. One is the same as the other, so far as the depositor
is concerned. The examination of the banks could always be made with a view to
their being possible borrowers, and it seems to me should eliminate any possibility of
loss if properly conducted. What banker would not be relieved if his loans were all
made to houses of which he or a deputy had made a personal examination?
Another method which might be developed for putting the extra issue into circula­
tion when needed would be along the lines of James G. Cannon’s suggestion of loaning
them to clearing houses where commercial paper would be used as the basis of the
security, or a discount committee could be organized in various subtreasury cities
which could buy commercial paper. Whatever method was used for accommodating
the banking community in time of need if practicable would do. The essential thing,
which is usually overlooked, is that the currency in the first instance should be based
on a sound economic foundation.
I said that I would make the interest charge to the banks for this extra accommoda­
tion 5 per cent, and in the discretion of the Secretary of the Treasury it should be
gradually raised to 7 per cent, 8 per cent, 9 per cent, and more if necessary, as the per­
centage of gold reserve was lowered, thus forcing either a reduction of the issue or an
importation of gold. There might be a commission authorized, composed of one mem­
ber named by the clearing house in each city of 1,000,000 inhabitants and two by the
President, making a board of five, who could have the power to check if necessary,
but not to destroy the initiative of the Secretary.
The Treasury notes thus issued should not be of a smaller denomination than $20,
thus insuring their principal use as bank reserves. Further, the silver issues now con­
stituting the ones, twos, and fives should all gradually be made into tens. The bank
circulation should be reversed; instead of being composed of denominations of $5 and
over, should be converted into denominations of $5 and under— that is, ones, twos, and
fives. Thus we would have a currency harmonious and well balanced, with the
Treasury notes making the larger denominations, and the silver certificates, which
would be tens, available as bank reserve; the national bank circulation limited to
fives, twos, and ones not available as reserve for national banks at least, and to be used
as hand to hand money. Thus, naturally, in the regular day’s work would the reserve




440

BANKING AND CURRENCY.

money be separated from the nonreserve money, and the banks would not have to face
every Friday and Saturday morning a heavy drain upon their reserve money, as they
do now. And again, the recurrent shortage and plethora of small bills with which we
are all familiar could be alternately supplied and corrected b y the banks themselves
as they saw fit, instead of waiting for the tardy action of the Treasury Department.
In fact, the Government will soon have to resort to silver purchases in order to supply
the demand for ones and twos unless something like this is done. Thus could the
national bank circulation be made useful and still stay within its legal limitations.
We know that to-day it is not used for local accommodation, as the theorists presume,
but a country bank orders its new issue shipped to its New York correspondent, who
has the officers’ names lithographed upon it, and then credits the country bank’ s
account. This is the usual procedure, though there are exceptions.
Other than I have suggested, I would not be in favor of disturbing the present
national bank circulation except that the rule should be more strictly enforced that
it should not be carried as a reserve. As to the privilege of the national banks carry­
ing so large a percentage of their reserve in other banks, as I said previously in this
paper, if not entirely eliminated it should be decidedly reduced. I believe there
lies the cause of our recurrent money stringency and money plenty in so aggravated
a form, and I do not believe that any currency system can be devised which will
correct it. A too easily expanded currency will only humor it until it goes beyond
bounds and leads to fearful disaster. According to my theory, a legal reserve should
be all cash, although the percentage of the total reserve be reduced. For instance,
say 25 per cent in cities of 1,000,000 inhabitants, 20 per cent in cities of between
100,000 and 1,000,000, 15 per cent in all cities of between 30,000 and 100,000, and
10 per cent in all other sections, all to be held in legal reserve money in the bank’s
own vaults.
The natural tendency of funds to collect in money centers is inevitable. W hy
add to this a harsh law which aggravates the trouble manyfold? If actual elimina­
tion of the credit reserve is not possible, then the percentage which is carried in other
banks should be reduced. At present a nonreserve bank may carry 60 per cent of
its reserve in a reserve city, and that bank may carry 50 per cent of its reserve in a
central reserve city.
It seems needless to say more on this subject. A little reflection makes the whole
trouble so self-evident. Carrying this principle a little further, no two banking
institutions in the same city should be allowed to carry each other’s reserve, whether
they are national or State banks or trust companies. That situation has obtained
and still does in this city. Under what principle of finance such a situation is tol­
erated I am at a loss to understand. I am aware that in making some of these points
I am going to be opposed by many who prefer the present situation to losing deposits.
But I think it will be found that such a system can not go on forever. Indeed, I
believe that if a central bank is instituted with the purpose of fostering this system
of banks in three cities, attempting to carry the reserve for the whole country, it will
soon find its power to lend credit exhausted.
The present is the very time to make such a change in the reserve system as I have
suggested, as after the panic of last autumn and the natural retrenchment which is
bound to follow the whole banking system will have an abundance of reserve money,
and the change may be made without hardship, and, moreover, that change should
be made before heavy gold shipments begin. It is, of course, understood that my
plan for remodeling the currency is only given here in a rough sketch. I have used
as few figures as possible, and those are only approximated and in round numbers,
in order to avert confusion. But I believe that in this manner only can we secure a
currency with some elasticity to it sufficient to allow for the enlargement and con­
traction of business activity at different seasons of the year. But 1 believe that no
form of credit currency can be devised or should be attempted calculated to take the
place of actual coin reserve during a long period of growth. And, moreover, this
increased issue of Treasury notes when necessary would, under certain departmental
rules, be available for use by any national bank at least that complied with those rules
on an equal footing and thus eliminate the possibility of our Treasury funds in time
of stress being put in control of a small coterie of men, be they ever so high-minded,
as we have recently witnessed.
N o t e .— In this connection a recent statement of Lord Averbury regarding gold
reserves in England is interesting. He said that the subject resolved itself under
two heads—gold reserves as against banknotes and gold reserves as against liabilities
So far as bank notes were concerned, he thought that his hearers would probably agree
that the reserve of gold was ample. There was not a shadow of doubt as to the con­
vertibility of the bank note. The deputy controller of the mint had given an estimate
of the amount of gold coin in circulation, including that held by banks. His estimate,




441

BANKING AND CURRENCY.

in round figures £116,000,000, was exclusive of bullion. He had no very trustworthy
figures as to the amount of gold or silver bullion, but it could hardly, with the gold
coin, be less than £150,000,000. The question of gold reserves of banks was, no doubt,
a more difficult one. If there were to be any legislation, savings banks must be
included. He was surprised that there should be any question on that subject. Yet
the chancellor of the exchequer asserted that savings banks were on a different footing.
Their deposits, in round figures, were £200,000.000, and against this enormous sum,
at the present moment, no reserve gold whatever was held. Yet surely reserve gold
was more important for savings banks than for other banks.
Table illustrating how the proposed issue would have been effected in January,
1908:
Amount.

Gold reserve. Percentage.

$346,000,000
800.000,000

$150,000,000
800,000,000

1.146.000.
1.246.000.

000 950.000.
000 950.000.

000
000

82
76

Comparison should be made with the table on page 45, where the reports of January,
1913, are used, and notice how deposits of gold would have increased the issue of
Treasury notes and strengthened the reserve.
TREASURY ISSUE

V.

BANK ISSUE: LET THE BEST CURRENCY IN THE WORLD BE IMPROVED,
NOT EMASCULATED.

[Delivered before convention of American Institute o. Banking at Providence, July, 1908.)

The first thought, it seems to me, which naturally arises in carefully analyzing the
emergency currency bill recently enacted by Congress 1 is, Why should the currency
be in the form of bank notes instead of the Government’s own direct obligations?
It is to be redeemed by the Government at its own expense, and it is practically
loaned by the Government to the various banking associations at a very fair rate of
interest upon deposit of approved collateral. In fact, the rate charged for this emer­
gency relief circulation is double that charged for the Government’s own funds when
placed with depositories. And yet the one is useless as reserve and the other is imme­
diately available as such and for building up or supporting three or four times its
volume in credits. The final outcome of all the money and currency agitation which
we have experienced for the past few years is a very good example of the manner in
which public questions will develop along certain arbitrary lines. When the ques­
tion first arose a few eminent parties versed in the theory of banking and credit pointed
the way of relief in the direction of bank issues, and alon» those lines only the discus­
sion has continued, oblivious of the fact that there might be relief in a different direc­
tion. At last a bill has been passed which brings little if any of the benefits which the
originators of the argument intended should be accomplished, and which in principle
is faulty, to say the least.
I am in favor of the Government issuing and guaranteeing its own currency. If it
chooses to loan the currency to banks under certain approved and fixed conditions in
order to relieve severe monetary difficulties, well and good, but what argument can
be advanced in favor of the Government issuing currency with the names of various
banks printed on it, but which the Government not only guarantees and redeems, but
charges a good round interest for? With our present bank circulation I have no
quarrel. We all know the conditions which gave it birth; and so long as it is kept
down to a reasonable amount it is not particularly dangerous. Its best quality is the
fact that it is rather unprofitable to issue.
This currency which I am in favor of should not be an emergency currency, but
should as soon as possible be made to absorb all of our present outstanding goldredeemed currency, including both the legal tender and gold certificates, the gold
which they represent being held as a reserve by the Treasury. There would be,
according to present conditions, under such a rearrangement, a specie reserve of about
86 per cent, arrived at as follows: Gold in the Treasury held as reserve for the legal
tenders, $150,000,000; gold held in trust against gold certificates, $1,086,000,000; total,
$1,236,000,000. Legal tender outstanding, $346,000,000; gold certificates outstanding,
1 Refers to Vreeland amendment to the national bank act providing for emergency currency.




442

BANKING AND CURRENCY.

$1,086,000,000; total, $1,432,000,000; $1,236,000,000 specie reserve against $1,432,000,000 currency outstanding, percentage, 86 per cent.
I recognize that the gold certificates represent a trust fund and that it would be
impossible to disturb those outstanding by throwing them arbitrarily into such an
issue, but if there were issued a Treasury gold note redeemable in gold on demand, and
as the gold certificates and old legal tenders came into the Treasury if they were retired
and these Treasury gold notes issued in their place the desired result would soon be
reached. The percentage of specie reserve to issue outstanding should be fixed, say,
86 per cent, as it is under present conditions, and that percentage never reduced
except under such conditions as we experienced in 1907, when an additional 100 or 200
millions of Treasury notes could be issued and loaned to the banks, interest to be
charged at not less than 5 or 6 per cent and raised or lowered according to conditions
prevailing. When any bank has regained its normal condition it would simply pay
off its loan with Treasury notes and the issue thus be reduced, or it could deposit gold
to cover the notes loaned to it, and the deficiency in the reserve would thus fie wiped
out; or the Secretary of the Treasury could buy United States bonds during a financial
stringency and sell them when money was abundant, just as the Bank of England buys
for cash and sells for the account, and the reverse at different periods.
But that is beyond the scope of this paper. Sufficient it is to say that any plan
whereby all banks were treated alike if they conformed to the conditions would do.
Under the Yreeland measure any bank wishing to pay off the Government loan may
do so by depositing with the Treasury “ lawful money,” which may be an entirely
different form of currency from that which it borrowed, and the currency which it is
supposed to retire may remain in circulation for years after. To be sure, the Govern­
ment stands ready to redeem it at any time, but why not make it originally a Govern­
ment issue and save this complication? The issue under the Yreeland bill is not
reserve money, still it is to be an emergency currency, loaned to the banks at the
very time when they are short of reserve and all are endeavoring to regain their legal
position at once. I know the argument of those in favor of this form of currency that
it is to be paid out by banks to their depositors and legal money held in the vault.
Let us presume that this is done. That practically all of the reserve money is in the
vaults of the banks of the country, and the depositors, the people, hold nothing but
bank notes. Then they will deposit nothing but bank notes in the form of money.
The deposits may increase, but the reserves of the banks can’ t increase, for they hold
all of the reserve already. Bank notes should never be counted as reserve money
even though they are guaranteed by the Government, for the principle is wrong.
But if the emergency issue under the Yreeland act is to be of any service at all, bank
notes will be counted in the reserves of banks. Bank notes are now counted in the
reserves of most of our State institutions and of many national banks, owing to the
impossibility of banks without regularly organized bill departments doing otherwise.
And what is- the result?
They are releasing just so much gold from the country’s reserve to be exported.
It is a fact now universally recognized by students of currency and money condi­
tions that any issue which is given power to do what gold can do does not increase
the country’s money supply, but simply frees gold to leave the country, or relieves
the necessity of gold being imported when it otherwise would be. Therefore, let
us lay down the general rule that a sound currency is one which represents gold
and not one which takes the place of gold.
A currency which represents gold will necessitate the importation of gold if its
issue is increased, for presumably the increase will only be made under pressure of
a high interest rate and an increased issue necessitates an increased reserve. Whereas,
a currency wffiich takes the place of gold, when increased, simply relieves the neces­
sity for more gold or allows some gold already in hand to go. This has been illus­
trated strongly several times in this country since 1860. The issue of greenbacks in
the sixties caused the exportation of gold which they displaced, but they were shorn
of a great deal of their power to do so by the fact that they went to a decided dis­
count in gold. And let me call your attention to the fact that a money which passes
freely with gold at par is far more dangerous in this regard than one which is at a
discount, for the very fact that a money is at a discount is proof that it is not taking
the place of gold entirely. But it is universally conceded that the greenback did
displace a great deal of gold in our currency and was a standing menace until the
resumption of specie payments, when it ceased to be fiat money and became vir­
tually a Treasury note.
And that is what this new issue should be; a gold note based upon a certain specie
reserve which should be a percentage rather than a fixed amount. To many such an
issue appears as fiat money and they at once throw up their hands and refuse to con­
sider it. But it is not fiat money any more than gold is as long as it is always redeem-




BANKING AND CURRENCY.

443

able in gold. To be sure it should be given the legal-tender quality in order to give
it an equal power with gold and in order to make it a better representative of the gold
for which it stands.
Another period in our financial history when a money issue which took the place of
gold instead of representing gold drove a great deal of that metal out of circulation—
or, rather, released it and allowed it to go, for gold does not have to be driven away—
was during the operation of the Sherman Act of July 14, 1890. That act provided for
the monthly purchase of 4,500,000 ounces of silver and the payment therefor with
Treasury notes which were redeemable in coin. The bill remained in force three
years, during which time $156,000,000 worth of silver was purchased and as much
new money put into circulation regardless of the need for it and with no reference to
any gold reserve, although it was redeemable in that metal at the option of the holder.
During the three years’ operation of the bill we exported $160,000,000 worth of gold.
We exported almost the exact amount of gold, because the new issue simply took its
lace and released it and very nearly bankrupted the Treasury through the operation,
ecause the notes were issued for ong metal and redeemed in another.
Other instances of issues which took the place of gold instead of representing it were
the forced mintage of the Bland silver dollar, whereby about $370,000,000 of that coin
were put into circulation between 1878 and 1890. Although they may not have caused
the exportation of large amounts of gold, they relieved the necessity for its importa­
tion, which would have naturally followed our country’s phenomenal growth during
that period and the consequent increased demand for currency.
Another instance is the national-bank note, which has none of the qualities that a
credit issue by banks is supposed to have, especially the quick redemption; it is not
elastic; it is not issued in relation to any gold reserve, and although it is not legal tender
or available as reserve for national banks, still it is for State banks and, as I said before
is reported as reserve to a certain extent by national banks and to that extent displaces
gold.
'
.
With these various issues which we have, displacing gold instead of drawing it to
us, our country would soon be depleted of its reserve if it were not for its phenomenal
growth, its tremendous and steadily increasing export trade, and the production of
its mines. Y et this should not be so. Our currency should be built on such lines
that though our exports were diminishing and our business drying up, the last dollar
of public credit outstanding would be provided for. This can be accomplished b y
means of a currency with a fixed percentage of gold reserve back of it. Then if the
volume of the currency is increased, the volume of its specie reserve must also increase
proportionately. If there were heavy gold shipments, the specie would be obtained
from the gold reserve by presenting the Treasury notes. The Treasury notes would
not be reissued except on deposit of a like amount of gold. Thus the withdrawal of
gold would at once reduce our circulation and, through the effect upon the interest
rate, make further shipments unprofitable, thus automatically protecting the reserve.
By a currency founded on these lines we could make a fuller and much more bene­
ficial use of our stock of gold than we do at present. By clinging to the gold certificate
as at present issued we are limiting the development of our credit and of our national
resources to the stock of gold in hand, whereas there i6 no reason why there should be
any such arbitrary limit set upon them. Does anyone believe that the deposits of
gold under the earth’s surface were originally measured b y the need for that metal
m carrying on the banking and financial operations of the world? If they were, then
let us stick to the use of gold coin and gold certificates. If not, let us, devise some
means by which we can use a currency based upon gold, representing gold, redeemable
in gold, "but which, if necessary, may almost double the usefulness of the stock of gold
which we find it convenient and necessary to carry. Such a currency would be to the
people and the banks exactly the same as a gold certificate, for it would be redeemable
in gold on demand and it would be issuable on deposit of gold.
A default in their redemption would be impossible, for long before the reserve was
half used for redemption the volume of our currency would be so reduced that no
more could or would be presented. In the famous bullion report of 1810, I think, it
was first recognized that a country wall absorb a certain amount of money and that if
the circulation is increased beyond that amount it is corrected through the exchanges
or the currency decreases in value. Acting upon this, we may take it that our country
will always have use for the volume of currency outstanding to-day and probably
more as it grows.
Therefore we are acting with perfect safety if we take the stock of gold now in the
Treasury as a reserve and issue the Treasury notes against it, as I have suggested. In
a total issue of over 1,400 million there would be less than 200 million of notes not
actually covered by coin. If an occasion arises when additional circulation i6 needed

E

9328°— S. Doc. 232, 63-1—vol 1-----29




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BANKING AND CURRENCY.

temporarily, this 200 million of uncovered notes could be increased to 300 or 400
million with perfect safety, for at such a time more money is needed.
If the demand for money is permanent, gold would be imported eventually and de­
posited with the Treasury, thus bringing the uncovered notes down again to 200
million, but allowing the volume of notes outstanding to remain at the higher figure.
This process could continue as our country grew and would operate the same with
two billion notes outstanding as it would with one billion.
Thus we should have an elastic legal-tender currency redeemable in gold and
available as bank reserve. And it is as bank reserve that an emergency currency is
needed. The use of clearing-house certificates proves that conclusively. The
emergency issue of these Treasury notes would remove the necessity for clearing-house
certificates and the consequent interruption to our domestic exchange.
How much more scientific and useful would such a currency be than that authorized
by the Yreeland measure. The one would relieve instantly, going direct to the work
for which it was intended, whereas the other has first to be issued by the banks and find
its way into the hands of the people, where it is to take the place of reserve money
which is to be returned bv the people to the banks before there can be any relief. Or,
the banks will put the Vreeland currency directly into their reserve contrary to the
letter and spirit of the law, and I am inclined to think that it will be the latter.
A comparison of this proposed Treasury note with the issues of the banks of England
and Germany will show that it is not very different from them in principle though it
would be a direct obligation of the Government, whereas they are the indirect obliga­
tion through the Government bank. The Bank of England was authorized by the act
of 1844 to issue 14,000,000 sterling in notes, against Government securities anything
above that amount to be covered by gold, so that the amount invested is fixed and the
specie reserve fluctuates with the excess of the issue over that amount.
By the same act the privilege of note issue on the part of other banks in the King­
dom was limited to the amount in existence at that time, April, 1844, with the proviso
that upon the privilege of issue of any of those banks expiring from disuse or failure
it should revert to the central bank which could thereupon increase its uncovered
notes by two-thirds of the amount. Through the operation of this clause the bank
may now issue in the neighborhood of £18,000,000 of uncovered notes. We note
here the gradual extinction of other banks of issue and concentration of note issue in
the one central bank which is opposed to our present policy of having 8,000 banks of
issue and increasing their privileges. We note also the amount of uncovered notes
£18,000,000 or $90,000,000, which compares with the $200,000,000 of uncovered
Treasury notes under the proposed issue. The Bank of England note is also a legal
tender, therefore, available as reserve for other banks, through, of course, there is no
legal requirement.
It is interesting to note also that the only time when the circulation of the Bank
of England has been found inadequate or its weak points brought out were in 1847,
1857, and 1866. At these times it was necessary to suspend the act or allow the bank
to increase its uncovered notes, which amounts to the same thing as our proposition
to increase the uncovered Treasury notes during times of financial stress. Let us also
note that the weakness lay not in the bank note issue, but that the bank acted as
reserve agent for all of the banking institutions of the Kingdom, and that the trouble
was caused by their drawing their balances to replenish the cash in their own vaults.
The gold was drawn not by the bank note, but by check. We therefore come to the
strong conclusion that to completely divorce the monetary issue of a country from the
banking business is the only safe and sound plan.
The note circulation of the Imperial Bank of Germany is based largely on the
English banking act of 1844. There is a fixed limit of authorized circulation against
which specie must be held in the proportion of one-third and issues beyond this
amount must be covered in specie for the full amount; except that the bank may
exceed this limit without metallic reserve upon the payment o f a 5 per cent tax to the
Government. Here also the banks of issue are limited to those in existence at the
time the act was passed (1875) with reversion of the privilege to the central bank
upon the suspension of other banks and the proportionate increase of uncovered notes
to be issued by the central bank.
The authorized circulation as originally adopted was 250,000,000 marks, one-third of
which (83,000,000 marks) had to be covered in specie; two-thirds (167,000,000 marks)
to be invested. You will note that the amount uncovered, 167,000,000 marks, is fixed,
whereas the amount uninvested or represented by coin and metal is not; for the issue
may exceed 250,000.000 marks by any amount so long as the excess is covered by coin.
But if this increase is not all covered by coin and the two-thirds, or 167,000,000 marks,
allowed for investment is exceeded, then the 5 per cent tax becomes operative until
the note issue is decreased or the metallic reserve increased.




445

BANKING AND CURRENCY.

The circulation is something over a billion marks, so the amount to be invested is
practically fixed, although the above-given figures have been considerably increased
by the imperial bank having taken over the circulation of other banks. Again, we
see the similarity to the proposed Treasury notes, with the added feature of the 5 per
cent tax which corresponds to the interest to be charged by the Treasury for accommo­
dation. We hear a great deal about the Government going out of the banking business,
but I do not believe that in so far as the currency needs of our country are concerned
it is possible or feasible for it to do so. M. Noel, in speaking of the Imperial Bank of
Germany, says: “ The establishment is closely bound to the State and is only able to
move, think, or act when the State manifests in some manner its presence and affirms
its control.” What is that but the Government going into the banking business? If
we establish a central bank here we must do one of two things: We must hand the
whole of our financial business oyer to private parties or the Government must take
full control. I do not believe 1 in 1,000 of our citizens would consent to the first,
and if the latter then it seems to me that the Government would be deeper in the
banking business than before.
Therefore, why not utilize and extend the good points of our Treasury system, seiz­
ing upon the good points of the currency systems of the world, adapting them to ours
and proceed on our prosperous way with the firm conviction that Uncle Sam when he
once sees the way clear will do a tiling a little better than anyone else could do it.
The following table shows how present Treasury issues would be thrown into pro­
posed new issue and how easily an emergency issue could be effected, which would
bv ia te the necessity of using clearing-house certificates.
|Gold certificates are aken as of Jan. 31, 1913.)
Present issue.

Gold reserve.

Legal tender......................
Gold certificates...............

$346,090,000
1,086,000,000

$150,000,000
1,086,000,000

Total present issue.

1,432,000,000

1,236,000,000

Inter­
est
Treasury notes.
rate.
Perct.
4
5
6
7

Gold reserve.

$1,432,000,000 $1,236,000,000
1.532.000. 000 1.236.000. 000
1.632.000. 000 1.236.000. 000
1.732.000. 000 1,236 000 000

Per­
cent­
age.

86
80
75
70

Those who are familiar with this subject know how delicate an operation it is to
tamper with the currency of a highly developed commercial nation such as the United
States. The prudence and caution demanded may be compared to that of a surgeon
when he wields the knife near the vitals of a human being. Here is a change which
may be effected with no more attention attracted than is occasioned by the changing
of the engraving on one of the bills of our existing issues, and yet it would go to the very
root of our disorder. Experts claim that $150,000,000 increase would be ample to
satisfy the reserve shortages of our worst periods. A separate “ issue department”
should be created in the Treasury and all currency issues controlled from there and not
reported and confused with the fiscal department. A surplus or deficiency in the
income of the Government should have no effect on or relation to the issue depart­
ment. The emergency issue could be put into circulation by loaning direct to banks
in proportion to capital and surplus, or to deposits, and be made a first lien against the
assets, or through discount committees at the clearing houses, or at the subtreasuries.
Any one of these three methods would serve; the main thing is to create a sound cur­
rency issue first, and, secondly, to keep it in the control of the people’s Government
and its operations within the bounds of absolute necessity.
FINALE.

If through the perusal of the three foregoing papers the reader has been induced to
think a little for himself along the general lines of the greatest good for the greatest
number; if he has been brought to realize that a plan or proposal which has all of the
advantages urged in its favor may have certain disadvantages which are extraneous




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BANKING AND CURRENCY.

or outside the direct argument, but still have great weight; if he has begun to see as in a
picture this vast structure of credit which contains and supports our whole business,
social, and commercial life, and then to see it crumbling and fading away over night.,
leaving in its relentless wake the helpless and unfortunate victims of its enticing and
tempting possibilities, then they shall not have been published in vain. The average
person one meets in the street has so vague and pitiful a view of general financial move­
ments and of the effect of credit growth or paralysis, that a little study will seem like a
revelation to him. The fact that the laws of credit and finance as applied to the indi­
vidual or the community are so divergent accounts for this in a great degree. How
many men who have not made a study of finance realize that an increase in loans
results in an increase in deposits? And yet it is axiomatic to a banker. How many
earnest men are there who do not rail at "the law which prevents national banks from
loaning on real estate? Yet it has been demonstrated time and again, during and after
crises, that banks have been crippled by it. How many depositors who do not think
that their offerings of notes should be taken indefinitely as long as those notes are
unquestionably good? They do not realize the peril of too much credit. How many
are there who do not think that an A1 check on Chicago is just as good as gold in New
York? That a certified check is identical with money? How many bankers are there
who do not think that reserve carried in another bank as long as the law allows it is not
just as good as though in their own vaults? How many who wonder why the law does
not allow a national bank to carry bank notes as reserve? How many who do not want
to carry bonds as reserve? How many who do not fret at having to carry so much
useless cash as reserve when it might be earning interest? And what is it which sud­
denly changes the mental attitude of all of them? It is the panic. Then the merchant
does not want notes, the Chicago check does not appeal to him, the banker forgets the
coveted interest on his reserve. The panic is at once the scourge and the purger of
commercial life. It is the firebrand which sears, but maybe it cleanses.

Senator R e e d . Y ou think that it is entirely practical for us to
require in this bill, if it should be passed, that the reserves of the
banks should be put in in gold. Do you think we can get the gold
accessible to the banks ?
Mr. A l l i n g . I do not know why not. Every bank carries a
certain amount of gold certificates. In fact, you will notice the
term “ specie” in the statement of the comptroller’s report. That
is not all gold. Various banks are careless about making this amount
up. Specie includes gold certificates, silver certificates, and any
coin they may have. There was $713,000,000 on September 4, 1913,
and on June 12, 1913, there was $724,000,000.
That is the amount of specie, and most of that is gold certificates.
So you see they have an ample amount of about $400,000,000 or
$500,000,000, provided they get these other notes back in exchange
so they can go on and do business. I have a statement here which
shows— I am not familiar with these figures— the total is appar­
ently $420,000,000 in gold— coin and certificates. There certainly
is $1,000,000,000 in Treasury certificates outstanding.
Senator R eed . If we put gold certificates in we would not actu­
ally increase the gold supply, because the gold we have already
got locked up. The thought I had in my mind was whether by a
provision such as you suggest in this bill we could actually largely
increase the amount of gold in the Treasury or in the banks and the
Treasury together.
Mr. A lling . Y ou mean the actual metal.
Senator R eed . I mean the actual metal.
Mr. A lling . N o ; you can not increase that by legislation.
Senator R eed . I mean increase the gathering of it. I do not
mean to increase the actual gold. I am not a fiat money man— at
least I do not think you can create gold by a fiat. What I mean is this:
Could we actually gather $550,000,000 more of actual gold coin?
Do you think it is in the country and that the banks could get it ?




BANKING AND CURRENCY.

447

Mr. A lling . Y ou mean coin that is in the country?
Senator R eed . Yes; so that the banks could gather it up.
Mi . A lling . I think that could be done— not all of it, but a large
portion of it.
Senator R eed . D o you think that a large portion of it could be
accumulated substantially at once— immediately I mean— and the
balance of it gathered in gradually out of the circulation?
Mr. A lling . I should think if all of the national banks came into
this system that in the neighborhood of $400,000,000 or $500,000,000
in gold could be accumulated.
Senator R eed . If we got that much in addition to the $1,100,000,000
that we have back of our gold certificates, and in addition, I think it
is, to the $150,000,000 that we have back of our legal tender, we would
then have in this country the largest gold reserve of any country in
the world.
Mr. A lling . I think we would. I am not familiar enough with
the figures, however, to state just now. They could use either gold
certificates or gold coin if required in the bill.
Senator R eed . What I am asking and what I am dealing with,
Prof. Sprague, is the actual accumulation of money. I understand
that a bank could take a gold certificate and use it in lieu of the
gold. In that event our gold in this country in the banks and Govern­
ment vaults would not be decreased a dollar. I am inquiring as to
the feasibility and practicability of actually getting more gold coin.
Prof. Sprague . There is a lot of gold coin, of course, in circulation,
and by a process of substituting some other kind of money for it, you
might gradually attract that gold coin into the banks. I do not
believe there is very much away from the Pacific coast in circula­
tion— that is, outside of the banks— to be gathered in. It would have
to be imported from abroad, and they could not secure any great
amount of gold other than the gold certificates.
Senator R eed . What do you think about that, Mr. Alling ? Do
you not find a good deal of gold going through your bank right along ?
Mr. A lling . Oh, the bulk of the money above $20 bills seems to
be gold— gold certificates.
Prof. Sprague . Those are included in the Senator’s supposition.
Senator R eed . I am talking about the gold; yellow, shiny, gold
coin.
Mr. A lling . I could not say how much there would be. What
does the statement say ?
Senator R eed . I am dealing with the proposition with the idea
in mind of seeing how much we can actually increase the gold which
will be in the Treasury of the United States or in the vaults of these
regional banks or any other system of banks we establish and which
will constitute a gold reserve on which notes might be issued.
Prof. Sprague . There were $143,000,000 of gold coin, as distin­
guished from gold certificates, in the national banks. Thst might
go into these Federal reserve banks. Then, there is probably some
gold coin out in circulation.
Senator R eed . That gold is held now back of our Federal cur­
rency.
Prof. Sprague . That, as I understand you, is to include the gold
coin in the banks.




448

BANKING AND CURRENCY.

Senator R eed . That is not what I am trying to get from Mr.
Ailing. What we have already is locked up and is safe.
Prof. Sprague . I do not think there is much gold outside of the
banks at the present time away from the mountain and Pacific Coast
States. What there is could only be gathered up very slowly by a
process of the banks carefully keeping any gold that came in over
the counter and insisting that their depositors wheiv-they paid checks
should take currency rather than gold. I do not believe it would
be possible to get by that means $100,000,000.
Senator R eed . W h a t> you think about that, Mr. Ailing?
do
Mr. A lling . I can not make any statement in connection with
that. I have not made a study of how much actual coin there is in
circulation. W hat were the figures, the limit that the professor
gave ?
Senator R eed . $100,000,000.
Mr. A lling . He stated that you could not get $100,000,000 out­
side of the gold certificates.
Prof. Sprague . And the gold coin in the banks.
Senator R eed . I do not care what gold the bank has in it— whether
it is in the bank or whether it is in an old woman’s stocking. I would
rathe** it would be in a bank because the money could then be used.
I am talking about whether there is gold in existence in the United
States of America outside of the vaults of the Federal Treasury
sufficient to make up $500,000,000 of gold which could be taken now,
gathered together and locked up just as we have locked up the
$1,100,000,000 of gold back of the gold certificates.
Mr. A lling . I do not see why not. The report of the Secretary of
the Treasury shows that there is over $1,000,000,000 of gold certifi­
cates outstanding. And there certainly has not been $500,000,000
destroyed by fire and loss.
Senator Shafroth . The Senator says “ besides that.” He elimi­
nates that.
Mr. A lling . I thought you meant the $500,000,000.
Senator R eed . Oh, no.
Mr. A lling Well, I will have to consider that before I come back
from Richmond.
Senator R eed . Then you will probably stop on your way back.
However, I am going to ask you just one more question. You are
in the banking business in New York City?
Mr. A lling . Yes.
Senator R eed . What is the capital of your bank?
Mr. A lling . $1,000,000.
Senator R eed . What are your deposits ?
Mr. A lling . About $14,000,000— a little over that— gross deposits.
Net deposits under $12,000,000.
Senator R eed . H ow long have you been in the banking business
Mr. A lling . Twenty-six years.
Senator R eed . Have you been in New York most of the time?
Mr. A lling . Yes, sir; I have been in New York all of the time.
Senator R eed . So that you have had an extensive experience in
banking in New York City, I take it. How long have you been with
this bank ?
Mr. A lling . I have been with the bank for 26 years.
Senator R eed . Have you been president all that time ?




BANKING AND CURRENCY.

449

Mr. A lling . N o, sir. I am now vice president. I started in as
a messenger boy, practically.
Senator R e e d . You have worked right up all the way through.
You have been occupying a responsible position with the bank, how
long?
Mr. A lling . About five or six years. My powers of observation,
however, were not limited previous to that time.
Senator R eed . I understand. I only desired to get your experience
into the record.
I wish you might stop over in Washington on your way back from
Richmond. In the meantime you might think over the question of
how much gold we could gather up in this comitry.
Mr. A lling . The committee sits Friday and does not sit Saturday?
The Chairman . I think the committee will be in session every day.
Senator P o m e r e n e . I would like to ask one question here, if 1 may.
You spoke of an elastic system of currency which ought to expand
according to the necessities of financial conditions. Now, believing
in that system, as you evidently do, is it your judgment, assuming that
this system is adopted, that this reserve board should be named by the
Government or by the bankers ?
Mr. A lling . That is a little outside of the scope of my paper.
Senator P omerene . I know it is; but it is not outside of the scope
of our inquiry.
Mr. A lling . I think the Government should control this, but I
still think that no harm could arise from having representation by
the banks
The banking business is a very peculiar business and
there are things that have to be foreseen at times that a man who is
not trained in that business does not foresee.
Senator P omorene . Assuming that this board is to be appointed
by the Government, it does not mean for one minute if I properly
construe it, that this board should be composed of men who had no
experience or were without judgment.
Mr. A lling . Well, I was speaking of men who had no experience
in banking.
Senator P omerene . It might or might not be a banking experience.
Mr. A lling . N o ; I thought that one provision eliminates the rest
of them from it. Is not there one provision which said that one shall
have had three years’ experience at a banker. Naturally that means
that the others shall not.
Senator P omerene . Not necessarily so.
Mr. A lling . It does not say “ at least one” ?
Senator R eed . Well, that would be the construction.
Senator P omerene . I am speaking of the reserve board.
Senator R eed . That would be the construction, that at least one
must be, and the others may be.
Senator P om erene . I want your judgment as to another propo­
sition.
Do you think that the national banks should have the privilege of
going into this business or staying out of it, or should that provision
be compulsory ?
Mr. A lling . I think it would be a great deal better if all the banks
were in it.
Senator Pom erene . I agree with you; and to that end, do you
not think, in view of the fact that we are trying to adopt a national




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BANKING AND CURRENCY.

system here, that it should be compulsory, rather than voluntary—
looking at it now from the standpoint of an American citizen ?
Mr. A lling . I really think that I have an open mind on that sub­
ject. I am not trying to dodge the question, Senator------Senator P om erene . I understand that.
Mr. A l o n g (continuing). But, of course, I am here representing—
I am a bank officer.
Senator R e e d . Are your views which you have expressed here—
with the exception of this one matter, which you have not answered
directly— the result of some conference or talk that you have had
with some other bankers ?
Mr. A l o n g . N o, sir. I never had the honor of being invited into
a conference.
Senator R eed . D o you know anything about any propaganda that
has been carried on— not only now, but for some years past— by the
banks to bring about a change in the banking and currency laws ?
Mr. A l o n g . W ell; I would not call it a propaganda.
Senator R eed . Well, you may call it by whatever term you wish
to refer to.
Mr. A lling . I think that there is a universal feeling among the
banks that there should be some change in the currency system, and
different men have different methods of attaining it, but I do not
think there has been any concealed move.
Senator R eed . D o you know anything about a fund for that pur­
pose— for publicity purposes?
Mr. A lling . I do not.
Senator R eed . Do you know anything about letters having been
sent out from New York City by certain banks?
Mr. A lling . I do not.
Senator R eed . Through the other banks of the country?
Mr. A lling . No.
Senator R eed . That has not come under your observation ?
Mr. A lling . N o.
Senator Pomerene . Among the powers which are given to the
Federal reserve board under this bill is the power denominated as—
(b) To permit or require, in time of emergency, Federal reserve banks to rediscount
the discounted prime paper of other Federal reserve banks. * * *

The American Bankers’ Association proposed an amendment which
would eliminate the power to require and confine it to the power to
permit this rediscounting. What is your judgment as to whether the
board should have the power to require it or the power to permit it
only ?
Mr. A lling . I do not think that it is anything to be worried about.
I mean the fact that the board would have the powder.
• Senator P omerene . In other words, you believe that the Govern­
ment ordinarily would not require a thing to be done unless it in
effect should be done ?
Mr. A lling . No.
Senator R eed . Y ou do not get his answer into the record as it
should be.
Senator P omerene . And for that reason you are not worrying
about it ?
Mr. A lling . I am assuming that this board will be composed of
men of such character that anything they will do in that line will be




BANKING AND CURRENCY.

451

for the best interests of the whole country. I think that is the idea
of the drafters of the bill.
Senator Shafroth . Mr. Ailing, I want to ask you one or two ques­
tions, please.
There is no way under this bill of getting money issued under its
provisions except by the member banks depositing commercial paper,
is there?
Mr. A lling . There is no other way for member banks to get money.
Senator Shafroth . There is no way for any money to be issued
under the provisions of this bill except by member banks presenting
paper for discount?
Mr. A lling . N o. There is no other way. I do not know as I un­
derstand the full purport of your question, because money is not issued
when member banks present paper for discount. It is issued when
the—*
—•
Senator Shafroth . The paper is predicated upon the assets that
are in the reserve banks.
Senator R eed . Y ou mean the money that is issued?
Senator S hafroth . 1 mean the money that is to be issued upon
that. There is nothing else back of it except the commercial paper
that is in the hands of the Federal reserve banks, placed there by
the member bank.
Now, if that is true, and the circulating medium should include all
ultimately of the bank’s circulation that now exists and the emer­
gency currency which it is supposed that this bill gives, would it not
require the Federal reserve banks to have an enormous banking
business in keeping this paper, which is only 90-day paper, in cir­
culation ?
Mr. A lling . I do not know. You say “ enormous banking
business.”
Senator Shafroth . Yes. If there is $750,000,000 of nationalbank notes now; if that is to be substituted by the currency author­
ized by this bill, and that currency is predicated solely upon these
short-time obligations, it means that for that loan there are to be
renewals every 90 days, or even less time than that, for a good deal of
the paper is 30-day paper, and would not that require a great banking
force ?
Mr. A lling . Y ou can figure out what it would require. It would
be simply the total at one time. It would be the total amount of the
loans and the total amount of the business of the year. With a 45day note you divide the 45 days into the year and the number of
notes that would have to bo discounted during the year, if that is
what you mean by “ enormous banking business.” It does not seem
to me that that is a thing to be worried over a great deal. I am not
worrying about the paper being 45-day paper. I think these Federal
reserve banks are organized for the purpose of aiding the banks in
times when they need aid. They are not organized to give the banks
permanent capital or permanent cash or to help them to build up
their business.
Senator Shafroth . But this bill does provide that the currency
authorized under its terms shall ultimately take the place of all the
bank currency now existing.
Mr. A lling . Yes;but they would not have to loan that, would they?




452

BANKING AND CURRENCY.

Senator Shafroth . It would have to be in circulation or it would
be a contraction of the currency.
Mr. A lling . It would not have to be loaned. There is $700,000,000
of national-bank notes outstanding now. If you held $100, we will
say------Senator Shafroth . Yes.
Mr. A lling . The reserve bank issues $100 of reserve notes; they
give them to you and take the $100 back. There is no decrease in
the circulation.
Senator Shafroth . Y es; but the national-bank notes that are now
issued have to be retired according to this bill.
Mr. A lling . That is as I understand it, but the Federal reserve
notes are to be issued in exchange for the national-bank notes.
Whether that is done through a deposit in the Treasury Building,
whether it is done between the Federal reserve bank and the national
bank, makes no difference. It is simply an exchange of one note
for another.
Senator Shafroth . But that bank note in circulation has to be
retired by the bank. They present their notes and they are can­
celed, and they get notes of this reserve bank which are substituted
in their place. That circulation then becomes based upon shorttime paper instead of, as it is now based, upon bonds. There has to
be some basis for money circulation. It is now based upon bonds,
is it not?
Mr. A lling . Yes.
Senator Shafroth . Y ou have 2 per cent bonds that are on file
with the Treasury Department ?
Mr. A lling . Yes.
Senator Shafroth . They are to be canceled. The banks are to
get 3 per cent bonds issued to them and wipe that currency out. It
will be as though it had never been issued. That currency has to be
issued by these reserve banks, and the only way it can be done is
by the banks, in substitution for this currency of the country, to de­
posit their bank notes and then have the Federal reserve banks issue
new notes.
Mr. A lling . H ow would they have to borrow it? This $700,000,000, as I understand it, could not be loaned. We have to go back
to the beginning of that. Let us say the national bank holds a
United States bond worth $1,000.
Senator Shafroth . Yes.
Mr. A lling . It wants to retire those bank notes, through the
operation of the Treasury Department.
Senator Shafroth . Yes.
Mr. A lling . It sells the bond and somebody has to buy the bond;
and he can pay that back for the bond with, we will say, Federal
reserve notes.
Senator B ristow . Where would he get them ?
Senator Shafroth . Y es; where does he get them to do that with?
Mr. A lling . I am not particularly in favor of that, as you will
notice in my bill. I have never thought of that feature of it, however,
and I will ask to let you give me time to think that over also when I
go down to Richmond.
Senator Shafroth . I wish you would do so. And now I will not
ask you any more questions.




BANKING AND CURRENCY.

453

Mr. A lling . I am now speaking offhand, without figuiing it out,
and I should say it would not result in a contraction. There must
be a displacement there; if I have $100 national-bank notes and they
are retired I still have $100.
The Chairm an . W hat objection, Mr. Alling, would you see to tak­
ing the $50,000,000 of actual gold coin now in the Treasury of the
United States that happens to be theie to-day, all free gold in the
current funds they happen to have— what objection would there be
to putting that gold in the Redemption Division, the reserve division
of the Federal Treasury, and issuing Treasury notes against it, pay­
able in gold— without being a gold certificate but payable in gold— and
issuing then a like amount ox $50,000,000 of Treasury notes against
3 per cent bonds, and take up these 2 per cent bonds, putting these
threes in the Redemption Division, the reserve division of the Treas­
ury Department; so that the result would be to retire $50,000,OOOof
twos and $50,000,000 of national-bank notes, replacing the natonalbank notes with Treasury notes, but having $100,000,000 of these
Treasury notes and $50,000,000 of gold and $50,000,000 of 3 per cent
bonds in the Federal Treasury? Would you regard that as a judi­
cious or proper way to take care of these national-bank notes out­
standing ?
Mr. A lling . I would not think so at first thought. I would have
to think about that, because there are always so many ramifications
about a thing like that. A question like that must be thought over
very carefully, but it seems to me— your idea is to issue against this
$50,000,000 of gold coin just $50,000,000 of United States notes?
The Chairm an . In this transaction I speak of, there would be
$50,000,000 of gold and $50,000,000 of 3 per cent bonds, against
which $100,000,000 of notes would be issued.
Mr. A lling . Fifty per cent of reserve against those notes ?
The Chairm an . I mean $100,000,000 of notes against $50,000,000
of gold and $50,000,000 of 3 per cent bonds in the Treasury. That
would be dollar for dollar of bonds and gold.
Mr. A lling . These would be 2 per cent bonds, so that it would
result in the retirement of that much national-bank notes in circula­
tion. There would be no change in the total volume of our circula­
tion.
The Ch airm an . N o ; there would be no change.
Mr. A lling . I do not see how it could do any harm, but it looks as
though the Government would be tying up the free balance of gold
very much. It would not be able to use that any more. That is,
the free balance, which the Government has to sustain its credit with.
Senator Shafroth . But there would be twice that amount of
notes outstanding.
Mr. A lling . Yes; but they are outstanding. They are not in the
Treasury.
Senator R e e d . I do not believe Mr. Alling got the import of that
question.
The Ch airm an . The proposition is this: It has been suggested
that we retire the national-bank notes by issuing Treasury notes in
lieu of them as rapidly as we have available free gold to put also into
the reserve division of the Treasury, so that— if we have $500,000,000
of free gold now in the current fund— if we replace those gold dollars,




454

BANKING AND CURRENCY.

those actual coined dollars now in the Treasury, with Treasury notes
and put that coin into the reserve division of the Treasury------Senator R eed . Y ou would have then 100 per cent of gold reserve.
Mr. A lling . That is, if you start at that point.
The Chairman . Yes, you would have 100 per cent of gold re­
serve, if you start at that point, against these particular notes. But
at the same time, coincidental with this, $50,000,000 of 2 per cents
will be taken over.
Mr. A lling . With an additional issue------The Chairman (continuing). Retiring the $50,000,000 of nationalbank notes issued against those 2 per cent bonds, and issuing in lieu
of the national-bank notes Treasury notes and in lieu of the 2 per
cents now in the hands of the comptroller belonging to the various
national banks which deposited them substitute 3 per cents owned
by the United States and kept in the redemption division, which
will be an available form of public credit by which gold can be ob­
tained in the markets of the world, if necessary, on 3 per cent cur­
rent bonds, either by borrowing or by actually selling them, if neces­
sary, but probably by borrowing them through the fiscal agents of
the Government, if it should be necessary to add to our store of gold
from foreign supplies. It is a somewhat long proposition, but in
view of the fact that you are so familiar with the whole subject, I
venture to put it before you, because that was along the line of your
previous paper.
Mr. A lling . These suggestions are sound enough, but I do not
like the idea of proposing to issue all forms of currency. What we
want is to get our currency down to as simple a basis as it is possible,
and to have as few different forms of currency as we can have.
The Chairman . The purpose of that was to retire the 7,000 and
odd different bank notes, each of which has from four to five plates
and therefore there are 28,000 to 30,000 plates, and instead of that
have a Treasury note the only form of paper in this country, but
have that note secured by dollar for dollar, either of gold or United
States bonds, but in that contingency the bonds will be owned by
the United States in its own Treasury, the United States can receive
the interest on its own bonds, and put an end to the payment of
interest upon bonds owned by the banks.
Mr. A lling . Another thing that would result would be a replacing
of national-bank notes not a reserve for national banks by a note
which would be a reserve. That would at once result in $50,000,000 of
cash being added to that in the banks.
The Chairman . At the present time the State banks have the
advantage of the national banks in that they can hold these nationalbank notes as their reserve while the national banks are denied a
like authority. It is an advantage which the State banks have over
the national banks.
Mr. A lling . Possibly, but as our national banks were organized
originally, besides having the privilege of issuing currency they are
supposed to be the national reserve-carrying banks of the country.
That is what I take the concept of the law to mean, that they were
to be the reserve-carrying banks of the country. A country which
has a central bank relies upon its central bank. W e have none, and
we rely upon our national banks. They have certain privileges, or




BANKING AND CURRENCY.

455

did have in the past, of issuing currency and doing business with each
other in different parts of the country in the way of carrying reserves,
which were given to them in exchange for carrying the reserves of the
country. That is what I should say was the spirit in which the
n atio n al-b an k act was drawn outside the issuing of national-bank
notes against bonds.
Senator R e e d . If I understand Senator Owen’s proposition that
he put to you, it is this: To retire all of the gold certificates, all the
greenbacks, and all the national-bank notes, and to issue Treasury
notes and to have the Treasury notes backed by 50 cents on the dollar
actual gold, and backed by a Government bond bearing 3 per cent
interest, so that the holder of a note would have 100 per cent, one-half
of which would be gold and one-half of which would be a bond of the
United States.
Mr. A lling . Y ou have made your statement a little broader than
Senator Owen made his. He started with $50,000,000 and increased
it to $100,000,000. You have taken in all the gold available.
Senator R e e d . That is where it would ultimately work out. Would
that be a safe currency ?
Mr. A dding. Not if you double it right away by making 50 per
cent gold reserve, but it you started off with all the gold in hand and
issued United States Treasury notes for the same amount as we have
now, and only increased that as circumstances demanded and con­
ditions warranted, then 1 would call it a good proposition, but I would
not call it a good proposition to suddenly double the amount of the
gold.
Senator R eed . That is a question of inflation.
Mr. A dding. And another thing that I do not particularly care for
is to carry all United States bonds as security for these notes, be­
cause they are no more security than the ordinary credit of the Gov­
ernment, and it looks as though we were trying to fool ourselves.
r
The Chairman . It is merchantable.
Senator R e e d . There is this distinction.
Mr. A dding. Y ou mean that you do not have to have a special
act to issue them.
The Chairman . Y ou can get gold whenever you want to by issu­
ing bonds and selling them.
Senator R e e d . If you devise a system of currency for the country
with 50 per cent reserve of gold, it is generally conceded that that in
itself is a pretty healthy reserve, and the faith and credit of the
Government in addition. Now, as a bracer to that, if actually every
time you issue $1,000,000, you squarely set aside $500,000 of gold
over that, and at the same time about $500,000 interest-bearing
bonds and hold it, if there ever came a run that depleted that gold
to a point of danger the Federal authorities would then be author­
ized to take these bonds and put them upon the market until they
got enough gold to replenish the exchequer— the reserve. That
would be, would it not, some element of safety over and above the
mere faith of the Government, because the Government says:
We now have issued ready to put on the market, when necessary, gold interest-bear­
ing bonds.

Mr. A dding. It would give you a means of restoring your gold
supply by sacrificing your bonds once in a while.




456

BANKING AND CURRENCY,

Senator H e e d . D o you think that would have to be done? If a
note will float with a 50 per cent gold reserve, and the faith of the
Government back of it, the bond would never have to be used, would
it, unless there came some supreme emergency and crisis sufficient to
break down the bond ?
Mr. A lling . The bond might decrease a little.
The Chairman . In connection with the question asked b^ Senator
Reed, I submit for the record a table showing the percentage of the
actual gold reserve against the notes of the different reserve banks
of Europe, the actual gold reserve against the notes and deposits,
and the actual gold reserve against the deposits only, which only
is possible in the case of the Bank of England, because it is the only
bank that keeps the accounts in such a form permitting the cal­
culation.
Senator S hafroth . That is very valuable; it ought to go in.
The Chairm an . I want it to go in so that it will explain my ques­
tion.
The meaning of the table is that these percentages show the ratio
of reserves in actual gold, or silver, which the Bank of England, the
Reichsbank of Germanv, the Bank of France, the Bank of Nether­
lands, and the Bank of Belgium, which are all reserve banks, carry
as against their actual note issue; second, against their note issue
and deposits combined; and, third, against their deposits only. The
Bank of England carries £22,000,000 of notes against the amount
of its deposits and has in actual gold reserve against its demand
deposits only about 25 per cent of gold.
(The statement submitted by the chairman is as follows:)
R eserv e o f a ctu al g o ld v ersu s n o tes o n l y , versu s n o tes a n d d ep o sits a ga in st d ep o sits o n l y .

Versus
notes
only.

Per cent.
62.7
50.0
88.0
58.0
19.0

Versus
Versus
both
notes and deposits
only.
deposits.
P er cent.
38.3
37.1
75.0
57.0
17.0

Per cent.
125

> Banking department.
See Congressional Record (p. 3466) of Aug. 5, 1913.—R . L. O.

It is now five minutes of 5, and I think we had better give Mr. Mar­
shall an opportunity to be heard.
Senator R eed . Will you stop on your way back, Mr. Ailing ?
Mr. A lling . Y es; I will have pleasure in stopping here on my way
back.
STA TE M EN T OF ME. F. E. MARSHALL, OF N E W YORK, N. Y.

The Chairman . Mr. Marshall, I wish you would state for the benefit
of the stenographer your full name and address.
Mr. Marshall . My name is F. E. Marshall, and my residence is
New York.




BANKING AND CURRENCY.

457

The Chairman . With reference to the various positions which Mr.
Marshall has occupied as a banker, incidentally, I wish to preface
his statement by saying that I expressly requested him to appear
before the committee in connection with this bill, because of his long
and particularly valuable experience in the banking world, he having
started out as a bank examiner, then was vice president of the National
Bank of Commerce of Kansas City, afterwards president of the Con­
tinental National Bank of St. Louis, vice president of the National
Bank of St. Louis, and afterwards president of the Phenix National
Bank of New York.
With that explanatory statement, I will allow Mr. Marshall to
proceed.
Mr. M arshall . Responding to the request of Senator Owen, I will
say that I am not here to discuss the bill from a scientific point of
view. I have read the bill and have tried to fit it practically to the
banking business of the country as I have come in contact with that
business in all sections of the United States. I have been a country
banker, and then have been in the different cities named by Senator
Owen.
Like most people in reading this bill, my apprehension first was
about the contraction of credit, whether or not the banks would be
called upon and that it would be necessary to contract credit faster
than the conditions would justify in order to meet the provisions of
the bill; second, my apprehension was as to the issue of currency,
whether or not the door was open for an inflated currency. While I
am not at this time an active officer of a bank, being out of business
actively, yet I consider that I am a banker. I am a stockholder in
several banks, and from that standpoint I have studied this bill.
Like other bankers, I have realized that we need something, and that
is about as far as the bankers themselves have gone. They have
never agreed amongst themselves as to what that something was.
I think that really down at the bottom of the bill that probably
the experiences that we went through in 1907, which brought us
facing the fact that we must do something that would put us on a
more stable basis in times of stress and that we can not simply go on
in times of stress and shut down and say “ N o,” that that was what
1907 did for us.
When New York gets in trouble, it is big trouble, and there is no
place for that city’s banks to go for help, and therefore the reserves
of the country are locked up and are not available, and I assume that
the purpose of this bill is, first, to get the reserves back into the country,
where they are needed and belong, and at the same time establish a
bank or banks that is a safe depository and a surer source of supply
in times of stress. Whether this meets it I can not say any more than
you can. Unless the banks come in and work with you, of course, it
will not be worth much. It all depends upon the banks coming in.
I have taken the liberty of preparing a few suggestions which I
want to make as to a few changes in the bill. I am very much in
favor of the bill, but like many bills it probably needs a number of
changes here and there in order to make it more workable. My idea
was right in the beginning here, on page 3, where it says:
The total number of reserve cities designated by the organization committee shall
be not less than 12.




458

BANKING AND CURBENCY.

To make it perfectly sure, I will put that:
Not less than 6 nor more than 12.

If enough do not come in to establish 12, I would let it be so you
could establish less than that number to start with.
Now, with respect to section 7, which was the next one I took up
and referred to. This relates to the division of earnings, and which
reads, “ Dividend of 5 per cent” — and it is fixed at that— “ to the
stockholders.” My suggestion is that that should be 5 per cent until
the surplus fund is built up to the 20 per cent; then the dividends
should be increased to 6 per cent, the balance of the earnings to be
divided equally between the United States and the stockholders.
I would, however, in addition to the surplus funds, create an undivided
profit account of, say, 10 per cent, making it that much more safe
and as a protection to the surplus fund. My idea there is that that
is an inducement. Naturally, bankers are like other people, they
are human, and they want to get a return on their money, and the
majority of banks are accustomed to making 6 per cent or more. I
am speaking from the stockholder’s standpoint. When we speak of
the “ banker,” we are liable to misconstrue it as just simply referring
to the managers of the bank. It should be remembered that the
stockholders of the country banks throughout the United States are
country people largely.
I next direct your attention to section 11, relating to the Federal
reserve board, about which there has been a great deal of talk. I am
just as strong as anybody can be in the belief that the Government
should be in control. I believe that the governmental supervision of
this bank should be as we are discussing “ governmental control.” But,
I also believe that the stockholders. of the different banks should have
representation on this board or the Federal reserve board. My sug­
gestion is that that board consist of seven members, composed of the
Secretary of the Treasury and four members to be chosen by the
President of the United States, at least two of whom are to be ex­
perienced bankers and two members to be chosen by the stockholders
of the Federal reserve bank, all to be with the advice and consent of
the Senate.
Senator R e e d . Y ou are speaking of the regional bank now?
Mr. M a r s h a l l . N o ; I am speaking of the reserve board. It gives
the Government absolute control, yet it gives the stockholders of the
bank representation. Of course, I would go on as to the politics of
each one of them. I think that that should be as it now provides, of
different parties.
Senator R e e d . D o you think that that feature would amount
to much ?

Mr. M a r s h a l l . I believe that the people would be better satisfied.
There is a great deal of talk to the effect that we are going to have a
politically managed bank.
Senator R e e d . I I o w would you control that, Mr. Marshall ? I
observe you are speaking from notes.
Mr. M a r s h a l l . N o ; I have just a little memorandum here.
Senator R e e d . I take it that my interruption will not interfere
with the trend of your remarks ?
Mr. M a r s h a l l . That is right, it will not.




BANKING AND CURRENCY.

459

Senator R eed . H ow would you control that bipartisan feature ?
My experience and my observation have been that a bipartisan board,
selected by a bipartisan, is more thoroughly under the control of the
partisan who selected him than a purely partisan board.
Mr. Marshall . Purely nonpartisan ?
Senator R eed . N o ; than a purely partisan board. In other words,
I want to illustrate it and see if you can suggest something: If the
Republican Party could pay two Republicans by some means and
the Democratic Party could pay two Democrats, the source of the
appointment being partisan in each case, you get two partisans
to represent each side. But if the Democrat is President and he
picks a Republican, how are you going to prevent him picking a
couple of “ Democratic” Republicans?
Senator Shafroth . Who will “ out-Herod Herod” ?
Senator R eed . A couple of Republicans who will be more subser­
vient to him than the Democrats? I have had some experience
and have made some observations of those things. I always found
out that when I appointed a bipartisan board that my Democrats
were rather independent. They felt they had earned the right to
some recognition and promotion, and that they had received only
that which was coming to them, and that often not as much as they
ought to obtain; but when I came to my Republican appointees,
they were solely my creatures, and I had appointed them because
they were exceedingly friendly to me; and I always found that if
I had any trouble with my boards, that my two Republicans were
sure to stand with me and my Democrats might be doubtful. I have
observed that when Republicans made appointments that it worked
out about the same way; and when you come to talk about appointing
a bipartisan board of bankers, my observation has been that you
would have some difficulty in getting Democratic bankers.
[Laughter.]
Mr. M arshall . N o ; I do not agree with you there.
Senator R eed . Unless you went out and got some man whose
conscience and partiotism outweighed his interest.
Mr. M arshall . Senator, I have tried to look at this and have
looked at it------Senator R eed . I want to say right now if a man can devise a
plan— perhaps you can suggest it— by which the Republicans in
Congress, or some other authorized party source, could name the
two Republicans, and you had an equal partisan force to name a
Democrat, you would have a bipartisan board. In other words, I
think it is a farce------Senator S hafroth . The length of service would have a tendency
to cure that.
Senator B ristow . T o my mind, that would make the board con­
tinually bipartisan. The Supreme Court is not bipartisan, and
that is appointed for a long period of time. When a Republican is
appointed under a Republican administration, he is a Republican.
Senator R eed . D o you propose to have this board a long-term
board ?
Senator S hafroth . Yes.
Mr. M arshall . Three, six— how is this ?
Senator S hafroth . Eight years.
Mr. M arshall . Three, six, and nine years, is it not?
9328°— S. Doc. 232, 63-1—vol 1-----30




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BANKING AND CURRENCY.

Senator R eed . This is not giving the witness an opportunity to
make his statement, but I will never consent while I live to creating
a system in this Government that the people of the United States
can not change at the next election.
Mr. M arshall . Well, you would not put a board of directors—
that is what it is, the management of a bank— up as an elective
office, subject to election of the people?
Senator R eed . N o, sir; but I would not create a power that con­
trolled the finances, controlled the commerce of a nation, and call
it a Government power, as an arm of the Government, that would
be independent of the men that the population of the United States
sent down here to represent them. I never would consent to that.
Mr. M arshall . Senator, I have tried to look at that provision of
it, and I have thought of it not as a political matter, but we are
trying to get something here to take hold of the conditions which
now exist.
Senator R eed . It is not political. I am not talking about that.
Mr. M arshall . And I, for one, would be willing for this board just
simply to be appointed. W e hear a great deal of talk about the politi­
cal complexion, and that we are going to have a politically controlled
board of management.
Senator R eed . If you are going to have the Government out of it,
if you are going to turn this over to the banks and let the banks control
it, that is one plan. It might be the right plan, and there are many
things that might be said in its favor. But, if you are going to have a
Government control, then I am not in favor of fixing that Government
control so that the people who elect the Government can not change it
whenever they see fit to elect a new set of men to represent them.
Mr. M arshall . I suggest that the two members chosen by the Presi­
dent of the United States and the two members chosen by the stock­
holders shall be with the advice and consent of the Senate.
Senator R eed . That, of course, is a different question.
Mr. M arshall . A s I say, that is simply to answer the question that
is abroad in the country as to a political complexion of this board.
I believe I have enough confidence in men, and m y experience has
taught me that the responsibility will be so great on the men who are
to sit on this board that they will be equal to the responsibility and
never think of their political beliefs, and it will not be run along that
line.

Senator R eed . I do not think there is, however, so much danger
from politics coming in as I do from creating a concern here that is
practically permanent and which is, to a large extent, independent of
that Government which the people have the power to elect.
Mr. M arshall . Well, so far as creating the bank is concerned and
the idea that bankers are going to control, that is as far as we got
with the Aldrich plan. Two-thirds of the people who read that,
whether Congressmen or bankers or others, thev got far enough to
see that the door was unlocked and that the bank would be in a
little while in charge of the bankers of New York, and that was
enough to kill it. The people of this country aie not going to stand
for a central bank or any other one bank controlled by the bankers
of this country. W hat we call our “ country bankers” are not going
to submit to that.




BANKING AND CUBBENCY.

461

Senator P omerene . They had their experience in that regard in
1907.
Mr. M arshall . I feel a little closer to the country bankers myself
than to the city bankers. I am a country banker. I was president
of a bank in New York, however, during the panic of 1907, and I
believe that the country bankers of this country are very much in
favor of this bill. I have never seen it figured------ Senator B ristow . I would like to find one of them out in our
country who is. I have not found him yet.
Mr. M arshall . I am not saying that from personal observation.
I have not been out in the country, but I am speaking of my general
knowledge of the country banker. W e know that every time that
there is the least scare or anything of that kind the country banker
commences to fill his vault with money.
Senator R e e d . He would not do that if he could go and get the
money from the reserve bank when he needed it.
Mr. M arshall . I think not. In the panic of 1907 customers who
were my best friends in Missouri, my home State, and from Kansas,
came to me, and I asked them to send me a statement to look at.
They were wanting money. They would have 50 or 60 per cent
reserve, and then they were crying for more. They wanted it to
sleep on. Those are really the facts when you come down to it.
Senator R eed . That is because they did not know when a run
would be started on them.
Mr. M arshall . Certainly.
Senator R eed . W hy can not a plan be devised whereby that
country banker could go to the Government, of his own right, accord­
ing to the laws that are prescribed, and get the relief which he needs
without having to depend upon New York or some other bank, and
when the occasion is over let it automatically retire ?
Mr. M arshall . Well, I think this will take the place of it.
Senator R eed . W hy should anything take the place of it? W hy
is not that the best plan?
Mr. M arshall . Y ou can go out here, say, to the State of Kansas
and Nebraska and Oklahoma, and the men in control of the reserve
banks are in a position to know and they do know that country.
They know the people that they are dealing with.
Senator R eed . D o you mean they know the banks they are dealing
with or the customers of the banks ?

Mr. M arshall . They know both.
Senator R eed . There is a domain that is as big as Germany,
France, and the island of England put together, and even more.
Mr. M arshall . Y ou are going to have men on that board from
every one of those places.

Senator R eed . Y ou can get a man from each State.
Mr. M arshall . There are to be nine, and they are all right in that
immediate neighborhood; three of them are to be elected by the
bankers and are to be bankers themselves; three of them are to be
business men of that section; and then there are to be three appointed
by this Federal board, and they are to be from that section, as I
understand it— all local men.
Senator R eed . They can not be local in the sense of being able to
pass upon securities, except they have some method of testing it




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BANKING AND CURRENCY.

because you take two men from the State of Missouri; there are
nearly 3,000,000 people in the State of Missouri, as you know. There
are three large cities in the western part of the State, one with nearly
three-quarters of a million, another with a population for banking
purposes of 400,000, another with a population of 125,000, with 30
towns or cities above 10,000. No man can know the individual
credits, nor can any three men know the individual credits, Mr.
Marshall. You do not mean that.
Mr. M arshall . I do not mean for a minute that the first time a
note comes up they are going to say “ yes” and “ no.” Thev have
got to build up a credit bureau, just as our banks have to do, and
become acquainted with it, and that will take time; but in the mean­
time they are going to have their bank examiners and they are going
to have their means of finding out these things.
Senator B ristow . The Government has its bank examiners. W hy
has not the Government means of knowing the reliability of this debt
or that debt, just as well as a bank in Kansas City or St. Louis has ?
Mr. M arshall . They are closer at hand— the bank examiners. He
oes into a bank and examines all of its assets, of course, but naturally
e can not tell, when he comes across John Smith’s note, and says to
the cashier, “ Who is he?” “ He is John Smith out here; he is a
farmer.” But he can not go out and see John Smith and see where
he lives and verify that.
Senator B ristow . Y ou do not expect one of these nine men, who
will not even see the notes and who will never get inside of the
bank------Mr. M arshall . Y ou are mistaken about that.
Senator B ristow . One of these nine men ?
Mr. Marshall . One of the member banks. He will not go out
into the country or anything of that kind. A t the same time the
members of that bank will have all the information there from the
member banks. If that man offers a note of John Smith he should
tell him at least that John Smith is one of our farmers here, that he
knows his farm, etc.
Senator R eed . He will tell them just exactly what he told the
bank examiner when he goes to get a credit.
Mr. M arshall . My experience, as far as that is concerned, is that
now and then you will find a banker who lies, and he is wrong; but, as
a rule, the manager of that bank, I think, may be relied upon to tell
the truth. My experience is that the banker who runs tne bank is
interested in his bank, although now and then you have a cashier,
a president, or a bookkeeper who will go wrong; but this must be
done on faith and confidence in men, and I believe that you have got
to do that in this case as well as in other banks.
Senator B ristow . W hy do you think this intermediate step neces­
sary ? You take 20 per cent of the capital of a bank at Salina, Kans.,
out of its banking capital and put it into this bank in St. Louis or
Kansas City, and you take 5 per cent of its deposits and put them
down there in order to create a bank to do business, in order that
this bank might get its paper discounted at a critical period. W hy
should you impose such an unjustifiable burden on the country bank
in order that it may get exactly what this regional bank comes to the
Government for? W hy can not the country bank go direct to the
Government ?

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BANKING AND CURRENCY.

463

Mr. M arshall . I do not agree with you that you are imposing a
burden on this country bank. You take the 10 per cent capital that
the regional bank gets— —
Senator B ristow . It is 20 per cent in the bill.
Mr. M arshall . Call it 10 per cent.
Senator R e e d . I understand that the bank capital is as to the
bank deposits as one to eight, in round numbers.
Mr. M arshall . Y es; the capital represents simply a portion of the
reserve of that bank. If you take a part of the reserves of the
banks and start a bank with it, you have got $500,000,000 of deposits,
or $600,000,000, we will put it. You are going to keep one-third of
that as a reserve. Then, you have got $400,000,000 of it to use.
You are not going to keep all of it in the vault.
Senator B ristow . Y ou are taking 20 per cent of the banking
capital out of the country community, and you are taking that to a
distant city and compelling it to be invested there, and you do not
permit more than 5 per cent dividends to be paid on it.
Mr. M arshall . Y es; but I am asking 6.
Senator B ristow . W e will say 6, then. The bill puts it at 5, and
that is money that is taken out of the community; it is the com­
munity’s money which comes from the farmers and the merchants
and the men in various occupations there, that they have put into
their own bank for their own local community. You take that
capital to a distant city, limit the amount they can earn on it, which
is less than they are getting now in nineteen-twentieths of the banks,
and compel this bank to take a part of its deposits down there, and
then it gets in return the privilege of borrowing it back. That is
the proposition that you are putting up to the country banker.
Mr. M arshall . But the money that you say you are taking away
from them is now already away m New York, Cnicago, or St. Louis,
and under the law it is legal reserve.
Senator P om erene . And where they can not get it when they
want it.
The Chairm an . It is tied up in stock and bond loans.
Mr. M arshall . I have never seen this worked out in tables. I am
sorry to say that under the provisions of the bill it is necessary
for any of the banks individually or collectively to become borrowers.
I noticed from figures submitted— I have forgotten the name of the
Member— in the House a day or two ago, showing that in order to
comply with the provisions of this bill that reserve banks would have
to borrow about $105,000,000 or $110,000,000, and the central reserve
city banks about $150,000,000 or $160,000,000. I was very glad to
see that if it should be borrowing at all that it should be by the city
banks, because their assets are more liquid, and it gives them three
years in which to accomplish it, and my prediction is they will never
Dorrow a dollar, and that these banks will be able to take care of
themselves and turn themselves over in ample time; in fact, the
reduction in reserves as now fixed takes care of the capital stock
investment.
Senator B ristow . W hat is the use, if you are going to reduce the
reserve, which I think ought to be done, of creating this intei mediate
machinery in order to permit the country bank to avail itself of the
advantage which the Government proposes to create for it? W hy
not let it have the full advantage of the reduction of the reserve ?




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BANKING AND CtTRBENCY.

Mr. M arshall . When you come to issuing notes— and I am very
much afraid of the issuing of notes— I have always been opposed to
asset currency, it seems necessary as an emergency currency and it
should be for that purpose only. These reserve banks are built by
reserves that are now dead— you make that a bank, and a bank of
$600,000,000. You use that as active, working monev, except the
33§ per cent of this $600,000,000 of deposits which is now dead capital,
which is in the vaults as reserve, ana you make that now a working
item of $600,000, less 33 J per cent, or $400,000, which you are going to
loan out to the various banks that want it. They are not all going to
come in at once. They are going to come in as it is needed, and I
believe that this reserve board and the board of directors that you
have will weigh very carefully their power of rediscounting, and my
opinion is that it will be very seldom if ever that the note issue will be
resorted to. If I followed it correctly, you said that this note issue of
the reserve banks was to take the place of national-bank currency as
retired. I do not so construe it.
Senator B ristow . That is the provision of the bill.
The t hairm an . Oh, yes; it is.
Senator R eed . Taking care of emergencies without the issuance of
money. Let us say that you establish at the city of St. Louis a
regional reserve bank for the States of Missouri, Kansas, Nebraska,
and Oklahoma; that is, four States— that is about what would go
into that reserve. They have a capital of $500,000,000; and you
want money to move crops. How is that bank going to give it?
W hy, the banks of Kansas City asked Mr. McAdoo for a loan of
$5,000,000, and they got $2,750,000; and the banks of St. Joseph—
I will not be sure of this— wanted $1,500,000. I think the banks of
St. Louis wanted much more than those of Kansas City. That is only
the State of Missouri. If you took in these other States you would
find a very heavy demand from Senator Bristow’s State of Kansas,
because they have a large State and a population of 1,700,000. Then,
there is Omaha, up in Nebraska; and then comes Oklahoma. It
means to me that you would exhaust the total assets of that bank
before you got well started.
Mr. Marshall . My understanding, Senator, is that the banks of
the country— take the banks of Kansas and Missouri— are not going
to do all of their business with this reserve bank. My understanding
is that this is their reserve repository.
The Chairman . Part of their reserve.
Mr. M arshall . But they will continue to do business— the country
bank— with Kansas City, St. Louis, or New York, but they will not
do as much.
Senator R eed . They will use the whole of that $5,000,000, and in
crop-moving time they will not have enough to start on.
Mr. M arshall . $5,000,000 is only the capital. I do not think
that this bank in the district you say would be able to furnish all the
money they would need with $5,000,000.
Senator R eed . I do not know whether they are going to be able to
furnish enough to cut any substantial figure; you understand, I am not
opposing this matter. 1 am trying to find out what it is going to be
able to accomplish, and absolutely where we are going to bring up.
Senator B ristow . Excuse me. Mr. Marshall, referring to the sug­
gestion you made a while ago, that this money would not be used




BANKING AND CURRENCY.

465

by these banks— why, we are to have no other kind of currency.
Tne national-bank notes will be retired.
Mr. M arshall . I understand.
Senator B ristow . This will be substituted for it.
Mr. M arshall . My construction of it was that the currency
issued by these reserve banks was simply to be resorted to in times
of emergency or stress. So far as that is concerned, I am not alto­
gether in sympathy with the idea of retiring the national-bank cir­
culation at this time.
Senator R eed . H ow will we keep it in flow when the banks pro­
test about the bonds'?
Mr. M arshall . So far as that is concerned, these 2 per cent bonds,
we have them. Those 2 per cent bonds, as you all know, were put
out under conditions and representations which caused the banks
to run after them, because it was not a basis of circulation, but they
were all going to be made depositaries, and every little bank in the
country was going to get $25,000 or $50,000, and many of them were
appointed; the money was to be put right back, and it hardly got
warm until they began to call it. These bonds went up on that basis
to 110.
Senator P omerene . And the Treasury Department called it out of
those depositaries where it was supposed to draw interest and put it
in others where it did not draw interest.
Mr. M arshall . That is true as far as that is concerned. A t that
time I do not believe the banks were paying interest, but, at the same
time, that was done.
Senator R eed . Tlmy robbed the little banks.
Mr. M arshall . There is no use talking about that, it was done.
It was necessary to find a provision, then, to maintain these 2 per
cent bonds. They then turned around and made them the only bond
that was available for circulation, taking off the 3 per cent bonds.
The idea that I had in mind in order to bring these bonds back to par,
or above— I can not name the section of the law, but you gentlemen
can refer to it.
There is one section of the law where banks of
$150,000 capital and under must buy these bonds equal to onefourth of their capital, and keep a circulation. Banks of $200,000
capital and above— that means the reserve city banks —can buy a
minimum of $50,000. In other words, you take one of the big banks
of New York City, and it can buy $50,000 worth of bonds and be
within the meaning of the law. I would amend that section so that
the reserve city banks of New York and Chicago and Kansas City
and everywhere else should buy bonds at least equal to half of their
capital.
Senator R eed . In other words, you would treat them the same as
the small banks have been treated.
Mr. M arshall . If it is a burden, let them carry their part of it.
It is a just and fair thing to do, and you are making a market for your
bonds.
Senator Shafroth . Y ou would not have enough bonds to supply
the demand.
Mr. M arshall . Y ou had better have them above par and the
banks running after them than to have them kicking them around.
I went over the list the other day and figured out about 10 banks—■
5 or 10 in New York, 1 or 2 in Chicago and St. Louis, and so on—-and




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BANKING AND CURRENCY.

out of those 10 banks on that scale you would have a demand for
$20,000,000 of bonds.
Senator R eed . That sounds to me like a pretty practical sugges­
tion.

Mr. M arshall . It is fair. You will find some banks that have a
capital of $5,000,000 that have less than one-half million dollars
of bonds. Suppose those banks during the panic would have had
that much more circulation and would have had their full capital in
circulation. If I had the national-bank act, I think I could refer to
that section of the law.
These 2 per cent bonds going below par have, in a way, destroyed
a little confidence. I have recently been out West— in fact, I have
been spending most of my time out there— ’and I was talking to
some brokers, and they told me there were men and women who had
come in with $100 or $200 or $300 worth of bonds, 2 per cents and
others, where they had seen these United States bonds going down,
and they thought they would sell. Of course, there has been a great
deal published on that subject.
Senator Shafroth . I thought nearly all of those bonds were held
by banks— hypothecated.

Mr. M arshall . I said it was not altogether twos— different United
States bonds. It had an effect on all bonds. If you will notice, 4
er cents have dropped from 114 to about 110, and our threes are just
arely par. I doubt very much if you will find the threes, so far as
the investment basis is concerned, maintained par.
I will go on with this. This will give the Government five mem­
bers and the shareholders two, the Government, however, having
a majority of the board, but the shareholders would have represen­
tation, which would seem to be but fair. In the board of directors
of the Federal reserve banks the shareholders elect a majority, six
to three. In this case the shareholders have a majority, but all have
representation. This change would drop the Secretary of Agri­
culture and the Comptroller of the Currency from the Federal reserve
board. While I fully realize that their presence on the board is
desirable, yet I also fully realize that the gentlemen composing this
board hold a very responsible position, and it will justly require all
of their time and attention. They will, no doubt, find it necessary
to visit the different reserve banks from time to time, and will find it
advisable to make their stay long enough to become acquainted with
the conditions and detail operations of the banks, and I very much
doubt if the positions now held by the Secretary of Agriculture and
the Comptroller of the Currency would admit of them giving the time
to this position that it will require of each and every member of the
board.
Now, as to section No. 13. That covers the Federal advisory
council. It seems to me that this is unnecessary and not required.
The close and active relations of the reserve board and the board of
directors, it would seem, meets this requirement, especially if the
shareholders have two members on the Federal board.
Section 16 is the next one I allude to, in reference to Government
deposits. The Government proposes to charge interest on their
deposits. My idea is that the Government should accept division
of profits in lieu of interest the same as other depositors. In other
words, if we go into partnership let us divide the profits.

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BANKING AND CURRENCY.

467

Senator Shafkoth . That does not require the Government; it
says it “ may.”
Mr. Marshall . It is in there, and I think if you would leave it
open, it would------Senator B ristow . Public opinion will have something to do with
that.
Mr. M arshall . If the Government is going to be a depositor the
same as other stockholders, let it get interest when it is divided up
the same as the other depositors.
Next is section 17, page 30. Collateral security to protect the issue
of notes should have 20 to 25 per cent margin, and it would seem
to me that security should include United States bonds and other
securities that might be held by Federal reserve banks. In other
words, this money is not to be issued to the Federal reserve bank.
It is to be issued to the people and the reserve bank is going to be
used as the distributor, but that bank is to furnish the collateral.
Senator B ristow . Y ou think bonds are not good security?
Mr. M arshall . The assets of the Federal bank.
Senator B ristow . That suits me better.
Mr. M arshall . I would not confine it to simply collateral notes,
commercial paper as defined and looked upon in this country as it is
to-day. I believe that if any one class of credit is inflated it is com­
mercial paper, and it has been going that wav for some time.
Senator R eed . I s it not true, Mr. Marshall, getting down to real
absolute truth, that there are more mercantile failures of a disas­
trous character than any other class of failures ?

Mr. M arshall . There are a good many of them; I have been in a
good many.
The Chairman . When you speak of commercial notes, Mr. Mar­
shall, being inflated, you really are grouping together all that class
of accommodations extended to commercial men, are you not ?
Mr. Marshall . I am speaking now of what we bankers call “ com­
mercial paper.”
The Chairman . Are you speaking of commercial paper as qualified
and narrowed down in this bill to paper drawn against actual ship­
ments of merchandise?
Mr. M arshall . No; I am not putting it that way. In other words,
I am not including any commercial paper------The Chairman . That is the only kmd of commercial paper the
Federal reserve bank will have. They will only have commercial
paper drawn against shipments of merchandise— cotton, corn, and
wheat, and manufactured goods.
Mr. M a r s h a l l . I would say that the security, or the paper, if you
please, that this board would require as collateral against notes issued
would be different and would get quite a different scrutiny from the
discounts of a member bank.
Senator R e e d . H ow are you going to tell whether notes are drawn
against cotton, corn, and wheat? If you attached a warehouse re­
ceipt, then it would be all right, but without that how are you going
to tell ?

Mr. M arshall . Suppose you go to Temple, Tex., which is a big
cotton-shipping point, and there are 1,000 bales of cotton which is




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B A N K IN G

AND CU RRENCY.

going to Liverpool. That will go by the way of Galveston. They
draw their draft, with railroad bill of lading attached, and send it
through to be exchanged for the bill of lading. That is what I call
a draft against existing values.
Senator R eed . They have nothing in this bill requiring any such
thing.
Mr. Marshall . I think it says “ against existing values."
Senator R eed . There is nothing in this bill, as I understand it,
that requires a bill of lading or warehouse receipt to be attached.
The C hairman. It dots require that the Federal reserve board
shall clearly differentiate these bills and make them bills which are
actually based upon commercial transactions, and it is intended that
they shall be limited to transactions of that character.
Senator R eed . Upon commercial transactions. That is very in­
definite.
The Chairman . It is not indefinite when you come to deal with
individual bills, Senator.
Senator R eed . I am a merchant. I am a retail merchant, and I
have a stock of goods which cost SI,000,000. I am in debt to the
wholesale houses lor a lot of it, and I give the wholesale houses my
notes. I have creditors who are owing me, and I get their notes.
Would that come within the purview of this bill?
The Chairman . It would. You take a shipment of stoves to this
retailer, and that retailer gives his note in payment for those stoves,
to be paid for at a particular time. It is assumed that those stoves
would be sold out to country people and the money from them used
to liquidate that.
Senator R eed . The trouble is that the money collected for the
stoves may be collected and may not; but if it is collected there is no
guaranty that it will follow that the money will go back to the dis­
charge of the note given by the retailer to the wholesaler, and the
fact is that of all men who are liable to break out any moment and
to fail disastrously it is these merchants.
The C hairman. If they mix up their accounts in that way.
Senator R eed . They all mix them up.
Mr. Marshall . Y ou do not get much more paper such as you
describe there; that is, you take the merchant, for instance, in
Kansas City— the wholesale merchant who gives his note to the
manufacturer from whom he buys, and then the manufacturer comes
to the bank and discounts it. That paper has really passed away,
because the wholesale merchant in St. Louis or Cnicago borrows
through the note broker on his open credit, on his statement as a basis
of credit, and from his bank in Chicago, St. Louis, or New York.
That is why I said that such paper was inflated, if any line of credit
is inflated. Within the past 10 or 15 years what we call our “ note
brokers" have sprung up, and they are the distributers of paper and
they borrow on their open note.
The Chairman . That permits the very evil Senator Reed was
describing.
Mr. Marshall . Single-name paper.

The Chairman. That is what it does and encourages it.
Senator R eed . There is no way to stop it on that class of paper.
The Chairman . This plan would not mclude that class of paper.




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469

Senator K e e d . Without it you would not have anything according
to the statement of Mr. Marshall.
Mr. M a r s h a l l . Oh, yes; you would. I was just saying that in the
broad sense commercial paper such as I am describing now, while the
majority of that paper is good, it is renewed over and taken up and
renewed.. I believe that any currency that is issued on an asset
should, on what we call merchandise, such as corn, cotton, or wheat,
which is seeking a final resting place, and that is to be absorbed and
going to be paid for in money.
Senator 1 e e d . Then you would attach a warehouse receipt?
Senator P omerene. A o u discriminate and designate that as prime
paper?
Mr. Marshall . I discriminate and designate that as prime paper,
given for existing values— that is, in the process of transportation,
you might say, or that is to be consumed and paid for.
Senator R eed . If you were going to loan money on that and be
perfectly safe, you would take a bill of lading ?
Mr. Marshall. Or a warehouse receipt or something of that kind.
Senator R eed . There is nothing in this bill that says that there
shall be attached anything of that kind.
Mr. Marshall . It says, “ Drawn against existing values.” etc.
Senator B ristow . Suppose that a merchant at Kansas City has a
large stock of goods and lie has not the money to pay for them and
he wants to discount his bills, which most of them want to do, if they
are good ?
Mr. Marshall . They must do it, if they are successful.
Senator B ristow . He goes to the bank and borrows the money
and pays the wholesaler and takes the discount. His note is given
for 30, 60, or 90 days or probably 6 months— I don’t know. Do you
mean to say that that merchant’s notes in that bank are not the assets
that could be available here on the 90-day note ?

Mr. Marshall . A s far as that is concerned, I am inclined to think
that this may cover that.
Senator R eed . If it does not cover it, it does not do much good,
does it ?
Mr. Marshall . Oh, yes; we have plenty of instances. When we
go to move the crop is when we need the money. The movement of
cotton absorbs more real money than any one product. The bankers
in the South in the cotton district provide and get most of their
money for planting along in April and May, ana that is for the
planting purpose and does not bring on a stringency or anything,
because it is bank credit; but when September and October comes,
then that is the money to move the cotton, and it takes a good deal
of money. With the exception of probably September and October—
maybe commencing the latter part of August— you will find New
York exchange at a premium the year around in Chicago, St. Louis,
Kansas City, and Galveston and every place; but n those months
when the money is coming back from the East and going there you
will find it at a discount, but just as soon as the movement comes
and a whole lot of cash is required you will begin to see New York
exchange at a premium.
Senator R eed . Coming back to this other question we were just
discussing: A man has 100 bales of cotton. He sells that to a cotton




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B A N K IN G A N D C U B R E N C Y .

broker or merchant in Galveston and he draws upon that man for his
money. Of course that is a transaction to be settled in a very few
days. He puts up his draft at the bank, and that would be good to
issue assets against, because back of it lies the cotton. Let us take
the man now who has bought the cotton and put it in his warehouse.
He goes to the bank and borrows money. The cotton is back of that
just the same as it was in the other transaction. Would you say
that was good ?
Mr. Marshall . I would say that was good, if you got your margin.
Senator R eed . Suppose instead of it being cotton in the bale it is
cotton in the roll, ana silk and woolen goods.
Mr. Marshall . Oh, you mean it is manufactured?
Senator R eed . That it has been manufactured. Would you say
that man was not entitled to those benefits ?

Mr. Marshall . He certainly is entitled to those benefits.
Senator R eed . Y ou have gotten down to a point that the mer­
chant’s note should be accepted if he is a solvent man and has a stock
of goods?
Mr. Marshall . Certainly.
Senator R eed . Then you have gotten down to the point where that

merchant’s note issued and sold by a broker and scattered throughout
the country is a thing that can be put into the banks and currency
issued on it ?
Mr. Marshall . Of course it is good for value, if you follow it
through.
My idea there was that the line can be drawn, and that is why I put
in tnere what are the assets of the bank. These Federal reserve
banks are going to have United States bonds and municipal bonds,
etc., and I should say that the assets of that bank is the thing that
wants to be scrutinized. I do not care what their security is, if it is
good. But then the time limit must be considered. Every one of
these notes must find their home as quickly as possible.
Senator R eed . Y ou say that is a margin of safety against taking
all those assets, of course throwing out those found to be bad. You
would put in 20 per cent?
M
b*. Marshall . Twenty per cent margin in place of issuing it
on par.
Senator B ristow . W hy would not a few good mortgages do to
put in as assets of a bank ?
Mr. Marshall . There is nothing that I like better than a good
real estate farm mortgage, as far as being good is concerned, but
we have not a good market for that. You want to have something
there that is liquid if you have to realize on it. It is either going
to be paid or there must be a market for it. There is really not a
built-up active market for farm mortgages.
Senator B ristow. Mr. Marshall, you interest me there very much.
Here is John Wanamaker, Woodward & Lothrop------Senator R eed . I wish you would go into that in the morning.
Senator Shafroth. Mr. Marshall is not going to be here to-morrow
morning.
Mr. Marshall . I will stay here and arrange to catch the 11.45
train.
Senator P o m e r e n e . All right; we will question you further in the
morning.




BANKING A N D C U R R E N C Y .

471

The Chairman . To-morrow, Mr. William H. Berry, of Chester, Pa.,
is to be with us.
Mr. Marshall . Can you start with me at 10 o’clock?
Senator P omerene . Y ou are giving the practical side of this mat­
ter in a very intelligent way. Some of these bankers only see the
matter through a banker’s eye.
Mr, Marshall. I am interested not as a bank president. I am a
stockholder— a little one— in country banks and a reserve city bank.
Senator P omerene . I have a bill of lading here that I think you
will see the benefit of.
Mr. Marshall. All right.
The Chairman . W e will now adjourn to meet to-morrow morning
at 10 o’clock sharp.
(Thereupon, at 6 o’clock p. m., the committee adjourned to meet
to-morrow, September 17, 1913, at 10 o’clock a. m.)

W E D N E S D A Y , S E P T E M B E R 17, 1 9 1 3 .

Committee

on

B anking and Currency ,
U nited States S enate ,

Washington, D. C.
The committee assembled at 10.15 o’clock a. m.
Present: Messrs. Owen (chairman), Reed, Pomerene, Shafroth, and
Bristow.
FURTHER STATEMENT OF F. E. MARSHALL, OF NEW YORK.
The Chairman. Mr. Marshall, the committee will be glad to have
you conclude your comments of yesterday upon the pending meas­
ure. Have you a written memorandum which you desire to submit ?
Mr. Marshall . N o, Mr. Chairman; I have just some memoranda
for me to refer to. I think yesterday afternoon when the committee
adjourned that we were discussing section 17 of the bill, as to collateral
security.
Senator P omerene . Y es; I believe you were discussing that
feature.
Mr. Marshall . Collateral security to protect the issue of notes.
The bill now provides that that security be put up to par.
Senator P omerene . Yes.
Mr. Marshall . And I should say that it should be a margin of
20 to 25 per cent.
Senator P omerene . D o you mean above?
Mr. Marshall . Y es; above------The Chairman (interposing). You mean by that that as to those
notes to be issued by the Government, you think that the member
bank getting a loan from the Federal reserve bank should also put
up a light margin above the amount of that loan ?
Mr. Marshall . Yes, sir. Strictly construing the law, it speaks
of discounting certain paper. You construe that to mean that if the
member bank came to the Federal reserve bank to borrow money, it
would bring a note of, let us say, John Smith, for $5,000 or $10,000,
and the Federal reserve bank would discount that note. I have




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B A N K IN G A N D C U R R E N C Y .

always preferred, as a banker, to have a bank come to me to borrow.
I always preferred, if a banker borrowed money from me, rather
than to discount his customer’s note, that I would take the bank’s
note, with his bills receivable as collateral security. Do you under­
stand the distinction I make?
Senator P omerene . Y es; you mean to make it a primary obliga­
tion of the bank?
Mr. Marshall . I was saying, Senator Pomerene, that this language
would seem to be rather that you were aiming to discount the paper
of the bank. I always prefer, in lending money to a country bank,
to take its own note, with its bills receivable as collateral. Then you
get a margin of 35 or 40 per cent, taking the customer’s note as col­
lateral to work on. You discount the note of John Smith, on the
indorsement of the bank, you have.
Senator P omerene . In making that statement, do you have in
mind the provision of the bill which permits the board to demand at
any time additional security from the bank?
Mr. Marshall . Certainly. That is why I put in my suggestion of
having a margin. And it would seem to me that this security should
include United States bonds and other securities that the Federal
reserve bank might have.
Senator P omerene. I think that is a good suggestion.
Mr. Marshall . Now, in this same section 17, page 31 of the bill,
where it refers to the redemption of the notes—
Whenever Federal reserve notes issued through one Federal reserve bank shall be
received by another Federal reserve bank they shall be returned for redemption to
the Federal reserve bank through which they were originally issued, or shall be
charged off against Government deposits and returned to the Treasury of the United
States.

It says the notes shell be charged against the Government de­
posits. I would not give this privilege; it seems to me no bank
should be given the privilege of making a charge against the Gov­
ernment account. In other words, they should not charge these
notes against the Government account and then return them for
redemption, but should return them to the Treasury for redemption.
Senator B ristow . If they charged them against the Government
deposits, the Government would not have any way of knowing what
its balance was at a given time.
Mr. Marshall . N o. Then, there is a redemption fund provided
for that purpose. Let it go through the regular course.
The Chairman. I think that is a substantial objection.
Mr. Marshall . Yes. It is a bookkeeping matter; but it is im­
portant. The 5 per cent redemption fund that the Government has
for the redemption of notes issued, I would have in addition to the
33§ per cent required reserve carried in the vault of the Federal re­
serve bank. You make that redemption fund now as a part of the
33^ per cent reserve. I would make it in addition to the reserve.
The Chairman . D o you think it is necessary to have these notes
redeemed at the Treasury of the United States at all, since they are
redeemable by the Federal reserve bank?
Mr. Marshall . Well, it is a Government note.
The Chairman . I know; but these reserve banks are agents of the
Government and are acting as redemption agents. Would it not
really tie up that additional amount oi money to send them to the
Treasury ?




B A N K IN G

AN D CU RRENCY.

473

Mr. M a r s h a l l . Y es; of course it would tie up that amount of
money— not, however, if you would increase the reserve in the vault.
If you only have 33$ per cent reserve in the bank’s vault, it would tie
up more; but if you increase that 33$ per cent by 5 per cent more,
there would be the same amount of money. But I think with the
custom of redeeming notes at the Treasury— then you would have
part of your own circulation out, which was redeemable at the Treas­
ury, and part which was not, which would make a confusion.
The Chairman . If it was made redeemable at the banks alone, the
bank report would contain a constant record of that; whereas other­
wise, there would have to be Treasury account, and at the same time
an account of the bank coincident with that. Of course, that is not
a matter of vital importance.
Mr. Marshall . Yes. Now, I will continue at the same page of
the bill, or rather, the next page, 32, line 21, reading as follows:
Any Federal reserve bank may at any time reduce its liability for outstanding
Federal reserve notes by the deposit of Federal reserve notes, whether issued to
such bank or to some other reserve bank.

It would seem to me that a Federal reserve bank which desired to
reduce or retire its note issues should be required to do so by the
deposit with the Treasuiy of the United States only of its own notes,
or gold, or lawful money of the United States and should not make
the redemption deposit for retiring such issues with any Federal reserve
agent and should not make the retirement by the deposit of note issues
of other Federal reserve banks. My understanding is that one Fed­
eral reserve bank is not liable for the issue of another Federal reserve
bank; is that right?
The Chairman . Yes. That is, the Federal reserve bank does not
itself issue the notes. The bank is merely a borrower of these notes.
Mr. Marshall . I understand that.
The Chairman . And the banks are not issuing the notes, and hence
they are not responsible for them, except to the extent that they
borrow them.
Mr. Marshall. Certainly. Well, they are responsible for them,
are they not ?

The Chairman . T o the extent that they borrow them, but no more.
Mr. Marshall . But this bill would provide that a bank located,
for example, at St. Louis, if it should take an issue of these notes
from the Government, when they got ready to retire these notes
they could send in the notes of another Federal reserve bank located
in New York, and thereby retire their own circulation.
The Chairman . Yes.
Mr. Marshall . Well, I do not think that is right.
The Chairman . But in every case the notes of the various banks
are identical.
Mr. Marshall . Y es; but the national bank to-day is responsible
for its own note which it issues. You are going by this bill to make
the Federal reserve bank responsible for the issues of other banks.
The Chairman . But these Federal reserve notes are issued upon
the responsibility of the Government of the United States, and then
loaned to the Federal reserve bank; and the bank is responsible only
for such notes as it borrows.
Mr. Marshall . Only for such notes as it borrows ?




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BANKING AND CURRENCY.

The Ch airm an . Y es; only for those. Now, whether it returns
upon retirement these identical notes which it borrowed, whether
they are earmarked, or whether they are not earmarked, would make
no difference.
Mr. M arshall . I understand, but they have got to deposit gold
or lawful money with the Treasurer of the United States.
The Chairman . Certainly.
Mr. M arshall . Well, I think the deposit for the purpose of reduc­
ing the liability of a bank upon its note issues should be a deposit
of its own identical note, and not the notes of another bank.
The Chairm an . I s your suggestion, then, that these particular
notes should be earmarked ?
Mr. M arshall . N o, Mr. Chairman; I want nothing of the kind.
The Chairman . Well, would they not have to be earmarked in
order to return the identical note ?
Mr. M arshall . Well, as I understand, you are going to provide
by this bill for a number on these notes; and I want to have them
earmarked just as little as possible.
The Chairm an . I do not think they ought to be earmarked at all.
Mr. M arshall . Well, that is understood. When you mark a note
you put a question mark on it.
Senator R e e d . If a bank goes down to the Federal Treasury and
gets $1,000,000 of notes issued by the Treasury clerk, and another
bank goes and gets another $1,000,000, and so on— it is not necessary
to extend the illustration further. But finally there is $10,000,000
out in that way.
Now, the Government is interested in being paid back its money.
If you are one of those bankers and you take the same $1,000,000
that you borrowed and bring it back, of course the Government is
made whole.
Now, if you take the $1,000,000 that I borrowed, which is the
same kind and class of money, and carry that back to the Treasury,
why is not the Government made whole just the same? There is
just $9,000,000 of that money still outstanding in either event. It
is all the same class, character, and kind of money.
Mr. M arshall . My suggestion, Senator Reed, was not to protect
the Government. Each one of these Federal reserve banks is re­
sponsible for the amount of notes which it takes out.
Senator R eed . Yes.
Mr. M arshall . For its own notes.
Senator R eed . Yes.
Mr. M arshall . I say then, going on the theory that there would
be a mark on them------Senator R eed (interposing). W hy is there any necessity for doing
that?
The Chairm an . Mr. Marshall is addressing himself to the form of
the bill as it was reported to the House; and he agrees with us that
the Federal reserve notes should not be earmarked.
Mr. M arshall . Y es; but if they are going to be earmarked—
which this St. Louis bank, which I have been mentioning, for in­
stance— it may be numbered 7, it is going to be liable for every note
that is marked with the number 7, for instance.
Senator R eed . Well, if you fixed a liability on the bank to re­
deem, not $1,000,000 of its money, but a particular $1,000,000 out




BANKING AND CURRENCY.

475

of that $10,000,000 that has been mentioned, then, of course, you
must identify that $1,000,000.
Mr. Marshall . Y es; but you are doing so if you earmark them.
The Chairman . Well, you agree that the notes ought not to be
earmarked ?
Senator R eed . It would introduce interminable confusion.
Mr. M arshall . W e agree on that, but I am taking the House
bill as it now provides.
The Chairm an . All right, Mr. Marshall; we understand.
Mr. Marshall . I will now refer to page 33 of the House bill, line
13, where it says:
It shall be the duty of every Federal reserve bank to receive on deposit at par and
without charge for exchange or collection'------

And so on. I predict that this will be very heavy and expensive
operation, and will absorb a large amount of money.
Senator R eed . W ill you please read that again ?
The Chairm an . W ill you please read that portion of the bill a
little more fully, Mr. Marshall?
Mr. M arshall (reading):
It shall be the duty of every Federal reserve bank to receive on deposit, at par and
without charge for exchange or collection, checks and drafts drawn upon any of its
depositors upon any other depositor and checks and drafts drawn by any depositor in
any other Federal reserve bank upon funds to the credit of said depositor in said
reserve bank last mentioned.

Senator R eed . I understand what you refer to now. You have
read enough of the context.
Mr. M arshall . There are a great many checks afloat— too many
of them to make it proper to bind the Federal reserve bank down to
par. W e should let the business itself take care of that. Do you
not think so ?
Senator B ristow . D o I understand that if I were in Missouri
somewhere and gave a bank there a check on a bank at Salina, Kans.,
and it was presented to one of these member banks, both banks being
members of this regional association, that that bank is compelled to
take that check ?
Mr. M arshall . It is compelled to take that check at par, yes,
according to this bill. In other words, if your bank at Salina, Kans.,
was a member bank and any other bank that was a member should
deposit that check which came in to them with the Federal reserve
bank, they must take it at par. Now, as a rule, that bank at Salina
would charge 10, 15, or 25 cents.
Senator B ristow . Well, in some places they do and in others
they do not make a charge, but let us suppose that the check was
not good.
Mr. M arshall . Well, that is a banking matter. They should
not take it unless it has some good indorsers. That is simply a
business transaction.
Senator R eed . Well, let us suppose this sort of case: W e have been
dealing with the question of exchange. Let us suppose that a large
institution in a bankrupt condition, and with no funds in its own
bank, should draw a check for $1,000,000— that is a very large sum,
of course, but we will take an extreme case— and the institution
should cash that check at a member bank with a capital of only
$100,000; but the bank thought the check was good and indorsed
9328°— S. Doc. 232, 63-1— vol 1----- 31




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BANKING AND CURRENCY.

it. Now, under this bill the regional bank would have to take that
check, would it not, whether it was good, bad, 6r indifferent, or does
the language of the bill simply relate to exchange ?
Mr. M arshall . Well, it means simply taking checks, and so on.
I do not think it means to bind the regional bank; the managers of
the bank must always say “ ves.”
Senator R eed . Of course the first bank does not have to say “ yes” ?
Mr. M arshall . N o ; nor the regional reserve bank.
Senator R eed . Well, I think that language in the bill is broad
enough to cover that.
Mr. M arshall . My idea is that these banks are going to be con­
ducted like other banks.
Senator R e e d . I am speaking of that language in the bill. It says:
“ It shall be the duty of every Federal reserve bank,” and so on.
The Ch a irm an . If you look at that language I have interlined you
will see what is meant. Let me explain that, if I may. If that were
written out in full it would read this way:
It shall be the duty of every Federal reserve bank to receive on deposit [from mem­
ber bank], at par and without charge for exchange or collection, checks and drafts
drawn upon any of its depositors [member bank] or------

Mr. M arshall . Certainly.
The Ch a ir m an . And that might include private checks—
or by any of its depositors [member bank] upon any other depositor [member bank]
and checks and drafts drawn by any depositor [member bank] in any other Federal
reserve bank upon funds to the credit of said depositor [member bank] in said reserve
bank last mentioned, nothing herein contained to be construed as prohibiting member
banks from making reasonable charges to cover actual expenses incurred in collecting
and remitting funds for their patrons.

That would still permit the member banks to charge their patrons.
Mr. M arshall . Certainly.
The Ch airm an . And would still permit the member banks, so far
as they themselves are concerned, to par their own items through the
Federal reserve bank.
Senator P o m erene . It is not intended to apply to the collection
of checks drawn by an individual depositor on a member bank ?
The Chairm an . N o. The member bank may par such checks,
however, through the Federal reserve bank, so far as the member
bank is concerned.
Senator R eed . Well, I am taking a different view of that or else
I am not making myself understood. I am not dealing for the mo­
ment with the question of the exchange that may be charged off.
I am dealing with the question that this language seems to make it
incumbent upon the reserve bank to cash a check.
Mr. M arshall . N o ; I do not think that, Senator Reed.
Senator R eed . Well, I think you can say that the language is sus­
ceptible of the other construction; and certainly in drawing a law
we ought to remove any possible ambiguity.
Mr. M arshall . Yes.
Senator R eed . And it ought to be framed so that it clearly applies
only to the matter of exchange.
Mr. M arshall . Well, my idea was to get away from what I know,
from discussing the matter with one banker at one time; I know
that he had the idea in view that he could take this great bundle of




BANKING AND CURRENCY,

477

items he had in the process of collection all over the United States
and go and dump them into this Federal reserve bank.
Now, every city bank has got a large amount of money tied up,
running all tne way from Maine to California, in the process of col­
lection; and the man I spoke of was working on the idea that he
could take all of those checks and dump them into the reserve bank
and convert them immediately into what we call reserve funds. Do
you not see ?
Senator B ristow . Yes.
Mr. M arshall . And it would rather sound to me as if they were
aiming to put that burden on the Federal reserve bank, which would
tie up a lot of money in the first place, and be expensive; and I just
thought I would call attention of the committee to it for that reason.
Now the next suggestion I have------Senator R eed (interposing). Will you wait just a moment, Mr.
Marshall? I think this language ought to go in after the word
“ patrons” on line 23 of page 33:
Nothing herein contained shall be considered or be construed so as to require any
banks to receive any checks or drafts which it believes to be unsafe.

Mr. M arshall . Y e s; that would prevent them from being com­
pelled to handle it when it was unsafe.
Senator B ristow . Well, Mr. Marshall, if you are going to take up
some other subject now I would like to take up the matters we were
considering yesterday afternoon.
Mr. M arshall . All right. I will refer to section 19, relating to re­
funding bonds. Now, 1 have not any memorandum on this for mv
guidance. As I said to the committee, I am not in sympathy with
the bill to the extent of refunding the 2 per cent bonds and retiring
the national bank circulation at this time.
The Chairm an . D o you think it better to defer that ?
Mr. M arshall . Y es; I think it better to defer it.
The Chairm an . Would you think it advisable to have a provision
in the bill for retiring a part of these bonds that are now on the
market ?
Mr. M arshall . I think, Mr. Chairman, that I would amend that
law so as to make the national banks take out circulation alike, and
thus create a demand for the present 2 per cent Government bond.
The Chairm an . S o as to absorb a quantity of them ?
Mr. M arshall . S o as to absorb them all and make a demand for
them.
The Chairman . Y ou might create an overdemand for them.
Mr. M a r s h a l l . It would be better to have an overdemand than
an underdemand. But you can figure that out to adjust it.

The Chairm an . Yes; relatively.
Mr. M arshall . A s I say, you can take a dozen or two of banks
now in the larger cities and by increasing the circulation very little
you can get a demand for $25,000,000 to $50,000,000 of bonds. It
would bring these bonds to par, in my opinion.
The Chairm an . Well, there is no doubt about that; not the
sli 1 :est.
• M arshall . I look upon bonds which are below par as very
undesirable and unsafe.
The Chairm an . I agree with you upon that.




478

BANKING AND CUKBENCY.

Senator P omerene . W hat do you regard as the cause of these
bonds falling below par? I understand what is given as being the

reason but I should like to know what is the actual reason.
Mr. M arshall . Well, it is lack of demand, so far as that is con­
cerned. The law provides for the larger banks taking out a minimum
amount. Of course, the supply is more than the requirements. I
have read something about it but I know nothing about it at all per­
sonally, but it has been a strain all the time to keep the bonds at par.
Senator P omerene . Yes. I had in mind a statement which is cur­
rent to the effect that they were being purposely discredited. I have
no doubt that you also have heard of that.
Mr. M arshall . Yes, sir.
Senator P om erene . Now, the question is, is there any foundation
for that statement ?
Mr. M arshall . I know nothing about that.
Senator B ristow . W hy would the banks try to depreciate'
8600,000,000 or $700,000,000 worth of property which they own?
That is the question to my mind.
The Chairm an . The term “ they” is pretty broad when making a
charge against anybody
Mr. M arshall . Yes. Now, this charge has been made as to
a few.
The Ch airm an . T wo or three.
Mr. M arshall . S o far as that is concerned, the market for United
States bonds, as well as for practically all other bonds, is largely in
one center, and that is New York. It you want to sell even a Gov­
ernment bond in San Francisco, or St. Louis, or Chicago, you will
wait until the broker gets a quotation on it in New York, and he is
probably selling it in New York for delivery in New York.
Senator B ristow . Well, the quotation may be in New York, but
these bonds------Mr. M arshall (interposing). Y es; the real purchaser is in New
York as a rule.
Senator B ristow . That is, if a bank at Salina wants to increase its
circulation------Mr. M arshall (interposing). Or decrease it.
Senator B ristow . If it wants to sell $25,000 of these bonds, they
would sell them in New York?
Mr. Marshall . They would sell them in New York. They may
do so through their Kansas City correspondent.
Senator B ristow . Yes.
Mr. Mar sh a ll . But the Kansas City correspondent will get for
the broker in Kansas the quotation in New York.
Senator B ristow . And suppose they wanted to buy ?
Mr. M arshall . It would be the same way.
The Ch airm an . $15,000,000 or $20,000,000 of these bonds would
fix the market price, would it not ?
Mr. Marshall . Y es; when I was in St. Louis I sold them always
in New York.
Senator B ristow . Of course these 2 per cent bonds would not sell
as an investment?
Mr. M arshall . N o ; I doubt if you could keep up that amount of
even 3 per cent— $700,000,000. T think it is very doubtful.




BANKING AND CURRENCY.

479

Senator B ristow . Speaking of retiring these bonds, suppose that
we should issue a currency, put a gold reserve behind it— tne same as
our greenbacks are— and take that up and substitute instead of a
bonded national debt a noninterest-oearing national debt in the
shape of currency, like our greenbacks------Senator Shafroth (interposing). With the 50 per cent gold
reserve ?
Senator B r isto w . I would put it at even more— at 60 per cent
or more.
Mr. M arshall . Well, you are opening the door for redemption
faster than you have got the money to do it, of course. But it would
probably be safe.
Senator B ristow . I think Mr. Ailing in the article which he pre­
pared suggests about 70 per cent gold reserve.
Senator Shafroth . Y es; I read that last night.
Senator B ristow . Seventy or seventy-five per cent.
Mr. M arshall . I have no doubt 75 per cent would be safe, so far
as that is concerned. You would never have any trouble.
Senator Shafroth . Well, would not 50 per cent be sufficient, if
you had in the law itself a provision directing the Secretary of the
Treasury to buy gold, if necessary, and sell bonds, if necessary, in order
to maintain that 50 per cent reserve?
Mr. M arshall . Well, no doubt it would be safe; but you would
never want to buy the gold or sell the bonds except when you needed
it, and then you would be at the mercy of the fellow that had gold to
sell or could buy your bonds. It is like we had to put out the 4 per
cent bonds; it had to be done at the mercy of the man who had the
gold. And yet the 4 per cent bonds, after they got them, sold at a
premium of 32 or 33.
Senator Shafroth . But that would not cost as much as the pay­
ment of interest on these bonds which the banks hold, of $14,000,000
a year.
Mr. M arshall . Well, so far as that is concerned, as long as we are
a borrowing Nation, and have got out already these 2 per cent bonds,
we must figure on that. It is a fact that they are out at the present
time, 2 per cent interest bonds, payable at the option of the Govern­
ment.
Senator S hafroth . N o ; they are not payable at the option of
the Government.
Mr. M arshall . Y es; I think they are payable at the option of the
Government, Senator Shafroth.
Now, I would like to correct something that some member of the
committee said last night, that the purpose of these Federal reserve
banks was to issue currency to take the place of national-bank notes.
I think you are mistaken. I read that law over again, and it says
distinctly that the issue of this currency is for these banks, and for
them only. There is no provision in this bill------Senator Shafroth (interposing). Well, there is a provision for the
retirement of these 2 per cent bonds.
Mr. M arshall . Y es; but it does not say that it shall be done
through the issue of currency through these banks.
Senator B ristow . W hat becomes of that, then ?
Mr. M arshall . There is no such provision.




480

BANKING AND CURRENCY.

Senator Shafroth . D o you mean to say that we are going to give
3 per cent instead of 2 per cent interest, and have the national-bank
circulation still in existence ?
Mr. M arshall . N o ; you are going to retire that.

Senator Shafroth . Then there would be a contraction in the
currency ?
Mr. M arshall . That is the way I should see it.
Senator Shafroth . That would be a crisis that would be terrible.
Mr. M arshall . One moment, please. I had that here before me.
It is under the section of the bill relating to note issues. It says:
That Federal reserve notes, to be issued at the discretion of the Federal reserve
board for the purpose of making advances to Federal reserve banks as hereinafter set
forth, and for no other purpose, are hereby authorized.

Now, where do you get such a provision for retirement?
Senator Shafroth . Well, if they retire these national-bank notes
it is supposed that some currency snail take their place and that there
will be a demand by the national banks for this currency to take the
place of their own bank notes.
Mr. M arshall . Well, this section provides that the basis of the
security for this issue of notes shall be the assets of the bank, 90-day
notes, etc.
Senator Shafroth . Yes.
Mr. M arshall . Y ou do not think that that contemplates getting
out a currency for the retirement of these national-bank notes, do
you?
Senator Shafroth . Yes.
Mr. M arshall . My construction of this language is that that is to
be an emergency currency only.
Senator Shafroth . Yes.
Mr. M arshall . And it certainly should be held for that purpose.
Senator Shafroth . I think it ought to be limited to emergency
currency; but I think the national-bank note should be retired by the
substitution of United States notes.
Senator R eed . But you are talking about what you believe,
while------Mr. M arshall (interposing). While I am talking about what this
bill provides.
Senator Shafroth . Yes.
Senator R e e d . This bill provides for the retirement of these
national-bank notes, without any substitute, or else for this emergency
currency as a substitute; one or the other?
Senator Shafroth . If that were the case, you would have a crisis
such as we had in 1893.
Senator R e e d . All of which leads me to believe that we ought to
rush this bill through in the next two or three days without read­
ing it.
Mr. M arshall . N ow , in section 21 of the bill it says:
That so much of sections two and three of the act of June twentieth, eighteen hunclred and seventy-four, entitled “ An act fixing the amount of United States notes,
providing for a redistribution of the national-bank currency, and for other purposes,’ ’
as provides that the fund deposited by any national banking association with the
Treasurer of the United States for the redemption of its notes shall be counted as a
part of its lawful reserve as provided in the act aforesaid, be, and the same is hereby,
repealed.




BANKING AND CURRENCY.

481

In other words, the 5 per cent redemption fund the national banks
now carry with the Treasurer of the United States for the redemption
of national-bank notes is now carried as a part of the national-hank
reserves. You repeal that part of that act. They have got to carry
the 5 per cent redemption fund and it is not a part of their reserve.
I suggest that if that is to be done that that redemption fund of 5
per cent should be reduced to 2^ or 3 per cent. You will relieve a
considerable amount of money that is now tied up for redemption

loses.
)w, I have not looked into the redemption bureau, but my expe­
rience as a banker is— for instance, while I was in New York we had
$1,000,000 currency, and we had $50,000 redemption fund with the
Treasurer of the United States. W e seldom had more than $5,000 to
$10,000 of redeemed money. That is charged to our $50,000. We
might make it good— in other words, the $25,000 to $40,000 that is
tied up there------Senator B ristow (interposing). Is never used ?
Mr. M arshall (continuing). Is never used. It is tied there in the
Treasury for that purpose. Now, if that is checked up, you will find
that at certain times that 5 per cent redemption fund is overdrawn.
In other words, when they redeem this currency, they do not promptly
make it good.
Senator B ristow . They do not promptly make it good to the bank ?
]
lit
Mr. M arshall . That is the fau of the Government; the fault of
the fellow in charge.
Senator S hafroth. I would like to call attention to this language
in the report of the House committee upon this bill, as Chairman
Glass says that these bonds are redeemable after 1930:
The bonds now have no due date, and while the Government may redeem them
after 1930 they are not necessarily payable after that period.

Mr. M arshall . That is right. Therefore they are redeemable at
the option of the Government.
Senator S hafroth . Yes, and not until 1930; not now.
Mr. M arshall . Y es; but you want to redeem your bonds.
The Chairman . There is no danger whatever of any disturbance
from the provision in this bill, because the possible maximum is only
$39,000,000.
Mr. M arshall . Y ou mean that much a year.
The Chairm an . Yes.
Senator Shafroth . $37,000,000 a year. But you can, under this
bill, get out new bank notes, under the provision of this bill, after the
20 years elapse. They do not limit that. There is a provision in there
that they can go on and organize new national banks and take out
new currency until the 20 years expire.
Mr. M arshall . Yes.
Senator B ristow . Or they can surrender their currency.
Senator Shafroth . They can surrender their currency, yes; they
can do that now.
Mr. M arshall . N ow , section 23 of the bill relates to bank exam­
iners.
That the examination of the affairs ot every national banking association authorized
by existing law shall take place at least twice in each calendar year and as much of tener
as the Federal reserve board------




482

BANKING AND CURRENCY.

I would put in there the words “ Comptroller of the Currency”
before the words “ Federal reserve board” ; and also after the words
“ Secretary of the Treasury” in line 10 I would put the words “ the
Comptroller of the Currency.”
Line 19, “ amount whereof shall be determined” — as to the salaries
I would put it that the Secretary of the Treasury and the Comptroller
of the Currency should fix the salaries of bank examiners.
Senator R e e d . Well, now, why have a subordinate sit with his
superior officer to fix those salaries ?
Mr. M arshall . The bank examiners generally are closer in contact
with the active work. Do you mean that the comptroller should not
have power with the Secretary ?
Senator R e e d . Yes.
Mr. Marshall . The comptroller knows what the examiners are
doing and the duties of the examiner better than the Secretary.
Senator R e e d . Y es; but you have got to have a superior in every
office.
Mr. M arshall . That is true.
Senator R e e d . N o w , the Secretary would naturally consult, if he
was a man of proper discretion, with the comptroller; but to give the
comptroller an equal authority with the Secretary— does the comp­
troller have the appointing power of examiners ?
Mr. Marshall . Yes; he has the appointing power. The comp­
troller appoints the bank examiners.
Senator R e e d . But the Secretary of the Treasury appoints the
comptroller, does he not ?
Mr. M arshall . N o ; the Treasurer appoints him.
Senator R e e d . But on the Secretary’s recommendation.
Mr. M arshall . He is a presidential appointee, and the comptroller
appoints the examiners with the approval of the Secretary of the
Treasury.
And I put it that way because— now, this goes on here, and I think
the way the examinations are provided for here in the bill is very
burdensome.
The Comptroller of the Currency shall so arrange the duties of national-bank ex­
aminers.

That is the same as it is now.
That no two successive examinations of any association shall be made by the same
examiner.

That is wrong, because an examiner knows more after he has
examined a bank 5 times or 10 or 20 times than he did before.
The Chairm an . D o you think that the purpose contemplated by
that provision might be accomplished by providing merely that
other examiners should be allowed to come in?
Mr. M arshall . Yes, sir.
The Chairman . And you think it is better not to bind the comp­
troller down to that arrangement as contained in the bill?
Mr. M arshall . My idea is to make him responsible, my idea
being that all examinations of Federal reserve banks and the mem­
ber banks and the national banks should be made by the direction
of and to the Comptroller of the Currency. All requests for special
examinations by Federal reserve board should be made to the comp­
troller, who should have charge of all examiners and their work and




BANKING AND CURRENCY.

483

the supervision of all banks, Federal examinations not to be oftener
than twice a year, special examinations as often as necessary and as
often as requested by the Federal reserve board.
The Chairman . So that your suggestion is as to page 41, line 18,
that the whole provision should be that the examination should not
be more than twice a year ?
Mr. M arshall . Yes. Suppose you have got a trust company.
The State is examining that company twice a year, or more and the
Comptroller of the Currency is examining it four times or more; and
you would have examinations for that company nearly all the time.
Now, banks are like everything else, there are good banks and bad
banks. Some banks would be better off without examination at all,
and others would be better off with examinations three or four times
a year. You would not want to burden a good bank on account of
the faults of another.
Senator Shafroth . In the banks in England, no examination
whatever is required.
Mr. M arshall . That may be true; but we are different.
Senator Shafroth . Oh, I think that is a wrong principle.
The Chairm an . Our system is very different from theirs.
Senator R eed . My idea is that the author of that provision in the
bill undoubtedly thought that one examiner should be a check upon
another.
Mr. M arshall . Yes.
Senator R eed . That apparently is a good idea.
The Chairm an . Yes; of course.
Senator R eed . But it would be better to provide for an examiner
in chief who might at stated intervals, or at such times as he saw fit,
drop in and make an independent examination.
Mr. M arshall . Well, the Comptroller of the Treasury is the exam­
iner in chief.
Senator R eed . But he does not go out to the different banks.
Mr. M arshall . No.
Senator R eed . But if there was an examiner in chief, too, he would
simply drop around occasionally and look over the work of these
exammers.
Mr. M arshall . That is exactly what is being done now.
Senator R eed . I suppose so.
Mr. M arshall . These examiners are being switched from place to
place; but the idea of this bill seems to be that no one examiner
should examine a bank a second time.
Senator B ristow . That would be a great weakness.
Senator R eed . A bank examiner might get his mind on a certain
class of paper. He might begin to suspect it, but not have sufficient
ground to reject it.
Mr. M arshall . I speak from experience. I was a bank examiner
at one time. I knew more about a bank at the end of three years as
an examiner than I did the first year.
Senator S hafroth . You got familiar with some of the paper
then ?
Mr. M arshall . Yes- and with the bankers themselves.
Senator B ristow . Yes; with the bankers; it is also a personal
matter.




484

BANKING AND CUBEENCY.

Mr. M arshall . And my idea of that is to put the responsibility
on the comptroller, and to put the examiners under him, as they are
now, and make him responsible for his work. The more responsi­
bility you put on him the better it would be done.
The Chairm an . Have you any other points which you wish to
submit, Mr. Marshall?
Mr. M arshall . Yes. Section 25 relating to transfer of stock.
On page 43 it says:
The stockholders in any national banking association who shall have transferred
their shares or registered the transfer thereof within sixty days next before the date
of the failure of such association to meet its obligations shall be liable to the same
extent as if they had made no such transfer.

I would change that provision to apply not to the stockholder, but
to any officer or director. W e have got many stockholders that know
nothing about the management of the bank, and they should not be
liable for the criminal acts or mismanagement of the officers or
directors, except as they are liable for their double assessment in
case of failure. If you were a stockholder in some bank you might
be away a great deal and know nothing about what was going on.
There are many women up in New England who are stockholders,
and if a bank failed and a woman happens to sell her stock 30 or 60
days before the bank fails, by this provision she is made liable just
the same.
Senator R eed . It seems to me that when you fix the 60-day limit
you do not reach the real evil, because the man who knows that the
bank it going to fail and wants to escape his liability might know it
60 days or 6 months or a year before it failed. It seems that some­
thing should be inserted that would cover that point, such as—
every stockholder who transfers his stock, with knowledge of the insolvency or im­
pending insolvency of the bank, or any knowledge of facts sufficient to put him upon
inquiry or notice, be held liable.

Mr. Marshall . Yes.
The Chairman . That is much better, I think.
Senator Shafroth . D o you not think that in addition to such a
provision there ought to be that fixed limit ?
Senator R eed . I would not put in any limit at all, but only actual
knowledge of the failing condition of the bank.
The Chairman . That is the important point.
Senator S hafroth . But if you do not have any limit you might
go back to a director or stockholder within six years.
Senator R eed . But if he transferred with knowledge of the bank’s
failing condition, he ought to be held. I will give an illustration:
There is a bank in my State that I think for five years was absolutely
insolvent. The president I believe— well, I believe it was not the
president but the cashier— knew that there was a very large amount
of paper that had been forged. The paper would have been good if
it had been signed by the man whose name it bore; but it was forged
aper which was carried along there on a note from time to time.
ow, a man who knew that condition never ought to be able to
escape liability for his stock. Probably he would be liable on another
ground than as a mere stockholder.
Senator Shafroth . If he sold his stock, the person to whom he
sold it would have a right of action against him for false pretenses.

S




BANKING AND CURRENCY.

485

Senator R eed . But I am speaking about his being liable to a stock­
holder upon another ground than stock ownership. Because a man
who runs any bank, and has actual knowledge of fraud of that kind
being perpetrated, if I put my money in it, there ought to be a liability
on him absolutely unlimited.
The Chairman . I suppose you refer to the Shafer case ?
Senator R eed . Yes.
The Chairm an . I s there any other point you wish to submit,
Mr. Marshall?
Mr. M arshall . Yes. Section 26, relating to farm loans. Now,
suppose that a trust company or State bank comes into this system.
They loan money. Would this 12 months’ limit apply to trust
companies and State banks?
Senator B ristow . It would have to apply to all the banks that
come in.
The Chairman . But these banks have different policies; one is a
commercial bank and the other is an investment bank. I think there
ought to be a distinction between them, not to compel them all to
come under the same rule. Take a savings bank; they make a large
part of their investments in real estate.
Senator B ristow . Before we leave that I would like to suggest------ Mr. M arshall . Will you please let me finish this point ? I would
not have a separate capital for the commercial and the savings
departments, but would have a regular savings department with
proper books, and provide safe investments for savings funds; and
the reports should clearly state the amount of savings deposits and
the amount of investments carried for account of savings; but one
capital should be liable for all deposits, both commercial and savings
alike. I think it would be complicated otherwise. This bill pro­
vides for a certain amount of capital. It says that it shall not be
less than $25,000. Well, there are several national banks, small
ones, with $25,000 capital; and they might desire to start a savings
department, but it would not justify them with a capital of $25,000.
The Chairman . Of course, that is right; they are carrying on
savings departments now on the time-certificate plan.
Mr. M arshall . Y es; that is better.
Senator B ristow . I should like to take up that matter in con­
nection with these farm loans. I asked yesterday why a real estate
mortgage should not be made the basis for this currency and why it is
not preferable and more desirable than the short-time paper; and
you suggested that the difficulty was that there was no established
market for a security of that kind like there was for bonds. Is there
not just as much of a market for real estate mortgages as there is for
commercial paper ?
Mr. M arshall . Oh, no.
Senator B ristow . There is not ?
The Chairm an . Might I interpose a statement here ?
Senator B ristow . Certainly
The Chairm an . Mr. Festus J. Wade, of the Mercantile Trust Co.
of St. Louis, established a market for farm loans, by wide advertise­
ment among the people themselves, so that he actually made those
farm mortgages a liquid asset; and right in the middle of the recent
panic he was selling farm mortgages at 6 per cent. When money was




486

BANKING AND CURRENCY.

easy he was selling them on a 5 per cent basis. But he was able to
collect money right in the middle of the panic upon farm mortgages,
owing to the fact that he had, by himself, through that institution,
established a market for farm mortgages. I think that answers your
question. Of course there is no market for them now, except as
built up by some individual.
Senator R e e d . There might be some market for them if we had
some means of cashing them.
The Ch a irm an . Certainly.
Mr. M arshall . My idea is that back of this currency there is a
security that is going to be paid, and therefore retire the currency.
Senator B ristow . That is a beautiful theory. But as a matter of
fact the banks of the country with which I have a very slight famili­
arity— while their short-time paper is the only kind of paper they
do carry, as a matter of fact it is not paid any more than a farm
mortgage is paid. They are carried along from year to year. I have
renewed notes over five times. The banker would know that it
would ultimately be paid.
Senator R eed . Y ou run a newspaper, do you not? [Laughter.]
Senator B ristow . Now, that is a way the majority of the news­
paper men do.
Mr. M arshall . I know that.
Senator B ristow . And it will not be paid.
Mr. M arshall . Well, suppose that your bank at Salina discounts
John Smith’s plain note. John Smith is a farmer breeding cattle.
His note is as good as gold.
Senator B ristow . Yes.
Mr. M arshall . N ow , that note— I do not know whether it would
be under the bill— it says paper, “ issued for agricultural purposes,”
whether the money is used for or is going to be used for that purpose
or not.
Senator B ristow . The point I am making about the discrimination
against farm mortgages is that John Smith is a farmer at Salina in
the example you mentioned; and a banker can take his note, due in
90 days, and make it the basis of this currency. Now, if John Smith
did not have a farm his note might not be worth anything.
Mr. M arshall . Yes.
Senator B ristow . And yet a mortgage on his farm is barred by
the bill.
Mr. M arshall . Yes. But the argument against that is that it is
not a liquid security for payment.
Senator R eed . You mean that it does not come due quickly?
Mr. M arshall . Y es; it does not come due quickly.
Senator R eed . Then, the evil does not reside in the fact that it
has got a security back of it of a certain character, but in the cir
cumstance that it does not become due soon enough. Is not that
the real objection, instead of the fact—■
—Mr. M arshall (interposing). It does not come due, and, as 1
said, it is not liquid. That is no reflection on the security.
Senator R eed . Well, I would like to have somebody define to
me what is meant by a security being “ liquid.” If “ liquid” means
that a note is a good note, and it is coming due in 30 or 60 or 90 days,
or a shorter time— if that constitutes being a liquid security, I know
what you mean; if it means anything else, I would like to know
what it does mean.




BANKING AND CURRENCY.

487

Mr. M arshall . Well, as you say, it runs a year sometimes.
Senator R eed . But I am trying to get you to tell me what you
mean by “ liquid,” if it does not mean what I have said.
Mr. M arshall . A security that will be reduced to cash— be paid.
Senator R eed . Well, I am speaking of a note of 30 or 60 or 90
days, a note the maker of which can be compelled to pay it. Does
that constitute a liquid note ?
Mr. M arshall . Not compelled; that means at the end of six
months or a year— through a court.
Senator R eed . I mean the maker is good, and if you demand your
money you can get it.
Mr. M arshall . If you demand your money you can get it; and
the purpose is to pay it at maturity; the purpose of the borrower and
the holder of the note is to cash the note at maturity.
Senator R eed . If the Senator will pardon me another question:
Now, as a matter of fact, banks have a line of credit which consti­
tutes a large part of their business with regular customers that they
carry from year to year, renewing the notes every 30, 60, or 90 days—
do they not ?
Mr. M arshall . Oh, certainly.
Senator R eed . N ow , would you exclude that character of note ?
Mr. M arshall . S o far as that is concerned, that is a note that is
given for the purpose— that is practically going to be renewed, and
you know it— why, I would exclude it. I would make a great dis­
tinction between security that is to be put up between the note issue,
and the security or note, if you are going to discount it for the bank
for the puipose of taking care of his customers.
Senator R eed . That is what I am getting at. Here is a large mer­
cantile concern in a city. It goes down to the bank and arranges
for a line of credit. It proposes to open its account and says,
“ How much of a line of account will you extend to m e?” The
banker says, “ Up to $200,000.” Now, he borrows that. Sometimes
he is up to $200,000; sometimes he is down to $10,000 or $15,000;
but as a matter of fact he is probably owing the bank something all
the time. Would you exclude that class of paper ?
Mr. M arshall . Not if he was a good substantial customer.
Senator R eed . Well, if, as a matter of fact, he borrows $200,000
and was entitled to a credit of $200,000; he borrowed $100,000 and
ran along just at that amount; would you exclude that paper?
Mr. M arshall . D o you mean that he is a continuous borrower ?
Senator R eed . Yes. He generally owes that bank $100,000, renew­
ing his notes from month to month, but at any time the bank said
to him “ Pay,” he would get the money in there in a very short time.
Would you exclude that?
Mr. M arshall . If he is good I would not.
Senator R eed . Well, I want to know now in the name of the Lord
God of Israel— and I do not say it in any irreverent sense— whether
you are going to exclude that class of paper in the practical operation
of this law ?
Mr. M arshall . Well, as I said a while ago, I would make a dif­
ference in the paper that I take as security for a note issue and the
paper that I discount as a paper for its general use.
Senator R eed . I understand that your distinction is that you want
liquid paper on the one hand and would accept nothing else, while on




488

BANKING AND CURRENCY.

the other hand you would accept other paper; but when you come to
really decide whether a paper is liquid paper or not, by what rule
will you decide and by what yardstick will you measure it?
Mr. Marshall. In the first place, if you have a note that is good —
what we call commercial paper, that we defined yesterday— paper
based on cotton, we will say, in the course of shipment, with a draft
at 30 or 60 or 90 days, that is strictly prime paper, and I would put
just as much of that kind of paper behind a note issue as I said.

Senator R eed. Y ou say a note with a draft. Do you mean an
acceptance?
Mr. Marshall. Yes; I mean an acceptance.
Senator R eed. N ow, I want to ask you what proportion of the com­
mercial business of this country is carried on through acceptances?
Is it not the fact that the acceptance has almost gone out of date ?
Mr. Marshall. Well, the acceptance has, so far as that is con­
cerned. There are, however, a good many acceptances while the
cotton is on the way to Liverpool.
Senator R eed. Well, there may be some foreign acceptances; but
now, getting down to the real situation in this country— but is it not
a fact that the aggregate of all the acceptances in this country would
not begin to furnish enough securities to issue money against ?
Mr. Marshall. Certainly.
Senator R eed. N ow, that is what you call prime commercial paper.
That is one call. What else ?
Mr. Marshall . I told you last night. You spoke of a certain line
of paper. Take your wholesale merchant, who buys his goods and
gives his note to the manufacturer, and the manufacturer discounts it.
Those are what we call commercial paper. That class of paper is
not used much more, because the creditor who borrows through his
bank and the commercial broker and gives his paper direct and pays
and takes his discount, and so on.
Senator R eed . I am through with my line of questioning, Senator
Bristow; I beg your pardon for the interruption.
Senator B ristow . As to commercial paper I will give an illustra­
tion. W e will take Woodward & Lothrop, or John Wanamaker, or
Armour & Co. These merchants, as I understand, keep out a large
amount of paper. Say it is 90-day paper of Woodward & Lothrop’s.
The broker settles that. That wiil be paid; but it is paid by the sale
of another note.
Mr. Marshall , Quite often. Not always.
Senator B ristow . Not always, but frequently. And he keeps so
much of that afloat all the time.

Mr. Marshall . Certainly; no question about that.
Senator B ristow . Well, why should that be given any different
consideration from the merchant at home, in a small way, who
renews his notes every 90 days ? It is a part of his capital, is it not ?
Mr. Marshall . But if your bank at Salina buys John Wannamaker’s note through a broker he is absolutely free from all obliga­
tions to John Wannamaker to renew. He buys that note. When
it comes due he sends it to the place where it is payable, and he gets
his money, and it is reduced, so far as he is concerned, to money.
Senator B ristow . N ow, when you take the 90-day notes or 60day notes that are held by any bank—-I do not know much about
these city banks, but take a country bank— and most of the banks




BANKING AND CURRENCY.

489

are country banks— and there is not a bank in the United States that
could compel payment of those 90-day notes without disaster.
Mr. Marshall . D o you mean all at once ?
Senator B ristow . All at once— when they become due. There is
not a bank in the United States that could do it.
Mr. Marshall. D o you mean compel them all at once? That is
not a condition ever heard of. If all depositors, for instance, should
demand payment at once it would produce a very serious situation.
Senator B ristow . W hy is not the mortgage on the farm, on the
land itself, which is the basis of the prosperity of this country anyway,
conservatively made, the best security in the world ?
Mr. Marshall. Senator, I have seen the time when it was about
the poorest— in 1893, when I was a banker in Kansas City, and one
of these farm-mortgage concerns, which was taking mortgages and
selling them, broke, and we had to take quite a number of its mort­
gages as security.
Senator Shafroth . That was the Lombard Investment Co.
Mr. Marshall. I had 14 of them on land in your State, and some
of them not so far from you. Those mortgage descriptions read fine—
fenced, barn, house, etc.— and not one of them had the improvements
they said they had, and those mortgages were on 80 to 320 acres, and
loans run from $300 to $500 apiece. I got a lawyer at St. John,
Kans., to go out and run down a lot of those pieces of land and fix
up the titles, and see where they got to, and when I got through they
were not worth over $1 an acre, and they could not be sold.
Senator R e e d . Mr. Marshall, you furnished an illustration o f the
badness------Mr. Marshall. Of what?
Senator R eed . The badness of farm loans by citing a splendid,
barefaced fraud, a parallel of which would be to say that a lot of
rascals got together and organized a fake corporation and put in a
lot of paper that had nothing back of it, probably part of it forged, and
put it into the channels of commerce for the purpose of imposing
upon somebody. You would not want commercial paper con­
demned because of that, and I do not think your illustration, with
all due respect, about farm loans is any more fair. W e all know
what the Lombard Investment Co. was.
Mr. Marshall . I was speaking not as a whole. Nobody has a
higher regard for farm mortgages than I have, and the day I was
speaking of is past. That was when the country was settling up and
everything was new. It is quite different there now.
Senator R eed . Maybe you have heard of some gentlemen who
laid out some lots that were 50 by 140, and had a nice map of them,
and they mortgaged them, and they had perfect titles, and then it
was discovered that the lots were 50 inches wide and 140 inches deep;
but we hardly take that as an illustration.
Mr. Marshall. Senator, it was far from my purpose to give that
as an illustration to base farm mortgages on generally.
Senator R eed . Certainly; I thought so.

Mr. Marshall. I have taken plenty of farm mortgages, and I have
great confidence in them, and I was just speaking of that isolated
instance.
The Chairman . There is no doubt about it that the Lombard In­
vestment Co., with the gigantic fraud that was behind it, which




490

BANKING AND CURRENCY.

Senator Reed points out, as we all know, did have a very bad effect
on the country at large.
Senator B ristow . H ow many merchants were there in 1893 who
were in financial straits?

Mr. Marshall. There were many.
Senator B ristow . What was their paper worth ?
Mr. Marshall. It might also be asked, What were many banks
worth ?
Senator B ristow . Take the banks that failed, what were they
worth ?
Mr. Marshall. That in 1893 not only the farm but practically the
rest of the country was broke.
Senator B ristow . Everybody was broke. W e can look back
and recall farms which you could not get $1 an acre for, but if the man
gets the mortgage or took the farm, there is not one in all that western
country who kept it who did not make money.
Mr. Marshall. Certainly. I wish I had kept them all.
Senator B ristow . Yes, if you had kept them all-------

Mr. Marshall. But those were extreme conditions.
Senator R eed. If you had kept them you would have had enough
money to start a country newspaper and come to the Senate.
Mr. Marshall. W e were all broke, because we were selling $1.50
hogs, and $1 and $2 cattle, and burning corn for fuel.
Senator R eed . What was the trouble with prime commercial
paper in those days?
Mr. Marshall. Those were extreme times, and it is not a fair com­
parison.
The Chairman . I will remind the witness that he will miss his
train.
Senator B ristow . Just one more question. Only as a rule— there
are exceptions, but, as a rule, the only security that did come back
in the end was good farms, was it not ?

Mr. Marshall. Well, I think some of the merchants and banks
that were shaky at that time got well.
Senator B ristow . Many of them went into bankruptcy.
Mr. Marshall. Many of them that were sick got well.
Senator B ristow . But all the farms got well.
Mr. Marshall. Many of them got well; yes; I should say so; I
agree with you there.
Senator R eed . That could be accomplished if the man who had
the farm could have lived without anything to eat.
Senator B ristow . They could find something to eat and get a
little sorghum t(Asweeten the bread.

Mr. Marshall. It is no reflection on the farm-mortgage security,
because as a class of security it is probably the best, or among the
best, that we have.
Senator B ristow . Y ou have six minutes yet.
Senator R eed . He can not catch his train unless he goes.
Mr. Marshall. I have a conveyance down there waiting for me
and I can catch the train all right. •
Senator B ristow . The Government issues this currency and loans
it to the banks and the banks put up the security and tne currency
is returned. The banks, as far as tne Government is concerned, do
not have to return that money and it is not intended that they shall




BANKING AND OUBRENCY.

491

return that money until the community can conveniently meet their
obligations ?
Mr. Marshall. That is right.
Senator B ristow . W hy is it necessary to have short-time paper,
making it possible to force the community to return the money until
they can conveniently ?
Mr. Marshall. A s far as that is concerned, that is just why I
injected that, that I would take the assets of the Federal reserve bank
as collateral, and other bonds. When you go to issuing money, I
say, take all the security you can get.
Senator Shafroth. Mr. Marshall, do you think there is enough
prime commercial paper that could be used for the purpose of deposit­
ing in the reserve banks that would take the place of the $750,000,000
of bank currency ?
Mr. M arshall . N o, sir.
Senator Shafroth . D o you think it would be more commercial
ir than would be in existence ?
r. Marshall. Well, I do not know as to totals; but, on the other
hand, Senator, I would not indorse putting out a permanent asset
currency. I believe that to be asset currency, if you please, but it
would simply be a short time— emergency— currency to meet the
emergency and to get it back in and cancel it just as quickly as
conditions would justify.
Senator Shafroth. Would it not require enormous machinery on
the part of the reserve bank to handle $750,000,000 of commercial
paper ?
Mr. Marshall. Certainly.
Senator Shafroth. Maturing at from 30 to 60 and 90 days ?
Mr. Marshall. Certainly it would, and especially if you undertook
to make it permanent.
Senator R eed . I am very sorry you have to go.
The Chairman . I will ask the committee now to give Mr. Dos
Passos a few minutes to be heard.
STA TE M EN T OF JOHN R. DOS PASSOS, OF N E W YORK, N. Y.

Mr. Dos P assos. I will take onty about 10 minut s.
The Chairman . I want you to give your name and address to the
stenographer.
Mr. Dos P assos. My name is John R. Dos Passos, and my resi­
dence is New York City. I have some thoughts on these questions,
and I have put them in print to save you gentlemen’s time.
Senator R eed . Before you begin, will you make a statement as
to who you are? Not for our enlightenment, but for the enlighten­
ment of those who want to read your statement.
Mr. Dos P assos. With becoming modesty, I wish to announce
myself as a gentleman who has had to do with Wall Street for 35
years. I am the author of the work on Stockbrokers and Stock
Exchanges, but I am before this committee in a perfectly inde­
pendent character, representing nobody but myself, and nobody is
responsible for my thoughts.
Senator R eed . W hat has been your experience in financial mat­
ters, in a broad way ?
9328°— S. Doc. 232, 63-1—vol 1----- 32




492

BANKING AND CURRENCY.

Mr. Dos P assos. Everything; I have been connected with all
kinds of trusts, and I have been connected with all kinds of corporartions for 35 years in Wall Street.
Senator R eed . A s a capitalist and investor?
Mr. Dos P assos. N o, as a lawyer, representing capital and
investments. The last retainer I had was from a French syndicate,
which built a road out in the State of Oklahoma.
The Chairman . He refers to the Missouri, Oklahoma & Gulf,
which was financed by a French syndicate represented by Mr. Dos
Passos.
Mr. Dos P assos. W hat I wanted to do was not to take your time
now, but if after you have read the pamphlet if you think it is of
sufficient importance to read the little pamphlet I have printed here,
I shall be very glad to obey the call of the committee and to appear
especially on questions that you have discussed here this morning
about the farm mortgages. I have studied that question thoroughly,
and I think possibly I might give you some enlightenment in regard
to that— views that perhaps may not have occurred to outside people.
You have here, in the fourteenth section, under the head of “ Re­
discounts,” this language:
* * * but such definition shall not include notes or bills issued or drawn for the
purpose of carrying on or trading in stocks, bonds, or other investment securities. * * *

Senator Shafroth . W hat page is that ?
Mr. Dos P assos. That is under the heading “ Rediscounts,”
I have it on page 120 of this book here.
Senator P omerene . That is the Glass report, I think.
The Chairman . That is the report of the House, page 120. It is
section 14 of the bill and page 24.
Mr. Dos P assos. This language that I have read here—
*
*
* but such definition shall not include notes or bills issued or drawn for the
purpose of carrying or trading in stocks, banks, or other investment securities, * * *

W hat does that mean? The aim of the author of that language,
I assume, is to exclude banks from lending on securities of the stock
exchange, but it is very ambiguous and will give rise to enormous
discussion, both among the lawyers and everybody else who read
this passage. If you want to exclude or prevent' or prohibit the
banks formed under this law from loaning money on securities dealt
in on the stock exchange, I think you had better say so plainly. I
am in favor of that to a certain extent, and yet I am supposed to
represent Wall Street interests. I believe to-Sav if you pass a law
by which the stock exchange would be excluded from participating
in the proceeds of banks you would do something for tne benefit of
the stock exchange and you would not have to legislate in regard to
currency at all.
Senator R eed . How would it benefit the stock exchange ?
Mr. Dos P assos. The stock exchange would not be required to
borrow money, but do as they do in London and Paris.
The Chairman . Bimonthly ?
Mr. Dos P assos. Bimonthly; and if thev did that the whole busi­
ness of currency and rates of interest would be settled, and you would
never hear of tightness of money. Where does that all come from,
this tightness of money? You have not gone into that aspect of the
matter.




BANKING AND CUREENCY.

493

Senator P omerene. Y ou mean “ tightness” of money as it has to
do with operations in W all Street?
Mr. Dos P assos. Everything; that is when interest goes up to
100 or 200 or 300 or 500 per cent, which is a thing absolutely unheard
of in London and in Paris.
Senator R eed . Y ou do not expect to cover such a subject as that
in 10 minutes ?
Mr. Dos P assos. No.
The Chairman. When could you return, Mr. Dos Passos ?
Mr. Dos P assos. I will come here Friday. Would that suit you ?
Senator Shafroth. He had better come Monday.
Senator P omerene. I suggest that we wire him when he shall
come.
Mr. Dos P assos. I am going to sail for Europe on the 24th of this
month, and, of course, I would not be able to get here next week, but
I can come back here on Friday and I shall do it with great pleasure.
Senator Shafroth. I think that is all right.
The Chairman . Will it suit the convenience of the committee to
hear him on Friday ?
Senator Shafroth. I think so.
Mr. Dos P assos. I will leave a number of copies of this article of
mine, which will open up the subject to you, so that you will be able
to examine me with a great deal more skill.
The Chairman . Very well.
Mr. Dos P assos. I am obliged to you for allowing me to intervene
for a moment.
(The document filed with the committee by Mr. Dos Passos follows:)
T

he

R

e l a t io n

of th e

Sto ck E

xchanges

to

the

C u r r e n c y Q u e s t io n .

[By John R . Dos Passos, of New York City.]

The pith of the President’s views on currency reform is contained in these words
in the message which he personally read to Congress:
“ Our banking laws * * * must not permit the concentration anywhere in a
few hands of the monetary resources of the country or their use for speculative pur­
poses in such volume as to hinder or impede or stand in the way of other more legiti­
mate, more fruitful uses.”
Without questioning the general necessity of a new system for banking and cur­
rency, and without criticizing the remedies or language of the new measure intro­
duced in Congress by the distinguished chairmen of the Senate and of the House
of Representatives, Messrs. Owen of Oklahoma and Glass of Virginia, 1 venture to
suggest a method by which “ the concentration * * * in a few hands of the
money resources of the country or their use for speculative purposes” will be pre­
vented most effectually and which will not interfere with the reforms sought to be
accomplished by the above or any other measures finally adopted.
I believe that the first step toward true banking reform would be to divorce the
transactions of the stock exchange from the banks—to prevent brokers from using
the money of these institutions in speculative adventures. The operations of the
exchange as now conducted require the banks of New York to furnish a vast sum of
money to facilitate the business of its members. When one gives an order, for example,
to purchase, say, 5,000 shares of New York Central Railroad stock in the stock exchange
it involves the raising of, say, about $500,000, of which the customers’^ordinary margin
contributes 10 per cent, $50,000, and 10 per cent, $50,000, is furnished out of the
capital of the stock broker, making $100,000. As the broker must pay for the stock
on the following day he is required to go into the money market and borrow $400,000
by the pledge of the 5,000 shares of stock bought. Now, as 85 per cent of the trans­
actions of the exchange are speculative, in the case put $400,000 is furnished by the
banks to aid a purely speculative venture. And as one can very readily perceive,
if 1,000,000 shares of stock are dealt with in a day, which has been a common occur­
rence, the aggregate sum of money drawn out of the banks would be simply colossal.





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