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BANKING AND CUKRENCY.
Of course, this money is placed back again in the banks to be used in some other
speculative deal, but the fact remains that hundreds of millions of dollars of banking
funds are daily employed by the stock brokers for the facilitation of purely speculative
transactions. This system is wholly unnecessary and useless. It should be eliminated.
The operator who buys for speculation 1,000 shares of stock never sees the certificates
of stock, never wants to see them, and is interested only in the rise and fall of the
market. He is playing for a profit. The borrowing of money and the financing of
the transaction are entirely with the stock broker who performs the operation, and the
customer or speculator never sees or handles the securities in which he is trading.
In addition to this misuse of banking funds, that ought to be at the disposal of the
industrial and commercial community, the system of actually financing each trans
action is a great hardship upon the corporations. Each corporation whose stock is
actively dealt in is subjected to enormous expense and inconvenience by being com
pelled to furnish and issue fresh certificates of stock each day.
The corporations to effectuate these useless transfers are compelled to have engraved
and on hand thousands of certificates by which transfers can be quickly made on
their books; they are compelled to furnish gratis these engraved certificates which
cost very large sums of money and in the course of the day when the operations in a
particular stock are very large, and the transfers upon the books continuous, the
corporations are compelled to employ clerks to do the work, or trust companies and
transfer agents to facilitate deliveries and to attest the regularity of the transfers and
the forms of the new certificates. There is no spectacle of Wall Street so ludicrous
as to behold the messengers running around with certificates of stock, demanding
large checks which are duly certified to close these purely speculative transactions.
This ridiculous and unnecessary process goes on day after day and these huge sums
of money are drawn out of the banks when the funds should be held to meet the legiti
mate business transactions. The exchange should be compelled to make bimonthly
settlements as is the practice in London and in Paris, and to close the transactions
by the payment of differences, or delivery of securities, as the parties require. The
New York Stock Exchange is no better than the two bodies just mentioned. If it
does not take the initiative in this respect it should be compelled by law to do so.
The benefits which would arise from bimonthly settlements are these: First, the
funds of the banks would not be used daily for the speculative purposes of the stock
exchange; second, high and fluctuating rates of interest would never prevail. Such
a situation as interest at the rate of 50 per cent, 100 per cent, or 300 per cent, or 400
per cent is never witnessed in Paris or London, simply because stock exchange trans
actions are settled by the payment of differences through bimonthly settlements.
The transactions of the exchanges are entirely segregated from regular legitimate
banking operations. The operations as there conducted are either for the “ account”
or for “ money,” which means “ cash.” One can always buy for cash and have quick
delivery of any stock required. But these transactions are rare— the bulk of the
business is for the “ account” to be settled bimonthly by deliveries or the payment
of differences; third, the corporation would be relieved of the enormous burden of
labor and expense now involved in the daily transfers of certificates of stock; fourth,
the brokers would be relieved from borrowing vast sums of money and of becoming the
victim of banks and bankers; besides, their business could be conducted with less
capital and in greater dimensions.
It will be said by some brokers who have not studied these questions that they can
not adopt the English method in this country because they can not protect themselves
against loss. That reply is absolutely unfounded and inadequate. Their business
can be carried on precisely as it is in London and it can be arranged by the exaction of
margins so that the stockbrokers in making transactions will suffer no further loss or
incur greater contingencies than those which are applicable to any speculative busi
ness.
In private I have always contended that the money of the country should not be
tied up in stock-exchange transactions. Why the stock exchange has not taken the
initiative for this reform I can not understand. Fortunately, I am not solitary in these
views. One of the most experienced and intelligent financial leaders of this country,
Mr. William A. Nash, who is now chairman of the board of the Corn Exchange Bank,
in an address before the subcommittee of the Committee on Banking and Currency, in
the House of Representatives, January 16, 1913, uses this significant language:
“ But financial history shows that panics and crises do arrive, and probably will
during all time. That those convulsions are more violent in our own country in con
tradistinction to other nations may be attributed principally to the cash basis of most
of our transactions. Especially on our stock exchanges the demand money feature
causes violent fluctuations in rates which the foreign exchanges are free from owing to
their plan of semimonthly settlement which places all their loans practically on time,
BANKING AND CURRENCY.
495
while with us we have a demand and cash basis; and it is the activity of the demand
for money and not the scarcity of money that creates the fluctuations in rates with
which we are so familiar.”
And now I wish to say a word about the history and progress of this important body.
The stock exchange as an institution and its members— the stock brokers—have within
the past year been the subject of much criticism. The comments upon Wall Street
generally have been conspicuously bitter, and many of these attacks were so be
sprinkled with ignorance, prejudice, or passion that the real and legitimate purposes of
the exchange have been disregarded. All of the evils growing out of the existence of
the stock exchange have been most vividly depicted, but the benefits of this great
institution have been more or less suppressed or misunderstood. Let us look at both
sides of the picture. A stock exchange was coeval with Anglo-Saxon finance. Pre
vious to the creation of the Bank of England in 1694, public stocks and what we now
designate under the general name of “ securities” were practically unknown in Eng
land, but at this epoch that country, having been fully relieved from the fetters of the
feudal system, began to blossom out into a new national career of commercial and
industrial life—and we have before us the wonderful and successful history which she
has since made. Instead of meeting public expenditures for the Army and Navy, for
the civil service, or for public works or improvements, by levying and collecting direct
assessments, the Nation began to borrow money by means of public stock or State
obligations which were issued at a fixed rate of interest and which were to be repaid
out of the governmental revenues.
As these and other public loans were subscribed for by a large number of indi
viduals, their ultimate success depended upon the stockbrokers, who began to act
as “ go-betweens” and who, in due course of time, after many migrations from one
quarter to another in London, finally, about 1698, located in Capel Court, which
became the central and fixed point of dealing in all kinds of securities, and the brokers
became licensed operators. It was necessary that these intermediaries should act
in accord as to price and other details in the distribution to the public of these se
curities, and the London Stock Exchange became the factor in this important work.
It is an indisputable fact that all the great public improvements and utilities in this
and other countries have been directly or indirectly financed through stock ex
changes. Shares of stock, as they are called, in the sense of negotiability, are only
one degree removed from bank notes and gold or silver currency, and they must be
so handled or manipulated that they can be quickly transferred from hand to hand
without the ceremonies and delays incident to other legal instruments, such as deeds
and mortgages. An intermediary between the creator of securities and the public
has grown to be an absolute necessity, and without it the successful negotiation of
securities could not be made. A stock exchange, therefore, is just as much a necessity
to the Government as it is to private corporations and individuals, for while in the
first instance a Government may sell its issues directly to purchasers when the time
comes, as it inevitably does, for the purchasers to dispose of their holdings, they must
have some place where they can do so safely and promptly. Few persons buy se
curities with the fixed purpose of holding them until they mature, and a market in
which they can dispose of them is a necessary element of their negotiation. A public,
recognized, established mart is a sine qua non to the merchants, as well as to the
financiers or brokers; in fact, Government and corporation securities could not be
negotiated if there were not a place where they could be speedily converted into cash.
A stock exchange, among others, accomplishes two purposes: First, it furnishes the
place where continuous buying and selling of securities prevails and where uniform
rules of dealing are maintained, and, second, the brokers themselves constitute a large
class of temporary purchasers, who are ready to deal in all kinds of State or corporate
obligations and who afterwards, so to speak, send them adrift through hundreds of
channels and rivulets to professional speculators or investors. It has truthfully been
said that the real-estate broker has largely contributed to the building up of New
York, but the sphere of his operation has been immeasurably less in scope and im
portance than that of the stockbroker. The railroad map of this country attests, the
large cities illustrate, and the colossal public improvements exhibit his wonderful
work. This marvelous record has all been accomplished by the sale of railroad, gov
ernmental, municipal, and corporate securities, which have been placed in the hands
of hundreds of thousands of investors in this country and all over the world through
the agency of the stock exchange. If, instead of one fixed and recognized plac<* for
dealing in securities, there were many, acting under different methods of business,
the wildest confusion in price and terms would prevail.
In view of the magnitude of public and commercial operations and the stupendous
amount of capital required to finance them, a stock exchange is to-day more important
than ever it has been in the history of the world. The New York Stock Exchange
496
BANKING AND CURRENCY.
has in round numbers 1.100 members. That body can absorb and distribute millions
of dollars’ worth of securities each day. The brokers act as distributors and they also
constitute a financial breakwater, for the predominating speculative element in the
exchange renders it always possible to deal in large or small quantities of bonds and
stock for cash. It is cause for depreciation therefore, that the stock brokers’ side
of this great question has heretofore not been more boldly presented and more strongly
elaborated, instead of in a sort of apologetic, defensive manner, as if the occupation
needed explanation and excuse— as if his business were furtive. No doubt there
have been thieves among stock brokers, as there have been thieves in churches, but
in balancing the good and evil to the community of this institution, the former pre
ponderates, and while we might wish that the speculative transactions could be
curtailed,, and that the pure gambling which is often witnessed, with its consequent
evils, could be abated, the necessity for the exchange is predominating, and he who
would stop its operations, or diminish its efficiency, is either utterly reckless of the
future of the country, or ignorant of the greatest factor in its development.
That evils are connected with the operations in the stock exchange is undeniable.
The point is whether many of these can not be remedied, and whether the time has
not arrived when the method of doing business in the exchange must not be radically
changed. The prominent evils are over speculations and reckless trading; frauds
perpetrated upon a customer by individual brokers; besides the operations of cliques
of wealthy men who control particular corporations and who witn the knowledge of
their inside working manipulate the securities in such a way that it becomes almost
impossible for the average operator in or outside of the exchange to make money by
his intelligence or knowledge— or in fact to have a fair deal. All of these evils have
become accentuated in the last decade and they ought to be corrected, not by a multi
tude of penal laws but by the exchange itself. Short sales become so reckless at
times that they should be curtailed. They can not entirely be abolished, but when
they are openly and brazenly made the stock exchange should instantly reduce their
proportions. I have neither time nor space to go into the details of a remedy for this
shameful practice, but one can be easily devised. I must, however, suggest that the
specialist with his hands full of “ stop orders” should be abolished. No one or two
men should be allowed, by appointment or custom, to monopolize the dealing in any
particular securities. This practice places the orders for purchase and sale in the
hands of one individual and enables him consciously or unconsciously to make prices
and shape the course of speculation. With half a dozen “ stop orders.” as they are
called, in his hands at one time the specialist becomes the absolute master of the par
ticular stock in which he deals. I make no charge against the specialist either of
carelessness or dishonesty. I only assert that the method is a most dangerous one, and I
contend that he should be summarily extinguished and with his extirpation the
practice of “ stop orders” would soon disappear.
The brokers say that “ stop orders” are necessary for their protection. My reply is
simple and brief: They must find some other way to protect themselves. They
enjoy an extraordinary franchise both from the Federal and State Government as
brokers without the payment of license fees, and they should not employ business
methods which result in such dreadful losses not only to individual customers but to
the whole body of speculators and innocent investors. If the brokers should say that
the “ stop order” is in the interest of the customer, the answer is equally clear that
unless the customer can find some better method of limiting his loss in his specula
tive operations he must desist from them. It is overlooked that the real investor is
entitled to protection as well as the stockbroker and speculator. If in giving a “ stop
order” a stock speculator were injuring himself only then the community might be
indifferent to his speculations, but the execution of one stop order for never so small
a quantity in the hands of a specialist of shares establishes a price which affects all
persons interested in that particular stock. Like a ten-pin ball, it strikes all along
the line, and in a feverish market it generally occasions enormous losses to innocent
operators and sometimes a panic—and a panic because one individual dealing in 100
shares has chosen to set a price at which he imperatively commands a sale of a par
ticular stock and if not at the price named, at a lower price, and like the cry of fire
in a crowded building confusion and panic are instantly created.
Then it is charged, and with more than a modicum of truth, that frauds may be
and are committed by brokers as against their customers. But there is full redress
for such acts—one in the courts and the other in the exchange itself. I have had an
experience covering many years and I am bound to say that in general the redress is
equal to the wrong in either tribunal. The courts and juries favor the customer.
Besides, one who asserts that he has been wronged may, in general, place his claim
before the stock exchange and as a rule he will find quick and proper redress. It is
true that there are a few stupid and ignorant men in the governing committee, but in
Na n k i n g
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currency.
497
my humble judgment a more equitable body does not exist. It is, par excellence,
the tribunal to which resort shoi Id be had when a customer feels he is injured—it is
cheap and prompt and the j ‘ dges are experts.
It has been suggested that the remedy for many evils is in the incorporation of the
exchange. In my judgment it is not only unnecessary but it would be detrimental
to the interest of the public. The stock exchange should always have the first and
final right of saying who should be of its members. The occupation of a stockbroker
is one of peculiar delicacy and importance and I am glad to say that the esprit de corps
has been well maintained. The exchange should be allowed the unlimited privileges
of saying “ y es” or “ n o” to an applicant without public interference. The incorpora
tion of tne exchange puts it under the domination of a general statute and it could not
make any fundamental alterations in its regulations without special legislation. The
necessities of commerce can not wait upon such slow and uncertain methods. More
over, the exchange would have to be incorporated under a general law, which would
invite into this important field classes of adventurers and speculators who would cause
the real objects of the exchange to be disregarded, to the immeasurable loss of the pul die.
A multitude of exchanges would at once spring up like mushrooms. Which would be
the proper organization? The creation of different exchanges would inevitably work
confusion as to price and terms, the uniformity of which is one of the main purposes
of its creation. To be efficacious there can be only one great central mart for the sale
and purchase of securities—there must be a responsible body creating one standard of
values— not only that, but to exercise a controlling voice as to the form, language, and
conditions of negotiable instruments. The press is the best censor for this body and
although at times the criticisms are harsh and often unjust, the exchange can survive
them when it knows that investigation will show that its inward management is correct
and fair.
Besides, the courts exercise jurisdiction over the exchange as a body dealing with
quasi public interests. To alter fundamentally the present legal status of the ex
change would be a pure experiment. It is not true reform—it is a wild dream of a
class which believes in breaking up or pulling down without soberly considering
results.
N e w Y o r k , September, 1918.
(The following statement of Prof. Sprague was made at different
times during the sessions of the committee on September 16 and 17
and is inserted at this point in the record in order that the remarks
may be consecutive:)
FURTHER STATEM EN T OF PROF. 0 . W . M. SPRAGUE, OF
HARVARD UN IVER SITY, CAMBRIDGE, MASS.
(Proceedings of Sept. 1 6 ,1913.|
The Chairman . Prof. Sprague, we have had many witnesses who,
passing upon this matter, have been suggesting changes in the bill.
I do not think we have had a single witness who has pointed out
anything in the bill that was of advantage. Would you be kind
enough to point out what features of the bill you regard as improv
ing tile present system, if you consider that there are any such fea
tures ?
Prof. Sprague . There surely are many good features in this bill,
Mr. Chairman, and I will try to indicate some of them to the com
mittee before I go on to make such suggestions as to changes as I
have in mind.
Senator P omerene. Let me suggest, Mr. Chairman, before Prof.
Sprague goes on, that of course the committee understands that he
is a professor in the University of Harvard, and so on; but I think it
would be well for him to give his residence, his connections, and so
on, for the benefit of the record.
The Chairman . Y es; it would be well for you to put that at the
head of your statement, Prof. Sprague.
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BANKING AND CURRENCY.
Senator Shafroth . In other words, you can answer the usual
interrogatories by lawyers— “ What is your name, residence, and
occupation/’ etc.
Prof. Sprague . My name is O. M. W . Sprague, and I am converse
professor of banking and finance in Harvard University.
A t the hearing on September 5, I indicated the defects in our bank
ing system which this bill is designed to remedy. I believe that the
measure, if adopted in its present form without change, would provide
the machinery which under competent management would very
largely remove these defects. The institutions to be established
would have adequate resources to meet seasonal requirements and to
enable them to handle emergencies effectively. Their operations
would also tend to make commercial paper the most liquid asset for
all banks; this because the Federal reserve banks are limited in their
rediscounting operations to commercial paper.
A t the present time banks employ an undesirably large portion of
their funcls in stock-exchange loans, not because they have any par
ticular preference for this sort of loan, not because they wish to give
special consideration to those engaged in speculative activities, but
because most bankers have been of the opinion that it was possible
to liquidate stock-exchange loans more quickly than commercial loans.
One result of the adoption of this measure will unquestionably be
that a somewhat smaller proportion of bank loans will be available to
borrowers engaged in dealings in securities.
This will be due in part to the change in the relative liquidness of
commercial paper contrasted with security loans, which I have already
mentioned, and will be in part due to the decentralization of reserves,
for which provision is made in the bill.
WTiether the decentralization of reserves provided in the bill may
not cause disturbance during the period of transition is a question
which should be given careful consideration. The present arrange
ment of reserves is, after all, in large part, the result of national legis
lation which authorizes the countmg of balances with city banks as
reserve for country banks. This is a feature of the bill to which I
shall come a little later.
When I say that the bill, if passed in its present form, would re
move the most serious defects in our banking system, I assume two
things: First, that the banks generally assent to the arrangement;
and, secondly, that the management of the various institutions to be
established shall be competent.
Senator Shafroth. The management shall be what? I did not
understand.
Prof. Sprague. Shall be competent.
The problems which will confront the management of these insti
tutions will be novel and complicated. As I indicated in the previous
hearing, these institutions, possessing great powers to extend credit,
must also possess some power to restrain the abuse of credit.
The managers of the reserve banks will find, I am convinced, that
they will often have to act counter to general public sentiment—both the sentiment of the business community and the sentiment of
bankers in general. There are comparatively few people in the com
munity who can ever be convinced, in any circumstances, that it is
desirable to lessen the amount of credit available. And yet this will
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BANKING AND CURRENCY.
499
be at times the duty of the managers of the Federal reserve banks
and of the Federal reserve board.
The Ch a ir m a n . T o limit credits?
Prof. Sprague . T o limit credits. I will consider the situation
this spring as an illustration.
Suppose these institutions had been established, and that they
had available a large amount of lending power. There would have
been strong pressure put upon the management of the reserve banks
to grant rediscounts liberally last winter and spring and this sum
mer. Very few people in the business community were of the opin
ion at that time that it was desirable that credits should be in the
slightest degree curtailed, but rather they held the opinion that
they should be increased.
Senator B ristow . Pardon me, Prof. Sprague, but I think it is
better to ask these questions when they come to our minds, if it does
not disturb you.
Prof. Sprague . N o, Senator Bristow; it does not disturb me.
Senator B ristow . Y ou say that the people in the business com
munity thought it would have been unwise?
Prof. Sprague . N o ; that the people in the business community
thought it would have been wise.
Senator B ristow . Oh, they thought it would have been wise?
Prof. Sprague . Y es; they wanted more credit.
Senator B ristow . Well, do I understand you to say that there
should not have been more credit ?
Prof. Sprague . I say that emphatically. I hold that the moder
ate amount of liquidation which has taken place during the last six
months has been of very great advantage to the business community.
It has strengthened the business situation. Large numbers of concerns
were borrowing distinctly more than was altogether safe at that
time. They were endeavoring to conduct an increasing amount of
business upon insufficient working capital provided by themselves.
In other words, they were endeavoring to supply increasing working
capital requirements by means of short-time loans, and entirely by
that means.
Senator B ristow . Well, am I to understand that you think it is
desirable that some commission, or board, or individual should have
the authority to say when this credit shall be extended and when it
shall not be extended ?
Prof. Sprague . If these Federal reserve banks are to possess
special powers to extend credit, they must use great judgment in
granting that credit. For nothing is more certain than that indefi
nitely large additions to the total supply of credit are an unhealthy
business influence. The local banker is not in position to take such
considerations sufficiently into account. He is lending to his local
customer. Ho is eager to make as large profits as he can; he lends
ordinarily all that his reserves will permit him to lend.
Senator B ristow . Well, why should not he do that, if it is safe ?
Prof. Sprague . But it is not safe.
Senator B ristow . Well, who is a better judge than he as to its
safety ?
Prof. Sprague . He is a fair judge regarding particular loans, but
not regarding the general situation.
i
500
BANKING AND CURRENCY.
To take a particular instance of a company which expanded its
operations during the last two years by quite 100 per cent: It pro
vided itself with a sufficient amount of capital by means of long
time obligations to enlarge its plant, but it did not provide itself
with any additional capital with which to finance its sales. It
relied upon banks for these additional requirements, and it suc
ceeded in getting from banks in one way or another the funds for
these additional requirements, but its situation was far less satis
factory than before, for any delay in collections became an increas
ingly serious matter.
Senator B ristow . Well, is not that a question for the local banks
that lend this concern money to decide ? W hat right has any board
or commission to say to that bank that this man or that man is or is
not good, or that the bank ought or ought not to make this loan to
him? W hy should not the head of that bank decide that question
for himself ?
Prof. Sprague . The local banker should decide that; but when
the local banker appears before the Federal reserve bank desiring to
rediscount a large amount of paper in order to get the funds with
which to make additional loans, then it becomes the duty of the
Federal reserve bank to determine whether the situation is becom
ing overextended; whether it is safe that large additions should at
that time be made to the available credits at the disposal of the
local banks.
Senator B ristow . Well, why should' not the same rule apply to
this— of course I do not take much stock myself in these regional
banks; I think it is a kind of artificial arrangement that is not very
desirable. But it may be; I do not know much about it.
Senator Shafroth . D o you think that they are less desirable than
the central banks, Senator Bristow?
Senator B ristow . Well, I do not believe in either.
Senator Shafroth . Y ou do not believe in either?
Senator B ristow . N o ; I think we have got along pretty well be
fore this idea was developed; and it seems, because we do need some
elasticity— although not nearly so much as speculators think— that
they are undertaking to reform the whole world, because there are
defects that could be cured without much trouble. But why should
not the man who discounts this paper decide whether or not it is a
good business proceeding to do so, instead of having that question
decided for him by some student of finance? It is his money to
invest, why should he not decide for himself whether it is good
policy to do so or not?
Prof. S prague . S o far as the banks are using their own resources
I quite agree with you, but it becomes a different question when
that local banker desires to borrow from the Federal reserve bank, in
order that he may lend more to his own customers.
The management of the Federal reserve bank has no voice in the
matter until the various local bankers desire to borrow from the
Federal reserve bank.
It is proposed here to set up institutions with power to enlarge the
total amount of credit to a very great extent. This power to increase
credit should be coupled with the power and determination to exer
cise judgment in granting this credit. It is not a question of reducing
the resources of the local banks; it is simply a question as to whether
BANKING AND CURRENCY.
501
it is desirable, at any particular time, to increase their resources, and
as to how much it is desirable to increase those resources.
Senator Shafroth . H ow , under this bill, Prof. Sprague, will the
regional banks contract credit?
Prof. Sprague . They will at times contract the credit which they
themselves have created. If, for instance------Senator Shafroth (interposing). W ill it be by simply refusing ac
commodations ?
Prof. Sprague . Yes. If, for instance, they opened for business
this morning, and during the next two months they did a business
of, say, $200,000,000, that would be the net addition to the amount
of credit which would otherwise have been granted the business
community. Now, they will have power to contract the credit
which they have advanced if it seems wise to do so.
Senator Shafroth . Then the paper they have taken as security
becomes due, does it not?
Prof. Sprague Yes; that is the only way they will contract.
The resources of the banks, other than the Federal reserve bank, will
be just as great hi any case as they would have been if these institu
tions had never been established.
Senator Shafroth . Yes. Now, under the provisions of this bill,
Prof. Sprague, the currency which is now known as the national-bank
note would be substituted by the Treasury note which is prescribed,
would it not ?
Prof. Sprague . That is a matter which I do not think is satisfac
torily handled in this measure; and my first suggestion for a change
has to do with the matter of the national-bank note.
Senator Shafroth . Well, now, give us your suggestions as to that
change in the measure, will you ?
Prof. Sprague . The bill provides for the gradual substitution of
Federal reserve Treasury notes for the existing circulation of the
national banks— seven hundred odd million dollam. This is to be
carried through gradually. But, when completed, t the end of 20
years, the Federal reserve bank would presumably have steadily
outstanding notes for at least as much as this $700,000,000 of nationalbank notes. In addition, they would, of course, have such further
amount as might be deemed advisable. But surely they would have
outstanding at all times something like the existing issue of nationalbank notes.
As security for any issues of notes these Federal reserve banks must,
in addition to a cash reserve of 33 ^ per cent, deposit as security 100
per cent in commercial paper. It follows, therefore, that if these Fed
eral reserve banks are to issue regularly $700,000,000 of notes to take
the place of the national-bank notes, they must be constantly doing
a business in rediscounting commercial paper of at least $700,000,000.
Now, I think it is wholly undesirable that these institutions should
be doing any such amount of business as that merely to maintain
the status quo.
Senator Shafroth . In other words, these 90-day notes, or dis
counts, that they have taken in order to maintain the currency after
it has once been issued, will have to be discounted continually every
90 days, or at intervals------Prof. Sprague (interposing). Yes.
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BANKING AND CURRENCY.
Senator B ristow . Or there will be a contraction ?
Senator Shafroth . Yes. In order to keep that paper money in
existence, or else contraction must occur?
Prof. Sprague . Yes, sir; the amount of paper money in existence,
to say nothing of that amount which, in the course of 20 years, it will
be perfectly proper to issue because of the growth in population
and business of the country.
I hold that a different form of security should be provided for the
amount of circulation issued by these Federal reserve banks, which
simply takes the place of the existing issue of the national banks;
and I propose as security for this $700,000,000 or $750,000,000 the
very same security which the national banks now hold; that is to say,
United States bonds.
Senator B ristow . Well, why not leave the same debt as it is, so
far as they are concerned ?
Prof. S prague . There are two reasons for making the change. In
the first place, the change would give these regional associations a
certain steady income without any additional burden upon the
Government.
I would exchange the 2 per cent bonds held now by the national
banks for a 3 per cent Government issue when the bonds were taken
over by the Federal reserve banks from the national banks. I
would then impose a tax of 1^ per cent upon these issues of notes,
so that the burden upon the Government would be exactly what it is
now, since at present on notes secured by 2 per cent bonds there is
a tax of one-half of 1 per cent. Therefore, if a tax of
per cent
were imposed and the rate on the bonds raised to 3 per cent, the
situation, so far as the Government is concerned, would be exactly
as it is at present.
Senator B ristow . That would have a tendency to contract the
currency, however, would it not ?
Prof. Sprague . N o ; the national banks would surrender $700,000,000 of bonds to the Federal reserve banks. The Federal reserve
banks would then assume the obligation of the $700,000,000 of
outstanding national-bank circulation.
Senator Shafroth . Would you do that all at once, Prof. Sprague?
Prof. Sprague . I would do it all at once. The reason for making
this change from 2 to 3 per cent bonds, and raising the tax from onehalf of 1 per cent to 1^ per cent is this: It is desirable that these Fed
eral reserve banks should have a marketable security. The 3 per
cent------Senator B ristow (interposing). Well, why should the security be
marketable ?
Prof. S prague . I am going to explain that in just a moment. The
3 per cent bonds, perhaps, would be marketable. But I do not think
it is desirable or necessary that the Federal reserve bank should dis
pose of the 3 per cent bonds to the general public permanently. But
if a part of these 3 per cent obligations were put in the form of one-year
notes, then the Federal reserve bank could readily market, at any
time, its one-year notes at par; at the end of the year the one-year
notes would be paid by the Government, but paid through the Federal
reserve banks which would take over from the Government another
issue of one-year notes.
BANKING AND CURRENCY.
503
Let me illustrate it in figures: Suppose that we secured the $700,000,000 of Federal reserve bank notes which take the place of the
national bank notes by $400,000,000 of 3 per cent bonds, maturing
in 20 years, and by $300,000,000 of one-year notes the Federal
reserve banks being under the obligation, at the end of each year, to
take another batch of one-year notes, maturing 12 months later, and
so on year after year.
The only purpose of putting a part of this Government indebtedness
in the form of one-year notes is to give the reserve banks something
which they could readily market at any time when it might seem
desirable to them to increase their resources or to secure control of
the market.
The greatest difficulty which will probably confront the manage
ment of these regional banks will be that of making the rate of discount
effective. When the other banks have abundant funds, the rate
which the regional banks may set up for rediscounting will be wholly
ineffective. A t times it is exceedingly important that banks such as
these shall be able to control the market in a measure to make their
rate of discount effective. That could be done easily if among the
assets of these Federal reserve banks were one-year notes— Govern
ment notes— which the Federal reserve banks could sell in case they
desired to make their rate of discount effective.
All of the European central banks have assets of this sort, and it
is very largely by the manipulation of these short-term Government
obligations that they are enabled to make their rates of discount
effective whenever it seems to them desirable.
Senator Shafroth . D o not the European banks, in order to make
their rates effective, often go upon the market and buy securities for
the purpose of taking up the quantity of available paper offered for
sale among the other banks ?
Prof. S prague . Oh, no; just the contrary; if they buy then they
must pay, and that will provide the market with more funds of these
central institutions. The method is to sell; then the market has to
pay.
Senator Shafroth . Often they sell their paper at a less rate than
they have discounted it for ?
Prof. Sprague . Commonly they do not sell the paper that they
have discounted; they sell these Government obligations. It is
contrary to traditions that these central institutions should take
commercial paper which they have already discounted and dispose
of it to some other institution, but they do take Government se
curities and sell them, and the payments for these securities reduce
the available resources of the market, and consequently market
rates move up.
Senator Shafroth . W hat Government securities would these
banks have ?
Prof. Sprague . Under the plan I have suggested, they would have
$700,000,000 of Government securities which they would have taken
over from the national banks, but a part of that would be in the form
of one-year notes renewed year after year and a part of them would
be in the form of long-time bonds.
Senator Shafroth . Bonds of the Government?
Prof. Sprague . Bonds of the Government.
504
BANKING AND CURRENCY.
Senator Shafroth . That is, United States bonds or bonds which
they have hypothecated there ?
Prof. S prague . N o ; I referred simply to Government bonds which
the reserve banks would have taken over from the national banks on
assuming the obligation of the national banks to redeem their out
standing circulation. No money would pass.
Senator Shafroth . But would not they have to hold those bonds
as security for the circulation ?
Prof. Sprague . It should also be provided that in lieu of securities
the bank might impound gold or lawful money as security. Under
the provisions of this bill the Federal reserve banks must hold 33$
per cent in cash and 100 per cent in commercial paper. I should
suppose that no one could conceive of any objection to the banks
holding, say, 10 per cent more in cash and only 90 per cent in com
mercial paper. If they held 43 § per cent in cash, why, clearly 90
per cent in commercial paper would be an entirely additional security.
So, in the case of these Government obligations to whieh I referred,
as securing the $700,000,000 of circulation, those notes might very
well be secured by gold or lawful money in lieu of the Government
obligations, and that would give the reserve banks a free hand in
disposing of some of these securities when it might be necessary in
order to make discount rates effective.
Senator Shafroth . This bill, Professor, provides that the reserve
bank shall pay no interest upon deposits except to the Government.
Will that not have a tendency to prevent the depositing of moneys
of national banks or of other banks with the Federal reserve bank?
Prof. S prague . Unquestionably so.
Senator Shafroth . In other words they would prefer, above the
amount which they are required to keep there for their own re
sources—
Prof. Sprague . Yes.
Senator Shafroth (continuing). And the capital which they
invest in the matter of the required 20 per cent or 10 percent— ’they
would, of course, prefer to keep their deposits in New York and get
a rate of interest on them ?
Prof. Sprague . Surely.
Senator Shafroth . Do you think that is a good provision that
requires that the Federal reserve banks shall not pay interest on
deposits ?
Prof. Sprague . I do. These Federal reserve banks should not be
placed in a position which will make it difficult for them to earn at
least their running expenses and a moderate return on their capital;
and yet it is probable that at certain times there will not be enough
business for these institutions, if wisely handled, to yield very large
earnings. Their earnings will vary with the activity of business, but
in periods of business inactivity, in years like 1908 and 1909, I can
not see where these institutions will secure any very considerable
income. Further, I do not regard it as desirable that all of the banks
in the country should deposit temporarily idle funds in these regional
institutions. The result would be to overburden these regional insti
tutions with enormous amounts of funds and varying amounts of
funds, which they would find it extremely difficult to invest profita
bly and to the general advantage. I think that these institutions
should have resources sufficient to accomplish the particular pur
BANKING AND CURRENCY.
505
poses of meeting seasonal requirements, of keeping the banking
machinery going in emergencies, and so on; but I do not think any
evils have been shown in our system as the result of the depositing
of reserves in city banks, which call at the present time for arrange
ments which would make it wholly impossible or undesirable for the
banks to deposit any funds whatever with each other.
Senator Shafroth . Professor, what objection is there for the
currency which is to take the place of the national-bank note being
made a full legal tender for the payment of all debts and dues to
the Government ?
Prof. S prague . I do not feel that there is any danger------Senator Shafroth . Would it not have a tendency to strengthen
the currency ?
Prof. S prague . There has been no difficulty whatever regarding
the currency since 1897. The currency problem settled itself very
largely because of the enormous increase in gold production. The
silver certificates and the bank notes and the United States notes
were too large a part of our total circulating medium in the early
nineties. They are not a dangerously large part of the circulating
medium at the present time, because we have, like other countries,
much more gold than we had 15 years ago, and it makes no difference
whatever whether you make the silver certificates and the United
States notes and the national-bank notes legal tender or not. Peo
ple who worry about that are simply fighting over again the battles
of 20 years ago, not realizing that conditions have changed. If you
do not increase the amount of silver certificates and national-bank
notes that you make legal tender above the existing amount, it does
not make the slightest difference whether you make them legal tender
or not.
Senator Pom erene . W hat effect would it have upon the supply of
gold ?
Prof. S prague . It would have no effect whatever. All of these
kinds of money are in fact in circulation practically as if they were
legal tenders now. If they had not been in circulation, if we had
not had them, there would, of course, be more gold in the country
now than in fact there is; but there is an abundantly sufficient sup
ply of gold in the country, so that all of the various paper issues are
entirely safe.
Senator S hafroth . Would not the legal-tender quality added to
the paper, if there ever comes a time when the quantity of gold may
be slight, make such a demand for the legal-tender currency by
reason of there being probably 100 billions of debt or 80 billions of
debt, as I have seen it stated, that could be paid in the full legaltender money, and would it not have a tendency to keep its parity
with gold bullion if it was legal tender?
Prof. S prague . It would have a very slight influence in that
direction, but the fundamental factor would be its quantity relative
to the quantity of gold. If gold production all over the world were
suddenly suspended, one can conceive a situation in which a con
siderable amount of the gold now in circulation in this country
might go abroad. I do not say that it certainly would go, but in
such an extreme case it might, and in that case the existing amount
of paper might be relatively too great, but I do not regard discus
sions of that sort now as being of any great practical importance,
506
BANKING AND CURRENCY.
and for the reasons which I have mentioned. There are a great
many persons who would disagree with me about this point, but I
believe that they are simply basing their present arguments upon
recollections of past conditions.
Senator S hafroth . Well, at any rate the legal-tender character
of the permanent money could not be of any detriment to the sta
bilities of that money ?
Prof. Sprag ue . Oh, no.
Senator Shafroth . Professor, you mentioned the other day in
your testimony— I do not know whether it was in talking to me pri
vately or whether it was in your testimony— that the bill which I
introduced concerning the national-bank currency might be made
workable by a few changes. Will you point out the changes that
you suggest?
Prof. S prague . It begins to be apparent that I am to go on until
after lunch, and I should like to go over the bill once more.
Senator S hafroth . All right. Then, we will change that line of
questioning.
I want to know, Professor, if you have got a table that would indi
cate the quantity of gold reserves that are required of the central
banks of Europe to back their currency. In England we know that,
outside of the $90,000,000 or £18,000,000, they keep dollar for
dollar of gold back of their notes that they issue and which, with
the $90,000,000, makes a gold reserve of practically 66 per cent.
Do you know what the Imperial Bank of Germany keeps ?
Prof. S prague . They are required to hold a cash reserve of at
least 33J per cent.
Senator Shafroth . Y ou mean a gold reserve?
Prof. S prague . Not a gold reserve. It includes silver and it
includes an issue of Imperial Government notes, a relatively small
issue, and only a small part of it is found in the reserve of the
Reichsbank; but there is no specific gold requirement of reserve
against their notes. As a matter of fact, the gold reserve has varied
enormously in its ratio to the notes.
Mr. Charles A. Con ant . I think the German law of 1911 re
quired gold to be held in lieu of lawful money previously required.
You know they revise the law every 10 years. Is not that your
recollection ?
Prof. S prague . Very likely you are right.
Senator S hafroth . W hat percentage ?
Mr. Conant . Thirty-three and one-third per cent is legal, but
actual holdings are enormously above that.
Senator S hafroth . I s that gold or gold and silver?
Mr. Conant . Gold since 1911; previously lawful money, but always
mainly gold.
Senator S hafroth . I notice by Mr. Conant’s work that in Canada
a gold reserve is required of 25 per cent upon the issue of Dominion
notes up to $30,000,000, and that thereafter they have a provision
something like our gold certificates by which any person can get a
certificate or a note upon depositing a dollar in gold. Has there been
any change in that law within recent years that you know of?
Prof. Sprague . N o ; there was a change in the conditions of note
issue of the Canadian banks, but my recollection is that no change
was made as regards the conditions of issue of the Canadian note,
BANKING AND CURRENCY.
507
but the issue is somewhat analogous to the arrangement which you
propose in your bill.
Senator Shafroth . Something like the requirement as to the
greenbacks ?
Prof. Sprague . Yes. Suppose, for instance, that we fused the
$150,000,000 gold reserve and all the gold held against the gold cer
tificates and issued a uniform note, with that gold as reserve, and pro
vided that additional notes would be issued if gold were brought to
the Treasury. Thus any increase in the issue would involve an
equivalent deposit of gold, but the total deposit of gold would be
less by the difference between $150,000,000 and $346,000,000 than
the gold held. That is virtually the Canadian note.
Senator S hafroth . Professor, will you explain to us the process
that would take place under this system ol making the rate of discount
effective ?
Prof. S prague . The rate of discount of institutions such as are pro
posed will be effective without any difficulty if the other banks are
quite generally borrowers by means of rediscounts.
Sonator Shafroth . From these banks ?
Prof. S prague . From these banks. For then it will bo only nec
essary for the Federal reserve bank to raise the rates, and the other
banks, finding that they must pay higher rates for rediscounts, will
naturally exact higher rates from their own customers. It happens,
however, at times that it is thought desirable to make the rate of dis
count of such institutions effective, when the other banks are not bor
rowing to any appreciable extent, when the other banks’ own resources
are quite sufficient to enable them to meet all demands for accommo
dation at lower rates than the reserve banks deem advisable. It is
then that the reserve banks would find it necessary to curtail the
resources of the market, and they could accomplish that if they had
this succession of one-year Government 3 per cent notes that I have
spoken about. Otherwise I do not see how these institutions could
secure effective control, unless they themselves were doing a largo
amount of business with the general public. The Bank of England
does a considerable amount of business with individual customers.
Senator Shafroth . Professor, •when the Bank of England has a dis
count rate— that is, a rate of interest at 4 per cent— you will often find
the loans are made by outside banks as low as 3 per cent ?
Prof. S prague . Yes.
Senator Shafroth . D o you call that rate effective under that con
dition of affairs?
Prof. S prague . N o.
Senator Shafroth . It is not?
Prof. S prague .
'
he rate then is not effective.
Senator Shafroth . It is only effective when it raises the rate of
discount by the general banks equal to the Bank of England ?
Prof. Sprague . Or very close to it.
Senator Shafroth. And that is presumed to invite foreign capital
to buy securities ihere, and thereby an influx of g< Id comes in ?
Prof. S prague . ' hat would be more true of a market in 'he posi
tion of the German market. In London a large part of the foreign
trade of all the wmrld is financed. When, therefore, rates go up in
London, there is a tendency upon the part of foreigners to finance
their own trade a little more at home than they formerly were doing,
9328°— S. Doc. 232, U3-1— vot 1------ 33
508
BANKING AND CURRENCY.
and it is by that means that the advance in the rate of discount in
London tends to relieve the demands for accommodation in the Lon
don market.
Now, the problems which will confront our Federal reserve banks
will be very different and in some respects less easy to handle than in
London. W e shall not be financing the foreign trade of other coun
tries, and it is somewhat uncertain whether we shall finance the bulk
of our own foreign trade. When we liquidate, therefore, the pres
sure comes upon people within the country doing business in this
country; when London liquidates the liquidation is spread over
pretty much the entire commercial world, and it is carried through
more easily and is less disturbing to the domestic borrower in Great
Britain. Our regional bank managers will find that the foreign ex
changes are a very much less important factor in determining their
policy than they are in the case of the Bank of England. The situa
tion of the foreign exchanges has never, I should say, in the past been
a fundamental cause of financial disturbance in this country. Even
in 1893 it was not a fundamental cause, and in so far as it was a cause
it was due to the redundancy of the currency and excessive silver
issues; and in 1907 the commotion of that year was not due to the
unsatisfactory situation regarding foreign exchanges, but it was due
to unsatisfactory conditions in the country itself, and that will prob
ably continue to be the situation for many years to come.
Our regional reserve banks therefore will have to direct their policy
to conserving and strengthening the situation at home, since when
they come to liquidate, if they do, it will be liquidation of accommo
dation to our own people and not, as is largely the case in London,
the liquidation of loans made to people in all of the different com
mercial countries.
Senator Shafroth . D o you contemplate that under the workings
of this bill that we will have one rate of discount in one regional dis
trict and another rate of discount in another regional district ?
Prof. Sprague . I do; and I regard that as one of the great ex
cellencies in this bill. I covered that point at some length the other
day when I appeared before the committee.
Senator Shafroth . I remember something of it, but I do not re
member all. I do not think I was there all the time. I do not care,
however, for you to go through it again, if it is in the record. I ex
pect to read the record fully anyway.
Senator B ristow . I asked the Professor something about this
restraining of credits. I wanted to get his ideas as nearly as I could.
The plan that he suggested, as I understood it, was that when the
local bank comes to the regional bank desiring currency------Prof. Sprague . Or credit ?
Senator B ristow . Yes. That this bank shall determine whether
or not it shall have it. Suppose that a member bank that needs more
money or could use more money to make loans that were good loans
T
brought a portfolio of notes to be discounted, in order to get the cur
rency to use. Your idea is that that regional bank shall accept these
notes or not as it sees fit ?
Prof. Sprague . Not quite that. Of course it would exercise that
right if it thought the security presented by the borrowing bank was
unsatisfactory.
Senator B r i s t o w . Yes,
BANKING AND CURRENCY.
509
Prof. Sprague . But, assuming that the security itself were satis
factory, then the reserve bank would in no case positively refuse to
rediscount; but if in the judgment of the board the situation was one
in which it was desirable to restrain credit a little or keep it from ex
panding quite so rapidly as it seemed likely to expand— to put up
its rate o f discount, to charge, for instance, 6 per cent instead of 5—
these general considerations which I have talked about with reference
to the danger of overexpansion and that sort of thing would be taken
into account by the managers of the reserve banks in determining the
rate at which they would rediscount. They would not be a ground
for wholly refusing to lend.
Senator B ristow . In other words, that puts in the control of the
regional banks the power to expand or contract the currency?
Prof. Sprague . It does.
Senator B ristow . D o you think that is desirable ?
Prof. Sprague . That power must be somewhere, if we are to have
a currency that will be adjusted to varying requirements for currency.
Senator P om erene . Where would you lodge it, Senator?
Senator Shafroth . Have a permanent currency like the green
backs now, and then------Senator B ristow . I would not give it to two men, I am sure.
Senator Shafroth . And then let it be operated in this way-----Senator B ristow . It seems to me, of course, that is placing in
the hands of these 12 banks the power to expand or contract, and it
is a question of judgment------Prof. Sprague . It is.
Senator B ristow (continuing). With them.
Prof. Sprague . The situation is this at the present time: W e
have another kind of currency which is wholly controlled by hanks—
that is, deposit currency; 90 to 95 per cent of the business of the
country is done with checks drawn against deposit accounts, and
the banks by making loans increase the amount of those deposit
accounts, and consequently the amount of checks that are drawn,
and very largely those checks never involve any use of money or
currency whatever.
Senator B ristow . But there is this radical difference, as I see it,
in operation. There are 25,000 banks. They do this in the normal
operation of their business, and this other system gives 12 banks the
power to do it irrespective of what the other 25,000 banks might wish.
Prof. Sprague . It leaves the 25,000 banks the powers which they
now have over this deposit currency, but it adds a group of institu
tions with some power also to increase and decrease deposit currency
and a considerable power to increase and decrease note currency,
because we have found in the past that the 25,000 banks working
separately land us in chaos every 15 years.
Senator B ristow . I hear a lot about this “ chaos.” I would like
to know what chaos it is.
Prof. S prague . Wre are in chaos when it becomes impossible for
the time being to make payments by the ordinary banking ma
chinery. When a man who has purchased cotton in Memphis and
has in turn sold it to Liverpool is unable to get back to Memphis the
roceeds of that sale from New York so that he may continue to
uy more cotton and to ship more cotton; that is the situation which
E
510
BANKING AND CURRENCY.
occurred in 1907, and it was reflected in a contraction and a decrease
in the amount of goods between different parts of the country.
Senator B ristow . That was because New York refused to send
the currency, was it not ?
Prof. Sprague . But we are trying to develop a system under
which New York will not refuse to send currency.
Senator B ristow . N ow why is not this present law, the Vreeland
bill, if made a little more flexible, just as good as all this machinery
that you are trying to create here ?
Prof. S prague . Because it leaves the situation as regards the use
of the liquid funds of banks just what it is at the present time.
It does not lessen the concentration of the money in idle bonds in
New York, and it leaves the stock exchange loan apparently, if not in
fact, the most liquid asset which banks can hold.
Senator B ristow . The concentration of funds in New York is largely
because the New York banks pay interest on these reserves?
Prof. S prague . Oh, no, no. You could abolish the interest upon
reserves and yet New York would continue to be the center where
the strain would be concentrated in emergencies, for outside banks
would then lend direct in the New York Stock Exchange, as many of
them do now, whenever the call rate is at all above 2 per cent, and it
is always much above that in any period prior to an emergency.
Senator B ristow . A s I understand, the only difficulty is in getting
the money from New York when it is needed in these commercial
transactions, and New York needs it and does not want to send it
to New Orleans. This Vreeland bill proposes that under conditions
of that kind that the bank can take certain securities and get the
money direct from the Government, and an interest rate is imposed
so that when the stress is over that that retires itself. W hy would
not that be effective ?
Prof. S prague . If the machinery were somewhat improved, I will
admit that it would make the situation somewhat more workable
than it is at present, but it would not lessen the tendency to invest
temporarily idle funds on the stock exchange, would not make com
mercial loans the most liquid assets banks can hold, and therefore
give such borrowers the lowest going rate. The situation in this
country is this------Senator B ristow . I do not believe in that, you see. I do not
think a man who gives a note for 90 days is entitled to any lower
rate than a man who gives it for a year, unless the security is better.
Prof. Sprague . It is so here, but in England a man who is in
business and who buvs some wool for the purpose of making it up
into cloth will get a lower rate ordinarily than the man who buys
100 shares of steel stock and uses that as a basis for a three-montlis’
loan. The secured-security loan has to pay a higher rate in London
than the mercantile loan, and that is distinctly a desirable situation.
Senator P eed . W hy?
Prof. S prague . I would not say that the secured-security loans-------Senator P eed . W hy is that desirable?
Prof. Sprague . Because upon the whole the proceeds of mer
cantile loans are being used in connection with current industrial
processes, whereas the proceeds of secured-security loans may bo
used lor that purpose; they may be used also in connection with
the marketing of new issues of securities, and then they serve a
BANKING AND CURRENCY.
511
highly useful purpose, but they very largely are used for the pur
pose of simply holding securities for a rise, and that is not serving a
particularly important economic purpose. If I buy 100 shares of
steel stock, hoping that it will go to 80, I do not see why 1 should
be able to get a three-months’ loan at 4 per cent while you, who
are engaged in making cloth, are obliged, we will say, to pay 6.
Senator H eed . I did not mean to interrupt the progress of your
examination, Senator. I will take this up later.
Senator B ristow . Just a moment. There is another point. I
understood you to say, Profi ssor, that one of the desirable features
of this bill was that it would decrease security loans ?
Prof. Sprague . The tendency would be to decrease the security
loan.
Senator B ristow . And increase these commercial loans?
Prof. Sprague . Yes.
Senator B ristow . D o you think these commercial loans ought to
be given greater consideration than the permanent and stable
investments of the country?
Prof. Sprague . Well, that is quite a different proposition. The
security loans to which I refer are like the commercial loans as regards
maturity. They mature at various dates, commonly within six
months. We are considering here short-time loans of various kinds.
The question of rate upon long-term obligations— bonds and mort
gages— is wholly a different matter.
Senator B ristow . But in this banking system that we arc under
taking to create here, the only kind of paper that can be made a basis
of currency— that is to be the currency of the country, substituted
for the national-bank currency we now have— is this commercial
paper ?
Prof. S prague . That is not my proposition. My proposition is
that of the comparatively small fluctuating part of the currency,
the $100,000,000 or $200,000,000 or $300,000,000 by which it is
desirable if the total amount of currency in a given year should
expand and contract, should be related in some way to those com
mercial operations which occasion these changes in requirements
for currency. I do not believe that these Federal reserve banks, if
properly handled, will, aside from the present outstanding circulation
of national-bank notes, issue in any ordinary year more than $100,000,000 or $200,000,000 of currency.
Senator B ristow . You have used the expression several times “ if
properly handled” — that qualification. Suppose it is improperly
handled, then what?
Prof. Sprague . Then it were better we had none of this legislation.
But we never have feared to set up desirable arrangements because
of the fear that they might be abused, and I suppose that we would all
agree that if they are abused that we shall learn in the course of
time how to use these arrangements, if they themselves are of a
desirable kind.
Senator B ristow . Ah, but, Professor, here we are placing in the
hands of these 12 banks the authority to contract or expand the
currency.
Prof. Sprague . Not the authority to reduce it below its present
amount; simply the authority to contract that amount which they
have previously expanded.
Senator B ristow . But this bill gives them the power to contract
the currency by law— that which we now have— does it not ?
Prof. Sprague . I am not quite certain, for, as I said at the outset,
I find the note-issue section of the bill unsatisfactory, and I find it a
little difficult to make clear to my mind just how it would work, but I
can say, regarding the suggestion that I make, that it would not give
these Federal reserve banks------Senator B ristow . Your suggestion is entirely different from this
bill?
Prof. S prague . It is.
Senator B ristow . Oh, yes; very different. You propose a cur
rency quite similar to the national-bank currency we have now—
somewhat different— I do not think as good, to be frank with you.
Prof. Sprague . Yes.
Senator B ristow . Because I do not believe in giving these banks
these short-time notes in order to let them put pressure on the public
and discourage business and business activity, but the same principle
would underlie your system that we now have ?
Prof. Sprague . Yes.
Senator B ristow . If that is the system which is to be abolished
and this other substituted for it------Prof. Sprague . I do not propose to change materially the condi
tions under which the existing volume of currency is issued. I would
confine the control of these institutions almost wholly to that part of
the supply of credit which they themselves create, leaving to the
banks the control over the supplies of credit which they now control,
and leaving the outstanding currency in volume where it is, so far as
its amount goes.
Senator B ristow . Leaving the national-bank notes as they are,
will you state— if vou are not prepared to do it now, this afternoon
sometime— just what changes ought to be made in the present
Vreeland bill in order to give desirable flexibility to the currency?
Prof. Sprague . That would be on the assumption that no bill of
this kind is to pass, and to indicate how the Vreeland bill might be
changed in details, not in essentials, to make it at least helpful. I will
attempt to do that, but I think I would prefer to take that up after I
have finished with this bill.
Senator B ristow . All right.
Prof. Sprague . And I can give it a little more thought.
Senator B ristow . You can do that in writing, if you will. I would
like to have it, Mr. Chairman. As I understand, there are two weak
nesses in our present currency system, concerning which complaint is
made, and that is that it is not flexible, and that the rates are not
mobile; that a large amount of the money is locked up in individual
banks as reserves.
Prof. Sprague . I should add to that a third defect, which I regard
as even more serious, that our check machinery breaks down in every
emergency.
Senator B ristow . The “ check machinery” ?
Prof. Sprague . Yes. In 1907, for instance------Senator B ristow . That was by the violation of the law by a bank
refusing to pay out money upon check when it ought to have done
it, because it said it could not?
Prof. S prague . Yes.
r
BANKING AND CURRENCY.
513
Senator B ristow . If that bank could take its securities and get
the money, then there would be no reason for it refusing that pay
ment, would there ?
Prof. Sprague . That is right.
Senator B ristow . Could not the Vreeland bill be made so as to
meet that emergency ?
Prof. Sprague . I will either make a statement at the end of my
discussion of the bill or put it in writing.
Senator B ristow . This breaking down of the checking system is
due to the inflexibility of the currency, is it not ?
Prof. Sprague . It is due to the failure of the banks to make re
mittances to each other between different parts of the country, whether
because they refuse to use the reserves which they have or whether
because the reserves which they have are not large enough, or whether
because the currency is inflexible is------Senator B ristow . I s it sometimes because they do not want to
do it?
Prof. Sprague . It is because we have in this country made a fetish
of the required reserve. The bankers and the public have the idea
that a bank must maintain its legal ratio of reserve to deposit liabili
ties, though the heavens fall. They do not take the view that the
reserve is something to be used.
Senator B ristow . That is the fault of the reserves; that is the
immobility of the reserve and the inflexibility of the currency. Do
not all these complaints that you make come right back to these
two things ?
Prof. Sprague . Yes, sir; one can put it that way.
Senator R e e d . May I ask a question ?
Senator B ristow . Yes; certainly.
Senator R eed . Just abandoning all circumlocution, you get back
to this, do you not, that the bank takes over its counter a given sum
of money, say, $1,000,000, all of which may be demanded in a moment?
Prof. S prague . Yes.
Senator R eed . And it loans it out— about 80 per cent of it— which
it can not get back under 30, 60 or 90 days ?
Prof. S prague . Yes.
Senator R eed . That is just where we come to; that is what you
mean, is it not ?
Prof. Sprague . That is the whole theory of credit banking.
Senator R eed . That is the whole difficulty. If the banks could go
and get the cash any time they wanted to, they would not have to
stop their checks and they would not have any trouble ?
Prof. S prague . That is true.
Senator R eed . That is all.
Senator B ristow . A s I said awhile ago, I do not think, Professor—
it may be because I do not comprehend it properly— that you pre
sented any other weaknesses that do grow out of these two alleged
defects.
Prof. S prague . H ow about the better rates for security as con
trasted with commercial loans ?
Senator B ristow . Well, I do not think law ought to control that.
Prof. S prague . But it is law very largely which has given security
loans the present prestige.
Senator B ristow . Ought they not to have that ?
514
BANKING AND CURRENCY.
Prof. S prague . They ought not to have it, because the uses to
which the proceeds of such loans are put, taking them as a whole,
are not so important in the development of the agricultural and
manufacturing interests, and the commerce of the country------Senator B ristow . ' here is simply a difference of opinion about
that, and of course it is presumptuous to put mine against yours, but
I think that in v e stm e n t loans are just as important or more im
portant than any o<her loans we have.
Prof. S prague . But the abundance of money available for shorttime security loans puts ihe whole security market I’pon a very un
sound foundation. If I have saved a certain amount of money and
buy some steel stock------Senator P eed . Suppose instead of buying stock you buy a
mor gage ?
Prof. Sprague . If I buy a mortgage, then I pay for it?
Senator B ristow . Yes.
Prof. S prague . That is one thing; but suppose ins toed of that I
buy my mortg. ge and at the same time I buy an automobile. I must
pay for my automobile, but I use my mortgage as a basis for a loan
at a bank, for three months or six months. If a very 1 rge number
of people are doing this, if a considerable part of the long-time obli
gations of the country, whether mortgages or stocks or bonds, is
made the basis for short-time loans, these securities are not strongly
held; they are largely held speculatively, and if it becomes necessary
for the banks to liquidate, the price of these securities drops suddenly
and the banks find it is impossible to liquidate.
Senator B ristow . If those securities are good— of course, that is
to be presumed ?
Prof. S prague . Y es; I understood that.
Senator B ristow . And this pressure comes for funds, why should
not the banks take those securities to the Government and get the
money to meet the emergency, as this Vreeland bill provides; and
when the emergency is over why can they not get the securities back ?
Prof. Sprague . Securities have an almost indefinite capacity for
rising in price in case you can secure banking accommodations.
Take the case of loans made on good mixed stock exchange collat
eral, and assume that the average price of the securities is at par—
a hundred— and that the banks have plenty of funds. The banks
are making loans freely, let us say, at 3 per cent. They make loans
to the amount of $80 upon these securities. The securities begin to
advance in price because we can get loans upon them so readily.
They go to $120. The banks now loan 80 per cent of 120, say, $96.
They keep on moving up, and they go to $140 or $160, reaching a
price wholly out of relation to the earning power of the properties
represented which put out those securities.
Senator B ristow . If that is the great favor which commercial
paper will receive from the enactment of this legislation, why should
commercial paper be selected out to be favored in that way as against
substantial investment secured by a mortgage ? W hy should not
the mortgage on a man’s farm or building, if it is properly made,
have just as much consideration in legislation at this time?
Prof. S prague . I have answered that question before; I think the
fluctuating part of the currency ought to be related to the business
operations which occasion the fluctuation in demand. But another
BANKING AND CURRENCY.
515
reason is this, we should develop arrangements in this country by
which the borrower on the mortgage can reach effectively distant
investors. Such persons are not to be reached by means of credit
banks, the business of which is primarily to make short-time loans.
They can be reached in the case of agricultural mortgages, I believe,
by a syst m of deb 'nture banks of some sort, under which you will
bunch together a great many mortgages or a great many farms and
use th m as the security for issues of debentures in sufficient amounts,
say, that it is worth while to incur the expense of reaching the
distant investor, of putting this very satisfactory sort of security
before him. 1 ou can not expect to reach an investor in eastern
Massachusetts with a SI,000 mortgage on a Kansas farm, but if you
can bunch together 1,000 of such mortgages and use them as a basis
for nutting out $500,000 or SI,000,000 of debentures then you can
reach the most distant investor; that is the proper method.
Senator B ristow . I think that is very desirable. And I agree with
you as to that. But I can not see why you should, in fact, penalize
investments of that kind, as this proposition does.
Prof. S prague . This bill will not penalize any investment except
the security investments in the large cities, and it will not penalize
them to any greater extent than they are penalized in all the
European countries; it will simply put the boot a little upon the
other leg.
The Chairman . If I understand it, Professor, you mean that when
money can be readily available upon stocks and bonds it wmuld
permit a ready basis for a bull market that would have practically
no limit if that should continue.
Prof. S prague . It would; that is the danger, and it has happened
in the past. And one consequence is that the fluctuations in our
stock market are far wider than they are in any of the European
markets, and is wholly out of ielation to the fluctuations in the earn
ing power of the various corporations.
Senator B ristow . I have not any defense of the stock-market
gambling by the banks that encourage it.
Senator R eed . May I ask a question here that will save me asking
a number later on? “if I understand you, Professor, you hold that
sound banking demands that banks do not loan my money upon
ordinary industrial stocks, because the stocks are not stable and are
liable to either go up or down to a very considerable extent ?
Prof. S prague . Partly occasioned by the abundance of bank credit
available for «uch loans.
Senator R eed . Regardless of the reason, you hold that is not sound
banking ?
Prof. Sprague . I would not wish to put it in that way exactly. I
think a moderate amount of loans may with entire proprietv be made
unon such security. W hat I object to is that our present banking
system tends to put an unduly large proportion of the available
amount of bank credits------Senator R eed . I s that due to any law, or is that due to any practice
* of banking?
Prof. S prague .
Senator R eed .
Prof. Sprague .
Senator R eed .
It is largely due to the law.
What phase of the law gives that advantage?
It is due to the tendency------I am speaking of law and not tendency.
516
BANKING AND CUKRENCY.
Prof. Sprague . T o the concentration of funds in New York City
to an extent vastly beyond the commercial requirements of borrowers
in New York City plus the nonspeculative security requirements of
borrowers in New York City.
Senator R eed . What feature of law operates to put the money
there? Do you refer to the fact that New York City, St. Louis, and
Chicago are the three general reserve cities of the country ? Is that
the phase of the law that you refer to ?
Prof. Sprague . Yes.
Senator R eed . In other words now— so that I may clearly under
stand you— the ordinary bank of the country has to keep 6 per cent
on reserve in its own vaults, and the bank in an ordinary city has to
keep 12£ per cent of its own bonds. Over 12£ per cent it may send
to New York, St. Louis, or Chicago ?
Prof. Sprague . Yes.
Senator R eed . And when you get to New York or Chicago or St.
Louis they keep 25 per cent in reserve; but they also have the
reserves of these other banks— a portion of their reserves— deposited
with them. Is that*what you refer to under the law?
Prof. S prague . Y es; I would not wish to say, however, that that
is the only factor.
Senator R eed . W e will say that the law permits that. The law
does require the deposit of these reserves to be held by a bank in its
own vaults; the law does not require the deposit of that in a reserve
city. So that if it is sent to the reserve city it is sent not as a mat
ter of law but as a matter of volition------Prof. Sprague . Under the law.
Senator R eed . The banks do it because they are permitted to do it ?
Prof. S prague . Yes.
Senator R eed . Not because they are permitted to do it; they do it
because they want to do it and are permitted to do it.
Prof. S prague . Y es; under the law.
Senator R eed . The law does not prohibit it. Would you suggest
that these deposits of surplus should not in the future be permitted
to be sent to other banks ?
Prof. S prague . N o ; because I believe there is a more effective
means to accomplish the same result.
Senator R eed . N ow , regardless of the means; would you suggest
that ?
Prof. Sprague . Not by prohibition.
Senator R eed . Not by prohibition ?
Prof. Sprague . N o ; not by prohibition, which would be putting
nothing in its place.
Senator R eed . Let us not discuss the question of what you are
going to put in its place. If it is a bad system and it has grown up
because it is not prohibited then ought it not to be prohibited ?
Prof. Sprague . It is not so bad a system that it is desirable to
root it up and put no system in its place.
Senator R eed . Very well. The first step in the process would be
to stop it. Now, then, we agree on that; that it ought to be stopped ?
Prof. Sprague . Yes.
Senator R eed . N ow , then, you propose to put something in lieu
of it ?
BANKING AND CURRENCY.
517
Prof. Sprague . Yes.
Senator R eed . I would like to ask you what that is.
Prof. Sprague . I would set up an arrangement which would make
so m eth in g other than stock exchange loans the most liquid asset
which banks can hold. The reason why commercial loans get a bet
ter rate in Europe than stock exchange loans is because banks like
the Bank of England rediscount commercial paper at a lower rate
than they rediscount the stock exchange security loans.
Senator R eed . Of course, that involves a whole system. Going
back to the question of prohibition, would this be of any benefit: To
provide that no bank should loan money above a certain per cent of
the then cash value of stocks and nothing above a certain per cent of
the face value ?
Prof. S prague . I am rather distrustful of such rigid restrictions.
Offhand, I would not wish to express an opinion as to just how they
would work, but it seems to me that it is ordinarily desirable to make
it worth while, and desirable for people to do what is the most advan
tageous to the community, if that is possible, rather than to attempt
to secure the same result by meani
Senator R eed . If it is wrong,
with it ?
Prof. Sprague . It is only wrong because of its excess.
Senator R eed . I understand; but it is unsafe.
Prof. Sprague . In excess it is unsafe.
Senator R eed . Suppose we would say they should not loan more
than a certain per cent of their money upon stocks ?
Prof. Sprague . Y ou can not put it upon that basis, either. There
are at times comparatively small commercial requirements, whereas
there may be large issues of new securities being marketed by invest
ment houses. It is very difficult to distinguish between the stockexchange loan for speculative purposes and the loan which is made
in connection with, say, marketing a new issue pf telephone securities.
Senator R eed . I s not that answer just equivalent to saying that,
after all, you have to leave this to the banks? W hat you would
like to do is to hold up some other system that would be so attractive
that the attraction of that system would overcome the tendency of
banks to go into improper speculation. Is not that about where we
end on that proposition, and do we not end there without any real
remedy ?
Prof- Sprague . I think it is a remedy. The banks in New York
do not lend to the extent that they do lend on securities because they
wish to foster speculation. They lend in that way partly because
it is the easiest way to lend. It is much more easy to lend $1,000,000
on good stock-exchange collateral than it is to lend it to Smith and
Jones and Robinson, one of whom is in the woolen business, another
in boots and shoes, and the third in the flour business.
Senator R e e d . But they will just keep that up unless we prohibit
it?
Prof. Sprague . N o. They will lessen stock-exchange loans if they
find that the loans made to Jones and Smith can be converted quickly
into cash —more quickly than the stock-exchange loan.
518
BANKING AND CURRENCY.
Senator R e e d . In other words, you say to a bank: ( Now if you
loan money to A, a merchant, you can go and have money issued by
the Government on it, if you desire t; but if you loan it to B upon
stock you can not use that stock for that purpose.”
Prof. S prague . Exactly.
S mator R eed . In other words, you would give a death blow to the
value of stocks to that extent, just in proportion— that is a mixed
metaphor. You can not speak of it as a proportion— just as your
system approached the utter destruction of tno value of stocks as
securities it would be effective, and just in proportion as it did not
approach it it would be noneffective?
Prof. S prague . N o .
Senator R eed . If the desire is to destroy these stock-exchange
loans as a security, why not do it by direct means ?
Prof. S frague . That is not the desire, to my mind.
Senator R eed . If the object to be attained is to make it so that a
bank will not borrow or loan on stock securities, why not do it by
direction ?
Prof. S prague . That is not the object at all.
Senator R eed . But I understood you to say so. Let me under
stand your process of reasoning. Your first proposition is that it is
dangerous for banks to loan their money upon industrial stocks?
Prof. S prague . No.
Senator R eed (continuing). Unless they do it to a very limited
extent.
Prof. Sprague . And unless they do not regard these loans as their
most liquid assets. If the banks will regard their stock exchange
loans as a mode of tying up funds which they can not for the moment
employ in other directions------Senator R eed . That is the reason you give, of course, but the
amount of it is that you want to discourage the banks from loaning
upon industrial stocks. That is what you want to accomplish.
Prof. Sprague . T o a moderate extent, yes; and to encourage com
mercial loans to a moderate extent.
Senator R eed . But the object is to discourage the loans upon
industrial stocks. That can be done of course by a prohibition,
can it not ?
Prof. S prague . That is entirely annihilating it, though.
Senator R eed . That discourages it completely.
Prof. S prague . But I said to discourage moderately.
Senator R eed . I know you said that you wished to discourage it
moderately. Your method of discouraging that practice moderately
is to give the note of the merchant a utility in tne hands of a bank
that is not given to the stock put up with that banker as collateral ?
Prof. Sprague . Exactly.
Senator R eed . N ow , just in proportion as you increase the ad
vantages of the ordinary note of the merchant you discourage the
loans upon stocks ?
Prof. Sprague . Yes.
Senator R eed . If you desire to discourage loans upon stocks and
do discourage loans upon stocks, you destroy one of the elements of
value of the stock, do you not; and you force the price of the stock
down. Is not that inevitable ?
Prof. S prague . It depends a good deal upon the extent of the dis-'
couragement.
BANKING AND CURRENCY.
519
Senator R eed . But I said to that extent. If you will notice my
question I said to that extent.
Prof. Sprague . Not necessarily.
Senator R eed . For instance, I can go and buy 1,000 shares of steel
stock, if I have the money, which no Senator is presumed to have.
I put my money into that, first, because it pays an interest, and I
regard it as a safe investment. I put it into it further for the reason
that I can take that stock and go to a bank and borrow money upon
it when I need it. Now, you take away my ability to borrow the
money, and I will at once hesitate about buying the stock.
Prof. S prague . I do not take it away; I lessen it a little.
Senator R eed . Y ou lessen it?
Prof. S prague . Yes.
Senator R eed . T o the extent you lessen it, you impair to that same
extent the value of the stock ?
Prof. S prague . That is particularly true of speculative securities.
Senator R eed . Without regard to whether they are speculative
securities or not, it will inevitably beat down the value of anything,
will it not ?
Prof. S prague . I do not like to answer these questions without a
little explanation upon my own part.
Senator R eed . The trouble is that the explanation generally leads
us away and we do not get anywhere if everything is qualified.
W e have to dosomething positive in this bill if we do anything. W e
have either got to stand stdl and do nothing or we have to enact a law
that will do something. You can not give to a law all the fine and
delicate shades of distinction that a skilled logician may make when
he is talking across a table.
W e have to do something. If you are going to make your law so
that the banks will quit loaning their money on these stocks or so
that they will only loan a quarter as much as they do now on that paper
or half as much or three-quarters as much, we have to do something
either to compel the banks to do that or to induce them to do it.
The point I am dwelling on at this moment, and I dwell on nothing
else, is whether that necessarily does not impair the value of all that
kind of stock.
Prof. S prague . It is pretty certain to do so at the outset.
Senator R eed . Will it not inevitably do so?
Prof. Sprague . N o ; and for this reason: That in this country an
inordinately large amount of stocks are held by weak holders on the
basis of bank loans. With a system which tends in a moderate
measure to discourage that kind of operation the tendency will be to
lessen such speculative holding of securities; to lessen the fluctua
tions in securities on our markets; to make them more highly re
garded by permanent investors both here and abroad.
It will, in other words, clean up the market rather better than is
ordinarily the case in this country.
I believe that these consequences will offset some average decrease
in the amount of security loans. Another thing that will probably
happen is this: The stock exchange in this country is run in a way
peculiar to itself, with daily settlements. The dealings are con
cluded day by day; the stock sold to-day is delivered to-morrow.
Stock dealings in all other parts of the world are conducted on the
basis of fortnightly settlements, a method which ties up very much
520
BANKING AND CURRENCY.
less bank credit than our method. I am of the opinion that if
legislation such as is before us is passed the stock exchange will
find that it will be obliged to adopt the European practice of fort
nightly settlements, a change which will economize credits and
which will perhaps lessen somewhat speculation.
Senator R eed . Well, now, that is introducing an entirely different
element.
Prof. Sprague . It is impossible to answer questions such as you
are asking without qualifying them somewhat. There are a great
variety of ramifications in bills of this sort.
Senator R eed . The trouble I find with your answers— I am speak
ing with great respect; I am not critical— is this— and I think I speak
for most of us here— that you introduce every time some new element
in the equation. The point we w ere considering was whether or not
r
denying to the banks the right to loan money upon industrial securi
ties, or creating a system that would make it undesirable for the banks
to loan money upon industrial stocks, would not impair the utility of
the stock and consequently its value ?
You say that it would except for the fact that a stability would
come to the stock market. In other words, if I understand you, as
you limit the uses to which a thing can be put you increase its sta
bility and thereby increase its value. Is not that the hole we come
out of ?
Prof. Sprague . A s you limit the fluctuating supply of credit for
stock-exchange dealings you will tend to make the prices more stable.
It is largely because at one time in the year you may have $200,000,000
or $300,000,000 more available for stock-exchange operations than
at another time of the year.
Senator R eed . Would not it be a pretty good idea to wipe out the
stock exchange and all speculation ?
Prof. Sprague . N o.
Senator R eed . W hy not ? W e would stop the speculation entirely
and then you would have nothing but stability.
Prof. Sprague . A certain amount of speculation is desirable.
Senator R eed . That is, a little gambling is a stimulus to enterprise.
Prof. Sprague . Enterprise is tinctured with gambling.
Senator R eed . Well, I will not follow the subject further.
The Chairman . I would like to have appear m the record at this
point this suggestion: That the 25,000 banks in the country are
naturally and necessarily apportioning their assets in the form of
cash, which is entirely and immediately liquid; in open accounts
with reserve agents, which except in times of panic is immediately
liquid; in short time, quickly maturing commercial paper against
actual commercial transactions, which is supposed to be collectible
out of the pockets of the people promptly and therefore will serve as
a liquid asset from the reservoir of money in the pockets of the
people; and, finally, in the longer-time loans sometimes based upon
mvestment securities which in normal tunes are not difficult of con
version; sometimes in investment loans to clients which are intended
to be carried along from season to season as a loan expected to be
worked out after several years. Many banks carry loans of this
character and in that way convert their securities into substantial
investments. These reserve banks are intended to make immedi
ately mobile the commercial paper against actual commercial
transactions.
BANKING AND CURRENCY.
521
Senator B r is t o w . I want to ask one more question, if I may, and
it is in line with the inquiries by Senator Reed. What effect would it
have on this undue accumulation of funds in New York if we reduced
the reserve required of country banks to 6 per cent ? Will they loan
their additional money at home instead of sending it to New York?
Prof. S p r a g u e . W e find that in fact country banks do not, through
out the country, lend at home all that they might be permitted to lend
and still keep within reserve requirements. Many of them lend out
side their own localities by purchases of commercial paper, or by direct
loans in New York, or by surplus balances with reserve agents. I
should expect, however, that after the reduction in reserve require
ments they would lend a little more at home than they now do ; but
I should expect that they would continue to deposit very largely
with city banks.
Senator B r is t o w . They do that because they fear that in an
emergency they might need those funds and they place the funds on
deposit there in order to have the money if needed ?
Prof. S p r a g u e . A bank can seldom insist upon payment of loans
made to its own solvent depositors merely because it would like to
gather in some funds. Its own clientele expects to be taken care of
right along. Largely the amount of loans made to its clientele is by
arrangement at the beginning of the year under lines of credit. A
bank needs to have some resources which it can call in without dis
turbing any of its regular patrons, and it regards balances with out
side banks or purchases of commercial paper of firms at a distance
as resources which it can call in if it needs additional funds. A wellconducted bank, therefore, in the country would not in any circum
stances lend all but 6 per cent of its resources to people in the imme
diate vicinity.
Senator R eed . So that it will still continue, notwithstanding the
change we might make with reference to the amount of reserves, to
deposit a considerable portion of its cash in other banks, and for the
reason you have just stated ?
Prof. S p r a g u e . Yes; but with these Federal reserve banks es
tablished and in good working order I should expect that the local
bank would feel that it could then loan a rather large percentage of
its funds right at home. This it would prefer to do, because anything
that develops its own locality is a direct advantage to its own busi
ness, and if it can take this paper to the Federal reserve bank and get
it rediscounted, that is all it wants.
Senator B r is t o w . Suppose that it could take good securities to
the Government— to a subtreasury somewhere— and get the cash
from the Government that it needed, would not the disposition then
be to loan the money at home instead of to keep a reservoir some
where else ?
Prof. S p r a g u e . The disposition then would probably be to do that
and to invest in local securities such as county bonds; but it seems
to me that from the local point of view that is rather undesirable, for
county bonds now find a market with distant investors. You have
tapped the sources of cheap money for that kind of security, but you
have not and you are not able under our system to tap outside
sources for loans— short-time loans to the local merchant and the
farmer and the manufacturer,
522
BANKING AND CURRENCY.
Senator B ristow . But suppose a mortgage was available as well
as bonds ?
Prof. S prague . I think von can reach that result very much better
through the debenture banking m( thod that I spoke of a moment ago.
Senator B ristow . But we have not that proposition before us.
Prof. Sprague . I thought it possibly would come before you in
the future. If there was no better means of g< tting capital for
mortgages it would be distinctly unfair to the farmer to exclude the
mortgage; but even this bill contains arrangements for savings
departments, which will probably increase somewhat the demand for
mortgages.
Senator B ristow . It will never be used in any of the small towns,
of course.
Prof. Sprague . I think that the only feasible means is some
arrangement for debentures which would I believe tend to reduce
the mortgage rate in many parts of this country by 1 or 2 per cent
at least.
Senator B ristow . Of course, you will understand that I am an
amateur in any discussion of this kind; but I can not understand
why mortgages on property conservatively made are not as good a
basis upon which to establish a temporary currency as a man’s note
without the mortgage, but who owns the property.
Prof. Sprague . The reason is not one of safety. It is partly
because there is so much in the way of lands and of mortgages, and
the amounts loaned on mortgages have no connection with changes
in the requirements for the use of currency. There are good safe
mortgages— enough to furnish security for billions of additional
currency, but it would not be desirable to have those billions of
additional currency issued. It would simply inflate prices and cause
most undesirable results.
This other kind of security is rather more limited in amount------Senator R eed . You use tne phrase “ rather more.” How much
of it is outstanding?
■ Prof. S prague . Oh, it is impossible to say. I used that expres
sion advisedly, “ rather more.” There is a danger.
Senator P eed . If we issued currency on all the commercial
paper— if we issued a dollar of currency for every dollar of commer
cial paper there is in this country—we would have an inflation such
as has never been dreamed of in any country in the world.
Prof. Sprague . I heartily concur with what you say there, and it
suggests to me that this is a good place to ent r a criticism of the
opinion which has been expressed here by bankrrs, that there is
some automatic means of keeping the currency within safe limits
if you tie it up with commercial paper. There is no such automatic
safety valve as that.
Senator R eed . I am glad to hear somebody say som thin" that
has been perfectly patent on the face of these hearings from the
beginning. If that is true, 1 rof ssor, it is p rf ctly manifest that
the safety limit— the point of safety has got to be fixed by some
thing other than the volume of comm* reial paper. It has got to be
fixed by a law, or by a board, or by some governing power. Is not
that true ?
Prof. Sprague . Yes. That is one of my reasons for having said
at the very beginning this morning that the problems which will
BANKING AND CURRENCY.
523
confront the management of these Federal banks are novel and
exceedingly complicated. To know whether the amount of credits
granted by rediscount is getting beyond safe bounds will require
very great judgment, indeed, and they will not be able to determine
the matter in any automatic way whatever.
A D D IT IO N A L S T A T E M E N T O F P R O F . O. M. W. S P R A G U E .
(Proceedings of Sept. 17,1913.]
Senator S h a f r o t h . Would you prefer, Prof. Sprague, to go now?
Prof. S p r a g u e . I would.
The Ch a ir m a n . He has been very patient about waiting here, and
I do think we should give him an opportunity to conclude.
Senator S h a f r o t h . Mr. Berry is here, and he is compelled to leave
to-night.
Mr. W ill ia m H . B e r r y . Yes, I have to leave to-night, but I am
in no hurry to leave.
The Ch a ir m a n . Prof. Sprague would like to have the opportunity
of making his statement without interruption.
Senator P o m e r e n e . I think he should have that privilege.
The Ch a ir m a n . And then he will be willing to answer any questions.
He has been interrupted so much that he has been unable to make any
coherent suggestions in regard to the bill.
Senator P o m e r e n e . That is the purpose I had in mind in making
the motion I did when our hearings commenced. Let him make his
statement, and after he is through we can ask him questions based
upon memoranda we have made as he proceeds with his consecutive
statement and it will be of greater advantage to the committee when
they take this up in executive session.
Senator H e e d . Mr. Chairman, while you are making these pre
cautionary suggestions, I venture to remark that Senator Bristow
is out of the room.
The Chairm an . Senator Bristow is to be invited back when Prof.
Sprague resumes his statement, and I will now send word to him.
(At this point Senator Bristow’ returned to the hearing room.)
Prof. S prague . My statement regarding the sections in the bill
having to do with the issue of notes appears in such scrappy form in
the hearings of yesterday, being interrupted by questions, that I
should like to first summarize my opinion on that part of the bill.
I think it undesirable that the outstanding circulation of the national
banks should be transferred to Federal reserve banks unless some
change is made regarding the requirements for security of the notes
issued by those banks. The national-bank notes might be left where
they are. The issue might be continued by the individual banks,
and that would not seriously affect the workability of this measure.
They might conceivably be transferred to the Government— issued
by the Government and redeemed by the Government— and under
proper safeguards that would be entirely feasible and would not affect
one way or another the effectiveness of this measure.
If, however, it is decided that the Federal reserve banks should
issue the outstanding national-bank circulation, then some other
form of security should be devised for at least that amount of notes,
and I suggested yesterday that the same security be held for that
9328°— s. Doc. 232, 63-1— vol 1----- 34
524
BANKING AND CUBBENCY.
amount of issue as is now held by the national banks, namely, Gov
ernment bonds, but that the rate of interest on the bonds be raised
to 3 per cent, the notes to be taxed 1£ per cent, and that a portion
of the bonds be changed into one-year notes to give the Federal banks
a readily marketable security, as a means of securing control of the
market. That would be my suggestion regarding this matter, in
case the Federal reserve banks are to issue the outstanding circulation
of the national banks now or later.
The present provisions of the bill in this respect are unsatisfactory,
also, because they increase the interest burden upon the Government,
and because they are not entirely fair to the banks. There would
probably, under the arrangements for transferring the note issue and
for refunding the bonds, be some fall in the price of the bonds which
the banks now hold as security. I do not think that the banks should
be required to suffer any loss on account of the 2 per cent bonds which
they have purchased in order to take out circulation. If it is deemed
advisable not to turn the issue of the national banks over to the
Federal reserve banks, then some other arrangement can doubtless
be devised which will be entirely fair to the banks and which will
place the $700,000,000 of notes upon a sound foundation; but as I am
confining myself to the provisions of this bill I will not at this moment
enter upon a discussion of any arrangements which do not presuppose
taking over the notes by the Federal reserve banks.
I now turn to a second proposal, designed to make this measure on
the purely banking side somewhat more workable. It has to do with
the provisions in the bill regarding the rearrangement of reserves.
I think that the principle embodied in this bill of transferring a con
siderable portion of the deposited reserves of the banks from reserve
and central reserve city banks to these Federal reserve banks is
entirely sound. But I am inclined to think that the bill goes some
what too far in this respect. It transfers all of the reserve balances
of reserve city banks deposited in central reserve city banks to the
Federal reserve banks, and that seems to me entirely wise.
It also does the same with the balances of country banks; and
here in my opinion the bill goes too far. My reason is not because I
think it particularly necessary to give reserve agent banks these
country bank balances. It is rather from the point of view of the
country banker that I am looking at this problem. The country
bank does not ordinarily have a very large volume of assets of the
kind that will meet the rediscount provisions in this bill. Properly,
those rediscounting provisions are drawn with care to limit the
operations of the Federal reserve banks to paper maturing within
short periods of time, and which can ordinarily be liquidated readily.
Reserve agent banks can lend with much more freedom to coun
try banks than can these Federal reserve banks. Doubtless rela
tionships will continue between city and country banks, even if this
bill is passed in its present form. But I am convinced that the
accommodation which the country banker can secure from city
banks will be somewhat greater if the city banks hold a moderate
portion of the reserves of the country banks. I am in favor, there
fore, of leaving it optional with the country banker to hold the
last 4 per cent of his requirements either in vault in a Federal reserve
bank or with properly qualified reserve agents in the reserve cities.
An arrangement of this sort will be apt to lessen materially the
BANKING AND CURRENCY.
525
number of applications made for accommodation from the Federal
reserve banks, and will be helpful to the management of those insti
tutions for that reason. But, primarily, my ground for taking this
position is that it will give the country banker two strings to his
bow, put him in better condition to meet all requirements that come
upon him from his local clientele. It may be added that this change
would doubtless make the bill a bit more attractive to the banks in
general, but that is not the fundamental reason for advocacy of this
chango in the bill.
I now turn to changes designed to secure more satisfactory manage
ment and greater publicity. Bankers have appeared before this com
mittee desiring representation upon the Federal reserve board. I am
not going to waste time urging a modification of that sort. I do
think, however, that it is most undesirable that a majority of the
board should be reconstituted at the very beginning of a presidential
term or, indeed, at any one time. By making the end of the term of
Comptroller of the Currency come in the second year of a presidential
term this difficulty would be met. I think, moreover, that the bill
should be modified in another direction with results which should be
all that the banking fraternity can reasonably demand, and with re
sults which will be to my mind helpful in securing efficient manage
ment for the proposed institution.
The bill provides for an advisory -council, which shall meet four
times a year, but it does not provide any means for giving members
of the advisory council regular, continuous information regarding the
policy of action of the Federal reserve board. I would urge that the
chairman of the advisory council, or, in his absence, its vice chairman,
be given a seat on the Federal reserve board, without a vote. This
would put him in a position to know what is being done on the board.
It would enable him to know at any time whether it was desirable
to call his advisory council together to offer advice or to formulate
criticism of the management of the policy of the Federal reserve
board. A change of this sort in the measure would simply give
effective publicity, and that is about all that the bankers would secure
through minority representation on the board itself.
I turn now to the management of the separate reserve banks. It
is only the management of the Federal reserve banks that will make
loans— the Federal reserve board is authorized to make no loans.
Whatever its policies, however ill-advised it might conceivably be,
the Federal reserve board could not dissipate the resources intrusted
by the Government and by the banks to the Federal reserve banks.
If losses are incurred it will be entirely owing to faulty management
of the reserve banks.
I do not think in the public discussions of this bill that this point
has been given proper emphasis. Many have criticized the proposal,
apparently on the assumption that the Federal reserve board itself
might dissipate the assets intrusted by the banks to these institutions.
I attach very great importance— indeed, fundamental importance, I
may say— to the character of the management of the Federal reserve
banks distinguished from the Federal reserve board. The pro
visions in the bill regarding the selection of the directorates of the
Federal reserve banks seem to me entirely satisfactory, wfith one
exception. I refer to the class B directors, who are to fairly repre
sent agricultural, commercial, and manufacturing interests. The
526
BANKING AND CUKRENCY.
bill provides that the Federal reserve board may at any time remove
this class of directors if they do not seem to fairly represent these
interests. In other words, there is a string attached to this group
of directors throughout their incumbency of the office. The Federal
reserve board should, in my opinion, be empowered to approve or
disapprove of the men selected to fill these positions, but after they
have been approved that should be the end of it so far as their term of
office is concerned, just as is the case with Government officials whose
appointment involves the advice and consent of the Senate.
The bill is also slightly obscure regarding the functions of the
chairmen of the boards of the Federal reserve banks. Whether they
are to be the chief executive officers of these regional banks or not
is not clear. Apparently the chairman is simply to be a presiding
officer, and the chief executive officer is to be selected by the board
of directors. That, in my opinion, is the proper arrangement, but
whatever the arrangement is to be, it should be more clearly indicated
in the bill than is the case at the present time.
I am now going to turn to the question of the proper number of
reserve associations, and I would relate the discussion of this subject
to what I have said at various times during these hearings regarding
the novel and complicated problems which will have to be solved
largely by the managers of the various reserve banks and of course
also by the Federal reserve board. It is a matter which should be
given careful consideration, whether it is entirely feasible to secure
a satisfactory management at the outset for as many as 12 of these
regional associations. I am inclined to think that a satisfactory
management would be a little more certain in case the number of
regional banks were somewhat less. This is a matter which can be
in part determined by the organizing committee. It is one reason
for giving the organizing committee a little latitude in the number of
regional banks which should be established; and then there is another
reason of a practical sort: It is not certain that all of the banks will
come in. I believe that most of them will come in, but the whole
scheme could be more easily upset by recalcitrant bankers if the
organizing board must set up 12 reserve banks than would be the
case if this organizing board has some latitude in the matter. Give
the organizing board, for example, the power to establish not less
than whatever number you think must be made— say 7, if you like,
or 8, and not more than 12— and you have one of the impediments
removed to setting up this machinery.
It is quite conceivable, for instance, that in order to make 12
regional banks it might be necessary to split up New York City into
two in order to meet the absolute requirements of the bill.
Assuming that a satisfactory management can be secured for the
various regional banks, I do not regard it as absolutely essential that
their number shall be 5, 8, or even 12. In some respects doubtless
the machinery could be handled more easily with 5 than with 12, but
I see no compelling reason for holding that if 5 institutions of this
kind will serve a useful purpose that 12 can also serve a useful pur
pose. It is largely, to my mind, a question of the kind of management
you can get, and whether the choice of the directors for the regional
reserve banks will be as satisfactory if each institution covers a com
paratively small area as it would be if it covered a somewhat wider
area.
BANKING AND CURRENCY.
527
Some of the modifications which I have so far touched upon would
doubtless make the measure a little more attractive to the banks, and
that the measure should be made as attractive to the banks so far as
is consistent with securing the purposes in view seems to me to go
without saying. An added reason for taking this position is the
coercive feature of the bill. I consider that it is entirely proper that
this bill should contain provisions which put a little compulsion upon
the banks to come into the system. This is because the success of
the system requires or presupposes that at least a very considerable
number of the national banks come in. Bankers are properly a rather
cautious body of men. We would not wish to have our banks con
ducted by the most speculatively inclined portion of the community.
Many bankers in the absence of any slight compulsory feature in the
bill, however satisfactory the bill may be, will be apt to delay coming
in, would be apt to allow the machinery to be established by others,
waiting themselves to see how it would work. A moderate measure
of compulsion, therefore, seems to me to be entirely proper, in the
interest of securing any sort of legislation of this kind. But, that
being the case, the system into which the banks are to be gently
forced should be quite fair to the banks, at least so far as is consistent
with the purposes in view. It does not seem to me that this bill
should contain provisions which would in fact or even apparently
lessen the earning power of the banks, unless those provisions are
essential to the working of the proposed scheme. I therefore ven
ture to suggest a few additional modifications, which would, so far as
I can see, have no appreciable effect upon the character of the manage
ment or upon the working of the machinery to be established.
The first of these proposals is a reduction in the subscription to the
capital from 20 to 10 per cent of the capital of subscribing banks.
The capital of an ordinary bank serves two purposes. It gives con
fidence in the institution; it makes certain that those conducting it
have something at stake, and, in the second place, it is a margin of
safety against loss. These proposed Federal reserve banks, how
ever, are only to do business with the banks; they are only to do
business with the institutions who are to provide the capital, and who
are also to provide a large portion of its other funds. If these people
who are to do business with the reserve banks are entirely satisfied
with 10 per cent rather than the 20 per cent capital, the ground for
a large capitalization, as a means of inspiring confidence disappears.
Second, as regards the margin of safety, the reserve banks are so
tied up as regards the character of the loans which they may make
that there is exceedingly little danger of any appreciable loss being
made; -that in any year the losses incurred would approach current
income seems to me to be wholly unlikely. None of the grounds
therefore for large capital which are present in the case of ordinary
banks appear when we consider this special class of institutions.
The European central banks, with hardly an exception, conduct
none of their banking operations wfith funds secured from their
shareholders. In all instances, so far as I recall, these various
European banks in securing their charters or renewals of charters,
have been obliged to invest in the securities of their Governments,
or to make special loans to their Governments, which have absorbed
their entire capital and often more than their entire capital. They
conduct their banking business with the funds which they have cur
528
BANKING AND CURRENCY.
rently secured from depositors, chiefly banking depositors. Similarly
these Federal reserve institutions would have ample funds from the
Government deposits and the balances placed with them by the other
banks.
It may further be noted that as the Government is very largely
the residuary of profits, that the smaller the capital the larger the
return which will come to the Government from the operations of
these institutions. I think that if the banks are required to put in an
amount equal to 5 per cent of their own capital and another 5 per cent
remains on call as an obligation, these banks will have quite sufficient
capital for any conceivable purpose. After all, $10,000,000 secured
by bank subscriptions to capital is no more a basis for the operations
of these institutions than an equal amount secured either from the
Government as deposits or from the banks as balances. After a bank
gets its funds, there they are, and the extent of its operations is deter
mined by the amount of the funds and the source of the funds is a
negligible factor.
In most parts of the country 6 per cent is a very common rate for
bank loans. The country banker, in particular, feels disinclined to
invest his capital in this institution on a 5 per cent basis. As a means
of meeting this objection, the bill was modified after its first intro
duction, and provision was made for giving the shareholders 40 per
cent of the surplus earnings, 60 per cent going to the Government,
the distribution being made on the basis of the balances carried by
the various banks with their Federal reserve bank.
I dislike this method of giving the banks a somewhat larger share
in the earnings of these institutions, for the reason that it may tempt
the management of the reserve banks to handle them so as to earn a
large income. Now, these institutions should not be handled prima
rily or even appreciably for the purpose of making profits. If they
are so handled, they will not serve some of the purposes for which
they are to be set up.
Take, for example, a case like that of the Bank of England at the
present time, with a reserve approaching 60 per cent, brought up to
that level because the situation in the immediate future is somewhat
confused and because there may be very heavy demands upon that
institution. Clearly if the Bank of England were run very largely for
the purpose of getting the largest possible profit it would make a con
siderable amount of loans now and would not maintain these high
reserves. I think that a definite dividend to the shareholders is a
very much better arrangement than anything which gives them a
right to a share in surplus earnings. I think that it would be far
better to raise the rate of the return to 6 per cent and drop out this
provision that 40 per cent should go to the banks. Then all over and
above 6 per cent on the shares would go to the Government, and I am
firmly of the opinion that in the long run the Government would get
vastly more out of these institutions than it will if the measure is
passed containing its present provisions regarding the disposition of
earnings.
One more change I will venture to outline regarding capital,
although it is a suggestion which I make with some little hesitation.
It would probably be regarded as more satisfactory by the banks if,
in subscribing to the capital stock of these Federal reserve banks,
they became subscribers to the capital stock of the entire group of
BACKIN G AND CURRENCY.
52 $
Federal reserve banks. If this were to be done, it need not change
and should not change in the slightest degree the method of select
ing the directors of Federal reserve banks. The Boston bank, for
instance, subscribing, would have a vote only in choosing the direc
tors of the Federal reserve bank of Boston, and similarly with a bank
in New York or San Francisco or elsewhere. The dividend would
be then somewhat more secure, for the dividends would be on a sort
of cooperative basis. It might very well happen that the regional
bank in New England would not earn enough to pay its dividend in
a given year; while the regional bank in Chicago might in the same
year be earning much more than enough to pay 6 per cent upon its
shares.
Under the plan that I have been outlining, the total profits of all
the reserve banks would be available for paying the limited dividend
upon the shares owned by all of the banks. It would simply be a
change which would make a little more certain that in all years 6 or
5 per cent would be paid to the shareholders.
I have now finished the suggestions for changes that I wished to
bring before the committee. It will be observed that they do not
cover very many points in this bill. The larger portion of the bill
seems to me to be entirely satisfactory, and in many respects superior
to other measures which have been brought forward during the last
three or four years.
The rediscounting features seem to me to be entirely satisfactory,
calculated to give commercial loans a better rate than security loans,
because commercial loans will become more liquid. The bill is en
tirely satisfactory, to my way of thinking, in confining the use of
acceptances to foreign dealings. It is in the foreign trade that the
acceptance is generally in use. It is an unfamiliar method of grant
ing credit in this country, and to grant the right to accept to banks
in connection with purely domestic transactions would not, to my
mind, serve any good purpose, and it might very well result in serious
abuse.
The provisions in this bill regarding the making of short-time
loans to farmers on lands, as security, would seem to me to go about
as far as it is wise to go in facilitating increased accommodation to
farmers through credit banks.
It is impossible to go further, not because mortgages, taken as a
class, are a less safe form of security than commercial paper, and not
because mortgage loans are less liquid than commercial paper in
emergencies. In emergencies nothing is liquid, and extensive
liquidation should not be attempted. The purpose of this bill is to
set up institutions which will make it unnecessary at any time in the
future to resort to drastic, wholesale liquidation, which always fails
and which cannot be carried through. But there is a reason why
mortgaged loans in large quantities are not satisfactory security for
credit banks and the reason has to do with the situation of the indi
vidual bank in ordinary times. In ordinary times any one or small
number of banks that for any reason get into trouble can quickly
liquidate commercial loans. They mature soon, and they are an
asset which other banks may be willing to take, so as to give the few
banks that are in trouble the necessary funds.
Mortgages can not be quickly converted, and the individual bank
which gets into trouble finds it ordinarily exceedingly difficult to raise
530
BANKING AND CURRENCY.
money quickly from other lenders on the basis of its mortgages; and
of course its mortgages do not mature within a short period. It can
not get any funds by simply doing no more new business.
Senator B ristow . Professor, I should like to ask you a question
right there.
The Ch airm an . Well, Senator, we agreed to let the Professor
finish and then cross-question him at length.
Senator B ristow . I thought he was through.
Prof. Sprague . That would be my reason for differentiating be
tween the mortgage loan and the commercial paper; not because,
taken as a whole, mortgages are less liquid than the commercial
ier,
nother entirely satisfactory feature of this bill, to my way of
thinking, is the provision for savings-bank departments. Over a
large part of this country there are no mutual savings banks and it
does not seem likely that they will be developed in the near future.
Indeed, in sparsely settled or purely agricultural sections of the
country there is not room for the two classes of banks. The business
is, in fact, combined with ordinary banking, but it is desirable that
the funds of small savers should incur the same risk of loss to which
deposits of the ordinary business man are subject. The business man
is in better position to choose a bank and to withdraw' his account
in case he ’ thinks that anything is unsatisfactory. The savings
depositor should be given especial protection. His funds should be
more carefully safeguarded than those of the ordinary checking
depositor. I believe that the demand for the guarantee of deposits
which sprang up in the W est a few years ago was largely due to the
fact that in that part of the country savings deposits and other
deposits are indiscriminately mixed together and invested in one
mass of assets.
The provision regarding the foreign banking in this bill seems to be
entirely adequate.
Finally, I mention as further excellencies in the bill the simplicity
of its organization. Contrasted, for example, with the bill of the
National Monetary Commission, this bill in its method of choosing
the management is vastly superior. It is, furthermore, superior to
the bill of the National Monetary Commission in that it does not in
any case impose upon banks the burden of guaranteeing loans made
by other banks wdth these institutions to be established.
Much criticism is made of this bill because of an excess of Govern
ment influence in its management. Without characterizing the bill
of the National Monetary Commission, it does seem to me that from
the point of view of the banks it should be a very large offset that this
bill does not obligate them in any case to guarantee the loans which
other banks are to secure from the Federal reserve institutions.
The banks can not lose any of the funds which they intrust to
these institutions unless they themselves choose incompetent persons
to make up the majority of the boards of the Federal reserve banks.
And if the banks can not lose any money from the working of these
institutions, the question of Government against banking control of
the central board narrows itself down to this: Will the general policy
adopted be wiser if there is a Government board than if it is a board
largely selected by bankers ?
BAN KIN G AND CURRENCY.
531
But even if the central board is unwise and incompetent it can not
involve the disposition of the assets intrusted to these Federal
reserve banks by the Government and by the banks.
Senator R eed . W hy not ?
Prof. Sprague . Because the central board can not lend any money
It can simply say that the rate of discount shall be 12 per cent
instead of 7.
Senator R eed . Y ou are speaking of the central board, are you not ?
Prof. Sprague . Y es; I am speaking of the central board. The six
out of the nine members of each Federal reserve bank board are chosen
by bankers, and if they choose incompetent persons and the assets
are dissipated they will then only have themselves to thank.
Senator R eed . I understand; I thought your last remark amounted
to a statement that even if you had this management of regional
reserve banks the assets would not be dissipated. I understand your
proposition now. I thought you spoke ol the other banks.
Senator B ristow . I understood you to say that the reason it was
not desirable to have farm loans— real estate mortgages— as the
basis for this currency was that they could not be realized upon so
rapidly.
Prof. Sprague . I referred rather to the provision in the bill per
mitting individual banks to make a moderate amount of 12-month
loans on the basis of mortgage security. I was not referring at all
to the Federal reserve banks or to the issuing of currency. I was
trying to indicate why, to my way of thinking, considerable long-time
investments for banks whose obligations are payable on demand are
undesirable.
Senator B ristow . D o you see any objection to making mortgages
the basis for the issuing of currency to these banks ?
Prof. Sprague . Yes. A t the present time there is no satisfactory
machinery in this country for marketing mortgages or securities based
upon mortgages. If, for example, the States would establish de
benture institutions— rural banks with a State bank at the head—
which could put out debentures against mortgage loans and get in
touch with the financial markets, then I should say that these State
institutions would become satisfactory borrowers at these Federal
reserve banks.
Senator B ristow . It is contemplated that the Government will
have to collect this money— realize on these securities. Do you con
template that ?
Prof. S prague . Referring to this debenture arrangement?
Senator B ristow . N o. That is a thing that we can not consider
here at all. It is an impossibility to imagine anything like that.
We have no control over the States.
The purpose of this legislation mainly is to insure a more elastic
currency, so we have been told, and to do that an emergency cur
rency is provided for, so that when the banks need it they can get it,
and they get it by putting up this security, and it is limited to com
mercial paper that matures m a certain time. W hy does the Gov
ernment want paper that matures within 45 and 60 days as a security
for this currency?
Prof. S prague . The reasons are involved. An adequate answer
involving the whole range of banking operations must be taken into
consideration. Perhaps I can put it shortly in this way: The re
striction of the security to commercial paper is not because commer
532
BANKING AND CUBRENCY.
cial paper is a safer asset than some other kinds of security. It is
not a safer asset than the best of farm loans or the best of real-estate
loans in cities, nor the best of bonds issued by certain corporations.
It is not, therefore, on the ground of safety that there is any reason
for picking out commercial paper rather than something else.
Commercial paper, is, however, preferable, because, so far as the
individual bank is concerned, it will be able, in ordinary times, to
liquidate its commercial paper to meet its obligations with the
Federal reserve banks more readily than would ordinarily be the case
with other kinds of security.
Suppose that our Federaf reserve bank rediscounts for a member bank
notes which are good but slow. Suppose, for example, it rediscounts
a note based upon the security of some New York City block. The
proceeds of the loan have not presumably been put into any trans
action which will be completed during the life of the loan. If it is
commercial paper in the true sense and you have borrowed, say, for
four months’ time presumably you are employing the proceeds of
that loan in a transaction which will be completed within the four
months, so that in a sense the loan will pay for itself.
The transaction in connection with which you used the proceeds
of the loan will pay for it. In this case the bank that used this com
mercial paper will be paid, and it can meet its rediscount obligations.
If, however, you open the door to rediscounts based upon bonds and
other things, individual banks will have their funds tied up in long
time operations and consequently will require continuous rediscounts
with the Federal reserve banks.
Senator B ristow . Well, the objection, as I understand it, that you
offer is that the farm mortgage runs for a long time— it does not
become due— and that you expect the notes that are put up as security
to be paid within a short time. Is not that a thing for the bank to
take into consideration in making its loans ?
If that bank has mortgages that are better as a rule than ordinary
notes of hand, why should not that be made the basis for the cur
rency? The note that is put up as security for the currency does
not necessarily have to be paid m order to enable the bank to meet
the bill. Let it keep its 90 day paper or 30 day paper in its vaults,
in the regular way as it does, and retire the currency. The only thing
that will retire this emergency currency is the tax on it anyway. It
will not be retired at all unless it is taxed.
Prof. S prague . It will be retired if we have a competent manage
ment for these institutions. If, as was assumed yesterday, these
institutions are so managed that they get down to a 33£ basis just
as far as they possibly can these institutions will not do us any good
at all.
Senator B ristow . Y ou can not get any Government board to
contract a currency. It will not do it, because it would be a very
unpopular thing, and it will never be done, in my judgment. You
may theorize all you please, but as a practical matter it will not be
done. You can expand, of course, but you will never contract.
Prof. S prague . 'That is the danger of this institution, whether it
is handled by a group of people appointed by Government authority
or appointee! by the banks.
Senator B ristow . The only thing that will retire these notes is
a tax that will make it unprofitable to keep them out to the bankers
who are using them.
BANKING AND CURRENCY.
533
Prof. S prague . But that will not necessarily prevent overexpan
sion on the part of these institutions, because after these institu
tions are set up you will find that the demand for notes will be
vastly lessened. You will find that the banks will make settlements
between each other on the books of these Federal reserve banks, and
that what they will chiefly want will be additional deposit accounts
against which they can check. When the Bank of England makes
additional loans and the banks need additional funds what they
want is almost never currency; what they want is additional deposits
at the Bank of England; and the same will be largely the case in
this country in the operations of these institutions, and if they get
down to anything approaching the minimum of their reserve in
ordinary times they will be able to help us but slightly in an emergency.
I have repeated this warning over and over again in these hearings,
because I have observed that very few people in the discussion of this
subject during the last three or four years have dwelt upon it at all.
Most persons in urging some such measure as this have dwelt almost
exclusively upon its power to expand credits when there was a need,
and have said almost nothing about the necessity of such an institu
tion if it is to expand when there is need also of being in position to
contract a little or to restrain long before emergencies come upon us.
W e should have, according to the theory of some people who have
discussed this measure, something a most similar to a United States
Treasury with an indefinite amount of funds ready to pay them out
to the banks whenever the banks ask for them. That would be a
most unhealthful condition of affairs. W e have had something ap
proaching it during certain administrations of the Treasury Depart
ment when there lias been a large surplus, with the result that the
bankers have felt no appreciable responsibility for maintaining the
credit structure and have expanded credit to a dangerously rapid
extent. If the managers of these institutions, including the Federal
reserve board, are not conservative men, the results of setting these
institutions at work will be disastrous.
Senator B ristow . If any of you financiers and experts think any
administration will set about deliberately to contract the currency for
the purpose of giving business more stability, you are pursuing a
dream. It will not be done; there would be a protest made here from
which they would all shrink.
Prof. S prague . I think you will find that the responsibilities
which will rest upon the Federal reserve board will be very obvious
and so heavy that they will almost in spite of themselves take the
conservative point of view. A t any rate I feel certain that after one
experience with the consequences of over liberal granting of credits
in periods of active business, we shall settle down to a proper under
standing of the proper functions of such institutions as is proposed
by this measure. That was the case in the history of the Bank of
England. For years there was no proper conception on the part of
the directors of that institution of its duties, and it took a succession
of crises to make clear both to the officials of the bank and to the
general public the proper functions of that great institution.
Senator B ristow . W e have a pretty good system here now, except
that it is not flexible enough. W hy should we change it ?
534
BANKING AND CURRENCY.
Prof. S prague . That is not the trouble with it— that it is not
flexible. Consider the situation from 1897 to 1907.
The total
amount of currency in this country increased by about 40 per cent
during that period of time.
Senator B ristow . Well, that did not hurt anybody; that was a
very prosperous and desirable period.
Prof. Sprague . But at the end of it we landed in the panic of 1907.
Senator B ristow . The panic of 1907 would have been avoided
if these New York banks had not loaned on securities that were
not good; if they had not loaned money for speculative purposes.
When the water was squeezed they had to liquidate; they had to
foreclose and they could not get their money and the country people
who had their money there in New York could not get their money.
If these banks could have gone to the Government and got relief,
temporary relief, the panic of 1907 never would have come.
Prof. Sprague . Y es; it would. It might have come in 1908. The
situation would have become very much worse if they could have
got additional credit at that time.
I have two more matters which I will put into the record if the
committee desires. Senator Shafroth asked me to go over his bill and
give him an opinion on it. I was also asked by Senator Bristow to
express an opinion about the possibilities of the Aldrich-Vreeland bill.
The Ch airm an . W e will be glad to have you do so.
I would like to ask the consent of the committee just here to put
into the record the interest tables of the five reserve banks of Europe.
The matter is explained in great detail and is a very valuable com
pilation which I think ought to be before the committee.
(The tables mentioned by the chairman are as follows:)
Bank o f England.
I ssue D epartm ent .
LIABILITIES.
Notes issued.............................................. £51,241,210
ASSETS.
G ovem m ent debt.................................... £11,015,100
Other securities........................................
7,434,900
Gold coin and bullion............................. 32,791,210
51,241,210
51,241,210
B anking D epartment .
Proprietors’ capital............................. .'. £14,553,000 \ Government securities............................. £17,507,945
3,300,154 i Other securities........................................
36,211,089
R est...................... .....................................
Public deposits (includin'; exchequer,
Notes..........................................................
22,375,490
Gold and silver coin................................
912,633
savings Banks, commissioners of na
tional debt, and dividend accounts).
9,936,777
O ther deposits..........................................
49,139,180
7-day ana other bills...............................
18,046
77,007,157
77,007,157
Dated January 6, 1910.
The above is the statement as it appears in the weekly returns.
J. O . N
a ir n e
Chief Cashier.
B alance S heet , Ja n . 6, 1910.
[Arranged so that it corresponds in form with the balance sheets of the other banks given here.]
LIABILITIES.
ASSETS.
Capital and rest........................................ £17,913,154
Notes in circulation................................. 28,865,720
7-dav and other bills. . . *.........................
18,046
Public deposits.........................................
9,936,777
49,139,180
Other deposits..........................................
Cold coin and bullion and silver coin.. £33,703,843
Government securities in both depart
ments...................................................... 28,523,045
Other securities........................................
43,654,989
105,872.877
105,872,877
[N ote .—All per contra entries, as those of the notes of the banks held b y themselves, etc., are omitted
bo as to show the real position of the accounts. J
535
BANKING AND CURRENCY.
It will thus be observed that the note issues are covered by 62.7 per cent gold.
That the public and private deposits are covered in the banking department by
38.3 per cent of notes and coin, nearly all such reserve being in notes, which, meas
ured by actual gold, would make a gold reserve of only about 25 per cent against the
deposits.
It will be observed under the tables of interest rates that this narrow margin has
been supplemented b y frequent changes of the rate of interest to attract gold from
other countries when English commerce requires gold, and it would also appear that
in 1847, 1857, and 1867 the Bank of England was permitted to issue legal-tender
notes against commercial paper in times of panic in order to extend needed loans,
restore confidence, and safeguard the commerce and industry of England.
Imperial Bank o f Germany
B alance Sh eet , Dec. 31,1908.
[Marks converted as 20=£1.|
LIABILITIES.
ASSETS.
Capital and reserve.............................. £12,458.581
Notes in circulation............................. 98,771,474
Amount due on clearing and current
accounts...........................................
33,244,291
25,167
Deposits (not bearing interest)............
Sundry liabilities and reserve for doubt
ful debts...........................................
720.072
Net profits for 1907...............................
1,537,287
Gold in bars..................... £16.792,075
German gold coin............ 21,620.898
---------------- £38,412,973
Divisional money................................ 10,594,046
Notes of imperial treasury (Reichskassenscheinen)................................
Notes of other banks............................
49,007,019
2,876,243
505,105
Bills held:
Due within 15 days.......................
Due at later dates..........................
22,660,590
28,939,529
Bills on foreign places.........................
51,600,119
6,457,493
58,057,612
Loans......................................................
8.796,468
Securities............................................. 19,724,627
Value of real property belonging to the
bank....................................................
2,849,450
Sundry assets.........................................
4,940,348
146,756,872
146,756,872
[N ote .—A ll per contra entries, as those of the notes of the banks held by themselves, etc., are omitted
so as to show the real position of the accounts.l
It will be observed that the Bank of Germany carries 50 per cent of gold against
its notes and 37.1 per cent of gold against its notes and deposits, but the Bank of
Germany can also issue legal-tender notes against commercial paper of a aualified class.
It will be observed that the Bank of Germany also carries a large volume of quick
assets. Thus the Bank of Germany, like the Bank of England and the Bank of
France, holds its reserves liquid and always available for loaning for commercial
and industrial needs.
536
BANKING AND CURRENCY.
Bank o f France.
B alance Sheet , D ec . 31, 1908.
[Francs converted as 25=£1.|
LIABILITIES.
ASSETS.
Capital of the bank.............................
Reserve and profits in addition to capNotes payable to bearer in circulation
(head office and branches)...............
Drafts.................................................
Current account with the treasury___
Current accounts and deposit ac
counts:
Paris......................... £22,780,727
Branches..................
2,721,524
Dividends unpaid, etc
£7,300,000 Coin and bullion at Paris and at the
branches......................................... £175,401,607
1,700,774 Bills due yesterday to be received
this day..........................................
1,757
197,972,403 Amount of bills:
914,397
Paris.......................... £9,920,192
7,199,491
Branches.................. 18,886,626
--------------28,806,818
Advances on securities:
Paris......................... 6,332,341
Branches.................... 14,478,603
25,502,251
--------------20,810,944
1,876,386 Advances to Government (laws of
June 9, 1857; June 13, 1878; Nov.
17,1897)..........................................
7,200,000
Government stock reserve fund........
519,230
Disposable funds, Government stock.
3,985,234
Immovable funds, Government stock
(law of June 9,1857).......................
4,000,000
Amount appropriated to special re
serve...............................................
336,298
Office and furniture of the bank and
buildings at the branches, etc........
1,403,814
242,465,702
242,465,702
[N ote .—All per contra entries, as those of the notes of the banks held b y themselves, etc., are omitted
soas to show the real position of the accounts.]
This table shows that the Bank of France carries 88 per cent in coin against notes,
the coin including both gold and silver, however, and carries 75 per cent of coin
against notes and deposits. Its authorized issue of notes is 5,800,000,000 francs, or
£232,000,000, which leaves a margin of over £35,000,000 sterling, or $175,000,000
margin of notes, besides the quick assets which it constantly carries, just as the Bank
of England does.
The need for large cash reserves in France is due to the fact that the check system
(currency) against deposits is not developed in France as in England and in the United
States
Bank o f the Netherlands.
B alance Sh ee t , Ma e . 31, 1909.
[Guilders converted as 12=£1.)
LIABILITIES.
ASSETS.
Capital.................................................. £1,666,667
Reserve................................................
435,955
Notes in circulation.............................. 22,798,206
Transfers..............................................
173,200
Current accounts............................... ..
539,849
Discount on—
Inland bills.....................................
10,521
3,060
Foreign bills...................................
Sundry liabilities..................................
59,598
Net profit for distribution....................
90,360
Coin, bullion, etc................................ £13,665,502
Inland bills.........................................
3,514,247
Foreign bills........................................
1,550,309
Loan accounts.....................................
4,144,246
Advances on current accounts............
1,882,021
Investments:
Capital..........................................
332,662
Reserve.........................................
432,708
Sundry assets, buildings.....................
255,721
25,777,416
25,777,416
[N ote .—A ll per contra entries, as those of the not' s of the banks held by themselves etc., are omitted
s
so as to show the real position of the accounts.]
This bank carries gold against its notes of 58 per cent and gold against notes and
deposits of 57 per cent, its deposits being ' rery small.
537
BANKING AND CURRENCY.
National Bank o f Belgium.
B alance Sh eet , D ec . 31,1908.
[Francs converted as 25=£1.)
LIABILITIES.
ASSETS.
Capital paid up..................................... £2,000,000
Reserve fund........................................ 1,444,899
Notes in circulation.............................. 32,275,122
Current accounts.................................. 4,028,662
Stamp duty, share of profits due to the
Government, employees’ superannua
tion, provident funds, dividends due,
etc..................................................... 1,029,776
Specie and bullion................................ £6,326,529
Bills discounted (bills in Belgium,
£19,738,332; foreign bills, £7,421,639;
total, £27,159,971).............................. 27,159,971
193,849
Securities due for collection..................
Advances on Government securities__ 2,056,765
Government and reserve fund securities 3,418,343
Securities for current accounts, etc....... 1,623,002
40,778,459
40,778,459
[N ote .—A ll per contra entries, as those of the notes of the banks held b y themselves, etc., are omitted
so as to show the real position of the accounts.l
The Bank of the Netherlands carries 58 per cent of gold against its notes and 57
per cent of gold against its notes and deposits. This bank only carries a very small
line of deposits.
The National Bank of Belgium carries 19 per cent of gold against its notes and 17
per cent of gold against its notes and deposits.
The three great banks of England, France, and Germany, as above mentioned,
practically provide the gold accommodation needed by western European commerce,
the two latter banks, however, serving a useful local purpose.
T
a b le
I .—Rate o f discount— Number o f changes in each year at the Banks o f England, France, Germany, Holland (1844-1909), and Belgium (18511909.)
Bank of England.
Bank of France.
Bank of Germany
Bank of Holland.
Bank of Belgium.
Year
Rise.
1844....................................................................
1845.........................................................
1846.....................................................
1847............................................................
1848.........................................................
1849..............................................................
1850..............................................
1851..................................................
1852..............................................
1853............................................................
1854.........................................................
1855.......................................................................
1856.........................................................
1857.........................................................................
1858.......................................................................
1859............................................................
1860.........................................................
1861.....................................................
1862................................................................
1863.............................................................................
1864................................................................
1865................................................................
1866..............................................................................
1867.................... .............................................................
1868................................................................................
1869..................................................................................
1870...........................................................................
1871..................................................................................
1872..................................................................................
1873...........................................................................
1874..................................................................................
1875..................................................................................
1876..................................................................................
1877................................................................................
1878..................................................................................
1879..................................................................................
1880...................................................................................
1881..................................................................................
Fall.
Par ct.
P er ct.
Total.
Rise.
Fall.
Total.
Rise.
Fall.
Total.
Rise.
Fall.
Total.
P er ct.
P er ct.
P er ct.
P erct.
P er ct.
P er ct.
0
0
Per ct.
P er ct.
P er ct.
Per cf.
0
0 )
(*)
(*)
0 )
0
0
1
1
2
i
2
1
6
3
3
9
3
1
1
1
1
(l)
(1)o
6
1
4
2
6
1
4
3
6
2
8
3
3
3
8
2
8
3
4
8
8
8
7
5
9
3
2
3
4
4
9
(l)
0
2
0
2
8
1
4
0 )1
(>)
0
0
i
(l)l
2
1
7
6
6
10
10
y
4
y
2
1
W
3
y
0 )
(*)
(*)
0
0
0
(*)
(*)
0
0 ) 1
(1)
y
t1)
(l)
(*)
0
(*)
0
V)
(1)
P er ct.
0
(2)
(’ )
(*)
0
0
2
8
6
(1) i
1
i
y
(l) l
1
1
i
1 2
1
6
4
0
0
G
6
1
7
()
1
1
2
2
2
(,)i
3
3
1
1
1
1
2
2
2
12
1 2
6
(l)
i
3
6
9
2
6
3
3
6
(i) 1
\r) „
1
2
0)
y
8
2
1
3
2
1
1
1
2
( , ) 1
1
0
1
1
( ) 2
2
2
2
5
(‘ )
P er ct. P er ct.
(*)___
0
i
( ) i
( ) i
0)
1
1
cl
10
o)1
(l)
6
1
(l\
i
2
5
7
2
Total.
1
0
1
12
8
11
6
2
2
4
3
5
15
16
14
3
y
1
2
5
12
1
(I) 2
3
i
2
6
(*)
0
............
1
Fall.
(J)
(*)
(’ )
0
0
(’ )
0
2
1
1
1
1
4
2
2
2
8
1
6
41
i
(1 )1
1
l
2
7
9
14
24
13
5
W 2
0
0
(1 )1
1
1
11
11
1
1
1
1
1
1
1
0
0
5
13
7
7
4
3
4
5
11
6
1
(I )1
m
0
0)
1
Rise.
W
y
0
n
9
17
9
9
2
y
1
(»)
1
1
1
4
3
2
1
1
3
3
o)
3
4
7
1
1882 ................................................................................
1884 ................................................................................
1885
.............A ...........................................................
1887
1903 .
1904
1905
1906
1907
5
3
4
5
4
7
7
7
7
7
2
4
4
4
5
2
3
4
1
2
1
1
9
8
11
12
3
4
6
2
1
6
(l )
^ 3
6
12
2
(!)
13
G
)
4
3
2
5
4
6
6
6
3
3
2
2
2
1
2
6
3
7
2
6
6
241
443
2
4
4
‘ No change.
6
2
3
(i)
(!)
0 )
(l)
g
(i)
^
2
G
)
(V)
G
)
(*)
G
)
G
)
(!)
G
)
(i)
0 )
0
1
2
1
4
)
2
2
2
1
1
2
(1)
1
2
2
2
2
2
(i)
(!)
1
1
0
1
)
G
)
G
)
1
G
)
1
2
3
0
G
)
(1)
(!)
(1)
0)
G
)
G
)
(!)
4
3
(i)
2
2
2
2
G
)
50
1
1
1
1
(9
G
)
65
4
4
4
(!)
0)
G)
0)
1
3
(!)
(1)
)
(»)
)
0
)
0)
115
G
)
2
1
3
1
1
2
3
5
2
2
4
3
4
G
)
G)
(1)
(1)
0
)
4
3
2
7
3
4
3
2
1
3
2
91
105
2
1
7
5
4
)
4
(!)
G
)
4
3
1
6
G
)
2
2
1
1
3
4
3
4
1
1
G
)
G
)
l
l
2
6
3
4
2
G
)
G
)
G
)
G
)
1
1
2
G
)
l
l
4
G
)
1
G
)
l
l
l
G
)
1
1
2
196
94
94
188
86
i Operations commenced in 1851.
G
)
G
)
2
l
l
l
6
2
2
2
2
2
G ,
)
G
)
3
1
3
3
5
106
192
1
6
2
1
1
G
)
G
)
2
5
3
3
1
G
)
1
l
3
3
3
3
4
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)
3
4
1
l
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2
10
1
2
6
4
G
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C
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6
1
1
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1
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)
1
2
2
6
3
3
3
8
0
)
2
3
2
1
1
1
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0)
0
4
4
3
3
5
1
2
2
6
1
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(D
2
2
2
3
4
1
1
4
2
1
2
0
G
)
G
)
(>)
G
)
6
6
202
...........................................................
...........................................................
G
)
3
1
2
3
1
539
3
2
4
4
..................................................................
1909
4
3
1
6
6
BANKING AND CURRENCY.
..............................................................
1 * 8 8 ................................................................................
1889 .................................................................................
1890
1891
................................................
1892
............................
1893
...........................................................
1894
.................................
1895
1896
.................................
1897
.........................................
1898
1899
...................................
1000
.....................................
1901
3
5
3
540
Bank of England.
Year.
Lowest Highest Fluctu Lowest Highest Fluctu Lowest Highest Fluctu Lowest Highest Fluctu Lowest Highest Fluctu
ation.
ation.
rate.
rate.
ation.
ation.
rate.
rate.
ation.
rate.
rate.
rate.
rate.
rate.
rate.
Per ct.
(l)
21
3
3
3
21
21
(')
2
2
5
31
41
51
21
21
21
Per ct.
(»)
31
34
Per ct.
(*)
1
1
8
5
5
3
3
( l)
2
21
5
51
7
7
10
8
41
l
0
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1
3
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4'
5!
2
3
6
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31
5
2
3
1
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8
6
9
7
5
3
4
3
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2
2
21
21
2
3
3
21
2
2
2
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21
10
ft r
31
3
41
1
1
2
6
P er ct.
( l)
1
(‘ )
4
0 )
‘
(l)
0 )
3
3
4
4
5
5
3
3
31
41
31
31
41
3
3
31
3
4
5
7
9
6
6
5
5
6
5
3
i
21
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(>)
21
5
5
5
4
6
31
4
3
3
4
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1
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3
2
2
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Per ct.
0 )
oj
(»)
5
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1
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4
4
5
6
6
9
5
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41
7
5
7
8
5
5
3
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6
6
6
7
5
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4
3
3
3
31
Per ct.
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1
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1
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1
0
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1
1
1
1
2
1
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11
31
34
2
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1
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31
1
1
2
1
(l)
1
1
1
1
1
Per ct.
4
4
4
41
44
4
( l)
<»)
4
4
4
4
5
4
4
(')
1
«)
4
41
4
4
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(»)
4
4
4
4
4
4
4
3}
4
4
3
4
P er ct.
41
5
5
5
5
41
(l)
1
(l)
5
5
41
Per ct.
1
1
1
0
C
1)
1
1
2
1
21
21
1
(>)
(')
(')
1
21
0
0
21
2
)
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0
71
61
5
3
5
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1
8
4
5
5
1
1
2
2
2
51
5
41
51
4
4
3
)
1
2
6
6
6
6
21
1
1
1
6
(»)
(»)
C
1)
41
7
7
9
(l)
(l)
5
Per ct.
(*)
21
11
1
11
11
(»)
3
4
4
3
0 )
(l)
3
31
3
41
3
41
21
24
21
3
3
21
4
31
3
(l)
V)
3
3
(»)
P er ct.
0 )
51
51
5
5
3
” 21
(l)
( ')
3
0 )
4
51
7
7
( ')
0 )
4
4
5
7
Per ct.
( ')
3
11
1
2
1
1
0
0
)
)
1
(l)
1
1
11
3
4
0 )
(l)
1
1
2
21
6
3
7
41
3}
5
21
2
1
21
6
3
4
5
61
5
31
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4
4
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1
21
21
11
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31
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3
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3
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21
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21
21
21
31
31
3
21
0
1
1
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Per ct.
(!)
(*)
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(*)
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(*)
(*)
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3
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21
21
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3
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*)
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51
5
4
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(!)
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(*)
(*)
(*)
(*)
(*
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l
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1
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6
6
6
3
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0 )
6
51
51
7
6
41
31
31
41
4
31
X
2
2
1
1
2
1
3
3
1
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(l)
31
3
3
31
24
1J
1
1
2
11
1
BANKING AND CURBENCY,
1844...............
1845...............
1846...............
1847...............
1848...............
1849...............
1850...............
1851...............
1852...............
1853...............
1854...............
1855...............
1856...............
1857...............
1858...............
1859...............
1860...............
1861...............
1862...............
1863...............
1864...............
1865...............
1866...............
1867...............
1868...............
1869...............
1870...............
1871...............
1872...............
1873...............
1874...............
1875...............
1876...............
1877...............
1878...............
1879...............
1880...............
Bank of Belgium.
Bank of Holland.
Bank of Germany.
Bank of France.
2i
2
2$
2
G
)
2
2
21
3
3
3
3
3
3
21
31
4
21
21
i No change.
5
6
5
5
5
5
5
5
6
6
5
31
5
3
(1),
4
4
4
6
6
5
4
4
31
4
6
7
6
5
21
3
2
3
3
3
3
3
31
3
21
11
21
1
31
31
3
G)
of
G)
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3
G)
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l>
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5
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6
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1
2
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* Operations com m enced in 1851.
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21
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21
21
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l
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31
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3
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6
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5
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4
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6
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1
1
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11
l
l
1
l
l
2
3
1
541
21
3
3
2
2
2
2
2
2*
3
BANKING AND CURRENCY.
1881.
1882.
1883.
1884.
1885.
1886.
1887.
1888.
1889.
1890.
1891.
1892.
1893.
1894.
1895.
1896.
1897.
1898.
1899.
1900.
1901.
1902.
1903.
1904.
1905.
1906.
1907.
1908.
1909.
542
T
BANKING AND CURRENCY.
able
I II.—Rate o f discount, 1844-1909— The number o f days at each rate arranged
from the lowest rate to the highest.
Bank of
France.8
Bank of
England.1
Rate.
3,409
28
3,599
5,859
1,921
3,772
608
2,195
263
975
91
633
143
1
151
246
80
158
26
92
11
41
4
26
268
95
141
11
4
6
23,857
1,000
1 Lowest
* Lowest
8 Lowest
4 Lowest
6 Lowest
T
able
Bank of the
Netherlands.4
National Bank
of Belgium.4
Num
Num
Num
Num
Num
ber of
ber of
ber of
ber of
ber of
Num
Num
Num
Num
days
days
Num
days
days
days
ber of per cent ber of per cent ber of per cent ber of per cent ber of per cent
days. of total days. of total days. of total days. of total days. of total
(total=
(total«■
(total»
(total=
(total—
1,000).
1,000).
1,000).
1,000).
1,000).
2J per cen t..............
2\ per cent..............
3 per cen t................
3 f per cent..............
4 per cen t................
4£ per cent..............
5 per cen t................
54 per cen t..............
6 per cen t................
Total.............
Imperial Bank
of Germany.-1
I Y . — Rate
2,735
115
1,328
56
2,579
7,828
2,060
4,579
353
2,061
120
1,170
8
286
21
41
16
108
329
86
192
15
86
5
49
5,058
8,013
3,737
2,167
811
1,823
375
260
150
135
212
336
157
91
34
76
16
11
6
5
3,169
9^412
2,965
3,416
698
944
378
540
23,857
1,000
23,857
1,000
21,549
rate
rate
rate
rate
rate
12
1
2
3,073
644
12,192
1,626
4,094
707
970
72
269
110
37
63
129
27
511
68
172
30
41
3
11
5
1
2
23,857
1,000
147
437
138
159
32
44
18
25
27
1,000
2 per cent; highest rate 10 per cent.
2 per cent; highest rate 9 per cent.
3 per cent; highest rate 9 per cent.
2 per cent; highest rate 7 per cent.
2£ per cent; highest rate 7 per cent.
o f discount, 1844-1909— The number o f days at each rate, arranged from
the highest number of days to the lowest.
It will thus be seen that these great banks holding the national reserves have been
able to furnish commerce with a very low rate of discount for nearly all the time and
only occasionally have been compelled to raise the rate to a high point.
These low rates illustrate the enormous value of these great banks to European com
merce and the urgent necessity for action by the United States along similar lines.
(Thereupon at 12.55 o’clock p. m. the committee took a recess until
2.30 o’clock p. m.
BAN KIN G AND CURRENCY.
543
AFTER RECESS.
The C h a i r m a n . Prof. Sprague, the committee wanted to give 30
minutes to Mr. Claflin, if that will be agreeable to you. He has to
go away this evening.
Prof. S p r a g u e . That will be entirely agreeable to me, Mr. Chair
man.
STA TE M EN T OF JOHN CLAFLIN, OF H. B. CLAFLIN CO.,
N E W YOKK CITY.
Mr. C l a f l i n . In the first place, I would like to say that I agree
with the recommendations of Prof. Sprague, especially with regard
to the question of removal of the class B directors and the expediency
of havmg the chairman of the advisory committee sit with the
Federal council.
The C h a i r m a n . Or the reserve board, as they call it ?
Mr. C l a f l i n . Yes. Personally I should very much like to have
the Federal board composed of three members to be appointed by
banks, leaving three to be appointed by the President, and the Secre
tary of the Treasury having practically the casting vote. I think
such men as Mr. Marshall, to whom we listened this morning, and
Mr. Wade, whose name was mentioned this morning, and any of the
notable bankers of the country, even if we did not go so far as New
York and took a man like Mr. Hepburn, whom you have seen here
and who is as clear-headed and as fair-minded a man as I know. It
seems to me that their expert knowledge would be of great value to
the Government appointees and would probably enable the Govern
ment appointees to solve some questions that might be difficult for
them to solve without a pretty extensive knowledge of banking. If
they, however, should not be obtainable, I should be very glad to
have the chairman of the advisory council sit with the other members.
1 think that would effect a very large part of what I would like to see;
that is, the discussion of these current topics by some one who would
have really expert knowledge of the matter.
Prof. Sprague’s suggestion that 4 per cent of the reserves of the
country banks should be left continuously with the city banks rather
than to be put finally apart in their own vaults and apart with the
Federal reserve banks, seems to me a wise suggestion.
I was thinking on that line myself, and I had in mind suggesting
2 per cent; but I feel that it is very desirable to make the country
banks feel that as far as possible the facilities which they now have
are not withdrawn from them. Of course it is going to be a pretty
serious matter for all these country banks to determine what to do.
If a large part of them should determine that they would rather
make a sacrifice on their bonds than go into this proposed Federal
issue, it would mean that the issue would be very much crippled and
could hardly expect to do the great work which I think it will do if
there should be a hearty cooperation of the banks.
And in that line, too, it must be borne in mind that if a large part
of the banks would not come in, then there would be a contraction
of the circulation which would be a very serious problem, indeed.
I can see no way in which that could be met, because if a half of the
I
544
BANKING AND CURRENCY.
750 millions were to be liquidated— that is, if those notes were to be
withdrawn from circulation within a year— the question would be a
very serious one, indeed; and while in a way it is a fact that the banks
are not suffering very much by selling their Government bonds, and
that is to a certain extent an inducement, a very great inducement,
for them to come in, yet, on the other hand, if a great many of them
should see that this association could hardly be formed without their
cooperation, and they should stay out for this year, the situation
mignt be serious, and I would suggest from that point of view that
it would be better that the banks, though they would have to forego
the other privileges of the national bank within a year, should be
allowed for as long as three years— two years more— to keep their
circulation. That would mean a slower liquidation of the Govern
ment bonds.
The Ch airm an . Y ou understand this reduction is a maximum of
35 millions per annum?
Mr. Claflin . N o; I did not understand that. I am very glad
to know that.
The Chairm an . It is a maximum possibility of 35 millions per
annum.
Senator B r i s t o w . Suppose they cease to be United States banks ?
Mr. Claf lin . That is the point. Suppose they cease to be United
States banks. Then they are compelled to give up the circulation at
once.
The Ch airm an . Yes; they would do that. They would give up the
circulation if they did not come in.
Mr. Claflin . That is what I am afraid of, not from their stand
point; but if they can not afford to make the losses, it is their question
and not mine. But as a merchant, as a member of the general com
munity, I should suffer very much if those banks, or half of them,
should elect not to come in and should be compelled by the terms of
this law to give up their circulation within a year. It seems to me
that would be nothing less than a calamity; and as I look at it I do
not for the moment see any reason why that one year for them to give
up their circulation should not be extended to three years. The banks
would suffer the loss of going out, and the privileges that the national
banks have otherwise would be denied them. But I think for the
benefit of the community they should be allowed to continue the
circulation for three years. That would make a slower liquidation of
the Government bonds, and, meantime, probably under this bill a
considerable part of the 375 millions could be put out in some other
form.
I look at it, of course, in a different way from the bankers. I am
looking at it entirely in its effect on the whole community, the mercan
tile community especially.
The Ch airm an . That is the point of view we especially want to get
from you, Mr. Claflin.
Mr. Claf lin . And so it has seemed to me that there is a serious
danger, and it seems to me, too, that perhaps in the shifting of the
reserve accounts it might be better to mako the changes a little more
slowly. For instance, of course the country banks are the most
important of all. The present requirement is that within 60 days
and up to 14 months, 3 per cent of their reserves-----Senator P o m e r e n e . What page are you reading from, please ?
BANKING AND CUBBENCY.
545
Mr. Claflin . I am reading, now, from page 61. My suggestion
would be that instead of 3 per cent, only 2 per cent should be required
at first, and that that should be increased at the end of 36 months to
4 per cent instead of to 5 per cent, as is proposed here. And after 36
months it should be, as is suggested here, 5 per cent. It would simply
make it slower, but arrive at the same conclusion.
And then on deposit in the reserve or central reserve city banks it is
now permitted that 4 per cent should remain up to 14 months. I
would increase that to 5 per cent, taking the gold out of the Federal
banks and putting it back into the city banks, and within from
14 to 36 months I would have a gradual reduction. That is,
in one year it would be up to 4 per cent, the next year to 3 per
cent, and the next year to 2 per cent. There I should like to leave it,
although if it were thought better not to do so, I would have it go
from two to one and then from one to nothing, taking two additional
years.
My whole thought is that it is most important from every standpoint
that this new act should be put into operation in such a way that there
will be no violent suffering, there will be no great loss over it. There
is a very interesting compilation here in regard to the results at the
end of 36 months. That is on page 65. I think that compilation
would be correct if it were not for the question of the timidity of
very many people, especially, we will say, bankers, when the future
is uncertain. This computation is made on the general theory that
there would be a pretty even division of the reserves among the
banks; that the banks, in other words, would have it divided so that
no one bank would hold very much more than it was compelled to
hold.
In point of fact, whenever the bankers feel somewhat uneasy,
some of the bankers, instead of trying to help a community, go to
work to strengthen themselves.
Senator P om erene . That is pretty general, is it not ?
Mr. Claflin . It is pretty general; yes. I knew several country
banks, after 1907, who boasted that they had at the end of the panic
a reserve of 50 per cent. They had broken a good many of their
customers in doing that, but it was a question of self-preservation.
Happily, under this act, when it is thoroughly in operation, there
should be no such necessity. I believe they will all feel easy, and in
the beginning, as it is going into operation, while there may be some
uneasiness, because they are somewhat uncertain as to what will
happen, I think we will have to count that some of them are going
to De abnormally desirous of keeping stronger than the others, keeping
stronger than is necessary, and I think we must take that human
element into consideration and provide, as I have suggested, for the
first 60 days and perhaps for the first year; and then I would make
a gradual taking away of the reserves from the city banks and depos
iting them in the Federal banks in such a way and at such times that
it would look perfectly clear to everybody who studied it that it
could be done and there could not be any difference of opinion
about it.
I do not know, gentlemen, that there is anything else that I want
to say to you. I do want to express to you my approval of the
general principles of the bill, and I think that I have indicated to
you the things that I should like to see changed. I myself would
546
BANKING AND CURRENCY.
very much rather have these notes issued by the banks than by the
Government. I feel that there is a sentimental as well as a practical
reason why that would be better, because in times of stress if there
is any doubt about the Government itself, it has a very much more
harmful effect than a doubt about the bankers. But I do not think
the workings of the bill will be materially affected by what may be
done in that regard.
Senator P om erene . In other words, your criticisms go to the
transition from one system to the other, rather than to the ultimate
effect of the system proposed ?
Mr. Claf lin . Y es; that is what I am commenting on now. I
made, in the first place, some suggestions following Prof. Sprague’s
remarks of this morning which seem to me to be thoroughly sound.
Senator B ristow . Mr. Claflin, what defects do you think our
present currency system has ?
Mr. Claf lin . The great defect is the lack of flexibility.
And, by the wa^, right in that line, I think that if we had a Federal
board partly consisting of bankers they would be very much more
certain to contract the currency when it ought to be contracted
than if they were appointed mainly not from bankers. Bankers
appreciate, perhaps, more than anybody else how important it is to
contract when things are easy, so they may be prepared for expan
sion when there is stress.
Senator B ristow . Lack of flexibility. The chief purpose of this
legislation is to provide, then, means by which credit can be extended;
currency provided when there is stress ?
Air. Claflin . Yes, sir.
Senator B ristow . W hy could not that be done without breaking
up this present currency system which we have and taking the
chances on disturbance?
Mr. Claflin . It could be, perfectly well.
Senator B ristow . H ow would you suggest that we go about it if
we undertook to do that ?
Mr. Claflin . I think it would be a simple matter. I should leave
the present currency undisturbed, just as it is, and I should authorize
an association, various associations of banks, if you please. I should
personally like better one great association, but if there is any ob
jection to that, then a series of associations, probably the fewer the
better, and give them certain rights under Government supervision
to rediscount for all the national banks of the country. I am throw
ing this out just as a thought, as it comes to me on this question, but
I have no doubt in my own mind that if, for instance, there were three
or five or seven or whatever the number, the fewer the better, I think,
and these associations were made up from the banks of the country,
and if those banks had the right, subject to strict Government super
vision, to discount— that is, to rediscount— for the member banks a
limited amount, I think there would be afforded then an additional
currency that would have all those elements of flexibility, because
this must always be borne in mind, that you never want the whole
currency flexible. That is not important. It is only the superficies
of it, the outside, a certain rim, that is to be flexible, and that is all
we want.
Senator B ristow . If I understand it, these associations would per
form the functions, to a certain extent, that the clearing house aoes
BANKING AND CURRENCY.
547
now, and that you would rather legalize a clearing house certificate,
or something after that order, in times when it was necessary to
resort to that ?
Mr. Claf lin . My idea would be that this should always be in op
eration. These associations might be called clearing houses, for they
would be very much of that kind. They would be associations of
banks, and these banks would have the right to rediscount for their
member banks. They would have the right any time, and it would
be used not always in times of stress. I should think it ought to be
used every autumn to an extent, and it ought to go out every Febru
ary or March. Every year it should be used instead of having to
draw from New York and Chicago, as they have now, some 75 millions
or possibly 100 millions of legal money and cause in that way a very
great contraction of credits m all the cities, indeed everywhere, be
cause all the smaller cities depend more or less on the larger cities to
cause a contraction right in the fall of the year when the merchants
want the money most, and at the same time crops have to be moved.
If we had such associations as I suggest, and they had the right to
rediscount under Government supervision, they could rediscount at
that time for the farmers and people who have the crops to move,
and there would be no better security than that.
Senator P om erene . H ow would you capitalize this association?
Mr. Claf lin . It really does not make very much difference. They
would be perfectly good, being made up of these associated banks.
I would capitalize them for a moderate amount.
Senator P om erene . H ow would you organize them?
Mr. Claf lin . Allow the banks to come in; allow them only to
come in ratably, you know.
Senator P om erene . Wherein does that differ from the regional
system here ?
Mr. Claflin . It does not differ from it, practically. The only
thing is this is supplemental and this does not consider the doing away
with the present bond-secured currency. I should simply leave that
and make this a very much less important association. You see
now it is proposing a very extensive reform in the currency. There
would be a very much slower effect, but it would be on top; it would
be a very much smaller association.
Senator B ristow . That would be dealing with the flexible part of
it. It would be providing a flexibility which it does not now have
by supplementing the present system.
Mr. Claflin . The present change is basic, and that would be simply
supplemental. They would be very much less important institutions,
but they would perform a certain function, which would be additional
to what is now performed.
Senator B ristow . A s to the additional currency that might be
issued, would you have that currency issued by the Government and
furnished these associations?
Mr. Claflin . N o ; I would have that issued by the banks entirely
on their responsibility.
Senator Pom erene . The banks, or associations?
Mr. Claflin . These new associations.
Senator P om erene . Pardon my interruption, Senator.
Senator B ristow . That is all right. W hat would be the nature of
this currency, then, that would be issued ?
548
BANKING AND CURRENCY.
Mr. Claf lin . Bank notes.
Senator B ristow . By the associations, or by the banks ?
Mr. Claflin . By the association.
Senator B ristow . And that would be of temporary use and then
automatically retired ?
Mr. Claflin . Yes; we would make very strict requirements that
no bank should pay out any other bank’s notes, and that in itself would
compel the retirement. The banks would not hold the notes. They
would be no good to them excepting to pay debts with. They could
not be held as reserve; they would go back to the bank that issued
them and have to be paid. I should have strict requirements of re
demption at all these various centers.
I really ought, perhaps, not to take up the time of the committee
with simply throwing out these answers that are made on the spur
of the moment and without very much thought.
Senator B ristow . I understand you do not take very kindly to
the Government issuing this money?
Mr. Claflin . N o ; I very much prefer the banks to issue it.
Senator P om erene . Will you allow me to ask a question there,
Senator ?
Senator B ristow . Yes.
Senator P om erene . Y ou say you much prefer the banks to issue it ?
Mr. Claflin . Yes.
Senator P omerene . I s not that really a matter of sentiment
rather than anything else ?
Mr. Claflin . I think to some extent it is, because in the last
analysis really the Government does stand behind it; but I think
there is this great difference, that in the case of stress and there comes
to be any question of the Government defaulting, we get such a condi
tion as we had in 1893 when the fears that the Government would
cease paying gold on greenbacks caused alarm that has hardly ever
been equaled in this country. If it was simply a question of the
banks ceasing to pay, the alarm would be very much less.
Senator Shafroth . But the reserve was only 100 millions for the
346 millions of greenbacks, was it not ? And that was afterwards
increased. There has not been a single flurry since that time. There
has not been any redemptions at all, they tell me.
Mr. Claflin . That is perfectly true, and it is perfectly true that if
the Government issues any money, if it has a sufficient redemption
fund, there can be no question about it.
The Chairman . And we have really now 1,100 millions of gold
warehoused against it, and if anybody wanted gold, that would be
available before they needed to call upon the Government reserve
fund against the greenbacks.
Mr. Claflin . Of course, the difficulty about that, as I understand
it, is this, that those warehouse receipts are already in the hands of
various people who may not want to part with them. The Govern
ment can not use that gold.
The Chairm an . Oh, no; I was only speaking of the public being
already supplied with these certificates upon which they could get coin
or bullion gold if they really desired it for shipment.
Mr. Claflin . Oh, perfectly for shipment.
Senator Shafroth . They are in circulation pretty generally now,
are they not, among the people ?
Mr. Claflin . T o some extent.
BANKING AND CURRENCY.
549
Senator Siiafroth . I drew out some money the other day, and I
do not know but what it is all gold certificates. There is a gold note
[indicating], there is a gold note, and there is one. All of them are
gold notes.
Mr. Claflin . But I think the difficulty in 1893 was not that the
people needed gold, but that they were afraid they could not get it.
As soon as they found out they could get it, it was all right. The
most astonishing thing occurred in 1893. Within two days after Con
gress had passed the silver purchasing repeal bill there was plenty of
money everywhere. The clay before there was no money to be had
at any price. Twenty-four per cent was freely paid for money, per
annum, and that in a mercantile way, too— mercantile paper;
choice paper was offered at 24 per cent per annum. It was not a
stock-exchange proposition at all. And two days after that same
money was freely offered at 8 or 9 per cent, and in another week it
was offered at 6 per cen— any amount of it. And within a month
after it was down to 3 per cent, or a month and a half after.
The Ch airm an . The Chair must remind the committee that Mr.
Claflin’s time has expired.
Senator B r isto w . Can not we ask more questions if he has time?
The Ch airm an . The committee itself limited the time.
Senator B ristow . But I do not understand that we are limited
here to the number of questions we can ask.
Senator Shafrotii . The only thing is, Senator, we have got some
people here who are waiting to be heard.
Mr. Claflin . I do not want to impose on the other gentlemen.
Senator B ristow . I must say that I object to not being permitted
to interrogate the witnesses.
The Ch a irm an . The committee is in control of its own time, and
the committee assigned 30 minutes for hearing Mr. Claflin.
Senator B ristow . I did not hear anything about the committee
doing that.
The Ch airm an . Y ou were here: I do not know why you did not
hear it. The committee can easily adjust that. But Prof. Sprague
and Mr. Berry are both here and they expect to be heard this after
noon.
Mr. Claflin . I feel that I am really imposing on these gentlemen.
Senator B ristow . N o. If anybody is imposing on them, it is
myself. Have we not plenty of time ?
The Ch a irm an . W e have, but Mr. Claflin wanted to leave this
evening, and we had Prof. Sprague yield to him in order to give him
that opportunity.
Mr. Claf lin . Thank you very much, gentlemen. I appreciate
your courtesy.
The Ch a irm an . W e are very much obliged to you, Mr. Claflin.
Now, let us come to some understanding.
Senator B r isto w . I think we had better. There is no use in my
wasting my time here undertaking to acquire information in regard
to this bill, when we have a witness of this kind who understands the
business feelings and needs of the country, and then not have an
opportunity to ask him questions. That is the objection I make.
The Chairm an . The rights of the witnesses themselves should be
taken into consideration. Prof. Sprague, of Harvard, has been here
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BANKING AND CURRENCY.
for 10 days. He went home and came back, and he has been inter
fered with three or four times. Mr. Claflin having only a limited
number of minutes that he could give us, we persuaded Prof. Sprague
to wait. It was not with any view to cutting you off, Senator. The
matter was submitted to the committee, and the question was asked
should we give this time to Mr. Claflin, and it was agreed that we
should, and having done that it is the duty of the chair to remind
the committee when the time arrives. The committee has the right
then to proceed with another witness, if they want to. The matter
is entirely at the will of the committee. I am not disposed to make
any arbitrary suggestions or rules about it. I only want to be fair
to the men who have been good enough to come here to give us all
the information they can.
Senator S iiafroth . Whom shall wa call now ?
The Chairm an . We ought to say what we are going to do. I am
perfectly willing to leave it to the committee.
Senator B ristow . I am perfectly willing that the committee adjust
itself to the convenience of the gentlemen, provided that if we do not
get through they will come back and let us finish up at some other
time. I think it would be very much better to get through with one
witness before we take up another, and try to arrange so that the
gentlemen who come can remain until we get to them, and not have
so many of them at one time.
Senator Siiafroth . But Mr. Claflin was not really entitled to go
on the stand at all at this time. He was put on the stand on the
plea that he could get through in 10 minutes. W e gave him 30
minutes.
Senator B ristow . I think it is a good deal of a farce to call a man
of Mr. Claflin’s importance and with his relations to the business
interests of this country, and then give him only 10 or 30 minutes.
Senator S hafroth . That is all he asked.
Senator B ristow . That is not all I ask.
Senator Siiafroth . I am perfectly willing that you should have
him back here.
The Chairman . W e could ask him to come back here with perfect
ease and with perfect propriety.
Senator B ristow . That is the objection I make, and I think it is
a most important thing. I do not look upon this as lightly as some
gentlemen seem to. I think it is the most important piece of legis
lation, by all odds, that this Congress will undertake, and I do not
believe you can take too much care.
The Chairm an . W e are all agreed on that, Senator.
Senator B ristow . And when we have men who have valuable infor
mation which we need in legislating upon this question I think we
ou^ht to exhaust every means that we nave to get such information.
The Chairm an . W e have pursued that course with the exception
of this one witness, and this witness had to go, he said.
Senator S hafroth . Let us take up some one else, then.
The Chairman . Take Prof. Sprague and ask him any questions you
wish to, and then we will take up Mr. Berry.
Senator B ristow . Anything the committee desires, just so we have
full opportunity to bring out the information.
BANKING AND CURRENCY.
551
STA TE M EN T OF PROF. SPRAGUE— Continued.
Prof. S prague . I have prepared a short statement regarding
Senator Shafroth’s bill and a statement regarding the AldrichVreeland Act, in response to a request from Senator Bristow.
If Senator Shafroth’s bill were passed in its present form it would
not add a single dollar to the existing amount of paper money in
circulation or reduce the amount of gold in the country. It would
provide in the course of time for a single issue of notes to take the
place of gold certificates, the national-bank notes, and the United
States notes. The total of these issues is something like two billions
of dollars. But it would require the conversion of only about 700
millions of the gold certificates to put back of all of the new issue,
the 50 per cent gold reserve provided in the bill.
When the process of converting the national-bank notes had been
completed we should have about 1,700 millions of notes protected
by a gold reserve of 850 millions of dollars. There would be no
more difficulty in continuing the redemption of these notes than
there is about continuing the redemption of the notes which they
are to replace; and that is no difficulty at all.
Presumably, in the course of the next 10 years, as during the last
10 years, we shall add considerably to the stock of gold money in
this country, because of the large current gold production of which
we, like other countries, will naturally acquire some share. I can
conceive, therefore, of no circumstances in which the issue of these
1,700 millions under the proposed arrangement would occasion any
serious difficulty. I think, however, the measure might be improved
in one respect if provision were made for a gold reserve of 55 per
cent, with the further provision that in case the reserve should fall
to 45 per cent the Government should then replenish the reserve by
the sale of its obligations, either long-term bonds or short-term
notes. It is wholly unlikely that in any circumstances this reserve
would drop from 55 to 45 per cent, for it would mean that something
like 150 millions or more of these notes would be redeemed; and it is
wholly unlikely that any such amount of gold would in any single
period be required for export purposes or otherwise.
If the reserve were placed, however, exactly at 50 per cent, it
might be frequently necessary for the Government to secure gold
elsewhere on account of a very slight amount of redemption.
There is a provision in this bill which I regard as wholly unneces
sary and also as calculated to discredit the notes, since it somehow
assumes that the notes to be issued are not an entirely satisfactory
circulating medium. I refer to the provision of the bill empowering
the Secretary of the Treasury to require banks to hold such propor
tion of these notes as a constituent part of their reserve as may be
deemed advisable. If this issue of notes needs any such adminis
trative protection as that, it is not a thoroughly sound, well-but
tressed issue. I think it quite undesirable to give the Secretary of
the Treasury such authority. If this bill were passed------The Ch airm an . After mentioning the bill you had better state
the number, otherwise it will be confused with the measure we have
been considering.
Prof. Sprague . Senate No. 3041. If this bill were passed, and
the conversion of various kinds of notes into a single issue were
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BANKING AND CURRENCY.
completed, our banking situation would be practically wbat it is
at the present time except that the national banks would no longer
be issuing the national-bank notes, but the difficulties which we have
experienced in the working of our banking machinery would remain,
neither affected for the worse nor for the better. This bill is a
purely monetary bill concerned with that part of the circulating
medium which there is every reason to suppose will be constantly
required for monetary purposes by the people. If attached to a
banking bill, it would be an obstacle to the passage of any measure
whatever, because there are a large number of people in this country
in whose minds are ever present the experiences of the country in
the seventies and the eighties, when our currency was redundant.
It is a measure which to my mind, if presented to Congress, should
be presented on its own merits, by itself. There would then be a far
better chance to convince the public of its merits than would be the
case if it is a portion of a measure which is already so complicated
that it is impossible in any short period of time to set forth its
merits.
That is all on Senator Shafroth’s bill.
Senator S hafroth . That is very satisfactory.
The Ch airm an . Now you have another one which Senator Bristow
asked you about— the Vreeland bill.
Prof. S prague . I have reexamined the Aldrich-Vreeland bill
and am of the opinion that the obstacles which prevent its being a
very serviceable measure are largely sentimental, but they are none
the less real on that account.
This measure when passed purported to be an emergency measure.
Bankers and the public generally look upon the resort to the powers
granted in the bill as an indication of a serious situation of something
bordering upon a panic. The notes authorized by the bill perhaps
could be put out without loss by the banks at the present time, but
they will not be put out because of this feeling not only among
bankers, but among the people generally. This suggests to my mind
the defect of purely emergency measures as contrasted with measures
along the lines of the Glass bill, which we have been considering.
The machinery set up by the Glass bill will be in operation con
stantly. There will not be so much business for the Federal reserve
banks in ordinary times as in times of moderate or great strain,
but the increase in business by the Federal reserve banks will not
be apparent to the general public. On the other hand, there is a
certain machinery provided in the Aldrich-Vreeland bill which will
only be set up on special occasions. It is therefore a little analogous
to clearing-house loan certificates in its sentimental effect, because
clearing-house loan certificates have only been issued on occasions
of serious crisis. The good effect of their issue is largely nullified
by the alarm which their very issue creates. And so with this bill.
I do not think that slight changes in the conditions under which
these notes could be issued, such as changes in the constitution of the
associations or changes in the character of the security to be deposited
or modifications in the taxation of these notes, would make any
appreciable difference.
Senator B ristow . What changes? What I asked was that you
suggest the changes to be made in it that would make it adaptable.
BANKING AND CUBBENCY.
553
Prof. Sprague . That is what I expected to do, but after looking
over the bill I came to the conclusion that the powers in the bill were
sufficient; that it is not through modification in the terms of the bill
that would make it appreciably more helpful than it has been in the
past. You can not overcome by slight modifications in its provisions
the sort of sentiment which I believe is the explanation of the failure
to use the bill, and the unwillingness of the bankers to use the bill. I
may be wrong in this opinion, but that is the conclusion at which I
have arrived. I think that probably any purely emergency measure,
however agreeable it may be made in its details, will not be used unless
the emergency is extreme.
Senator B ristow . Mr. Claffin suggested that if our present cur
rency system was left as it is, and a number of associations formed by
the bankers, these associations should rediscount for their members
and issue a currency in the nature of an asset currency, and that it
would take care of the desire for flexibility without disturbing our
currency system which is already in existence. Do you think these
associations provided for in this bill could be arranged so that they
could be organized and be in existence and used for the purposes sug
gested by Mr. Claffin, and in that way overcome the prejudice that you
are referring to ?
Prof. Sprague . That is conceivable. If the conditions of issue
were made so easy that it would almost be worth while to take out
these notes in ordinary times, it might be done. If, for instance, you
should set up an arrangement with the avowed purpose that it should
be used every year, in the autumn, we will say, and at other times if
there was a very moderate strain, it is conceivable that the bankers
might get in the way of using that machinery. I am, however, not
altogether certain that I should go along with Mr. Claflin in this
suggestion, which it is fair for us to recall he made rather in an
offhand fashion. I should be inclined to fear that if these associa
tions of banks were set up with power to rediscount and issue notes
pretty freely, they would issue notes pretty freely and that credit
would be undesirably expanded. I do not feel certain that these
more or less voluntary associations of banks with these wide powers
would handle these powers as carefully and wisely as a group of
regional banks, more or less under the control of a Federal reserve
board. No one can say that the scheme would not work well, but I
should feel a little less confident of good results than I should from
the kind of institutions proposed in the bill before us.
Senator B ristow . Y ou think the banks would be inclined to
inflate the currency under the system suggested by Mr. Claffin more
than under this regional-reserve system that is suggested in this bill ?
Prof. Sprague . I am inclined to think so.
Senator B ristow . W hy ? W hat makes you think that ?
Prof. Sprague . My observation is that the bankers in this country,
and indeed in other countries as well, in periods of active business
lend to the full extent of their lending power, whatever that may be.
The moderate contraction of the last 10 months would not, in
opinion, have taken place if the banks had held in their vaults say
a couple of hundred millions more of cash with the same deposit
liabilities that in fact they had. I believe if there had been 200
millions more of cash scattered about among the banks in this country,
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BANKING AND CURRENCY.
that instead of moderate contraction during the last few months
there would have been further expansion.
Let us suppose that we had had such voluntary associations of
banks with power to issue notes. They would have rediscounted to
a considerable extent during the last autumn. And I am inclined to
think that the notes which they put out would not have come back
for redemption; that they would have remained in circulation and a
Kttle of the gold certificates, of United States notes that are now in
the pockets of the people, would have drifted into the coffers of the
banks and would have made there a basis for further credit expansion.
I am not sure of this, as I have said before, but I do believe that we
are more likely to get that element of conservatism in the handling
of these great powers of extending credit through a comparatively
small number of boards and through a central board at Washington
than we are through an indefinite number or an uncertain number of
voluntary associations of banks.
Senator B ristow . That is all I care to ask the professor.
Senator R eed . First, Professor, I want to ask you if you have ever
been a practical banker yourself ?
Prof. Sprague . N o, sit.
Senator R eed . Y ou have studied and read, I presume, a very
great deal on this question ?
Prof. Sprague . And, I may add, argued a good deal with banker
friends.
Senator R eed . I only wanted to know just whether you had seen
the practical side, because I wanted to ask a question which would
relate to that, which I am going to ask you now.
Were you here when Mr. Ailing gave us his views with regard to
gold reserve ?
• .
Prof. Sprague . Yes, sir.
Senator R eed . His plan differed from this plan suggested in the
bill, radically. Have you given any thought to the suggestions ?
Prof. Sprague . It is a little difficult to express an opmion about a
proposition which one has heard only in these hearings before there
has been any opportunity to read them over.
Senator R eed . I just asked you if you had considered them?
Prof. Sprague . I had some impressions, but they are not such
settled convictions as I might have after reading over what he has
said. But my feeling as he outlined his scheme was that he was at
tempting to secure certain results by means of mathematical ratios
which, to my mind, can only be secured by a competent management.
I do not believe that it is possible to devise any system of ratios of gold
to note issues and ratios of cash reserve to deposit liabilities of Fed
eral reserve banks which will insure that the powers of such institu
tions will be wisely used and be available for all sorts of situations. It
does not, to my mind, matter very much whether we place a 40 per
cent reserve or a 33 J per cent reserve or any other ratio of reserve
against the notes or other obligations of these Federal reserve banks.
Whatever the ratio is, the management will be obliged to maintain a
considerable reserve above that ratio in ordinary times, so as to have
something to use in emergencies. But what they should have above
the minimum legal requirement can only be determined by experience.
Senator R eed . Yes. And frankly speaking, any system which has
not been tried out must necessarily contain at least some of the ele
ments of an experiment?
BANKING AND CURRENCY.
555
Prof. Sprague . Exactly.
Senator R eed . I wish, if you could do it in a very brief statement,
you would give us your idea of what would constitute an ideal banking
system in the United States, disregarding, now, this bill.
Prof. Sprague . Some years ago I prepared a series of articles
later published as $ book with the title “ Banking Reform in the
United States.” The propositions which I then made differed to
some extent from those which we have before us, and differed even
more from those in the bill of the National Monetary Commission, in
that I took the position that the minimum amount of change should
be made in our banking system necessary to secure a given result;
and if I were to develop an ideal banking system or measure of
legislation it would involve making a minimum amount of change to
remove present defects.
Senator R eed . N o; that is just exactly what I do not want you to
do. I want you just to imagine this country now as a country
without a banking system at all, and you gifted with the absolute
power to establish a banking system which would be the best that
your ingenuity could conceive.
Prof. Sprague . I should, in the first place, permit banks to be
established with branches within at least countv areas, and perhaps
somewhat larger jurisdictions, although I should not be willing to go
so far as to establish a branch bank system covering an area as large
as the State of New York.
Senator R eed . Y ou say a branch banking system. That implies
a head, and it would mean that there should be a central bank ?
Prof. Sprague . N o ; I mean that any bank would organize branches.
The biggest difference between our banking system and that in other
countries is that we do not permit the individual banks to have
branches, and I do not believe in the overgrown system of branches
which characterizes banking in many other countries. I think,
however, we have gone a little too far in splitting banks, localizing
banks, and I should like to see our banks given the power to operate
branches within a moderate area. I believe that that would give
better banking accommodation in sparsely settled sections of the
country.
Senator R eed . S o that now you would establish a system of banks
in which a member of that system would have the right to have
branches ?
Prof. Sprague . Within restricted areas.
Senator R eed . Within restricted areas. Very well. Now, what
is the next step ?
Prof. Sprague . In the second place, I should permit these banks
to conduct every variety of financial business, the operation of sav
ings departments and of certain kinds of trust-company business.
I am convinced that experience shows that the “ department store”
principle in banking is a sound one under proper legislation and
supervision, of course.
This would give the national banks the ability to hold their own
against State institutions which, in many parts of the country, they
do not now possess.
As regards reserves, I should, because of the large number of our
banks, continue to impose a reserve requirement. This is a require
ment peculiar to the United States; and the fundamental reason is
9328°— S. Doc. 232, 63-1—vol 1-----36
I
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BANKING AND CURRENCY.
the large number of banks which we have; and my slight modification
with reference to branch banks would not greatly diminish the
number.
I should have no more than two classes of banks— country banks
and reserve agent banks. I would permit any bank that cared to
enter into this class of business to become a reserve agent bank.
All banks which did not care to qualify for such business would be
country banks, wherever situated. The reserve agent bank would
have to have a higher capitalization than country banks and hold a
larger reserve, of course. But I would permit country banks to keep
perhaps a third of their required reserve, whatever it might be, with
these reserve agents.
I should further insert a provision in the law regarding the method
of paying interest upon bankers’ balances, whether counted as a part
of the required reserves or not.
The trouble which we have experienced in the past on account of the
concentration of balances of country banks in city institutions is very
largely due to the fluctuating portion of such balances. Country
banks, for example, increase their reserve balances by perhaps 50 to
100 millions of dollars between the end of May and the end of July.
These balances and something more are withdrawn in September,
October, and November. The city banks, because they pay interest
upon daily balances, must fully employ them. When they receive
funds from country banks in June, they must employ those funds,
even though they Know that those funds will be withdrawn in Sep
tember or October. Now it happens that there is no temporary
requirement for accommodation from city banks during just those
few months when their country balances are at the maximum. It is
possible, however, in most years to lend these funds on stock-exchange
securities. It is a favorite period of the year for bull campaigns in
stocks. When the balances must be withdrawn in the autumn, these
stock-exchange loans are contracted and prices go down. No one is
harmed in ordinary years except those who are speculating in securi
ties; but in unusual years it is very difficult to withdraw the funds
thus employed.
If the bankers themselves had adopted an arrangement for interest
on balances under the terms of which interest would be paid on
minimum monthly balances during periods of six months, there would
not be this temporary inflow of funds to New York City, the use of
which has never served any particularly useful purpose. A country
bank, under this arrangement, would receive interest on that balance,
the lowest balance which it held— not to any day during a period of
six months, because that would be unfair, but its lowest average
monthly balance during any six months’ period.
A simple modification of the method of paying interest on deposits
like this would have vastly diminished the disturbances which m the
past have been caused by the concentration of bank balances in the
cities.
Some years ago I w of the opinion that the changes which I have
~as
mentioned, together with a specially taxed and definitely limited asset
currency, would be entirely sufficient to enable our banks to pass
through periods of emergency without breaking down or without
suspension of cash payments. I am no longer of that opinion. Both
bankers and the public have lost confidence to such an extent in our
BANKING AND CUBBENCY.
557
banking machinery that confidence can not be regained unless some
pretty considerable and striking change is made in the system.
On the whole, I am therefore of the opinion that some sort of
central rediscounting institutions are now needed to give bankers and
the public confidence in the system.
The stronger, however, the individual banks are and the more per
fect their arrangements among themselves the less burdensome will
be the task which will fall to the rediscounting institutions. The bill
of the National Monetary Commission did not add in any direction
to the strength of the banks or strengthen their relationships one with
the other, but left things as they were and provided a rediscounting
association. The present bill does make important changes in the
relations between banks, but, as I said this morning, I think it goes
too far in breaking up those arrangements, with the consequence of
concentrating relationships between the many thousands of banks
on the one hand and the Federal reserve banks on the other.
I believe, as I intimated this morning, that the reserve agent
banks might well act in a sense as buiiers between the regional
banks and the great mass of country banks, not separating the
country banks from the regional banks by any means, but continu
ing the relationships with reserve agents so that the country banks
will have more places to which to go for accommodation, and not find
accommodation unduly restricted because of lack of a particular
kind of security.
Putting it in another way, it seems to me altogether wise to mini
mize, so far as is compatible with the purposes in view, the duties
and responsibilities of the regional banks; and particularly is this
true during the first few years after institutions are set up. If they
work well, it may in the future be found a better arrangement to
withdraw country balances entirely from reserve agents. If the
regional banks were providing a better service, that would be pretty
certainly largely done without any legislation.
If I were going to add an entirely novel provision to this bill it
would be the one regarding the method of paying interest upon
bankers’ balances. There will be bankers’ balances, even if this
measure is passed, because there are large bankers’ balances over
and above reserve requirements, and there will still be the tendency
for bankers to send temporarily idle funds to the cities for short
periods of time in order to get the 2 per cent; and the situation that
is created by the use of such temporary funds by the city banks will
create pressure upon the regional banks for accommodation. If it
were thought feasible to insert a provision in this bill regarding the
method of paying interest upon bankers’ balances, I think it would
prove of very great service to the managing boards of the regional
institutions.
Senator Siiafroth . Professor, I want to ask you just one or two
questions. Will you state whether, in your judgment, the provision
concerning the discounting of paper at the regional reserve bank and
the issuance of currency upon the same would take care of the na
tional-bank notes that are outstanding now, the 700 millions of bank
notes ?
Prof. Sprague . I suppose it could, but it would be most unde
sirable. Suppose, for instance, that these notes are retired, ac
cording to the provisions of this bill, 5 per cent year after year. That
558
BANKING AND CURRENCY.
would mean 35 millions each year. Well, 35 millions might not
make a very appreciable impression, particularly if currents of trade
were such as to bring in that year a very large amount of gold. But
next year another 35 millions is withdrawn, and another 35 the year
after. Sooner or later this withdrawal of the national-bank notes
would have an effect upon bank reserves. It would not lessen the
amount of money in use among the people in their pockets; it would
come out of bank reserves, and trie banks would find that their
lending power was lessened somewhat. They would find it necessary
to go to the Federal reserve banks to rediscount, and it might work
out that in the course of 20 years the volume of rediscounts would
expand and provide the security for an equivalent of these nationalbank notes which were being retired.
I think that might happen, but I think it most undesirable that
these Federal reserve banks should be doing so large a business right
along simply for the purpose of keeping national-bank notes afloat,
those notes which have been for many years a permanent part of the
circulating medium and which the ordinary requirements of the pop
ulation absorb.
Senator Shafroth . Then you think that the operation of this bill,
which is called the Owen-Glass bill, is not desirable so far as its feature
of retiring national-bank currency is concerned ?
Prof. Sprague . Exactly. I think it most unsatisfactory.
The Chairman . I will ask you just one question, Professor. In
case of the substitution of legal-tender notes for the present nationalbank notes, do you think that that would cause a material increase
of credits in the country by enlarging the reserves ?
Prof. Sprague . I do not. The national-bank notes are now pretty
completely in circulation outside of the banks in so far as they are
not held by the State banks as reserves.
The Chairman . A s pocket money, you mean ?
Prof. Sprague . Yes, as pocket money by the people, in so far as
they are not held by the State banks as reserves. Every year as
the business of the country increases an increased amount of money
is used outside of the national banks in the pockets of the people or
by State banks, so that I do not think the conversion of the seven
hundred odd million dollars of national-bank notes to legal-tender
notes would make any appreciable difference now, and such slight
difference as it might make would be a diminishing influence if we
assume no further increase in the total. I regard it myself now as
quite negligible.
Senator Shafroth . Professor, I have been requested to ask you
a question. While I am anxious to have Mr. Berry go on the stand,
I think I ought to ask this one question. W hat would the effect be,
in your judgment, upon the repeal of the United States statute that
imposes a tax of 10 per cent upon State bank circulation? Suppose
it were repealed.
Prof. Sprague . I think that we have altogether too many banks
in this country to permit them generally to issue notes secured gen
erally against their assets. There are so many banks that it would
be probably out of the question to set up any system of regular
redemption. A provision of law forbidding any bank to pay out the
notes of any other bank would have some influence in checking undue
expansion of the notes, but it would not be sufficient. Many people
BANKING AND CURRENCY.
559
are constantly dwelling upon the Suffolk banking system of Massa
chusetts and its device of daily redemptions. That system was a
very perfect one so far as its redemption device went. The notes
were redeemed steadily, constantly, and under that system it was
impossible for any single bank to largely increase its note issue, for
the reason that it was certain that an unusually large amount of its
notes would be presented against it for redemption; but when all of
the banks in Massachusetts were expanding at the same time, the
system of daily redemptions did not check the expansion in the
slightest degree. While each bank found that more of its notes were
being presented for redemption, each bank found that it had more
notes of other banks to be redeemed as an offset, and it worked just
as it does in the case of checks. Checks are steadily redeemed, but
if all of the banks are expanding, clearing-house operations do not
reduce in the slightest degree the volume of deposits.
The result in the case of Massachusetts banks was this: That they
increased their note issue to such an extent that practically all of
the gold money was f#rced out of circulation. In the first place it
was drawn into the bank by the simple process of substitution, but
it did not stay there. Loans contmued to be expanded, and in
making payments outside of New England, where the notes were not
so satisfactory as gold, the gold gradually drifted away. The result
was that the banks were conducting business— both deposits and
notes steadily retired— on a basis of practically no cash whatever.
That is what would happen in this country under a system of uni
versal asset currency even though an arrangement for steady redemp
tion were set up.
In the course of time bank notes would gradually be substituted
for lawful money and gold now in circulation. That would be at
tracted into the banks and be made the basis for additional loans,
which would force up prices and gradually force an amount of gold
out of the country unless we had a collapse before that process was
completed. It is only by moderation in loans that credit can be kept
within due bounds. No processes of redemption will accomplish that
purpose when the banks generally are expanding their loans.
Senator P omerene . I want to ask you just a question or two.
Assuming that this regional system of banks is adopted, what do you
say as to the wisdom or unwisdom of permitting the public to sub
scribe for this stock, instead of the banks; either in part or whole?
Prof. Sprague . I see no objection to it whatever, and I do not feel
that there would be any tendency on that account for the people to
demand that the Federal reserve banks lend directly to individuals.
People who invested in the bank stock would be a comparatively
small number compared with the total population of the country.
Senator P omerene . In your judgment they would subscribe for
that about as they would subscribe for an issue of bonds if the Gov
ernment should issue bonds ?
Prof. Sprague . Yes.
Senator P omerene. And if that were done, would you not to that
extent be increasing the bank capital of the country— that is, by not
requiring so much to be paid or subscribed by the banks ?
Prof. Sprague . Well, I am not certain of that. The banks now,
most banks, have various investments which are not strictly of a bank
ing sort— bonds, for example. I should expect that the banks would
560
BANKING AND CURRENCY.
sell some of their bonds to provide themselves with the funds for
their capital subscription. The bonds we will assume for the sake
of the illustration will be purchased by the individuals who might,
under the other arrangement, have bought stock in the proposed
bank.
After all the amount of funds which are available for banking
purposes depends more largely upon the amount of funds which
people leave with the banks than it does upon the capital, and the
increase in capital is not necessarily a net increase in the available
banking fund. I think, however, it would probably, to some extent,
though not to the extent of the capital subscription, add to funds
available for banking purposes.
Senator P omerene. Senator Bristow’s objection seems to be that
the country banks are opposed to subscribing for the amount of stock
in the regional banks provided for in this bill. It occurred to me that
if that objection is sound, by opening up this stock subscription to the
ublic you could provide for the necessary capital for tne regional
anks in that way.
•
Prof. Sprague . It might make necessary some changes in the
method of selecting the managements of the Federal reserve banks.
Senator P omerene. Probably so.
Prof. Sprague . That would open up a wide field for discussion.
If the capital can be disposed of to individuals without involving
any other change in the bill, I do not see that there is any objection
which can be made. The one that the bankers made seems to me
to be rather fanciful. They contended that then the banks would
soon begin to do business with the public. I do not think there is
anything in that at all.
Senator P omerene. Just another question on which I want to
get your view. This bill provides that the reserve funds for the
redemption of the reserve notes shall be gold or lawful money.
What do you say as to whether that should be limited to gold or
not?
Prof. Sprague . I do not feel that that is a matter of serious
importance. The European central banks, with the exception of
the Bank of England, nave always had to support a considerable
amount of other than gold money in their reserves. The amount
of lawful money which this institution would in any conceivable
circumstance find itself burdened with must be exceedingly small,
because, as I have said several times, practically all of the lawful
money is in constant use outside the banks. If lawful money is not
going to be increased in quantity, I think it is a matter not worth
bothering about, whether the reserve is to be gold or gold and lawful
money.
Senator Shafroth. That is all. W e are very much obliged to
you, Professor.
E
STATEMENT OF HON. WILLIAM H. BERRY, OF CHESTER, PA.
Senator Shafroth . Mr. Berry is the gentleman whose book we
started to read in the committee and of which we read several chapters.
I wish it also to appear in the record that Mr. Berry was at one
time treasurer of the State of Pennsylvania.
Senator P omerene. And he is now collector of customs.
BANKING AND CURRENCY.
561
Mr. B erry . There are two general schools of thought on this cur
rency question, one of which supposes that it is necessary that a
certain restraint be put upon the activities of the people. I think
that school would perhaps be most ably represented by the professor
who has just preceded me and to whose remarks I have listened with
so much interest.
The other school of thought is that in which the concept of indi
vidual freedom in the matter of activity is the great consideration.
I am of the second class. I do not believe that any restraint should
be put upon the activity of any man. I do not believe that it is wise
to put any restraint upon any individual who wishes to exercise his
activity in the production of wealth; nor do I believe that any man
should sit in judgment as to what activity he should engage in.
Therefore I approach this subject from a different standpoint alto
gether from that which the professor has presented. I am sorry to
break in upon your deliberations because it will be a rather abrupt
change in the viewpoint at least.
I am not a banker. I am like the fellow who when he was asked
whether he was the mate of the vessel or not said, “ N o; I ate the
mate.”
I am the fellow who stands on the outside of the bank, and I speak
from the standpoint of the business man who uses the banks.
The Senate Committee on Banking and Currency sent out a list of
questions, which in my judgment were very searching and covered
trie entire field of thought under consideration. I spent a good deal
of time in endeavoring to intelligently answer those questions. There
were 33 questions, but they are nol all quite pertinent to this dis
cussion this afternoon. I shall not trouble you with any of the details
in regard to the organization of the bank and I have no suggestions
to make along that line.
Senator Siiafrotii. Mr. Berry, I read those answers, and I feel
that they ought to go into the record right here. They are splendid
answers to those questions.
Mr. B erry . I am perfectly willing to put them into the record, but
I thought it would be rather an abuse of your time to undertake to
read them all now. There are a few which it will be necessary for me
to refer to as I make my argument on this bill in order that they may
be properly understood.
The Chairman . I think it would be well to have the questions of
the committee and the answers prepared by Mr. Berry incorporated
in the record.
Mr. B erry . I want to make this preliminary statement. I believe,
with the President, that every man who has an asset to hypothecate
ought to be able to secure credit in a competitive market, in a market
which would establish a just interest rate, and it is with that point
in view that I have prepared the figures I have here to submit to
this committee.
I believe that to be the great desideratum.
Now, it will save time for everybody concerned if I go over some
of these answers and refer to portions of them respecting matter
which I think very pertinent. In the first place, I would like as many
of you gentlemen as can to make use of this table. It is a table com
piled from the report of the Comptroller of Currency and appears in
my books.
562
BANKING AND CURRENCY.
Senator Shafroth . That shows that only 8 per cent of the money
of the country is used.
Mr. B erry . My remarks will be largely a statement of facts.
The first question asked by the committee was:
What are the essential defects of our banking and currency system?
*
My answer to that is: The basic defect of the system is in the ina
bility of the banks, collectively, to secure legal tender money in suffi
cient quantities to enable them to safely meet the legitimate demands
for credit.
By “ legitimate demands” I mean such as are accompanied by the
offering of adequate security.
Any such demand for credit would incite an active competition
among the banks for the privilege of supplying it, if they could safely
do so; in which case an equitable interest or discount rate would be
automatically established, and discrimination in favor of certain bor
rowers would be reduced to the minimum or entirely eliminated.
Under natural laws, as well as existing statutes, the power of the
banks to extend credit is limited by the amount of reserve money
that they hold.
They can not discount paper beyond this point.
The Chairm an . There is not the slightest doubt about that.
Mr. B erry . I will continue. Banking is founded and operated
upon the law of averages determined by experience. Of the checks
drawn by an individual against his account, only a small percentage
will demand cash payment; the rest will be deposited, and a transfer
of credit on the books will take care of them; but those who ask for
the money must receive it. So that while the exact amount of money
necessary to promptly meet this demand in any given case may be
debatable; the fact that the bank imperatively needs some money
in order to discount paper and physically care for the checks drawn
against an account is beyond question.
Safe banking requires a liberal percentage above the amount ordi
narily found necessary to pay checks.
In addition to this physical limitation, and because of it, the stat
utes require the national banks to hold an average of about 12.5 per
cent of legal tender against deposits; but by means of deposits of
legal tender in these banks by the State banks, trust companies,
etc., the general average in the banks collectively may be, and is,
considerably reduced.
A point is, and must be finally reached, however, when no further
reduction in the per cent of reserve can be safely or legally made, and
when this point is reached no further credit can be floated, no matter
what security is offered.
In such case the transfer of cash from one bank or one city or even
from one country to another can not help the general situation, since it
does not increase the total held, and therefore the absolute solvency
of our banks, as proven by their four billions of unimpaired capital
and surplus, which is held in the form of so-called quick assets (stocks
and bonds), is of no use whatever in the premises.
In such case there is nothing the banks can do but refuse to extend
credit. If credit is refused, panic conditions are set up which compel
the banks to withdraw existing credit.
563
BANKING AND CURRENCY,
Inevitably extensions will be refused to and withdrawals made from
those in whom the bankers are not personally interested, and all the
evils of a so-called money or credit trust or monopoly at once appear.
Therefore the demand for credit can not be met.
A careful study of the following table, taken from the report of
the Comptroller of the Currency, June 30, 1912, will show that 10
per cent of reserve money held against deposits approaches the danger
line and is certainly the limit of safety.
The table in my answer shows the condition of 25,193 banks of all
kinds, compiled from the report of the Comptroller of Currency, June
30, 1912 (pp. 39 and 40).
It is not an exact transcription. Two or three of the columns
have been brought together so as to condense it. All of the obliga
tions are in one column and all the cash assets are in another column,
so that the basis of percentage can be had.
The table is as follows:
[The national-bank notes are included in the demand obligations. The 5 per cent redemption fund is
also included in the total cash.]
[Amounts in millions.]
Years.
1864...................................................................
I 8 6 0 ...................................................................
1866..................................................................
1867..................................................................
1868.................................................................
1869.................................................................
1870..................................................................
1871...................................................................
1872...................................................................
1873...................................................................
1874...................................................................
1875...................................................................
1876...................................................................
1877...................................................................
1878...................................................................
1879...................................................................
1880...................................................................
1881...................................................................
1882...................................................................
1883.................................................................
1884...................................................................
1885...................................................................
1886...................................................................
1887...................................................................
1888...................................................................
1889...................................................................
1890...................................................................
1891.................................................................
1892.................................................................
1893...................................................................
1894...................................................................
1895...................................................................
1896...................................................................
1897...................................................................
1898...................................................................
1899...................................................................
1900.................................................................
1901.................................................................
1902.................................................................
1903.................................................................
1904.................................................................
1905.................................................................
1906...........
1907...............
1908...................................................................
1909......................
1910.................................................................
1911.................................................................
1912...................................................................
Total
Capital
Govern
Total
Loans
demand
and
and
ment de cash in
obliga
surplus. discounts. posits.
all banks.
tions.
$391.0
451.5
561.2
577.7
595.8
615.7
646.4
659.8
748.0
748.5
750.2
846. 8
863.9
874.7
825.4
826.5
825.4
864.3
900.7
973.4
1.036.0
1.040.0
1,080.5
1,267.0
1,347.4
1,425.2
1,552.7
1,648.9
1,721.4
1,781.1
1,752.2
1,759.6
1,756.3
1,725.2
1.724.7
1,734.7
1,906.9
2,031.7
2,298.5
2,595.3
2,753.4
2,902.7
3,224.2
3,335.8
3,513.7
3,634.6
3,832.5
4,018.0
4,176.9
$70.7
362.4
550.4
588.5
655.7
686.3
719.3
789.4
871.5
1,439.9
1,564.5
1,748.1
1,727.1
1,720.9
1,561.2
1,507.4
1,662.1
1,901.9
2,050.3
2,133.6
2,260.7
2,272.3
2,456.7
2,944.9
3,161.1
3,475.2
3,842.1
3,965.9
4,336.6
4,368.6
4,085.0
4,268.8
4,251.1
4,216.0
4,652.2
5,177.6
5,657.5
6,425.2
7,189.0
7,738.9
7,982.0
9,027.2
9,893.7
10,763.9
10,438.0
11,373.2
12,521.7
13,046.0
13,953.6
$58.0
39.1
33.3
28.3
1 2 .8
13.2
1 1 .1
12.4
15.1
1 0 .6
1 0 .2
1 1 .1
10.9
25.6
252.1
10.7
1 2 .2
1 2 .6
13.9
14.2
14.0
17.1
23.2
58.4
46.7
30.6
25.9
14.2
13.7
14.1
13.2
15.4
16.4
52.9
76.3
98.9
99.1
124.0
147.3
110.3
75.3
89.9
180.7
130.3
70.4
54.5
48.4
58.9
$198.3
199.4
231.9
205.6
200.7
162.5
187.7
194.0
177.6
218.2
252.2
238.7
226.4
230.5
214.6
216.3
285.5
295.0
287.1
321.0
321.2
414.3
375.5
432.8
446.1
499.1
478.3
478.1
586.4
515.9
688.9
631.1
531.8
628.2
687.8
723.3
749.9
807.5
848.1
857.2
990.6
994.1
1,016.4
1,113.7
1,368.3
1,452.0
1,423.8
1,554.1
1,572.9
Per cent
of cash
to obligar
tions.
$544. 8
830.5
$18.5
24.0
1 , 1 22 .7
1 ,101.7
2 0 .0
1,291.8
1,337.5
1,356.3
1,578.2
1,693.3
1,776.5
1,875.8
2,115.3
2,084.5
2,115.0
2,043.4
2,254.0
2,279.7
2,621.5
2,781.9
2,899.5
2,875.9
3,017.5
3,067.1
3,498.2
3,636.6
3,953.8
4,219.6
4,346.2
4,820.3
4,896.1
4,837.1
5,113.1
5,160.7
5,221.7
5,831.0
6,944.4
7,603.1
8,878.7
9,838.1
10,060.1
10,509.9
11,871.4
12,816.6
13,828.2
13,528.5
14,743.2
16,013.5
16,640.5
17,790.0
17.1
15.5
1 2 .1
13.9
1 2 .2
1 1 .6
12.3
13.4
1 1 .2
1 0 .8
1 0 .8
10.5
9.6
12.5
1 1 .2
10.5
1 1 .0
1 1 .1
13.7
12.9
13.1
13.0
14.0
11.3
1 1 .0
1 2 .1
10.7
14.2
12.3
10.3
1 2 .0
11.7
10.4
9.8
9.0
8.9
8.5
9.4
8.3
7.9-6.5
8 . 0 - 6 .6
1 0 . 0 - 8 .6
9 . 8 - 8 .8
8 . 8 - 8 .0
9.3-8.0
8 .2
564
BANKING AND CURRENCY.
It appears from the table that in 1865 the reserve cash held was
24 per cent of deposits; and through the substitution of bonds for
United States notes, and an accompanying expansion of credit
amounting to $860,000,000, the reserve was reduced to 11.6 per cent
in 1872. This forced a curtailment of credit that caused the panic of
1873\
This curtailment raised the percentage of reserve to 13.4 per cent
in 1874, from which time it steadily fell to 9.6 per cent in 1879.
Credit was restrained and panic was only averted by the deposit of
$250,000,000 of Government funds in the banks. (See table, p.563.)
In the next decade the coinage of silver under the Bland-Allison
Act increased the legal tender money in banks, and for this reason
an increase of $700,000,000 of new credit was accompanied by a rise
in the reserve cash to 14 per cent in 1889.
This result was hastened by the fact that in 1878 the balance of
trade turned in our favor, and in 1877 the excess of exports over
imports of merchandise was $150,000,000, and continued at this
average throughout the decade (1877 to 1887).
This favorable balance in merchandise gave rise to an importation
of gold during this period amounting to $21,654,000 per year, or a
total of over $216,000,000, which, added to the $240,000,000 of silver
coined in that period, made a total increase of legal tender or re
serve money in the country, above the current coinage of gold, or
$456,000,000 in the decade. This accounts fully for the rise in per
cent of reserve during this period of business activity and credit ex
pansion.
In 1888 the balance of trade turned against us for two years, and
in the period from 1888 to 1896 the average in our favor was reduced
from $150,000,000 to $80,000,000.
I wish you would note carefully this statement, gentlemen. So
much has been said of the cost of gold under which we labored in 1893
that this is a very important statement.
This necessitated the exportation of gold, and in this period of
nine years $298,000,000 of gold went abroad, or $33,000,000 per year.
The coinage of silver ($24,000,000 per year) was not sufficient to
supply this loss and provide a basis for expanding credit, and the
per cent of reserve cash rapidly fell to 10.7 in 1893. There were
no funds in the National Treasury from which to help the banks as in
1879 and other years. New credit was necessarily refused, and panic
ensued during which $280,000,000 of existing credit was withdrawn.
I take the position firmly and undertake to defend it against all
comers that that cataclysm was due solely to the exportation of gold,
due to the change in commercial relations between this and foreign
countries.
Strange to relate, as a remedial (?) measure, the purchase of silver
was stopped at this time, and the only available source of reserve
money shut off in time of famine, and the country wallowed in the
slough of depression until the discovery of new gold fields and new
processes for refining low-grade ores in 1897 and 1898 increased the
rate of gold production in the world by 50 per cent in two years, and
for the simple reason that we had no money in the bank upon which
we could maintain the credit necessary for our business.
This gold gave immediate relief, and a period of world-wide business
activity and credit expansion was inaugurated, unparalleled in
BANKING AND CUKRENCY.
565
history. Reserves in our banks were strengthened, but new and
undreamed-of concepts of our productive powers were awakened,
and the expansion of business soon overtook the increased produc
tion of gold, and while reserves increased enormously in actual vol
ume the percentage began to decline and in 1901 had fallen to the
unprecedented low level of 9 per cent. The reduction continued
until in 1906 it had fallen to 7.9 per cent, although the total reserve
held had increased 47 per cent.
A t this point it became impossible for the banks to physically
meet the cash payments of checks or to comply with the law as to
reserves, and in the midst of unparalleled optimism and business
activity the crash of 1907 came.
The railroads of this country were overwhelmed with business.
There was not an idle car in the United States when the panic struck
us in 1907, and that panic came simply because the banks of the
country were unable to meet the requirements of the law as to the
reserves and they were compelled to withdraw credit.
Senator R eed . Y ou spoke of the railroads. That was true of
every industry, was it not ?
Mr. B er r y . Yes, sir.
In the year ending June 30, 1908, no new credit was created and
$320,000,000 of existing credit was withdrawn.
The deposit of $100,000,000 of Government funds in the banks,
together with $100,000,000 of forced imports of gold and the with
drawal of $300,000,000 of credit, raised the reserve to 10 per cent in
1908, since which time it has again fallen to 8.2 per cent in 1912. The
figures for 1913 are not at hand, but large exports of gold have been
recently made, and the banks have been retrenching, which indicates
that the reserve is now at or below the point of collapse in 1907.
It is my firm conviction that the credit situation of the United
States is more strained than it was at this time in 1907 by reason of
the fact that these $63,000,000 of gold has left the country, and some
additional credit has been expanded.
These facts clearly show the cause of our financial difficulties, and,
in my judgment, completely exonerates the banks from all blame for it.
Judged by the work it does, our banking system is, in my opinion,
the best in the world. The difficulty is wholly resident in the currency
end of the system.
Those are the two great factors in the currency of the Nation.
Our currency is a compound, consisting, first, of legal-tender money
uttered solely by national authority; and, second, of circulating credit
mainly emanating from the banks.
Money is a resource or asset that is given by law a fixed power to
extinguish debt. The credit that circulates with and in lieu of it
is a debt or a promise to pay money. It is circulated by and for the
convenience of those who create it, and it is received by the public
on sufferance.
The proportion of credit, therefore, that can circulate at par with
money depends upon the disposition of the people to voluntarily
receive it.
Experience in this country, as indicated in the table, shows that
100 per cent of credit to 10 per cent of cash in banks is about the
highest proportion possible. The slightest hesitancy on the part of
566
BANKING AND CURRENCY.
the banks in paying any kind of cash the customer wants increases
the amount required.
The law fixes a lower proportion (100 to 12.5) in the banks over
which the Government has supervision.
The law also fixes the amount of money available in the country
by designating the sources from which alone it may be supplied, and
since the difficulty is resident in the scant supply the law alone can
remedy it.
Now I take up the next question:
To enumerate concisely the advantages and disadvantages of the present system.
In answer to the first question I have described at length the one
essential defect of the system. There are others, but they are trifling.
The advantages of our present banking system are many.
First. It consists of about 26,000 independent banks widely dis
tributed over an enormous territory, so wide indeed that collusion
and monopolistic control are well-nigh impossible.
Freed from the difficulty inherent in the scarcity of reserve- money,
competition among these banks for the privilege of extending
credit would insure an equitable interest rate and a supply of
credit equal to the demand.
This would allow our people to indulge their disposition to improve
their condition without limit other than their ability and disposition
to work.
Second. This system, comprising 26,000 banks, has been a natural
growth answering a demand for banking facilities wherever it has
appeared. These banks have an unimpaired capital of $2,000,000,000
and a surplus of more than $2,000,000,000. They carry $5,000,000,000
of quick assets (stocks and bonds) and are carrying nearly $20,000,000,000 of credit upon $1,500,000,000 of cash.
They have established clearing-house facilities, local and general,
that make their credit universally mobile with a trifling cost for ex
change. They are capable of furnishing to the people of this Nation
all the credit they need, and fail to do so solely because they are unable
to convert their vast assets into new reserve money any faster than
the gold supply will permit.
No new banking machinery is needed.
If any extension should be needed (as it will), the energy and ini
tiative of the people will supply it when and where it is needed just
as it has in the past.
The experience of the past 10 years shows that the natural expan
sion of business in this country requires an annual increase of bank
credit amounting to more than $1,000,000,000.
Senator R e e d . You mean a billion dollars of new money?
Mr. B e r r y . I mean newT credits, new bank credits, discounts of
paper, and other methods of established bank circulation.
Senator S h a f r o t h . On the basis of eight to one, it would be about
$125,000 of new legal-tender money.
Mr. B e r r y . In 1910 the banks extended $1,300,000,000 of new
credit; in 1912, $1,150,000,000.
Assuming that 10 per cent of legal tender is necessary to carry
credit, the banks, collectively, must secure $100,000,000 of new
legal-tender money each year to safely meet this demand.
BANKING AND CURRENCY.
567
It is the experience of 50 years that the banks can secure only one
half of the new money that comes into the country; the other half
remains in the hands of the people. It follows, therefore, that in
order that the banks may secure $100,000,000, an increase of
$200,000,000 must be made m the country each year.
Senator Shafroth . Mr. Forgan said that the building up of legal
money was one to eight. That is the reason I said $125,000. You
say one to ten.
Mr. B er r y . Yes.
The most favorable view that can be taken of the prospect is that
the annual average importation of gold for the last 32 years, which is
$5,000,000—you will find that in the Statistical Abstract. There are
mutations— it goes in more rapidly one year than another.
That will be continued, and that the highest yearly production of
gold in the country, $90,000,000, will also continue.
Thirty millions of this annual product is used in the arts, leaving
$60,000,000 for coinage, to which add $5,000,000 imported, and we
have $65,000,000 as the total possible annual increment from gold, as
against $200,000,000 that the country needs.
In the presence of these facts it is no wonder that the banks do not
respond to the demand for credit, for while they have $5,000,000,000
of quick assets it is impossible to liquefy them in sufficient quantities
to do so.
Nor is it surprising that an abnormally high interest rate obtains,
nor that discrimination between borrowers leads to charges of con
spiracy by lenders.
All of this is inevitable in the presence of a limited supply of credit
which is forced by a limited supply of money.
The banks have vast resources unimpaired (stocks and bonds), but
are unable to increase reserves, and must refuse credit.
I now take up question No. 3, which is:
What are the chief purposes to be attained by an improved system?
I answer that question as follows:
The chief purpose is to provide an unlimited supply of credit
everywhere available, so that any man who has an asset to hypothe
cate as security can not only obtain credit upon it, but may do so in a
market where competition among the bankers will insure him a just
interest rate.
Bankers will readily extend credit when it is to their interest to
do so, and since only a 10 or 15 per cent reserve is necessary, the
conversion of a $150 asset bearing 4 or 5 per cent interest into cash
will qualify them (without reducing their total of assets) to take on
$1,000 of discounts at 6 per cent; but under existing conditions,
where all the banks are loaned up (the conversion of the asset into
new money being unlawful), the sale of the asset can not be made
except at a sacrifice, and when sold by one bank to another does not
help the general situation, since to qualify one bank to loan $1,000
has disqualified another.
There is no remedy along that line.
If there was a place where certain forms of bank assets (the pub
lic credit, for instance) could be converted into money, outside of
the general market, bank reserves could be strengthened when
I
568
BANKING AND CURRENCY.
needed, and the demand for legitimate credit met, the interest rate
kept normal, and the general profit to bankers increased.
I will take up question No. 4, which was as follows:
Should national banks continue to have a bond-secured currency?
I answer “ no,” and for several reasons.
First, this currency is of less value to the banks or to the commu
nity than the capital invested in the bonds would be if it was em
ployed, as it should be, in the more proper and profitable forms of
banking.
To illustrate: In round figures $700,000,000 of bank capital is
invested in these bonds; $35,000,000 more of their cash is impounded
in the redemption fund to which the Government finds it necessary
to add $25,000,000 more; making $60,000,000 absorbed in main
taining current redemption for the notes issued against the bonds.
$650,000,000, or 87.8 per cent of the entire issue, was thus redeemed
in 1912.
We may assume that one-half of these notes are constantly loaned
and earning 6 per cent for the banks, say $25,000,000 per annum, to
which add $20,000,000 interest on the bonds, or $50,000,000 in all
accruing to the banks on a total investment of $730,000,000, or a
trifle less than 7 per cent per annum.
Now, if these bonds were sold to the Government for new legal
tender United States notes, and the bank notes destroyed, the pro
ceeds ($700,000,000) held in bank reserves would enable them to
carry the five to seven billions of credit which is now needed and can
not be granted, and from which at 6 per cent they would receive
$300,000,000 per year, or six times the present return, while general
business, using the credit, would reap a far greater return.
Second. The bank note is a mongrel in our currency. It is given,
as I believe unjustly, certain monetary privileges and masquerades
as money until it reaches the bank, where its real character is dis
closed, and it runs immediately to the redemption bureau, for the
sole reason that it is not money and can not stand in bank reserves.
Eighty-seven per cent of the entire issue runs back in a single year,
and the 5 per cent fund of the banks being found insufficient, the
Government furnishes the rest.
Third, a bank note secured by any kind of collateral is a form of
credit; it is a promise to pay money, and therefore can not be justly
or wisely given legal tender powers and made the basis of further
expansion of credit or promises to pay money. There is no bottom
to that pit. The piling up credit upon credit is dangerous, and
therefore a remedy is not possible through the issue of credit notes
of any kind.
Every note or coin that carries legal tender power and circulates
in the Nation should be issued by the General Government, not as a
loan secured by bonds or any other collateral— for this is banking, and
the Government should not engage in banking— but by issuing it in
exchange for an equivalent in value, just as the gold coin and gold
certificate are issued. This is a Government function and can not
be safely or lawfully delegated.
The bonded debt of the Nation in the hands of the banks is an
equivalent in value to the money it represents. It is an evidence
that an equivalent sacrifice has been made to the community by the
BANKING AND CUBBENCY.
569
holder of it, and, when surrendered, affords the most just and direct
way to supplement the mining of gold and furnish the banks with the
needed legal cash basis for their credit.
I have shown, in answer to question No. 2, that in order to safely
carry the billion of new credit that the Nation needs each year,
$200,000,000 of new legal-tender money is necessary, and that only
$65,000,000 can be secured from mining importation of gold. W e
must, therefore, either supply this deficiency with legal-tender paper
or refuse to allow business to freely expand— to adopt or practice
another proposition, and say, “ Hold on.”
The only alternative is to reduce the required reserve of legal cash
or put some form of credit currency in reserves with it, and thus
invite disaster. The issue of credit upon credit in endless succession
is to invite disaster and is entirely unnecessary.
Banking is not a governmental function. All the circulating
credit, of whatever form, should emanate from the banks. The local
bank is alone capable of determining the validity of the demand for
or the value of the assets offered to secure credit in its vicinity, and
should loan its credit on its own initiative and at its own risk, reaping
the benefits and suffering the losses incident thereto. This credit
will circulate by the sufferance of the people, because they find it
more convenient and less expensive than money. It should— and
would, if enough could be carried by the banks— automatically
correspond in volume to the growing needs of the people.
It may be noted in passing that since the population is constantly
growing and the scale of living constantly rising, that even a tem
porary shrinkage of credit can not occur unless forced by circum
stances outside of the volitions of the people, so that if we remove
this outside pressure we need have no concern about retiring any of it.
The sole cause of the failure of credit to expand in response to
demand is the impossibility of securing sufficient reserve money to
safely carry it. The sole cause of contraction is the effort of the
banks to adjust the volume of credit to their scant reserves.
Bank notes, however issued, can not remedy this evil, unless they
are given power to stand in reserves— a travesty upon sound finance
that woula finally result in chaos.
If the essential difference between credit and money is held in
mind, much of the confusion of thought on this subject will disappear.
Credit arises out of the voluntary arrangements between indi
viduals, and without the sacrifice of an equivalent in value.
For example, citizen A goes to banker B, and on giving security,
directly or indirectly, is given a credit on the books of the bank, which
he uses as currency while he still owns and uses the asset against
which the credit was issued. In other words, he has the “ cake and
the penny too,” having made no sacrifice whatever except the interest
charge. Nor has the banker sacrificed anything be}T
ond the use or
impounding of the fractional reserve required to carry the loan, for
which, and his service in cashing checks, he is receiving the interest.
On the contrary, legal-tender money is purely a creation of law,
and the universal practice of sane lawmakers is to demand the abso
lute sacrifice of a full equivalent in value b y the individual receiving
it to the community issuing it.
For example, it is assumed that the effort involved in the produc
tion of 25.8 grains of gold is equivalent in value to a dollar of legal-
570
BANKING AND CURRENCY.
tender currency, and the law provides that any person presenting
that quantity of gold as evidence of this sacrifice, may have it coined
into a dollar, but the gold must be sacrificed or devoted to the
money used, and finally surrendered in exchange for other valuable
things desired. The owner can not keep his gold as an ornament
and use it as money at the same time; he can not have the “ cake and
the penny, too.”
,
Money should always and only be thus issued, and when thus
issued an overissue is not to be feared, unless the gold or other form
of wealth thus used should by some fortuitous circumstance become
accessible in large quantities without effort, in which case sane legis
lation would deny it the privilege of free coin.
A Government bond is an evidence of sacrifice just as surely as is
gold or any other commodity. The concrete result of the sacrifice
involved in acquiring a bond is not a piece of any one metal or thing,
but is just as tangible in the form of Government machinery and the
public works in general as is gold. The Panama Canal is just as
useful to humanity and just as real as $350,000,000 of gold would be.
The community has received the benefit of the sacrifice involved in
producing the bond in the form of a perpetual utility and may justly
convert the bond into money— as justly and I think more wisely even
than gold— not by a process of hypothecation as security for bank
notes, but by a process of coinage into legal-tender notes.
Senator R eed . I do not understand that last remark:
Not by a process of hypothecation as security for bank notes, but by a process of
coinage into legal-tender notes.
Senator S hafroth . That means the issue of legal tender.
Mr. B erry . That means the purchase by the Government of the
bond before maturity with new legal-tender paper.
Senator B ristow . If I understand your position, it is, then, that the
Government when it expends, as it has expended, $350,000,000 on this
canal that it could have issued $350,000,000 of legal-tender notes------Mr. B erry . N o .
Senator B ristow . And paid the bills ?
Mr. B erry . N o . I think, brother, if you will wait until I have
finished you will get the answer to what is in your mind. N o; that
would not do at all. That is where we got to actually in war time.
W e issued money in war time in response to the exigencies of the war.
W e wanted to fight a battle, and we ground out a basket of money and
fought the battle, regardless of where the money came from, and as a
result we got more money than business could absorb, and it depre
ciated. It is not safe to put out money directly for public works.
Build your canal with bonds, give your bonds or issue them to be con
verted at the will of the holder into legal tender, and then the money
will come out in response to the demands of business, and no faster.
That will be the result of this proposition as I see it.
I come now to question No. 5:
Should the present requirement of reserves for national banks be reduced, increased,
or otherwise modified?
I would like to have your especial attention to this.
One of two things must be clone— and I think the whole problem is
right there.
Senator R eed . State that again, please.
BANKING AND CURRENCY.
571 ’
Mr. B e r r y . One of two things must be done: W e must either
reduce the required per cent of reserve, or make it easily possible for
banks to maintain the present requirements without refusing or
withdrawing credits.
The whole question of safety is raised by this consideration, and I
would say at once that in the interest of general business any change
made should be in the direction of greater safety rather than less.
The principal value of reserves, beyond the actual necessity for
cash payment of checks, is to inspire the general public with confidence
in the banks; and up to a certain point, at least, the larger the reserve
known to be held the less will be required, for when confidence is
fully established nothing but the amount of cash physically necessary
to
current demands would be needed.
— i amount is variable, being greater in some places than in others,
and varying in different seasons and different years in the same place,
but never very large at any time or place, unless confidence is dis
turbed, in which case an enormous quantity may become necessary.
It is a wise provision, therefore, to have an ample reserve of legaltender money m all of the banks and public supervision to announce
it; and unless there is some compelling reason it should not be
reduced.
There is no such reason, but, on the contrary, there are many
reasons why the present requirement should be maintained or in
creased.
I have shown, in answer to question No. 4, that the conversion of
$700,000,000 of bank notes, which are now a burden upon reserves,
into reserve money would largely increase the earning powqr of the
banks without increasing or decreasing the total of their surplus
assets, cash taking the place of the bonds therein. The notes are
now a liability.
A t the same time this would afford a basis for the credit needed
in general business, so that a direct benefit would result inside and
outside of the banks.
An enormous increase in the safety of general business would result
if the necessity for restricting credit was shown to be certainly and
permanently removed.
I have no interest in any scheme that does not look to the pre
vention of panics and not to their amelioration after they are here.
W hat we want is a preventive, something that will make it impossible
for us to have a panic in the United States.
From the standpoint of the banks the question of safety is not
important. The banks are already safe; they have a constant
inflow of maturing paper upon which they can compel payment in
case of necessity.
Right here I might interpolate that there has been some discussion
as to the difference between commercial paper and farm mortgages
as a basis for rediscounting. The essential reason at the bottom of
the opposition to the use of a farm mortgage for that purpose lies in
this fact, in my judgment: With a commercial note involved, whose
maturity is almost immediately at hand, somebody’s notes are coming
duo every day. The bank can force the borrower to sell his stuff in a
stringent market, whereas if the loan is put up on a mortgage, the
mortgage can be sold, but the seller is the bank, and the banker does
not want to sell it in a bad market.
9328°— S. Doc. 232, 63 -1— vol 1------ 37
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BANKING AND CUKRENCY.
Senator B ristow . Mr. Berry, what we are undertaking to remedy
is to provide the bank with the means by which it will not be necessary
for it to force the maker of this note to sell his stuff on a stringent
market and thereby bring about a depreciation.
Mr. B er r y . That is exactly what we want to do. I agree with you
perfectly on that, and the standpoint I have outlined here is at least
looking in that direction. But I wanted to introduce the idea there,
because, as I have said, at the bottom of the whole opposition to our
fixed asset, like mortgages or bonds, lies in the fact that if the sale is
to be made, the banker has got to make it and not the borrower.
Senator Shafroth . And if there is any sacrifice, the banker will
take it?
Mr. B erry . The banker will take it. On the other hand, as it is
now, in the case of a stringency, the banker calls my note and says,
“ Mr. Berry, I want the money.” “ I have not got it.” “ Sell some
thing; it don’t make any difference whether you can get a good price
for it or not, go and sell it and bring me the money.” If it was a loan
on a mortgage, and he was hard up for money and he had to have it,
and the mortgage was not due to-day and he could not force me, he
would have to go and sell it; and a mortgage is just as salable as any
commercial paper, except that it falls to the other fellow; that is all
there is to that, in my opinion.
Senator Shafroth . So that the banker must supply the same logic
to himself that he does to others ?
Mr. B erry . So that the same logic must be applied to both.
But this can only be done by forcing their customers to sell their
assets on a strained market and often at a sacrifice.
The banks are safe, but general business is never safe, and at
irregular and unexpected intervals is made to suffer an enormous loss
by the contraction of credit.
A comparison of money quotations of bank stocks with rails or
industrials on any given date will show a startling contrast.
Bank stocks range far above par, some of them many hundred per
cent, while the other stocks struggle to keep at par.
There is no valid reason why banking should be any more profit
able than any other business, and it would not be if competition was
as active behind the bank counter as it is in front of it. This would
be the case if every bank could build up its reserve at will at the ex
pense of its surplus assets.
The remedy lies, therefore, in providing the opportunity for the
banks to easily maintain reserves rather than in reducing the re
quired reserve. The only alternative, as I have said, is the restriction
of the volume of business, and this is the cause of all our trouble.
There is a disposition to regard money held in reserve as inactive
and practically useless. No greater mistake could possibly be made.
The money in bank reserves is the most active and useful money in
the country. It makes possible ten times its volume in circulating
credit, and without it our business would be decimated. The most
important work that statesmanship can do is to make it easily pos
sible to maintain it.
Senator P om erene . Mr. Berry, referring to the difference between
mortgage paper and your commercial paper, to which you alluded a
moment ago. You can only compel, if the bank is a holder of com
mercial paper, the maker to sell when that becomes due?
BANKING AND CURRENCY.
573
Mr. B er r y . That is right.
Senator P o m erene . He can do the same thing with his farm paper ?
Mr. B er r y . Sure, he can do the same thing if it is a mortgage.
Senator P om erene . S o that it is not a difference in kind; it is
merely a question of degree, if anything.
Mr. B e r r y . A question of degree solely. There is not any diference in the security. So far as I can see, one is as good as the
other, except that there is a constant stream of maturing paper
coming into the bank, and he can make the borrower sell it, and
the mortgage, if sold, the bank must sell it, because it is not due
for five or six years, and he can not compel the maker of the mort
gage to pay it.
Senator R e e d . Therefore, he has to go out and sell his own note.
Mr. B e r r y . His own security, the mortgage, his own asset. In
a case like that the mortgage is always sacrificed, and he can never
get half of what it is worth.
Senator Siiafroth . He can not sell a note before maturity?
Mr. B e r r y . Yes.
Senator R e e d . A s an illustration, I go to a bank and put up my
note for $10,000 due in 30 days. At the same time I put into the
bank or sell to the bank a farm mortgage of $10,000 due m five years.
The bank has to have money. It can say to me on the first of next
month, “ Your note is due, and we want $10,000 of money, and if
you have not got it, go and sell your stock of goods, or sell whatever
you have— cotton, wheat, or whatever you have— and bring it
here.” On the other hand, with the other security, it has got to
hock that paper around itself.
Mr. B er r y . Sell its own notes.
Senator R e e d . But it is a better security, as far as safety is con
cerned.
Mr. B er r y . I would not say it was anv better, Senator. I do
not think that a mortgage on an individual piece of property is any
better than the note of a reputable man who has plenty— a dozen
different kinds of property, which is reachable through process of
law. I would not say there is any difference in the safety of it.
Senator R eed . Of course back of this note, which is secured by a
specific piece of property, lies all the credit of the man who has
issued it ?
Mr. B er r y . Yes.
Senator R eed . S o that it is better, and it is so regarded as far as
actual security is concerned ?
Mr. B er r y . Yes.
The next question is:
Should an elastic currency be authorized by law?
to what amount?
If so, should it be limited, and
The first question may be answered in the affirmative, for the ref
erence is doubtless to the money factor in the currency, and money
can only come into existence by the operation of the law.
If we are going to have any currency, the law has got to do it, and
it must be established by law, whatever it is.
Elasticity, in the sense that it will automatically increase in volume
in response to, and only in response to, the legitimate demands of
business, should be its chief characteristic.
574
BANKING AND CURRENCY.
Provision may be made for an automatic decrease in volume, but
if it is issued under proper restraints it will never decrease in volume.
If it is called out only in response to the growth of business, it can
never retire unless the busmess diminishes, and business in this
country is not destined to diminish. It never can diminish, except
when forced to do so by the scarcity of money, and never will.
I wish to impress that thought upon this committee. If this
money is issued under proper restraints it will never decrease hi
volume. If it is called out only in response to the growth of business
it can never retire until the business diminishes and busmess in this
country is not destined to dimmish.
In a country covering the diversity of climate and conditions
that this does business may and does experience local mutations of
activity, but generally speaking there is no month in any year when
the volume of business generally recedes. I have sought in vain
to discover a period long or short in the recent history of the country
when it was necessary to decrease the volume of money on account
of a scarcity of business, but I have found many periods long and
short in which business was of necessity withdrawn on account of
scarce money. Elasticity “ downward” or “ inward” may be pro
vided for, but it will never be used.
The credit factor in the currency emanating from the banks shows
the same persistent disposition to expand and would constantly
and regularly do so if an adequate supply of money to carry it was
automatically supplied.
To the second part of the question I would answer that it should
not be artificially limited. If an adequate sacrifice is demanded in
its issue, natural laws wfill regulate the volume automatically.
A demand strong enough to overcome the resistance imposed by
the sacrifice will alone be able to bring it out, and the continuance
of the business that brought it out will keep it out. Elasticity, in
the sense that any individual .or clique, public or private, may
exercise a controlling influence over the volume of currency, is not
desirable.
The arbitrary fixing of the discount rate is a means to siich con
trol, and should be punished as a crime instead of being authorized
by law.
Competition on both sides of the bank counter is the only safe
reliance for establishing the discount rates.
W e need to disabuse our minds of the erroneous notion that the
prople can not be trusted to know when they are doing all the buisness
they wish to do.
When anyone offers satisfactory security for credit he should be
able to get it in a competitive market, and he will be if we provide for
the instant response in reserve-money volume to every such demand.
No sane man will borrow money on good security and pay interest
for it unless he sees some w ay in which he can profitably use the money,
T
and every such demand for money must be considered legitimate.
The so-called rigidity of bond-secured bank-note currency, or its
failure to relieve a stringency by expanding, is charged to the fact
that it is based on bonds of which there is a fixed amount. This is a
mistake. The bond issue has never been fully used for note issues.
Moreover, the extent to which it is now used is the result of pressure
BANKING AND CURRENCY.
575
from the Treasury Department, and not natural voluntary expansion.
Again, when a stringency occurs, the retirement or contraction of
the existing volume of bank notes, instead of expansion, occurs.
Every time you have a stringency the bank note contracts and does
not expand. This can not be due to the fact that it is based on bonds,
but it is due to the fact that the bank note is a form of credit and not
money.
Whenever a stringency appears it is from the lack of reserve money
upon which to carry credit, and the banks, in an effort to strengthen
reserves, send in for redemption their holdings of bank notes other
than their own.
Stringency always arises from an overissue of credit as compared
to reserve cash, and bank notes, being the most readily liquidated
form of credit existing— Uncle Sam pays if the issuing bank is tardy—
they are sent in for redemption first.
A moment’s thought will show that this result is inevitable and
reveals the cause of it.
A banker finds that his reserve is depleted and must be restored.
The only possible way to restore it is to call a loan. That is the only
way he can build up his reserves; he must call a loan to build up his
reserves. He has many loans that are drawing interest; all are in the
process of maturing and can be called if necessary at maturity, but
he finds that he has one loan that is fully matured and which is not
drawing interest. It is in the form of bank notes other than his own,
in the cash drawer, and to call it will not discommode his customers,
so he sends it in for redemption, gets legal tender for it, and fixes up
his reserve.
Senator P o m e r e n e . You say he must “ call” his loan. Is that
strictly correct ? If it gets below the required reserve point, of course,
that is the only way to build up his reserve, by calling a loan ? Another
way is where his deposits accumulate without loanmg out any more.
Mr. B er r y . T o refuse further loans ?
Senator P om erene . Y es; refuse further loans.
Mr. B er r y . Yes. I mean by “ calling a loan” ------Senator P omerene . I catch your point, but I thought you did not
fully state it.
Mr. B erry . I put in a month’s note to carry my business over the
period in which I accumulate stock, and that period is six or seven
months. A t the end of the first three months I go there to get that
note renewed. I want the banker to carry it another three months,
and he says he can not do it. “ Mr. Berry, you will have to pay me.”
That is what I mean by calling a loan.
Senator P omerene . Under that state of facts------Mr. B er r y . But the bank note does not interfere with any of his
customers at all, and he fires that in first.
Senator R eed . But what Senator Pomerene meant was, that he
might just let his present loan stand, but as people deposited then
quit loaning, and the effect of that would be the same; that is, would
have the same effect upon the commerce and business of the country
But now, let me understand you— were you through with that ?
Senator P om erene . This reserve is simply against further loans;
it may be used for the purpose of paying off the mortgages.
Mr. B erry . I do not catch that, Senator.
576
B A N K IN G
AND CURRENCY.
Senator P o m e r e n e . Suppose the reserve would have to be $50,000,
and it fell down to $48,000. If I am a depositor there, I can continue
to draw out my money. It is only a reserve as against loans ?
Mr. B erry . Yes. 1 get your idea now. I understand vou. But
the bank may not make any further loans until it has made up some
way or other its reserve, either by calling paper or accumulating, or
as you say, current deposits.
Senator R eed . Let me get a point clear in my mind. The bank
can not count as any part of its reserve bank notes ?
Mr. B e r r y . N o .
Senator R e e d . That is right, is it not ?
Senator S hafroth . A national bank can not; the State bank can.
Senator R eed . The national bank can not. A national bank has
$100,000 of bank notes in its vaults. It can not count them as part
of its reserve. It needs $100,000 to build its reserve up to the legal
requirements. Thereupon it will take those $100,000 bank notes,
its own------Mr. B er r y . Its own it can not use. It must hold its own. It can
not send in its own notes.
Senator R eed . It can send in the notes of others ?
Mr. B er r y . Yes, sir.
Senator R eed . It sends them down to Washington, and it gets
back gold certificates, greenbacks, or some form of money issued by
the GoA^ernment. The result, then, is that every time the 7,354 banks
of the country gather up the notes of each other and send them down
here and get Treasury notes and put them in their vaults, when they
have sent them down here they have depreciated that class of cur
rency. But, now, the Treasury notes come in and take their place,
do they not? Then that does not make an actual contraction,
does it ?
Mr. B er r y . There is no contraction involved in that, except this,
that there is a physical inertia. That 5 per cent redemption fund
maintained by the banks here is called back. It has been out at times,
but the Treasurer has complained seriously for the last four years
that he has got about $25,000,000 or $30,000,000 of United States
money invested in those notes all the time in addition to this
$35,000,000 of the banks.
Senator S hafroth . And it is a contraction to the extent of the
time that is taken from Chicago to Washington and return ?
Senator R eed . Where does the Government get this money that
it uses to redeem these bank notes ?
Mr. B er r y . This $35,000,000, the 5 per cent fund provided by the
banks themselves ?
Senator R eed . Yes.
Mr. B er r y . I think if a bank sends notes in to the extent of
$1,000 they are immediately forwarded to the bank that issued them,
and they must make their 5 per cent good. They are paid for out
of the 5 per cent fund.
Senator R eed . Then when they make it good, they have got to
take other money to make it good with ?
Mr. B er r y . Surely.
Senator R eed . And that does make a contraction at that point,
does it not ?
BANKING AND CUBRENCY.
577
Mr. B er r y . I do not think so, because each takes the place of the
other in the exchange.
Senator R e e d . Let us follow it and see about that. I want to get
that clear. If I am muddled on it I want to get unmuddled.
Let us say that there is $100,000,000 of bank notes in circulation.
There are in the Treasury of the United States $5,000,000 of a re
demption fund. A condition of affairs arises whereby the reserves
of the banks have been cut down so low that they all want money,
and they gather up actually all of the $100,000,000 and they send it
down to the Treasury. The Treasurer takes the $5,000,000 and
pays out, and it is short $95,000,000. Whereupon it goes over into
its vaults and takes out the other $95,000,000 and redeems this
paper. W e are even at this point. There has $100,000,000 come in
and there has $100,000,000 gone out. But what happens ?
Mr. B er r y . The outlying banks have sent that------Senator R eed . The next step is that the Government says to
these banks: “ Send us $95,000,000,” and they have to send the
$95,000,000, and the Government locks it up. Now, you have
retired $95,000,000.
Mr. B erry . Because you had it locked up before you started.
Senator R eed . I do not believe it.
Mr. B erry . Oh, yes; you could not have had it unless the Gov
ernment had $95,000,000 locked up before.
Senator R eed . But when the Government sent back that $95,000,000 in payment of those notes, then you have locked it up again.
Mr. B erry . Y es; but it was locked up before.
Senator Shafroth . But they transfer that to the General Treasury
and pay it out.
Senator R eed . I do not care anything about that. I tell you it
was an actual decrease of that amount of money in circulation. I
may be wrong; but I do not think I am.
Mr. B er r y . I think you are mistaken.
Senator R eed . But I think you are wrong. W e are supposing
that there are $100,000,000 of bank notes out in circulation to-day.
There is in the Treasury of the United States the sum of just $5,000,000 reserve against that.
Mr. B erry . Belonging to the banks.
Senator R eed . Belonging to the banks; yes. And there is just
$95,000,000 of Government money. They have not got any more.
Senator Siiafkotii. Y ou mean the legal-tender money?
Senator R e e d . I mean money of any kind. That is all they
have got.
Mr. B erry . Yes.
Senator R eed . And the banks conclude that they want to re
deem— to get this legal-tender money that is over here in the
Government’s vaults for use, to add to their reserves. They take
$100,000,000 of bank notes out of their vaults. It is out in circula
tion now, when they take it out of their vaults, is it not ?
Mr. B erry . Yes.
Senator R eed . They send it to the Federal Government and they
get $5,000,000 that they have there and $95,000,000 of the Govern
ment money for it, do they not ?
Mr. B er r y . Yes.
578
BANKING AND CURRENCY.
Senator R eed . And they take that back and put it in their bank.
Now, they have just as much money as they had, and no more, as
they had before the operation began, have they not?
Mr. B er r y . Yes.
Senator R eed . N ow , what has happened? The Government had
this $95,000,000 locked up. The}’ have taken this $95,000,000 which
was locked up and exchanged it'for $95,000,000 which was in circu
lation, have they not ?
Mr. B erry . Yes.
Senator R eed . Then the Government says, “ Pay us back our
$95,000,000; we want to lock it up again” ; and the banks do pay
it back, and it goes into the Federal Treasury and is locked up and
is not in circulation ?
Mr. B er r y . But $95,000,000 of bank notes went the other way
at the same time.
Senator R e e d . N o .
Senator B ristow . N o ; it was not bank notes; it was reserve
money that went back; bank notes are not reserve money. Ninetyfive million dollars of bank notes have been returned to the banks.
Mr. B er r y . But it was a bank note in the first place that went
back to the Government and was lodged in fche Treasury. Ninetyfive million dollars went back to the banks and was lodged in the
banks. It was an exchange.
Senator R e e d . The Government takes that $95,000,000 of bank
notes and destroys them.
Mr. B er r y . N o ; the Government says, “ Give us our money,”
and sends them back. I am talking about currency redemption now,
not the reserves of banks.
Senator R eed . Well, how does that help the Government ? I
am going, for the sake of making this a plain illustration, to assume
that there are just two kinds of money in the country.
Mr. B er r y . Yes.
Senator R e e d . Bank notes and gold. There are $100,000,000 of
bank notes in circulation that can not be used as reserves. The re
serves drop down. The banks thereupon say, “ W e have got to have
these reserves replenished with gold from the vaults of the Treasury.”
They take their $100,000,000 of bank notes; they send it down to
the Treasury. There are $100,000,000 there of gold; that is all the
money they have there. Five million dollars of it belongs to the
banks, and $95,000,000 to the Government. The banks say to the
Government, “ Redeem this money and give us gold.” The "Govern
ment takes this $100,000,000 of gold— $5,000,000 of which belongs to
the banks— and sends it to the banks, and the Government puts in
its vaults $100,000,000 of bank paper. That far your theory is cor
rect. Next day, the Government of the United States says to the
banks, “ Pay us back our gold. W e redeemed your paper, and now
you owe us $95,000,000; please pay it back.”
Mr. B erry . Yes.
Senator R eed . And there is no more bank paper sent into the
Treasury.
Mr. B er r y . But there is bank paper sent back, and it goes back------Senator R eed (interposing). W ait a moment, please. Conse
quently, the banks take the gold, which is all they have now, and send
BANKING AND CURRENCY.
579
it back, and the Government sends back their paper; and they are
not a bit better off than they were the day before the operation began.
Mr. B erry . Y ou are right as to that.
Senator R eed . N ow, whenever this money is really sent into the
Government, and gold is really sent out, or Treasury notes— but I
will stick to my original illustration of gold— the only way that gold
can constitute a permanent reserve for the banks is to contract the
currency by the amount of bank currency sent in to the Treasury;
so that it is a contracting operation, is it not ?
Mr. B erry . If you are speaking of the retirement of the currency,
yes; but we are speaking of currency redemption now. Then it is
paid right out again.
Senator Shafroth . Y es; it is paid out again.
Mr. B erry . But as to the retirement of the notes (which is limited
to a certain amount per month) your statement is correct.
Senator R eed . But it is a contracting process ?
Mr. B erry . Yes.
Senator R eed . But when they get down to counting the money for
reserves, that is a prescribed fund; and I thought I was talking in
consonance, now, with your idea which you have expressed (although
I put it in different language) that the first thing that retires in that
case of a stringency was the bank note.
Mr. B erry . That is also right.
Senator R eed . N ow, when that retires that means a contraction,
does it not ?
Mr. B erry . Well, you, see, as I said in the first place, there is a
certain physical inertia that is involved in that operation.
Senator R eed . Well, we will cut the inertia part of it out for the
moment.
Mr. B erry . Well, that is all there is there.
Senator R eed . N o ; there is the actual retirement there. The
banks must, of course, build up the kind of money that will act as a
reserve; and they do so by sending in bank notes.
Mr. B erry . Well, if they retire the bank note and get legal tender
for it, in that case, you are perfectly right; it is a contraction. But I
am speaking about currency redemption, not retirement. A t the
very moment you want the money for reserves, that is the moment
you lose it; because it takes a week to get the money from the bank
to the Treasury and back.
Senator Shafroth. And it is therefore an actual contraction for a
week.
Senator R eed . I do not care about that feature.
Mr. B erry . And you will find the very moment you want it is the
very moment it runs away.
Senator R eed . N ow, back of these bank notes there is what?
Mr. B erry . There is the Government bond.
Senator R eed . Of course, if the bank brought its bond which it had
paid the Government money for to the Government, that is the way
it would settle it, would it not ?
Mr. B erry . Yes.
Senator R eed . The banks have got the $100,000,000 of bonds now,
we will say. Now, let us see if that would amount to the same thing.
Senator Shafroth . Certainly, if you present the bond it would
make no change.
580
BANKING AND CURRENCY.'
Mr. B erry . Well, if you do not get new money for it.
Senator Shafroth . If you do not present the money for it, you are
merely “ running around the barn.”
The Chairman . That is what this redemption amounts to; it is
merely “ running around the barn.” It is not a retirement of the
bank note at all.
Senator R e e d . But you have not gained anything by the process;
conditions are the same as before.
Senator Shafroth . Well, there is the economic loss of time.
Senator R eed . I do not care anything about the economic loss of
time. I am speaking of the fact that it is going to contract this
currency— the process of redeeming notes I have described and illus
trated.
Senator Shafroth . There are a very large number of redemptions
made of national-bank notes every year. Last year there were
$600,000,000 redeemed; and according to that, if your theory of a
contraction were correct, there would be $600,000,000 less of nationalbank notes outstanding now than last year; and instead of that there
are more.
Mr. B erry . The only loss is in transition, in the movement back
and forth.
Senator Shafroth . That is all.
Mr. B erry . It is the inertia that is involved there.
The Chairman . Senator Reed, will you let me explain the matter?
Senator R eed . Y ou will not explain it so that I will understand it.
The Chairman . I was entertaining the hope that I could.
Senator R eed . Because you will talk over my head. But I am
really serious about wanting to get this method in my mind; and
after I get through with this difficult question, then I shall be glad to
hear all you have to say in explanation.
There is, in the case I put, m the country just $100,000,000 of bank
notes. There is in the Treasury just $100,000,000 of gold. The
Government obtained that gold by selling the 2 per cent bonds—
$95,000,000 of it; and the other $5,000,000 the banks put in.
That is all it has. It holds the bonds; it holds the money. The
banks find that they have to have $100,000,000 of gold to make their
reserves good; and they have to gather up $100,000,000 of their paper;
all there is. They say, “ We will go to the Federal Government and
get this gold.” They go to the Government and get this gold. They
get $100,000,000 of gold from there, and there is not a cent left.
And they take it over here and put it in their vaults; and they put in
the vaults of the Government $100,000,000 of bank paper.
Now, the Government says, “ All right; you owe us $951,000,000.”
The banks say, “ Very well; take your bond.” Now, what is the
effect of that operation ?
Mr. B erry . W h y that is the most simple thing. If you will do
that you have got the whole thing solved.
Senator R eed . But the effect of that is that $100,000,000 of bank
paper is wiped out; it no longer exists. And there is just the same
amount of money in the country as there was before you ever issued
a bank note.
Mr. B erry . W ith this exception, that now that bank could float
$1,000,000,000 of credit which it could not float before. That is the
whole difference.
BAN KIN G AND CURRENCY.
581
Senator R eed . Very well, But there was prior to this time in
circulation $100,000,000 of bank paper and $100,000,000 of gold in
the vaults of the Treasury— but it was locked up.
Mr. B erry . Yes.
Senator R eed . And you have now released the $100,000,000 of
of gold in the Treasury.
Mr. B erry . Yes.
Senator R eed . And put it in circulation— against the bank note.
Mr. B erry . In other words, you have changed the $100,000,000
from bank notes to legal-tender gold; and now your banks can float
a billion dollars of new credit.
Senator Shafroth . And the bank note goes out again ?
Mr. B erry . N o ; the note is destroyed with the bond.
Senator R eed . Now I understand your logic. There is $100,000,000
less bank notes in existence ?
Mr. B erry . Yes.
Senator R eed . But $100,000,000 of gold has been unlocked from a
place where it could not be used and has gone into circulation in lieu
of the $100,000,000 which retired from circulation.
Mr. B erry . That is right. But the plan I propose would not have
changed the gold situation at all and would have added $100,000,000
of new legal-tender paper to the circulation.
Senator R eed . I do not understand your plan.
Mr. B erry . The plan is that the bank can take this $100,000,000
of bankers’ notes to the Government, along with the bond, and say,
“ Here is your stuff; give me legal tender for it.” It sells the bond
and the notes both for $100,000,000 of legal-tender paper. Now, it
takes that back, and it does not decrease the Government holdings
at all. That money was made brand new by the printing-press for
that special occasion; new money.
Senator B ristow . Now, what becomes of these notes of the bank?
Mr. B erry . They are burnt up.
Senator Shafroth. That would be a substitution of one currency
for another?
Mr. B erry . Yes.
Senator B ristow . What does the bank give to get this legal-tender
paper ?
Mr. B erry . Its $100,000,000 of bonds.
The Chairman . The bank has these bonds in the comptroller’s
office; and Mr. Berry proposes that those bonds shall be burned up
and canceled, and that the bank notes assumed by the United States,
as they come in, shall also be burned up, because these bonds belong
to the Government. And the Government, in order to prevent con
traction will issue in lieu of those national-bank notes as they are
burned, legal tender of the United States.
Senator R eed . But why do that, when you have just told me that
we did not contract the currency; we actually substituted good
money for bad?
Senator Shafroth. Because, in one instance, he referred to the fact that the bond was not presented for cancellation. In that event,
there was no contraction. But if you say, “ I want the bond and the
whole circulating medium destroyed” -------
582
BANKING AND CURRENCY.
Senator R eed (interposing). Well, then, if you did not destroy the
bond— I will go back to mv illustration: The bank takes its
$100,000,000 of paper to the Treasury and gets the $100,000,000 of
gold; and the next day the Government says, “ Pay us back.” What
are they going to pay back with ?
Mr. B erry . With that same money they take.
Senator R eed . If with the same money, then their reserves are in
the same shape the day after to-morrow that they were the day
before they started.
Mr. B erry . Precisely.
Senator R eed . S o that they have not done themselves a particle
of good by the operation.
Mr. B erry . Not a particle; and they are doing it every day, to the
tune of $700,000,000 a year.
Senator Siiafroth . Each bank has but a certain proportion of
this outstanding $700,000,000. And when the demand is made to
restore this money, it is made on all the banks and not on one bank
alone. And for that reason it does serve its purpose, until more
notes accumulate in the bank vaults------The Chairman . Senator Reed, I think you do not distinguish
between one bank and another. There is all kinds of difference.
When bank No. 1, for instance, sends in the bank notes of bank No. 2
for redemption, bank No. 1 proposes to get legal tender for the money
of bank No. 2. The Government redeems the notes of bank No. 2 in
lawful money, and sends the lawful money to bank No. 1, and sends
this note back to bank No. 2 for redemption.
Senator R eed . Exactly. But the grand total of the operation is
that every dollar of paper that is taken down to the Federal Govern
ment has got to be redeemed in lawTul money.
The Chairman . The Government redeems it and charges it up to
the bank which issues it.
Senator R eed . And when the bank of issue is finally confronted
with its paper, which the Government has redeemed, it has got to
take it out of the body of money in the country?
Senator Shafroth. It is not the same bank.
Senator R eed . I understand; it is one bank playing against
another. But the sum total of all the operations must he a con
traction.
The Chairman . Well, when you in the period of a year send in the
$600,000,000 of bank notes for redemption, there goes out of the
Treasury the $600,000,000 legal tender notes; and the Government
collects that amount of $600,000,000 from the notes it redeems.
Therefore it is just like running around the barn.
Senator R eed . Well, you can not tell me that you can fill up the
gold reserves of the banks without taking that gold from some place,
or that you can burn up that paper money that once represented
that without losing something in the volume of money in the country.
The Chairman . Y ou do not burn up the notes in the redemption
of money.
Mr. B erry . The only case is when you substitute legal-tender
paper.
Senator Shafroth. And substitute the bond.
Senator R eed . And if you do not do that------ Mr. B erry . It is just the same.
BANKING AND CURRENCY.
583
The Chairman . It is confusing to talk about the retirement of
these notes at the same time you talk about redemption. There is
as much distance between the two operations as between the North
and South Poles. The redemption process consists in a bank sending
in the notes of some other bank and getting the lawful notes from the
Government, and letting the Government collect the lawful money
from the bank which emitted the notes.
Senator R eed . Well, when the Government has collected from the
bank, you are iust taking that much money out of the general aggre
gate of the country.
The Chairman . Out of the reserves.
Senator R eed . That is contraction.
Mr. B erry . N o ; there is no contraction other than is involved in
the inertia of the movement.
Senator B ristow . But, Senator Reed has been talking about re
storing the reserve of the bank which is depleted; and whenever the
bank sends in money which is not reserve and gets money which is
reserve, that money is retired, not redeemed. He says it is retired;
he is right. You can not restore your reserve with a money that is
not legal tender.
Senator R eed . And if any of you gentlemen can convince me of
that you will convince me that a man can lift himself up by his boot
straps.
Senator Shafroth . Here is this $100,000,000 that has been re
deemed; it goes to one bank and comes from another. W hat is the
reduction in circulating medium ?
The Chairman . Just exactly.
Senator B ristow . This way of building up reserves comes to
nothing, because if you do not issue money that is reserve money you
do not have to reserve any.
Mr. B erry . It affects the individual bank. It does not help the
general situation an iota.
Senator R eed . That is what I meant.
The Chairman . It does not help the general situation at all.
Senator Shafroth . T o this extent it affects it, however, that it
takes about a year to get around with all these redemptions to the
Treasury, and back again into circulation.
Senator R eed . N ow, you have gotten away from my original
illustration. I was talking about a condition that did not affect one
individual bank but a general condition of the country, such as you
say now obtains when the reserves are so low that they must be
replenished.
Now, when that is true, there are a multitude of banks in the same
unfortunate condition; and that multitude of banks will begin send
ing in their money; and if they all are in that condition, they are all
bound to send in their money.
Mr. B erry . Yes.
Senator R eed . And the whole point that I have in mind is that,
in the hour of depression and danger, we have got a system that is
likely to cause actual contraction of the volume of money in the
country.
The Chairman . It does contract it just to the extent of the
physical inertia.
584
BANKING AND CURRENCY.
Mr. B erry . That is the point I am trying to make clear—that the
ultimate contraction is simply what lies in the inertia, which, how
ever, becomes enormous at times, because everybody is doing it,
and all the money is on its way to Washington or back again.
Senator Shafroth . Not at the same time, however?
Mr. B erry . Practically at the same time. There is as high as
$50,000,000 tied up in this way.
The Chairman . Here is the Treasury statement of September,
1913, which shows national-bank notes on hand of $52,000,000.
This includes $48,000,000 which the Treasury has redeemed, and for
which it will receive payment from national banks. That is, a certain
group of banks has sent in $48,000,000, and that is redeemed through
the agency of the Government, and the Government then collects the
money of the banks whose notes it has redeemed. It just transfers
legal-tender money from the banks whose notes are emitted to the
banks wdiich hold those notes for redemption. That is all.
Senator R eed . But when the Government gets in that $48,000,000,
it is going to get that in lawful money ?
The Chairman . Yes.
Senator R eed . And there is going to be that much lawful money
locked up in the vaults of the Treasury ?
The Chairman . Well, that much money has just been taken out.
Senator R eed . And the bank notes are destroyed?
The Chairman . N o .
Mr. B erry . Oh, no. In the process of retirement they are, but not
in redemption.
Senator R eed . I am speaking about the process of redemption.
The Chairman . Those $48,000,000 of bank notes are sent back to
the banks which emitted them; all national-bank notes are sent back
in such cases, and those banks have got to send lawful money for
them. But the other banks had received lawful money for them
when they sent them to the Treasury.
Senator R eed. S o that the minute they send the lawful money
back to the Federal Government it is no longer in their vaults?
The Chairman . N o.
Senator R eed . And it does, therefore, cut down those reserves to
that extent ?
The Chairman . Yes.
Senator R eed . So that it is an utterly useless thing, except that
you can temporarily create a sound reserve while the money is in
transit ?
Senator Shafroth . Yes.
Mr. B erry . Yes.
Senator R eed . And that is just exactly like my keeping my bank
balance good by drawing a draft on you, Mr. Berry, and you drawing
on Senator Shafroth, and he on the chairman, and my finally going
around to make my draft good ?
Mr. B erry . Yes.
Senator R eed . That seems to me an utterly useless process.
Mr. B erry . The biggest piece of foolishness in the world.
The Chairman . It is.
Senator R eed . But if somebody says, “ Pay up,” you can not pre
vent that ?
Mr. B erry . No.
/
BANKING AND CURRENCY.
585
Senator R eed . Then somebody is going to s a y ,“ Redeem our bonds
down here, and we will take the g o ld /’ and when that is done there is
a contraction.
Mr. B erry . You are right. Now, the greater the percentage of
these notes in circulation, the larger will be the proportion of such
deposits and the larger the demand for redemption. The issue of
credit notes tends to greater rigidity, and not to greater elasticity,
and can not therefore be used for this purpose. I wish to impress
that upon this committee, because I think it is very important.
Now, it will make no difference whether that note is issued by the
United States Government or by the banks. The same thing is true
of it in either case. If it is not competent to stand in reserve when
it is issued, it is not useful------Senator Shafroth. Pardon me for interrupting you; but do you
have to leave the city to-night, Mr. Berry ?
Mr. B erry . Well, I want to leave. But I will telegraph to Pitts
burgh that I can not go there to-night. I do not want to disturb you
gentlemen; but I have devoted a great deal of study to the subject----Senator Shafroth . W e are very much interested in what you say.
Senator R eed . Y es; there are some further questions I should
like to ask you.
Mr. B erry . Then I will stay here. The paper which I have pre
pared with reference to this bill you will not be thoroughly interested
in unless we have had this preliminary discussion. The first 10
comments on the questions are very brief. I have no instructions
to give the committee in regard to the management of your Federal
reserve banks.
(Thereupon, at 5.45 p. m., the committee adjourned until to
morrow, Thursday, September 18, 1913, at 10.30 o’clock a. m.)
T H U R S D A Y , S E P T E M B E R 18, 19 13 .
Committee
on
B anking and Currency ,
U nited States S enate,
Washington, D. C.
The committee assembled at 10.30 o’clock a. m.
Present: Senators Owen (chairman), Reed, Shafroth, Pomerene,
and Bristow.
The Chairman . Mr. Berry, we will be glad to have you proceed.
FURTHER STATEMENT OF WILLIAM H. BERRY, OF
CHESTER, PA.
Mr. B erry . A s I remember, I finished discussing question No. 6
and my answer thereto, and I will now continue where I left off.
Senator R eed . Referring to your answer to question No. 6 I
should like to ask just one question. Do I understand that you mean
that in the crop-moving period, while there is a demand for money, a
large amount of it to move the crops, and when the crops are moved
that particular demand has ended that immediately there is some
other counterbalancing demand------Mr. B e r r y . The miller, for instance.
586
BAN KIN G AND CURRENCY.
Senator R eed (continuing). In some other part of the country or
in some other line of industry that takes up the same money that the
crop-moving demand did. That is what you mean, taking the whole
average ?
Mr. B erry . Yes, sir.
Senator R eed . Very well; I understand.
Now, I will ask another question, because I have the matter in mind.
I do not mean to go into it in detail: In your answer you assume that
the volume of trade in the country is constantly on an increase, and
you say that the crop-moving period, while it demands a lot of money,
as soon as it is over there are other activities that demand the same
money; but you go further than that in this statement, and claim
this: That there will be constantly from year to year an increased
demand for money. Now, do you not think that statement is rather
too broad ?
Let me illustrate what I mean by this further question: Whether
in periods of greater activity running over several years, perhaps,
there will be greater demands than there would be in other years
growing out of the multitude of conditions?
Mr. B erry . There are such periods undoubtedly, but they arise
solely from the fact that during the period in which the great
activity is manifested the money supply is accelerated prior to the
development of the business.
Senator R eed . N ow, are you not making the mistake of attributing
everything to the volume of money? Let me illustrate again: Sup
pose there is a great war, such as we had here in the United States
between the States, which paralyzes the industry to a very large
extent of a great nation and puts out of good working order the entire
commercial system of the world. Would not that depress production ?
Mr. B erry . Yes.
Senator R eed . Then, are there not cases where, for instance, there
may be a world shortage in the production of cereals and crops of
all kinds. Does that not have its depressing effect on all lines of
production, upon all commerce and all trade?
Mr. B erry . There would doubtless be an effect resultant from a
world shortage of crops. There would be fewer crops to move and
fewer crops to handle.
Senator R eed . There would be less buying and less selling?
Mr. B erry . There would be less buying and less selling as measured
in crops, but ordinarily a condition of that sort increases the price
level and involves the use of practically the same amount of money in
either case.
Senator R eed . Does not it decrease the sale of other commodities ?
Mr. B erry . Not necessarily.
Senator R eed . I am trying to just see whether your rule is not
subject to some qualification. You say, “ not necessarily,” but is
that not very likely to follow, given tins sort of condition in the
United States of two or three short crops. The farmer can not buy
as readily as he can with full crops. The country merchant therefore
finds his sales are curtailed and his purchases are necessarily cur
tailed until finally you reach the factory. Do not conditions of that
kind come ?
Mr. B erry . They certainly do come, but as to whether they influ
ence the volume of business or not I very much question.
BANKING AND CURRENCY.
587
Senator R eed . Y ou do not question the fact, do you now, that if
you have bumper crops, if you have plenty of rain and plenty of sun
shine, and there are great crops raised in the country, so that there
is plenty of stuff for people to live upon, that that stimulates every
kind of business. You do not question that do you?
Mr. B erry . N o; I would not question that as a general statement.
Senator R eed . If it stimulates every kind of business, the more
business you do the more money you get in circulation, do you not—
more circulating medium ?
Mr. B erry . Surely.
Senator R eed . In addition to the mere matter of crops, do not we
have this condition to contend with, which has this effect upon the
demand for money: W e have a period of good crops and everything
is running in fine shape; people begin to expand, they build houses,
they buy automobiles, they start new enterprises of a thousand
different kinds. The demand for money is very heavy, and then,
after a while, they just reach the limit. They have gone a little too
far, and there comes a period of settlement and curtailment. Is not
that a thing to contend with and does that not affect }rour general
rule?
Mr. B erry . Well, perhaps so. I think there is no doubt but that
the relative world production of crops directly from the ground
affects the general world activity, but my experience and my search,
as I have stated in this previous answer, is to the effect that practi
cally, as a world problem, that does not occur. W e do not have any
appreciable variation.
Senator R eed . But we do in this country.
Mr. B erry . Y es; and they do in other countries, but while it is
good here it will be bad there and it is a compensatory matter.
Senator R eed . Y ou say if it is bad here it is good there?
Mr. B erry . Yes.
Senator R eed . N ow, if you had a world-circulating medium those
conditions might equalize.
Mr. B e r r y . B u t we have a world m edium ; and they have a world
medium.
Senator R eed . Oh, no; we have a monetary system for our own
country. Let us suppose this sort of condition: Splendid crops all
over the world except in the United States for three or four years in
succession and poor crops here for the same period of time, so that we
would have a short production with very little surplus to market,
and what little we did have to market would get low prices because
of the production abroad. That is bound to produce depression here,
is it not ?
Mr. B erry . Y es; but your first assumption is that we have a cur
rency confined to this country and that is an error.
Senator R eed . Well, I admit it is not strictly a fact.
Mr. B erry (continuing). Because the currency question is a world
question, and just as long as that condition is set up wherein there is a
scarcity of products in one country which affects the price limit, just
that instant it begins to move the money from one country to the
other.
Senator R eed . Y ou mean to move the gold.
Mr. B erry . Yes; because the gold is the one common factor in the
various currencies and that makes it a world question.
9328°— S. Doe. 232, 63-1— vol 1------38
588
BANKING AND CURRENCY.
Senator R eed . But in this bill we are not dealing with the gold so
much as we are dealing with the question of other kinds of money.
Mr. B erry . I think we can not deal with the question at all without
having prime reference to gold.
Senator R eed . I think there is much truth and philosophy in what
you said, but I think your inference is too broad— entirely too broad.
Senator Siiafroth . Is it not a fact, though, that there is more
currency needed when these depressed times come, when the banks
are demanding of the people that they pay their notes, than in the
boom times ?
Senator R eed . The People who hold the money do not need more.
Senator Shafroth . Well, there is a limitation of things and there
is a demand for liquidation, and if money were plenty there would
not be a call upon them.
Senator R eed . Liquidation once made is over.
Senator Shafroth . That is true.
Senator R eed . But in business and good times one business trans
action simply leads to another and another.
Senator Shafroth . But that liquidation that takes place pro
duces a condition where there is panic, and everybody concedes
that we need money in panic times.
Senator R eed . Your philosophy would lead to this: That in good
times we would not need any currency, but when bad times come
we would need a great deal of money.
Senator Shafroth . I do not think that; I think there is a truth
to a great extent in what you say, but I do not think that they
recognize that when the depressed times------Senator R eed . There ought not to be a contraction.
Senator Shafroth . I think so too.
Senator R eed . There ought not to be, then, a forced contraction,
making it hard to transact business.
Senator Shafroth . But at the present time it is my judgment
that we need a good deal of money.
Mr. B erry . If you confine this to a single locality or a single
nation in the consideration of this question, you will encounter just
the question that you have raised; but if you take the broad effect
and assume, which I do, that the currency problem is a world problem
and that it can not be localized, the question is better understood.
Therefore the world progress and the world development are things
that you must have in view; and this is the point that I make— that
at no time have I been able to find when the world at large was
required to reduce its currency because of a reduction of business.
Senator R eed . Y ou spoke about world supplies and world con
ditions, and you spoke about one country being considered by
itself. Do you not think that world conditions, that these periods
of settlement, are world-wide ?
Mr. B erry . Surely.
Senator R eed . For instance, I notice that in a number of our
panics in this country there was a panic in England the very same year
or a year or two previous. Nearly every panic we have had within
modern times, they have had a panic in England at the same time
or perhaps a year earlier, just giving time for the reflex action.
Mr. B erry . I think if you will allow me to finish the discussion
of my paper you will get my view as to all these facts.
BANKING AND CURRENCY.
589
Senator Heed . I just wanted to get your point of view in that
connection. If you are about to take it up, you may as wel1 proceed.
Mr. B erry . I will now take up question No. 7.
Should such currency be the notes of individual banks, or of a central reserve asso
ciation, or of a number of regional reserve associations, or of the United States
Treasury?
I answer that question as follows: The notes must of necessity be
issued from the United States Treasury.
To be of any service whatever they must be clothed with legaltender power— the power to extinguish debt— and therefore compe
tent to stand in bank reserves as a liquid asset.
Such notes can only be issued by the General Government. Even
the sovereign States are forbidden by the Constitution to make any
thing but gold or silver legal tender.
If any bank is permitted to issue circulating notes, all banks ^should
be permitted to do so; and all such notes should be purely credit
instruments, devoid of all legal powers, and circulate, as other
credit instruments— checks, etc.— must do, on the sufferance of the
public.
I do not think that such an issue would be profitable to the banks
or desirable in the community. The maintenance of redemption for
them would absorb as much or more of reserve money than would
a similar amount of book credit.
In my judgment, the Government should issue all the notes as well
as coins that are used in the country, and they should all be made a
full legal tender for all debts, public and private, in the nation.
If there were no profit in issuing notes, the banks would not do it.
If there is a profit in issuing notes— and there is— it should revert to
the Public Treasury, and not to private individuals or banks. Sim
plicity, economy, and justice would all be accomplished by this
process.
Now, referring to question No. 8:
Should these notes be procured from the Trejisury on pledge of security; and if so,
of what should this security consist? Should these notes be a first lien of the Govern
ment upon the assets of the association or bank to which they are issued?
The notes should be procured from the Treasury on the surrender
of an equivalent in value, just as gold certificates are procured by the
surrender of gold.
In my judgment, the best form of equivalent to be surrendered is
a Government bond.
The Government (all the people) have been the recipients of the
benefits derived in creating the bond. The Government must pay
interest upon it until maturity, and finally pay the individual that
owns it the face of the bond.
The Government may justly buy it when voluntarily presented
before maturity at the market price, and pay for it with new noninterest-bearing notes payable on demand in gold, to which notes
legal-tender powers may be lawfully and justly given.
13y a bond issue the Government (all the people) becomes indebted
to a part of the people, the evidence being an interest-bearing time
obligation. By this process of purchase the Government (all the
people) is still indebted to a part of the people to the same extent,
the evidence being a noninterest-bearing demand obligation circu
lating as money.
590
BANKING AND CURRENCY.
If this is done only on the voluntary solicitation of the bond
holder, who finds that legal-tender money will be of more use or value
to him than an investment at current interest rates, no possible injus
tice is done to him or to his debtor (the people); but a public neces
sity has been met, and the public has reaped a benefit in the cessation
of interest.
If the note is never presented to the Government for payment, by
reason of its loss or destruction or by reason of the continued neces
sity for its presence in bank reserves, the public gains not only the
interest but the face of the note.
A private individual would find no advantage in thus converting
a bond, for he already has a safe investment at current rates and
can not improve it, but a banker would find it to his advantage to
convert a SI,000 bond bearing, say, 4 per cent interest in order to
qualify himself in the matter of reserves to take on a safe loan of
$7,000 or $8,000 at 4 or 5 per cent.
An unsafe loan would not tempt him, so that the notes would
automatically come into circulation in response, and only in response,
to the legitimate demands of business, and would stay in circulation
as long as business continued.
Manifestly, the banker would not convert a bond into money if
his reserves were maintained by the voluntary deposit of newly
mined or imported gold in his vaults by his customers, so that the
mutations of gold production and movement would be met by an
automatic adjustment of note issues. If gold increased, note issues
would decrease, and vice versa.
I think the same reasoning could be applied to the mutations of
current production, and that is the philosophy of the proposition,
the mutations of current production. W e have a constant in the
production of gold, practically; we have a variant in the commodities
which are measured by gold. Some years it is greater, some years it
is less; so that as the constant is always deficient the supplement
which should automatically come into existence would automatically
come into existence, following this same reasoning in answer to the
mutations of the production of notes, just as it would in answer to
the mutations in the production of gold. It would supplement
whatever the gold supply failed to produce.
These notes if issued as described would become a permanent part
of the monetary circulation. They would never be presented for
payment or for reconversion into bonds unless the production of gold
became more than sufficient to supply the demand for reserve money,
and this, I think, if it ever happens, will make it. necessary to deny free
coinage to gold.
These notes should be an obligation of the Government and not of
the banks, and the question of preferred creditors of the bank is elim
inated. In any event, if properly issued they would never be pre
sented for payment, and it is mainly for this reason that the banks
should not issue them.
Now I come to question No. 9. That is the most important ques
tion of the lot, gentlemen, and I want to have your attention.
Should all currency be based on gold?
per cent of gold should be required?
If so, how should it be issued, and what
And I answer that question in this way.
In the sense of reatly exchangeability, all currency should be based
on gold.
BANKING AND CURRENCY.
591
Since gold is admitted by law to free coinage at a fixed price in all
the important countries of the world, it affords an efficient means of
maintaining the par of exchange so necessary to foreign commerce;
and certainly the interchangeability of all our forms of money, each
into the other at the will of the holder, is a necessity, for this and other
reasons.
All forms of money issued by the Government should be full legal
tender for all debts, public and private, in the Nation, in which case,
with free interchangeability, the most convenient forms would dis
place the less convenient, and finally an approach to stability of
form would be reached and exchanges (redemption) reduced to a
minimum. If all the forms were full legal tender, exchange of one
form for another would be made only for convenience or export.
When the most convenient forms had finally been selected in
proper proportion, exchanges would practically occur only for export,
and since gold is recognized as coinable in all the foreign laws on the
subject, gold would be sought for this purpose, and the Government
should be prepared to exchange gold for any and every form of
money at sight.
It should also continue to exchange notes for gold as now, at least
until gold should become sufficiently plentiful to require its demone
tization. Even then the existing com should be exchangeable, for
it would be the duty of the Government to maintain its gold coin
at par with its paper money just as it now maintains its silver coin.
The automatic flow of gold from one country wffiere money has
fallen in value to another where it has risen (sufficiently to pay cost
of transportation) maintains the par of exchange by a process not
generally understood.
If prices rise or the value (purchasing power) of money falls in
the United States below the average abroad, an automatic movement
of money abroad is set up to restore the equilibrium or par, and gold,
being the one factor or element common to all currencies, is the factor
that moves, and in the case cited above gold leaves the United States
and raises the value of the money that remains by decreasing the
supply and reduces the value of foreign money by increasing the
supply, so that gold is actually used in the world to dilute or reduce the
value of money by its presence and increase its value by its absence.
The notion that currency derives its value from the value of gold
is erroneous. Currency derives its value solely from the relative
quantity in existence, and anything that serves the currency purpose
in any degree is a factor. W e have several factors in our currency.
In 1913 it stood as follows:
G old.......................................................................................
Gold certificates...................................................................
$611,000,000
943,000,000
Total gold........................................... ................................................. $1,554,000, 000
Silver.....................................................................................
215,000,000
Silver certificates.................................................................
469,000,000
Total silver...........................................................................................
United States notes........................................................................................
Bank notes......................................... ..................................
705,000,000
Other bank credit................................................................17, 085, 000,000
684, 000, 000
350,000,000
Total bank credit.
17,790,000,000
Total currency...
20, 378,000,000
592
BANKING AND CURRENCY.
Senator R eed . Y ou count in checks ?
Mr. B erry . Count in checks, which circulate as exchanges. Any
thing which is in process of fact exchange is currency.
The total gold is $1,554,000,000. The per cent of gold is 7.6.
The total legal-tender money in the currency is $2,588,000,000,
including gold, silver, and United States notes, as against $17,790,000
of bank credit, or 14.5 per cent, and, unit for unit, the bank credit
is more efficient in effecting exchanges than is money.
If we were to suppose that any one factor fixes the value of the
rest, we must give the distinction to bank credit. Certainly, if we
conclude that the value of gold gives value to all the rest, then it is
a case of 7.6 per cent of tail wagging 100 per cent of dog, or 7.6 per
cent of dog wagging 100 per cent of tail. (Difficult to believe in
either case.)
As a matter of fact, the value of the commodity gold (bullion) is
fixed by the value of currency into which it may be freely coined
under the laws of civilized nations, two-thirds of the entire product
being thus used.
The value of the currency is fixed by the quantity offered in ex
change for other things, as compared to the demand (offering of
other things in exchange) for it.
The great utility of gold as money is resident in the fact that it is
made by law a factor in the various currencies of the world, and
affords an automatic method of maintaining the par of exchange.
W e need not discuss the primary reasons for the selection of gold
for this purpose; they are well understood by students of the prob
lem, but the fact must not be forgotten— gold is the one common
factor in all civilized currency systems.
Gold redemption, therefore, must be a part of the plan for an
extension of our legal-tender paper circulation, and the facts as to
gold are therefore very important.
First. Forty-nine and eight-tenths percent of all our money (includ
ing bank notes) is gold or gold certificates. If we exclude bank
notes, we find that 74 per cent of our legal-tender money is gold or
gold certificates.
That our people prefer paper money to gold for daily use is proven
by the fact that 57 per cent of all the gold in the country has been
“ redeemed ” or exchanged for certificates. The remaining 43 per
cent is mainly lying in reserves. Comparatively little of it is in
active circulation in the hands of the people.
The issue of gold certificates in 1912 was $45,000,000, while only
$43,000,000 of gold was added to our stock. Three million dollars
of the old stock went into certificates with all the new. Gold will
only be sought for export.
Second. The annual requirements for gold export average nothing.
For the past 32 years we nave imported an average of $5,000,000 per
year.
The largest net export of any year was $89,000,000 in 1864; that
was during the war. So that in an experience of 50 years the export
of gold is seen to be a negligible quantity.
It would be extravagantly safe to assume that $150,000,000 might
be needed for this purpose in any one year, and equally safe to
assume that an average of $20,000,000 per year of gold exports would
BANKING AND CURRENCY.
593
be the limit for any extended period. For the past 32 years an average
of $5,000,000 per year has been imported.
We have an annual production of $90,000,000, $60,000,000 of
which is available for money, or three times the possible average
export. The ability of the Nation, therefore, to “ redeem” its full
legal-tender paper in gold is so well assured that we need give the
matter no concern.
Third. The necessary annual increment of legal tender in the
country is (as we have seen in answer to question No. 2) $200,000,000
and thie annual increment of gold is $65,000,000. The increment of
legal-tender paper needed, therefore, is $135,000,000 per year, of
which the gold increment ($65,000,000) is 49 per cent.
On June 30, 1912, we had in circulation:
United States notes.........................................................................................
Silver dollars.................................
Gold certificates................................................................................................
Silver...................................................................................................................
Subsidiary silver..............................................................................................
$340, 000,000
70, 000, 000
943, 000, 000
469, 000, 000
145, 000, 000
Total......................................................................................................... 1,967,000,000
All of which may be considered redeemable in gold.
Neglecting entirely the silver held in the Treasury as an asset, we
had of gold at the same time:
In Treasury reserves..................................................................................... $1,093,000,000
In circulation..................................................................................................
610, 000, 000
Total gold .............................................................................................
1,703,000,000
All of which was available for redemption purposes, or 86 per cent
of the total redeemable currency.
If we eliminate the subsidiary silver, and the $1 and $2 notes, no
part of which can be spared from actual use, we find that more than
one-half of our money is gold. In other words, we have 100 per
cent of gold back of our uncovered money, of which $1,093,000,000
is already assembled in the United States Treasury for redemption
purposes, and amounts to 85 per cent of our redeemable currency.
Starting, therefore, with 85 per cent of gold money in the redemp
tion fund, and currently securing 49 per cent of gold against the new
notes to be issued, we would seem to hav3 a competent equipment
with which to face a situation in which in the long run no redemption
would be required, and in which in all human probability the-deposit
of gold in exchange for the more convenient forms of paper must
increase more rapidly than in the past.
In answer to the second part of this question, I would say that the
new currency should be issued by the Treasury Department in ex
change for an equivalent in value of Government bonds, whenever
and by whomsoever presented, the bonds to be canceled as fully
paid.
The notes should be full legal tender for all debts public and private
in this country, and redeemable in gold or any other form of currency
issued by the Government on demand.
A minimum reserve fund of gold coin amounting to 20 per cent of
all outstanding currency other than gold should be maintained in
the Treasury, the same to be replenished when necessary by the sale
of bonds for gold in the open market.
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BANKING AND CURRENCY.
Since a constant increment of 49 per cent of gold automatically
accompanies the proposed expansion of notes, which increment flows
of its own volition into the reserve fund, it is altogether probable, if
not certain, that the gold reserve will constantly increase, and no
bond sale for this purpose would ever occur.
I mean a 20 per cent reserve here as a minimum. You can put it
up as high as 33$ per cent. You can not maintain it above that and
furnish the country with the money it needs.
Senator Shafroth . There is not enough gold.
Mr. B erry . Yes, sir; there is not enough of it.
Now I pass to question No. 10.
If notes are issued to or b y an association what should be the limit in amount of
this currency for each association, and should this limit be based on its capital stock
and surplus?
I now answer that question in this way.
No notes should be issued by a bank or association.
If thus issued, they can not be given legal-tender powers, and
would be useless otherwise. If issued to an association or bank by
the Government in exchange for an equivalent the question of capital
and surplus is not pertinent.
Senator R eed . W hy is not capital and surplus pertinent ?
Mr. B er r y . Suppose I sell you a horse for $150; I do not care
whether you have any capital or assets or not, as long as you pay for
the horse.
Senator R eed . Y es; but we are not dealing with horses.
Mr. B er r y . W e are dealing with assets just like horses, only better.
Senator R e e d . What kind of assets ?
Mr. B er r y . Government bonds.
Senator R eed . Nothing but Government bonds ?
Mr. B er r y . Nothing but Government bonds.
Senator R eed . Well, if you limit it to that, that is true, but if you
limit it to any other medium you have a radical departure from the
proposition contained in this measure. I understand you with that
explanation.
Mr. B er r y . It is only when we introduce the idea of Government
loaning money to the banks that the question of security enters the
problem, but as a matter of fact if the money issued either as a loan
(however secure) or as an equivalent to the asset (bond) surrendered,
and only in answer to the demands of business, final payment will
not and" can not be made unless business is reduced, and business
should not and will not be reduced. Therefore the security will only
cover the interest payment. The final result will be a perpetual debt
and interest payment by the people to the banks and by the banks
to the Government (the people), and a horde of clerks to attend to
an utterly useless and fruitless mass of detail.
If the money is issued, as are the gold certificates, in exchange for
an equivalent, the question of capital and surplus is not pertinent,
and no bookkeeping is involved.
I now come to question No. 11.
What device should be provided to force the retirement of this currency in whole
or in part when the legitimate demands of trade subside?
I will now answer this question as follows: The legitimate demands
of trade do not subside, and when these notes become the basis of
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595
credit in bank reserves they can not be retired without forcing
business to “ subside.”
If, however, it is desired to provide for the voluntary retirement
of any portion of the notes— which will never occur (I think it should
be forbidden)— the reissue of the bonds in exchange for the notes
would be the best method.
I now take up question 12.
If a tax on this currency payable to the Government is provided, should it be
graduated so as to increase with the volume of currency issued by the reserve asso
ciation, or graduated so as to increase with the length of time it is outstanding?
I will answer this question as follows:
There should be no tax, graduated or otherwise, on the notes
issued. The tax would be ultimately paid by the borrower, and
credit is sufficiently costly already.
Senator R eed . I do not like to interrupt you, because you are
talking from your manuscript; but I wish you would tell me the
sense of the proposition which involves the issuance of an interestbearing bona, the deposit of that bond with the Government in
order to have currency issued against it, and then taxing the cur
rency. W e take, for instance, a 3 per cent bond, and then we have
a tax upon the currency of a cent and a half. W hy not have a 11
per cent bond and no tax on the currency ?
Mr. B er r y . Just as well. I do not see anything in it at all. The
proposition, of course, is that the country would hardly stand for
the banks having all the cake, and so long as you make them give
back a part of the cake in the form of a tax we have endured it. I
do not see anything in it. I do not believe in the Government
loaning money on any kind of an asset.
Senator Shafroth . It is just a circumlocution without any result.
It is like this 5 per cent in the Treasury to redeem the bank notes.
They send it in and then they send it out. It merely involves loss
of time and loss of energy.
The Ch airm an . That is right; it is an economic loss.
Mr. B erry . That is right.
I now take up questions Nos. 13 and 14, referring to the new
Federal reserve banks. It is my opinion that no new banking
machinery is needed. The issue of money is a Government function,
and the Government is already provided with all the machinery
needed for this purpose.
The conduct of general business, including banking, is a matter
for the people to inaugurate and manage and should meet with as
little interference from the Government as possible.
It is only where monopoly is necessarily inherent in a business
activity tnat uovernment snouia mterrere. Banking is not such an
activity, and to secure publicity as to the condition of financial
institutions is as far as Government should go in controlling them.
Conspiracies among them for the purpose of limiting credit or fixing
the interest rates should be treated as crimes and punished under
the Sherman law.
Question No. 15 is:
Should such reserve associations have State banks and trust companies as stock
holders; and, if so, what requirements should be made of such State banks and trust
companies?
I
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BANKING AND CURRENCY.
In the matter of currency issue, State banks, trust companies, and
all other banking institutions should stand on an equality.
Senator R e e d . Let me ask jpu a question about that. If I under
stand your fundamental idea it is this: First, the Government is to
issue money; second, if the bank wants money issued to it by the
Government it has to take bonds, and it is your opinion that that
privilege should be open to any bank, State or National. Is that
your idea ?
Mr. B er r y . Yes.
Senator Shafroth . But the bonds shall not be continued as their
security, but shall be sold to the Government for the currency that is
issued. That is as I understand Mr. Berry’s proposition.
Mr. B er r y . Yes.
Senator B ristow . W hat kind of bonds do you refer to ?
Mr. B er r y . United States bonds.
Now, referring to questions 16 to 22, inclusive, with reference to
the new Federal reserve banks: In my opinion no new 1 1 '
machinery is needed. It can serve no useful purpose
involve a horde of new officers and clerks at high salaries and put an
added burden on credit, which the borrower must finally pay.
The banking system of the country as now constituted, with
clearing-houses in the principal cities of every “ region” in the
country, is competent to handle all the credit the country needs.
Scarcely an individual bank in the country is handling more than
half the business it could handle if reserve cash could be readily
secured. Credit would be thus reduced to cost instead of increased.
Question No. 23 is:
Should Government deposits be withdrawn from banks and placed with the reserve
associations; and, if so, how should they be apportioned and what rate of interest, if
any, should be paid? Within what time could this be safely done?
All Government funds, excepting possibly a small working balance,
should be deposited in banks on uniform approved security at interest
rates established by competition.
The absorption of money in the Treasury in times of plethoric
revenue is an evil. It now causes a depletion of reserves and con
traction of business. Under a new law providing for the issue of
new legal tender, as I have described, the withdrawal of money into
the Treasury would cause an unnecessary issue of new money which
might become redundant in case of subsequent large disbursements.
The Government should use the banks as other interests do.
W ith your permission, I will elaborate that statement a little.
Senator R eed . W hat question are you referring to now?
Mr. B er r y . N o. 23.
Senator S hafroth . It is his answer to the twenty-third question.
Mr. B er r y . When I was treasurer of the State of Pennsylvania
I had $20,000,000 of State funds in my hands all during that period.
Senator S hafroth . During what period ?
Mr. B er r y . During the period of my incumbency— two years.
Senator S hafroth . W hat years do you refer to ?
Mr. B er r y . I refer to 1906 and 1907, during the panic. I had that
money deposited in the various banks in my State, and the law fixed
the interest rate at which I must deposit this money at 2 per cent and
prescribed the various kinds of security I must take for it, but I was
absolutely without information as to where that money was most
BANKING AND CURRENCY.
597
needed in my State. I had nothing but the importunity of the
bankers to guide me. The fellow that was loudest mouthed and put
up the biggest holler got the money. But inevitably as soon as I
deposited that money at 2 per cent it instantly flowed to the spot that
needed it most and where the highest interest was paid. I traced it.
I put $100,000 in a bank in the northern part of the State, and inside
of three days that same $100,000 landed in Pittsburgh. This man
was paying 2 per cent for the $100,000, and he was getting 4 per cent
from the Pittsburgh bank. The Pittsburgh bank would not pay my
checks. They had $5,000,000 of my money and would not pay my
checks. I had the severest experience I ever had in my life during
that panic. I had $5,000,000 tied up, and I could not get a dollar
for four months.
Senator R eed . I take it, though, that your idea is that it was unjust
to give advantages to a bank that did not need it when there was a
bank that needed it so badly.
Mr. B er r y . Yes.
Senator R e e d . But I call your attention to this fact: The bank
that you did let have the money was a bank that had not repudiated
its checks, and when that bank put its credit back of the loan or
advancement from the State treasury------Mr. B er r y . He put his cash up— not his credit.
Senator R e e d . He did not put up cash with the Treasury, did he ?
Mr. B er r y . Here is the thought I had in mind. Perhaps I did
not express it as well as might be. It should have been this: Had I
been permitted to take bids for that money, the spots in the State
where the necessity was greatest would have obtained the highest
interest rate.
Senator R e e d . Would you have let a bank have that money if
that bank had repudiated your checks ?
Mr. B er r y . I would have had the same security in each case.
I had the bonding companies of the country behind every loan. Of
course if I had been permitted to get competitive bids, at once the
money would have gone to the spot where if finally went to, and the
State would have got the increased interest instead of the individual
bank up in the corner of the State.
Senator R e e d . When you let the money out, did you not have the
security of the bank, and the credit and faith of the bank that got it
in addition to any bonds ?
Mr. B e r r y . Of course I suppose I might have had that, but that
was not the security the loan was made on. When a bank failed, as
several did, I went immediately to the security and got the money
and let them fight the bank. 1 had no trouble about that end of it;
but the point I wanted to make was this: In distributing any amount
of money at a rate lower than the prevailing rate it is bound to seek
the highest rate of interest which is paid.
Senator R e b d . I s there not this possible danger in that, unless you
put some limitation upon your rule: Let us assume— and my assump
tion is not made as a reflection upon the group of banks I am going
to mention— but let us assume that the banks of New York should
become wicked enough in case of financial stringency to conclude
that they wanted to corner the money and that they should bid
higher than the other banks and get all of the money of the Federal
Government, take it to their banks, and keep it away from the other
598
BANKING AND CURRENCY.
banks. Might not that be a dangerous situation if the Government
was obliged to send it there ?
Mr. B er r y . It is no more dangerous, in my judgment, than it now
is, because that is the reason the money goes to these centers. They
offer more for it than anybody else. They can go to the outlying
banks and get the gold and absorb the money of the country by that
process. I do not think they ever did do it.
Senator R eed . I may be wrong, but I thought the amount of
money the Government had, taken as a whole, was the very thing
we were dealing with here as a balance check of safety, if I may
mix my metaphors, an element of safety in time of trouble; and
that the fact that the Government could take that money and
throw it into the banks in case of emergency was an element of
safety. For instance, if all the banks in New York City were to
close their doors the Government of the United States might deposit
this money elsewhere in the country and start business going.
Senator S h a f r o t h . The net balance in the Treasury on the 13th
of this month, Monday, was $131,390,515.83. The Government
could not lend more than that amount.
Mr. B er r y . And one-half of that is already deposited in the
banks and $40,000,000 is in bank notes. They have not any money
in the Treasury now, and, very wisely, they put out what they
did have.
Senator H eed . That does not meet my statement fairly, however.
Your proposition amounts to this: First, that the Government of the
United States will lend out substantially all of its money, except a
small working balance; second, that that money will go all of it to
one bank.
Mr. B er r y . Y es; if that bank pays the highest price.
Senator R eed . If that bank pays the highest price all of the
money will go to that bank, or to a group of banks, if that group of
banks should pay the highest price.
Mr. B er r y . Yes, sir.
Senator Reed. Now the question I ask is whether that might not
be dangerous unless there was some check, some discretion, lodged
somewhere ?
Mr. B erry . Well, my theory about it is that the potentiality of
the bonded indebtedness of the country for immediate coinage is the
great safeguard. If you have the reserve of bank A, for instance,
composed of $50,000 of actual money and $50,000 of Government
bonds, which Government bonds are instantly convertible, we have
stopped every possibility of a stringency.
Senator R eed . But would you nave enough Government bonds
out?
Mr. B erry . Y ou can easily get that. All you have to do here in
Congress is to provide for it. There is no trouble about that; that is
the safeguard.
Senator R eed . Your theory, then, run down, amounts to this:
That in order for the Government to have a safe currency in this
country it ought to keep always in debt ?
Mr. B erry . Y es; to some extent.
Senator R eed . And be constantly charged with a heavy interest
account.
BANKING AND CURRENCY.
599
Mr. B erry . Not necessarily a heavy interest account, but an
interest account which would be sufficient to erect a dam, if you
please, so as to hinder the flow of bonds into the currency.
Senator R e e d . W hat is back of a Government bond ?
Mr. B er r y . Every stick and stave in the United States.
Senator R eed . W hat is back of the Government guaranty?
Mr. B er r y . The ta x in g power of the United States.
Senator R eed . Then they practically amount to the same thing,
except that a bond is written on a piece of paper and the other is
written into the law.
Mr. B erry . Yes.
Senator R eed . W hy is it necessary to have a bond at all ?
Mr. B er r y . Simply to make it automatic, Senator, and take it out
of the hands of anvbody whose business it shall be to say when you
issue money and wlien not. If I purchase this bond, which is a 3 per
cent investment, I will hold it just as long as a 3 per cent investment
is a better thing than I can get elsewhere. As soon as the demand for
money puts the rate where I can get a better than a 3 per cent rate,
I will slip this bond back into the currency. It will do that auto
matically. Nobody will have to lay awake at night to think about
it; it will slip back into the currency just whenever and wherever it
is wanted.
Senator S hafroth . That will prevent unnecessarily or unduly
raising rates.
Mr. B er r y . It will prevent it absolutely. Not only that, it will
prevent overinflation. That is what I meant by speaking of this
dam erected by the interest rates established by the Government.
You must make it to my interest to hold this or I will slip it into the
currency; but let it be an interest rate which will make it difficult for
me to part with it, so that there will be a resistance which the demand
for money must overcome before the money can go out, and it will
have a most beneficial effect.
I will now take up question No. 24:
Should every national bank be required to keep its reserve with the association to
which it belongs except such as it keeps in its own vaults; or should it be permitted
to keep any certain per cent of its reserve with other reserve associations? If so, how
much?
Every bank, national or otherwise, should keep its determined
reserve in its own vaults. It should be periodically examined, and
its condition as to reserve publicly announced.
It is different as to reserves.
Senator R eed . That is every national bank ?
Mr. B erry . Every national bank, and every other bank that has
this issuing privilege. That is the only thing that I would require
of them; that they submit to this publicity of their condition.
Senator R eed . I understood you to state that you were going to
give the issuance privilege to everybody that has a bond. Just let
them walk up and shove the bontl over the counter of the Treasury
and say, “ Give me some money.”
Mr. B erry . Yes.
Senator R eed . Then there would be no reason for having a national
bank at all, would there ?
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BANKING AND CURRENCY.
Mr. B er r y . Not so far as the currency is concerned. Here is the
principle of it. Currency is a system of two parts, actual cash and
coinable bonds. The storing of all the potatoes or other food in the
cellar of the city hall does not increase its power to feed the people
of the town unless a scarcity exists that requires restraint of the
natural appetite of the people. There is no necessity whatsoever
for a concentration of reserves in gold unless such reserves are in such
position that restraint must be exercised upon them.
The reserve should consist of two parts— actual cash and coinable
bonds. W ith bonds immediately convertible into cash, the cash
holdings need not be much larger than the daily necessities of check
redemption require.
The practice of moving the reserves of outlying banks into the cen
ters in the vain hope that by concentrating them their efficiency will
be increased, is a snare and a delusion. The storing of all the pota
toes or other food in the cellar of the city hall will not increase its
power to feed the people of a town, unless a scarcity exists that
requires the restraint oi natural appetites.
This practice only tends to increase the advantage over the out
lying towns naturally held by the cities, and does not materially
increase the efficiency of the reserve money.
The reserve cities are nominally required to hold 25 per cent of
reserve which is reduced by central reserve deposits to a lower figure,
but remains much larger than the actual demands of check redemp
tion require, while in central reserve cities 35 per cent is required, an
amount far in excess of actual needs.
If reserve money was distributed throughout the Nation in pro
portion to the actual demands upon it in the various communities,
an equal amount of credit would be more safely carried by i t ; and the
extremities (particularly the farming communities) would be well
nourished as the trunk. ‘ ‘ Cold fe et/' or scarce credit, among the
farmers would not be so prevalent if the extreme ramifications of the
banking system were as well supplied with reserve cash as are the
centers, regional or otherwise.
Senator R e e d . D o you think that your potato illustration is a
fair one ?
Mr. B er r y . It will not do to test any analogy too closely.
Senator R e e d . The analogy that can not be tested ceases to be
valuable. W hat we want in the nature of a reserve is something to
draw upon in order to redeem obligations that are out. One dollar
in a bank may pay $100 before the dollar has actually gone, but your
potato illustration is different. Once the potatoes are gone out they
are consumed; they do not circulate.
Mr. B erry . Well, that illustration halts, I am free to confess, but
I think it illustrates my point. This is a subject I have not found
possible to illustrate to any great extent. It is so thoroughly unique
that a good illustration is exceedingly difficult to find.
Now, as to questions Nos. 25 to 31 I have no suggestions to offer
as to the management of reserve associations. They are, to my
mind, entirely unnecessary.
Referring to question No. 32:
Are you familiar with the recommendations of the National Monetary Commission
made to Congress in January, 1912? If so, what is your opinion of the plan, and what
modifications would you suggest, if any?
• BANKING AND CURRENCY.
601
I am familiar with the recommendations of the National Mone
tary Commission. My opinion of the plan can be inferred from
what I have said in answer to the other questions.
The plan involves a lot of useless machinery and will serve no
useful purpose unless the fundamental principles of sound finance
are violated by giving a credit note the power to stand in reserve as a
basis for further credits. This, to me, is a monstrous proposition
from whatever source it emanates.
Question No. 33 is the last. It is a very long one, but it proposes a
plan, and I say the plan proposed here is more nearly correct than the
Aldrich plan, to my mind.
Instead of calling the new Treasury division a reserve division, I
would call it “ The division of issue and redemption.”
Its assets should consist of the gold and silver now held in the Treas
ury as trust funds or redemption funds and such other gold as may
flow to it naturally in exchange for legal-tender paper currency or to
be forced to it by, the sale of bonds for gold in the open market.
This division should exchange any kind of legal-tender money for
any other kind desired and destroy worn-out notes or defaced coins
and replace them with new.
It should exchange new United States notes for Government bonds
(when voluntarily presented) at the market price and retire the
bonds.
It should maintain a minimum reserve of 20 per cent of gold
against the total of all other forms of legal-tender money and furnish
gold for export in exchange, and only in exchange for notes, the notes
to be withheld from circulation until exchanged for gold on the vol
untary solicitation of the holder of the gold, or in exchange for bonds
in lieu of now notes.
B y this process the volume of legal-tender money can only be
changed by the surrender of bonds, and proceeds on the assumption
that a Government bond bearing the current rate of interest will not be
surrendered unless the demand for credit tends to raise the interest
rate, which is a sure indication that more money is needed, and
when thus issued will never be retired unless the developments of the
country cease.
Under the operation of such a law the bonds bearing the lowest
interest rate (2 per cent) would naturally be exchanged first; and the
first effect would be to retire the bank notes, at least to reduce them
to a volume where they would not be redundant and their redemption
a burden.
The privilege of note issues by the banks, if continued at all, should
be continued upon the 2 per cent bonds being held as security for
them, and they should be stripped entirely of legal-tender powers.
B y a gradual process the bank notes would disappear and with them
the 2 per cent bonds.'
A volume could be written as to the advantages to be realized from
the adoption of this plan, but I forbear.
Much could also be said as to the danger imminent under the
present system, but here I also forbear.
Now, gentlemen, that is all I have prepared to set before you.
Senator B r i s t o w . N o w , just before you go on I would like to ask
this question: How do you get the gold into this reserve? You put
the minimum at 20 per cent.
I
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BANKING AND CUBRENCY.
Mr. B erry . Yes.
Senator B r isto w . H ow do you replenish that ? Of course, it would
be more than that as a rule, would it not ?
Mr. B erry . Y es; at the present time it is about 85 per cent, and I
apprehend that it will ultimately fall to 33§ per cent unless the supply
of gold production should very greatly increase.
Senator B ristow . Suppose it went down to 20 per cent, what
would you do to get gold ?
Mr. B erry . By the sale of bonds. W e would have to sell bonds
in the markets of the world to secure the gold. W e have redeemed
the bonds and gotten the money out.
Senator B ristow . D o you think that with 20 per cent there would
not be danger of a period coming when there would be a lack of con
fidence in these bonds and they would go below par ?
Mr. B er r y . N o, sir; I do not. I spoke of that as a minimum for
this reason: To m y mind it seems to have been neglected by most of
our people, but it has come to be the duty of the United States to
finance the world. We are the greatest Nation on earth, and nearly
one-half of the business of the nations of the world is done in this
country. Three-sevenths of the entire banking power of the world
is in this country, and it has come to pass through the natural adjust
ment of the growth of civilization that this country is at the head of the
procession.
W e have South America, Africa. China, and India soon to demand
a larger volume of money than has ever been conceived of in our
wildest imagining, and it is my judgment that the United States
must largely finance those countries. We have the money; we have
the resources; and it is up to us to do it. When you come to world
finance nothing but gold will do. W e are producing an increment of
gold yearly which will maintain all the currency that we wish to use
on about a 33§ per cent basis. W e therefore can very readily spare a
billion and a half gold to finance the rest of the world; and ultimately
we will be called upon to furnish it.
Senator B ristow . Suppose this reserve went down to 20 per cent
and some speculators got control of a very large amount of these
notes. They would come here and demand the money; the Govern
ment would have to pay the gold. It puts it? bonds on the market
and the gold is cornered somewhere, so that they would hold the
Government up for heavy interest rates on the bonds in order to get
gold; and then, after the bonds have been sold and they got the bonds,
furnished the gold, why, of course, they would have made their
speculation and the price of gold would at once go down.
Mr. B erry . I can imagine such a condition as that, but I can not
conceive how it can ever practically happen. There is $1.700,000,000
of gold in the United States, the largest amount of gold ever assembled
in any country in the history of the world. There is no considerable
number of people in this world— that is. there is no small number of
people, no number of people involving less than 1,000— who could
make any impressionable dent on that gold.
It is a practical impossibility that the gold could be cornered now.
It has been cornered in times past. It can not be now; the supply is
too great.
That is the reason that I read so carefully to the committee the
status of the gold situation, to impress your minds with the fact that
BANKING AND CUBBENCY.
603
at this time in the history of the country gold is so abundant that the
fear of its being cornered may be absolutely dismissed. It is a prac
tical impossibility. I can imagine, of course, just as you have, what
might be done under those circumstances: but it is out of the ques
tion for it to occur.
And, moreover, in the process of incurring the obligation involved
in issuing redeemable paper the Government has withdrawn an
equivalent of bonds, upon which it has ceased to pay interest, bonds
upon which it now pays $25,000,000 a year interest; in the course of
a few years the saving of that $25,000,000 would be sufficient to
enable us to go into any market of the world and beat any combi
nation on earth, and get all the gold we want. W e, as a matter of
fact, must now be viewed, as a Nation that is master of the situation.
Senator B ristow . But you must admit, of course, that if it were
possible for the speculators to get control of the gold they could force
the Government to bid very high in order to get it.
Mr. B er r y . Surely, I will admit that.
Senator R eed . N ow , your idea is a currency issued and based upon
bonds, and that if a man wants this currency he has got to go and buy
a Government bond; then he can deposit the bond and draw currency.
And in that way, if we had plenty of bonds out, there would always
be plenty of money, because when money was needed they would
invest in these bonds.
Mr. B erry . Yes, sir.
Senator R eed . So that takes care of the matter of expansion, in
your judgment ?
Mr. B erry . Yes.
Senator R eed . And now, when the money becomes less needed,
they would prefer drawing interest on the bonds and go back with
the money and take the bonds out.
Mr. B erry . That is in answer to the assumed necessity for that
retirement. My own judgment about it, after years of close study,
is that they ought not to be granted any such privilege. You should
put the restraint entirely upon the issue; but once issued, let it stay
there, let no man retire a single dollar of legal-tender money under
any consideration. That is my own judgment. But I would not
seriously object to your providing for the reissue of the bond in ex
change for the money in case the money should become redundant.
Senator B ristow . And that money, when you took these notes
and bought the bonds, the note would go out of circulation and the
bond go in ?
Mr. B erry . Yes; that is a means of contracting the currency. I
would personally oppose it, however. In my judgment we should
not allow any man, or any set of men, to cancel a single dollar of
legal-tender money, for as soon as you do you make trouble, for
your price level is adjusted to it, your business (ommunity assumes
that it is there to stay, and expands business upon it; and if it is
retired, it means the contraction of your credit and business, and it
puts you in greater danger of a corner of gold than anything else
will. You need have no fear of that; but you now have this great
danger: It is now possiblo for one man to go in the banks of New
York on any afternoon and deposit his check for $10,000,000, then
take the $10,000,000 out of the paying teller’s window and carry it
around and put it in the safe-deposit vault, and on the next morning
$40,000,000 of credit must come down in the city of New Yrork.
9328°— s. Doc. 232, 63 -1— vol 1------ 39
1
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BANKING AND CUKRENCY.
The Chairm an . It is absolutely the fact.
Senator H eed . H ow do you mean, “ must come down?”
Mr. B er r y . Because the reserve fund is at the ragged edge all the
time: and the next Monday morning the banks are SI0,000,000 be
low in their reserve fund, and they have got to call their credit: that
means a loss of $40,000,000 of credit, four times $10,000,000.
Senator R e e d . W hy do they have to withdraw $40,000,000 ?
Mr. B erry . Because the ratio of credit to reserve funds in New
York City is four to one.
The Ch airm an . It is $1,600,000,000 of these loans against
$400,000,000 of money.
Mr. B erry . N ow , if you have a bond in reserve, that hank, instead
of answering to that pressure on the part of the schemer who has
withdrawn his cash in order to force a contraction of the credit and
the destruction of prices on the stock market, can instantly in that
case put his bonds in and secure cash and everything is all right.
The knowledge that a potential supply of cash in the form of bonds
is always available will stop this practice.
Senator R eed . That is, if he has got the bonds?
Mr. B erry . If he has got the bonds, yes; and we propose to see
that he shall have them.
Senator R eed . Have you got a plan outlined in your paper which
you have prepared of vour views of what ought to be done ?
Mr. B er r y . N o , I have not got any specific statement of plan here.
I have simply outlined the principle this far that underlie my thought.
Senator R eed . Well, when you are through answering questions
by members of the committee, I see you have a paper and I assume
you have some plan.
Mr. B erry . Yes, I have a paper directly bearing on this bill which
is pending, and applying these principles to it.
Senator R eed . T o this bill ?
Mr. B erry . Yes.
Senator R eed . I do not see how you are going to apply the prin
ciples that you have just announced to this bill any more than you
are going to put a square peg in a round hole.
Mr. B erry . If you apply a bunch of dynamite to a hole in a stone,
you know what will happen. [Laughter.]
Senator R eed . That kind of application, of course, is possible.
Senator Siiafroth . Mr. Berry, I thought you said in your pre
pared statement that the credit was built up upon this money at the
ratio of 10 to 1.
Mr. B erry . In the country at large the rate is 10 to 1; in New
York City it is 4 to 1. Now, if that were done in an outlying town,
the situation would be that much worse— and it can be done in
outlying towns, and I am not sure that it has not been frequently
done. It has been done in New York. I have the record to show
you that it has been done in New York. My book shows just how
it was done.
Senator S hafroth . Mr. Ailing, vice president of the Nassau Bank,
gave the figures as to the amount of their reserves and the amount
of their deposits, but I think it was about at the rate of 12 to 1.
Mr. B erry . Actual issue; yes.
Senator S hafroth . In that one case——
BANKING AND CUBKENCY.
605
Mr. B erry (interposing). But you know the way they are counted.
Senator Shafroth . Yes.
Mr. B erry . I s the case you spoke of in a central reserve city—-is
he a New York man ?
Senator Shafroth . Y es; that is in New York City. Of course,
they are bound to keep 25 per cent.
Mr. B erry . A t any rate, I give them credit for 25 per cent. If
the ratio should be 12 per cent, the credit would be eight times the
amount of money instead of four times.
Senator R eed . Mr. Berry, what I am interested in having you do
is to put on a piece of paper, without note or comment, the outline
material of what you say ought to be done, not with the proposed
bill, but with the present situation.
Senator B ristow . Would it not be better to have him leave that
until he gets through with this subject?
Mr. B erry . Well, as I have said,SenatorOwen,chairmanof this com
mittee, has introduced a bill to provide for the retirement of the 2 per
cent bonds to meet this situation, and Senator Shafroth has intro
duced another bill upon the subject. I am rather inclined to think
that of the two measures I prefer Senator Shafroth’s bill, because it is
more frank and direct and will solve this problem. Either one of the
bills I think will do that.
Senator R eed . Without doing anything else ?
Mr. B erry . So far as I can see, yes. It might need a word or two
of change, but the principle involved in both of those bills is the prin
ciple I am advocating, and it will furnish the opportunity for the
expansion of the currency in response to the demand for it.
Senator Shafroth . Here is an article [indicating paper in the
Senator’s hand] that was written by Mr. Ailing, the gentleman I have
just referred to, which is upon the same basis exactly. I wish you
would read that, Mr. Berry, during the recess of the committee, because
it suggests this very plan.
Mr. B erry . Well, I am very glad to know that there are other
people who agree with my views. In fact, my experience has been
that there are. I have been a student of this question for 30 years.
I have delivered many lectures before bankers’ associations and else
where and have had many conversations with eminent bankers and
others interested in the subject, and I have never found a man who
had given sufficient consideration to it, who had fastened his mind
upon the fundamentals, who did not agree with me in regard to it.
I have not found a single man who has given the matter thought for
a sufficient period who did not, and I have a letter from Mr. Andrew
Mellen, the president of the Mellen National Bank of Pittsburgh,
which is one of the most complimentary letters I have ever received.
Senator R eed . D o I understand you to say yourself that all that
it is necessary to do is to retire the greenbacks------Mr. B erry (interposing). You mean the bank notes, do you not?
Senator B ristow . The bank notes. The bank notes are a sub
stitute for or an enlargement of the greenbacks.
Senator R eed . Please wait until I get my sentiments expressed—
is to retire the bank notes and greenbacks and the Treasury notes
and every form of paper money, and have an issue in lieu of it as a
new Treasury note, and hold back of it the gold reserve that we now
have, which is the $1,100,000,000 that is back of the gold certificates
606
BANKING AND CURRENCY.
and the gold that we now have back of the greenbacks, and that will
constitute the money of the country ?
Mr. B erry . Practically so, yes. I do not think you need a new
Treasury note. Your present Treasury note is good enough. Just
extend it.
Senator R e e d . Well, I think you can not bring in the gold cer
tificate, which is now good for a dollar of gold and which has been
described as a warehouse receipt for a dollar of gold, unless you
would do it by calling that note m and redeeming it and issuing some
note that would not profess to be merely a certificate by the United
States that it holds 100 cents in gold.
Mr. B erry . Y ou will find the details of that kind in this little book.
I have planned as I would propose to do it of my own initiative. I
do not propose to upset your scheme, but what I wanted was to get
this idea of the utterance of notes which are competent to stand in
bank reserves incorporated in it or in a separate bill.
Senator R eed . Well, in addition to that, Mr. Berry, your idea is
that for the future needs of the country we would provide a Govern
ment bond carrying a sufficiently attractive rate of interest, so that
it would be purchased by people as an investment; and then provide
that anybody who had one of those bonds could go down any day
and turn it into the Treasury, and if it was a $1,000 bond, get $1,000
of these notes ?
Mr. B erry . Yes, sir; practically so. I would not fix it, however,
at the face value of the bond.
Senator R eed . Where would you fix it ?
Mr. B erry . At the market prices.
Senator R eed . At the market prices ?
Mr. B erry . Yes; because it would throw you out if you put it at
the face value, because the 3 per cent bonds would probably sell
below par. If it did, it ought not to be convertible at par. If it
was a 5 per cent bond and sold above par, it ought to be convertible
above par. In other words, it ought to be convertible at its mone
tary market value.
Senator R eed . Then, if bonds went up to 120, a man could come
down with that sort of bond and get $1,200 on it, if it was a $1,000
bond.
Mr. B erry . Yes, sir.
. Senator R eed . And the Government would be losing that 20 per
cent. It sells the bond at its face value and redeems it at 20 per
cent premium.
Mr. B erry . It may have sold it at its face value, and it may not.
It would depend upon what the circumstances were. If you issued
a 5 per cent Government bond now and sold it in the open market,
it would bring a premium. In other words, the natural interest rate
should determine the price of a first-class security and it does, out
side of the privilege granted to our 2 per cent bonds.
Senator Shafroth . If a man could get the amount of the premium
out in the market, he would not think of coming to the Treasury of
the United States and taking a lesser premium on the bond.
Mr. B erry . Certainly not.
Senator R eed . Well, I am not so sure about that. I have in mind
the fact that it is a common thing for the Government of the United
States to sell a bond at par, and then find that the bonds have gone
up the next day, or within a week, very materially.
BANKING AND CURRENCY.
607
Mr. B er r y . That has happened.
Senator R eed . Y es; and it looks to me as though there might be
an influence brought about that could put a Government bond up
pretty high, if it wanted to, and then come down and have the Gov
ernment redeem it.
Mr. B er r y . Well, that is a detail that perhaps would have to be
discussed.
Senator B ristow . Well, suppose 3-per-cent bonds were issued,
would there be a sale when money is scarce and rates are high— there
would not be a sale for 3-per-cent bonds, then, would there ?
Mr. B erry . There would, at a discount.
Senator B ristow . Well, I mean at par. Suppose they were sold
at par. If they were convertible immediately, however, at par, they
would sell at par, would they not? That is, if it was a 3-per-cent
bond and I could buy a SI,000 bond that drew 3 per cent, and this
morning or this afternoon or to-morrow I could go to the Treasury
and exchange that bond for $1,000 of legal-tender notes, and I could
loan those notes for 5 per cent. I could take that process, could
I not ?
Mr. B er r y . Yes.
Senator B ristow . H ow would it relieve a stringency unless the
bond were out ?
Mr. B e r r y . Well, there is $1,000,000,000 of the bonds out now.
Senator Siiafrotii. A little over that since the Panama bonds
were issued.
Mr. B er r y . Over $1,000,000,000; and we are going to issue more
on account of the Panama Canal; and in my judgment we ought to
issue more on account of inland waterways, and other public improve
ments. I see no reason why there should not be a constant modicum
of bonds. The annual increment of paper money required now is
$135,000,000, so that if you have twice or three times that amount
constantly outstanding it would be sufficient. If you have that
amount as compared to $1,000,000,000, as you now have, that would
be all you would want, because you only require $135,000,000 to sup
ply this deficiency of currency each year. Your present bond issue
would last you for several years. The bonds will not disappear any
faster than the demands of business call for more money; and your
present bond issue would carry you for several years.
Senator R e e d . I am so much of a farmer on this question that
there is one bit of it that is an utter maze to me, and I want somebody
to take me up on the mountain and show me the elasticity of it. I
understood you to say a little while ago that all there was back of a
Government bond was the faith and credit of the United States, but
that that faith and credit involved all the property there was, private
or public, in the United States.
Mr. B er r y . That is fight.
Senator R eed . N ow , a bond is nothing but a guaranty by the
Government; that is all. W e call it a bond, but it is nothing more
than a promise to pay.
Mr. B er r y . Yes.
Senator R eed . N ow , if the Government can issue its promise to
pay and upon that promise to pay can issue another promise to pay,
m the shape of a note which we call currency, why is it necessary
to have the bond at all ? Back of both is the same thing, the faith
and credit and property of the United States.
608
BANKING AND CURRENCY.
Mr. B er r y . That is the very consideration, Senator Reed. The
only reason why you need the bonds in the process is to safeguard
you against an overissue of this currency.
Senator R eed . Well, can not we conceive that the United States
Government— the Treasury Department— can restrain itself from
running away, unless we hobble it in this way ?
Mr. B er r y . But you see you are up to either one of two things.
You must let this money come out automatically or artificially.
Yours is the artificial method. You put it into the hands of some
man or set of men to determine where, and when, and how much
money shall come out. On the other hand, you should let the auto
matic forces of trade call it out. The bond is a part of that machin
ery.
Senator R eed . I get your meaning. In other words, when the
demands of trade call for money, more money than the interest of
these bonds bring, then the man will sacrifice his bonds or sell his
bonds in order to get the money, so that the check which the
bond puts is simply this, that whenever the interest rate the Gov
ernment pays is less than the interest rate that money will earn,
then people will exchange these low interest-bearing securities for
the higher interest-earning money. That is about it, is it not?
Mr. B e r r y . Well, that is close to it; but it has one error. The
interest rate denominated in the bonds, say 3 per cent, that is the
interest rate that the Government pays on the face of the bond.
But the exigencies of trade will vary that interest rate, and cause
that bond to sell for less or more than its face value, as the case
may be.
Senator R eed . Yes.
Mr. B er r y . And that interest rate may be higher or lower and
the proper interest rate can only be determined by allowing the
forces of trade free play, and letting them establish what this interest
rate is. It is matter of impossibility for any man or any set of men
to tell what the interest rate ought to be.
Senator Siiafroth . Interest rate on the bond will always be less
than the current rate in the market, will it not?
Mr. B er r y . Not necessarily, if that bond is denied the special
privilege of note issues, as our present bonds are.
Senator R e e d . Pardon me, Senator Shafroth, for interrupting you.
Senator Shafroth . Certainly.
Senator R e e d . But let me get this particular thing into my head.
But the thing that constitutes a check upon inflation is the fact that
the form of security in which a man has his money invested ceases
to be as profitable to him or as useful to him as a Government note.
That is true, and that check, that sacrifice which must be made, is
sufficient, in your judgment, to keep down inflation?
Mr. B er r y . Yes.
Senator R eed . Now, then, why must we have Government bonds
in order to get that check ? W hy is it not practically assumed, now
that a safe plan is worked out, that we might as well issue this money
upon the bonds of cities and States and upon the promissory notes
that the individual holds— the promissory notes of another— assum
ing now that we get that in shape so that that could be done ? W hy
would not that furnish the same check ? I have got a 3 per cent bond
here of the Government— or, I will say, a 6 per cent bond of the Gov
BANKING AND CURRENCY.
609
ernment— 1 have got an 8 per cent note of A B, and A B is sound and
good. But I need the money. I have got to have money. Now, if
I take my 8 per cent note of the individual the sacrifice is just as
great, and a little greater, than if I would take my Government bond.
The check upon my desire to have money issued by the Government is
just as great.
Now, why is it that a bank might not just as well take the notes of
its customers which draw 6 per cent, probably, on the average, over
the country; take those down to the Federal Treasury and say, “ Here
is $1,000,000; it is drawing 6 per cent; I want some money,” and
get it? I am assuming now that a safe plan is worked out.
Mr. B erry . I have no doubt but that is just as equitable, except
as to this, that it puts the Government directly in the banking
business. This note is now an asset of the Government and the
Government is going to collect interest from an individual.
Senator R eed . N o.
Mr. B er r y . And to renew that paper when that individual wants
to renew it, or else contract the currency.
Senator R eed . I do not think you are right about that at all.
W e all want to get right. Nobody here ought to have any pride of
opinion.
Mr. B er r y . That is right.
Senator R eed . I am willing any minute to take back anything I
have said the minute before as long as this conference lasts, if some
body convinces me that I am wrong. You run a bank. Let us say
it is a great bank, a bank which has $2,000,000 of stock and with
$10,000,000 of deposits. And suppose I am the Secretary of the
Treasury— for a moment. You need $1,000,000. You take $1,000,000 of the paper in your bank, and you come down and ask me to
issue to you $1,000,000 of money, and you deposit that $1,000,000
of paper. I issue you the $1,000,000 of money. I charge you for
that money, say, 7 per cent, just for the sake of illustration. Now,
1 do not have to collect those notes that you put up with me. You
have got to pay me back; you have got to redeem that money I gave
you. You will collect $1,000,000 in and bring it down to me. I do
not have to necessarily go out and collect these notes from A , B, or C,
do I ?
Mr. B er r y . N o, not under that supposition. But you are not
issuing money at all under that supposition. When those notes are
paid back to you, you are just where you were before.
Senator R eed . It comes back to just where it went in, and I have
not increased it at all. So that it is safer against inflation than it
would be if you put the bond in and issued the money permanently.
Mr. B erry . Safer, if you insisted upon the payment. But the
point is that the plan as outlined, will result in a perpetual chain of new
people coming in and old people going out.
Senator R eed . Will not that be the same thing with your bond ?
Mr. B erry . Oh, no.
Senator R eed . N ow , let us see why it will not. I am still the
Secretary of the Treasury for the moment.
Senator Shafrotii. W e will indorse your bond. [Laughter.]
Senator R eed . Yes. In view of some of the men who have held
that position in the remote past, anybody can without the slightest
610
BANKING AND CURRENCY.
compliment to himself assume that he holds it. And je t I ought not
to have said that, perhaps, because they have been mostly good men;
one or two wild-catters.
But suppose I issue Government bonds to the amount of SI ,000,000.
You are a banker. You have got money in this big bank of yours.
You notice that I am giving you all the best of it. I am giving you
the money, and I am just holding the position.
And you come down with that surplus of money that you have,
and you buy $1,000,000 worth of those bonds from me, and you take
them and put them in your vaults. Some day you need money and
you come down to me with that $1,000,000 and say, “ Here is that
$1,000,000 of bonds that I paid you $1,000,000 for and I want that
$1,000,000 back.” I do not know why that does not------Mr. B erry (interposing). There is all the difference in the world,
Senator Reed, because when I gave you------Senator R eed (interposing). The money went just where the
other did, did it not ?
Mr. B erry . Oh, no. I gave you $1,000,000 for the bonds, and I
got the bonds, and then you spent the $1,000,000 to build the Panama
Canal. You have not any money now at all; that money I gave you
is in circulation again, having come out through the channels of
trade.
Now, I come to you and say “ Secretary, here are your bonds.
Give me $1,000,000.” Then you give me a million dollars of absolutely
now money; you grind your printing presses and give me $1,000,000
of new money. You add to the circulation by doing that. In the
other case you do not.
Senator R eed . Yes, I do it. You bring me in the notes; and I
grind out of the printing presses $1,000,000 and give it to you for
those promissory notes of A, B, and C.
Mr. B erry . Then you have to have a perpetual motion of------Senator R eed (interposing). But I take them up quicker than
we might in this other way.
Mr. B erry . It would surprise me of they were ever taken up at all.
Senator R eed . Well, just as quickly as they are taken up from
your bank the same condition arises again, as a necessity for money,
and another bank brings them in, and you do inflate in order to meet
the immediate demands of business; and you do retire the circulation
as the demands of business are less. I can not see why it is necessary
to have a Government bond.
Mr. B erry . Well, it is not necessary at all, but I think it is more
desirable.
Senator S hafrotit. Under your scheme, Senator Reed, would it
not make the United States the purchaser of all municipal and
State bonds and other security which the banks have when they
wanted the money ?
Senator R eed . For the temporary purpose, but with the burden
attached so great------Senator S hafrotii (interposing). W hat is that burden?
Senator R eed . The interest I am charging that bank upon that
money that I let it have, and which it can only escape from when
BANKING AND CURRENCY.
611
it brings me back that money or exactly the same kind of money
issued to some other bank. Now, that is the feature which is con
tained in this bill. There is nothing new' in it whatever. I can not
see why w have to have Government bonds under your plan.
^e
Mr. B er r y . I do not think you have to have them. I simply
say you should have them in preference to other forms of security,
for the reason that you have a public obligation there, and some
body is going to be benefited by the fact that this money vr
hen it
goes into circulation will stay in circulation and never be presented
for redemption. It becomes a permanent part of the equipment
of the Nation and the people should benefit by it and not any indi
vidual or a bank or anybody else.
Senator R e e d . Are you not mistaken in saying that it stays out
in circulation without limit ?
Mr. B erry . N o, sir.
Senator R eed . Well now, the Government issues $10,000,000 of
bonds, and sells them upon the market, and it gets $10,000,000 and
goes out and spends that; it is not a very desirable thing to be doing
now, by the way; but let us assume that it does it. You get this
$10,000,000 of bonds. You bought them because at the time you
bought them the interest made it desirable for you as an investor.
There comes a time when there is a money shortage. You need
money and have to have it. It may be that you have to have that
money only because there is a run on your bank; and you may not
need it more than 30 days. You bring your $10,000,000 down to the
Government of the United States, and it starts its printing presses
whirling to print you $10,000,000 of money; and you have put your
bonds over here with me as Treasurer. The crisis passes; interest
drops in the country; you have got a surplus in your bank. Are you
not very likely to come down and buy back that $10,000,000 of
bonds ?
Mr. B erry . Y ou are, if------Senator R eed (interposing). Now, when you do that, you have
done exactly the same thing that you would have done if you had
put up the promissory note that you had in your vaults with me and
come and retired the money. When you bring me back $10,000,000
of this money to buy the bonds back, I put it in my vault. I have
got it there, and I have not been wasting it, any more than I would
the other money. Do you not come out of the same place, except
in one case you pay interest all the vT along, and in the other way
ay
you collect interest.
Mr. B erry . I think you come out practically in the same place;
but at the same time not just that way. You are saving interest
instead of paying it, because you are canceling a bond to get this
money out. My thought is that w ith the sacrifice of a bond as a
condition precedent the money would not issue unless needed in
business, in which case it would not come back unless business
subsided.
Senator R eed . In the other case you are charging interest to let
the money out.
Mr. B erry . In the other case you are putting the Government
directly in the banking business, which I do not consider desirable.
Senator R eed . I want to ask what is the banking business ?
Senator B ristow'. Pardon me for interrupting, but I just want
to understand this: If a bank takes $1,000,000 of its collateral, it has
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BANKING AND CURRENCY.
notes and bonds which would draw interest of from 5 to 6 per cent—
varying rates. Now, what interest is it proposed that the banker
shall pay the Government for the money which he gets with his col
lateral? As I understand, the Government is to turn back the col
lateral when the money is returned. That was your suggestion,
Senator Reed. I say, wliat interest do you propose that the Govern
ment shall charge the banker when he brings this collateral for the
money which the Government lets the banker have ?
Senator R eed . Pardon me, I did not know you were addressing
that question to me. W ill the stenographer read the question ?
(Here the stenographer read the last preceding question as follows:)
Pardon me for interrupting, but I just want to understand this: If a bank takes
$1,000,000 of its collateral, it has notes and bonds which would draw interest from 5
to 6 per cent—varying rates. Now, what interest is it proposed that the banker shall
pay the Government for the money which he gets with his collateral? As I under
stand, the Government is to turn back the collateral when the money is returned.
Senator R eed . I understand the question now. That is enough.
I have no plan, Senator Bristow. I was simply trying to parallel
Mr. Berry’s bond plan with this other plan that has been suggested in
this bill and variously elsewhere.
But the rudiments of the plan, as I understand it, Senator Bristow,
are these: That the Government when it issues this money will fix a
rate upon it so high that it is to the interest of the bank, as speedily
as possible, to redeem it and take it up.
Now, a suggestion was made the other day, which struck me as
having a good deal of sense in it— although again I say that I am
liable to change my mind if somebody gives me a reason— and that
was that if the Government was called upon to issue money and it set
aside a certain amount, let us say $25,000,000, that might go out at
a certain rate of interest— let us say, for illustration, 5 per cent.
That if another $25,000,000 was called for, it would make that 6 or 7
per cent.; and that every time there was more money called for the
rate would go up.
Thus, by the constant rise of the rate, putting a check upon the
demand so as to keep it within reasonable limits all the time.
Now, I understand, without knowing much about it, that that is
the system that has been pursued in every case, that when they have
emitted a certain amount of this paper, they raise the rate, and keep
on raising the rate until it becomes practically prohibitive, and thus
stop it.
Mr. B erry . Will it not be better to allow me to read the rest of this
paper and get over with this thing, so as to get my views fully before
you ?
Senator R eed . Oh, certainly.
Mr. B erry . In reference to the Glass bill, which is a duplicate of
the Owen bill, would say that I have examined it carefully, and while
the answers I have made to the Senate’s questions will indicate my
view on the general subject of central banks, I would say that I would
be willing to endure almost anything in the way of detail in order that
the basic principle might be incorporated.
I am not at all sure that the provision requiring national banks
to invest a part of their capital in the stock of Federal banks at a
maximum return of 5 per cent will not cause a number of them to
613
BANKING AND CTJRKENCY.
surrender their charters. It certainly will unless a compensatory
benefit is to be derived from the use of the rediscounting privilege,
and I do not see how this is probable or even possible.
As I understand the friends of the Owen bill, their thought is that
the assembling of reserves in the Federal banks will furnish an added
basis for rediscounting, and therefore help the situation. They are
also depending upon the deposit of Government money in the Federal
banks as a basis of further credit.
The following analysis and comparison of the Owen bill and the
present law seems to me to indicate that this hope, based either upon
the accumulated reserves or Government deposits, must prove de
lusive, and I submit the same for your consideration. (Reading:)
E x a m p l e o f the c o u n tr y ban ks u n d er the n e w la w .
Supposed deposits......................................................
$
100, 000
15.000
Reserve required (15 per cent)...............................
Held intact in home banks (5 per cen t)...............
Deposited in reserve city banks (5 per cent)___
$5,000
Reserve required here (20 per cent)......................
1,000
Held intact (10 per cent).........................................
Deposited in central reserve banks (10 per cent)
$500
Reserve required here (20 per cen t)......................
100
Held intact (10 per cent).........................................
Deposited in Federal reserve banks (10 per c e n t )...
50
Deposited by home banks in Federal reserve bank.
5, 000
Held intact by Federal reserve banks (33J per cent)
Total held intact against $100,000 deposits in country banks:
$5,000+500+50+1,683=$7,233 or 7.2 per cent
Total individual deposits in all country banks in 1912..................
$3,309, 515, 000
.072
6, 619, 030. 000
231, 666, 050. 00
Total actual reserve held intact against deposits in country
banks in 1912............................................................................
$238, 285, 080
614
BANKING AND CURRENCY.
E x a m p l e o f c o u n tr y ba n ks u n d er the p resen t o r o ld la w .
$ 100,
Supposed deposits.................................. .
000
Required reserve (15 per cent)............
15,000
Held intact in home bank (6 per cent)
( 6^000)
Deposited in reserve city banks (9 per cent)............................................ $9,000
Required reserve (25 per cent)............ ......................................................
Held intact (12J per cent)....................
2,250
..................................
Deposited in central reserve banks (12 i per cent)................... $1,125
Required reserve (25 per cent), all intiact..................................
(280)
Total held intact in reserve:
$6,000+1,125+280=17,405 or 7.4 per cent
Total individual deposits in all country banks in 1912........................
$3, 309, 515, 000
.074
13, 238, 060. 000
231, 666, 050. 00
Actual reserve held in and for country banks under old la w ..............
$244, 904,11
Actual reserve held in and for country banks under new* law..............
238, 285, 08
Actual saving or release of reserve money under the new law on
account of country banks.........................................................................
6, 619, 030
Mr. B erry . That is the net result of the application of the new
law as over the old law to the country banks.
Senator H eed . The whole country ?
Mr. B er r y . The country banks.
Senator R eed . For all the country banks?
Mr. B erry . That is, national banks.
Senator R eed . All of the banks outside of the reserve cities?
Mr. B er r y . Yes.
Senator R eed . That is, the three reserve cities ?
Mr. B erry . Yes, sir— no; the reserve cities and the central
reserve cities— all of them.
Senator R eed . That is what I am trying to get at— whether you
say this is held outside of the reserve cities.
Mr. B erry . Central reserve cities.
Senator R eed . You say reserve cities?
Mr. B er r y . All that is held in the country banks, as distinguished
from reserve banks and central reserve cities.
Senator R eed . All that is outside of these reserve city banks and
central reserve city banks.
615
BANKING AND CUKKENCY.
Example o f reserve city banks under the new law.
Supposed deposits......................................................................................................$100,000
Required reserve (20 per c e n t)................................................................................
20, 000
Held intact in reserve city bank (10 per c e n t)....................................................
(10,000).
Deposited in central reserve bank (5 per cent)........................................ $5,000
Reserve required here (20 per cent)............................................................
1,000
Held intact here (10 per cent)......................................................................
(500)
Deposited in Federal reserve bank (10 per cent).................................................
500
Deposited in Federal reserve bank by the reserve city bank (5 per cent)___
5, 000 '
Held intact in Federal reserve bank (33$ per cent)...........................
Total held intact:
$10,000+500+1,832=$12,332 or 12.3 per cent.
Total individual deposits in reserve city banks in 1912......................... $1,383,813, 000
.123
4,151,439,000
27,676, 260,00
138,381, 300,0
Actual reserve held in and for reserve city banks under the new law. $170, 208, 999.
Example o f reserve city banks under the old law.
Supposed deposits..................................................................................
Required reserve (25 per ce n t)............................................................
$ 100,
000
25, 000
Held intact (12$ per cent)....................................................................
Deposited in central reserve banks (12$ per cent)...........................
Required reserve (25 per cent)—all held in ta ct..............................
Total held intact:
$12,500+$3,125=$15,625 or 15.6 per cent.
Total individual deposits in reserve city banks in 1912.................
$1,383,813,000
.156
8,302, 878,000
69,190, 650, 00
138,381, 300, 0
Actual reserve held in and for reserve city banks under the
old la w ............................................................................................
$215,874, 828
Actual reserve held in and for reserve city banks under the
new law...........................................................................................
170, 208, 999
Actual saving in reserve money under the new law .................
45, 665, 829
616
BANKING AND CURRENCY.
Example o f central reserve banks under the new law.
Supposed deposits................................................................................
$ 100,000
Required reserve (20 per cent)..........................................................
20,000
Held intact (10 per cent)...............................................................
Deposited in Federal reserve banks (10 per cenD .........................
Held intact here (33$ per cent).........................................................
Total held intact:
$10,000+$3,333=$13,333 or 13.3 per cent.
Total deposits in central reserve banks in 1912
$1,056, 704,000
.133
3,170,112,000
31, 701,120,00
105,670,400,0
Actual reserve held in and for central reserve banks (1912).. $140, 541,632,000
Example o f central reserve banks under the old law.
Supposed deposits........................................................................................
$100,000
Required reserve (25 per cen t)..................................................................
25, 000
Held intact (25 per cent)............................................................................
(25,00(j)
Total deposits in central reserve banks in 1912......................................
$1,056, 704,000
.25
Actual reserve held in central reserve banks under the old law.
264,176, 000
Actual reserve held in central reserve banks under the new law.
140,541, 632
Actual saving of reserve
money in central reservebanks.............
123, 634, 368
Actual saving of reserve
money in reserve city banks.................
45, 665, 829
Actual saving of reserve
money in country banks........................
6, 619, 030
Total reserve money apparently released....................................
175, 919, 227
Example applied to all new banks under the new law.
Total reserve required to be held for
central reserve banks.
Total reserve required to be held for
reserve city banks.
170,
208, 999
Total reserve required to be held for
country banks.........................
238, 285, 080
Total reserve required to be held in all national banks in 1912 .
549, 035, 711
Total deposits held in all national banks in 1912.................................
5, 719,156, 000
Per cent of reserves to deposits..................................................................
9.6
$140,
541, 632
617
BANKING AND CURRENCY.
Example applied to all banks under the old law.
Total reserve required to be held for central reserve banks...............
$264; 176, 000
Total reserve required to be held for reserve city banks....................
215, 874, 828
Total reserve required to be held for country banks...........................
244, 904,110
Total reserve required to be held in all national banks in 1912.
724, 954, 938
Total deposits held in all national banks in 1912..................................
5, 719,156, 000
Per cent of reserves to deposits..................................................................
12. 6
724, 954, 938
549, 035, 711
Actual money apparently released from national bank reserves
175, 919, 227
Reduction of general reserve: 12.6 per cent — 9.6 per cent = 3 per cent.
In this process there will have been absorbed into the Federal banks
a part of the reserve money of the country which is now carrying
credit on a 15.6 and 25 per cent basis and which in the Federal bank
will be on a 33 £ per cent basis.
Senator R e e d . W hat do you mean— Federal banks?
Mr. B e r r y . These new banks— Federal reserve banks.
Senator R e e d . Federal reserve banks?
Mr. B e r r y . Yes.
Senator S h a f o r t i i . T o be created by this bill.
Senator R e e d . I understand.
This will result in a loss of loaning power in these banks as follows
(reading):
Taken from country banks.................................................. $165, 475, 750
Carrying credit in reserve city banks at 15.6 per cent............................ $1, 060, 613, 000
Taken from reserve city banks...........................................
76,109, 715
Carrying credit in central reserve banks at 15.6 per cent.......................
487, 882, 700
Taken from central reserve banks...................................... 140, 541, 750
Carrying credit at 25 per cent......................................................................
562,167, 000
Total cash absorbed...................................................
Federal bank reserve (33J per cent)..................................
382,127,215
127, 365, 738
Apparently free for rediscount................................
254, 751, 477
Total credit sacrificed........................................................................
2,110, 662, 700
Mr. B e r r y . This loss of credit, however, is partially compensated
by a reduction in the per cent of reserve required in reserve city and
central reserve banks from 25 to 20 per cent.
The transfer of 5 percent of reserves in country banks directly to
Federal banks results in a minimum loss of $105,000,000 of usable
reserves in reserve city banks. If the country banks still require 6
per cent of money to carry their credits, as I think they will, the loss
to reserve city banks will be $139,000,000, and the compensation, 5
per cent, will be $66,000,000, making the loss $73,000,000.
The transfer of 5 per cent of reserve city banks reserve directly to
the Federal bank will result in a minimum loss of $74,379,000 of
usable reserves in central reserve banks, and the compensation, 5 per
I
618
BANKING AND CURRENCY.
cent, will be $50,000,000, showing the loss of $24,379,000 in these
banks.
Seventy-three million dollars plus $24,379,000 equals $97,379,000,
which is the total loss that must be immediately made up by redis
count from the $254,000,000 set free in the Federal banks. Now,
that money has got to go back at once out of the Federal reserve
accumulations for the purpose of sustaining an existing credit.
Senator R e e d . That is, a country bank is compelled under this
law to pay into a regional reserve bank $25,000, and it must imme
diately borrow it back ?
Mr. B e r r y . A part of it.
Senator R e e d . Well------Mr. B e r r y . Not the outside bank, but the reserve city banks.
This $25,000 that that outside bank puts into the Federal reserve
formerly went into the reserve city bank, and there stood at a basis
of credit. Now it comes into the Federal bank, where it is a basis
of discount, and, in order that that reserve city bank may keep its
present credit, it must instantly get a portion of that money back,
in order to put us where we now are, without any provision of after
expansion.
Senator R e e d . And it puts this in in place of it ?
Mr. B e r r y . Whatever it puts there as security, but the point is
to keep track of the money.
This leaves $157,372,477 as the final amount actually released for
carrying new credit.
By no possible stretch of imagination can this amount exceed
$175,919,227, as shown in our example applied to all banks, and in
practice it must fall much below this figure. This is the extreme
possibility of the law in these figures; practically it will be less.
But, assuming it to be all available, it will carry, if distributed in
proper proportion to all the banks, at 9.6 per cent, $1,830,000,000 of
new credit, and together with the annual increment from gold will
provide for the normal growth of business for possibly two and
one-half years. That is the total limit of the beneficial results
which can possibly be predicated on the operation of this law, that
it will carry the normal development of credit for two and one-half
years.
A t the end of this time, unless gold production should greatly
increase, it would all be absorbed, and the present condition of stress
would again be set up. W e would back into the same position we
are now. The best that can be hoped for from the new law is that
the demand for credit would be met for about two years, after which
a new adjustment of reserves involving a further reduction in the
per cent required would be necessary, and so on, ad infinitum.
But we have thus far entirely neglected the fact that there are
other demands for reserves upon the Federal banks, notably the
substitution of Treasury notes for bank notes. There are $730,000,000 of these notes, and their substitution with Treasury notes,
as provided in the Glass-Owen bill, will require $243,000,000 of
reserves and will leave the Federal banks not only without funds
for rediscount purposes, but with a deficit of $68,000,000, which will
have to be made up by Government deposits.
Senator R e e d . Will you not state that over? My mind does not
move rapidly enough to grasp that as fast as you state it.
BANKING AND CURRENCY.
619
Mr. B e r r y . But we have thus far entirely neglected the fact that
there are other demands for reserves upon the Federal banks, notably
the substitution of Treasury notes for bank notes. There are
$730,000,000 of such notes, and their substitution with Treasury
notes, as provided in the Glass-Owen bill, will require $243,000,000
of reserves, which will leave the Federal banks not only entirely
without funds for rediscount purposes, but with a deficit of $68,000,000 that will have to be made up by Government deposits.
Government deposits will help the situation if there are any legaltender funds in the general fund of the Treasury that may be de
posited. A recent report showed about $40,000,000 of bank notes
held in this fund, and these are, of course, useless for reserve pur
poses, and unless I am greatly deceived, the present emergency will
require the deposit of all the legal tender in the Treasury in order
to put the present credit fabric on a safe basis, 9.6 per cent, and will
leave none for deposit in Federal banks for rediscount purposes.
So far as I am able to judge, the operation of the proposed law will
not improve the present situation or furnish any means of meeting
the demands for new credit incident to the growth of the country.
Nor am I able to see any advantage to the national banks that will
compensate them for the investment of a portion of their capital at a
maximum dividend rate of 5 per cent.
The net result of the whole transaction will be the retirement of
the bank notes and their replacement with Treasury notes, having a
33J per cent reserve against them, and the reduction of the general
reserve under bank credit from 12.6 to 9.6 per cent.
To my mind, the basic fact to be considered is that the gold sup
ply— $65,000,000 per year— since only half of it will reach the banks,
will furnish a basis, at 9.6 per cent, for only $330,000,000 of additional
credit each year, whereas $1,000,000,000 per year is needed. If we
fail to provide other new reserve money, we are shut up to one or two
alternatives: W e must either refuse to allow business to normally
expand, or continually reduce the percentage of reserve to be held
against bank credit, a thoroughly dangerous proceeding.
The remedy lies in giving to the new Treasury notes the legaltender powers that will enable them to stand in bank reserves. The
gold supply will furnish to the reserve fund $32,500,000 per year,
which will carry the notes in sufficient volume to furnish reserves for
all the new credit we need. As I see the case, we must do this or
restrain credit and business.
If we choose the latter course, the trust problem must grow apace
and can not be safely treated. Periodic panics must still be expected
and all the evils that flow from them.
In my judgment, it is unwise to reduce the per cent of reserves under
our bank credit, and it is entirely unnecessary. The notes to sub
stitute the bank notes ean be issued directly by the Government in
exchange for the bonds and bank notes, and directly to the banks that
need additional reserves, as fast and no faster than the demand for
credit calls for them; and the whole problem of the 2 per cent bonds,
as well as a safe and adequate supply of credit, is solved at once.
The Government should, and easily can, maintain in a special
reserve fund a gold reserve together with the surrendered bonds, or a
new issue of bonds at a higher rate of interest, as an asset for redemp9328°— S. Doc. 232, 63-1— vol 1----- 40
620
BANKING AND CUBRENCY.
tion purposes. This is what is contemplated in Senator Owen’s
supplemental bill.
In order to obtain legal-tender notes, the banks could afford to
and would make a sacrifice; but to secure a Treasury note that is no
bett r than a bank note and useless for reserve purposes, they could
not and would not sacrifice anything.
The problem before us is to break the so-called credit monopoly,
which, like every other monopoly, can only exist when the supply of
the article monopolized is limited. To do this the supply of credit
must be made to readily increase in response to demand.
The supply of credit can only be increased in one of two ways;
and as I have said, in answer to question No. 5, we must either
reduce the per cent of legal-tender cash reserve upon which it stands
or increase the cash, in order that a larger volume of credit may exist
upon the present per cent of reserve.
The Glass-Owen bill is seeking to reduce the per cent of reserve,
and proposes to make a present of $175,000,000 flat to the banks by
releasing that amount of reserves and make possible $1,800,000,000
of additional credit upon which they may draw interest.
I submit that the banks are reaping a sufficient return from the
interest on their loans without giving them money on which to float
them. This is especially vicious, in view of the fact that the gift is
made at the sacrifice of the margin of safety in reserves. This
“ margin of safety” is an asset of the borrowers only, for the banks
do not need it for their own protection. They are always safe in
that they can and do call loans at will; and it is never the assets of
the bank, but always the collateral of the borrower, that is forced to
sacrificial sale in an emergency.
But, assuming that it is possible to thus expand credit, which I
do not concede, the relief will be only temporary. The situation
demands an annual contribution of reserve money in excess of the
gold supply; and the maximum supply that can be possibly claimed
from this reduction of reserve requirements would not last three
years. Practically, the time consumed in making the changes
would be so considerable that the supply of credit would not equal
the demand at any time in the interim, and fail entirely in the end.
The credit monopoly will, therefore, still exist with its high rates
and discriminations, and the people at large will not be greatly, if
at all, benefited; while the credit fabric which has failed disastrously
three times in a generation on a 12.6 per cent reserve mil be still less
stable on a 9.6 per cent reserve.
I am constrained to register my protest against this dangerous
experiment.
By the second method, the present per cent of reserve can be
maintained or increased and the credit monopoly broken by sup
plying the entire demand for credit through the conversion of the
bonded indebtedness of the nation into a clemand obligation in the
form of legal-tender paper competent to stand in bank reserves.
By this process we will make a present of about $135,000,000 per
year to the Government— the people instead of the banks— which
can be devoted to public works; and the benefits of an equitable
interest rate, with nondiscriminative and competitive credit to
legitimate borrowers, will be realized.
BANKING AND CURRENCY.
621
This is not an experiment in any sense. W e now have $350,000,000
of Treasury notes and $600,000,000 of silver serving the purpose of
reserve money, no part of which is giving the slightest trouble, and
can not do so, unless a heavy export of gold should set in and con
tinue for years, in which case the resale of the retired bonds is the
remedy.
The bank note is the sole cause of redemption trouble, and the new
Treasury note will be exactly like it unless given power to stand in
bank reserves. Since the figures I have given you were prepared
the House caucus has amended the Glass bill, still further reducing
the percentage of reserves required in all the banks to an average of
9.2 per cent, as against 9.6 per cent as originallycontemplated. This
will add $22,300,000 to the $175,900,000 apparently released for
rediscount purposes, making $198,200,000.
Carrying this figure through the calculation, we find that the total
deficit instead of being $68,000,000 will be about $45,000,000. It is
therefore clear that the bill as amended is not essentially better than
the original.
I am very much obliged to you, gentlemen, for your attention.
Senator Shafroth. We are very much obliged to you; but Senator
Reed wants to have a talk with 3 mu further.
Senator B ristow . I think Senator Reed and Mr. Berry had better
take a rest and then come back here at 2 o’clock.
Senator R eed . I think so.
The Chairman . A t 2 o’clock there is an executive session in the
Senate. I do not suppose it will last very long.
Senator R e e d . Suppose we meet here, Air. Chairman, immediately
after the executive session.
Senator B ristow . Air. Berry, I am very much interested in your
statements. You have given, to my mind, some very ingenious
suggestions.
Mr. B erry . Boiled down to its last terms, there is only one sug
gestion, and that is to substitute legal-tender notes and make the pro
posed issue under this bill a legal-tender instead of a nonlegal-tender
note, and you will have the solution of the problem.
The Chairman . I think you are absolutely right about the legal
tender.
Senator Shafroth . So do I.
Air. B e r r y . A t the last analysis that is what it boils down to.
The Chairman . We will now stand adjourned to meet within 10
or 15 minutes after the Senate rises from executive session this
afternoon.
(Thereupon, at 12.45 o’clock p. m., the committee took a recess
until this afternoon at the time stated.)
AFTER RECESS.
The Chairman . I submit, from the report of the Director of the
Alint for 1912, dated December 31, a table of the monetary state
ments and approximate stocks of money, in the aggregate and per
capita, in the principal countries of the world, pages 66 and 67,
annual report of the Director of the Mint.
Senator R eed . W hat year?
The C h a ir m a n . 1912.
622
BANKING AND CURRENCY.
STA TE M EN T OF W ILLIAM H. B E R R Y - Continued.
Mr. B erry . I do not know whether it would be worth while, Mr.
Chairman, to ascertain. There are no statistics that I have ever
been able to find which give definitely the amount of banking credit
which is available in these various countries. If there were such
statistics available it would be instructive to have them along with
it. I do not know where such statistics may be found. I have
hunted for such statistics, but I do not know where they may be
found.
May I just very briefly introduce another thought here ? Of course
my argument is based largely on the assumption that the supply of
legal-tender money is not adequate, and as an indication of its
scarcity I have before me the last report of the Treasury Department
showing the condition of the national banks on June 14, 1913, from
which I secure the following facts:
Those banks held on that date, collectively, $952,900,000 of legaltender money. They owed to State banks and trust companies on
that date $862,000,000. They owed a billion and 57 millions, alto
gether, but there was a counter debit of 194 millions, leaving 862
millions as the net obligation of the national banks to the State banks
and trust companies.
The Chairman . I would like also to put in as a part of that paper
this statement dated June 30, 1912. it is a very interesting com
pilation, and will also go to explain Mr. Berry’s evidence.
Mr. B erry . The difference between what these banks hold and
what they owe, net, to State banks and trust companies, outside of
their depositors, was 90 millions of dollars; 90 millions of dollars as
against their total demand obligations, which were 7,599 millions.
That is 1.1 per cent. The extent to which the funds of State banks
and trust companies are moving over into the custody of the national
banks in order that a legal showing of reserves may be made is
astonishing.
Senator R eed . W hat do you mean by that ?
Mr. B erry . Just exactly what I have said. The growth of the
system of affiliated national banks with trust companies, next door
or on the other side of the hall in the same building, in Pennsylvania,
is astonishing.
Senator R eed . D o I understand you this way: The bank reserve
has fallen below the legal requirement, and in order to make their
showing of a proper reserve they simply get into a trust company and
carry over and put in their vaults temporarily a certain amount of
money ?
Mr. B erry . Wliich appears as due ro banks.
Senator R eed . And they make their report upon that, and you
say that is done extensively ?
Mr. B erry . Yes, sir.
Senator R eed . Could you tell us to what extent ?
Mr. B erry . The general extent is indicated by this report, as I
have just analyzed it.
Senator R eed . That is to say, that they have actually got about
one-tenth of what they ought to have ?
Mr. B erry . Yes. That is, they actually own only $1 for every
$100 that they had on demand account.
BANKING AND CURRENCY.
623
Senator R eed . In other words, they shift their reserves from one
bank to the other ?
Mr. B erry. Yes.
Senator R eed . And a reserve serves twice in that way. I ought
to have a reserve of $1,000,000, and I take all that the law permits
me to put in another bank, and I put that over in your bank, and
thereupon it begins to operate as a reserve ? Is not that the way it
works out ?
Mr. B erry . Well, as between national banks that works out, but
this other is another thing altogether. It is the affiliation of national
banks with trust companies across the hall, or next door, under the
same control and under the same management. And when the bank
examiner is present in the national bank, that bank is full of money,
it having crossed the hall in gripsacks a day or two before; and when
the State bank examiner is present in the trust company, the reverse
movement occurs.
Senator R eed . H ow would that be prevented ?
Mr. B erry . By making money enough for both of them. I think
that is the best way.
Senator R eed . H ow can it be prevented, as a matter of exam
ination ?
Mr. B erry . Simultaneous examination will counteract that.
Senator Shafrotii. In the State of Colorado we have a State law
which provides that the report made by the State banks shall be on
the same day as the report made by the national banks.
Mr. B erry. Yes.
Senator Shafroth. And it seems to me reporting all at the same
time would check that.
Senator R eed . If they tried to beat a law, they could easily
enough make one report at 9 o’clock in the morning and the other
at 5 o’clock in the afternoon.
Senator Shafroth. N o; I think they call for it at the close of
business on a certain day.
Mr. B erry . It is a very difficult thing to reach by law.
Senator R eed . Following out just what we have been talking
about, assume that a bank had sufficient deposits so that under the
law its reserve would have to be $1,000,000. That bank, if it is
an ordinary city bank, can put half of that money in another bank,
can it not, and hold half ?
Mr. B erry . Yes.
Senator R eed . The bank into which the money has been placed
can hold 12£ per cent of it, which would be what?
Mr. B erry . $125,000.
Senator R eed . Twelve and a half per cent ?
Mr. B erry . $125,000, would it not?
Senator R eed . N o. 'H alf a million— there is a half million held
by the first bank as its 12£ per cent. It is 12£ per cent that it can
put into another bank.
Mr. B erry . Oh, ves.
Senator R eed . S o that it puts $500,000 over in the next bank, and
that bank can hold 12£ per cent of that $500,000, which would be
$62,500, would it not?
Mr. B erry . Yes.
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BANKING AND CUBRENCY.
Senator R eed . And it can then take— well, I will have to figure
that.
Mr. B erry . That problem is fully figured out in this last paper
that I read from.
Senator R eed . It could then have the balance of the $500,000 put
into still another bank, and it can take 12£ per cent and keep on
shifting that money around and can bring part of it right back into
the original bank if it wants to, can it not?
Mr. B erry . N o ; I do not think so. It could not do that legally.
The law contemplates that a bank can only use a central reserve
bank as a depositary for its reserve.
Senator R eed . That is where it is broken. But, outside of the
central reserve bank, is there anything to prevent the country bank
from doing so ?
Mr. B erry. The method is to deposit a portion of its reserve in
the reserve city bank, and the reserve city Rank deposits a portion
of its reserve in the central reserve bank.
Senator R eed . Can it deposit a part of its reserve in any other
bank?
Mr. B erry. Oh, yes; it is not compelled to deposit any part of it
anywhere. As a matter of fact, they do. They deposit a portion
of that in the reserve banks and a portion of it in the outlying banks.
Funds are put in the central reserve cities directly.
Senator R eed. Mr. Berry, taking the system which we now have
in this Government, do you regard our system as some people seem
to have regarded it— that it is the poorest banking system in the
world ?
Mr. B erry. N o, sir; I do not.
Senator R eed. D o you think it is a good banking system, taken
as a wdiole ?
Mr. B erry. A s I have said already in my paper, I believe it is
the best banking system in the world.
Senator R eed . N ow ?
Mr. B erry. N ow ; yes, sir.
Senator R eed. Then somebody, if you are correct, has been grossly
exaggerating the evils of this present system; that is, those who
have said it is the poorest banking system in the world. They have
been grossly exaggerating the defects of the system ?
Mr. B erry . They have been charging the defects to the banking
end of it, whereas the defect is solely resident in the currency end
of it.
Senator R eed . D o you regard our currency system as an exceed
ingly poor system, or only a system that has some defects in it ?
Mr. B erry. It is a system that has one basic defect in it. It is
not capable of expansion with sufficient rapidity.
Senator R eed . Taking this banking and currency system as it is
now, can you not, in a few words, point out the defects in the cur
rency system ? I mean, not in the way of argument, but in a state
ment of the fact, just in a few words ?
Mr. B erry. Well, the basic defect is in the inability of the banks
to secure sufficient reserve money to meet the demand for credit.
Senator Shafroth. It is due to the fact that there is insufficient
legal-tender money.
BANKING AND CURRENCY.
625
Senator R eed. D o you agree with Senator Shafroth that it is due
to the fact that it has not sufficient legal-tender money?
Mr. B erry . Yes, sir. In my judgment that is the one real crucial
difficulty in the whole situation; and if corrected, the banking
system will respond, in my judgment, almost immediately to the
demands for credit.
Senator R eed . Your method of furnishing the banks with sufficient
reserve money, broadly stated, is to make more money ?
Mr. B erry . Yes, sir.
Senator R eed . The method that you have in mind for making
more money, worked out, would be what ? How would you go at it ?
Mr. B erry . T o allow any bank that has a Government bond in
its assets to present that bond and receive the market price for it in
new legal-tender money.
Senator R eed . Regardless of what that market price was ?
Mr. B erry . Yes, sir.
Senator R eed . D o you think that would prevent panics ?
Mr. B erry . Yes, sir; a panic would be impossible if that law were
established.
Senator R eed . H ow many bonds has the United States Govern
ment out now that would be available ?
Mr. B erry . A billion, about.
Senator R eed . For that purpose ?
Mr. B erry . Yes.
Senator R eed . A t the present time, in the matter of emergency
currency, what does that have to be issued on ? What class of bonds ?
Mr. B erry . A t the present time ?
Senator R eed . Y es; under the Aid rich-Vreeland Act.
Mr. B erry . W hy— do you mean the asset currency plan?
Senator R eed . The Aldrich-Vreeland Act. If a bank wants money
under the Aidrich-Vreeland Act and wants the coin, the Government
can coin or print $500,000,000 worth. W ith what kind of security
is that money obtained ?
Mr. B erry . W hy, as I understand, on various securities, to be
determined by the judgment of the Treasurer.
Senator R eed . It has never in fact been used, has it?
Mr. B erry . N o, sir; nor will it ever be used.
Senator R eed . W hy?
Mr. B erry . Because the money is not a legal tender when thej
get it, and it is of no use to them.
Senator R eed . Y ou say it is not a legal tender. It would pay
their ordinary customers, would it not?
Mr. B erry . Yes; but that is not what they want. They have not
any trouble in paying their ordinary customers. Their trouble is
that their reserves are down, and they can not get money to replen
ish them from anywhere. That is the trouble.
Senator R eed . Y ou make the point, then, as to this money which
they could obtain under the Aldrieh-Vreeland Act, that when they
did obtain it it would not do them any good, because they could not
build up their reserves ?
Mr. B erry. That is right.
Senator R eed . Let us see if that is literally the case. If you
have a bank, and your reserves have got down too low, and you need
$1,000,000 to replenish them— at the same time you do not want to
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BANKING AND CURRENCY.
deny customers the ordinary credits that you have been extending
to them—you go over to the Treasurer with such securities as can
be accepted under the Aldrich-Vreeland Act, and you get $1,000,000,
and take it down and put it in your vaults. Every man who is doing
business with you continues to pay in money to you every day, and
the money that you pay out is this $1,000,000 that you got from
the Government. The money that comes in is the ordinary money
of the country, the great mass of which is legal-tender money, and
can be put in your reserves. W hy can you not build up your re
serves by that process ?
Mr. B erry . It would not be more than three days after you got
that million dollars until that million dollars would appear in your
bank or somebody’s bank as a deposit.
Senator R eed . Part of it.
Mr. B erry. And the instant it appeared as a deposit you would
have to rush somewhere to get legal-tender money to hold against it,
and you could not get it.
Senator R eed . N o ; the instant it appeared as a deposit you could
turn around and loan it out and pay it out, but continue to conserve
and hoard in your vaults the other money that comes in. I can not
see why.
Mr. B erry. Well, if you could persuade the people who make
deposits with you to hold always their bank notes and deposit always
their legal tender perhaps you would reap a benefit. You doubtless
would; but the difficulty is that you and I, when we go to the bank,
do not pay any attention to that. W e deposit what we have.
Senator R eed . Certainly.
Mr. B erry. And the more bank notes there are in circulation in
our town the more there are deposited, and it gets worse and worse
every time you put a new one out.
Senator R eed . D o you know about what the total money in cir
culation in this country is, in round numbers ?
Mr. B erry. In circulation? W hy, about 2 billion 500 million, in
round figures.
Senator Shafroth. T wo billion six hundred million.
Senator R eed . Let us say that the whole $500,000,000 is issued
under the Aldrich-Vreeland Act, that you have 3 billion 100 million.
But there is $5, in round numbers, of money out for $1 of the emergency
money. So that you would take over your counter in the ordinary
course of business $5 of ordinary money where you would take over
$1 of this emergency currency; and most of the money that you take
over your counter, other than the emergency money, could be utilized
for reserve money, could it not ?
Mr. B erry. Yes.
Senator R eed. W ith that sort of condition, it does seem to me a
man could speedily build up his reserve and build it up by legal-tender
money. Is not the trouble with the Aldrich-Vreeland Act something
else than what you have indicated ? It has never been used. Does
it not lie in the interest charge, or does it not lie in the fact that the
machinery is not adequate for getting it out, or does it not lie in the
further fact that a bank does not want to go down there and appear
to be in such stress that it needs money ?
Mr. B e r r y . I think not, and I base m y opinion upon the experience
that the banks now have with the 730 millions of bank notes. There
BANKING AND CURRENCY.
627
is scarcely a bank in the country that does not. You go in some time
and pay in a bunch of money and you see the receiving teller shift it,
and he will take out every bank note there is in it and put them into
one drawer, the near drawer, so that the next fellow that comes in will
get that, and it will go out. They do now with that money just exactly
what you refer to, to the largest extent possible, and yet 700 millions
of it go back for redemption every year.
Senator R eed . But it goes right out again, does it not?
Mr. B erry . I know it does, but it absorbs 60 millions of money
to do it.
Senator S h a f r o t h . The main defect in the Aldrich-Vreeland bill, as
I understand it, is that the bankers’ associations, which are required
to be formed in the community that wants any money under the
Vreeland Act, are not willing to be responsible for each other, and
that act requires that there should be a joint obligation of the associ
ation; and that has been the reason, as I understand it, that they
have not made any demands on the Treasury under the Vreeland Act.
Senator R eed . I am satisfied that there must be some reason of
that kind, or else there has been no great necessity for money.
The Chairman . There is another reason, Senator, that has not
been commented on, and that is this: Whenever a bank applies under
the Vreeland-Aldrich bill to its associates in that association, the
condition of that bank is known to the other members of the associ
ation— that it is in stringent need— and they do not like to make that
confession, because it frightens their depositors.
Senator R eed . That is one of the things that I really suggested in
that question— that they did not like to apply for it because it was in
the nature of emergency money.
Mr. B erry . That may be a factor. I doubt not that it is, but I
base my view upon the experience that we have with the bank notes.
A bank note requires an 8$ per cent reserve of legal tender behind
it to keep it in circulation, and the Aldrich-Vreeland bill will require
the same thing. There is the trouble, and the whole trouble. You
have absorbed 75 millions of dollars of legal-tender money whose
sole occupation is the maintenance of that 730 millions of bank
paper in circulation.
Senator R eed . Well, it seems to me you could well afford to absorb
that much money if you got that much more for it. You are still
multiplying your money very rapidly. But what I am trying to get
at is the reason that the Alarich-Vreeland Act has never been used.
Of course, one reason is that we have never had a real panic since
we had it. If we had had a real panic, the probabilities are that
money would have gone out, would it not ?
Mr. B erry . I do not think so.
Senator R eed . Y ou do not think the banks would have used it
even in case of a panic?
Mr. B erry. N o ; I do not.
Senator R eed . Suppose that the Aldrich-Vreeland Act was
amended so that any bank, on its own motion, without going to
any other bank for indorsement, could take its assets, whatever
they were, to the Treasury and get their money issues at a low rate
of interest. Would the money now out then?
Mr. B erry . Well, it might if the interest rate was low enough and
the terms sufficiently attractive; but I do not see how the situation
628
BANKING AND CURRENCY.
would be in any degree relieved. My impression is that the more of
that money that you have in circulation the more trouble you would
have in regard to its redemption. The larger percentage of it that
there is in circulation the larger percentage would be deposited.
Therefore more reserve should be required behind that money than
would be required behind a book credit of the same volume, and you
are in no better position. It does not relieve your situation at all.
Senator R eed . Just because it can not be used as reserve money ?
Mr. B erry . Surely.
Senator R eed . Suppose it could be used as reserve money?
Mr. B e r r y . Then you have the problem solved.
Senator R e e d . That is all that is necessary ?
Mr. B er r y . Yes, sir; that is all.
Senator R e e d . Would there be anything, in your judgment, unsafe
in the Government of the United States issuing money in any amount,
within the bounds of reason, upon Government bonds ?
Mr. B er r y . N o .
Senator R eed . And if the Government got their securities and
piled them up in its vaults, the securities of the citizen and of the
banks and of the big corporations of the country, and piled them up
in its vaults and also put the faith and credit of the United States
back of the money that it emitted, do you think that would impair or
jeopardize the credit of the country ?
Mr. B erry . No- I do not.
Senator R eed . Then, if I get you right, all that we have to do is to
provide that the Treasurer of the United States shall print money, and
that whenever any banker comes to the Treasurer with Government
bonds or with such other security as may be safe security to issue that
money upon it, making that money full legal tender for all debts,
public and private? You think that would not impair the credit of
the country, and you think that would give us the money to handle
the business of the country ?
Mr. B erry . Yes; I think so; but still I would object to the method.
That will do the right thing in what I think is, partially at least, the
wrong way. I do not think that the assets of an individual— that is,
the obligations of an individual— ought to be used for that purpose.
I think nothing but the public credit should have that privilege.
Senator R eed . That is just exactly what is being done under this
present bdl, is it not ?
Mr. B erry . Yes.
Senator R eed . The assets of an individual are being used, as I
understand it. Let us follow that.
Mr. B erry . Not exactly; I do not mean the assets of an individual,
but the obligations of an individual.
Senator R eed . Yes; that is what I should have said. A bank is
opened for business, we will say, and it loans a million dollars of
money and takes the notes of the merchant, the farmer, and every
body else— good safe paper— let us say. It wants to get money
from a regional bank. It goes to the regional bank, deposits these
securities, and borrows the million dollars. That is the first step, is it
not ?
Mr. B erry . Yes.
Senator R eed . And the million dollars that is given to it is got
out of the vaults of the regional bank. The regional bank then takes
BANKING AND CURRENCY.
629
that million dollars of paper, indorses it, which of course makes it
that much better, and carries it down to the Federal Treasury, or
rather carries it over and it is locked up in a special place with the
representative of the Federal Government, who is there in the bank,
and thereupon there is delivered, based upon that security, SI,000,000
of these notes. That is the same proposition that we were first
talking about, exactly, except that in this instance you have the
indorsement of two banks upon the paper, but nevertheless it is
money issued upon the debts of individuals?
Mr. B erry . Yes.
Senator R eed . And if it is proper in that instance it would be
proper in the first instance named, provided there is not something
defective in the manner of working it out. But the same thing is
fundamentally there, the same idea, is it not ? Do you assent to that ?
Mr. B erry . Yes, except this, that you have the difference there
between the paper which is indorsed by a bank— you included that
in your proposition, did you not?
Senator R eed . I was first just simply trying to find out whether
the money that is issued by the Government in both instances was
not issued upon debts of private individuals, including as individuals
any corporation, banking corporation, or any other corporation; it is
nevertheless money issued upon that kind of assets ?
Do you not think that we coidd let our present banking system
stand just, as it is and provide this currency by doing two tilings:
First, provide that currency could be issued upon all Government
bonds that were brought there with the request that money should
be issued upon them; and, second, that there should be vested in the
Secretary of the Treasury or comptroller or some other Federal authority
the right to issue additional money upon notes of individuals, State
bonds, or other banking assets under such rules and requirements as
might be provided by these Federal authorities touching the matter
of safety, the amount of the issue, etc. ?
Mr. B erry . I think so. I see no reason why you could not do it
now just as well as you could under new arrangements. But my
fundamental objection to it still inheres. I would not wish to com
mit myself to a proposition that would allow anything but a public
obligation. The absorption of a public obligation into the Treasury
in lieu of notes issued ends the transaction. There is no bookkeep
ing or any horde of clerks necessary to be employed to take care of
the proposition. It is a finished transaction. On the contrary, if
they have these notes of individuals to handle there is endless detail.
This objection is only to commercial paper. Of course, as to a State
bond or any other bond having the taxing power beliind it, in any
considerable area or territory, I would be willing to give that same
privilege, but my thought is that the development of this Nation
will require the expenditure and ought to have the expenditure of
enormous sums of money in the immediate future; and therefore the
obligations of the Government issued for the purpose of these public
improvements would be a sufficient reservoir, a sufficient source for
supplying all of the legal-tender money that the country needs. It
would only amount to 135 millions a year. It probably would be
more as we grow, but at this moment it stands on the basis of the
last 10 years at 135 millions a year.
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BANKING AND CURRENCY.
Senator R eed . I think Mr. Berry, I understand that, and I do
not want to shut you off from any answer, because you are entitled
to have your views plainly set forth. But I think we understand
that, and if I may stick to the line of questions I started with I will
ask you this: Your idea is that one reason the Government bond is
better as the basis for this money than the short-time commercial
paper is that when the money is issued upon the Government bond
it goes out and stays out and becomes a part of the permanent circu
lation of the country, unless money becomes so plentiful that interest
rates drop to a point where the holder of the money might want to
go and take up his bond. That is the reason, is it not ?
Mr. B er r y . Yes, sir.
Senator R eed . Therefore, what you desire in your plan is not a
money that is created only for a few days’ time and which must be
at the end of that short period absorbed back into the Treasury and
distributed, but it is a permanent money. Is that right ?
Mr. B erry . Yes, sir.
Senator R eed . If what you desire is a permanent money, a per
manent security is the thing to put up upon which to have it issued,
is it not ?
Mr. B erry . Yes, sir.
Senator R eed . Y ou prefer the Government bond. Now, why not
the bond of a State, the unchallenged and undoubted bond of a
State I
Mr. B erry . There is no reason why not.
Senator R eed . W hy not the bonds of cities and counties, when
they have been classified, and it has been ascertained that they are
undoubtedly good ?
Mr. B er r y . Well, you are approaching the danger line. I think
you are getting too near the individual in that, but the principal
thing------Senator R eed . I am not approaching it in the matter of the
security being good.
Mr. B erry . N o ; not at all.
Senator R eed . Because I have put into my question the statement
that it must have been ascertained to be good I do not mean that
every city bond is to be accepted because a city issues it, but I
mean when bonds have been issued and when an examination has
shown that they have been legally issued— and I will add to that,
even bonds that have been issued with the interest regularly paid up
for a given period of time, something similar to a requirement, I
believe, in the New York statute with reference to certain securities—
that would be pretty good security, would it not ?
Mr. B er r y . Oh, yes.
Senator R eed . Y ou would have a money that was backed by the
faith of the United States, would you not ?
Mr. B erry . Yes.
Senator R eed . But vou would have in the hands of the United
States the obligation of either a city" or a county or a State.
Mr. B erry . Or the Nation itself.
Senator R eed . But we have also got the Nation itself in the
Nation’s guaranty. W hy does not that furnish a much higher and
better class of security than the paper of A B indorsed by the bank
B C and reindorsed by the bank C D ?
Mr. B erry . It does.
BANKING AND CURRENCY.
631
Senator "Reed . If what I have suggested by my questions is
adopted as a currency measure, then there would be no necessity,
in your opinion, for the creation of these reserve banks or any other
machinery. The banks would simply go on in their own way and get
whatever money they needed as individual banks?
Mr. B er r y . That is the way J should look at it.
Senator H e e d . I want to get you to help me in finding what is
the final result of the organization of all these regional reserve banks.
Have you the table before you showing the capital that would go into
these banks ?
Mr. B er r y . N o ; they took my manuscript. I had it here, but
they have taken it away. But I can recall it very closely.
Senator R eed . I am going to insist that I be given the right to
carry a gun, for every investigation I have been on just the moment
I wanted anything I found the reporters had carried it off.
The Chairman . I gave instructions to have the manuscript
returned to-morrow morning.
Senator R eed . But I wanted, if I could, to get this in in accurate
figures, for a reason. Of course you could not, out of your mind,
recall those figures with absolute accuracy. Have you the total
capital, Senator Owen? You have nearly everything of all the
national banks.
The Chairman . Y es; certainly.
Mr. B erry . I have that right here.
Total capital stock paid in, $1,056,000,000.
of surplus.
Seven hundred and twenty millions
Senator R eed . If all the national banks came in and paid into
the regional reserve banks the 10 per cent required, there would
actually be a capital for the regional reserve banks of what ?
Mr. B erry . $100,000,000.
Senator R eed . $100,000,000 in round numbers?
Mr. B erry . Yes.
Senator R eed . But there would not be any increase of banking
capital in the Nation. They would simply take this 10 per cent of
their present capital, which they own locally, to reduce their capital
that much and transfer it over into the Federal reserve banks?
Mr. B erry . Yes, sir.
Senator R eed . S o we have not created a new dollar of money by
that process, have we ?
Mr. B erry . N o .
Senator R eed . If there is $100,000,000 of capital stock for all of
these regional reserve banks, and we had 12 of them, there would be
approximately $8,000,000 for each bank?
Mr. B er r y . For each one, yes.
Senator R eed . Y es; $8,000,000 for each one of these reserve
banks. There would be deposited in these reserve banks 5 per cent,
an amount equal to 5 per cent of the total deposits of the country,
which would be what? I mean, total deposits not of the country
but of the national banks of the country.
Mr. B erry . There is about 6 billions of those deposits. That
would be about 300 millions.
Senator R eed . Three hundred millions of deposits ?
Mr. B e r r y . Y es.
1
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BANKING AND CURRENCY.
Senator R e e d . But all you have done is to shift it from many
banks into one common bank. You have now got a total of $400,000,000 in assets in these banks, $100,000,000 of which they own?
Mr. B er r y . Yes.
Senator R eed . And you have not added a dollar to the money of
the country yet, have you ?
Mr. B er r y . N o , sir.
Senator R eed . W hat did you say the total deposits of the country
were?
Mr. B er r y . The total deposits of the country ?
Senator R eed . Yes.
Senator S h a f r o t h . About 19 billion.
Mr. B er r y . Yes.
Senator R eed . I s that for the country, or for the national banks ?
Mr. B erry . That is all together.
Senator R eed . W hat is the total deposits of the national banks ?
Mr. B erry . About six billions.
Senator R eed . For the national banks as a whole; the 19 billions
includes all State banks and trust companies ?
Mr. B erry . Yes, sir.
Senator R eed . Y ou will have, then, in these banks 400 millions of
dollars as against 19 billions of deposits. It would constitute a reserve.
Can you tell me, in your head, rapidly, about what percentage ?
Mr. B erry . I can not tell you in my head, but I can do it with a
pencil in a jiffy. [After calculation:] It is about 5 per cent.
Senator R eed . It can not be 5 per cent.
Mr. B er r y . Oh, no. W hat did you say? W hat is the total of
your cash ?
Senator S h a f r o t h . Four hundred millions. It would be absolutely
just 2 per cent if it was 20 millions.
Mr. B e r r y (after calculation). A little over 2 per cent.
Senator R eed . And it is 6 per cent, speaking in round numbers.
The total assets of the regional reserve banks would be 6 per cent of
the deposits of the national banks and about 2 per cent of the deposits
of all the banks of the country; and still we have not a single dollar
of new money.
Mr. B er r y . N o .
Senator R e e d . When the banks put this reserve of 5 per cent which
they now have into the regional banks, it will take $300,000,000 out
of the national banks' vaults at once, will it not ?
Mr. B er r y . Yes.
Senator R e e d . And the $100,000,000 which they have put in there
as capital will also come out of the assets of the banks, will it not ?
•Mr. B e r r y . Just there, Senator, I wish to inquire of Mr. Owen my
figures. If you are going to demand that these banks furnish that
capital in cash, my figures are not near bad enough. But I have
assumed that the capital contributed by these outlying banks would
be contributed in the form of securities rather than in the form of
cash. If they are going to demand cash, why that is further up in
the air than I showed it to you.
Senator R e e d . But sticking to this one thing, for I am trying to
get to a certain conclusion------Mr. B er r y . Y ou are assuming, now, that it is cash?
BANKING AND CURBENCY.
633
Senator R e e d . Assuming that it is cash we have to put in; but a
hundred million dollars of cash out of their vaults as and for capital,
$300,000,000 of cash as and for the reserve of 5 per cent?
Mr. B er r y . Yes.
Senator R e e d . Necessarily the banks must utilize that $400,000,000
in some way pretty speedily or else it is going to make a shortage of
money in the banks of the country, is it not ?
Mr. B erry . Certainly.
Senator R eed . Therefore, is it not true that the result would be
that they would borrow from the regional banks back an amount of
money substantially equal to the amount they put in ?
Mr. B er r y . With the exception of 175 millions. They would have
to have it all back instantly excepting 175 millions.
Senator R eed . That is 33 per cent ?
Mr. B erry . N o ; that is the saving that they realize by reducing
their reserve requirements from 25 to 20 per cent and from 15 to 12
per cent in the banks.
Senator R eed . Yes. That is because the general reserve of the
country has been reduced ?
Mr. B er r y . That is it. It would all have to go back instantly
except 175 millions.
Senator R eed . But with an actual shortage of ready money, is it
not likely that these banks would borrow back almost immediately
the $400,000,000 they had put it, or substantially all of it?
Mr. B erry . They could not get all of it. They would not have
to have all of it. (After calculation.) They would have to have
immediately back 225 millions of it.
Senator R eed . T wo hundred and twenty-five millions of it that
they would have to get back immediately ?
Mr. B erry . Yes, sir.
Senator R eed . That leaves you 175 millions, just your figures of
a moment ago. Is not the regional reserve bank required to keep a
reserve ?
Mr. B erry . Yes, sir.
Senator R eed . Of how much ?
Mr. B erry . 33$ per cent.
Senator R eed . This 175 millions would barely cover their reserve,
would it ?
Mr. B erry . If you consider all of the reserve they have to carry,
it will not cover it by 50 millions.
Senator R eed . Very well. The first thing that happens in this
process is that the banks carry over $400,000,000 and borrow back
every dollar of it except what the regional bank has held by way of
reserve, speaking broadly, now. I am not trying to speak with
absolute mathematical accuracy. That is right, is it not ?
Mr. B erry . Yes, sir. '
Senator R eed . And we have left now in the banks $175,000,000,
substantially all of which has to be held as a reserve, and we have
not added a dollar of new money or new wealth of any kind, have
we, up to this point? I mean we have not added anything to the
aggregate bank capital of the country ?
Mr. B erry . Y ou have not added a new dollar, no, sir; but you have
let loose from the reserves of the country-------
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BANKING AND CURRENCY.
Senator R eed . That comes under another phase of this bill which
reduces the reserves. Mr. Berry, let us say that you have a bank
that has in its vaults $225,000,000 of bank paper ancf has $175,000,000
of reserve. There are 12 of these banks, and if they run on the average
and they have $1,750,000 in their reserves which they can not toucn,
the reserve of each of them would be a little over $145,000 in its
vault, of cash, and that would be held as a reserve. Is that right ?
Mr. B er r y . I am not able to follow your figures.
Senator R e e d . Divide the $1,755,000, which you say would be
left in these banks, by 12, will you, please?
Mr. B erry (after calculation). I would call it 15 millions, Senator?
Senator R eed . Y ou have only got in the banks 400 millions.
Mr. B erry . Y es; you sent back 225 millions.
Senator R eed . Y ou have $1,750,000 left------Mr. B erry . Y ou have $175,000,000 left.
Senator R e e d . Oh, yes; then you have how much?
Mr. B erry . Fifteen millions of money.
Senator R eed . Every dollar of which is tied up.
Mr. B erry . That is not the way my figures resulted. I find that
that was outside of the requirements for securing the national-bank
notes— that is, the requirements of reserve against the national-bank
notes and available balance of about 150 millions in the whole situa
tion, in my figures; but that was before you had included this 100
millions. That makes a vast difference. If you are going to make
those people furnish their capital subscription in cash, you would not
have a cent, not a nickel.
Senator R eed . I want to know how much of a real help that sort
of massing of money is when you have massed it in that way and
borrowed it back. Where is your reservoir to drink from when the
drought comes ?
Mr. B erry . There is none.
Senator R eed . That is just the way it has been striking me. It
is true that the bank can take these bank securities now, these notes
that the banks have put in there for their $225,000,000, and they
can go down to the Federal Government and they can get currency
issued.
Mr. B erry . Yes.
Senator R eed . But the solitary atom of original strength now that
we have added to this system, the first massing of any of this credit,
the first drop of water that has gone into the reservoir from which
we are all going to drink in the hour when we are thirsty, came out
of Uncle Sam’s reservoir, did it not?
Mr. B erry . New money.
Senator R eed . New money that he made. But the banks had
not added a penny?
Mr. B erry . Not a thing.
Senator R eed . Then, if Uncle Sam takes his money and deposits
it in these banks, of course that is that much more money that they
can use; but that money that Uncle Sam issued came out of the
Treasury, did it not ?
Mr. B erry . Yes.
Senator R eed . So that the only element of strength and the only
way these regional banks can do anything is with what they get
from the Federal Government; and this talk that we have had here,
BANKING AND CURRENCY.
635
that you are ^oing to mass the resources of the country, the reserves
of the banks m one common reservoir from which all can draw and
which will enable the money to flow from one part of the country to
another part of the country, appears to end in an idle dream; that
is your view of it, anywav?
Mr. B erry . Yes, sir. '’The only thing that promises a possible help
in the situation is the reduction of the percentage of reserve required
from 25 to 20 per cent and from 15 to 12 per cent. That is the only
thing.
Senator R eed . W e have not added a newr element of strength to
this by the banking system ?
Mr. B erry . Y ou have added an element of weakness by under
mining the credit.
Senator R eed . If you want to release 25 per cent of the reserves
that we now require the banks to hold, we could do that by enact
ing the statute changing the requirements of the present law?
Mr. B e r r y . Yes.
Senator R eed . And then we would have accomplished by that
direct method the only good which you see would be accomplished
by this indirection ?
Mr. B er r y . Absolutely.
Senator R eed . Indeed, that provision of this bill which relates to
the amount of reserves is a thing that is independent from the
scheme itself. It simply is a provision in this bill that the amount
of bank reserves may be reduced and they may be distributed differ
ently from what they are at the present time. That is where we
come out, is it not ?
Mr. B er r y . Yes, sir.
Senator R eed . If there is any excuse, then, for this system, it
must be found in the fact that it is a device or plan by which before
the Federal Government issues this new’ money it may have the
indorsement of this regional reserve bank upon the back of all the
individual paper the regional reserve bank has, and which it desires
to borrow money from the Government upon. That is about all
there is in the whole scheme, is it not ?
Mr. B erry . Yes.
Senator R eed . I confess if that is all there is in it I do not see
much use in it.
Mr. B erry . That is all that I have been able to see in it. I do
not know whether there is anything that I have not observed or not.
Senator R eed . You and I may both be mistaken, and I know
that I am very likely to be; but I think with your experience you
ought to be pretty sound.
Now, I want to come to another question. I take it that you
rather loan to the opinion that one of the weaknesses of our banking
system is in requiring hanks to maintain as large a reserve as they
are now required to maintain. Am I correct in that ?
Mr. B er r y . N o . My thought would be that they ought to be
still required to maintain as large a reserve as they now’ have, but
that it should be more distributed to the outlying banks rather than
concentrated in the central reserve city banks.
Senator R eed . I was in error. You would require the banks,
treating them as a whole, still to keep as large a reserve as they now
are required to maintain?
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BANKING AND CURRENCY.
Mr. B er r y . I do not know that I would insist upon that in the
central reserve cities. I think the reserve required in the central
reserve cities is more than is really necessary.
Senator R e e d . You misapprehend my question. I say that, treat
ing the banking system as a whole, you do not want to see the local
reserves go down ?
Mr. B er r y . N o , sir; I would not.
Senator R e e d . That is, if the required reserve figured up to be at
500 millions of dollars, the country bank putting in a certain per cent
and the ordinary reserve bank a certain per cent and the central
reserve banks a certain per cent, and they aggregated 500 millions
of dollars, you might want to distribute the reserves or change the
requirements as to what certain classes of banks would hold, but you
would still want in the aggregate $500,000,000 ?
Mr. B erry . That is my thought.
Senator R eed . The first thing this bill does is to reduce that aggre
gate, is it not ?
Mr. B erry . Yes.
Senator R eed . By how much?
Mr. B erry . By 25 per cent.
Senator R eed . It would be, in round numbers, based upon our
present moneys------Mr. B erry . About 175 millions is what it figures out for the national
banks.
Senator R e e d . In round numbers ?
Mr. B er r y . Yes, sir.
Senator R e e d . So that the first thing we do by this bill is to take
out of the present system 25 per cent of that element of safety which
has heretofore consisted in the reserve. Have we anywhere strength
ened the system by this process ?
Mr. B er r y . Not that I can see.
Senator R e e d . A s a matter of fact, when there is a financial shiver
goes over the Nation the danger to the banking system lies ii* the rush
of the people to demand cash and the inability of the banks to supply
that cash. If the people never lost confidence we might have hard
times, but we never would have a panic, would we ?
Mr. B erry . N o , sir.
Senator R e e d . Because a panic means lack of confidence. If it
was known that all of the banks of the country had 100 cents on the
dollar in their vaults and had all the deposits there that the depositors
had placed there, there never would be any trouble whatever. Of
course there would not be any banking business done, but there never
would be a lack of confidence ?
Mr. B er r y . N o , sir.
Senator R eed . Then, as you leduce the amount of money held in
the vaults of the bank you reduce public confidence in the hour of
trouble, do you not ?
Mr. B erry . Undoubtedly.
Senator R e e d . Then, is not the inevitable effect of this bill such
that the people of the country are more likely to raid the banks
because the reserve has been cut down 25 per cent ?
Mr. B erry . I can not view it any other wav, Senator.
Senator R eed . Can you discow t in the bill anywhere a provision
which offers to the customer of the bank— the depositor of the bank—
BANKING AND CURRENCY.
637
anything to compensate him for the additional risk incident to a
reduction of the reserve ?
Mr. B erry . Nothing whatever, unless, Senatoi, a provision is made
to have this currency given the legal-tender function competent to
stand in bank reserves. If it has, then the credit situation will be
instantly relieved.
Senator R eed . Coming to that, it of course brings us to quite a
different proposition from what we have been talking about. Would
you make all the money that is issued by the Government full legal
tender ?
Mr. B erry . Yes, sir.
Senator R eed . Would you retire the bank notes that are now out?
Mr. B er r y . Yes, sir.
Senator R eed . But issue in lieu of them full legal-tender money of
the United States ?
Mr. B er r y . Yes, sir.
Senator R eed . W hat would you do with the silver certificates?
Mr. B erry . I would substitute for them United States notes, if
anybody wanted them substituted. Otherwise let them stay until
by natural process they eliminate themselves, and substitute what
ever form of currency is the most desirable or convenient in the
estimation of the people that use it.
Senator R e e d . W hat would you do with the gold certificates ?
Mr. B er r y . The same thing.
Senator R e e d . How much gold reserve would you hold in the
Treasury of the United States back of money isssued by the United
States ?
Mr. B er r y . In my paper I have stated that a 20 per cent minimum
would be sufficient. I apprehend that under the present circum
stances we would tend toward a 33$ per cent reserve and would never
fall below it. W e might reach it. It would take a number of years
to do it, because we would start with about 85 per cent reserve, and
it would take a long time to get down to that. It would never go
below that, because the current production of gold would furnish
that reserve against the needed legal tender.
Senator R eed . W hat danger is there, in your opinion, with a 33$
per cent gold reserve and with a currency out backed by the faith of
the Government, of the gold reserve being depleted by so much of
this money being brought to the Treasury and gold demanded; that
the paper money would drive the gold out— exhaust our gold reserve ?
Mr. B er r y . Issued as I have indicated, with the necessary restraint
imposed by the sacrifice involved in its issue, it would never be issued
beyond the demands of business, in which case it would not act to
drive the gold out.
Senator R eed . I wish you would tell me why it would not.
Mr. B er r y . For the simple reason that it is not issued in excess of
the demand, not issued with sufficient rapidity to appreciate the
prices seriously. If it were issued with sufficient rapidity to appreci
ate prices, in other words depreciate our money, gold would immedi
ately leave the country for the purpose of improving the condition
of the money here. It is only in such cases as that that the Gresham
law would be applied.
Senator R eed . I understand, of course, that when you come to
originally issuing this money upon that plan, it is that it shall be
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BAN-KING AND CURRENCY.
issued upon a Government bond, the bond being surrendered and the
holder losing the interest upon that bond. He will not do that unless
there is some demand for the money, some use to put it to. But sup
pose that half a billion dollars of gold is in the Treasury, and suppose
we have issued three billions of dollars of money. W hat is to hinder
the banks of the country, if they saw fit so to do, gathering up money
and going down and demanding gold until they would deplete that
gold reserve ?
Mr. B er r y . Nothing that I can see, except the inconvenience of
handling the gold. It is a pretty expensive proposition for a man to
handle gold. I am told that it would cost the United States Govern
ment hundreds of thousands of dollars even to count the gold which
is here, in the loss incident to one handling.
Senator R e e d . W hat would there be to hinder the foreign bankers
who wanted to transport our gold over there ?
Senator R eed . What is there to hinder foreign bankers who wanted
to transfer the gold over there ?
Mr. B erry . That, I think, is what will transpire, in the event of an
emergency, though I am persuaded that the United States is soon to
be called upon to finance the world, and I hope we will be able to
make provision for the United States Government to send at least
$1,000,000 of gold into the foreign trade in the course of a period of
years.
I am satisfied that would take care of the gold, for 90 per cent of the
natural flow of business has a tendency to gather gold in the United
States, and it would only be in exchange for foreign securities that
our gold would go. It would become immediately a foreign asset to
the extent of the movement of gold away from the country, but of
course that sets up immediately a constant for our increment of
interest payments which would further work to our advantage. Of
course that is not immediately in prospect; oh, I do not know but
what it is immediately in prospect. It is not an uncommon thing for
foreign countries to now come to this country to sell their bonds and, in
my judgment, that will be increasingly so in the future. W e have
the largest amount of gold ever assembled in the history of any
nation; we have the largest market for the securities of the world,
and we must prepare, in my judgment, to assume that burden.
I view with satisfaction a situation in which we would begin to
send our money abroad just as for many generations past we have
been the recipient of foreign money into this country; but to-day
we are at the head of the procession. W e are the largest commercial
factor on earth; not only the largest but we come pretty nearly
being one-half of the whole show right here. Three-sevenths of the
entire banking power of the known world is in the United States to-day.
Senator R eed . Have you ever given any special study to the
Bank of England and its methods of preserving a parity of paper?
Mr. B erry . Yes, sir; one has to give attention to that, and of
course it is very frequently injected into the argument as something
to copy.
My own judgment about it is that it is something to avoid. The
method of the Bank of England is to conserve its reserve by raising
the discount rate. By raising the discount rate it practically puts
the brakes on business and stops the expansion of business whenever
it is necessary to preserve their gold situation.
BANKING AND CURRENCY.
639
Senator R e e d . D o you not think that there are periods of indus
trial excitement and development when it is a good thing to put a
check on business ?
Mr. B erry . N o, sir; I do not. As I told you when I started, I am
of the number of men who do not believe it wise to say to any man,
“ Stop working.”
Senator R eed . Suppose you said to him, “ Stop speculating” ?
Mr. B erry . Well, I would be sorry to see the situation of specu
lation disturbed. I am satisfied that the whole progress of civiliza
tion is the outcome of speculation. Speculation is a factor in almost
every exchange. I sell you a horse for $150. I take that $150
because that I think the $150 is worth more than the horse. You
take the horse and give me the $150 because you think that the horse
is worth more than $150.
Senator R eed . Well, that does not necessarily follow, and I do
not think your illustration throws any light upon the subject in the
connection with which you use it. You have two horses and you
have use for but one; I have no horse and must have one because I
can utilize him. You sell the horse because he is not of use to you
and therefore you can afford to sell him for what he is worth, and I
buy him because he is of use to me.
Mr. B erry . That is exactly what I said, stated in another way.
Senator R eed . That does not necessarily mean speculation at all.
A man who buys that horse does not buy him to speculate on; he gets
that horse because he needs him. Take the merchant who has his
goods upon a shelf in a store. They are not there for speculative
purposes. They are there for sale. I do not think that speculation
enters into but a very small per cent of our transactions taken in the
aggregate.
Mr. B er r y . N ow , it may be in the horse deal that both of us are
mistaken. You may discover that the horse was no good to you,
and I may discover that the money was no good to me. But nine
times out of ten wo will discover that we were both right. The
speculative idea enters because of the element involved in such a
deal.
Senator R eed . That is not true of everything we buy, but that is
true in connection with trade as distinguished from speculation.
Mr. B erry . I see nothing there except a difference in degree until
you come to the realm of gambling, and it can be easily differentiated.
If I bet you $50 one horse will get over the track before the other
that is a gambling transaction, because it is certain one of us is going
to lose. If one wins the other loses, but in an ordinary transaction
it is quite possible ninety times out of a hundred that both men will
make a profit on the deal.
Senator R eed . That is what I am saying; that is a legitimate
trade instead of speculation.
Mr. B erry . That is speculation, distinguished from gambling, as
I just put it.
Senator Siiafrotii. The difference between you is the difference
in interpretation of the word “ speculation.”
Senator R eed . I, of course, was using the term “ speculation” in
my questions awhile ago to cover such things as booming new enteririses without proper regard for business conditions, boom towns,
ocating acre property in lots, and that sort of thing.
I
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BANKING AND CURRENCY.
Mr. B erry . But that would of course have nothing to do with the
level of safety.
Senator R eed . That may be true, but we can do too much of it.
Mr. B erry . Very well.
Senator R eed . However, I will not pursue the subject further. I
am very greatly obliged to you, Mr. Berry. I have no further
questions.
Senator Siiafroth . I want to ask you a few questions. What
effect, in your judgment, would the establishment of such a system
have upon the level of prices ?
Mr. B erry . I do not think it would affect the level of prices at all,
because I do not propose an inflation. An inflation is an injection of
money into circulation faster than the demands of business call for
that money and in such cases you will always increase prices.
Senator Shafroth . T o what do you attribute the rise in prices of
commodities in the United States or in the world during the past five
years ?
Mr. B erry . In the first place, generally speaking, upon a basis of
comparison there has been no rise in prices since 1901. We have what
we call the phenomena of high cost of living, to wit, a very large in
crease in the price of the perishable commodities that enter into the
daily consumption of our people. This, in my judgment, is due to
causes entirely unrelated to the currency volume.
Senator S hafroth . Or to the increased volume of gold which has
been added to the currency ?
Mr. B er r y . Surely. The explanation of that situation is found in
the fact that, for reasons which if I had time I would develop, condi
tions have led our people to herd in the cities at the expense of the
country. In the last decade we have had a 2 per cent increase in our
suburban population and a 22 per cent increase in our urban popu
lation.
Senator Shafroth . W hat effect does that produce?
Mr. B er r y . It produces a demand for the products produced by
the country beyond the supply, and necessarily high prices result.
Senator S hafroth . And at the same time that small percentage of
population in the country has greatly diminished the producing
power ?
Mr. B erry . Surely; the supply of those commodities is not ade
quate to meet the demands for them by reason of the dissolution of
growth in the country which has been so great in the cities and so
small in the producing sections. If you wish to determine whether
or not the currency is redundant and therefore depreciating you
should measure your currency against things which are like it, to wit,
those things which do not perish in the use and which persist; and if
you will take the experience of the country since 1902 you will dis
cover that the average of such property has gone down steadily for
the last five years or six years.
Senator Shafroth . Such as what property ?
Mr. B erry . Railroad stocks or industrials. The Pennsylvania
Railroad has in that period lost, well, 50 points practically— one of
the best properties on the face of the earth— and other properties of
the same sort are in the same situation. Thirty rails and nine
industrials of the very best selection in the United States have lost
on an average of 30 points in that time. They have gone down.
BANKING AND CURRENCY.
641
They are properly conformable to the money or gold supply, for, like
gold, they stay with you. They are here day after day, not like
your perishable products.
Senator Shafroth . Are there any elements, in your judgment,
that would make my question not a fair test by reason of legislation
or demand in recent years to eliminate to a certain extent the income
on the franchises of railroads ?
Mr. B erry . I think possibly that there are some things of that
sort operating to some degree. I do not think they operate to the
degree that some would have us believe.
Senator Shafroth . S o you think, then, that the increased volume
of gold has not had the effect upon the country at large of causing
an upward tendency of prices ?
Mr. B erry . A s compared with the period of 1896 when we had
the rock bottom of prices, we had reason to expect a rise in prices,
and we experienced it. Up to 1901 it was very considerable in all
lines; but since 1901 it has been retrograding— it has been going
back.
Senator B ristow . N ow you take, as confirmatory to a certain
extent to the position of Mr. Berry’s, the price of wheat. The price
of wheat has not gone up any.
Senator Shafroth . I think it has a little, though not very much.
Senator B ristow . I do not think the price of wheat is as high as
it was a few years ago. In the production of wheat there has been
an expansion equivalent, probably, to the expansion of our cities’
population, while the production of live stock has not been to such
an extent. That is easily observable.
Mr. B erry . Yes, sir.
Senator B ristow . Take sugar. Sugar has not advanced in price,
because the expansion of the production of that commodity has been
greater than the increase.
Mr. B e r r y . That is the final test.
Senator Shafroth . And it has been greater than the increased
production of gold ?
Senator B ristow . Y es; I think so.
Senator S hafroth . Of course, when you are measuring things
according to gold you have to take into consideration the increase
and decline of the things that gold measures.
Mr. B erry . Well, the great increase in gold production in 1897
was a combination accompanied instantly by a phenomenal response
in productive lines. On your first question as to what effect the
injection of $135,000,000 of new legal tender money per year into the
country would have on prices, my answer was “ None at all,” for the
reason that it would be met instantly by a revival of production along
all lines— a stimulus of- business which would equal the situation.
In other words, this money would come out only in response to that
activity, and therefore it would not affect the prices; but if you
were to put out $300,000,000 a year you would affect it. Not only
that, but you would soon drive your gold out of the country. You
must put it out in response to the demand of business and only in
response to the demand of business, otherwise you will have it depre
ciating just as we had our currency depreciate during the war.
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BANKING AND CURRENCY.
Senator Shafroth . I s it also not true that this level of prices is
generally a world’s level of prices and not that of the United States
alone ?
Mr. B er r y . Oh, yes; the whole question is a world question.
Senator Shafroth . And that any increase of the circulating me
dium in a country, while it would have a tendency if it was unduly
great, to increase prices in the country, would not relatively have
that same effect on the world’s prices ?
Mr. B er r y . The moment you increase prices here you would send
the money out of the country. It will go right across the water as
soon as you disturb the level. If you inject a credit factor like the
national credit in a legal tender note into the currency of the country
to any undue proportion it will raise the prices. As soon as you raise
your prices your foreign exchange will pull the money out of the
country right away.
Senator S hafroth . And that will lower prices here ?
Mr. B erry . In other words, each country has a spout that leads
into the general monetary reservoir. As you force money into that
general reservoir and disturb the level of that reservoir the money
must find its proper level.
Senator Shafroth . Mr. Berry, you mentioned in your paper about
the power of the Bank of England to increase or decrease the rate of
interest as being a crime. Now, will you explain what you mean by
that and how it works to make it wrong ?
Mr. B er r y . Well, in the Bank of England with its reserves being
depleted by reason of too heavy discounts, in order to conserve its
reserves and restore the discount rates, the inevitable result is to
put a brake on the development of business among its clientele. In
other words, it is an arbitrary use of power which I do not believe is
proper.
Senator Shafroth . Then what, in your opinion, will be the effect
of the provision of the pending bill which gives the power to raise
or lower the rate of discount ?
Mr. B erry . The very same in this case as it is there; it would
simply say to people who wished to develop their territory and go
hypothecate their perfectly valid securities to get credit with which
to do it, “ Hold on; we are not ready for you to do that.”
Senator S hafroth . Y ou think that would have a depressing effect
upon business generally and development of the country ?
Mr. B erry . It can have no other purpose than practically stop
ping the development of the country and setting a brake on the
activities of the people. For those who believe that that is the way
to run a country, that is a sort of a thing they like. I do not. I am
satisfied they are diametrically wrong, and therefore I insist upon
it that the office of the Government and the duty of statesmanship
is to provide some means whereby the threatened depletion of re
serves can be checked by the supplying of more reserves instead of
by stopping business which wants to go on in the country.
Senator S hafroth . W hat check would you have in your system
for converting bonds into legal-tender money ?
Mr. B erry . N o check, except that I would compel the man who
had the bonds to surrender them and lose all interest on them.
Senator S hafroth . W hat rate of interest would you prefer to have
the bonds issued at ?
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Mr. B er r y . It is immaterial what rate of interest you issue the
bonds at is, provided you do not give them any special privileges,
because commerce will take care of the interest rate. If you issue 2
per cent bonds of the United States and go out and try to sell them,
you will sell them for about 60, and you will have a commercial
interest rate paid on it just the same.
Senator Shafroth . Then you would not have any of these bonds
come into the Treasury for the purpose of issuing legal tender upon ?
Mr. B er r y . Upon these bonds which pay 2 per cent ?
Senator Shafroth . Yes.
Mr. B e r r y . Oh, yes, I think it is incumbent upon the Government
to take in those bonds at par.
Senator Shafroth . But you would not take in those bonds at the
market rate ?
Mr. B er r y . N o .
Senator Shafroth . But you advocate taking in all the other bonds
at the market rate. You said that in your judgment a gold reserve
of more than 33 J per cent could not be maintained ?
Mr. B e r r y . Ultimately; no, sir.
Senator Shafroth . W ny is that?
Mr. B er r y . Because the demand for currency in the United States
is $200,000,000 per annum.
Senator Shafroth . H ow do you get at that?
Mr. B erry . W hy, I covered it in my paper. I showed you abso
lutely that the country has had in the last 10 years a billion dollars a
year of new credit. If it is to be issued on a 10 per cent basis,the
banks would have $100,000,000 of new money. The banks are only
able to secure and segregate one-half of the new money that comes
into the country. Therefore, if the banks are to get $100,000,000,
the country must get $200,000,000 a year, and the gold supply will
furnish you 33J per cent of it. Those are the figures. As a matter
of course, one does not wish to be held exactly to mathematical nicety
about those figures, but that is practically what the situation resolves
itself into. If you do not secure $200,000,000 of legal tender money
you have only two things to do: You have got to restrain business—
refuse credit— or attenuate the reserve, and instead of 9 per cent, as
now proposed, you must put it down further.
Senator Shafroth . Y ou say the banks need $100,000,000 a year?
Mr. B erry . Yes, sir.
Senator Shafroth . In order to build up their reserves ?
Mr. B erry . Yes, sir.
Senator S hafroth . W h y do the people need $100,000,000 a year
in addition to that?
Mr. B er r y . For the simple reason, as I will explain: I have got a
boy starting out in business who wants a bank account. In order
to give him the credit he wants, there is a quantity of money required;
it is only one-tenth of what his credit is, however. Suppose it is
$20 and he wants $200 credit to finance himself. He wants $20 on his
hip, at the same time, and he has got to have it and does get it.
Senator K eed . D o you mean that those figures show that those
proportions are maintained ?
Mr. B erry . For the last 50 years it has not varied 1 per cent. It is
not 50 per cent either; it should be only 46 per cent. The banks only
get 46 per cent of the money that comes into the country. It has not
644
BANKING AND CUEEENCY.
varied 1 per cent on either side of 46 per cent in 10 years. That is
rather an odd coincidence, but it is true.
Senator R eed . Upon what, Mr. Berry, do you base your con
clusion that a gold reserve of 20 per cent is sufficient to maintain a
currency of full legal tender money ?
Mr. B erry . On this assumption: The banks of the United States
are able to maintain a currency with only about 8 f per cent of cash
back of it, 5 per cent of which they furnish, and the rest of which the
Government furnishes. If the banks can maintain a currency which
is not a legal tender on an 8 per cent basis, I feel absolutely certain
that the United States can sustain a currency which is a legal tender
on three times that. I think it is beyond question that that per
centage of reserves would be all that would be required.
Again, bank credit, which is constantly redeemable, is maintained
in the country on an average of 8 per cent reserve; and if bank
credit, which is not a legal tender for anything, and is instantly
redeemable, can be maintained on 8 per cent basis, certainly the
currency of the country, which is a legal tender and only requires
redemption for export, can be maintained on a 20 per cent basis.
Senator Shafroth . Mr. Berry, Mr. Forgan, of Chicago, when
testifying, said that if the present bank currency was converted into
a full legal tender money of the Government, that it would produce
a great inflation of the currency— no; I believe I am mistaken; it
was not Mr. Forgan. Mr. Forgan took the other view. However, one
of the bankers from Chicago went on the theory that there would be
that much more money that could act as reserve, and inasmuch as
you could build up 8 or 10 to 1 on reserves that it would produ e a
great inflation of the currency. What is your view of that ?
Mr. B erry . That is my judgment. I am satisfied of that. That
is the point I have made all the time. The conversion of that moqey
into legal tender would solve the problem that is before this com
mittee. It would supply the country with the legal-tender basis upon
which these $7,000,000,000 of the money that the country at this
moment demands and can not get would 6e supplied.
Senator S hafroth . In your judgment, would it be such an infla
tion as would affect the prices ?
Mr. B erry . N o, sir; because it could not come out faster than the
demands of business, because the banks are not going to convert that
money any faster than the demands for money in their country calls
for, and they will do it just as fast as the situation requires, and no
faster, because they have got to make a sacrifice to do it.
Senator S hafroth . Mr. Reynolds, of Chicago, speaking of that
provision of the bill I introduced, converting the bank currency into
full legal tender, said that in his judgment the banks would volun
tarily offer to surrender their circulation and deliver their bonds upon
giving to them full legal-tender money for the bonds, or for the excess,
the bonds being hypothecated here in the Treasury Department. In
your judgment would that occur?
Mr. B er r y . Yes, sir; I think it would, ultimately: it would not
occur suddenly; no man would give up his bond or his currency or
his circulation until the demands of his business called for it, and
when they do, he will, and just in proportion as it does, he will.
Senator Shafroth . His theory was that if the bonds were on the
market they would sell at a much less rate than par; that it would be
b a n k in g
and
currency.
645
natural for their interests to cash those 2 per cent bonds so that they
would lose nothing on their circulation.
Mr. B er r y . My judgment about it is this: There is a certain pro
portion of those notes that are redundant. As fast as they were
converted that redundancy would disappear. If the banks were not
troubled to maintain redemption for these notes, they would have
no disposition whatever to redeem them, and to the extent that they
are redundant they would be, I think, speedily converted.
Senator R e e d . Well, but you say that there is not a redundancy
of currency now, but there is a shortage.
Mr. B e r r y . There is a redundancy of the bank note brought on
by the fact that it goes back for redemption, the entire issue in 12
months. If it were not redundant, it would not do that.
Senator R eed . Y ou say it goes back because you can not use it
for reserve ?
Mr. B er r y . Sure.
Senator R e e d . It is not redundant because it is not currency, but
because it is an in ferio r variety of currency ?
Mr. B er r y . That is it.
Senator S hafroth . D o you think it would be to the advantage of
banks to exchange that currency for the full legal-tender money in
order to have it a reserve upon which they could build credit ?
Mr. B er r y . Sure.
Senator Shafroth . And for that reason most of the bankers of the
country would voluntarily come in and surrender their circulation and
have full legal-tender money issued.
Senator R eed . T o take up the bonds?
Senator Shafroth . Yes; to take up the bonds.
Senator B ristow . Mr. Berry, I was interested in your discussion
as to the increase of the currency not increasing prices, unless it was
overdone, and you estimated that in the issue of $200,000,000 addi
tional money in the year would not overdo it. Do you not think that
conditions outside of this country might make business dull here;
that is, if there should be a lessened demand abroad for our export
production, so that we did not have a sale for the things that we make
and that caused a dull market, would not that result in a depression
of business ?
Mr. B er r y . Well, it might, but I think that the foreign trade of the
Nation is so negligible as compared to the great volume of trade that
if it were all to disappear it would not make any serious impression
on the situation.
Senator B ristow . Mr. Berry, while the foreign trade is small as
compared to our domestic commerce, yet you take a reduction of 15
or 20 per cent in the aggregate business of any concern and it is a very
serious thing for it, as a practical thing, is it not ?
Mr. B erry . Sometimes it might be; but this is the way I look at
it, Senator: Our foreign trade is far less than that of Britain, it is far
less than that of Germany, and yet it is still true that the trade of
the United States comprises one-half of the trade of the known
world, so that it seems to me like the foreign factor in our trade is
practically negligible; but I can not conceive of a condition in which
it would all disappear. It might, but it is a very violent assumption.
Senator B ristow . Of course, it would not all disappear, no; that
is not at all possible. The rate of interest on these bonds wdiich you
suggest as the basis of this currency, you say is of no consequence?
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BANKING AND CURRENCY.
Mr. B e r r y . That is the stated rate on them, because the actual
rate will be the commercial rate for safe investment, whatever it is.
Senator B ristow . Suppose they were 3 per cent bonds. A t times
they would sell for par and at other times they would not ?
Mr. B erry . I think we would ultimately come to a time when
they would sell continuously at par. I think the natural interest
rate is about 3 per cent and that the interest rate would come down
sufficiently to maintain a 3 per cent bond at par; that is, a Government
bond.
Senator B ristow . Suppose they were sold at par. W hat condi
tion could result in their advancing to a premium ?
Mr. B erry . Nothing, except the fall of the interest rate.
Senator B ristow . The fall of the interest rate ?
Mr. B er r y . Yes.
Senator B r isto w . The increase of the interest rate then would re
duce them below par?
Mr. B e r r y . Yes.
Senator B ristow . If they went down to 95 that would be because
of the increase of the interest rate, what advantage would it be to
anyone holding any of those bonds to go to the Treasury and get $95
in currency ?
Mr. B erry . It would not be of any advantage to a private citizen,
but to a banker it would be an immense advantage. If I was a
banker and had $1,000 of those bonds, and my reserves depleted, and
one of my customers wanted to borrow— I am speaking of an outlying
bank— and I could not lend it because I did not have any reserve
fund— I have a $1,000 investment at current rates, whatever they
are— if 95 on the basis of 3 per cent, that is what it is— it would pay
me to surrender that investment of $1,000, in order to take on a
$7,000 investment at current rates. As a banker, I could do it; as
an individual I would not do it.
Senator B ristow . Y ou would go then and sell that $1,000 worth of
bonds for $950, and lose $50 in the transaction ?
Mr. B er r y . Sure.
Senator B ristow . Y ou would have to make up that $50 in the
loan you were making to that individual?
Mr. B er r y . Yes.
Senator Shafroth . His loan to the individual would be $7,000.
Mr. B erry . The loan to the individual would be seven times the
$ 1, 000 .
Senator B ristow . W hy would it ?
Mr. B erry . That is the basis upon which you can do it; that is the
secret of banking.
Senator B ristow . I can not see through that.
Mr. B erry . That is the way it is done. There is not a dollar of
it in the country that is not carried just that way.
Senator B ristow . He has $950, and that is all the money he has,
and he loans that $950.
The Chairm an . He loans it over and over again.
Senator B ristow . I know that $950 is redeposited. As a rule,
instead of a man taking the $950 which he has borrowed, he takes------Mr. B erry . He takes credit on the bank books.
Senator B ristow . He takes credit on the bank books, and takes
a check book along and checks it out. Now, the bank has that $950
BANKING AND CURRENCY.
647
there, or the most of it, as a checking account, and he knows from
his experience that a certain part of it is going to be left there anyway,
and he can afford to loan it.
Mr. B erry . Sure.
Senator B ristow . And meet all of the requirements ?
Mr. B er r y . In other words, the banker would be the only man
who could afford to merge these bonds into currency, and he would
do it whenever a legitimate loan presented itself, and he would not do
it when the loan was illegitimate, because he has got to stand behind
his loan, and if he loses it he loses it; and he will not take on a bad
loan simply because he can sell a SI,000 bond, but he will take on
every good loan he can buy through that process.
On the other hand, I, as an individual, have my money invested in
the bond, which is as good an investment as I can buy. I do not
want to sell it. I have bought it for investment. But the banker
can merge it. He is the only man who can, and he will; but only
in response to the demands of business which precedes the issue.
It is only within the last 5 years, after 30 years of study of this
problem, that I have been able to see clearly a safe way in which we
could absolutely dispense with the individual supervision of the
issue of legal-tender paper. I do, now, see it absolutely clearly, safe
as a clock— absolutely safe; perfectly and entirely automatic, no
advisory board or anybody. It is simply between the banker and his
customer; and the natural demands of business will govern, and only
the demands of business.
It is perfectly clear that if gold production should be stimulated,
and some gold miner should come in and deposit a wad of money, he
will not merge any bonds. He has the reserve without it. The
mutations of gold production will be met absolutely by the muta
tions of currency issue. It is the most beautiful automatic propo
sition that a man can imagine. Not only that, but the mutations of
business and the mutations of crops will be met by it. It is hardly
conceivable that we will have a crop condition here which will destroy
two-thirds of the business of the United States within a year, anil
unless you do, you still need some legal-tender money along with
your gold, for that gold will only carry one-third of the business, and
you still need an increment of legal-tender money; but if one-third
of your crops fail, instead of issuing $135,000,000 that year, you will
only issue $65,000,000, because that is all that the business calls for,
and you will not have to lay awake, the board or anybody else; simply
the man right out on the margin, the man in the immediate touch
with the business is the man who does it.
Senator B r isto w . Suppose this interest rate was fixed at 3 per
cent and the Government would issue currency on these bonds at
any time and receive them at par, what would be the result ?
Mr. B er r y . I think you would lose a very essential feature in the
automatic system. You might have occasion, if the interest rate at
large, for instance, should increase and 4 per cent should become the
general rate, then all these fellows would rush in there and surrender
those bonds.
Senator B r isto w . Then the interest rate would go down ?
Mr. B e r r y . Well, no matter. You would have a loosening of the
automatic process, because you would have an extraneous circum
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BANKING AND CUBKENCY.
stance operating upon it other than the demands of business, but if
you hold to the market value of the bond then it does not make any
difference where the interest rate goes. This surrender means a sur
render at the current interest rate. It varies with the situation all
the time. If you have the market price of the bond as the deter
mining factor, then the individual man can sell that bond. Indi
viduals would rush in, you see. to do it. Because I have a 3 per
cent investment and I can get 4. and I will sell my 3 per cent bond
at once but if I can not sell it only on a 4 per cent basis it is not
going to do me any good and I will not do it; it is an automatic
situation.
Senator B ristow . W ith the rate on a Government bond at 3 per
cent, that bond would sell to an investor, even if he could get 4 per
cent, or even possibly 5 per cent, in other investments, because of
the desirability of the security ?
Mr. B er r y . Sometimes that is true, yes, sir. Of course, I am
comparing it with other things that are equally safe.
Senator B ristow . There are some desirable things about a Gov
ernment bond. It is not taxable, and that would not measure the
rate of interest, but it would have a tendency, would it not, to make
stable the rate of interest ?
Mr. B er r y . N o ; I do not think so. I think it would have a tend
ency to bring the general rate of interest down; that is what I think,
because it would meet the demand for credit, and whenever you have
a market in which the demand is equal to the supply, you have a
credit rate established which will be dependent upon the cost of
extending it, and not upon the exigencies of the situation.
Senator B ristow . If that interest rate was 3 per cent and the pre
vailing interest rates were 6 and 7 per cent, if a man could get 7 per
cent for his money a good many of them would part with the bonds
and undertake to earn more than 3 per cent on their investments ?
Mr. B er r y . Yes.
Senator B ristow . And whenever they began to part with their
bonds it would have a tendency to depress the advancing interest
rate, would it not ?
Mr. B erry . Yes.
Senator B ristow . Would not that be desirable?
Mr. B erry . Sure; that is what I say; that is the ultimate outcome
of it— the inevitable establishment of an interest rate based upon the
cost of extending credit rather than upon the stress of circumstances.
Senator B ristow . Would this tendency to regulate the interest
rate be so manifest if the bonds were redeemed by the Government
and notes issued at their market value instead of at their face value?
Mr. B erry . Oh, yes; I think so; that is a necessary characteristic.
You must use the market value. I do not think it would do at all
to have them redeemable at their face value.
Senator S hafroth . They would all rush in at one time ?
Mr. B erry . They would all rush out at one time, and you would
have no automatic feature about it.
Senator Shafroth . I think that is right.
Senator B ristow . I do not think I got one point very clear. You
may have explained it while I was out— as to how you would pro
ceed to substitute this currency for the currency that we now have.
W hat would be the methods ?
BANKING AND CURRENCY.
649
Mr. B erry . Well, Senator Shafroth’s bill or Senator Owen’s bill,
either one would answer the purpose. I would pass a bill which would
authorize the United States Treasurer to accept the 2 per cent bonds,
together with the currency that is floating upon them, in exchange
for legal-tender money at par, on these 2 per cent bonds, as far as they
lasted, because I think it is an obligation upon the Government to
take them in at par.
Senator B ristow . And they would be presented, of course ?
Mr. B erry . Whenever the bank wanted the money, and only then;
they would not all rush in at once, because the banks do not all want
the money at once. If there is a bank that wants money and needs
it to meet the demands of the situation, let it come in with its bonds
and get the money, and let them come whenever they please and let
them be just as long about coming as they please— no force about it.
Senator B ristow . Let the gold certificates stand just as they are?
Mr. B erry . Just as they are, unless you wanted to substitute
them finally with a Treasury note, which I think would be the wise
thing to do— have one kind of money and only one kind of money,
every piece of which is a gold certificate to all intents and purposes.
Senator B ristow . W e have got now $150,000,000 of reserve gold
which is usable for this purpose. When these bonds are surrendered
and additional notes are issued, then additional gold must be provided.
How do you propose to provide that ?
Mr. B er r y . Well, you have $150,000,000 which is about 33J per
cent of the reserve, against these notes, and if you do not succeed as
you have in the past in securing voluntarily from the people gold in
exchange for your paper— that is what we have been doing— you
would have to say at once, “ Now, we will not issue any more gold
certificates— no more of these 'warehouse’ receipts, but if you have a
bunch of gold and it is too heavy for you, bring it to me, and I will
give you paper for it— paper which I will pay you gold for whenever
you want it, but against which I will not maintain a 100 per cent of
gold.”
Senator B ristow . Suppose they did not bring it?
Mr. B er r y . If they did not bring it, you will have to go into the
market and sell your bonds to get gold. In other words, where you
take in two bonds of $1,000, you will have to sell one, if you want 33£
per cent. If you take in three bonds, you will sell one back for gold.
Senator B ristow . D o you not think there would be danger in the
transition period of your gold certificates going above par ?
Mr. B er r y . N o, sir; not the slightest danger. Last year there
were issued $43,000,000 of gold certificates, and there were only
$42,000,000 of gold come into the country; $3,000,000 of the old
stock went into the certificates.
Senator B ristow . A s commonly termed here, those are “ ware
house” certificates. The people go down there and they deposit this
heavy and bulky material that loses by erosion a great deal in com
merce, and they take'these certificates that can be reproduced with
out any loss, and it is common, ordinary business sense for them to do
it; but that is a certificate that I have in the Treasury of the United
States, stored away there, $20 in gold, and I can get it anv time I want
it. This other is a certificate that the United States will pay me $20
in gold if I demanded it. Now, its value depends upon the ability of
the United States to meet that obligation ?
650
BANKING AND CURRENCY.
Mr. B erry . Yes.
Senator B ristow . The other’s value depends upon the integrity
of the United States in keeping its contract ?
Mr. B e r r y . Y e s ; the same thing.
Senator B ristow . Oh, no. One is a trust fund that is there, that
the Government has got to steal in order to take it away from you.
Mr. B erry . Y ou have a contract with the gold-certificate holder
that you will keep his dollar there until he brings his certificate.
That much is on a 100 per cent basis, and you can not change that
until he is willing to change it, but you say to him, “ Now, I will not do
that for you any more; and if you do not want to take this kind of certif
icate for your gold, why, keep your gold ” ; that is all. You say to him,
“ I will give you legal-tender paper for that gold, if you want it, and I
will give you gold for the legal-tender paper whenever you bring it,
but I will not arrange to hold 100 per cent reserve against it, but I
will arrange and pledge the Nation behind me to give you what gold
you want when you come after it.” You will find he will come just
as quickly to get that kind of a paper dollar as he will for the one he
gets now.
Senator B ristow . W h y do the bankers say that this $345,000,000
of greenbacks ought to be retired; that it is bad money, ought not to
have been issued, and ought not to be maintained ?
Mr. B erry . I never could understand that. I do not want to
impute a sinister motive to anybody. I do not think probably it has
a sinister motive back of it; but naturally if I am in the coal busi
ness, I do not want any more competition in the coal business than
I must have. I want the market where I can control it, and this
$350,000,000 of legal-tender paper in this country is a part of the
currency that the bankers have never been able to exercise any
control over, and they have always opposed it. To-day that $350,000,000, together with $650,000,000 of silver certificates and coin— a
billion dollars of that kind of money— is afloat in this country and
practically carrying one-half of the business of this Nation to-day,
and without it we could not do one-half of the business we are doing.
Not a dollar of it has ever been offered for redemption since 1893.
Then, as I said to you in my general statement, the cause of that
offering was just such as we would meet again if the same condition
were repeated. W e had been exporting gold at the rate of $35,000,000
for 10 solid years and we ran out of gold and the Government simply
had to furnish it, and did the only thing it could do— went out with
its bonds and bought it and furnished i t ; and that is what we would
have to do again if the same conditions were repeated. W e made a
bad bargain buying some of it, but bad as it was, it had to be done
and it was the proper thing to do. There was nothing wrong nor
incongruous about it; a perfectly natural proposition. We had had
10 years of exporting in which we put out $35,000,000 each year,
excess of the exports over imports. During the years previous to
that we had imported gold and we had quite a stock o f gold when
that drain began, and it went out continuously for 10 years, due to
the balance of trade set up by crop conditions in the two sections of
the world. As soon as that changed— and it did change almost
immediately after that— gold began to come back into the country
again, and we have not had any trouble since.
BANKING AND CURRENCY.
651
Senator Shafroth . Mr. Berry, you said that the bankers were
unanimously against a currency of this kind. I want to call your
attention to the fact that in an article------Mr. B erry . I want to qualify that, if I said “ unanimously.” I
want to say there are some notable exceptions.
Senator Shafroth . This paper I refer to was written in March,
1908, by Newton D . Ailing, vice president of the National Nassau
Bank of New York, in which he uses this language:
And that is what this new issue should b e ; 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
able in gold. To be sure, it should be given the legal-tender quality in order to give it
an equal power with gold in order to make it a better representative of the gold for
which it stands.
Mr. B erry . That is all right; I agree with that. I might have
written that myself.
Senator Shafroth . The sentiment just expressed in that quota
tion I have read exactly conforms with your theory of the character
of money that should be issued ?
Mr. B erry . Absolutely.
Senator R eed . I wanted to ask Mr. Berry to give me a little light
on this: If the Government was to issue money with bonds and gold
as the basis— 20 per cent reserve of gold— to carry out the plan which
you have already outlined, but which I need not repeat, as the record
will show it, what will there be to hinder the banks gathering up
large amounts of this paper and making demand upon the Govern
ment for gold, depleting the reserve and forcing the Government to
sell its bonds in order to replenish the gold ?
Mr. B erry . Well, sir, if you can conceive of the possibility of the
banks doing that— of course, it is hardly supposable that the whole
banking fraternity would go into that conspiracy, or any considera
bly large percentage of them go into a conspiracy, for that purpose.
If you can conceive that they are going out in the go]d market in this
country, where we have 81,600,000,000 of gold in the circulation, and
making a demand for gold that would force the hands of the United
States, then there is a possibility that there would come a time when
the United States would be forced to sell bonds.
Senator R eed . Could not that device be used to compel the United
States to sell bonds and being compelled to sell them and compelled
to get the gold to pay a very high rate of interest ?
Mr. B erry . If you can conceive that possibility of their going out
in this market where 81,600,000,000 of gold is in existence, and if
where 8100,000,000 of gold a year is produced and brought into the
game, if you can conceive of the possibility of cornering that market,
then your surmise is possible. I have no fear of it myself, because I
think it is impossible to corner that market.
Senator R eed . There is no such a thing as having a gold reserve
that can not be attacked by that process, unless you have dollar for
dollar, is there?
Mr. B erry . N o; and I do not see why you can not attack it then
just as well.
Senator R eed . Y ou could; but of course you could pay out.
Mr. B erry . If you were obliged to hold 100 per cent you would be
in just the same fix.
9328°— S. Doc. 232, 63-1— vol 1------ 42
652
BAN KIN G AND CURRENCY.
Senator R eed . Where a man brings you in $1,000,000 you give
him $1,000,000 worth of gold?
Mr. B erry . Y ou have got $1,000,000 of bonds to make the reserve
good. If you have to maintain it at 100 per cent, you have got to go
out and sell bonds to put it in.
Senator R eed . Y ou did not understand. If we had no money out
into the country except that had a dollar of gold lying back of each
dollar issued, then, of course, they could not raid the Treasury,
because when they brought in a gold certificate and got a gold dollar
their gold certificate would be retired ?
Mr. B erry . Sure.
Senator R eed . Unless you do have 100 cents of actual gold reserve
for every dollar’s worth of certificates out it is always conceivable
that some kind of a raid can be made.
Mr. B erry . Yes, sir.
Senator B ristow . Senator Reed, if I may interrupt you, could
that be done now by gathering up the national-bank notes and going
in and demanding gold for them ?
Senator R eed . Could it be done ?
Senator B ristow . Yes.
Senator R eed . I do not see any reason why it can not be done,
and I do not see any reason why you should not take the nationalbank notes and gather them up and go to a bank with its own notes
and demand gold, and there is not a bank in the country which could
redeem its own circulation at once.
Senator Shafroth . There is no profit in doing it, and therefore it
is not done.
Senator R eed . If it goes on this way with the banks at present,
it would seem that it might go on that way with the Government
provided we keep within such bounds and limits that the financial
men of the country and the (
'
'
1
11 come alarmed.
I confess I have never seen
can maintain
a parity of money with 20 per cent reserve except the element of faith
enters into it.
Mr. B erry . I do not think the element of faith would enter into it,
Senator. There is the element of faith, in a certain sense now, back
of it, that the Government will maintain its integrity. The Govern
ment in order to get this money out, understand, cancels a bond
obligation. It has got that bond, and according to Senator Owen’s
proposition he proposes to put that bond right in the reserve fund
and to allow it to draw interest which will accumulate in the fund,
which is not a bad idea. So that stands potentially, on the instant,
the bond ready to be thrown on the market to get the gold. If the
Government of the United States can not beat the banks it is pretty
nearly time we found it out.
The Chairman . Mr. Berry, right here I call your attention to the
National Bank of Belgium, with 40,000,000 pounds of assets, which
only keeps a reserve of 19 per cent of gold against its notes, and it has
been perfectly successful in doing so.
Mr. B erry . Absolutely.
Senator Shafroth. Canada has 25 per cent reserve in gold.
Mr. B erry . That is the reason I called your attention to the Bel
gium situation. If you have read carefully the history of the Belgian
BANKING AND CURRENCY.
653
banking system you have found that it is the most interesting of the
whole European banking systems.
The Chairman . That confirms what you say about possibilities
even without the Government behind it, as suggested here.
Senator Shafroth. I have had a question that was presented to me
to ask you. It is this:
Would not an interchangeable bond be absorbed as a permanent investment security
and refuse to come out for exchange into Treasury notes?
Mr. B erry . Well, I do not think so. I do not see why it should.
Of course, the holder of that bond in this primitive form of investment
might demand a little premium on it when the bank wanted it for
this purpose, but a little extra pressure and a little more raise in the
interest rate will bring it out. It is bound to do it. You just let that
pressure loose so that it will always be effective, and if there is any
resistance against its coming out, the interest rate crawls right up and
begins to pull harder and harder until it comes over.
Senator B ristow . Of course, if the bonds bear a higher rate of
interest, it would take a higher commercial rate of interest to bring
it out ?
Mr. B erry . Sure; but that would be corrected in the selling price
of the bond, Senator. If I had a 6 per cent Government bona, for
instance, and the general interest rate was 4 per cent, that bond
would sell for 120, and I could coin it at 120.
Senator B ristow . H ow would you determine the marketable
value of a bond ?
Mr. B erry . That would have to be done, I think, by an average
of a certain period prior to the transaction. These securities are
listed in the market all the time, just as they always are— they have
no special privilege— and they would have a market value. There
would be no day or season of the year in which this could not be
done
Senator R eed . Mr. Berry, could you not add an element of abso
lute safety to your plan if you would provide that instead of the
Government issuing $1,000 of Treasury notes whenever a man
comes in with his bond for $1,000, that the option of determining
that be in the Secretary of the Treasury or in a board, if we wanted
to create one. W e have got it now so that you can not go to Heaven
without a commission.
Mr. B erry . My hands are up. I do not believe there is any man
here or elsewhere who ought to have anything to do with it.
Senator R eed . A s a check upon it ?
Mr. B erry . W e do not want a check upon it. W hy should you
wish to check it, Senator?
Senator R eed . If it was thought that it might run away, the
plan could simply be adopted and a check put upon it until the plan
was tried out.
Mr. B erry . Y es; you could do that as an experimental safe
guard, I suppose.
Senator Shafrotii. 1 want to ask Mr. Berry another question
concerning whether there is in this bill any provision that would
not contemplate the retirement of the bank currency without any
reissue ?
II
654
BANKING AND CUBBENCY.
Mr. B erry . Unless I have sadly misinterpreted the bill, it seems
to me like it contemplated the retirement of the bank currency and
the issue of Treasury notes in place of them, on 33§ per cent basis of
reserve.
Senator Shafroth . But that only upon the hypothecation by the
bank of 30, 60, or 90 day paper ?
Mr. B erry . N o ; not as I understand it.
Senator Shafroth . There is no currency under this bill that is con
templated to be issued without the hypothecation of 30, 60, or 90 day
paper; and to have that system take the place of a permanent
$700,000,000 of our circulation in the shape of bank notes, it seems to
me, might jeopardize our currency very much indeed before retirement.
Mr. B erry . Well, if they are retired without substituting them, it
would be a serious contraction which would result in a catastrophe.
Senator Shafroth. Prof. Sprague, I think it was, or some one, said
that there would not be sufficient transactions in 30, 60, or 90 day paper
to take in the bank notes and issue money upon that temporary paper
to permanently supply its place. W hat do you think of that ?
Mr. B erry . I do not know anything about that. I do not know
how much of that kind of paper there is out.
Senator S hafroth. D o you think that the money that should be
issued, called in this bill “ Treasury n o te s /’ should be only for tempo
rary emergency paper?
Mr. B erry . That is what it will be, unless it is made legal-tender
paper— it will only be temporary— because it will come back by the
process of redemption, just like the bank note does, but if it is given
the legal function it will stay out, and then it involves the incessant,
endless chain of the substitution of new paper every 90 days for the
old paper.
Senator Shafroth . And do you think that it is practicable to do
that for as large a volume of money as the national-bank notes ?
Mr. B erry . I do not.
Mr. H. J. B rowne . Assuming that this convertible bond bears a
current rate of interest which will make it attractive for permanent
investments, and then it became necessary to hold the price of those
bonds to get them out from the permanent investment, what is there
to stop hoisting the price of those bonds to some incredible figure, so
long as they may be presented to the Treasury for redemption at
that market price in legal tender, and the legal tender may then be
presented to the Treasury for redemption in gold ? It looks like an
endless chain with no limit on the price that the issue bonds could be
held at.
Mr. B erry . I see the point of your inquiry. I would simply say
that the remedy, in case such a condition were set up— for I assume
that such a condition would never be set up except through a con
spiracy— the remedy would be for the Government to immediately
unload bonds on the situation.
Senator Shafroth . Could there not be a power invested in the
Secretary of the Treasury to issue the money in his discretion and
thereby make a check upon any of these abnormal situations ?
Mr. B erry . I would not want to put in anybody who would have
any arbitrary control of the situation. I wish to have an automatic
response, and I do not see any reason for that fear. One can conjure
up, as did Senator Reed, a situation in which you could imagine now
655
BANKING AND CUKRENCY.
the cornering of the gold might force the same situation. There the
cornering of the bonds would furnish the same situation. There is
not a n y question about that, on the one hand, as I have answered in
the matter of the gold supply being of such volume that that corner
is practically impossible; whereas in the second place, the Govern
ment having a store of bonds in its vaults, the minute it discovered
that that scheme was in process would unload its bonds on the market
and break that corner in no time, if we were driven to that extremity.
I do not think that either one of those things would ever happen. I
can not see any reason why they should.
Senator B ristow . If this bond was redeemable only at par, that
could not happen, could it ?
Mr. B erry . N o ; that could not happen, but still------Senator Shafrotii. But you get your gold in partly because the
rates of interest of one year differ from the rates of the next year.
Senator B ristow . That would have a regulatory effect on the rate
of interest.
Senator Siiafroth . It would only go to a premium where the
money was worth more.
Senator B ristow . That may be, but we have known it to go to a
premium of 10 per cent.
Mr. B erry . Your thought is pertinent there, Senator, that when
the interest rate rose you would be all right, but when the interest
rate fell, then you would be------Senator B ristow . Then it would be the other way ?
Mr. B erry . Yes, it would be the other way.
Senator Shafrotii. W hat if the bonds fell below par ?
Senator B ristow . The interest rates would be high when . the
bonds would be below par.
Mr. B erry . Yes, that is so.
Senator B ristow . When the interest rate goes up the bonds would
go below par, because the owner of the bonds would take the bond
and get the cash and loan it at a higher rate than the bonds called for ?
Mr. B erry . Yes.
The Chairman . The committee feels greatly indebted to you,
Mr. Berry.
The committee will now stand adjourned until 1 o’clock to-morrow.
(The documents submitted by the chairman of the committee
follow.)
P a p e r cu rren cy o f the U n ited S ta tes , b y d e n o m in a t io n s , o u ts ta n d in g J u n e SO, 1 9 1 2 .
Denominations.
$1
$ 2 ......................
S5
$10..........................
$20..........................
$50.........................
$100....................
$500.................
$1,000..........
$5,000...............
$10,000...........
Fractional parts..
Total........
I
United
States notes.
$1,830,994
1,374,959
169,049,930
114,137,926
12,192,432
1,841,375
4,696,400
4,470,000
38,077,000
Treasury
notes, 1890.
,
111,000
$343,588
164,312
141,565,470
328,508,870
224,856,140
16,373,800
35,032,350
89,500
23,000
2,929,000
747,007,714
$373,606
241,744
688,160
898,470
434,970
14,550
166,500
10,000
347,681,016
♦
Nationalbank notes.
Gold certifi
cates.
$226,435,300
256,496,964
55,053,055
80,127,550
18.239.000
66,765,500
95.020.000
241.920,000
Silver cer
tificates.
$161,327,436
62,854,116
227,178,187
20.757,611
4,488,670
4,417,760
480,220
22,000
23,000
$163,875,624
64,635,131
538,481,747
690,738,177
498,469,176
77,700,540
120,503,020
22,820,500
104,999,500
95,020,000
241,930,000
50,684
481,549,000
2,619,224,099
50,684
1,040,057,369
Total.
656
BANKING AND CURRENCY.
M em ora n d u m
indicating probable changes in reserves under H. R. 78S7.
[52 central reserve city banks now on 25 per cent basis.]
[All dollars in millions.]
Net deposits.................................................................................................................... $1, 568
Req uired reserve...............’ ............................................................................................
392
On hand, cash and legal tender..................................................................................
405
Under new bill: Nine per cent in vault. 4$ per cent in Federal reserve banks, 4$
per cent optional.
Under the new bill, assuming that the optional reserves would be equally divided
in all cases between the banks’ own vaults and the Federal reserve banks, and that
the funds of the Federal reserve banks could be loaned up to 33$ per cent requirement,
and would be actually loaned up to 50 per cent, the following results would follow:
Cash, 9 per cent=$140+$ of 4$=$35 inown vaults.................................. $175
Net cash required, 4$ per cen t+ $ of 4$ per cent=$105 ($ to § loanable)
in Federal reserve banks...............................................................................
35
6
Capital stock, $182, and $18 required ($to? loanable)...............................
$175
Net requirement......................................................................................
237
216
53
9
Total requirement, $216 to $237, against $405 on hand.
Surplus available, $168 to $189.
[315 reserve city banks now on 25 per cent reserve basis, one-half with reserve agents in central reserve
cities.]
Net deposits.............. $1, 945 '9 per cent=$174, cash.
Required reserve..
468 5 per cen t= $97, Federal reserve banks.
Specie
and
legal
tender....................
248 4 per cen t= $77, optional.
232< In vault, $174+$ of $77=$212. Cash, $212 $212
With reserve agents.
Additional reserve..
28 In Federal reserve banks, $97+$ of $77=
$135. One-third to one-half cash..........
45
264 For capital stock, one-third to one-half
Capital stock.............
9
, of $26............................................................
$212
266
293
Total cash............................................
Cash actually required, $266 to $293. On hand, $248.
Additional cash needed, $18 to $45.
68
13
[7,173 country banks now on 15 per cent reserve basis, 6 per cent in vault 9 per cent with reserve agents.]
Net deposits............ $3, 610 New bill requires 5 per cent cash in vault.
541 5 per cent in Federal reserve bank, 2 per cent optional.
Required reserve..
Specie and legal ten
5
266 • per cent=$180, in vault.
der........................
With reserve agent.
310 5 per cent=$180, in Federal reserve bank.
Additional reserve.
186 2 per cent=$72, optional.
In vault in cash..................................... $180
Capital, $610.
Plus one-half of $72...............................
36
$216
216
One-third to one-half cash required for
Federal reserve bank..................................
60
90
One-third to one-half of one-half of $72 for
12
Federal reserve bank..................................
18
10 per cent of capital, $610, for stock (two21
thirds to one-half loanable) cash n eeded..
31
Total actual cash required.................
Less actual cash on hand...................
309
216
355
216
Deficit cash...............................
93
139
S u m m a r y after con sid erin g n et cash re q u ir e m e n ts , after d isc o u n ts p erm is s ib le to m em b er
ba n ks.
52 central reserve cities have surplus cash equal to..................................... $168 to $189
315 reserve city banks have deficit cash equal to......................$18 to $45
7,173 country banks have deficit cash equal to.......................... 93 to 139
111
184
184
Cash deficit or surplus............................................................................. —16
111
+78
657
BAN KIN G AND CURRENCY.
To which, should be added one-half to two-thirds of $210 United States
cash in Federal reserve bank......................................................................... $105
And 10 per cent of $500 of savings deposits (assuming 5 per cent reserve
instead of the present 15 per cent required)...............................................
50
$140
50
139
268
Available—minimum legal tender cash $139 to $268 maximum—loanable on basis
of 12 per cent to 18 per cent, making possible an expansion of credits equal to a sum
from four and a half to seven times such minimum or maximum as such cash may
be in country banks or reserve city banks, a probable average expansion of credit
from $600,000,000 to $1,500,000,000.
B o n d s held i n tru st f o r N a tio n a l BanJcs
S e p t . I S , 191 S . 1
Bonds held for national banks.
To secure deposits of
public moneys.
Rate of
interest.
Total amount
outstanding.
Total.
To secure
circulation.
Value at
Value at
rate ap
proved by
depart
ment.
GOVERNMENT.
TJ. S. loan of 1925,
at par...................
U. S.' loan of 19081918........ at pa r..
U. S. Panama of
I, U. S. consol of 1930,
4
$118,489,900
$37,992,400
$34,390,700
$3,601,700
3
63,945,460
25,891,200
22,132,200
3,759,000
$3,601,700
3,759,000
3
50,000,000
17,296,200
17,296,200
17,296,200
2
646,250,150
616,521,300
603,775,900
12,745,400
12,745,400
2
54,631,980
54,249,360
52,964, SC
O
1,284,500
1,284,500
2
30,000,000
29,424,140
28,822,140
602,000
602,000
4
16,000,000
5,967,000
5,967,000
5,967,000
4
5,225,000
1,821,000
1,821,000
1,821,000
3.65
6,949,650
933,000
933,000
933,000
0)
U. S'. Panama of
1936........ at p a r..
U. S. Panama of
1938........ at par..
Philippine loans,
6,515,000
1,998,000
1,998,000
1,950,900
4
8,551, C O
O
118,000
f 18,000
600,271
4
6,735,000
10,000
10,000
6,750
33,609,254
22,576,308
1,013,293,140
826,630,854
84,545,054
73,144,029
Porto R ico loans,
District of OolumII. Territory of Hawaii, 3J per cent
bonds at 90 per
cent of par: all
other Hawaiian
bonds at market
value, not exMISCELLANEOUS.
Philippino Railway Co.................
Mania
Railroad
III. Co., at 90 per
cent o. market
value, not ex
ceeding 90 per
IV. State, county, city,
and other securi
ties2......................
Total.....................
33,609,254
(‘ )
•
’.42,0S5.80J
1 Various.
As security lor deposits made in connection with crop movement Government bonds are accepted at
par, other bonds at 75 per cent of market value, and commercial paper at 65 per cent of face value.
Other outstanding bonds, $186,662,286.
When banks have occasion to withdraw bonds held by the Treasurer to secure deposits of public moneys,
the following shal' be the order of withdrawal: Group IV. Group III, Group II, and Group I.
Bonds within a group may be interchanged by banks if desired, but bonds in a lower group may not be
substituted jor those infa higher group, except that an initial substiution of bonds of a lower group for those
® ®higher group may be made to an amount not to exceed 30 per cent of the total security value of bonds
*
held for a particular bank National-bank depositaries which have not as yet taken out the full amount
of circulation authorized by law may withdraw United States 2’s and substitute for them bonds in Group
II, provided the 2’s as withdrawn shall be used as security for additional circulation.
658
BANKING AND CURRENCY.
Daily statement o f the United. States Treasury at dose oj business Sept. 16. 1915.
CASH ASSETS A N D L IA B IL IT IE S .
G eneral F
und.
assets.
LIABILITIES.
C a sh .
Current liabilities.
In Treasury offices:
Gold coin........................................ $48,698,805.49
Gold certificates........................... 64,872,850.00
Standard silver dollars................
3,740,127.00
Silver certificates.......................... 13,183,004.00
United States notes......................
5,837,393.00
Treasury notes of 1890 .................
4,488.00
Certified checks on banks...........
301,582.00
National-banknotes.................... >51,792,262.02
Subsidiary silver coin.................. 18,527,844.36
Fractional currency................. '..
347.26
Minor coin......................................
1,608,335.63
Silver bullion (available for sub
sidiary coinage).........................
2,091,539.21
In Treasury offices:
Disbursing officers’ balances___ $76,262,786.16
Outstanding warrants.................
1,823,348.93
Outstanding Treasurer’ s checks.
7,476,697.99
Post Office Department balances 12,361,628.16
Postal-savings balances...............
1,509,009.54
Judicial officers’ balances, e tc...
6,343,080.42
National-bank notes, redemp
tion fund ».................................. 20,666,426.00
National-bank 5 per cent fun d.. 28,071,077.85
Assets of failed national banks.. 10,110,129.54
Coupons and interest checks___
131,107.19
Miscellaneous (exchanges, etc.).
7,171,832.34
Total............................................ 171,927,124.12
210,658,577.97
Subtract checks not cleared....... 23,472,913.67
In national-bank depositaries:
To credit of Treasurer United
148,454,210.45
States.......................................... 62,676,478.39
To credit of postmasters, judi
In national-bank depositaries:
6,346,620.86
cial officers, etc..........................
Judicial officers’ balances, e tc...
6,346,620.86
509,200.06
Outstanding warrants.................
In treasury, Philippines:
To credit of Treasurer United
In treasury, Philippines:
3,430,796.73
States.............................................
3,016,856.05
Disbursing officers’ balances___
Outstanding warrants.................
1,291,932.00
To credit of disbursing officers..
3,430,796.73
160,032,760.10
Net balance in general fund............. 126,096,569.90
Total............................................ 286,129,330.00
T H E C U R R E N C Y T R U S T FUNDS
Total............................................ 286,129,330.00
T H E G E N E R A L F U N D , A N D T H E G O LD R E S E R V E
FU N D .
ASSETS.
LIABILITIES.
Currency trust funds:
Gold coin ..................................
Gold bullion.............................
$866,618,964.00
217,615,205. 00
Total gold..............................
Silver dollars............................
Silver dollars of 1890..............
1,084,234,169.00
488,916,000.00
2,614,000.00
Total currency trust funds.
1,575,764,169.00
General fund: Total cash assets,
as above........................................
286,129,330.00
Gold reserve fund:
Gold co in ..................................
Gold bullion............................
100,000,000.00
50,000,000.00
Grand total cash assets in
Treasury............................
2,011,893,499.00
Outstanding certificates:
Gold certificates outstanding. $1,084,234,169.00
Silver certificates outstand
ing..........................................
488,916,000.00
Treasury notes outstanding..
2,614,000.00
Total outstanding certifi
cates...................................
General fund liabilities and bal
ance:
Total liabilities, as above___
Balance
in
general
fund, a s
above........ $126,096,569.90
Gold reserve....... 1 150,000,000.00
3
*
Total net balances...............
1,575,764,169.00
160,032,760.10
276,096,569.90
2,011,893,499.00
1 This includes $48,118,368.02 which the Treasury has redeemed and for which it will receive payment
Irom national banks.
1 The act of July 14, 1890, provides that deposits made by national banks to redeem circulating note;
shall be covered into the Treasury as miscellaneous receipts and that the Treasury shall redeem from the
general cash the circulating notes which come into its possession subject to redemption
3 Reserved against $346,681,016 of United States notes and $2,614,000 oi Treasury notes oi 1890.
659
BANKING AND CUEEENCY.
Classification o f cash in banks June 14, 1912.
7,372 national
banks.
Classification.
Gold co in ..........................................
Gold certificates.............................
Gold clearing-house certificates . .
Silver dollars..................
Silver certificates.............
Subsidiary and minor c o r n .. .
Legal-tender notes..........
National-bank notes.......
Cash not classified................
17,823 State, etc.,
banks.
25,195 reporting
banks.
$149,294,417.78
356.602.380.00
80,479,000.00
12.637.221.00
138.569.628.00
22,555,692.68
188.440.207.00
47.564.277.00
10.320.174.00
55.804.541.00
15,182,315.61
64.681.846.00
60.717.410.00
74,543,684.40
$238,389,386.74
563.068.096.00
80,479,000.00
22,957,395.00
194.374.169.00
37,738,008.29
253.122.053.00
108.281.687.00
74,543,684.40
9%, 142,823.46
Total......................
$89,094,968.96
206,465,716.00
576,810,655.97
1,572,953,479.43
Distribution oj money in the United States.
Coin and
other
Year
money
ended
in the
June 30— United
States.
Coin and other
money in Treas
ury as assets.1
Amount.
1892........
1893........
1894........
1895........
1896........
1897........
1898........
1899........
1900........
1901........
1902........
1903........
1904........
1905........
1906........
1907........
1908........
1909........
1910........
1911........
1912........
Millions.
$1,752.2
1,738.8
1,805.5
1,819.3
1,799.9
1,906.7
2,073.5
2,190.0
2,339.7
2,483.1
2,563.2
2,684.7
2,803.5
2,883.1
3,069.9
3,115.6
3,378.8
3,406.3
3,419.5
3,555.9
3,648.8
Millions.
$150.9
142.1
144.2
217.4
293.5
265.7
235.7
286.0
284.6
307.8
313.9
317.0
284.3
295.2
333. 3
342.6
340.8
300.1
317.2
341.9
364.3
Per
cent.
8.60
8.17
7.99
11.95
16.31
13.93
11.37
13.06
12.16
12.39
12.24
11.80
10.14
10. 24
10.86
11.00
10.03
8.81
9.27
9.61
9.98
Coin and other
money in report
ing banks.2
Amount.
Millions.
$586.4
515.9
688.9
631.1
531.8
628.2
687.7
723.2
749.9
794.9
837.9
848.0
982.9
987.8
1,010.7
1,106.5
1,362.9
1,444.3
1,414.6
1,545.5
1,563.8
Coin and other money
not in Treasury or
banks.
In circulation,
exclusive of com
and other money
in Treasury as
assets.
Per
cent.
Amount.
Per
cent.
Per
capita.
Per
Amount. capita.
33.48
29.68
38.17
34.96
29.55
32.94
33.17
33.02
32.05
32.02
32.69
31.59
35.06
34.27
32.92
35.51
40.34
42. 40
41.37
43.46
42.86
Millions.
$1,014.9
1,080.8
972.4
970.8
974.6
1,012.8
1,150.1
1,180.8
1,305.2
1,380.4
1,411. 4
1,519.7
1,536.3
1,600.1
1,725.9
1,666.5
1,675.1
1,661.9
1,687.7
1,668.5
1,720.7
77.92
62.15
53.84
53.36
54.14
53.13
55.46
53.92
55.79
55.59
55.07
56.61
54.80
55.49
56.22
53.49
49.58
48.78
49.36
46.93
47.16
$15.50
16.14
14.21
13.89
13.65
13.87
15.43
15.51
17.11
17.75
17.90
18.88
18.77
19.22
20.39
19.36
19.15
18.68
18.68
17.75
17.98
Millions.
$1,601.3
1,596.7
1,661.3
1,601.9
1,506.4
1,641.0
1,837.8
1,904.0
2,055.1
2,175.3
2,249.3
2,367.7
2,519.2
2,587.9
2,736.6
2,773.0
3,038.0
3,106.2
3,102.3
3,214.0
3,284.5
524.60
24.06
24.56
23.24
21.44
22.92
25.19
25.62
26.93
27.98
28.43
29.42
30.77
31.03
32.32
32.22
34.72
34.93
34.33
34.20
34.34
1 Public money in national-bank depositaries to the credit of the Treasurer o. the United States not
included.
1Honey in banks of island possessions not included.
660
Savings banks, including postal savings banks: Number o f depositors, amount o f deposits, average deposits per deposit account and per inhabitant, by
specified countries.
[Compiled b y the Bureau of Foreign and Domestic Commerce, Department of Commerce and Labor, from the official reports of the respective countries.]
Countries.
Austria.
Egypt.............
France............
Algeria.......
Tunis..........
Germany ........
Luxemburg
Hungary *.........
Italy
Japan..........................
Form osa..............
China and Koroa
Netherlands...............
Dutch East Indies
Dutch Guiana
N orw a y................. .
R oum ania5............
R u s sia «..................
Finland...........
Spain 7.....................
Sweden.......
Switzerland
Number of
depositors.
[Dec. 31,1909
28,572,000 ^Dec. 31,1910
Communal and private savings banks.....................................
Postal savings banks, savings department.............................
/D ec. 31,1911
/D ec. 31,1910
Government savings banks........................................................
Communal and private savings banks....................................
June
Mar.
Dec.
/ Dec.
\ Dec.
Dec.
Dec.
30,1910
31,1910
31,1910
31,1911
31,1910
31,1908
31,1910
Caja do ahorros.............................................................................
Communal and corporate savings banks.................................
Government savings banks........................................................
Private savings banks.................................................................
Postal savings banks...................................................................
Municipal savings banks............................................................
Postal savings banks...................................................................
/ ___ d o.............
\ ..d o ............
/Juno 30,1911
34,687,000 \June 30,1910
/D oc. 31,1910
51,547,000 \Mar. 31,1912
/D ec. 31,1910
3.341.000 \Mar. 31,1911
Postal savings banks, savings department.............................
/D ec. 31,1909
5.945.000 \Dec. 31,1910
Private savings banks.................................................................
Postal savings banks....................................................................
4,119,295
2,205,703
102,574
2,901,753
46,997
280,775
268,731
1,166,607
104,095
8,411,791
5,786,035
19,301
5,701
21,534,034
69,202
175,970
20,716
2,294,063
5,160,008
7,500,470
11,950,158
6,779
100,819
207,195
433,209
1,510,033
13,228
91', 898
9,478
1,001,310
218,690
8,189,734
291,603
59,723
4951772
1,560,317
565,759
1,899,332
7.501.000
4.285.000
3.415.000
2.757.000
11,626,000
39.602.000
5.232.001
1,923,000
64.432.000
246,000
20. 886.000
37,717,000
86,000
2.393.000
6. 866.000
163,779,000
3,120,000
19,588,000
Date of
report.
Communal and corporate savings banks.................................
Postal savings b an k s...................................................................
Private savings banks.................................................................
Postal savings banks....................................................................
Private savings banks.................................................................
Postal savings banks....................................................................
\Doc. 31,1911 Postal savings banks. . . : ............................................................
Dec. 31,1910 ........d o ...............................................................................................
July 1,1910
June 30,1912
/D oc. 31,1910
\ .. d o ............
'D ec. 31,1910
/ Dec. 31,1910
5.522.000 \Dec. 31,1911
3.647.000 Dec. 31,1908
Government savings banks........................................................
State, including postal savings banks......................................
Private savings banks.................................................................
Private savings banks.................................................................
Communal and trustees savings banks...................................
Postal savings banks...................................................................
Communal and private savings banks.....................................
Deposits.
$1,161,149,241
46,623,889
79,682,452
194,534,158
11,679,721
9,129,423
10; 543; 275
174,182,302
2,255,664
754,255,333
329,974,970
934,380
1,288.268
3,993,775,184
11,863,592
21,894,118
20,075,888
472,879,910
324,279,617
73,106,674
91,896,942
121,327
955,592
3,098,571
41,718,485
66,039,592
2,887,566
3,616,685
337,925
135,886,457
11,616,820
784,117,885
44,068, 779
1,396,856
46,931,094
216,755,326
12,645,957
303,196,216
Average
deposit
account.
Average
deposit
per in
habitant.
$281.88
21.14
776.83
67.04
248.52
32.52
39.23
149.28
21.67
89.67
57.03
48.41
225.97
185.46
171.43
28.22
969.10
206.13
62.84
9.75
7.69
17.90
9.48
14.95
96.30
43.73
218.29
39.36
35.65
135. 71
53.12
95. 74
151.13
23.39
94.66
138.92
22.35
159.63
$40.64
1.63
2.79
25.93
1.56
2.13
3.09
63.18
.19
19.05
8.33
.18
.67
61.98
48.23
1.05
.96
13.63
9.35
1.42
1.78
.04
.28
7.02
11.11
.08
.10
3.86
56.78
1.69
4.79
14.12
.45
2.40
39.25
2.29
83.14
BANKING AND CURRENCY,
Belgium.............
Bulgaria............
Chile..................
Denmark ........
Form of organization.
Popula
tion.1
/N ov. 20,1911 Trustee savings banks..................................................................
45.289.000
United K ingdom 6................................
\Dec. 31,1911 Postal savings banks....................................................................
British India*
*................................. 244.127.000 Mar. 31,1910 ........d o ...............................................................................................
Government, trustee, and joint-stock savings banks...........
4.425.000
Australia, Commonwealth...........
1910-11
/D ec. 31,1910 Postal savings banks....................................................................
1.008.000 \___ d o .............
New Zealand...................................
/June 30,1912 Postal savings banks....................................................................
7.205.000
Canada ..........................................
\ . . . d o ............
British South A frica......................
6.745.000
Governm ent, post-office, and private savings banks............
1909-10
British W est Indies.......................
1.679.000
Governm ent and post-office savings banks.............................
1909-10
British colonies, n. e. s................. 20.427.000
........d o ...............................................................................................
1909-10
Total, foreign countries............. 859.620.000
/N o v . 30,1912
United States......................................... 95.411.000 \june 14,1912
Philippine Islands..........................
8.460.000 June 30,1912
Mutual and stock savings banks................................................
Postal savings banks....................................................................
1,849,043
12,370,646
1,378,916
1,600,112
380,714
51,508
146; 310
35,031
222,772
91,881
219,967
258,083,128
859,027,319
51,478,416
289,039,353
68,641,934
7,375,302
42,683,232
14,171,966
25; 103;835
6,301,465
12,921,863
139.58
69.44
37.33
180.64
180.30
143.19
291.73
404.55
112.69
68.58
58.74
5.70
18.97
.21
65.32
68.10
7.32
5.92
1.97
3.72
3.75
.63
109,725,758
' 300', 000
10,010,304
35,802
11,096,223,947
28', 000,000
4,451,818; 523
1,177,435
101.13
93.33
444.72
32.89
46.66
.14
12.91
661
BANKING AND CURRENCY.
1 The figures of population are for the nearest date to which the statistics of savings banks relate.
s Exclusive of 1,809 deposits of $173,011 in savings banks in Faroe Islands, and of data for savings departments of ordinary banks, which comprised 155,160 accounts, credited with
$31,370,748 on Mar. 31,1910.
* Exclusive of Brunswick.
< No separate data available for private and communal savings banks in 1910. The ordinary banks savings banks, and land-credit banks of Hungary held 1,768,455 savings
accounts credited with $699,288,107 on Dec. 31,1910.
* Figures for the Casa d ’Economio.
* Includes 38,958 depositors in school savings depositories, credited with $105,060. The above total is exclusive of $162,185,345 worth of securities held b y the savings banks to the
credit of depositors.
1 The peseta has been converted at the rate of 18 cents. Data taken from “ Espafia Econdm ica y Financiera,” Oct. 21,1911. E xclusive of data for savings departments of com
mercial banks, which comprised 124,657 accounts credited with $28,588,964 on Dec. 31,1910.
* Exclusive of Government stock held for depositors, w hich, at the end of the year, amounted to $120,776,096 in the postal savings banks and to $12,934,743 in the trustee savings
banks.
* Exclusive of the population of the feudatory States.
i* Exclusive of data lor special private savings banks, which on J u n e 3 0 ,1912, helddeposits amounting to $40,828,420. The above total does not include the savings deposits in
chartered banks ( “ Deposits payable after notice or on a fixed day ” ), w hich on June 30,1912, amounted to $631,317,687.
H Num ber of offices, 12,823.
662
BANKING AND CUBBENCY.
T
a b le
N o . 59.— Abstract o f reports o f earnings and dividends o f
IFigures in boldface type indicate loss.]
Location.
N um
ber of Capital stock.
banks.
1
2
3
4
5
6
7
Maine.........................................
New Hampshire......................
V erm ont...................................
Massachusetts..........................
B oston................................
R hode Island...........................
Connecticut..............................
70
56
50
167
20
22
79
$7,850,000.00
5,235,000.00
5,160,000.00
30,317,500.00
24,950,000.00
6,775,250.00
19,364,200.00
New England States...
464
8
9
10
11
12
13
14
15
16
17
18
19
20
New Y ork .................................
A lbany...............................
B rooklyn...........................
New York City.................
New Jersey...............................
Pennsylvania...........................
Philadelphia.....................
Pittsburgh........................
Delaware...................................
Maryland..................................
Baltimore..........................
District of Columbia...............
W ashington......................
416
3
6
39
195
772
32
24
28
90
17
1
10
Eastern States............... 1,633
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
Virginia.....................................
W est Virginia..........................
North Carolina........................
South Carolina........................
Georgia......................................
Savannah..........................
Florida......................................
Alabam a...................................
Mississippi................................
Louisiana..................................
New Orleans.....................
Texas.........................................
Dallas.................................
Fort W orth.......................
Galveston..........................
Houston.............................
San A ntonio......................
W aco..................................
Arkansas...................................
K en tu cky.................................
Louisville..........................
Tennessee.................................
129
108
73
43
112
2
45
84
31
28
5
479
4
8
2
5
6
6
48
136
8
100
Southern States............
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
O hio...........................................
Cincinnati..........................
Cleveland..........................
Columbus..........................
I n d i a n a . .............................
Indianapolis......................
Illinois.......................................
Chicago..............................
Michigan...................................
Detroit...............................
W isconsin.................................
Milwaukee.........................
Minnesota.................................
Minneapolis......................
St. Paul.............................
Iow a ..........................................
Cedar Rapids....................
Des Moines......................
Dubuque...........................
Sioux C it y ............................
Surplus.
Capital and
surplus.
Gross
earnings.
$3,579,250.00
3,083,800.00
2,022,481.21
17,490,750.00
20,630,500.00
4,241,500.00
11,449,300.00
$11,429,250.00 $2,752,144.72
8,318,800.00 1,728,723. 49
7,182,481.21 1,478,754.42
47,808,250.00 9,194,782.64
45,580,500.00 12,140,184.26
11,016,750.00 1,808,571.20
30,813,500.00 4,940,052.42
99,651,950.00
62,497,581.21
162,149,531.21 34,043,213.15
46,785,100.00
2,100,000.00
2,252.000.00
121,500,000.00
21,737,000.00
67,074,390.00
22,055,000.00
28,700,000.00
2,423,975.00
5,292,000.00
12,290,710.00
252,000.00
5,850,000.00
32,138,689.67
2,200,000.00
2,650,000.00
127,891,150.00
21,996,140.00
70,224,490.98
43,350,000.00
25,217,500.00
2,282,600.00
3,741,622.96
7,720,010.00
252,000.00
4,640,512.79
78,923,789.67
4,300,000.00
4,902,000.00
249,391,150.00
43,733,140.00
137,298,880.98
65,405,000.00
53,917,500.00
4,706,575.00
9,033,622. 96
20,010,720.00
504,000.00
10,490,512.79
33S,312,175.00
344,304,716.40
682,616,891.40 160,428,741.86
17,308,500.00
9,587,000.00
8,585,000.00
5,460,000.00
14,059,500.00
900,000.00
6,080,000.00
9,675,000.00
3,255,000.00
3,145,000.00
5,200,000.00
32,166,000.00
2,650,000.00
2,875,000.00
500,000.00
4,600,000.00
2,100,000.00
1,450,000.00
4,960,000.00
12,045,900.00
5,495,000.00
12,460,000.00
11,547,684.00
5,650,159.76
2,649,273.00
1,934,250.00
8,183,230.00
700,000.00
2,707,700.00
5,233,025.00
1,582,329.74
2,245,865.83
2,980,000.00
16,817,846.02
2,350,000.00.
1,915,000.00
250,000.00
1,190,000.00
1,080,000.00
308.300.00
1,776,020.00
4,793,067.22
2,645,000.00
5,294,961.26
28, S56,184.00 6,754,485.97
15,237,159.76 3,539,338.07
11,234,273.00 2,604,031.84
7,394,250.00 2,291,668.38
22,242,730.00 5,371,016.44
1,600,000.00
408,009.84
8,787,700.00 2,922,701.82
14,90S, 025.00 3,509,560.39
4, 837,329. 74 1,323,412.72
5,390,805.83 1,542,600.94
8,180,000.00 2,124,478.19
48,983,846.02 12,906,934.67
5,000,000.00 1,570,189.61
4,790,000.00 1,266,294.68
750,000.00
261,617.75
5,790,000.00 1,873,676.04
3,180,000.00
822,617.87
1,758,300.00
518,629.28
6,736,020.00 1,830,428.83
16,838,967.22 3,234,884.28
8,140,000.00 1,793,484.06
17,754,961.26 4,665,333.59
1,462
164,556,900.00
83,833,711.83
248,390,611.83 63,135,395.26
355
8
7
8
250
5
432
10
96
3
122
6
260
5
6
314
3
4
3
6
34,307,100.00
13,900,000.00
9,350,000.00
3,000,000.00
21,133,000.00
5,400,000.00
31,235,000.00
43,600,000.00
10,260,000.00
4,750,000.00
11,180,000.00
6,250,000.00
11,811,000.00
6,800,000.00
4,100,000.00
17,715,000.00
400,000.00
2,000,000.00
600 000 00
950,000.00
17,942,942.87
6,300,000.00
4,050,000.00
1,570,500.00
9,305,180.54
2,745,000.00
17,450,455.84
26,100.000.00
5,342,300.00
1,750,000.00
4,593,400.00
2,760,000.00
6,277,003.57
5,860,000.00
3,450,574. 34
7,328,710.75
308,000.00
600,000.00
130,000.00
4o6'66 o. oo
52,250,042.87 13,385,163.72
20,200,000.00 3,926,987.25
13,400,000.00 3,611,365.32
4,570,500.00 1,540,211.82
30,438,180.54 7,989,472.97
8,145,000.00 2,365,241.24
48,685,455.84 13,238,909.21
69,700,000.00 18,863,374.36
15,602,300.00 5,140,553.05
6, .500,000.00 2,150,335.89
15,773,400.00 5,319,816.92
9,010,000.00 2,990,364.61
18,088,003.57 7,452,013.47
12,660,000.00 3,308,701.77
7,550,574.34 2,140,505.80
24,953,710.75 8,293,263.14
708,000.00
510,755.01
2,600,000.00
932,581.78
207 782 47
730,000.00
1,350,000.00
6061340.30
21,345,497.95
1,811,075.13
1,200,503.21
61,172,456.75
11,458,092.40
28,539,468.04
12,862,741.49
13,300,141.60
762,350.61
2,285,956.34
3,832,198.30
72,643.21
1,785,616.83
BANKING AND CURRENCY.
lational banks in the United States for year ended July 1, 1912.
[Figures in boldface type indicate loss.]
Charged off.
Losses and
premiums.
Expenses and
taxes.
Ratios.
Net earnings.
Dividends.
Net earn
ings to
capital and
surplus.
Dividends
to capital
and
surplus.
Dividends
to capital.
P er cent.
7.09
8.87
7.82
6.83
6.55
6.99
Per cent.
5.24
5.98
6.08
4.79
4.67
4.47
5.00
Per cent.
7.62
9.50
8.46
7.55
8.53
7.26
7.95
$281,220.42
276,888.29
88,898.39
781.424.82
1,006,905.52
105,894.29
441,068.33
$1,660,545.53
713.958.28
828,532.41
5,134,246.28
8,021,795.90
981,480.23
2,345,383.47
$810,378.77
737,876.92
561,323.62
3,279,111.54
3,111,482.84
721.196.68
2,153,600.62
$598,412.50
497,316.68
436,363.00
2,288,353.00
2,127,000.00
492,115.00
1,540,283.00
2,982,300.06
19,685,942.10
11,374,970.99
7,979,843.18
7.02
4.92
8.01
1,858,041.83
115,073.97
131,915.16
3,898,298.25
852,480.87
2,830,911.57
747,236.31
2,353,452.01
51,954.15
104,268.48
587,171.53
692.25
92,342.06
12,463,219.69
1,306,953.80
740,511.94
33,639,088.98
6,389,558.03
15,770,059.47
8,177,177.40
7,662.420.49
393,343.44
1,435,371.19
2,098,099.54
37,073.42
844,852.41
7,024,236.43
389,047.36
328.076.11
23,635,069.52
4,216,053.50
9,938,497.00
3,938.327.78
3,284,269.10
317,053.02
746,316.67
1,146,927.23
34,877.54
848,422.36
4,493,596.50
283,061.00
230,400.00
25,902,500.00
2,744,835.00
5,921,023.60
2,572,500.00
2,724,000.00
214,221.58
473,285.00
1,126,656.50
30,240.00
636,000.00
8.90
9.05
6.69
9.48
9.64
7.24
5.69
6.58
4.70
10.39
6.28
4.31
3.93
5.05
4.55
5.24
5.63
9.60
13.48
10.23
21.32
12.63
8.83
13,623,838.44
90,957,729.80
55,847,173.62
47,352,319.18
366,650.05
330,681.13
80,608.37
165,702.58
341,584.31
78,071.77
222,446.54
320,035.12
131,441.92
136.981.95
209,361.61
1,210.979.92
147,898.67
97,065.79
27,510.80
191,887.12
14,030,05
51,725.52
114.990.03
397,524.51
154,850.80
471,918.24
3,975,828.78
1,999.291.62
1,421,848.40
1,383,995.37
2,786,709. 46
95,213.90
1,667,589.98
1,814,863.04
770,131.38
916,014.51
1,289,338.59
6,224,527.77
721,261.39
680,892.24
166,436.13
987,498.20
380,133.15
302,485.28
1,013,674.72
1,674,349.56
1.024,416.66
2,643,932.54
2,412,007.14
1,209.365.32
1,101,575.07
741.970. 43
2,242,722.67
234,724.17
1,032,665.30
1,374,662.23
421,839.42
489,604.48
625,777.99
5,441,426.98
701,029.55
488,336.65
67,670.82
694,290.72
428,454.67
164,418.48
701,764.08
1,163,010.21
614,216.60
1,549,482.81
1,512,390.00
920,019.14
679.550.00
501,538.00
1,725.650.00
57,500.00
495.050.00
971.225.00
292,100.00
450,400.00
541,000.00
4,095,523.94
448,000.00
271.000.00
36,000.00
667,000 00
279,000.00
359,000.00
497,350.00
943,543.00
416,100.00
1,278,200.00
5,293,946.80
33,940,432.67
23,901,015.79
17,437,139.08
1,405,784.08
2,547.714.73
363,523.60
118,779.36
555,682.22
529,369.63
1,015,964.64
1,645,344.54
315,809.51
271,364.38
365,420.24
191,203.71
361,591.00
99,823.15
289,559.98
588.454.96
36,387.86
95,892.93
5,350.40
43,948.34
7,820,440.63
2,011,509.84
2,334,291.60
916,5S7.66
4,798,906.11
1,277,768.45
7,598,102.75
11,403,149.97
3,304,144.57
1,520,508.22
3,555,703.36
1,953,252.76
4,765,881.61
2,101,640.42
1,134,375.03
5,026,149. 07
361,887.71
551,655.93
131,974.99
429,770.89
4,158,939.01
632,237.32
913,550.12
504,844.80
2,634,884.64
558,103.16
4,624,841.82
5,814,879.85
1,520,598.97
558,463.29
1,398,693.32
'
845,908.14
2,324,540.86
1,107,238.20
716,570.79
2,678,659.11
112,479.44
285,032.92
70,457.08
132,621.07
2,828,327.67
1,370,000.00
803.000.00
304,.500.00
1,875,433.66
380,000.00
3,518,100.00
6,226,000.00
959,731.96
400,000.00
1,285,450.00
586,250.00
1,658,349.08
708,000.00
440,200.00
2,044,807.81
61,000.00
154,000.00
50,000.00
86,000.00
1
6.86
6.02
6.09
6.74
8.26
5.73
6.92
8.09
6.00
11.66
9.49
8.84
8.94
9.17
12.00
6.06
10.87
8.18
6.94
5.24
6.04
6.05
6.78
7. 76
3.59
.63
6.51
6.04
8.35
6.61
8.36
8.96
5.66
4.80
11.52
8.77
20.42
7.38
5.60
5.11
7.02
8.74
9.60
7.92
9.19
12.27
6.39
8.14
10.04
8.97
14.32
10.40
12.73
16.91
9.43
7.20
14.50
13.29
24.76
10.03
7.83
7.57
10.26
9.62
7.02
5.41
6.78
5.99
8.24
9.86
8.59
10.15
8.87
7.04
11.26
14.28
9.35
8.42
11.50
9.38
14.04
10.41
10.74
11.54
15.25
7.70
8.33
9.05
5
6
7
8
9
10
11
12
13
14
5
1
16
17
18
19
20
10.60
7.96
3.13
6.82
11.05
3
4
14.00
8.36
7.94
9.81
10.03
10.08
14.67
11.75
9.22
8.72
9.08
7.65
2
11.11
14.02
10.19
9.02
11.99
13.47
9.35
10.42
6.91
7.55
8.73
8.66
6.85
9.50
8.34
9.75
8.59
8.87
9.39
12.85
8.75
9.49
10.73
15.89
10.96
9.65
9.82
6.66
6.16
4.67
7.23
8.93
6.15
6.15
8.15
6.51
9.17
5.59
5.83
8.19
8.62
5.92
6.85
6.37
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
»
664
’
BANKING AND CURRENCY.
T a b l e N o . 59.— Abstract o f reports o f earnings and dividends
of
IFigures in boldface type indicate loss.)
Num
ber of Capital stock.
banks.
Location.
Surplus.
Capital and
surplus.
Gross
earnings.
110
63 Missouri..................................
12
64
Kansas City....................
4
65
St. Joseph........................
8
66
St. Louis.........................
Middle Western States. 2,036
$6,665,000.00
7,850,000.00
1,100,000.00
20,400,000.00
274,756,100.00
$2,666,916.62
3,382,000.00
675,000.00
11,990,000.00
142,887,984.53
$9,331,916.62 $2,352,095.94
11,232,000.00 4,884,019.24
711,820.21
1,775,000.00
32,390,000.00 7,816,242.93
417,644,084.53 119,937,918.42
North Dakota........................
146
South Dakota........................
102
Nebraska...............................
231
Lincoln............................
4
Omaha............................
7
South Omaha.................
3
202
Kansas...................................
2
Kansas City....................
2
Topeka............................
3
Wichita...........................
Montana.................................
58
W yoming...............................
29
118
Colorado.................................
6
Denver............................
3
Pueblo.............................
39
New Mexico...........................
272
Oklahoma..............................
5
Muskogee -......................
6
Oklahoma City...............
Western States............ 1,238
5,26!S, 000.00
4,180,000.00
10,415,000.00
1,000,000.00
3,700,000.00
1,100,000.00
10,662,500.00
500,000.00
300,000.00
500,000.00
4,960,000.00
1,735,000.00
6,690,000.00
3,600,000.00
650,000.00
2,090,000.00
10,545,000.00
850,000.00
1,550,000.00
70,295,500.00
1,878,669.33
1,238,450.00
4,261,368.00
330,000.00
2,810,000.00
380,000.00
4,619,985.00
300,000.00
160,000.00
505,000.00
2,774,250.00
1,056,500.00
3,079,290.74
3,902,000.00
450,000.00
980,350.00
2,818,245.21
250,500.00
270,000.00
32,064,608.28
7,146,669.33 3,150,624.82
5,418,450.00 2,650,938.75
14,676,368.00 4,766,358.98
1,330,000.00
498,144.73
6,510,000.00 2,515,2S2. 42
1,480,000.00
548,852.27
15,282,485.00 4,792,684.67
800,000.00
342,278.45
190,871.94
460,000.00
1,005,000.00
453,024.93
7,734,250.00 3,176,080.31
2,791,500.00 1,192,234.78
9,769,290.74 3,350,315.87
7,502,000.00 2,961,449.27
1,100,000.00
463,135.21
3,070,350.00 1,216,074.79
13,363,245.21 5,566,733.22
1,100,500.00
468,249.93
1,820,000.00
765,707.67
102,360,108.28 39,069,043.01
86 Washington.........................
Seattle............................
87
88
Spokane.........................
Tacoma..........................
89
90 Oregon..................................
Portland........................
91
92 California..............................
93
Los Angeles...................
94
San Francisco................
95 Idaho....................................
96 Utah.....................................
Salt Lake City...............
97
98 Nevada.................................
99 Arizona.................................
100 Alaska..................................
66
6
5
2
76
4
197
9
9
48
17
5
11
13
2
4,075,000.00
4,200,000.00
3,400,000.00
500,000.00
4,611,000.00
4,000,000.00
18,872,800.00
6,100,000.00
28,250,000.00
2,940,000.00
1,155,000.00
2,150,000.00
1,742,000.00
1,105,000.00
100,000.00
1,985,915. 99
1,370,000.00
765,000.00
850,000.00
2,093,187.14
1,827,000.00
7,931,647.55
2,826,000.00
14,805,000.00
1,392,240.90
440,186.45
965,000. 00
474,000.00
725,000.00
53,500.00
Pacific States...............
470
83,200,800.00
38,503,678.03
Hawaii.................................
4
610,000.00
254,426.42
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
ji
]
j
101
United States..............
6,060,915.99
5,570,000.00
4,165,000.00
1,350,000.00
6,704,187.14
5,827,000. 00
26,804,447.55
8,926,000.00
43,055,000.00
4,332,240.90
1,595,186. 45
3,115,000.00
2,216,000.00
1,830,000.00
153,500. 00
2,310,295.02
2,263,475.87
1,427,605.47
449,184.35
2,092.837.50
1,879,845.83
7,891,103.62
2,987,864.93
7,308.656. 18
1,580,550.84
790,162. 58
899,180. 80
569,941.39
668,758. 58
157,998. 81
121,704,478.03 33,277.461.77
864,426.42
151,476.62
7,307 U,031,383,425.00 1704,346,706.70 1,735,730,131.70 450,043,250.09
i Capital and surplus as shown at the close of the year.
1
BANKING AND CURRENCY.
ational banks in the United States for year ended July 1, 1912—Continued.
[Figures in boldface type indicate loss.]
Charged off.
Ratios.
Net earnings.
Dividends.
Losses and
premiums.
Expenses and
taxes.
$155,992.87
410,245.90
61,330.60
870,386.91
12,344,925.54
51,340,457.09
3,274,933.67
507,648.39
5,270,111.58
73,390,852.30
$855,645.98
1,198,839.67
142,841.22
1.675,744.44
34,202,140.58
$682,625.00
625,000.00
96,500.00
2,259.000.00
29,402,275.18
235,087.22
127,140.70
343,417.59
22,695.33
272,052.11
38,742.50
425,894.15
24,851.56
15,999.32
27,292.90
507,035. 42
56,212.19
505,514.43
393,887.29
102,244.84
128,099.17
657,081.13
53,200. 80
178,938.14
4,115,386.79
2,032,282.49
1,802,295.89
2,690,443.13
318,057.44
1,508,550.79
358,194.94
2,682,109. 46
243,876.93
130,818.12
315,382.83
1,603,665.95
685,810.36
1,872,416.74
1,707,269.54
239,733.46
694,943.85
3,085,557.75
262,328.01
484,616.11
22,718,353.79
883,255.11
721,502.16
1,732,498.26
157,391.96
734,679.52
151,914.83
1,684,681.06
73,549. 96
44,054.50
110,349.20
1,065,378.94
450,212.23
972,384.70
860,292.44
121,156.91
393,031.77
1,824,094. 34
152,721.12
102,153.42
12,235,302.43
398,499.85
266,136.02
178,767.29
87,264.09
228,490.56
317,441.19
684,537.27
342,330.68
644,953. 44
203,558.89
50,895.88
160,822.70
128,486.44
104,815.22
95,587.46
1,319,033.04
1,375,774. 73
874,547.24
265,822.01
1,041,513.15
949,909.26
4,264,739.74
1,529,056.66
3,717,668.94
915,828.57
361,120.91
626,917.77
289,174.49
347,532.61
91,541.33
3,892,586.98
17,970,180.45
Net earn Dividends
ings to
to capital Dividends
to capital.
and
capital and
surplus.
surplus.
Per cent
9.17
10.67
8.05
5.17
8.19
Per cent.
7.31
5.56
5.44
6.97
7.04
Per cent.
10.24
7.96
8.77
11.07
10.70
690,789.21
512,700.41
1,424,572.97
79,000.00
348,000.00
90,000.00
1,301,567.65
36,000.00
34,000.00
57,000.00
909,900.00
290,250.00
769,950.00
472,750.00
73,000.00
372,500.00
1,644,713.32
115,250.00
108,000.00
9,329,943.56
12.36
13.32
11.80
11.83
11.29
10.26
11.02
9.19
9.58
10.98
13.77
16.13
9.95
11.47
9.67
9.46
9.71
5.94
5.35
6.08
8.52
4.50
7.39
5.67
11.76
10.40
7.88
6.30
6.64
12.13
12.31
10.47
5.93
9.11
13.11
12.27
13.68
7.90
9.41
8.18
12.21
7.20
11.33
11.40
18.34
16.73
11.51
13.13
11.23
17.82
15.60
13.56
6.97
13.27
67
592,762.13
621,565.12
374,290. 94
96,098.25
822,833.79
612,495.38
2,941,826.61
1,116,477.59
2,946,033.80
461,163.38
378,145.79
111,440.33
152,280.46
216,410.75
29,129.98
618,575.00
589,000.00
356,000.00
94,000.00
638,936.19
448,158.20
1,769,480.00
908,250.00
2,265,000.00
375,100.00
240.332.65
166,000.00
159,020.00
127,000.00
9.78
11.16
8.99
7.12
12.27
10.51
10.98
12.51
6.84
10.64
23.71
3.58
6.87
11.83
18.98
10.21
10.57
8.55
6.96
9.53
7.69
6.60
10.18
5.26
8.66
15.07
5.33
7.18
6.94
15.18
14.02
10.47
18.80
13.86
11.20
9.38
14.89
8.02
12.76
20.81
7.72
9.13
11.49
86
11,414,694.34
8,754,852.04
9.38
7.19
10.52
1 .0
11
12.80
13.65
13.88
5.61
11.95
66
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
87
88
89
90
91
92
93
94
95
96
97
9S
99
100
3,145.54
67,025.60
81,305.48
44,500.00
9.41
5.15
42,256,130.15
258,730,516.71
149,050,603.23
120,300,872.22
8.59
6.93
63
64
65
7.30 101
11.66
666
BANKING AND CURRENCY.
Monetary systems and approximate stocks o f money, in the aggregate and
Stock of gold.
Countries.
Monetary
standard.
Gold_
_
Monetary unit.
Dollar...................
Crown..................
British Empire:
.. .do...... Pound sterling_
_
Dollar...........“ ___
...d o ...... Pound sterling_
_
United Kingdom.
.. .do...... Pound sterling and
rupee.
_
South Africa... ...d o ...... Pound sterling_
ments.2
. ..do......
Mark....................
Japan.................... ...d o ...... Yen......................
South American
States:
Thousands.
94,800
49,400
7,300
4.400
In banks
and public
treasuries.
.. .do___
French...... .. .do___
Paraguav......... .. .do___
Sol........................
Silver9. . Peso.....................
In circula
tion.
Total.
Thousands. Thousands. Thousands.
369,800
1,429,800
1,799,600
90,600
265,700
356,300
36,500
45.000
6,200
207,800
138,200
1375,000
295,000
50,400
6,800
14,600
222,400
335,'800
I'no’aoo’
’ 44,600
7.800
1,600
4.000
2,100
2,700
11.300
2.900
39.300
64.900
2,600
1,500
33.900
.52,200
15.000
5.900
2.400
5.400
6.800
160,100
2,800
7.000
15,000
65,400
7,700
19,800
8,200
6,900
635.000
«205,700
2.500
1,300
288,500
117.000
31.200
56,400
16.200
6, .500
30,600
611,700
6.500
100
7,000
2.300
20,500
3.500
4.300
1.500
Guiana—
Central American
States.
Total............
Population.
1,900
2,100
4.400
3.400
16,900
133,900
19,200
4,600
8,000
2,100
334,000
75,600
20,800
14,500
32,700
946,300
2,100
5,400
3.900
12,200
2.500
138,200
3,200
34.700
127,500
100
3,100
213,100
26,000
65,700
142.400
1,400
248,300
7.800
116,500
500
300
100
100
800
4.500
1.100
2,600
19,700
5,400
3.300
24,000
5.300
42,000
18,500
38,300
174,500
<182,700
3,700
10,600
565,000 s 1 ,2 0 0 ,0 0 0
100
3.300
200
100
15.200
8.300
15.200
600
74.900
22,800
31,000
14.900
1.300
5,167,600
N ote .—The blank spaces in this table signify that no satisfactory information is available.
1Estimates for the United Kingdom prior to that for 1910 were for coin only; these figures include
$100,000,000 for bullion in the Bank of England; also $12,200,000 gold belonging to Indian gold-standard
reserve.
’ This is the amount in the currency reserves. Fred. J. Atkinson, accountant genera) of India, in 1908,
estimated the active rupee circulation at 2,040,000,000 rupees; small silver coin at 140,000,000 rupees.
8Includes Straits Settlements, the Malay States, and Johore.
4This estimate is based upon a calculation made b y Messrs. P. Arminjon and B. Michel in 1908, who
estimated the stock of gold in the country at from 33 000,000 to 41,000,000 Egyptian pounds. The mean
of these figures was adopted in this table last year. Since their estimate was made the net imports of
gold into E gypt to Dec. 31, 1911, have amounted to $28,919,061, but as there is said to be a considerable
absorption of gold for ornaments, no change in the estimate of the monetary stock has been made.
667
BANKING AND CURRENCY.
per capita, in the principal countries o f the world, Dec. SI, 1911.
Stock of silver.
Full tender.
Limited
tender.
Per capita.
Uncovered
paper
Total.
Gold.
Silver.
Paper.
Thousands.
568,300
Nil.
8,700
Thousands.
167,600
122,900
2,400
Thousands.
735,900
122,900
11,100
Thousands.
764,500
197,600
139,000
$18.98
7.21
5.00
$7.76
2.49
1.52
Nil.
Nil.
Nil.
10,000
7,700
116,800
10,000
7,700
116,800
79,100
115,200
50.54
22.29
15.80
2.27
1.24
2.59
12.76
2.56
97,400
45,000
142,400
45,400
.14
.48
Nil.
Nil.
20,000
19,000
20,000
19 ; 000
7,500
8.38
4.25
2.56
11.88
Nil.
Nil.
Nil.
Nil.
Nil.
347,400
Nil.
Nil.
1,000
22,700
Nil.
52,000
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
4,800
5,000
7,900
14.300
500
63,700
253,600
3,000
1,500
1,400
64,200
4,000
29,000
3,700
33,100
12,600
78,800
1,300
52,200
4,800
5,000
7,900
14,300
500
411,100
253,600
3,000
2,500
24,100
64,200
56,000
29,000
3,700
33,100
12,600
78,800
1,300
52,200
4,900
2,100
1.93
20.00
14.19
16.17
3.66
30.53
3.16
1.69
2.26
8.51
2.57
2.08
12.81
8.67
2.69
4.81
5.91
2.32
.01
1.20
2.38
2.92
1.26
.17
10.46
3.90
1.15
1.67
.71
1.23
3.73
4.92
1.54
6.13
1.85
.49
.46
7.46
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
9,400
700
25,000
8,500
9,400
700
25,000
8,500
7 692,200
*
2,000
777,900
19,000
35.47
3.39
5.68
.14
1.34
.30
1.22
2.43
1,300
1,300
L700
3.60
.87
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
Nil.
400
300
100
400
300
100
1.34
3.00
1.00
2,400
4; 300
10,800
256,800
8,600
13,500
26,400
9', 200
2,400
4; 300
10,800
256,800
8,600
13.500
26,400
9; 2 0
0
89,900
.33
2.00
1.00
19.00
2.71
13.82
1.19
10.82
4.81
19.91
5.93
.26
1,097,500
1,523,700
2,621,200
Total.
3,567,500
9,900
17,300
6,600
14,900
245,900
276,100
27,600
8.200
182,300
101,700
51,200
64,700
8,700
69,900
43,200
no, 000
10
0
300
600
42,900
8,000
800
76,000
34,700
27,900
.53
3.90
4.15
13.04
1.59
4.09
1.10
1.74
$34.81
$8.07
4.00
13.70
19.04 ^ 25.56
I
2
3
52.81
36.29
20.95
5
6
7
.16
.78
8
4.68
10.94
20.81
9
10
1.75
.30
5.60
22.38
23.52
18.01
8.96
47.25
11.30
13.46
9.40
14.00
5.55
9.22
28.70
13.83
21.76
13.01
6.40
4.53
7.77
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
98.89
.87
3.80
5.43
2.33
1.13
135.70
4.56
10.70
8.00
2.33
5.60
.33
3.00
6.00
53.63
2.00
8.00
8.00
72.63
3.24
25.00
5.65
27.71
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
2.47
6.41
.58
5.13
6.26
4.24
10.62
5.47
5.38
1.95
3.41
10 97
3.62
12.94
6.35
7.28
.31
3.85
6.43
8.45
16.96
12.85
32.45
7.03
18.96
8 Estimate of A. De Foville, 1909.
•German war fund and Imperial Hank of Germany. No definite information as to other holdings.
The coinage of gold since the establishment of the Empire less recoinage, amounts to $1 125,023,299 but
the exports are unknown and there has been an industrial consumption.
7 Gold conversion value.
8This amount has been reduced to a gold basis; that is, 100 pesos equal 1 United States gold dollar.
Except Costa Rica and British Honduras (gold-standard countries).
932S°— S. Doc. 232,'63-1— vol 1
43
668
BAN KIN G AND CUKKENOY.
B
a n k in g
and
Currency Con feren ce.
[Suggested resolutions prepared at the request of A. B. Hepburn, of New York, chairman currency com
mission of the American Bankers’ Association, by J B. Forgan, of Chicago, vice chairman; presented
at the morning session, Friday, Aug. 22 1913, and ordered read and referred to the conference for
discussion ]
Whereas the provisions of the Federal reserve act requiring all member banks, both
national and State, to invest 10 per cent of their own capital in the capital stock
of the proposed Federal reserve banks and to assume a liability of a further equal
amount payable on demand for the purpose when necessary of paying the obliga
tions of such Federal reserve banks, and further requiring that such member banks
shall deposit 5 per cent of their own total demand liabilities in said Federal reserve
banks; afld
Whereas both such capital investment and such deposits are placed entirely beyond
the management, control, or use of the depositing banks, except that the deposits
may erroneously be counted as part of their lawful money reserve; and
Whereas the banks would prefer to keep their reserves within their own control, so
that they could use them in such emergencies as reserves are intended to provide
for; and
Whereas we find in the Federal reserve act no compensating benefits to induce the
State banking institutions to voluntarily assume these obligations:
Resolved, That it is the opinion of this convention that notwithstanding the fact
that the State banking institutions outnumber the national banks b y more than two
to one and control more than one-half the banking business of the country, they could
not be induced to voluntarily com ply with the provisions of the Federal reserve act
and thus become parties to it; and be it further
Resolved, That if the opinion expressed in the previous resolution is correct the
reserve bank organization committee created b y the act will have to rely for the
organization of the Federal reserve banks entirely on the action of the national banks
under the more or less compulsory obligations imposed on them in the act, requiring
them within 12 months to contribute the necessary capital and the minimum reserve
deposits or accept one of the two alternatives of dissolution or of continuing their
business under State charters.
(No. 2.)
Whereas the Federal reserve act stipulates that there shall be not less than 12 Federal
reserve banks, with a minimum capital of-$5,000,000 each, which calls for a mini
mum aggregate capital subscription of $60,000,000; and
Whereas it is evident that in the larger districts much more than the minimum capital
would be necessary:
Resolved, That it is the opinion of this convention that the 12 Federal reserve banks
could not be amply capitalized b y a subscription amounting to 10 per cent on the
aggregate capital of the existing national banks, which approximates $105,000,000,
as the—
Federal Reserve Bank of New York would require not less than...............$25. 000, 000
Federal Reserve Bank of Chicago would require not less than................. 20. 000, 000
Federal Reserve Bank of St. Louis would require not less than.............. 15, 000. 000
Federal Reserve Bank of San Francisco would require not less than...... 10. 000. 000
Federal Reserve Bank of New Orleans would require not less than........ 10. 000. 000
Federal Reserve Bank of Philadelphia would require not less than....... 10. 000, 000
Federal Reserve Bank of Boston would require not less than................... 10, 000, 000
And there would have to be five others in different parts of the country
at not less than $5,000,000 each, making..................................................... 25, 000, 000
125, 000, 000
which would thus require $20,000,000 more than would be provided if every national
bank should become a subscriber.
(No. 3.)
Whereas, bank reserves against deposit liabilities being held for debt-paying pur
poses must be in the form of actual money or of obligations promptly convertible
into money:
Resolved, That in the opinion of this convention the minimum credit balances
which the national or other member banks are required to maintain with the Federal
reserve banks, not being subject to withdrawal, are not convertible into money and
therefore are not available for the purpose of paying debts; and such balances could
BAN KIN G AND CURRENCY.
669
not be regarded by the member banks which own but can not use them as anything
but a fixed capital investment similar to their contribution to the capital stock of
the Federal reserve banks except that they earn nothing for the investors.
(No. 4.)
Whereas in the opinion of this convention the contraction of loans in the national
banks made necessary by the payments in lawful money which they would be
required to make to the Federal reserve banks within 60 days would largely exceed
the loaning capacity of the Federal reserve banks:
Resolved, That we offer the following explanation of our opinion thus expressed:
The loans and bond investments of the national banks, exclusive of their Govern
ment bonds pledged as security for their note circulation, 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 represent 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 b y actual money in the banks. The estab
lished 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.......................................................
the national banks are required to make the following payments to
the Federal reserve banks, viz:
10 per cent of their aggregate capital........................ $105. 000, 000
3 per cent of their net deposits................................... 213,000, 000
$917, 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 amounting to.............................
599, 000, 000
On the established basis of 121 per cent of money to existing credits,
which seems little enough, this would provide for credits between
the banks and the public aggregating....................................................
Calling for a compulsory contraction in such credits o f..........................
4, 792, 000, 000
2, 544,000, 000
From their present amount o f......................................................................
7, 336, 000, 000
The Federal reserve banks with a capital paid in of...............................
And reserve deposits similarly paid in of..................................................
105, 000, 000
213, 000, 000
Would have in money to start w ith............................................................
318,000, 000
Which on the basis of the 33J per cent cash reserve they are requ ired
to carry against their total demand liabilities would enable them to
expand until they had assumed total liabilities o f..............................
Of which they would have already assumed liability for the reserve
deposits.........................................................................................................
954, 000, 000
Their net expansion capacity would therefore b e ....................................
And this would be the limit of their ability to rediscount for their
member banks, whose compulsory contraction of credits as shown
above would b e ...........................................................................................
Showing that their ability to rediscount would fall short of the con
traction of credits in their member banks b y .......................................
213,000,000
741, 000, 000
2,544,000, 000
1,803,000, 000
After 14 months when the minimum reserve deposits required are to be raised from
3 per cent to 5 per cent, this deficiency would of course be greatly increased. Such a
contraction of the credits between the national banks ana 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,
670
BANKING AND CUBBENCY.
the 3 per cent reserve deposit required on their “ total demand liabilities” has been
figured on their net and not on their gross deposits, under the assumption 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 proportionately
decrease their money reserve and increase the compulsory contraction of their loans.
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.
We do not wish it to be understood that these figures forecast precisely what would
occur were the Federal reserve act passed and were the national banks to operate
under it. W e are well aware that no calculation can possibly be made to correctly
7
forecast what would actually occur in such an event. We are 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.
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 eluci
dated as follows: It is proposed to transfer bodily from the national banks practically
one-third of the actual money now lodged in their vaults and place it in 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 12J
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 on the
established ratio of 121 per cent of money to total credits, otherwise to a proportionate
extent there will be an overexpansion of credits in the banks. The credit expan
sion of the Federal reserve banks is fixed on the basis of a 331 per cent money reserve
against their total liabilities. They are therefore restricted in their credit expansion
to $3 of credit against $1 of money, while the national banks have been doing business
on a 121 per cent money basis, or .$8 of 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.
If the Federal reserve banks could continue to use the money thus
transferred to them on the same basis on which the national banks
now use it, viz, $8 of credit expansion against $1 of money, their
expansive power would b e ....................................................................... $2, 544,000,000
But as they are restricted in the act to $3 of credit expansion against
$1 of money their actual expansive power is limited to......................
741,000,000
Which shows the same discrepancy o f.....................................................
1,803,000,000
between their expansive capacity and the compulsory credit contraction in the
banks.
(No. 5.)
Whereas in the opinion of this convention there is not sufficient money in the national
banks to meet the immediate requirements of the act:
Resolved, That we offer as ev dence thereof the following figures compiled by Mr.
A. B. Stickney, of St. Paul, which have been checked in the office of the Comptroller
of the Currency and certified correct.
Immediate cash requirements o f the bill.
Before the Federal reserve banks can be organized the national banks must sub
scribe for their capital stock to the extent of 20 per cent of their capital, $1,056,919,792,
and pay in cash 10 per cent.
Amount of this payment...............................................................................
On the basis of June 4, 1913, reports, the amounts of actual money
required for reserves at the outset are as follows:
Total net deposits...................................................... $7,124, 634. 372
Less time certificates.................................................
525, 508, 864
Net demand liabilities..................
3 per cent of net demand liabilities
$105, 691, 979
6. 599.125, 508
197, 973, 751
BANKING AND CURRENCY.
Lawful money in bank:
Country banks, $3,610,672,858 net deposits; 5
per cent...................................................................
Reserve city banks, $1,945,874,457 net deposits;
12$ per cent............................................................
Central reserve city banks, $1,568,087,056 net
deposits; 25 per cent.
Less 3 per cent on demand liabilities in Federal
reserve banks..........................................................
671
$180, 533, 642
243, 234, 307
345, 401, 083
$769,169, 032
Total cash required within 60 days after the organization.........
Items possessed by the banks which the bill permits
to be counted as reserve. The law permitting the
5 per cent redemption fund to count as reserve, the
bill repeals:
Fractional currency, etc...........................................
$3. 580, 483
Specie...........................................................................
724. 074, 627
Legal tenders..............................................................
189, 908, 013
----------- ------------
1, 072, 834, 762
Deficit....................................................................................................
If national-bank notes may be used to purchase stock in Federal re
serve banks, the deficit would be decreased b y ...................................
155, 271, 639
917, 563,123
51, 538, 808
103, 732, 831
This shortage of $155,000,000 would be the deficit in the actual lawful money re
quirements of the national banks, leaving them without any free money for current
uses. The free money required and carried by the national banks for their current
uses being usually about $150,000,000 and their having $51,000,000 in national-bank
notes on hand, the actual deficit would be, in round figures, $250,000,000.
(No. 6.)
Whereas the currency commission of the American Bankers’ Association, in its answer
to question No. 13 of questions formulated by a subcommittee of the Banking and
Currency Committee of the United States Senate, has expressed an opinion in
regard to the requirement that there shall be organized not less than 12 Federal
reserve banks,
Resolved, That we reiterate and approve such opinion, which reads as follows:
“ In our opinion one central reserve association with branches would best serve our
present necessities. Failing that, a small number of regional reserve associations,
also with branches, might be organized to serve the purpose. The smaller the number
of regional reserve associations, however, the more effective the reserve control. If
there are to be a number of regional reserve associations, they should be under some
kind of central control in which both the Government and the various associations
should have representation.
“ Three objections to the regional reserve associations occur to us:
“ First. They will divide the cash reserve of the country into as many different
ownerships as there are regional associations. No individual bank can now strengthen
its cash reserves without at the same time and to the same extent depleting the reserve
of some other bank, so with the regional reserve associations no one of them will be
able to strengthen its cash reserves without drawing them from and reducing to the
same extent the reserve of one of the other associations.
“ Second. In connection with the shipping of reserve money from one section of
the country to another. Under one central reserve association with branches this
could be accomplished without change of ownership of the money shipped, as it would
belong to the one association, irrespective of what branch had custody of it. In the
case of independent regional reserve associations no such transfer of reserve money
could be made from one region to another without a change in ownership. It would
increase the reserve of the association that receives it and deplete by a similar amount
the reserve of the association that ships it. In times of financial stress, when each
regional reserve association would be husbanding its resources for the benefit of its
own constituents, this might produce an undesirable and awkward situation, the
interests of the various sections of the country being at variance. Such effect will be
intensified in direct ratio to the number of regional reserve associations, and
672
BANKING AND CURBENCY.
“ Third. Under one ownership and control of the reserves transfers of funds could
under normal conditions be accomplished by book entries rather than by the shipment
of m oney.”
(No. 7.)
Whereas taken collectively the following provisions of the Federal reserve act are
most objectionable to us:
1. The coersive feature of the act as stated in section 8, which provides that any
national bank which shall not within one year after its passage become a national
banking association under its provisions, or which shall fail to comply with any of
its provisions applicable thereto shall be dissolved.
2. The provision that the national banks shall subscribe to the capital stock of
the Federal reserve banks a sum equal to 20 per cent of their unimpaired capital,
one-fourth of such subscription to be paid in cash, one-fourth in 60 days and the
remainder, subject to call and payment whenever necessary to meet the obligations
of the Federal reserve banks.
3. The provision that national banks within 60 days from and after the date the
Secretary of the Treasury shall have officially announced the fact of the establish
ment of the Federal reserve banks shall deposit with the Federal reserve banks as
part of their required reserve an amount not less than 3 per cent of their own total
demand liabilities, exclusive of circulating notes, and at the end of 14 months from
the date thus fixed by the Secretary of the Treasury shall increase the said 3 per cent
to 5 per cent, such reserve deposit to at no time fall below the amounts aforesaid.
4. The requirements in connection with the reserve deposits to be made by the
different classes of national banks in the Federal reserve banks. They are in any
event too onerous. The proper mobilization of the cash reserves of the banks
should economize their use and by concentration of them reduce the unscientific
wide distribution of them which now exists.
5. The provision limiting the dividends on the capital stock to 5 per cent per
annum.
6. The provision that no interest is to be paid by the Federal reserve banks upon
any deposits except those of the United States and except such as the national banks
may receive under the provision in connection with the division of earnings, whereby
40 per cent of the earnings in excess of 5 per cent to be paid them on tneir capital
stock investment is to be paid to the member banks in proportion to their annual
average balances with such Federal reserve banks.
7. The method of organizing the Federal reserve board, which places the manage
ment and control of the Federal reserve banks in the hands of seven men, all ap
pointees of the President of the United States, with the advice and consent of the
Senate, who would have no financial interest in the banks and who, with one excep
tion, need not necessarily have any experience in or knowledge of the banking
business. The management and control should be placed in the hands of experi
enced bankers and other men of business chosen jointly by the banks as proprietors
and by the Government in the interests of the public because of their knowledge
and experience in banking and other lines of business;
Resolved, That considering these provisions collectively we regard the measure as
an attempt to force the national banks to contribute the capital and deposits in the
Federal reserve banks, and we believe that the directors of the national banks, appreci
ating their responsibility in a fiduciary capacity to their stockholders and depositors,
will not be so coerced until they have tested in the Superme Court of the United States
whether or not such coercion is a violation of the fifth amendment of the Constitution
of the United States prohibiting the taking of property for public use without just
compensation, and we further believe that even if it should be decided by the Supreme
Court that it is not a constitutional violation the national banks of the country could
not become parties to a banking system that proposes such revolutionary interference
with the established credits now existing between the public and the national banks
by the practical appropriation of one-third of all the actual money now in their posses
sion, which is to be placed entirely beyond their control both as regards its manage
ment and its use as valid reserves against their deposits, except in so far as the advice
of the Federal advisory council might influence the action of the Federal reserve
board, which under the conditions and restrictions surrounding it could not be made
effective.
673
BANKING AND CURRENCY.
(No. 8.)
Whereas the conditions and regulations under which the circulating notes are to be
issued are in our opinion such as to make the note issue unscientific and impractical;
Resolved, That we offer the following in explanation of our opinion:
While the notes are to be the obligations of the United States they are in fact to be
primarily the obligations of the Federal reserve banks guaranteed by the Government.
Federal reserve banks are primarily charged with their redemption. As security for
these primary obligations of the Federal reserve banks the notes are made a first and
paramount lien on all their assets besides being collaterally secured b y them b y a
specific pledge of commercial paper of equal amount and by the segregation of gold
or lawful money equal to 33J per cent of the amount of them outstanding. While
they are to be redeemable at the United States Treasury, the funds for that purpose
are to be supplied by the Federal reserve banks. Unless, therefore, the Federal
reserve banks default in their obligation to redeem the notes the Government will
not be required to pay or redeem them with its own funds. These notes should be
made the direct obligation of the banks that pay them out and that are primarily
responsible for the redemption of them.
The machinery provided for their issue, circulation, and redemption seems to have
been unnecessarily complicated by an attempt to embody in the plan the erroneous
principle that to the Government belongs the exclusive prerogative of issuing the
circulating medium. The experience of the world has been that it is better for a
government to provide the paper circulating medium indirectly through properly
organized banks under strict government supervision rather than put the credit
of the government at iss"e with every note placed in circulation. Troublesome times
come to every community and to every nation, and it is better to have the credit of
the banks called in question than the credit of the government itself. As bank notes
they will be amply secured without the superfluous government guaranty. Issued
by the banks when and as needed they would more readily automatically adjust them
selves in volume to the actual commercial demands for them. As obligations of the
Government they are likely, as do our present Government issues and our Government
bond-secured national notes, to remain too long in circulation, no active redemption
of them being deemed necessary. It is active and constant redemption of a circu
lating medium that makes it elastic. Expansion without contraction is not elasticity,
but inflation.
The provisions recently added to the bill that 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, and that no Federal reserve bank shall pay out notes
issued through another under a penalty of a tax of 10 per cent upon the face value of
notes so paid out, are good so far as they go, but when the notes are once issued by
the Federal reserve banks the National and State banks doing business directly with
the public would be the principal agencies through which the notes would be kept
in circulation, and the practice now prevailing of receiving and paying out nationalbank notes without special reference to the location of the bank that issued them
would undoubtedly be continued in connection with the Federal reserve notes.
RECAPITULATION
Whereas the general effects of the measure on the existing credit relations between
the banks and the public as they have been forecast would be ruinous both to the
national banks and to general business;
Whereas, unless practically all the national banks agree to participate in the provi
sions of the measure and subscribe for the capital stock of the Federal reserve banks,
it will be impossible to organize the Federal reserve banks and the measure will
prove a failure;
Whereas the measure generally is in its main features unsatisfactory to the banks of
the country;
Whereas in our opinion the national banks will not agree to it without a contest as
to their constitutional rights and, even if such contest should be decided against
them, are most likely to withdraw from the system; and
Whereas in our opinion the State banks will not voluntarily become parties to it:
Be it
Resolved, That in view of these recapitulated considerations, which we believe to
be facts, we would respectfully recommend to Congress that the attempt to pass the
measure at the present special session be abandoned; and
/
674
BANKING AND CURRENCY.
Whereas, in view of the great importance of the subject, which is purely a business
problem as far removed from politics as any problem affecting the interests of the
public can be, the welfare of every citizen being affected by it, and the multitude
of bank depositors in the country being specially interested in it; and
Whereas a good measure would protect the interests of all classes of citizens and a bad
measure would be a universal calamity; and
Whereas we fully appreciate the necessity for early action: Therefore be it further
Resolved, That we respectfully recommend to Congress that a commission should be
organized, composed of three men representing the Government, to be appointed by
Congress; three men representing the commercial, industrial, and agricultural inter
ests of the country, to be appointed by the National Chamber of Commerce; and three
experienced bankers, to be appointed by the American Bankers’ Association, to
carefully consider the subject and prepare a bill to be submitted to the next regular
session of Congress.
(Thereupon, at 6.30 p. m., the committee adjourned until Friday,
September 19, 1913.)
F R ID A Y , SE PTE M B E R 18, 1913.
Committee
B anking and C urrency,
U nited S tates S enate,
1Vashington. D. C.
The committee assembled at 1.30 o'clock p. m.
Present: Senators Owen (chairman), Peed, Pomerene. Shafroth,
and Bristow.
The C hairman . Mr. Frame, the committee will be glad to hear
you now.
ox
STATEMENT OF ANDREW JAY FRAME, PRESIDENT OF THE
WAUKESHA NATIONAL BANK, OF WAUKESHA, W IS.
Mr. F rame. Mr. Chairman and gentlemen of the committee. I
thank you for the honor of being called before you, and will say
that I have had 50 years’ business experience in banking, and I have
been through the panics of 1873. 1893, and 1907. and the Waukesha
National Bank has never suspended cash payments.
After listening to what has been said here in the committee, as I
have------Senator P eed. Pardon me for interrupting you just a moment.
You are the president of the Waukesha National Bank?
Mr. F rame . Yes. sir; president of the Waukesha National Bank.
Senator P eed. What is the capital of that bank?
Mr. F rame. $150,000.
Senator R eed. H ow long has that institution existed?
Mr. F rame. Since 1865. as a national bank.
Senator P eed. And how long have you been its president?
Mr. F rame. Since 1880— 33 years.
Senator P eed. T o what extent have you made a study of banking
and currency, aside merely from your banking experience?
Mr. F rame. All my life. I have read all the best authorities on
political economy— at least the most of them— in my earliest banking
experience, in the first 10 years of it. Since then I have been making
a practical application of the principles of the banking business, with
the experience of panics, and have been rereading the historical ex
periences.
BANKING AND CURRENCY.
675
Senator R e e d . Thank you, that is all I wanted to know at this
time.
Mr. F rame. After listening for the last two da\7 I am frank to
s,
say that I believe you are endeavoring to do what, in your judgment,
is for the highest and best interests of the country. I f we differ
at all, we can not expect to be like unto a gentleman who lost
his.wife. The minister coming in. the man said to him, “ I have
lived 40 years with my wife and never have had a cross word with
her.” The minister replied, “ Ah. man. but you must have had an
awfully stupid time.” I trust we will have no serious differences
because of honest motives.
I believe in the mobilization of a certain amount of cash for ab
normal periods— to take care of us in the day of trouble. And to
my mind, it should be penalized sufficiently so far as the extra issue
of currency is concerned, so that it would come out to help us during
panicky periods, or previously thereto; and the penalization should
be sufficient to drive it back again, so that inflation and overexpan
sion of credit may not result.
As a matter of relief, during panic periods— I want to illustrate it
from a case that I have had in my own experience. As I say, I have
been through the panics of 1873, 1893. and 1907. In 1893, during the
panic, one-half of the banks in the city of Milwaukee were absolutely
suspended.
Senator R eed. Y ou mean 1893, do you not?
Mr. F rame. Yes; 1893. We live but 18 miles from Milwaukee.
Naturally, the farmers, our depositors, some of them, became a little
uneasy and began to withdraw their money from our bank. In order
to replenish our cash on hand temporarily, until they got their second
wind, I took $100,000 of bonds and went down to the city of
Chicago
Senator R eed (interposing). What kind of bonds?
Mr. F rame. Oh, various kinds— municipal and railroad and corpo
ration— some corporation and some public-utility bonds. I sold
$50,000 worth of those bonds for cash, costing us $1.02, at 92 cents.
W e lost $5,000.
On the other hand, I took the other $50,000 of bonds, and I bor
rowed $50,000 of money and put up those bonds as collateral security.
1 borrowed this for three months. I paid a rate of 8 per cent per
annum therefor. That cost us 2 per cent for the $50,000 for the three
months.
Senator R eed. W as that net?
Mr. F rame. It cost $1,000 for interest.
Senator R eed. Oh. I see.
Mr. F rame. But the bonds which we put up as collateral security
were drawing 5 per cent. Therefore we received 5 per cent on our
bonds, they paid 5 per cent per annum, which was. for three months,
1$ per cent on the bonds that we received. Deducting that from the
2 per cent that we foaid for the three months, we only lost threefourths of 1 per cent in all on that $50,000, $375 being all that it cost
us, net, to obtain that $50,000.
The C hairm an . But you took the risk of the bonds being sold to
meet the debt, did you not?
M r. F ram e . O f course, at the end o f the time.
676
BANKING AND CUKBENCY.
The C hairm an . But, I say, you took that risk, did you not?
Mr. F rame. Yes. Panics are generally all over in two or three
months. People get their second wind, they bring their deposits back
again, securities revive, and business gets back into normal condition
again.
Now, the point I ivish to illustrate is simply this, that, in the light
of that operation, I want to see the mobilization of cash so that the
banks, when panic threatens, can take good securities and go where
an extra pot of cash lies; and I care not what the rate of interest is,
just so that I may get the cash so as not to suspend cash payments,
which is always seriously detrimental, not alone to the bank, but it is
detrimental in the stopping of the -wheels of commerce.
I f we can get the extra cash to replace that which is withrawn by
the frightened depositors we run along in the even tenor of our way,
and we do not suspend cash payments, and therefore the serious
effects of a panic are avoided by keeping the wheels of commerce
revolving and keeping labor employed. I f we suspend cash pay
ments disaster is the result. I wanted to give you just that as an
illustration of my thought on the subject, as to what I would like
to say.
The C hairm an . Y ou did not mention 1884.
Mr. F rame. W ell, that did not trouble us in our section.
The C hairm an . In some parts of the country there was a panic in
1884, but in your part of the country, I do not believe there was?
Mr. F rame. N o ; it did not trouble us.
I just want to add one other thing, if you will allow me: Before
the repeal of the free silver bill in 1893— it was about two or three
months after we had borrowed the money— our depositors had
recovered their second wind, as I call it, and brought their money
back again. W e were then in ample funds, so I went to Chicago,
with the full approval of all of the board of directors, and repur
chased every single dollar of those bonds at the very same price that
I had sold them for. So, fortunately, we did not lose anything on
the operation.
Senator R eed. A s I understand, you bought back these securities
and did not lose any money on the whole transaction?
Mr. F rame. Y es; because we got in before the public got their
T
second -wind, as to buying securities. Within the week after we
bought those $50,000 back again, the bond market was up at least 5
per cent, and within another week it was up at least 2 or 3 per cent
more, and in another month they were back into the normal condition.
I have prepared here a few pages of what appear to me to be illus
trations of the subject before us, and, without going through the
bill itself, if you will allow me to just read my views, and then if
there are any questions the committee would like to ask, I will be
very glad to answer them.
The C hairman . I f it is agreeable to the committee, I shall be very
glad to have you read them.
Mr. F rame. It will make your record a little more methodical, it
would seem to me.
The C hairm an . You may proceed.
Mr. F rame. Our battle for the world’s standard of value has been
practically won. Now the paramount economic question before the
BANKING AND CUBBENCY.
677
American people is, How can we minimize conditions which produce
panics and also ameliorate their after-paralyzing effects?
Panics undoubtedly can not be wholly prevented, because it is im
possible to change human nature; because nature is unlikely to be
less fickle in her gifts to m an; because prosperity and adversity fol
low each other as surely as the tide rises and falls; because where
the rising tide of prosperity appears and a few clear-visioned Na
poleons of finance make quick fortunes, the masses lose their con
servatism, and riotous speculation ensues, resulting often in panic.
Notwithstanding this, I am a firm believer in ameliorating panic con
ditions, both as to their frequency and severity. But how? My
answer is:
First. By studying history and profiting by the experience of the
past.
Second. By passing conservative and sound banking laws and then
enforcing them.
Third. By providing cash on sound lines to meet extraordinary
demands and immediately retiring it as soon as the pressure for funds
is over, to prevent inflation, and also to be ready for the next
emergency.
That word “ elasticity ” is a sweet morsel to play upon the
credulity of an innocent public. It has worried the political econo
mists of all ages. Its ghost still stalks forth in this enlightened day.
The disease it attempts to cure, I diagnosed in a former address as
“ Hard-up.” A large majority of the human family have an annual
attack of it, and many have it in chronic form.
Senator R e e d . What does that “ hard-up ” mean that you have just
mentioned ?
Mr. F r a m e . W ell, I call it the “ hard-up disease.”
Easy methods of issuing I. O. U .’s rather aggravate the disease, but
liberal libations of conservatism wonderfully ameliorate severe
attacks.
The Standard Dictionary epitomizes conditions leading to panics
as follows:
An undue expansion o f loans by banks; an unsound standard o f value; overextension o f mercantile credits and widespread speculation are forerunners o f
panics.
Let us never forget that confidence upbuilds and distrust paralyzes.
The blighting effect of distrust in our standard of value which was the
main underlying cause of the panics of 1873 and 1893 has given to
our people convincing object lessons more potent than pages of logic
that a 100-cent dollar is indispensable to stability and prosperity.
W ith these calamitous conditions vividly before us it would seem, to
provide an elastic currency to prevent panics, that the political
economists of all ages have wrestled with this knotty problem with
indifferent results.
To my mind the Imperial Bank of Germany comes closer to cov
ering the correct method of relief, as it can issue but 130,000,000
of uncovered currency, and all in excess thereof must pay a tax of
5 per cent thereon to the Government, and therein alone lies flexi
bility. This penalizes overexpansion of currency and credit, and is
the safety valve which has kept her overstrained condition from
exploding. Even this method has taxed her utmost powers to pre
678
BANKING AND CUBRENCY.
vent a cataclysm there, as is evidenced by the German banks borrow
ing money of the United States banks on good collateral at rates run
ning from 5 to 6 per cent clear through 1911-12. The banks of
Germany even bid 20 per cent for money in the New York market in
December, 1911, and at several periods since have bid in excess of
G per cent.
Senator P omerene. They have bid as high as 20 per cent?
Senator S hafroth. That was for call loans.
Mr. F rame. Y es; that was for call loans. But it shows that even
Germany with her flexible currency is still hard up occasionally.
Sentor P omerene. Y ou mean by that at the rate of 20 per cent
per annum?
Mr. F rame. Y es; 20 per cent per annum. O f course that is not
equal to our own experience, where we have bid up to 100 per cent.
Senator S hafrotii. 400 per cent.
Mr. F rame. But that was an extraordinary case.
Senator S hafroth. Y es; it happened but once.
Mr. F rame. And if we had a mobilized currency, in a centralized
institution, where relief could be had we never would have any 100
per cent experiences.
Notwithstanding her 5 per cent penalized flexible currency saved
her from panic, yet Germany has bordered thereon for some time,
chiefly because of overindulgence in acceptances, which are more
freely granted there than elsewhere, coupled with an enthusiastic
industrial development, overtaxing her surplus capital.
Without further preliminaries, let us proceed to diagnose certain
features of the “ proposed bill on Federal reserve banks.” I prefer
not to discuss the matter of control, and will therefore confine my
remarks to what seems to me more vital to the success of the measure.
First permit a specific reference to the effect of the “ bill ” on the
bank of which I am president, the Waukesha National Bank. Ten
per cent of $150,000 capital is $15,000; 10 per cent more, of course, is
subject to call; 7 per cent of our deposits, $2,100,000, excluding sav
ings, is $147,000; total required by the Federal reserve bank $162,000.
This exceeds our total capital of $150,000. W e probably would be
willing to part with the $15,000 for capital and also 1 per cent of
our deposits, $21,000, a total of $36,000, which, with like contribu
tions of other banks, would seem to mobilize an ample quantity of
cash to fulfill the true mission of a reserve bank, to wit, to prevent
suspension in the day of trouble by being able to loan freely to solvent
banks in any troubled section.
All other sections will then keep the even tenor of their wav
through confidence. But to be forced into parting with $147.000—
practically our total capital of $150,000— which is not subject to call,
and without interest, seems beyond reason.
Except in panic periods we never rediscount— I will say as to that,
that I have inquired in Milwaukee of one of the great banks there,
having 400 country-bank accounts: and with the close money market
last fall, only 60 banks out of 400 asked for very moderate quantities
of rediscount in Wisconsin.
Senator P omerene. There is a sort of public prejudice against them,
now; but assuming that the system is changed, do you not think that
that prejudice would die?
IL
M
BANKING AND CURRENCY.
679
Mr. F rame. I do not think so. And probably we had better pass
that, as I have some thoughts I should like to express on that subject
later.
Senator P omerene. A ll right. I did not want to interrupt you.
The C h airm an . W ill you put into the record here, Mr. Frame, the
present reserves which you carry?
Mr. F rame. The present reserves which we carry?
The C hairm an . In your bank.
Mr. F rame. D o you mean in amount of cash ?
The C h airm an . In percentage.
Mr. F rame. In toto?
The C hairm an . Your total present reserves.
Mr. F rame. O f cash and due from other banks?
The C hairman . Yes.
Mr. F rame. W e average about 18 to 20 per cent.
Senator P omerene. That would make, if your total deposits are
$ 2,000,000-------
Mr. F rame (interposing). $2,100,000.
Senator P omerene. That would make your reserve, then— —
The C hairman (interposing). $420,000.
Mr. F rame. W e keep about that as an average.
Senator P omerene. And what were your figures which you men
tioned just now as to cash reserve and subject to call?
Mr. F rame. It would take $162,000 under this bill, and we keep on
hand about $150,000 of cash.
Senator R eed. W ell, when you said you had approximately
$400,000 of reserve, you did not mean that you kept that all in your
bank ?
Mr. F rame. W e keep $150,000 in cash, and the $250,000 due from
banks in Milwaukee, Chicago, and New York.
Senator R eed. Yes.
Mr. F rame. S o that as to most of the banks in Wisconsin, under
the suggestion which I made before, although there was a close
market last fall, there were 340 out of 400 that did not ask for
rediscount. I can understand that in the South they require more
rediscount than we do in our well-settled section and in other wellsettled sections of the country.
Most country banks do not have the kind of paper acceptable at a
reserve bank, therefore the arbitrary call for 7 per cent of deposits
from country banks beyond recall seems far beyond reasonable re
quirements and a burden that they can not afford to bear. Country
national banks now hold at least 6 per cent of deposits in cash. In
fact, they hold about 7 per cent in Wisconsin.
Senator P omerene. National banks, or all banks?
Mr. F rame. National. National banks must necessarily hold 1 or 2
per cent more, of course, than the law requires, for there are fluctua
tions all the time. The new bill requires 5 per cent. This is a reduc
tion of 1 per cent. Therefore, to take 6 per cent additional from them
requires withdrawals from other income-producing funds.
This
seems, to my mind, clearly unjust and unnecessary.
How will the bill affect all Wisconsin banks? Now, this, of course,
is an extreme case, because I have included them all. But taking
those who do join as against the whole the result would be propor
tionately the same.
I
680
BANKING AND CUKRENCY.
Senator R eed . D o you mean all national banks?
Mr. F r a m e . I mean all national and State banks, as a matter of
illustration.
Senator R eed . Yes.
Mr. F r a m e . I f all joined, this bill would require 10 per cent of the
total capitals of $3,800,000. They would be subject to call for
$3,800,000 more, 7 per cent from country and 9 per cent from M il
waukee reserve city banks, barring savings deposits, $21,000,000;
total, $24,800,000.
A ll banks in Wisconsin now hold in total cash 5§ per cent of de
posits, $21,000,000.
The new law compels banks to hold at least 5 per cent, and the
three-quarters of 1 per cent extra would be necessary to cover daily
fluctuations of cash. Therefore to comply with this new law, other
income-producing funds, all of which will come out of Wisconsin,
or securities, must be parted with to the extent of, say, $25,000,000,
all of which would go out of Wisconsin into a Federal reserve bank
at Chicago. Is that fair to the farmers, the merchants, and manu
facturers of Wisconsin? To rediscount at the Federal reserve bank
at Chicago, banks must simply part with their choicest securities,
losing interest thereon, for the doubtful privilege of borrowing back
their own funds which they deposited there. W ill the Wisconsin
banks voluntarily do it? The answer is found in my canvass of 450
country banks of Wisconsin under the former bill, which called for
5 per cent of deposits. The amended bill calls for 7 per cent, which
is 2 per cent more burdensome than when the canvass was made.
I sent about 450 banks the following question:
W
au kesh a
N a t io n a l R
ank
.
Waukesha, W is , July, 1918.
R rother B a n k e r : A s the new Federal reserve bank bill (H . R. 6454 or S.
2039) is now before the country for consideration, I have tried to diagnose it,
and without considering other points am anxious to secure a consensus o f opin
ion from Wisconsin bankers on the follow in g:
The bill provides that each national bank sh a ll:
First. Subscribe 20 per cent o f its capital stock as capital for the Federal
reserve bank; 10 per cent must be paid in on join in g ; 10 per cent is subject to
call o f the reserve b a n k ; dividends paid on capital are limited to 5 per cent per
annum.
Second. Each bank must pay 5 per cent o f its deposits into the Federal re
serve bank, on which no interest will be paid, and such deposit is not subject
to withdrawal at any time.
Third. Each bank must keep not less than 5 per cent o f its deposit liabilities
in cash on hand.
CONTRA.
The advantages to be derived therefrom appear to be the limited right to
discount with the Federal reserve b a n k :
(a ) Notes and bills o f exchange arising out o f commercial transactions,
maturing within 45 days.
That was under the other bill. The bill provides for paper matur
ing within G days now.
O
The C hairman . Y es; and up to 120 days.
Mr. F r a m e . Y es; up to 120 days. Then it was 45 days.
( b ) Loans running not over four months, secured on bonds o f the United
States. States, counties, or municipalities.
(c ) Acceptances based on imports and exports.
(d ) Loans on collateral satisfactory to Federal reserve board.
BANKING AND CURRENCY.
681
Considering the advantages in contrast to the disadvantages, would your bank
voluntarily join this Federal reserve-association?
Sincerely, yours,
A ndrew J a y F rame . President.
Out of the 450 letters sent out I have received up to this date
about 320 answers. One small country national bank, with $25,000
capital, and one small State bank, with $25,000 capital, answered
“ yes,” without qualification. Nine answered “ yes,” but expected
the bill to be more or less modified.
Senator S hafroth. H ow many were there who answered that?
Mr. F rame. There were 9. Out of 320 banks 309 answered “ no.”
Senator P omerene. H ow many is that who answered “ no.”
Mr. F rame. There were 309. I left out the Milwaukee city
bankers, and therefore they were all country bankers.
Senator P omerene. Did they assign any reasons?
Mr. F rame. About 30 or 40 of them gave short or long reasons;
but the general tenor of the reasons that were given was that they
could not see their way clear to putting up 5 per cent of their de
posits. They thought that was excessive and unprofitable to them;
it seemed too much.
Senator P omerene. W ill it interfere with you if I ask a question
there ?
Mr. F rame. N o.
Senator P omerene. Are you able to state what the average divi
dends are on your bank stocks in Wisconsin?
Mr. F rame. N o ; I could not.
The C hairman. On your own bank, what would they be?
Mr. F rame. On my own bank we make an average of about 8 per
cent, I guess, of our capital and surplus.
The C hairm an . W hat is your surplus?
Mr. F rame. $150,000 now.
Senator P omerene. W ell, yours must be, from your statement, one
of the unusually successful banks; and yours is about the equivalent
of 16 per cent on your capitalization.
Mr. F rame. N o ; I said capital and surplus.
Senator P omerene. But 8 per cent------Mr. F rame (interposing). On capital and surplus.
Senator P omerene. W ell, I know; 8 per cent on the two.
Mr. F rame. Yes.
Senator P omerene. Or 16 per cent on the capitalization.
Mr. F rame. It would be about 16 per cent on capitalization. But
we have been in business now for more than 50 years.
Senator P omerene. Y es; I understand that.
Mr. F rame. It has been a long accumulation; slow.
Senator P omerene. I understand that. Is it fair to assume that
the average dividends on these banks are about 6 or 7 per cent?
Mr. F rame. I think a little bit higher than that.
Senator P omerene. 8 per cent ?
Mr. F rame. S o far as national bank dividends are concerned,
since 1863— 50 years— I think they would average 84 per cent.
Senator P omerene. W ell, assuming that it was 7 per cent. I sug
gest that, because I do not think yours is any criterion by which
we can judge any other banks, by your statement.
Mr. F rame. I think it a fair criterion.
682
B A N K IN G A N D C U R R E N C Y .
Senator P omerene. S o that the stockholders would only be re
ceiving 2 per cent more of dividends on their stock in the banks as
now organized than they would receive on that portion of their
capital which was invested in the stock of the regional banks?
Mr. F rame. The fund which is put in by the different banks as
stock for the regional reserve banks, as far as I am concerned. I
can find no special fault with that, because I would be satisfied with
5 or 6 per cent on that.
Senator P omerene. Y ou would be just as much satisfied as you
would be with a Government bond, and even more satisfied, because
the income would be better.
Mr. F rame. I do not find any fault with that.
Senator P omerene. N o ; I do not think there can be any fault
found with it. Your objection goes to the amount of the reserve.
Mr. F rame. The percentage of deposits which are called for.
Senator P omerene. Yes.
Mr. F rame. T wo per cent even on our $147,000 would make nearly
$3,000 a year— just that 2 per cent alone would cut off 2 per cent per
annum on our dividends.
Senator P omerene. W ell, I am interrupting your statement here,
and I regret having done so.
Mr. F rame. That is all right to get it in here if it will be of any
assistance, of course.
Senator R eed. Mr. Frame, have you finished that point about the
canvass of the banks in your State?
Mr. F rame. Yes, sir.
Senator R eed. Then, I should like to ask you now if you think
that the question which you sent out, together with the explanation,
was a fair presentation of the advantages of the bill?
Mr. F rame. It seemed to me to be so.
Senator R eed. W ell, did you anywhere state, Mr. Frame, that it
was part of this plan, that when money was needed the reserve bank
could transfer to the Federal Government the securities it had on
hand and receive money at a low rate of interest, the money in turn to
be distributed to the member banks; did you state that proposition
to them?
Mr. F rame. I thought it was covered in the question of redis
counts. I so understand it. It has the privilege of rediscounting at
any time.
Senator R eed. And you think that covered it?
Mr. F rame. I think so.
Senator R eed. N ow, did you send anything else than just that let
ter, the substance of which you have read to us?
Mr. F rame. N o, sir.
Senator R eed. Y ou made an attempt to fairly state the case and
secure an expression of opinion, did you ?
Mr. F rame. That is what I tried to do.
Senator R eed. D o you know whether these bankers to whom you
wrote, or any considerable number of them, had really taken the bill
and studied the bill?
Mr. F rame. Y ou have asked me a question that it would be rather
difficult for me to answer.
BANKING AND CURRENCY.
683
Senator R eed. W ell, I would not expect you to answer it, except
that you might, by conversation, or by letter, have gathered knowl
edge of the fact that they were familiarizing themselves with the
bill, or that they were simply acting upon the statements contained
in your letter.
Mr. F rame. W ell, I think that more or less of them had studied
the subject somewhat, but not thoroughly.
Senator R eed. N ow , have they had any meetings, the bankers of
your State, since you wrote this letter ?
Mr. F rame. Yes, sir.
Senator R eed. Have they discussed this bill in the meetings?
Mr. F rame. Yes, sir.
Senator R eed. What has been the character of those meetings; I
mean have they been general meetings of the bankers, or only small
groups of bankers?
Mr. F rame. I sent general invitations to all of the national bankers,
but not to the State bankers, because it is voluntary with them
whether they come in under the bill or not.
Senator R eed. Y ou sent out invitations to a meeting?
Mr. F rame. Yes, sir.
Senator R eed. Did you have that meeting?
Mr. F rame. W e did; and nearly 30 of them attended, from different
sections of the State.
Senator R eed. Where did you hold that meeting?
Mr. F rame. At Milwaukee.
Senator R eed. And you got in about 10 per cent, then, of the
national bankers?
Mr. F rame. N o ; we got in more than 20 per cent.
Senator R eed. Y ou got in more than 20 per cent?
Mr. F rame. Yes, sir.
Senator R eed. The meeting was pretty generally attended from
all parts of the State?
Mr. F rame. They came from the West, clear across to La Crosse,
Oshkosh, Fond du Lac, and other sections of the State.
Senator R eed. S o that you would say that the meeting would be
fairly representative of the State at large, and not of a particular
section of the State?
Mr. F rame. Yes, sir.
Senator R eed. Mr. Frame, did you adopt any resolutions, or do
anything at that meeting?
Mr. F rame. W e did; and the resolutions are here.
Senator R eed. Ah, well, I did not know that. So that you have
a later expression of opinion than that contained in your letter?
Mr. F rame. Yes, sir.
Senator R eed. Can you tell us, without putting your record in at
this time what that expression of opinion was as to the banks com
ing in or staying out of this plan?
Mr. F rame. W e passed resolutions; and if you wish I can read
them.
Senator R eed. W ell, I would like to have them read into the
record here, because it is on the same topic. Are they long?
Mr. F rame. N o ; just one page.
9328°— S. Doc. 232, 6 3 -1— vol 1------44
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BANKING AND CURRENCY.
Senator R e e d . W ell, could you read the part in which they express
their opinion as to coming in or staying out?
Mr. F r a m e . Yes, sir.
Resolutions as passed by the country national banks o f Wisconsin.
Whereas a conference under the auspices o f the currency committee o f the
American Bankers’ Association was recently held in Chicago which confer
ence failed to adopt suggestions made by country bankers to reduce Federal
reserve bank deposits required o f country banks from 5 to 1 per cent o f their
deposits; at the same time this conference recommended material reductions
as to reserve city banks’ reserve requirements, which recommendation has
since been incorporated in the bill. Further, such a reduction o f reserves by
the central reserve city banks is no burden to them as against a severe burden
as placed upon the country banks, which the latter can not afford to bear,
because their cash reserves are proportionately sm aller; and
Whereas the bill as drawn has many admirable features, yet we as country
bankers believe several amendments are very essential: Therefore,
Resolved, That we urge upon Congress the follow ing essential principal
changes, v iz:
(a ) So amend the bill that country banks not in reserve cities be compelled
to contribute not exceeding 2 per cent instead o f 5 per cent plus 2 per cent at
end o f three years o f deposit liabilities for the reserve o f Federal reserve banks.
(ft) As section 27 o f the bill (creating savings departments) provides for
a segregation not only o f securities covering the savings deposits but a segre
gation o f capital to an amount equal to 20 per cent o f capital and surplus; but
capital can not be less than $25,000, and, requiring investment o f such demand
deposits in long-term securities, which we believe wrong in principle, and not
offering such security as is now offered savings depositors, we urge this section
be eliminated from the bill.
(c ) That the term o f real estate loans be increased from one year to five
years.
(d ) That dividends allowed reserve bank stockholders be increased from 5
to 6 per cent.
(e ) That the 40 per cent o f excess earnings allotted to banks be divided among
them on the basis o f capital stock in reserve banks instead o f on average de
posits therein.
( / ) That banks be allowed the same interest on deposits as is allowed upon
Government deposits.”
That concludes the resolutions.
Senator R eed . W ell, I think that concludes the topic you were on,
and I do not wish to interrupt you any more than is necessary.
Mr. F r a m e . I just wanted to explain that point as to this savingsbank question. As you understand, country banks, of course, only
have one of two employees in their office, and it is exceedingly dif
ficult to segregate and keep two sets of books, and two banks really—
and there is the double capitalization. That was one of the most
serious objections to the bill; of course, I mean as far as country
banks are concerned. I can, of course, understand that a segrega
tion of the large banks in cities is all right, but as far as country
banks are concerned, it is rather a troublesome proposition. Then,
because national banks have capitalization, Government regulation,
limitations on loans, and all that kind of thing, which is proof that
we have got a wonderfully fine banking system, so far as safety is
concerned, we thought that was ample security for savings-bank
deposits.
But let us broaden into all United States national banks. Ten
per cent of $1,050,000,000 approximate capital calls for $105,000,000.
They are subject to calls for $105,000,000 more. Four and one-half
per cent from central reserve city banks’ aggregate deposits, say,
BANKING AND CURRENCY.
685
$2,000,000,000, is $90,000,000. Nine per cent from general reserve
city banks’ deposits of $2,250,000,000 is $202,500,000. Seven per
cent from country banks’ deposits of $3,750,000,000, aggregate, is
$262,500,000. Total called from the three different kinds of banks,
$660,000,000.
I allow off from this, for deductions as against requirements on
savings-banks deposits, say, $60,000,000, leaving a net call on all the
banks of $600,000,000 from national banks alone, not counting United
States deposits, nor from a single State bank in the country.
To loan two-thirds of this $600,000,000, which the bill permits in
normal times even, is simply competing for choice loans which all
banks are nowT clamoring for, and with the very banks that furnish
the funds without interest therefor. When so loaned the reserve is
gone. Such colossal demands are not paralleled in the world’s his
tory on banking.
To take away from the national banks alone more than one-half
of their total capital seems beyond the pale of reason. W ith over
25,000 independent banks in the United States, we now have the most
democratic banking system in the world. The national banking sys
tem has proved the safest for the depositors the world ever knew.
The State systems, under improved laws in most States, in the past
15 years have made wonderful strides upward.
I f I may stop a moment on that question of the national banking
system being the safest for depositors ever known, I will say that
within the last 50 years, with the immense business of the national
banking system, the total losses to all the depositors in the half cen
tury of business does not exceed $40,000,000. The City of Glasgow
Bank, in Great Britain, failed in 1878, with 131 branches. It had
$70,000,000 of deposits and its losses were about $35,000,000— almost
the total losses to all the depositors in all the national banks of the
United States from 1863 to the present.
Senator B ristow. W hat per cent of the deposits do the losses rep
resent in that 50 years? Have you figured that out?
Senator S hafroth . It is said to be less than one-tenth of 1 per
cent.
Senator B ristow. Is it not about one-fortieth of 1 per cent?
Mr. F rame. I can not answer that offhand. I used to be a kind
of walking encyclopedia on this subject; but I am getting along in
years, so that the figures slip my memory.
Senator B ristow. I think it is less than one-twentieth of 1 per cent.
Mr. F rame. But it is a healthful condition, all said.
Senator R eed. W ell, you do not seem to think that we have got
the poorest banking system in the world, then?
Mr. F rame. That is a broad statement that can not be verified. I
am willing to stand up and debate it with any man on the face of
the earth. I think I have proof in my papers, for I have been on
platforms delivering addresses for 25 years. I have addressed nearly
half the State bankers’ associations of the United States, the Amer
ican Bankers’ Association, bankers’ clubs, and business men’s clubs
all over the country, and therefore I have given the matter quite
careful study, not only of our own system, but of the rest of the
world— at least the progressive world. I have not gone into the
unprogressive nations.
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BANKING AND CURRENCY.
Again, in 1893, I think it was, in Australia they had 28 cen
tral banks with 1,700 or 1,800 branches. In that year, within six
months, 13 of those 28 principal banks failed and, with 800 or 900
branches, closed their doors. The Government of Australia per
mitted them to take from one to five years in which to settle with
their depositors. They did recover, but with quite a few of them
it was a number of years before any dividends were paid. So that
there is a branch-bank system in Australia that was far more disad
vantageous than the splendid system which we have had, if we can
only cover that one point— to prevent the suspension of cash pay
ments. It is the only serious defect in our system, in my judgment.
I say, as to our banking system, that both State and national sys
tems have done more for the farmer, the merchant, and the manu
facturer in upbuilding this wonderful Nation than any monopolistic,
branch-banking, cream-skimming system ever did for any Nation.
Senator R eed. W hat kind of system?
Mr. F rame. Cream skimming. I would like to illustrate, if you
will permit me.
Senator R eed. I thought you had given a phrase that I understood.
Mr. F rame. I should like to give an illustration as to the Canadian
banking system. Perhaps, however, I had better pass that for the
present, and, if you will allow me, to explain what I mean by the
cream-skimming system, I will do so later.
Senator R eed. Y es; I wish you would.
Mr. F rame. The only thing we need is a moderate mobilization of
a part of our scattered cash reserves, which should be held like a full
reservoir to put out a fire in its incipient stage whenever it appears.
As panics are bred only in great cities care for them once in 10 or
20 years, and the country will care for itself in normal times.
As to the fallacy that all other nations are free from panics, I
respectfully refer to my late Oklahoma address, entitled “ Facts v.
Fallacies in Banking Reform,” pages 4 to 7, and I am impressed
that the most skeptical will accept the evidence as conclusive.
Senator R eed. N ow , you are referring to something that may be
interesting. Have you that here with you?
Mr. F rame. I have it here.
Senator R eed. I f you are going to refer to it, I suggest that you
put it iii the record.
The C hairm an . Y es; I think that would be well. Let it go in.
Mr. F rame. W ell, then, if I give an explanation of it, perhaps
there is no occasion for me to make any further record of it.
Senator R eed. I f you are going to read it in. why not do so, and
let us hear it while you are upon the subject? How long is it?
Mr. F rame. It is perhaps 8 or 10 pages.
Senator S hafroth . Y ou could read that without quoting all of it,
could you not?
The C hairm an . Just a part of it.
Senator R eed. The part that you have referred to, Mr. Frame.
Senator S hafroth . W ell, I think he had better get through with
this statement of his first.
Senator R eed. W ell, you have referred to a document as proof of
the fact.
BANKING AND CURBENCY.
687
Mr. F rame. A s proof both as to this question of panics and as to
the Canadian banking business. They are both in the pamphlet. I
think it would be better to put both in.
The C hairm an . W hat is the pleasure of the committee?
Mr. F rame. It also covers the banks abroad.
Senator R e e d . W ell, if you have got two different subjects there,
I did not understand that. It seemed to me that it should be put in
the record differently. I supposed that you had some documentary
evidence of the assertion you have just made as to panics.
The C h airm an . The statement to which he has referred is an
argument previously made by him.
Mr. F rame. The part in reference to panics is covered in pages
4 to 7.
Senator R eed. W ell, is there not a table in that book showing the
different panics?
Mr. F rame. Yes, sir; the panics in this country and abroad.
Senator R eed. Suppose you put that table in and then you can put
the whole thing in, possibly.
The C hairm an . Whatever is agreeable to the committee is agree
able to the Chair.
Senator S hafroth . I think we had better let Mr. Frame put in
that pamphlet wherever he wishes it to go.
Mr. F rame. There is little in the paper outside of those two sub
jects which I have already touched upon.
Senator S hafroth . D o you want it to go in right now or do you
want it at the end of your statement?
Mr. F rame. It had probably better go in as an addenda to my
statement.
The C h airm an . Very well ; it will be inserted in the record.
(The paper directed to be incorporated into the record appears at
the close of Mr. Frame’s statement.)
Mr. F rame. I now refer to national-bank reserves, approximately,
at the end of three years, as required. I wish you to note what ap
pears to me to be an unjust discrimination toward country national
banks. First the three central reserve city banks must contribute 10
per cent of capitals on, say, $180,000,000, which is $18,000,000, sub
ject to assessment of $18,000,000 more; 4£ per cent of aggregate de
posits— say, $2,000,000,000, which would be $90,000,000. making the
total required of three central reserve city banks $108,000,000.
As these banks are now required to hold in cash 25 per cent of
deposits, and the new bill reduces it to 18 per cent, that releases in
cash 7 per cent of deposits from the central reserve city banks, or
$140,000,000. This costs them not $1 and leaves $32,000,000 toward
liquidating any reduction of other reserve-bank deposits, the burden
of which is problematical.
The fact is that it really relieves them about $50,000,000 because
the $18,000,000 that they contribute to capital they get dividends
on. It is a mere transfer of their funds of $18,000,000 of ordinary
loans for which they would receive 5 per cent dividends on stock in
the Federal reserve banks. It would be a fair exchange. Trans
ferred in that way into capital stock, it would pay them about the
same, except that it takes $18,000,000 out of their funds, which they
ordinarily might use in other lines. That, however, is a small matter.
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BANKING AND CURRENCY.
Second. The general reserve city banks must contribute 10 per
cent of capitals on, say, $270,000,000, which is $27,000,000; subject to
assessment of $27,000,000 more; 9 per cent of aggregate deposits, say,
$2,250,000,000, which is $202,500,000; making a total required
$229,500,000.
The present law requires 12| per cent cash reserves. The new bill
requires 9 per cent. That releases in cash 3^ per cent of deposits, or
$78,750,000. This takes from them over $150,000,000, in addition
to the country bank deposits they will lose, from those joining the
Federal reserve bank. This burden is a serious one and probably will
precipitate trouble.
Third. The country banks must contribute 10 per cent of capitals
on, say, $600,000,000, which is $60,000,000; subject to assessment of
$60,000,000 more; 7 per cent of aggregate deposits, say $3,750,000,000,
which is $262,500,000. This makes the total from country banks
$322,500,000. Cash reserves now required is 6 per cent; in the new bill
5 per cent. This releases 1 per cent of deposits, or $37,500,000. This
means the country banks must contribute, net, $285,000,000 from their
assets, in addition to $37,500,000 cash, for the use of the Federal
reserve bank. The balance of cash on hand is required under the new
bill for reserves. The only deduction I can see is to cover savings
bank deposits of, say, one-tenth of the total.
Now, can any statesman justify such calls, especially from the coun
try and general reserve city banks? This transfers immense sums
to the great cities and impoverishes the country banks’ loaning
powers. Is it constitutional to arbitrarily take such colossal sums
from the banks ? Stock subscriptions and deposits in European cen
tral banks, I believe, are entirely voluntary. W hy not do likewise
here ?
I am with you, except only I think that it is excessive. I believe
in the underlying principles of the bill.
W e all desire a reasonable mobilization of cash to the end that cash
suspension of banks may be avoided, but such calls seem far beyond
reason to accomplish the object sought. Reason must reign, or a
continual warfare for a repeal of the bill will bring a second Andrew
Jackson to destroy these banks.
W hat we want to do is to work in harmony together. W e want it
so reasonable that we can afford to go into it even if it should cost
a little to go into it. I am willing that it should; I believe all banks
are willing that it should; but I believe you should do what seems
fair and not oppressive.
From my canvass of 450 country banks of Wisconsin, the result of
which is herewith submitted, I am confident if country national banks
contribute 10 per cent of capitals and 1 per cent of deposits, approxi
mating $100,000,000, it is all that should be required of them. To
demand more, I believe, will seriously injure if not wreck the system,
and State banks will not join.
I respectfully submit herewith a tentative compromise plan, which
should be acceptable to the Government, as it covers the underlying
principle of the bill, and probably would be acceptable to the banks.
The object sought would also be attained. Let us get together and
preserve our splendid independent banking system.
I now come to the tentative suggested amendments to House bill
7837 on Federal reserve banks.
BANKING AND CURRENCY.
689
The reserves: National banks are now compelled to hold in cash
as reserves, in three central reserve cities 25 per cent of deposits,
in general reserve cities 12^ per cent of deposits, and in country
banks 6 per cent of deposits. I would amend as follows, in order
to mobilise cash for troublous periods:
Take o per cent of deposits from the 25 per cent held by three
central reserve cities, say, $85,000,000; take 2£ per cent of deposits
from the 12£ per cent held by general reserve cities, say, $50,000,000;
take 1 per cent from the 6 per cent held by country banks, say,
$35,000,000.
I may be low on my estimate there.
This will mobilize in cash about $170,000,000. This is not count
ing a percentage of deposits of banks with reserve banks. I do not
make any compilation on that, but the new bill requires these per
centages on aggregate deposits; so that it will require not only on
individual deposits but on banks with banks. I am sure I am right
about that; so that it will increase this probably to $200,000,000.
This is taking just one-fifth, approximately, of the cash now held
by each of the different kinds of banks— three central reserve cities,
general reserve cities, and the country banks.
I f 5 per cent and 2£ per cent, respectively, of these were included,
it would increase the mobilized reserve of cash to, say, $200,000,000.
The 5 per cent, 2£ per cent, and 1 per cent cash taken from present
reserves should be still counted by depositing banks as reserves
while it is in the Federal reserve bank, and would leave ample cash
in all banks for ordinary times. The country banks can not afford
to part with 7 per cent of their deposits for use of the Federal re
serve bank.
It seems reasonable that the banks would accede to this, as it is
not seriously burdensome to part with, say, one-fifth of their cash,
as they would have the assurance that the cash mobilized in the
Federal reserve bank would assist any section of the country when
trouble threatens. This would inspire confidence. State banks in
well-developed sections would be inclined to join under these con
ditions, and, if done in great centers, the $200,000,000 reserve would
be materially enlarged. I f capitals paid in and Government deposits
were added, the reserve funds would probably exceed $350,000,000,
which is ample for all reasonable requirements.
I think I am materially within the mark, as I want to be careful
of my statements.
As a secondary relief for emergencies, permit State as well as
national bank members to borrow from the Federal reserve bank,
secured by ample high-class collateral from a fund of Federal re
serve bank notes held for that purpose. Such currency should be
loaned on a plan similar to the 5 per cent taxed currency issued by
the Imperial Bank of Germany, which gives true flexibility there.
I will say that in the past 35 years the Imperial Bank of Germany
has loaned its 5 per cent taxed currency to the other banks on re
discounts some 200 times. It comes out when there is a pressure for
funds, rises sometimes higher or lower, as the case may be, and just
the moment the rate of interest drops a little below or down to normal
the 5 per cent taxed currency is retired.
Senator R e e d . When it touches 5 per cent it comes back pretty
fast.
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BANKING AND CURKENCY.
Mr. F rame. That is what brings flexibility to it. Flexibility means
expansion and contraction. I f you do not have expansion and con
traction, you will never have flexibility. You must have contraction
which comes with it. That is the experience of Germany.
As to capital, say 10 per cent subscribed and 5 per cent paid in,
that would add $50,000,000. As to banks generally subscribing 20
per cent and at once paying in 10 per cent of their capitals, as capital
for the Federal reserve bank, and receive dividends limited to 5 per
cent per annum paid on capital, it is doubtful about country banks in
undeveloped sections joining, as interest rates w ould‘ naturally
prevent.
Banks where surplus capital is not abundant and their own home
demands require it— and at higher rates than the 5 per cent— would
think it quite hard to have to part with it simply for the purpose of
getting the rediscounts for relief in panic periods once in 10 or 20
years. I f the present centralized institutions could obtain relief
when needed, all other banks would get all accommodations and relief
necessary through the present system of central reserve depositories.
I f our credit is good with the banks with which we do business in
Chicago, Milwaukee, and New York, we can always get a rediscount,
and if we had a Federal reserve bank with a mobilized lot of cash
ready to take care of them, we would never have a suspension of
cash payments.
I f we had had a Federal reserve bank in New York in 1907 when
the depositors were pulling funds out of the trust companies that
first got into trouble, and then it spread to other banks through
distrust and generally cash began to be lowered, all the banks got
together for fear they were going to lose all their cash. They de
cided to suspend cash payments and wired to all the banks through
out the country, “ No cash going out of New York Monday morning
on balances.” Those banks in New York which were perfectly good,
like the National City Bank, the First National, the Chase National,
held limited reserves. I f they could have had a pot where they could
have got rediscounts on securities from some extra cash reservoir
they never would have sent such a telegram throughout the country
and we would have gone along the even tenor of our way about the
business of the country.
Senator P omerene . That is, they kept the money for their own use
and let the country bankers outside take care of themselves?
Mr. F ram e . W ell, I think that was justifiable. They only had
limited reserves. I f they could have had a pot where they could
have gone to; if they could have had a pot like the Aldrich-Vreeland
Act now upon the statute books provides for------Senator P omerene . That fact alone indicates the necessity for
some change in what you call the beautiful independent banking
system.
Mr. F rame . It is all right, except for that one feature, a rigid
currency. I said that in the beginning; but as far as the general
banking system itself is concerned I think it is all right.
Senator P e e d . Y ou think it is not necessary for a man to sur
render his liberty as a citizen in order that he may have some special
advantage conferred upon him once in a while by the Government?
Mr. F rame . That is the thought; but I think the scope of the hill
is too large and more than is really necessary to accomplish the
BANKING AND CURRENCY.
691
object sought. That is the important thought. I believe in the un
derlying principles of the bill, as we want relief so that we need
not have cash suspension; but I do not believe in such generous, large
contributions; I do not believe that is necessary to accomplish the
object sought.
Senator B ristow. N ow , suppose that bank in trouble in 1907 could
have gone to the Government with approved securities and got cur
rency for them as it needed it without any of this supervising ma
chinery to lie dormant here for so many years?
M r. F rame . Y ou mean to have gone direct?
Senator B ristow. Y es; to have gone direct. W hy would not that
have answered the purpose just as well?
Mr. F rame. From a fund that the Government held? Is that your
idea?
Senator B ristow. Yes.
Mr. F rame. And how would that fund be accumulated or loaned?
Senator B ristow. It would be divided just as the money we have
now under the Aldrich-Vreeland Act.
Mr. F rame. Y ou would have a large fund of cash in some reservoir,
retaining it and loaning it when panic or trouble ensued?
Senator B ristow. W ell, we would have it if it is needed.
Mr. F rame. I believe in that; but I would penalize it by a tax suffi
ciently high, because if you do not do that, as long as you can issue
currency at will, without a tax, and loan it at high rates of interest
you tend to overstrain credit.
Senator B ristow. Y es; that is true, of course. That is a question
of the amount of the tax.
Mr. F rame. That is a question as to how high the tax should be.
Senator B ristow. The Aldrich-Vreeland Act provides for taxation,
and the objection to it, as I understand it, is that it is not made avail
able with sufficient ease. The objection is not so much against the
interest as to the methods by which it may be utilized.
Mr. F rame. I agree with you perfectly on that; yet, at the same
time, before a bank would suspend I think it would put up the bonds
as collateral security. W e hold $100,000 of bonds to-day; we have
held them since that bill was enacted into law. Eighty banks in the
State of Wisconsin hold bonds they purchased for the purpose
of getting additional currency under the Aldrich-Vreeland Act should
occasion require. They hold it as a kind of secondary reserve, and if
it came to the point that it was absolutely necessary to do so to pre
vent cash suspension we would put up our bonds and get our cur
rency. There has been, as Prof. Sprague said, a sentimental protest
against it because of its publication. I f it could be done, and done
quietly, without making a noise about it through the public press— if
you can arrange in some way so that that can be done I think it will
be availed of. Other rediscounts with present central organizations,
in normal times, are ample.
Senator B ristow. S o that the public would not get the impression
that the bank had had financial trouble?
Mr. F rame. Exactly.
Senator B ristow. S o that no other view of this could be taken
except that it was simply a business move and not an indication of
danger?
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BANKING AND CURRENCY.
Mr. F rame. That is right exactly. You were not here when I com
menced my statement and spoke of how I got relief in 1893. I re
gret that you were not.
Senator B ristow. I will be glad to read it when it is printed in
the hearings.
Senator R e e d . N o w , about the money which was provided for by
Aldrich-Vreeland bill. It has never been used, but since 1907 we
have never had any very bad times, have we ?
Mr. F rame. It has been a little close this fall but not to the ex
treme that it has compelled banks to take advantage of it. I believe
that nearly $300,000,000 of capitalization of the banks of the United
States, principally in the great cities, have organized under the
Aldrich-Vreeland Act to take advantage of it in case of necessity,
and the kindness and goodness of our Secretary of the Treasury in
saying that he proposed to issue that if it became necessary and his
disposition of the extra funds that he has distributed throughout the
country has restored a condition of confidence, and loss of confidence
is what produces panic. Confidence upbuilds, distrust pulls us down.
Again, country banks rarely have the kind of prime paper dis
countable at the contemplated reserve bank.
Take care of the big centers in trouble, and the country will never
be seriously agitated.
A Federal reserve bank on above lines in New York, Chicago, and
San Francisco, will fully accomplish the end sought without vast
expense.
I f my suggested tentative amendments as to reserves as herein
before noted were adopted, to my mind you will fully accomplish
the objects sought and without material expense, as it could be done
through present subtreasuries. A large number of Federal reserve
banks would be very expensive in outfits, managements, employees,
etc. Therefore three subtreasuries now doing business would limit
the cost. In ordinary times the present central reserve banks will
take care of us all right, just as they do now, but occasionally in a
hard money market these three subtreasuries would assist any section
of the United States without any trouble whatever. The First Na
tional Bank of Chicago has its correspondents scattered from one end
of the Northwest to the other, clear over to Washington, Oregon, and
California. I f that bank is asked for a rediscount, it knows whether
to make it or not. Therefore there is no difficulty in a few centralized
organizations taking care of our vast country as a panic panacea.
Senator R eed. Y ou hold that the banks o f to-day have intimate
knowledge o f the business o f banking and the solvency o f their cor
respondents ?
Mr. F rame. Central reserve banks keep credit bureaus so that they
keep tab on country correspondents.
Senator R eed. S o that they are able to determine what paper they
shall take, and they do that without assistance from the Govern
ment in the way of governmental inspection of the paper?
Mr. F rame. Yes.
Senator R eed. I do not mean of the banks.
Mr. F rame. Yes, sir; I think so; wiihout any trouble.
I would like to speak just a moment or two upon the gold standard
under the bill.
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693
Great Britain, since 1816, unequivocally maintained it, and London
is the world’s clearing house.
W e have fought the good fight for the gold standard for 40 years
and won.
Our coin and currency holdings are now plethoric. As we have
in gold about $1,800,000,000, soft money, national-bank notes, silver
dollars, legal-tender notes, and subsidiary coin; about $1,800,000,000,
total, say, $3,600,000,000.
About one-half of our total circulation is “ flat money.” Far in
advance of all Europe combined.
This “ bill ” permits an unlimited issue of currency above that now
outstanding. The bill also provides for Federal bank reserves, either
“ gold or lawful (credit) money.”
Dr. Adam Smith says:
The cry o f all ages is for more money. Money, like wine, is always scarce
with those who have neither the credit or wherewithal to buy it.
Christ said:
A wise man builded his house upon a rock, but the foolish man upon the
sand. When the rain descended and the floods came and the winds blew the
wise man’s house fell not, but as to the foolish man’s house great was the fall
thereof.
Is not this a perfect simile to apply to the building up of the
superstructure of our great credit system upon a sound metallic
currency for a foundation as against the sands of a credit currency ?
The pages of history are strewn with proofs that when the great
instrument of exchange is deranged all trade, all industry, is stricken
as with a palsy. That instrument of exchange recognized by the
world as the solid foundation that does not totter when the storm
rages in its severest intensity, is the only foundation for a prosperous
people to rest upon and to-day our coffers hold over a billion of
dollars of it. This is a billion-dollar country and we need it. This
gold has come to us since 1873 in the natural course of trade in re
sponse to the well-known principles of the Gresham law and mone
tary science as expounded by Dr. Adam Smith, Ricardo, Jevons,
Sumner, and many other eminent economists, and as also clearly set
forth in what Prof. Sumner dubs the most important document in
financial literature, “ The celebrated bullion report of 1810 to the
House of Commons.” I have quoted these maxims before, but deepseated error requires repetition of them again and again. Summed
up these principles are:
1. That rich countries will have all the coin they need, provid
ing no impolitic act of legislation interferes to force it out of circula
tion by the injection of inferior currencies.
2. When the coin in any country exceeds the effectual demand no
vigilance of government can prevent its exportation.
3. It is the province of Government to settle the quality question
of money, and the needs of commerce will settle the quantity.
In proof of the above maxims, history says, Chinese walls, jails,
shotguns, or hanging did not prevent exportation of coin, and in
these modern days the object lesson of the exportation of millions
of gold in the past three months in the face of the plea for “ more
money in the United States ” is more potent than jmges of logic. Let
us fix the “ quality ” question and stop tinkering with the “ quantity,”
as the needs of commerce will settle that.
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BANKING AND CURRENCY.
A ll issues, not gold, are “ inferior currencies.” I f we inject more
I. O. U .’s as a product of the printing press than we have now, we
drive gold out under the Gresham law.
Prof. Jevons says:
Many well-intentioned people have disbelieved in the Gresham law, to the
great cost o f States and the perplexity o f statesmen who have not studied the
principles o f monetary science.
I firmly believe this bill to hold as reserves for liabilities of the
Federal reserve bank either “ gold or lawful money ” is a menace to
the gold standard, and will postpone the day when New York City
will become the world’s clearing house, thus supplanting London.
The House of Representatives is to be commended for its noble
stand yesterday to maintain the gold standard, but I am strongly
impressed the foregoing will add strength to our onward progress
toward the world’s financial supremacy.
Senator R eed. W hat is it that they did in the House of Represent
atives yesterday that you specifically refer to ?
Mr. F rame. They indorsed the gold-standard bill of March 14,
1900; that is the thing I commend.
In this bill the 33^ per cent against liabilities should be gold, and
gold alone.
Senator R eed. Y ou think what ought to be gold?
Mr. F rame. The reserve. I think that the Federal reserve bank
must hold on outstanding liabilities gold instead of lawful money.
Senator R eed. Have you finished referring to your manuscript?
Mr. F rame. Yes, sir.
Senator R eed. Y ou have already touched upon the matter, but I
want to ask you a question or two about it. W e have been frequently
told that this banking system of ours is the poorest in the world.
You say that it is one of the best. Is there any banking system
anywhere in the world that you know of that, taken all in all, is as
good as our banking system in your opinion?
Mr. F rame. I think there is not one in the world equal to it.
Senator P omerene. There is not, you say ?
Mr. F rame. I say there is not— and most State banking institu
tions to-day are materially better than they were 15 years ago. They
are improving continuously.
Senator R eed. Speaking of panics, we have heard a good deal in
these hearings about the wonderful system in England, conducted
by the Bank of England, and while you have, by reference, incor
porated this report of yours on the Bank of England into the record,
I want to ask this question about it. On page 6 of this document
which you attached as an exhibit is a statement of panics and of
losses.
In Great Britain, from 1836 to 1839, we have reported panics
with no record of the losses.
Mr. F rame. I was unable to find any.
Senator R eed. And the same years a panic in the United States
with no record of losses?
Mr. F ram e . I was unable to find any also.
Senator R eed. In 1847 you have recorded in England a panic and
a loss of £15,000,000 and no corresponding panic for that year in the
United States.
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Mr. F rame. That is correct, except liabilities were £15,000.000
sterling, not losses.
Senator R eed. Where did you get your figures for that statement?
That was £15,000,000 loss in England.
Mr. F rame. That is on page 5.
Senator R eed. That is quoted from McLeod’s History of Bank
ing. Is that a standard work?
Mr. F rame. I think there is no doubt of it.
Senator R eed. In 1857 you have recorded another panic in Great
Britain with the statement “ no record except far greater than 1847.”
In that same year there was a panic in the United States. So that
again it transpires that we had a panic the same year Great Britain
did and there was no record preserved of losses.
Mr. F rame. I was unable to find any.
Senator R eed. In 1866 we have reported in England a panic with
a loss of £50,000,000.
Mr. F rame. Yes, sir; 1866, with liabilities of £50.000,000 sterling,
not losses.
Senator R eed. And a panic for the same year is not recorded in the
United States.
Mr. F rame. There was none then.
Senator R eed. Where do you get your authority for your state
ment that there was £50,000,000 loss bv the panic in England— from
McLeod’s History of Banking?
Mr. F rame . Yes, as to McLeod; but the liabilities of the failed
banks were £50,000,000.
Senator R eed. These figures represent the liabilities?
Mr. F rame. Yes, sir.
Senator R eed. But they do not then, of course, represent the
losses ?
Mr. F rame. N o, sir.
Senator R eed. Have you anywhere any figures showing what
actually was lost?
Mr. F rame. I was unable to find any record of that.
Senator R eed. In 1873, according to this report, we appear to
have had a panic, whereas they did not have in England a panic
that year; and you have here a record of £2,200.000— our money being
reduced to pounds— in the national banks of our country.
Mr. F rame. The banks that failed in 1873— national banks— had
liabilities of £2,200,000.
Senator R eed. There would not appear to be any relationship
between that panic in this country and the panic in England.
Mr. F rame. N o, sir.
Senator R eed. In 1878 a panic is recorded in Great Britain with
liabilities of over £20,000,000.
Mr. F rame. Y es; £20,000,000.
Senator R eed. And we had no panic in this country that year ?
Mr. F rame . N o, sir.
Senator R eed. In 1900 thev had another panic in England.
Mr. F rame. That was in 1890.
Senator R eed. That is right— with liabilities of £21,000,000.
Mr. F rame . Baring Bros, failed for £21,000.000.
Senator R eed. That was the Baring failure?
Mr. F rame. Yes, sir.
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BANKING AND CURRENCY.
Senator R e e d . And we had then in 1893 the panic recorded here,
with liabilities of national banks at £6,000,000 and of all other banks
£14,800,000. Do you get all those figures from McLeod ?
Mr. F rame. N o ; those figures of 1893 are taken from one of the
reports of the Comptroller of the Currency.
Senator R eed. In this country?
Mr. F rame. Yes, sir.
Senator R eed. N ow, I want to ask you this question if you can
tell me. Take this panic of 1836 to 1839 and the same period of
years the panic in this country. Is it your opinion that those panics
had any relation to each other or just happened to occur at the
same period of time?
Mr. F rame. W ell, I think not, except in 1856 and 1857. I think
those panics seemed to be world-wide, or at least happened abroad
and in the United States, too.
Senator P omerene. What years do you refer to?
Mr. F rame. 1856 and 1857.
Senator R eed. D o you know where the panics first started—
whether it started in Great Britain or in this country in 1857?
Mr. F rame. I could not say.
Senator R eed. Let us go to 1890 in England. The Baring Bros,
failure in 1890. In 1893 we had a panic in this country. Is it not
a fact that the Baring Bros, failure in England produced or was
followed almost immediately by great stringency in this country, and
did that not continue until 1893, when it culminated in the panic in
this country in that year?
Mr. F rame. That undoubtedly added to our troubles. I do not
think there is any question about that. I was in the banking business
at that time and I felt it myself.
Senator R eed. S o that, if your figures are correct here, they have
had panics in England notwithstanding the Bank of England and
this magnificent banking system over there, and they have had panics
just as bad as we have had them.
Mr. F rame. The facts seem conclusive, more than we have had,
notwithstanding the air is surcharged to the contrary.
Senator R eed. I want to ask you now in regard to the character
of security which you think could be accepted safely bv the Gov
ernment when it is called upon to issue money to either of these
regional reserve banks, or if that plan is not adopted to groups of
banks or to individual banks. What character of security should
the Government safelv take?
Mr. F rame. I should say that it ought not to take anything except
the very highest class of securities for ordinary times, and when we
require it for extraordinary periods the standard ought to be kept
exceedingly high. Allow me to explain a little bit there. Perhaps
I might go beyond what you desire.
Senator R eed. G o as far as you like.
Mr. F rame. I was through the early days of wild catting. I have
bought currency which was depreciated and currency which was
based upon all kinds of securities, commercial paper, State bonds,
mortgages, and one thing or another issued by State banks all over
the United States. I have bought currency over the Waukesha
County Bank counter, starting at 9 o’clock in the morning, buying
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697
that depreciated currency at from 2 to 50 per cent discount, and at
4 o’clock in the afternoon I would not have currency enough to do
business with the next day. I would take that discredited currency
to Milwaukee. They would wait after banking hours for me to
exchange it for current money that I could take home and do busi
ness with the next day.
Senator R eed. When you bought it how did you pay for it?
Mr. F rame. New York currency was good. Some States were
good. W ith this we bought the discredited currency of Wisconsin
and Minnesota, Iowa, Michigan, Indiana, Illinois, the great bulk
of which was discredited and fluctuated in value day after day.
according to the confidence of the human family in its final re
demption.
Farmers in my section would start at 4 o’clock in the morning to
carry their grain to Milwaukee, get their checks, draw the money,
and then they would come to the Waukesha County Bank and de
posit that money, because they felt great concern about its stability.
Those experiences have impressed upon my mind the absolute
necessity of issuing no currency except that which is unquestionably
secured, and I suppose I will go to my grave with that impression.
Since 1863, when the national-bank law went into effect and Gov
ernment bonds were put up as collateral security, no man has pulled
out of his pocket a national-bank note and said to himself, “ W ill
that be redeemed; can I get good money for that ? ” It is good be
yond question. Therefore you can see that the trend of my talk is
that if we issue any currency at all it must be a currency in which
the people must have confidence. I f it is to be done at all, the secur
ity should be unquestioned, so that no man will ever pull the money
out of his pocket and say, “ I am a little doubtful about that, and I
guess I will go and get gold for it.” I want it so he will never want
to do that.
Senator R eed. That is very good as a generalization, but of course
I think we all agree on the fundamentals.
Mr. F rame. Yes, sir.
Senator R eed. But I am trying to get a more concrete statement.
It is contemplated in this bill, and it is contemplated in any scheme
which proposes to have money issued to meet the extraordinary con
ditions which arise in the country, either of emergency or of unusual
demand, that the Government shall issue money, either permanent or
temporary, and of course both theories have their advocates. Now,
what I am inquiring about is, what kind of security should the Gov
ernment have; not merely whether it is good or bad, but must it be
short-time paper of individuals indorsed by banks, must it be Gov
ernment bonds, or may it be other classes of security ?
Mr. F rame. For permanent issues I think that it ought to be Gov
ernment bonds. For a temporary emergency currency it might be
State, municipal, or county securities that are unquestionable. You
know we have the limitation on indebtedness, and indebtedness of
municipalities should be down to 5 per cent, or not to exceed 10 per
cent, as in New York.
Senator R eed. That is within the statutes of legal limitations in the
States ?
Mr. F rame. Yes. Then, if we have a Federal reserve bank, the
management must have some discretionary powers as to what securi-
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BANKING AND CURRENCY.
ties it will take. As far as the issuance of that kind of currency is
concerned it will not be distrusted on the part of the holder of the
notes providing there is ample capitalization of the bank that issues it.
Senator R eed. I want to ask the attention of the committee for
about five minutes now to the questions that I am going to ask Mr.
Frame, because, if I am right about this thing, we have been wrong
about a theory, or some of us have been wrong.
I do not care now whether it comes through the medium of the
reserve banks which may be established, or whether it comes through
individual banks. You say that when the Government is required to
issue a million dollars that a Government bond is an ideal thing to
put up with the Federal Government upon which to issue that money.
Now you say, in addition to that, you think that first-class industrial
securities and State bonds might be received also ?
Mr. F rame. Not industrial, but State, municipal, and other highclass bonds for extraordinary occasions.
Senator R eed. Very well.
Now, the claim has been made that if such bonds are long-time
securities, not maturing rapidly, they can not be used, and that the
only thing upon which money can be quickly issued, particularly
emergency money, is short-time paper, which readily matures and
consequently pays itself off. W hat have you to say about that ?
Mr. F rame. I simply say that the proof of the pudding is in eating
it— in a practical application of it. In the introduction to my state
ment I said I took $50,000 of bonds and went to Chicago and bor
rowed $50,000 on it. I got the cash.
Senator R eed. But you went and borrowed from somebody else and
you happened to find a man able to lend that amount of money.
Mr. F rame. Yes, sir; but if the Federal reserve banks were opened,
or even under the Aldrich-Vreeland Act, we now hold $100,000 of
bonds that we can walk into the Treasury with to-day and get the
money on those bonds.
Senator R eed. But I am dealing with this question of liquid secur
ities. I have heard that until I think it has begun to vaguely filter
through my mind. A t first I did not know whether it referred to mo
lasses or what it was; but I am beginning to understand that a liquid
security, as the term is used, is a note that matures quickly, so that,
for instance, you go to a Federal reserve bank and want money and
you have $10*0,000 of notes, all maturing within 45 days, and you
put them up with the bank and you get your $100,000. In 45 days,
if those securities are all good, the bank that lends the $100,000 has
collected from the country on those notes $100,000 and is therefore
whole.
Mr. F rame. Yes.
Senator R eed. N ow , it is urged here by many very eminent finan
ciers that you must have a short-time note in order to have this quick
return of the money, and therefore, you can not use the farm mort
gage and you can not use a State bond because they run for a long
period of time. W hat do you say about that?
Mr. F rame. I do not think it is necessary.
Senator R eed. W hy not?
Mr. F rame. For the very reason I just pointed out.
Senator R eed. That is where you took it and sold it. This bank
did not want to sell.
BANKING AND CURRENCY.
699
Mr. F rame. I did not sell the bonds; I simply put them up as col
lateral security and got the money.
Senator R eed. Y ou went to somebody who had it?
Mr. F rame. Yes.
Senator R eed. Your man had to wait until he either sold the bond
again or you paid the loan to get his money ? He had to be able to
carry it himself.
Mr. F rame. I paid the money within 90 days. I f I did not pay the
money within that time of course he could have sold my securities
and got the money back.
Senator R eed. Mr. Frame, I have this thought as to this question
of liquidity, if I may use that sort of a word. I might as well make
a word as anybody else. I want to follow this transaction: A man
takes $100,000— you take $100,000 and go to Senator Owen, who is
president of one of these reserve banks, with $100,000 of notes,
maturing within 45 days. You put up those notes with Senator
Owen and he gives you $100,000, and he goes to the Government of
the United States and gets $100,000 of money issued to him and puts
these notes up with the Government of the United States, or he puts
them up with the reserve agent, and in 45 davs those notes are all
paid off and he is able, because they are paid off, to liquidate his debt
with the Government and take up $100,000 of paper. I see that
transaction very clearly.
Now, suppose that you bring to him instead of that a State bond
for $100,000, which is due in 20 years. You deposit that with him.
He goes to the Government of the United States and gets $100,000.
Does not that fact make that bond liquid? The fact that you can
cash a long-time security or get the Government’s money upon a long
time security makes it as liquid as any possible security for the time
being? You get the money on it?
Mr. F rame. That is, accepted as collateral.
Senator R eed. W e are assuming that the Government takes it as
acceptable.
Mr. F rame. Yes, sir:
Senator R eed. He has let you have $100,000, and with that $100,000
you are able to keep your bank open and you begin to collect on the
short-time paper you have in order to pay him back, and you have
$100,000 of this short-time paper in your bank and you collect it in ;
and when you have it in 45 days you go and pay him off. W hy is not
that just as liquid an arrangement as it would be if you took the
short-time paper in the first instance? I want to know if I am sound
in my reasoning?
Mr. F rame. I think the Aldrich-Vreeland Act really covers both of
those points.
Senator R eed. I am not speaking of the Aldrich-Vreeland Act, I
am not speaking of this or any other bill, I am trying to find out
whether this is an insuperable objection which has been so often
raised; namely, that we can not take long-time paper because it is
not liquid.
Mr. F rame. I do not think it is an insuperable objection.
Senator R eed. O f course, long-time paper is not instantly liquid.
The moment, however, you provide a place where you could always
get the cash on the farm or the Government bonds, or the State bonds,
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the moment you provide a place where you can always get the money
on it, does it not then immediately become liquid ?
Mr. F rame. In putting up mortgages on country farms the diffi
culty would be that the central bank or even the Federal reserve
bank officials could not know as to the reliability of this security.
Senator R eed. I am not talking about the reliability; I am not
talking about the length of the term of the obligation. I am simply
discussing the one question of whether they are liquid or not, and the
point I have in mind is this— I will state it and see if you agree with
me: W e will take, for instance, a State bond running for 20 years.
It can not be collected until the end of 20 years, and therefore it is a
very rigid thing in itself; but if by law you make a provision where
by that bond can be cashed at any time, it then becomes the most
liquid security in the world, does it not?
Mr. F rame . Yes, and would be a secondary reserve, you might say,
for a bank to hold.
Senator R eed. The answer, then, would be that the Government
would have these things loaded upon it, and the Government has to
carry it for all those years; but assume that you put that bond up
with the reserve banks and the reserve banks went and got the money
from the Treasury. Suppose they got $100,000 and gave it to you,
and you took it and put it in your bank vaults. Then, having that
$100,000 to do business with, but having an obligation to this central
bank to return the money within a given time or to pay a heavy rate
of interest, which would compel you to take it up, you would proceed
to collect on your short-time paper yourself and pay it, would you
not?
Mr. F rame. Yes.
Senator R eed. W hy, therefore, can we not use long-time paper as
well as short-time paper as the basis for the issuance of money ?
Mr. F rame. W e can. But in lact, currency is issued on the credit
of the issuer. The issuer simply discounts time paper. It is a fallacy
to say currency is issued secured by commercial paper.
Senator R eed. That is the point I asked the committee to consider,
and I wish they would think about it, because it seems to me perfectly
patent that all this theory that you can not possibly take anything
but short-time paper is a mistake. I will put it that way, using a
gentle method of speech.
Senator B ristow. Senator, before you leave that question, I would
like to ask Mr. Frame a question or two. It is right on this point.
I would like to ask you, Mr. Frame, in respect to the farm mortgage.
You said the reserve bank which was discounting the paper might
not have knowledge as to the value of those mortgages in the com
munity. Knowledge as to the value of those mortgages would be
just as reliable as the knowledge as to the value of any short-time
paper that might be given in that community, might it not ?
Mr. F rame. Oh, yes, if it was local paper; but of course this bill
requires really more than local paper.
Now, on that question of taking local paper, if we should take a
piece of paper from our customers and rediscount that and send it
away, when that paper is returned and paid by the borrower the
question would be raised------Senator B ristow. Y ou think it would not be a practical thing
to do?
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701
Mr. F rame. I think not on general country loans. O f course your
bill does not really cover that. W hat you want to do is largely on
bills of lading and great commercial and manufacturing corporations,
etc. That is all right when you hold up the standard to an ex
tremely high scale.
Senator B ristow. It is not contemplated to use local paper, but
commercial paper of a different kind. Would that include the paper
of concerns like the Armour Packing Co., John Wanamaker & Co.,
and concerns of that character?
Mr. F rame. I should say yes.
Senator B ristow. The bills of lading paper, then, would refer to
a paper that has the bill of lading attached, so that the money is
paid before the article, whatever it is, is delivered ?
Mr. F rame. Suppose the shipment is of cotton; a draft is drawn
upon Great Britain, with that bill of lading attached to it. The
holder has no trouble in going to the bank and getting the money
on it. That paper is the highest class of paper of commercial char
acter that we have in the country.
Senator B ristow. H ow many country banks handle that class of
paper?
Mr. F rame. Oh, they are so few that they are inconsequential.
Senator B ristow. W hat other kind of this prime paper is there
except this that has a bill of lading attached, say, for a shipment of
cotton ?
Mr. F rame. W ell, you might term prime paper such as that of
Swift & Co., of Chicago, and others you named. O f course, more
or less country banks hold moderate quantities of such paper at
times.
Senator B ristow. D o they hold Armour’s also?
Mr. F rame. Armour’s do not sell very much paper.
Senator B ristow. They have done it, though, have they not? W e
have had it in our country a good deal, I know.
Mr. F rame. They do not make a practice of selling it openly.
Senator B ristow. They do not?
Mr. F rame. N o, sir; not as I understand it.
Senator B ristow. This prime paper is the paper of these com
mercial concerns in these great centers?
Mr. F rame. Yes. The small country bankers take care of their
own customers at home without much difficulty.
Senator B ristow. I thought there was something behind this com
mercial paper that we have been hearing so much about here from
these great financiers.
Senator P omerene. In connection with what Senator Bristow
brought out a moment ago, you made the statement that your cus
tomers would enter a protest if they found, for instance, that you
had rediscounted their paper in a reserve city?
Mr. F rame. Y es; or elsewhere.
Senator B ristow. I s not that because of the fact that under the
present banking system rediscounts are in disrepute, and it is one
of the defects of this so-called independent banking system? Sup
pose, on the other hand, that this method is adopted provided for
in this bill. You have your regional banks, and perhaps their
greatest function, at least one of their greatest functions, is with
the funds they have to rediscount paper. Here is a governmental
702
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organization made up by interdependent banks for a particular pur
pose, and would it not to a large extent do away with that prejudice
which the customer might have against his paper being rediscounted,
when he knew that a large part of your funds were in this one
reservoir ?
Mr. FixAME. N o; I think not. I don’t think it would make any
material difference.
Senator R eed. There are two objections, as I take it, to the matter
of rediscounting. One is that when a bank goes to heavily discount
ing it is a sort of notice that it is short of money, and that in a way
hurts the bank. That is one objection, is it not?
Mr. F rame . Y es; when done moderately the general public do not
pay any special attention to it.
Senator R eed. There is an objection of an entirely different char
acter on the part of the man who borrows the money through a bank.
He rather resents the idea that his note has been “ hocked ” about?
Mr. F rame. That is it exactly.
Senator R eed. And his note has been exposed ?
Mr. F rame. Yes, sir.
Senator R eed. And in addition to that, when that note is in your
hands, if he does not meet it on the exact date, he rather looks to
you to be kind of nice about it, but if it gets------Mr. F rame. He looks for renewal.
Senator R eed. Or an extension or some concession. But if it gets
into the hands of a bank 300 miles away, then he knows that when
he gets his notice that the spot cash has got to be there ?
Mr. F rame. That is what he knows.
Senator R eed. And that is an objection the customer would raise?
Mr. F rame. Yes, sir.
Senator R eed. And dealing with the man in your community,
where I suppose you know everybody by name, etc., the personal
equation enters very largely into your transactions ?
Mr. F rame. It certainly does.
Senator R eed. On both sides of the counter.
Senator P omerene. Some of these borrowers are very proud of
the fact that their notes will be received around over the country ?
Mr. F rame. I do not think they are to a great extent.
Senator R eed. I never knew of their having much pride in that.
Senator P omerene. I have known some of them.
Senator R eed. Mr. Frame, when a bank keeps a reserve, whatever
its reserve is, it loses all interest upon it. It is lying there idle ?
Mr. F rame. I f in cash.
Senator R eed. I f in cash, and if it is not in cash it is not a reserve
within a meaning we have heretofore attached to it— a reserve is
supposed to be cash on hand, is it not ?
Mr. F rame. Or due from banks.
Senator R eed. Due from banks. I want to leave that out, because
I am going to speak about the real reserves. O f course when money
is due from banks, if there is trouble in the country that is widespread,
your reserves that you have got in another bank are liable to be hard
to get just at the very time that you actually require it. That is true,
is it not?
BANKING AND CURRENCY.
703
Mr. F rame. That is what we want to doctor.
Senator R eed. Upon the reserve that you have in the other bank
you get very small interest, do you not?
Mr. F rame. W e get 2 per cent.
Senator R eed. I f you could make that 5 per cent, and have it abso
lutely safe, it would be a very profitable thing for the bank and very
pleasing, would it not?
Mr. F ram e . W e would be 3 per cent ahead.
Senator R eed. I f it could get 4 per cent, the same thing would be
true, only not to the same extent ?
Mr. F rame. Yes.
Senator R eed. I f you could, instead of putting it in another bank
and getting 2 per cent, buy a bond of the State of Wisconsin draw
ing 4 per cent interest and put that in your vault as a reserve, with
the absolute assurance that you could go to a Federal reserve bank
and turn that into cash in a few hours’ time, you would not want to
be depositing so much money in the other banks, would you ?
Mr. F rame. That is exactly what we do now, as a secondary re
serve. As I say, we have $100,000 of bonds drawing a fair rate of
interest— 5 per cent— that is a secondary reserve. W e are holding
them as an investment.
Senator R eed. While you are throwing light upon the question,
you are not quite answering my question, which was, if you could, in
stead of being forced to deposit this money in another bank in order
to get anything upon it in the way of interest in return, take it and
invest it in a State bond of the State of Wisconsin that drew 4 per
cent and put that in your bank, that would enable you to use that
much more of your bank capital and get a better return on it, would
it not?
Mr. F rame. Allow me to explain that.
Senator R eed. Y ou would like to do that, would you not?
Mr. F rame. Allow me to explain that.
Senator R eed. Yes.
Mr. F rame . W e keep, say, $250,000 now in Milwaukee, Chicago,
and New York banks as balances, against which we draw drafts
every day.
Senator R eed. Y ou would still have to do that?
Mr. F rame. W e would still have to do that; and therefore that
amount of money must be kept there to accommodate our customers
in selling exchange. I had my cashier make an examination of how
often that $250,000 was turned over, and, to my surprise, it was
turned over every 10 days. W e sell $250,000 of drafts on Milwaukee,
Chicago, and New York every 10 days, so that it is necessary in the
ordinary transaction of business to keep that there for that purpose.
Senator R eed. Then, what you put m there and count as part of
your reserve has another utility besides the earning of interest, to wit,
you are able to draw drafts upon it and thus utilize it in your gen
eral business?
Mr. F rame. Further; we should be able to get it if we want it,
which we sometimes can not do.
Senator R eed. W hat I am getting at is whether you could, by
putting in your vaults as a reserve, in lieu of a portion of the cash,
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BANKING AND CURRENCY.
long-time, gilt-edged securities, provided there was a means by
which you could go and cash that security on the instant.
Mr. F rame. T o a small extent— to the extent in which I have
pointed out here, I should say we could.
Senator R eed. W hat is that extent?
Mr. F ram e . I said to the extent of, say, $36,000, which cash we
could spare; $15,000 for capitalization, of the Federal reserve bank,
and 1 per cent of deposits. The balance of the cash on hand we must
keep under the law.
Senator R eed. I am talking about changing the law.
Mr. F rame. Changing the law so that we could have less cash on
hand?
Senator R eed. Y es; but having security of the character that I
speak of.
Mr. F rame. Then even reducing it lower than 5 per cent?
Senator R eed. Yes.
Mr. F rame. W ell, just how far to go on a matter of that kind is
problematical. In the United States, in a developing country—
all developing countries— we must keep larger reserves than they do
in old settled sections, like Great Britain, France, and Germany,
which have been thoroughly developed for hundreds of years. I
think that is a common principle that all practical bankers will
accede to. Therefore, as to just exactly what each bank should hold
is a pretty difficult proposition, because you take western bankers—
they hold larger cash reserves than we do.
Senator R eed. Let me put it to you in another way. I do not
limit this to your bank, but to the banking system generally. In
addition to the moneys which bankers keep in their vaults by way
of reserves, and which they put into other banks, not only to repre
sent a portion of their reserves, but for the purpose of keeping a
deposit there against which they can draw drafts and obtain bank
ing accommodations, is it not true that banks very frequently have
money which they can not loan out on short-time paper, and they
send it to these big centers ?
Mr. F rame. They do.
Senator R eed. Where they receive a small rate of interest?
Mr. F rame . Yes.
Senator R eed. They send it to the bank because they can get a
small rate of interest, and because they are supposed to be able to
get it back whenever they need it?
Mr. F rame. That is right.
Senator R eed. A s to that part of the money we are now speaking
of, if they could invest it in long-time gilt-edge securities which drew
a rate o f interest of 4 or 5 per cent, and were able to cash those
securities on the instant, would that not be a good thing for the
banks ?
Mr. F rame. It probably would release some of the cash.
Senator R eed. It would probably stave the congestion to some
extent, would it not— reduce the congestion to some extent which
we now have in the big centers ?
Mr. F rame. I think that would probably assist it somewhat.
Senator R eed. S o that the bank in the country would not be so
dependent in a time o f stringency upon the ability o f the bank in the
city to make good?
BANKING AND CURRENCY.
705
Mr. F rame. Yes.
There is one point I want to call your attention to, Senator; that as
far as our deposits are concerned they do not fluctuate much from
January until December. W e are in a State where our products are
diversified. Sections like that where products are diversified, the de
posits do not fluctuate up and down as widely as they do down South
or in the undeveloped West. I know certain sections where deposits
vary 100 per cent in the course of the year. Such a thing as that does
not occur with us. In that case, you see, there would be the more
difficulty about carrying out your proposition to the same extent that
we might do.
Senator R eed. Y ou mean that in the case of these places where
there is fluctuation?
Mr. F rame. W ide fluctuation.
Senator R eed. W hy, if you can take this security and turn it into
money ?
Mr. F rame. Providing if there was any profit in the operation.
O f course, generally, there is a little margin of cost in all such trans
actions.
Senator R eed. Either losing or gaining. I am speaking now about
going to a Government bank.
Mr. F rame. In that case there would not be any charge except for
expressage.
Senator R eed. Getting the face of it, paying, of course, an interest
charge, if you had to borrow money upon it?
Mr. F rame. That is rather a broad problem and quite difficult.
Senator R eed. Y ou spoke of a secondary reserve which you hold
now in the shape of bonds ?
Mr. F rame . Yes, sir.
Senator R eed. W hat do you mean by that, Mr. Frame?
Mr. F rame. State and municipal bonds.
Senator R eed. W hy do you call it a secondary reserve?
Mr. F rame. Simply because we cair utilize it for just the purposes
you are talking about.
Senator R eed. In other words, you do now keep a part of your de
posits invested in this class of securities ?
Mr. F rame . Yes, sir.
Senator R eed. Because in the case of emergency you can go and
get the money on them somewhere?
Mr. F rame. Y es; 80 other national banks in Wisconsin do the
same thing.
Senator R eed. And you select them now without any aid from the
Government?
Mr. F rame. A s a matter of prudence.
Senator R eed. S o that in the hour of trouble you are able to get
money upon them?
Mr. F rame. Yes, sir.
Senator R eed. I f the Government at this regional bank or at a sub
treasury or any other plan that is devised would take those securities
at their face, you would be all the more inclined to carry some of
them, would you not?
Mr. F rame. Sure.
Senator R eed. And it would be a perfectly fine thing for the bank
ing system, would it not?
706
BANKING AND CURRENCY.
Mr. F rame. Perfectly natural that it would.
Senator R e e d . I want to ask a word or two more about this socalled high-class commercial paper that is supposed to be deposited
under the provisions of this bill that we are now considering. I
think perhaps we left that in an unfortunate situation. I do not
think that you meant to say that the bill was so wrong, that the
paper of large concerns, like Swift’s, would be taken, and that alone
would be considered as prime paper to the exclusion of giving it an
advantage over other paper?
Mr. F rame. Oh, no. I did not mean to exclude other paper. I
give that as an illustration, merely.
Senator R eed. A bill of lading with the draft attached or an
acceptance attached is a very high-class security, and you nearly all
get cash out of it ?
Mr. F rame. Yes, sir.
Senator R eed. And you think that there would be accepted as
high-class paper the paper of such large institutions as Swift’s, be
cause they are engaged in heavy commercial transactions, have a large
amount of money flowing, I suppose, into their treasury every day?
Mr. F rame. They have large capitalization.
Senator R eed. But outside now of the bill of lading, money
loaned upon bill of lading, and such institutions as Swift’s, would you
class as prime commercial paper------Mr. F rame. Notes of large merchants and manufacturers in the
big cities. You could hardly call country paper “ prime paper.”
Senator R eed. S o that you think that under the terms of this bill,
those assets which the country banks, particularly that class o f coun
try banks that are in the smaller places, would hardly be acceptable
as prime paper?
M r. F rame. I do not.
Senator R eed. D o you think that it is excluded by the terms of the
bill, or do you think that the financial conditions are such that they
simply could not avail themseltes of it?
Mr. F rame. I think that it is not necessary that they should. Our
present central reserve banks can take care of us amply and they do
take care of us.
Senator R eed. That is to say, if there was a means provided by
which the central reserve bank of St. Louis and of Chicago and of
New York could take their securities in the hour of trouble and get
money, they would be able to accommodate you as one of their
customers ?
Mr. F rame. Yes, sir.
Senator R eed. And therefore that there is no necessity of dealing
with that bank at all?
Mr. F rame . I do not think there is— not in the least, even not in
emergencies, if the present reserve banks were cared for then.
Senator R eed. Y ou have spoken of an independent banking system.
Does not the thing that you have just now outlined, while it might
mean an independent banking system, using the term “ system ”
with some emphasis, does it not mean, after all, a lack of inde
pendence by the individual members, because they would be dependent
upon the reserve banks?
Mr. F rame. That is just exactly one of the points that seems to
me objectionable, to be compelled to put $147,000 into the Federal
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707
reserve bank, not subject to call, not subject to use in any way, shape,
or manner.
The C hairm an . It is subject to call, however.
Mr. F rame. Only through rediscounting. Now, if we have it in
one bank and that bank is not willing to accommodate us, if the busi
ness is unsatisfactory to us we transfer it to another one. That is
democratic. W e are not compelled to do business anywhere, at one
bank, if it is unkind and if it is unfair to us in any way. W e simply
transfer our account to some other bank.
Senator P omerene. By reason of that very fact, in 1893, you had to
take your securities down to Chicago and sell a part of them ?
Mr. F rame. Yes, sir; and that is just exactly what I want to pro
vide against. I f you will provide some measure of relief for present
reserve banks they will not be compelled to suspend cash payments.
Our balances will always be at our command.
Senator R eed. Let me get you right, because that is what we want.
You say that we have got three central reserve cities, and if there
was a scheme devised by which in the hour of stringency those banks
of the three central reserve cities could take their reserves and go to
the Government and get more money, they would then have enough
money to supply you as their customers?
Mr. F rame. Yes, sir.
Senator R e e d . And if you did not like to do business with the First
National Bank of Chicago, you could go right over to the Second
National Bank of Chicago, if there is such a bank?
Mr. F rame. The Continental.
Senator R eed. The Third National Bank or the Continental Na
tional Bank and get your money there?
Mr. F rame. That is right.
Senator R eed. I s not that giving special and peculiar advantage to
the banks of these large cities?
Mr. F rame. In what respect?
Senator R eed. W ell, they alone of all the banks in the country have
the privilege of going to the Government and getting this aid. W hy
should not that be extended out, so that the banker of Milwaukee
and even of Waukesha might go and get that aid directly without
having— you used the term “ skimming ” a while ago, and I am
familiar with that— without having the skimming process applied
to them?
Mr. F rame. That is what I called the “ branch system ” or “ skim
ming process,” which I have not referred to yet. I do not object to
it at all, because if there is competition between those banks as to get
ting accommodations, or if one bank does not serve me satisfactorily
I will go to another one. That is the free and independent banking
system. Under the branch banking system or the Scotch and other
foreign banking systems— take Canada, for instance, which has 25
great centralized banks and has nearly 3,000 branches. A ll the
branches do business with its parent bank. Every one of the branches
does business with the parent institution.
Senator R eed. I s that centralized institution Government con
trolled ?
Mr. F rame. N o, sir.
Senator R eed. I s it privately owned and privately controlled?
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BANKING AND CURRENCY.
Mr. F rame, xt does as it pleases— plays just as it pleases, without
any Government jurisdiction at all. The report of the Monetary
Commission shows that there has been $5 of losses, comparatively, to
depositors in Canadian banks as against $1 loss in the United States.
Senator R e e d . It takes into consideration volume in each instance ?
Mr. F rame. It takes into consideration the volume, of course.
Senator S hafroth . D o they include all banks, both national and
State, or only national ?
Mr. F rame. Just national.
Senator R eed. Let me understand that. There is a great bank and
it has numerous branches.
Mr. F rame. Yes, sir.
Senator R eed. Those numerous branches are owned by it or are
simply in alliance with it?
Mr. F rame. They are all owned by the banks in Quebec, Montreal,
and Toronto. I think the headquarters are all in those three cities.
Senator R eed. And no other banks exist?
Mr. F rame. Practically no others.
Senator R eed. S o that if a man wants to borrow money now he
has got just one bank to get it from?
Mr. F rame. Canada has 25 central banks which have, say, 3,000
branches, therefore these 25 banks are practically a great monopoly.
Senator R eed. In cities where there is a branch of each one of
these different banks?
Mr. F rame. Yes.
Senator R eed. D o they engage in some rivalry ?
Mr. F rame. More or less.
Senator R eed. Instead of having 3,000 or 4,000 independent banks,
each acting for itself, it results in your having in the Dominion of
Canada 25?
Mr. F rame. Just 25.
Senator R eed. A n d , of course, they are widely separated, or at least
their branches must be ?
Mr. F rame. Oh, they are scattered all over the country.
Senator R eed. The branches are scattered all over the country, but
the 25 banks must be remote from most parts of the country ?
Mr. F rame. There are not as many banks in Canada by far as
there are in the United States. There are eight banks in the United
States where there is one over there, as far as territory is concerned,
because the territory of Canada is just about equal to that of the
United States. W e have over 25,000 banks, and they have only about
3,000. No bank can start there with less than half a million dollars
capital.
I made an address before the State Bankers’ Association of Okla
homa last May, and I gave an illustration of what the branch banking
business of Canada would do to Muskogee if they had the branch
banking system there. The capitalization of all the banks in Mus
kogee is about a million and a half dollars. The profit on that, at G
per cent, is about $90,000. Those banks pay out about $30,000 a year
taxes to the city; total, $120,000. Under a branch banking system
such as they have in Canada there would be three or four branches of
centralized banks in New York, Boston, Philadelphia, or Chicago,
and every dollar of the profits that were made in the city of Muskogee
will be turned into those centralized institutions and Muskogee would
BANKING AND CURRENCY.
709
lose every dollar of it. As Canadian branches pay no taxes on stock,
the city would lose that also.
Senator R eed. That is what you call “ skimming ” ?
Mr. F rame. I call that “ skimming the cream ” from the country.
Senator P omerene. Stockholders do not live in Muskogee?
Mr. F rame. That is just where they do not live. In Canada the
great bulk of the 25 banks are owned and controlled in London,
Liverpool, Glasgow, of course including Quebec, Montreal, and
Toronto.
The C h airm an . Moreover, these 25 banks can have a gentleman’s
agreement about the conduct of business, and most of them do ?
Mr. F rame. I think they do, more or less.
Senator R eed. W hat is to hinder the 12 reserve banks or the 1
reserve bank that we propose to establish, which embraces some 600
or 700 independent national banks within its jurisdiction, effectuat
ing a gentleman’s agreement through that very organization which
will fix the interest rates and practically settle whether certain lines
of securities can be accepted within the vast domain in which that
bank is situated?
Mr. F rame . I think there is a probability of a thing of that kind
with supervision as provided. W e have ample supervision now,
under present conditions. That is why I say we have the best bank
ing system in the world, notwithstanding it has some defects. A
great big centralized organization having general care over all of
them seems monopolistic. I have fought against what I believed
to be a kind of a monopolistic management under the Monetary
Commission bill. I have not believed in that, because I think if the
great big centralized banks of the United States, to quite a material
extent, wanted, under that bill, to so conduct things that they could
regulate us and do just about what they pleased with us. I prefer
to stay just as we are now with the general supervision of the Comp
troller of the Currency.
Senator P omerene. Y ou mean the Aldrich banking bill?
Mr. F rame. The Monetary Commission bill.
Senator R eed. W hat I want to get at is this, and I want to get
at it just as it is in your opinion. Let us say that there is a regional
reserve bank organized at Chicago, and that your State is put into
that reserve district, along with two or three other States, and you
bankers meet to elect the three directors that the bankers select, and
then you select the three outsiders who are not bankers, but who may
be stockholders, and now you have got a board of directors of six
elected by the bank, and three selected by the Federal Government,
making nine, but a two-thirds majority are bankers’ men. Then,
there is a president selected by this board of directors. Do you think
that the big banks or the little banks are going to control in the
selection of those members of the board of directors, which will be
selected by the banks?
Mr. F rame. I think those little fellows will have little to say.
Senator R eed. Y ou think the big fellows would get it?
Mr. F rame. Almost certainly.
Senator R eed. Let us see why they would get it. Have they any
such power recognized to-day by virtue of their financial ability and
strength to enable them to control or influence the votes of the
member banks when they come to have an election ?
R
710
BANKING AND CURRENCY.
Mr. F rame. They would more or less. The little bank would not
spend the money to look after matters of that kind, but the big banks
would.
Senator R eed. S o you think the big fellow would get the six
directors ?
Mr. F rame. I think he would.
Senator R eed. O f course, the man who gets the board of directors
gets the presidency ?
Mr. F rame. It would be natural.
Senator R eed. I want to know if, in your opinion, this sort of thing
would be likely to happen. O f course that president and that manage
ment of that central bank would naturally want to make banking
profitable and safe, would it not ?
Mr. F rame . It naturally would result that way; that is human
nature.
Senator R eed. D o you think that by reason of this bringing of the
banks together in this way and under this scheme there is any
danger of the same thing happening as happens when there is what
is called “ a gentleman’s agreement ” between insurance companies,
for instance, or railroad companies? That is to say, a result worked
out by which there would be a regulation to some extent of interest
charges, charges for its exchange, of interest paid upon deposit, etc. ?
Mr. F rame. I think when you go down into details of it it is a
pretty clear proposition. Interest rates are different in different sec
tions of the country, and that question of fixing a rate of interest
which is uniform or for any section of the country, that is a practical
impossibility, except for the concern that the board of directors are
in control of. The law of supply and demand for money regulates
the rate of interest.
Senator R eed. W hat I want to get at, Mr. Frame, is this: You are
a practical banker, have seen these things in operation; that is, you
have seen the system in operation. I want to know if there is any
danger, for instance, if I was elected president of this central bank,
of my being able by virtue of that position to influence the conduct of
the member banks so that they might do business in a way that
would be more profitable to them and a little harder upon their com
munities ?
Mr. F rame. The trend would be in that direction.
Senator R eed. Would it tend, in your opinion, to strike down or
lessen competition between the banks ?
Mr. F rame. I think it would. I think that would be a natural
result.
Senator R eed. I f we had a control, great or small, exercised by
each president of these 12 regional banks, tell me whether you think
there is any danger of the same kind of control being exercised over
all of the regions by the great financial institutions?
Mr. F rame. I think the trend would be in that direction.
Senator R eed. A t the present time is it or is it not true that the
very wealthy concerns of the country, the great bankers of the coun
try, have interests in large numbers of banks scattered over the
country? I will put it in plain language. It has been asserted to
me that the Rockefeller interests control, have potential influence in,
a chain of banks across the country. I do not know whether it is
true or not. It has been asserted to me that the Morgan interests—
BANKING AND CURRENCY.
711
the Morgan banks, speaking of them in that broad way— are not
limited to New York City, hut that they have a potential influence
in chains of banks extending out into the country.
Senator S hafroth . By owning stock in the same?
Senator R e e d . In one form or another. W hat about that?
Mr. F rame. S o far as my own experience of 50 years is concerned,
we have run the Waukesha National Bank without any dictation or
suggestion on the part of anybody.
Senator R eed. Y ou run your own bank?
Mr. F rame. Yes.
Senator R eed. I am speaking about whether they do have in the
large cities— whether there is already in existence in the country— a
sort of chain tying together certain banks out in the country, and
that chain ending for its control with these large institutions in New
York.
Mr. F rame. A s to what extent that may go, I could not say, but
I think if we had a kind of combined organization instead of the
independent mechanism that it would be worse; that is all.
Senator R eed. The thought I had in mind was this: Whether now
these great institutions of the East, assuming that they do have their
branches or institutions in which they have some capital invested
so that they have a control------Mr. F rame. A s stockholders.
Senator R eed. A s stockholders or otherwise— would be able to pos
sibly influence the selection of the directors of these regional banks?
Mr. F rame. I think they would, to a certain extent. Just to what
extent I could not say. It would be perfectly natural.
Senator R eed. I have been told, for instance— a sort of general
talk— that in my State there are several large institutions in which
New York money is invested.
Mr. F rame. Which dominates largely.
Senator R eed. And to some extent dominates; and because of their
relations with New York they are able to exercise some advantage
over other banks. Those banks have been named to me. I am not
naming them here. But I am perfectly sure that the prominence
of those bankers is such to-day and their dominating influence is
such to-day in my State and in the surrounding States that if there
was a regional reserve bank established to-morrow in that country
and Missouri was in it some one of those gentlemen would be a
director, if not president.
Mr. F rame. Yes, sir.
Senator R eed. I speak of it that way not to get from you a certain
answer, but I want to know to what extent you think a danger of that
kind possibly exists, if at all.
Mr. F rame. I think that would be the natural trend. I do not
think there are any banks in Wisconsin that are dominated by W all
Street.
Senator R eed. A s far as Wisconsin is concerned, it is an old set
tled State, and as a matter of fact you have got in a pretty independ
ent position financially, speaking of the State as a whole; is that
true?
Mr. F rame. That is correct.
Senator S tone. It is practically a lending State?
Mr. F rame. Yes.
712
BANKING AND CURRENCY.
Senator R eed. More than a borrowing State?
Mr. F rame. Yes, sir; the people of the State of Wisconsin have
surplus funds, and are lending them in outside sections.
Senator R eed. I do not care to take more time now.
The C h airm an . Mr. Frame, I want to ask you one or two ques
tions.
Mr. F rame. Yes, sir.
The C hairm an . Did you see the book that was sent out by the
National City Bank of New York with Mr. Vanderlip’s letter or Mr.
Talbott’s letter, etc.?
Mr. F rame. I do not remember to have seen it.
The C h airm an . D o you know whether or not that book was sent
to each of the banks in Wisconsin or to any considerable number of
them?
Mr. F rame. W ell, I can not remember to have seen it myself, but
I have been exceedingly busy, and possibly it may have come and I
did not see it.
The C hairm an . Have you not heard anything about that publi
cation being distributed in Wisconsin?
Mr. F rame. Just what do you refer to particularly?
The C hairm an . A book issued by the National City Bank in op
position to this bill, containing a letter of Frank Vanderlip and Mr.
Talbott and others.
Mr. F rame. I do not remember to have seen it.
The C hairm an . Y ou do not know anything about it?
Mr. F rame. N o ; I do not. I can not recall that I have seen it.
The C hairm an . Y ou spoke of the earnings of the banks of W is
consin, and I call attention to the report of the Comptroller of the
Currency, Table No. 59------Senator P o m e r e n e . W hat year, please?
The C hairm an . Ending July 1, 1912; in which he gives the earn
ings of the banks of Wisconsin upon their capital and surplus of 8.87
per cent, and of the banks of Milwaukee 9.39 per cent, and the actual
dividends on the capital paid 11.50 per cent.
Senator P omerene. In the State?
The C hairm an . In the entire State of Wisconsin; and 9.39 per
cent of dividends paid on the stock of the banks of Milwaukee.
Mr. F rame. Total in the State, 8.87?
The C hairm an . 8.87 was the earnings on the capital and surplus.
Mr. F rame. Capital and surplus.
The C hairm an . But the capital of the Wisconsin banks was
$11,000,000 and the surplus $4,500,000, so that it would be a much
higher percentage on the capitalization?
Mr. F rame. Yes.
The C hairm an . The banking system of the United States shows a
dividend on the capital of national banks of the entire United States
of 11.66 per cent for 1912.
Mr. F rame. On capital?
The C hairm an . On capital; yes.
Mr. F rame. But you see the surplus is nearly equal to the capital.
Senator P e e d . One other phase of this matter occurs to me, which
is not clear in my mind. I am referring now to your paper. You
told us that under this bill the banks of the central reserve cities
would be required to keep less reserve than now, and as I under
BANKING AND CURBENCY.
713
stood you that reduction in the amount they are required to keep at
the present time would more than equal the amount they are obliged
to contribute to the central banks. Is that correct ?
Mr. F rame. I understand that to be the case.
Senator R eed. But when you get to the ordinary reserve banks does
the same condition exist?
Mr. F rame. The ordinary reserve bank, general reserve banks, must
put up $150,000,000 in excess.
Senator R eed. O f that amount?
Mr. F rame. O f the amount that the reduction of the reserve would
save them.
Senator R eed. But when you get to the country banks, what is the
condition there?
Mr. F rame. W ell, it costs us $285,000,000.
Senator R eed. O f course you give it to me now in figures. Can
you give it to me in percentages— that is, the percentage of cost?
Mr. F rame. Percentage on what?
Senator R eed. W ell, it is a little difficult for me to state that, Mr.
Frame. W hat I mean is this: I want to get a comparison of the
inequalities, if such there be, in percentages, instead of in the aggre
gate, because the country banks having more capital than the------Mr. F rame. General reserve banks, and also the central reserve
banks.
Senator R eed. Reserve bank, that is right, or the central banks. O f
course, when you say that it costs them so much money to go into
this, it does not mean anything unless I know the percentage. To
start with, the central reserve banks are relieved, according to your
opinion, of any burden by reason of this bill. In fact, they are re
lieved from some burdens that they now have by virtue of the cir
cumstance that the amount of their reserves required to be kept under
the bill is so much less than it is now that they can take from that
saving enough money to help capitalize— do their share toward
capitalizing— the regional reserve bank, and then have something left
in addition, that is released to them ?
Mr. F rame. The three central reserve banks are allowed to hold 7
per cent less of their deposits. That gives them a loaning power that
can be realized of $140,000,000.
Senator R eed. Y ou mean 7 per cent after they have contributed to
the organization ?
Mr. F rame. N o; they have got to contribute $108,000,000 to the
organization.
Senator R eed. H ow much per cent does this leave them?
Mr. F rame. It leaves them $32,000,000.
Senator R eed. That would be a small per cent.
Mr. F rame. Per cent on capitalization or percentage on deposits?
Senator R eed. On deposits.
Mr. F rame. On deposits, a little over 14 per cent.
Senator R eed. S o that they actually come out 14 per cent net to
the good.
Mr. F rame. Ahead, except what may be called from country and
other banks out of them for deposits which are now held by them
which would have to go to the Federal reserve bank, and that I do
not know.
Senator R eed. You do not know how m
uch that w
ould call?
714
BANKING AND CURRENCY.
Mr. F r a m e . I do not know what that would be.
Senator R eed. When you come to general reserve banks, how
much percentage do they have to contribute over and above what
they are now required to keep ?
Mr. F rame. On deposits, about 7 per cent.
Senator R eed. Over and above what they are required to keep
now?
Mr. F rame. It would take out about 7 per cent of their deposits—
on $2,250,000,000, say, $150,000,000.
Senator R eed. That is to say, when they put this money into this
regional reserve bank, although there has been some reduction in
the reserves they are required to keep, still they are 7 per cent------Mr. F rame. Short.
Senator R eed. Worse off as far as the actual good of their own
money is concerned.
Mr. F rame. Yes, sir.
Senator R eed. They have got to contribute that much.
Mr. F rame. And then, in addition to that, they may be called
upon by banks like ourselves, for instance, to withdraw out of M il
waukee and Chicago.
Senator R eed. Coming to the country bank, what is the situation
there in percentages?
Mr. F rame. The net $285,000,000, something over 7£ per cent
deposits.
Senator R eed. S o that if I get you right now, this bill as it is
now drawn will actually release to the central reserve banks----Mr. F rame. One and one-half per cent.
Senator R eed. It is no burden to them at all, but is an advantage
in that one respect that we are now talking of?
Mr. F rame. Yes.
Senator R eed. Whereas when you come to the other classes of
banks they have to put in from 7 per cent over and above.
Mr. F rame. From the general reserve banks 7 per cent, and 74
from the country banks.
Senator R eed. In other words, those banks outside of the central
reserve cities have to capitalize this regional reserve system?
Mr. F rame. Really, that would be the case; that is the way I
figure it.
The C hairman . Mr. Frame, the report of the Comptroller of the
Currency of June 4, 1913, shows net deposits of the 52 banks in the
central reserve cities, upon which they are required to keep reserves,
of only $1,568,000,000, and required reserve of $392,000,000, with
legal tender and gold coin of $405,000,000.
Under the new bill 9 per cent would be kept in their vaults, or 140
millions. Four and one-half per cent must be kept in the Federal
reserve bank, or 70 millions, and 4£ optional, which may be kept in
their own vaults or in the Federal reserve banks, at their pleasure?
Mr. F rame. Yes, sir.
The Chairman. Therefore, would it not be true that with the
cash kept in their own vaults of 140 millions, and assuming that this
4| per cent option would be divided, one-half being 70 millions,
which would mean 35 millions going into their own vaults, and you
would make a maximum of 175 millions in their own vaults and 70
millions, plus the 35 millions, or 105 millions, in the Federal reserve
BANKING AND CURRENCY.
715
bank. Would not that be a correct calculation? Or can you not
easily follow that?
Mr. F rame. I have lost a little of the chain, Mr. Chairman.
The Chairman . Perhaps it would be better for me to make a mere
statement of this matter for the use of the committee, because that
is really all I want to do; that is the best way to get at it and to ascer
tain the real facts in regard to it.
In the record will be found a table showing the exact requirement
of this bill, following the statement of Mr. Berry of yesterday, show
ing that the total requirement of the 52 banks in the central reserve
cities would be 216 millions, against 405 millions, leaving a surplus
available of 189 millions of cash, in legal tender or gold, every dollar
of which is due to the country banks if the choose to call upon it for
their ase; and therefore the theory that the city banks would get an
extraordinary advantage over the country banks is not really ten
able. The country banks, by this statement of June 4, 1913, had
3,610 millions of net deposits subject to the reserve requirement, and
the further requirement of 541 millions, and they had in specie and
legal tender 266 millions. W ith the reserve cities they had 446 mil
lions of dollars subject to their check. Therefore they could take,
if they desired, every dollar of this 189 millions for use; but under
X x
1
• i -i.
•
i reqUire(j a maximum of 103 milrequire gold upon this open account which they have with the central reserve cities for so large a
sum.
This statement proceeds upon the theory of this bill that the funds
which are placed in these Federal reserve banks are loaned to the
extent of two-thirds, and presumably would be loaned to the extent
of 50 per cent, keeping 50 per cent average reserve for conservative
management, with these alternatives open, and remembering that
the Government of the United States will place a large amount of
current funds in gold coin and legal tender and actual mone^ in
those banks, also subject to be loaned out up to two-thirds.
Mr. F rame. In the Federal reserve banks?
The C hairman. In the Federal reserve banks. It would afford a
surplus of actual cash for the country of an approximate total of
over 200 millions, which would be loanable, if this money was in the
reserve cities, on a basis of 18 per cent, which needs an expansion
of credits of 4.55 per cent upon that amount. I f it was in the country
banks, where the maximum requirement is only 12 per cent, it would
then multiply itself by seven times, and the expansion of credits
would be very important; and of those expansions of credits the coun
try bankers would get their proportionate part, and it would appear
first as loans, then as deposits, so that the country banks would have
a very substantial increase of deposits and of current loans of which
they would be the immediate beneficiaries.
That answers your conclusion, and I do not care to cross-question
you, because it is a mere matter of mathematical calculation that is
so obvious a matter of mathematics that no human opinion will affect
it one way or the other. It is a matter for an actuary to pass on.
Senator R eed. D o I understand you, Mr. Chairman, to say that,
speaking now of the central reserve cities, there is not such a reduc
tion in the amount of their reserves required to be kept that it more
than equals their contribution to the regional reserve banks?
9328°— S. Doc. 232, 63-1— vol 1----- 46
I
716
BANKING AND CUERENCY.
The Chairman. N o. W hat I said was that the actual calculation,
under this bill, would free in the 52 banks of the central reserve cities
$189,000,000, every dollar of which could be used by the country
banks, because they have on deposit subject to their check a very much
larger sum.
Senator R e e d . Y es; but they use that money that they have sub
ject to their check, as stated by Mr. Frame, constantly in their busi
ness.
The C hairman. Oh, yes; they get 2 per cent on it. The amount
which they actually have is $496,000,000 on open account, which is
far more than any possible demand for exchange purposes that you
have in mind.
Senator R eed. I understood Mr. Frame to say that his bank has a
quarter of a million of dollars in these large cities, and that you
actually use it to such an extent that you turn it over every 10 days.
Mr. F rame. Yes, sir.
Senator R eed. Could you reduce that without interference with
your business ?
Mr. F rame. I should think only to a moderate extent. One banker
of Milwaukee told me that his bank sometimes drew drafts for its
whole balance in one day from its New York correspondent.
The C hairman. O f course, these exchanges are turned over every
day in these large cities.
Mr. F rame. They are turned over much more rapidly than in the
country.
Senator R eed. The point I had in mind was this: It is a fair pre
sumption that banks do not take their money and put it otf in another
bank unless there is a corresponding advantage. O f course, they get
2 per cent, or something like that, but they do not put that money in
there to get 2 per cent.
Mr. F rame. W e keep it there because it is convenient to transact
our business.
Senator R eed. I f your bank loaned a quarter of a million of dol
lars— you are not a very large bank, speaking in comparison with
some banks— the question in my mind is whether all this money that
is now in New York, Chicago, and St. Louis, the three reserve cities,
is there because of the exigencies of business, and required to be kept
there and if withdrawn will unsettle to some extent the business con
ditions. W hat about that?
Mr. F rame. I do not think there is any reasonable doubt about it.
Take the transfer of loans that are now made by Milwaukee bankers
to customers, for instance. I f country banks withdraw funds from
the Milwaukee banks during the present condition of the money
market in large sums as this bill requires I think it would bring
distress to Milwaukee.
Senator Reed. Could not the banks borrow it right back again?
Mr. F rame. The Milwaukee banks might have the kind of paper
that would be acceptable at the Federal reserve bank, but the country
r
banks would have but little. Shifting of loans would bring trouble.
W hy should banks borrow back their own money?
Senator Reed. Y ou really think, now, that the country bank would
not be able to produce the kind of paper that would be acceptable
at the regional reserve bank under this bill, and thus get its money
back?
Mr. F rame. The trend of my answers would go to show that.
Very few of the banks hold it.
Senator P omerene. Your answers were rather categorical, yes or
no, were they not ?
Mr. F rame. The most of them; but I enlarged upon them enough
so as to show the trend of the general thought.
Senator P omerene. I want to ask you a question or two, unless
you had something else to say on that subject.
Mr. F rame. I have a letter here which I would like to put in, sir.
Senator P omerene. Do you desire to read it as a part of your
answer?
Mr. F rame. Yes. [Reading:]
F armers & M erchants * U nion B a n k ,
C o lu m b u s , W i s ., A u g u s t
1, 1P 1 8 .
Replying to your favor o f recent date w ith regard to the Federal reserve
bank bill (H . R. G454) :
We would not become a stockholder o f the bank because we would have noth
ing to gain, and we do not believe the organization o f a bank in accordance
with the proposed bill would be o f advantage to the country. We would have
to carry at least $5,000 more cash in our vaults (and what we have been
carrying we have found, over a period o f 50 years, has been sufficient), which
would virtually take that much out of circulation and upon which we would
receive po interest. We would also have to deposit approximately $25,000
with the reserve bank without interest, and the total loss to us, at the rate of
2 per cent, would be $000.
O f course lie keeps below the 5 per cent reserve.
The C hairman. That is very surprising, in view of the fact that
he is required to carry less, and he now says he will have to carry
more. As a witness I think he has------Mr. F rame. Spoiled his case?
The C hairman. W ell, go ahead.
Mr. F rame (reading) :
Banks located in agricultural communities like ours do not in the usual course
o f business receive notes and bills o f exchange rising out o f commercial trans
actions or make loans on United States, State, county, or municipal bonds.
Neither do they have the opportunity o f buying acceptances.
Our city bank friends claim they would not be benefited by the reserve bank,
and we think they would suffer with us a proportionate loss o f business and
profits.
Very truly, yours,
J. R. W heeler, C a s h i e r .
Senator Pomerene. Mr. Frame, I think I am safe in saying that
the purpose of establishing the amount of the reserves provided here
is to have a conservative amount. There may be some difference of
opinion as to what that shall be.
Mr. F rame. Yes, sir.
Senator P omerene. Under the provisions of the bill as it passed
the House— and, as I understand it, you have not read the whole of
it— in country banks it is to be 12 per cent and in the city banks it is
to be 18 per cent?
Mr. F rame. Yes.
Senator P omerene. Your position seems to be, briefly stated, that
these reserves are higher than they should be. Do I correctly state
that, or not?
Mr. F r a m e . Higher?
Senator P omerene. Yes.
Mr. F rame. Those reserves of 12 and 18 per cent ?
n
718
BANKING AND CUKKENCY.
Senator P omerene. Yes.
Mr. F rame. N o ; I should think not.
Senator P omerene. Are they too high?
Mr. F rame. N o ; I do not think they ought to be any less. I think
they ought to be at least that, because it gives generally better sta
bility to the country— more confidence.
Senator P omerene. I will make my point clear a little later. Do
you think they should be higher than is provided for here ?
Mr. F rame. N o ; not unless it may be for the country banks. I
think the 5 per cent is all right, but I think, as far as the city banks
are concerned, it ought not to be less than 20.
Senator P omerene. Everyone, I take it, will concede that during
the transition period the reserves possibly ought to be fixed a little
bit higher than what they would be after the system was finally estab
lished and in working order?
Mr. F rame. W ell, we keep now, although we are required to keep
15— all country banks keep an average of about 20. W e keep more
than the required amount. W e naturally would keep more than the
required amount under this bill.
Senator P omerene. This is what I had in mind. Some bankers
may be of the opinion that this reserve is too low. Others may be
of the opinion that it is too high. The aggregate amount of the re
serve will be determined, I take it, by actual demonstration later.
Would there be any objection to giving to the Federal reserve board
the power, in its sound discretion, to lower or to increase the amount
of these reserves as the exigencies of the situation might seem to
suggest ?
Mr. F rame. I think the bill now provides that if it runs below
that there is a tax on it; and I think that is a very good proposi
tion.
Senator P omerene. That is only temporary. But suppose that
in your judgment it ought to be permanently increased or per
manently decreased, do you think there would be any objection to
giving them that power?
Mr. F rame. That is a pretty hard question to answer. I f the
board of control thought credit expansion was needed they might
be inclined to cut it down a little too low. On the other hand, if
it was a little over conservative they might raise it.
Senator P omerene. I think we have a r-ight to presume that this
board, when appointed, will be just as well qualified and just as
conservative in the transaction of the business of that board and
can be relied upon as much as we rely on the judgment of the Su
preme Court.
Mr. F rame. I will not question that point.
Senator P omerene. I would not have it otherwise.
Mr. F rame. W hat I mean to say is that I do not think that all
of the human family would think exactly alike on it. That is the
only point I wanted to make.
Senator P omerene. Some of us, particularly when we are de
feated in a lawsuit, go out and swear at the Supreme Court of the
United States.
Senator P e e d . And frequently are fully justified. [Laughter.]
Senator P omerene. W e feel so; yes.
BANKING AND CURRENCY.
719
Senator B ristow. One question, please. Do you think that the
duty of passing upon the question of the business judgment like
this is at all similar to the duty of a court in undertaking to inter
pret a statute?
Senator P omerene. They are very much the same.
Senator B ristow. One is a question of judgment of business con
ditions; the other is interpretation of language.
Senator P omerene. Not always. It is a question of fact, often.
Mr. F rame. I f you will allow me just one moment to explain
Mr. Wheeler’s low cash reserves. Country banks in the State of
Wisconsin are allowed to loan money on mortgages. Their business
is more rural than that of national banks. Therefore national banks
have more of the commercial business and ought to keep larger re
serves than the State banks.
Senator P omerene. I think that is right.
Different views have been expressed here in the last few days upon
the subject as to whether these reserve notes which are issued would
be the obligation of the bank or the obligation of the Government.
W hat is your thought on that subject?
Mr. F rame. I think it is better if it is the obligation of the bank
than of the Government.
Senator P omerene. W hy?
Mr. F rame. Because popular clamor sometimes calls for expansion
of a paper currency, and it is more difficult in that case to stop the
calls than it would be if it was regulated by the board. I think the
board, in regulating that business, would be more apt to be right
about it than it would be under general clamor for more money. I
would prefer to leave it with the board of control. I believe their
judgment would be better than popular clamor.
Senator P omerene. That does not answer the question.
Senator S hafroth. The question is whether it should be the note
of the Government or the note of the banks ?
Mr. F rame. I think it ought to be the note of the banks and not
of the Government.
Senator P omerene. Then, you would have the bank the maker and
the Government the guarantor?
Mr. F rame. Perhaps that might be the case.
Senator R eed. That does not make much difference, does it, be
tween the Government making it and guaranteeing it?
Senator P omerene. I am open to conviction; but I do not see any
serious objection to making it the obligation of the Government,
under the terms of this bill.
Mr. F rame. I can not say that I would raise any material objec
tion to it.
Senator R eed. W hat I meant was that there was no difference in
his answers, Senator.
Senator P omerene. Oh. Another question that I would like your
view upon: The success of this system, if adopted, is going to depend
very largely upon the extent to which it will be adopted by the bank
ers throughout the country. That being so, do you see any objection
to the provisions of the bill requiring the national banks to accept its
provisions and to subscribe to the stock in the reserve banks ?
Mr. F r a m e . Yes.
720
BANKING AND CUBEENCY.
Senator P omerene. W hat is it?
Mr. F rame. Because the bill requires, to my mind, more than the
banks would be willing to subscribe to.
Senator P omerene. That does not answer my question, as I under
stand it. I meant, assuming in my mind that the amount of stock
which the law would require the bankers to take was a reasonable
amount. O f course there is a difference of opinion; but assuming
that to be so, is there any objection to the compulsory provision of
the bill?
Mr. F rame. Not within what might be termed reasonable limits;
that is right.
Senator P omerene. And would you not make it compulsory under
those circumstances?
Mr. F rame. I f it was made reasonable there is no objection to it
whatever.
Senator P omerene. By so doing you would be more likely to
insure the success of the system.
Mr. F rame. I f it is within reasonable bounds.
Senator P omerene. S o that the only question, then, that would be
raised on that score, in your judgment, is as to whether or not the
20 per cent is a reasonable amount?
Mr. F rame. I have not raised the question as far as the capitaliza
tion is concerned.
Senator P omerene. I know you have not, but I have in mind ob
jections which have been raised here by other witnesses.
Mr. F rame. I see. No, as far as I am concerned, on that point
I do not want to raise the question.
Senator P omerene. Under the provisions of this act the only
stockholders in the regional banks are the member banks. Do you
see any objection, and if so, what, to the opening up of these banks
so as to permit the public to take a portion of this stock in the re
gional banks?
Mr. F rame. I do not see any objection to it whatever.
Senator P omerene. Would there be any advantage to be derived
from it?
Mr. F rame. I can not see that it would make any material differ
ence.
Senator R eed. It would add more capital, would it not?
Mr. F rame. Oh, it would in that case, if it was compulsory.
Senator P omerene. But would it not be an advantage?
Mr. F rame. I can not see that it would be objectionable. I would
not object to it at all.
Senator P omerene. That does not quite answer my question. You
say it is not objectionable. But affirmatively, would there be any
advantage so far as the public is concerned?
Mr. F rame. N o. I f you will just cover the one point about taking
care of us when trouble ensued, I think the banking system of the
United States would take care of itself.
Senator P omerene. W e are trying to do that.
Do you think there is enough banking capital in this country now?
Mr. F rame. I think it is ample. I think the expansion of credit
to-day is ample, too. I f you will allow me I will give you my
reasons.
Senator P omerene. I will be very glad to have them.
Mr. F rame. The total wealth of the United States in 1890 was
about 65,000 million dollars. I f we leave off the word “ millions ”
we will easier grasp it— 65,000 millions.
Senator R eed. H ow many billions is that?
Mr. F rame. Sixty-five. In 1912 the total wealth had about
doubled— 130,000 millions.
Senator P o m e r e n e . In 1910?
Mr. F r a m e . N o ; 1912. That is a close estimate. In 1890 the bank
ing power of the United States was 5,150 millions; about 5,000 mil
lions. In 1912 it is five times as great, or 25,000 million dollars.
While our wealth has doubled, the expansion of bank credits has
quintupled. Therefore I think that we have expanded as far as is
wdthin reason and as far as our surplus capital will naturally permit.
W e are in a strained condition to a certain extent. As Sumner
puts it, in his History of American Currency.
Overspeculation is speculation which outstrips the capital o f the country.
When we lose our heads in the intoxication o f our own achievements, look on
currency anticipations, which are only fictitious capital, as if they were real,
use them as already earned, build other expansions upon them, then we bring
a convulsion and a dow n fall; sometime or other a liquidation must come
* * * then credit breaks down and there must be a settlement, a liquidation,
a dividend, a new start.
As far as the question of the overexpansion of credit is concerned,
I think the foregoing statements prove that almost conclusively.
I have quoted Sumner. I do not know whether I can lay my hands
on it or not, but Paul Le Roy Beaulieu, of Paris, France, lately de
clared that—
The whole w orld’s pyramid o f credit was overexpanded.
He is considered the greatest authority in the world on economics.
Senator S iiafroth. I would like to ask you a few questions.
Mr. F rame. Just one moment, if you will allow me, on that ques
tion of loans. From the report of the Comptroller of the Currency
for 1912 the loans and discounts, including discounts of all the banks
of the United States, are about as follows:
Various classes of bonds (not Government), 4,500 millions; loans
on real estate, 3,500 millions; general loans not quickly liquidated,
6.000 millions; prime paper, including bills of lading, 4,500 millions;
total, 18,500 millions.
Prime paper, according to the report of the Comptroller of the
Currency, is covered in about one-quarter of the total loans, and the
other loans are in what might be termed, in the general acceptation
of the term, not quickly liquidable. Therefore that indicates that we
are in an expanded condition and not having a full amount of quick
liquidable paper in the banks of the United States to-day equal to
loaning powers. As far as Great Britain, France, and Germany are
concerned, those banks have larger quantities of what might be
termed quickly liquidable paper, because in those three nations they
have exports and imports annually to the extent of about 10,500
millions of dollars a year; that is, to simplify it a little bit, nearly
1.000 millions of dollars a month of imports and exports from those
three countries.
Senator P omerene. Exports and imports combined?
Mr. F rame. Y es; practically all of this bill of lading paper is dis
counted in those nations. This paper covers generally nations with
1
722
BANKING AND CURRENCY.
which they do business, because they have their tentacles scattered all
over the world.
The sun never sets on Great Britain’s flag, you know, and they
have ramifications in all their different possessions. That being the
case these nations have about 1,000 millions of dollars a month of
paper that is quickly liquidable paper and paid when it is due. That
paper we can not hold while interest rates abroad are lower than
here. These nations have been building up surplus capital for cen
turies. Their surplus capital exceeds ours. Their rate of interest is
therefore lower than it is here. The bills of lading that are issued
in the United States for imports and exports almost invariably go
over there because the rate of interest is a little bit lower than it is
over here. When we become a creditor Nation, we can then turn
the tide, but not before.
The question was asked of a gentleman yesterday about the rise
and fall of the rate of interest of the Bank of England, and to my
mind his answer was not what it should be. He said that it stopped
progress. I do not think it does. When the bank of England raises
the rate of interest a little above the normal rate in Great Britain,
even one-half per cent above what obtains in France, Germany, or
Amsterdam, this paper for export and import, with the bills of lading
attached, instead of going into the English banks for discount will
go over to those other nations, because they can get it for a half a
cent less. The paper that is falling due in Great Britain is paid in
cash, and the flow of gold will start from France, Germany, and
Amsterdam over into London. It eases the money market just as
automatically as water running down hill. When they have suffi
cient of that gold paid in on their bills that are due and payable they
lower the rate again and get back into normal condition. France
does the same thing; Germany does the same thing; and it is just
simply transferring a little of their liquidable bills of lading— quick
paper— into the other nations.
Senator S hafroth. Does not that, however, while it affects the
gold one way or the other by raising the rate of interest, discourage
enterprise in the country that is raising the rate of interest ?
Mr. F rame. N o ; not to any perceptible extent, because it is only
temporary.
Senator S hafroth. It would depend on how long it is maintained ?
Mr. F rame. O f course, for the last year or two, while the war has
been going on, it has had that effect to slow progress.
Senator R e e d . That does not stop it as much as it would to have
a financial smash and have the bottom fall out of the whole currency
system ?
Mr. F rame . N o, sir. As far as currency expansion is concerned,
in Great Britain, you know, the Bank of England can not issue a
dollar of notes in excess of 90 millions of dollars, except if you
deposit £5 in gold they will give you a five-pound note.
Senator R eed. They are payable in gold or silver.
Mr. F rame. They are practically a gold certificate. But 25 years
ago, if you will remember it, the Bank of France had more than onehalf of its total holdings in silver instead of gold. To-day more than
three-fourths of its holdings are gold. The bank has been gradually
slipping out, little by little, its silver, because it has depreciated in
value.
BANKING AND CURRENCY.
723
Senator R eed. In regard to this condition that you have described,
that the currency is expanded as far as it is safe to do it, there are
only two remedies in that event, and that is either to contract credit
or else expand the medium upon which it is based. Is it not one of
those two ?
Mr. F rame. Or just hold steady. I f pace is accelerated, we might
meet the fate of the Titanic.
Senator R eed. It would not do to destroy any of that circulating
medium upon which this credit is built, would it?
Mr. F rame. It ought to be done with extreme caution, if it is done,
and done very slowly. I f it is done rapidly, it will produce a panic.
Senator R eed. In your judgment, does this bill contemplate the
retirement and cancellation of the bank currency without the substi
tution of any currency in its place?
Mr. F rame. N o, sir.
Senator R eed. In other words, it means the retirement of $37,500,000 in the cancellation of that much paper every year?
Mr. F rame. Five per cent per annum, unless the Federal reserve
bank increased to the same quantity.
Senator R eed. D o you believe that a permanent currency, such as
the national-bank currency has been amounting to— 750 millions of
dollars— would be supplanted by this 30, G , or 90 day paper and
O
enough money issued on it to take its place?
Mr. F rame. That is a hard question to answer. I think that my
statements show that it is in direct competition with all of the banks
in the United States for this class of paper. W e want that class of
paper if we can get it. The banks want the quick, liquidable paper
first before they take other loans.
Senator R eed. Y es; but do you believe that there would be a suffi
cient quantity of that kind of paper that would be taken and recalled
every 60 or 90 days to keep permanently in existence 750 millions of
paper to take the place of these bank notes?
The C h a i r m a n . It would enter into competition with the existing
order of banks in doing it, for that very kind of paper.
Senator R eed. Have you not shown by the present figures that you
have just read that there is only 450 millions of that out now?
Mr. F rame. Forty-five hundred millions.
Senator R eed. There would be only a little more than half enough ?
Mr. F rame. There is only one quarter enough to go around now,
for the banks of the United States to cover total loans and discounts.
Senator S hafrotii. I would like to ask you whether you think
there should be any more than 33$ per cent of gold back of these
notes that are issued, the Treasury notes, under this bill?
Mr. F rame. I should think it would be better if they held 50 per
cent even. O f course that is a limitation not necessarily incumbent
upon the managers to keep it that way.
Senator S iiafroth. D o you think that this is as good a currency
as the currency issued by the National Government upon a 50 per cent
reserve with the power given to the Secretary of the Treasury and
a direction given to him to maintain that parity at all times in gold
and to sell bonds, if necessary, to keep it at a parity?
Mr. F rame. I think my answer would be covered in the answer
to Senator Pomerone, that it does not seem to me the province of a
724
BANKING AND CURKENCY.
government as a prudent political thing to issue currency, because
public clamor sometimes calls for more than ought to come out.
Look at it in France. I f any of you have read Andrew D. White’s
Fiat Money in France, of experiences about a century ago, it will make
that clear. I regret exceedingly, gentlemen, that I could not find that
publication in New York. It is out of print. I wrote the Appleton
Co. in regard to it. I wanted to have a copy, because I think it is
a very elucidating pamphlet by a man whom you must all revere and
honor— Hon. Andrew D. White. He illustrates the clamor of the
people for more money until they had actually issued, in France,
a little over 100 years ago 8,000 millions of dollars of currency. It
was just simply because when they got into a little depressed condi
tion of affairs they said, “ Give us some more money. Let us run
the printing press and get some more.” That kept up until they
increased from 400 millions to start with until they got 40.000 mil
lions of francs— 8,000 millions of dollars outstanding. They con
fiscated the estates of the nobles of France, and the estates belonging
to the church, aggregating in value about 1,400 millions of dollars,
and they said that they would hold those as collateral security also;
and with one fell swoop France repudiated the whole debt.
The point about it is I wanted to illustrate that popular clamor
sometimes carry good people off their feet.
Senator S hafroth . But as a matter of fact, if a 50 per cent reserve
is made and declared and held to, it is a sufficient reserve for any cur
rency ?
Mr. F rame. It is better than 33J. O f course Great Britain— take
the Bank of England. It always has more gold on hand than notes
outstanding.
Senator S hafroth. Belgium money, though, is only 19 per cent.
Mr. F rame. The Bank of Belgium?
Senator S hafroth. Yes. The most of these banks have not any
maximum reserve which they have got to maintain at all, but they
maintain a higher rate. The Bank of Germany is 33^, but they
maintain often a higher reserve than that.
Senator P omerene. W hat is France?
Senator S hafroth. France is now down to nothing, if they want
to; but they have got a very fair reserve.
Mr. F rame. They keep an average of about 80 per cent on hand.
Senator S hafroth. It is very large at the present time.
The C hairm an . It includes silver, but it is mostly gold.
Mr. F rame. They have been gradually substituting gold for silver.
Senator S hafroth. Were you going to look up something?
Mr. F rame. W hat country was it you asked about?
Senator S hafroth . Belgium.
Mr. F rame. The national-bank circulation is 136 millions; de
posits, 16 millions; total specie, 24 millions; that is a little less than
20 per cent.
Senator S hafroth. Y es; about 19 per cent.
The C h a ir m a n . Are you speaking in francs?
Mr. F rame. This is the Bank of Belgium.
The C hairm an . N o ; I say you are speaking in francs?
Mr. F ram e . N o ; I have reduced it to dollars.
The C h a ir m a n . W hat did you say their specie was?
725
BANKING AND CURRENCY.
Mr. F ram e . When this pamphlet was written a number of years
ago— it is dated 1906— it was 24 millions. From this table all Euro
pean banks is shown, thus enlightening the whole subject.
T
able
N o.
1.— Capital, specie, circulation, etc., o f the great European single
banks o f issue on or about June 30, 1906.
[Amounts are expressed in millions.]
Capital.
128.9
41.9
9.6
1.8
6.8
28.9
1.9
35.2
3.9
28.9
11.6
Circula
tion.
Deposits.
$149.9
31.6
16.3
17.0
.8
134.2
4.2
189.1
23.4
90.6
16.1
10.6
1.9
2.5
29.3
Imperial Bank of Russia...........................
Bank of F.ngland......
National Bank of Servia...........................
Royal Bank of Sweden.............................
3.5
8.0
14.6
2.9
28.3
70.8
1.1
11.9
$412.0
376.5
136.5
8.6
34.9
305.7
18.2
908.8
23.1
213.3
66.6
14.8
21.4
113.0
74.5
43.1
591.0
146.8
6.6
52.2
Total (20 banks)..............................
340.5
3,567.6
Bank of Austria-Hungary'.......................
National Bank of Belgium........................
National Bank of Bulgaria........................
Bank of Spain...........................................
Bank of Finland.......................................
Bank of France.........................................
Bank of Italy............................................
Bank of Naples.........................................
Bank of Sicily...........................................
Bank of Netherlands.................................
Bank of Portugal......................................
Total
specie.
Loans.
109.8
280.3
.6
12.2
*211.1
299.2
24.1
7.6
27.2
200.2
5.2
803.4
.4
152.7
32.8
9.1
8.0
57.1
13.7
15.0
455.9
187.8
4.5
20.6
$345.7
189.8
124.8
11.9
13.7
154.4
11.7
255.3
21.6
91.6
34.5
10.9
12.0
59.8
26.5
25.2
208.3
156.8
2.3
37.0
1,120.4
2,525 6
1,793.8
The foregoing, practically banks of issue and not of deposit, show
demand liabilities versus coin reserves, as compared to the national
banks of issue in the United States, as follows (amounts being ex
pressed in millions) :
20
European
banks.
6,137
United
States
national
banks.
Circulation outstanding.......................................................................................
$3,567.6
$517.9
Deposits.....................r.........................................................................................
1,120.4
5,898.0
Total...........................................................................................................
4.688.0
2.525.0
6,415.9
464.4
Mark the fact that the great issuing banks of Europe hold 54 per
cent of demand liabilities in coin, as against only 7 per cent in the
United States.
Senator S ha fro th . D o you think that the national-bank currency
should be retired in this country under present conditions, either
gradually or all at once? O f course all at once would be absurd.
Mr. F ram e . W e would have a panic very quickly.
Senator S hafroth . But even gradually, with the substitution of
another currency or another system?
Mr. F ram e . I think we ought to have the national banks issue a
currency, or we ought to have some centralized organization do it. I
believe largely in the methods of the issuance of currency abroad.
Practically, as far as small banks are concerned, there are none in
726
BANKING AND CURRENCY.
Europe that have the power to issue currency to-day, except in
Great Britain. There are a number of them there that have the
privilege, whose charters have not expired, when they were issued
previous to 1844. Any bank that has been chartered since 1844 has
no power to issue currency at all. The amount of those who have the
privilege of issuing it is very limited to-day.
Senator S h a f r o t h . It only amounts, I think, to about £2,000,000
outside of the Bank of England?
Mr. F r a m e . I think that in Scotland it amounts to £2,600,000, or
about $13,000,000. But it is infinitestimal as a whole.
Senator B r i s t o w . I would like to ask a question there.
Senator R eed. Y ou were on the question of bank circulationbank notes— and I have a question pertinent to that. I understand
that it is a rule of finance, which you bankers recognize, that an in
ferior currency is always kept in circulation more than a superior
currency.
Mr. F ram e . A s an illustration of that, we keep on hand gold cer
tificates, because we like to have the gold in the department at
Washington here to save abrasion, because it is weighty to carry, etc.,
and we pay out other issues in preference to that. The human family
is built the same way the world over. W e always keep the best.
That is the Gresham iaw.
Senator P omerene . Y ou would pay out a dollar with a hole in it
rather than a sound one.
Mr. F ram e . I f you have two calves, as Adam Smith says, to pay a
debt, the leanest one does it, if both are legal tender.
Senator R eed. This national-bank note is not a full legal tender,
is it?
Mr. F r a m e . N o, sir.
Senator R eed. Therefore it can not be used to pay customs dues,
one of the great sources of revenue of our Government. The result,
therefore, is that the money which flows into the Federal Treasury
from that source comes in in something else than bank notes. That is
true, is it not?
Mr. F ram e . Yes.
Senator R eed. And yet the bank note stays out and performs the
function of money for ordinary business transactions?
Mr. F ram e . Yes.
Senator R eed. I s not the result of that that the Government gets
more gold at its ports of entry, its customhouses, than it would if
we were to make the bank note full legal tender?
Mr. F ram e . And acceptable for customs?
Senator R eed. Yes.
Mr. F ram e . I think that is just the point I wanted to raise about
this question of reserves for these Federal reserve banks— that they
be compelled to hold gold. The law should say so. I f done, then
when trouble ensues we have the gold to do business with.
Senator R eed. I am talking about the proposition of whether, if
we were to retire the national bank note and issue in lieu of it a full
legal-tender note, it would cut off our source of gold supply to some
extent?
Mr. F ram e . Not unless it was done to an extreme beyond what is
already outstanding.
BANKING AND CURRENCY.
727
Senator R eed. There are $750,000,000 of bank notes circulating in
the country. They are not receivable at the customhouses. They
perform the ordinary functions of money.
Senator S hafroth . I think they are receivable there now. I think
the duties are paid in bank notes or any currency of the United
States. Since the provision of 1900 I think every form of note in
the United States is received in the customhouses. During the war it
was not, but during the time up to that time my information has
been that they are received.
Senator R eed. They may be received, but they are not legally
receivable.
Senator S hafroth . Oh, no; they could shut down on it at any
time.
Senator R eed. I f we were now to transform that $750,000,000
into a full legal tender, receivable for customs and everything else,
then the money that would come into the Treasury would be just
like the money that goes into the pockets of all the people, and we
would be getting $750,000,000 of bank notes on the money that we
substitute for them instead of giving gold. Would not that interfere
with the Government being able to collect a currency and put aside
gold in its Treasury?
Mr. F ram e . The law to compel payment in gold always keeps
the Government in condition where it can maintain its supply.
Senator R eed. O f course, that would be true, but if we were to
make the bank note to-day a full legal tender, or were to substitute
for it another form of money as a full legal tender, and it flowed
through the customhouses, it would take the place in part of gold
that now goes through, would it not?
Mr. F ram e . Yes, sir.
Senator R eed. And our opportunity to get gold and to put it
away into the vaults, pile it up in the form of these gold reserves,
would be lessened, would it not?
Mr. F rame . It undoubtedly would.
Senator R eed. Then, is it not a serious question whether that
national-bank currency is not now performing a very useful func
tion to the Government?
Mr. F ram e . It, perhaps, performs a useful function in holding
the gold in the country, because gold for reserves is now held by the
banks largely. Over $712,000,000, I believe, at the last report, was in
gold or gold certificates.
Senator R eed. Those are all the questions I wanted to ask.
Mr. F rame . On that question o f the gold certificates, that does
not cost the United States Government anything more than the
printing and the storage. The people of the United States volun
tarily put that gold in there. They have the gold certificates. They
are the very best possible kind of a money that we could possibly
have. W e never think but what they are good beyond question. It
is just like my friend here pulling out of his pocket, yesterday, gold
certificates.
Senator S hafroth . Y es; I paid my check and it was cashed in
gold certificates.
Mr. F rame . It is keeping the gold in the country, and it is not
costing the people anything. It is a foundation which is a steadier
728
BANKING AND CURRENCY.
for our great superstructure of credit, which is far better than it
would be if it was simply an I. O. U . or a credit currency.
Senator S hafroth . They told me, over at the Treasury, that the
tendency of the Treasury Department is that the money comes in
there and is deposited and dropped into the vaults in order to get rid
of the abrasion, and in order to get rid of a great many inconveniences,
and that the tendency now of the department is to shove out the gold
certificates. The national-bank note is subordinate currency, so far
as it is concerned. It seems that they wished to shove out these gold
certificates, and they are doing it, as I understand it.
Mr. F ram e . That is the exact illustration of what I have done over
my counter hundreds of times. W e tried to pay gold over the
counter years ago, over and over and over again. The currency of
the United States is so unquestioned that no man ever takes it out of
his pocket to see whether it is good, bad, or indifferent. People often
say, “ I do not want that gold. Give me some of your good currency;
that is good enough for me.” They would rather have that in their
pockets than gold, except on the Pacific coast.
Senator S hafroth . And they will take any form of currency ?
Mr. F ram e . Any form of currency, because they have not had the
experience that I had in my early days.
Senator P omerene . W hy the exception on the coast?
Mr. F ram e . I do not know. They must be a little bit like the Eng
lishmen. They seem to hold to their pounds, shillings, and pence.
The C h a ir m a n . I would like to ask you one question. Would you
think it advisable to make these Federal reserve notes legal tender,
or not? I f not, why not?
Mr. F rame . As it would have a tendency to drive gold out of the
country, I would not make them a legal tender.
Senator P omerene . Why?
Mr. F rame . The so-called Gresham law would come into play.
The C h a ir m a n . I f it is made redeemable in gold why should it
drive out the gold?
Mr. F rame . W ell, if it is kept redeemable in gold it would always
be good in gold, as long as the confidence of the American people
was such that they said, “ W e can get it if we want it.” But in the
experience we had when President Cleveland sold a large amount of
4 per cent bonds it caused a loss of confidence in the ability of the
Government to maintain its power to redeem in gold.
Senator R eed. But there is another thing. There was not any
money in the Treasury.
Mr. F ram e . That is why I say keep reserves in gold.
Senator S hafroth . The appropriations exceeded the income.
Senator R eed. They did not have enough money to run 60 days.
Mr. F ram e . That is exactly the reason why I think it is the proper
thing to do to keep our final reserve money in the coin of the world.
That is the idea.
The C h a ir m a n . Mr. Flannagan, of New Jersey, is heTe. Is it the
wish of the committee to begin his testimony to-night or to-morrow?
Senator R eed. I am rather tired, Mr. Chairman. I do not mean
to say that you made me tired, Mr. Frame, except you made me
think, and it makes me tired to think.
Mr. F rame . There is just one part I would like to refer to in the
bill before closing.
BANKING AND CURRENCY.
729
I would like to call your attention to page 11, because I presume
it is an oversight on the part of the other House, as a matter of strict
justice:
In case a subscribing bank reduces its capital it shall surrender a proportion
ate amount o f its holdings in the capital o f said Federal reserve bank, and in
case a bank goes into voluntary liquidation it shall surrender all o f its holdings
o f the capital o f said Federal reserve bank.
Senator S ha fro th . That has been changed a little as it has passed.
The C h a ir m a n . W hat is the point ?
Mr. F rame (reading):
In either case the shares surrendered shall be canceled and the bank shall
receive in payment therefor a sum equal to its cash paid subscriptions on the
shares surrendered.
Senator S ha fro th . That has also been modified.
The C h a ir m a n . D o you mean that the earnings on the stock is
ignored ?
Mr. F ram e . Yes. The point I want to bring out is that the face
only is paid back. Now. suppose that during a term of six or eight
years an accumulation of 20 per cent of capital was added to it. It
would seem perfectly fair if the banks of the United States should
turn in that capitalization of $100,000,000 and you had $20,000,000
of surplus that was accumulated from profits, that the bank when it
surrenders it should receive its proportionate share of surplus.
The C h a ir m a n . Y ou mean the book value?
Mr. F ram e . The book value.
Senator F e e d . Then, in addition to that, this relates only to those
banks which voluntarily reduce their stock and go into voluntary
liquidation. What is the provision, if anyone here knows, when it is
involuntary? O f course, in that case some rule ought to be made
that the creditors would get the full book value of their stock.
They ought not to lose it and let it be added to the profits.
Mr. F ram e . Would not that cover the point that I make?
Senator S hafroth . Yes.
Senator R e e d . The point you make refers to one thing, but I
wondered whether it covers the involuntary liquidations.
Senator S hafro th . I f not, probably it ought to be made to
cover it?
Mr. F ram e . Oh, yes; it ought to cover both; if it does in one case
it certainly ought to be in another.
Senator R eed. It reads:
That if any shareholder o f a Federal reserve bank shall become insolvent and
a receiver be appointed, the stock held by it in said Federal reserve bank shall
be canceled and the balance, after deducting from the amount o f its cash-paid
subscriptions all debts due by such insolvent bank to said Federal reserve bank,
shall be paid to the receiver o f the insolvent bank.
Senator S hafroth . Y ou can just put in there, “ and accumula
tions.”
Mr. F rame . Or “ book values.”
Senator S hafroth . That will cover it.
Mr. F ram e . That is certainly equitable. In case a bank closed
voluntarily or through a receivership there is no provision that I
can see made for the care of the 2 per cent bonds. O f course, if
there is a public market for them so they can sell them without any
difficulty, that would be all right; but if there did not happen to be,
730
BANKING AND CURRENCY.
it would seem as though at least a provision should be in there that
if they did fail or if they went into voluntary liquidation that at
least a 3 per cent bond might be given to them in exchange for
their twos.
Senator R eed. That is, if we issued a 3 per cent bond.
Mr. F rame. W ell, you have provided in there for that, have you
not?
Senator S hafroth . He means if the bill passes.
The C hairm an . They have not actually been issued yet. [Laugh
ter.]
Mr. F rame. N o ; but they ought to be.
Senator S hafroth . That is one of the great stumbling blocks, you
know.
Mr. F rame. W ell, I am speaking about the question of the justice
of it.
Senator R eed. Y ou mean that bond ought to be cashed in some
way ?
Mr. F rame. Ought to be cashed in some way; taken care of by
the Government in some way instead of being thrown on the helpless
bank. I f it involuntarily suspended, or if the bank wanted to go out
of business, it ought to be provided for. Really, a 2 per cent bond
ought never to have been sold. I think it was a great misfortune
that it was sold. It ought to have been a 3 per cent bond, with a
higher tax.
I thank the committee for their kindness in hearing me, and I ap
preciate it very thoroughly.
The C hairm an . W e are glad to have you here with us, Mr. Frame.
Mr. F rame. And I do hope that you will give to the country
something that will live in history, equally with the Bullion Report
of 1810, made to the House o f Commons.
(The document referred to by the witness follows:)
S o m e F a c t s v e r s u s F a l l a c ie s i n B a n k i n g R e f o r m .
[Address by Andrew Jay Frame, president o f the Waukesha National Bank, Waukesha,
Wis., delivered before the State Bankers’ Association, at Muskogee, Okla., May 9,
1913.]
Great Britain, in her campaign o f education on currency reform, was agitated
by widespread discussion for 25 years previous to 1S16 when Parliament
indorsed the celebrated Bullion Report o f 1810 to the House o f Commons.
Prof. W illiam G. Sumner in his History o f American Currency dubs this report
“ The most important document in financial literature.”
As to ameliorating panic conditions, the paramount enunciation in that
document probably was ‘ ‘ in the presence o f a panic, it is the duty o f the bank
to discount freely to all solvent parties. I can not find in searching the records
that this document advocates the necessity o f discounting too freely in normal
times. That question must necessarily be governed automatically by the law
o f supply and demand for money. Abnormally high interest rates are the true
barometer that credit expansion has outstripped capital and in normal times,
even in advancing prosperity, should be a warning that extra currency issues,
which Prof. Sumner calls “ fictitious capital,” should not be greatly encouraged.
The late Titanic disaster is a fair illustration o f my meaning. Dr. Adam Smith
said: “ The cry o f all ages is for more money.” The cry o f the present age
is more speed in every way. The overbuoyant American needs a check rein
to insure a conservatism which gives more permanent prosperity to all, thus
limiting the evils o f too frequent panic periods as well as their severity.
b a n k in g
and
currency.
731
I declare that no live, progressive nation can be entirely free from panics.
Only those nations where commerce and progress are dead can enjoy the
doubtful legacy. Panics will forever be with those nations enjoying great
progress, expanded credit and unbounded energy. These reign here. I plead
for conservatism as a safety valve to true permanent progress and relief when
panic threatens.
Under Sir Robert Peel’s A ct o f 1844, Great Britain has a very limited per
capita circulation, and it is far more rigid than ours. Nevertheless, in 1847,
1857, and 1866, when panics were raging, and banks and business houses were
falling like snow in a winter’s storm, on Government assurance that the rigid
currency limitation would not be enforced, the governor o f the Bank o f England
publicly announced that all good, solvent bankers and merchants could obtain
at high rates discounts for cash or credit at the bank, the banking department
merely obtaining extra cash from the issue department on deposit with it o f
ample securities. The mere knowledge that relief was at hand, history says,
broke the back of the panic almost in the twinkling o f an eye. and little
“ extra cash ” was required to restore confidence. Mark the fact, relief came
with “ extra cash ” at high interest rates, and such cash was almost imme
diately retired and normal conditions prevailed thereafter.
As our general banking functions in most material respects under the
beneficient, independent banking systems o f the United States, barring a few
States without good laws, nowr fulfill their true mission toward the people in
our phenomenal progress, it seems the only needful requirement is some flex
ibility to our currency issues when panic threatens, to the end that general
paralysis o f trade and commerce may be avoided.
To accomplish this great end we need no monopolistic, branch banking system
that even threatens to revolutionize present conditions; we need in normal
times no further inflation o f our present excessive currency issu es; we need
no additional easy methods o f expanding credit by acceptances or otherwise,
but as I have often said before, we do need some method o f obtaining redis
counts in abnormal periods from some reservoir o f eStra cash at high interest
rates, purely as a relief measure to prevent the calamitous conditions o f general
cash suspension by banks. The citation from exi>erience, not theory, o f the
Bank o f England covers the point at issue, except that the barometer o f a high
interest rate for extra cash should be an automatic regulator o f flexibility,
and the bank should not be obliged to ask the Government not to prosecute
for infringement o f law for relief in time o f trouble. The chairman o f the
Monetary Commission told me he asked the governor o f the Bank o f England
why the Government did not give this extraordinary power to the bank for
relief in troublous times, and his answer was, “ W e fear overexpansion o f
credit.” My study o f the subject, however, convinces me that a middle ground
between the rigid English currency system on one hand and on the other hand
the demands o f the banking reform advocates for almost unlimited, untaxed
currency issues, even in normal tim es; also for monopolistic, revolutionary,
complex, and compound remedies at all times which are not germane to relief
under pressure, holds the true solution for our troubles. Doping patients
with sweetened quack medicine when they are not ill undermines a sound
constitution. Encouraging pyramiding o f credit by opening up easy methods
for expansion leads to bubble blowing. It is a panic breeder and not a pre
venter. The Imperial Bank o f Germany comes closer to covering the correct
method o f relief, as it can issue but one hundred and thirty millions o f un
covered currency, and all in excess thereof must pay a tax o f 5 per cent
thereon to the Government. This penalizes overexpansion o f currency and is
the safety valve which has kept her overstrained condition from exploding.
Even this method has taxed her utmost powers to prevent a cataclysm there,
as is evidenced by the German banks borrowing money o f the United States
banks on good collateral at rates running from 5 to 6 per cent clear through
1911-12, and even up to date. The banks o f Germany even bid 20 per cent for
money in the New York market in December, 1911, and at several periods since
have bid in excess o f 6 per cent. Notwithstanding her 5 per cent penalized
flexible currency saved her from panic, yet Germany has bordered thereon for
some time, chiefly because o f overindulgence in acceptances, which are more
freely granted there than elsewhere, coupled with an enthusiastic industrial
development, overtaxing her surplus capital.
9328°— S. Doc. 232, 63-1— vol 1------ 47
732
BANKING AND CUKRENCY.
HANDWRITING UPON THE WALL.
Just a few more w ords o f warning on overexpansion o f credit before I leave i t :
Millions.
In 1890 the total wealth o f the United States was about_______________ 65, 000
In 1913 the total wealth has about doubled, or_________________________ 130,000
The banking power o f the United States:
In 1890 w as_______ _____________________________________________________
5,150
In 1913 it is five times as great, or______________________________________
25, 000
therefore, while our wealth doubled, our pyramid o f bank credits increased
fivefold.
Again, the 1912 Report o f the Comptroller o f the Currency shows “ Loans
and discounts,” including bonds, o f all the banks in the United States about
as follow s:
M illions.
In various classes o f bonds (not G overnm ent)__________________________
Loans on real estate, say__________________________________________________
General loans, not quickly liquidated____________________________________
Prime paper, including bills o f lading____________________________________
4,500
3, 500
6, 000
4, 500
T otal_______________________________________________________________ 18,500
This indicates that only one-fourth o f the total is prime paper, and the other
three-fourths is in other securities, because all live paper is now promtly
cared for first. The heretical demand by the banking-reform advocates for
7,400 national banks to be allowed to loan their credit to their customers on
acceptances, which is clearly a complication and not a relief o f banks in panic
periods, is condemned by 12 bankers from 12 States in a signed brief which I
filed at Washington with the Banking and Currency Committee. These 12
bankers declare that if their city correspondents enter the field o f accepting
customers’ drafts they will transfer their balances to more conservative banks.
They declare this function is the field for acceptance or discount houses, and not
for banks o f deposit.
It is gratifying to note that although a year ago when, under the title o f
“ Diagnosis o f the monetary commission bill ” I addressed the bankers and
business men’s clubs o f Memphis, Tenn., Little Rock, Ark., and elsewhere, and
therein condemned general bank acceptances as unsafe, lately the chairman o f
the Business Men’s League o f the United States reiterated my expression that
“ it was a dangerous proposition.” Let there be more light and the whole ques
tion may be soundly solved yet without breaking all the crockery.
In face o f the fact that the w orld’s production o f gold from 1490 to 1890 ( 400
years) was 7,350 millions, and from 1890 to 1913 (23 years) was 7,000 millions,
in face o f the fact that the pages o f history are strewn with proofs, as recorded
by all the great authorities on political economy, warning us against overindulgence in credit expansion; in face o f the fact that practically all our con
servative banking journals and economic writers on the great dailies are con
tinually sounding their notes o f warning (tim e forbids quoting from a mass o f
evidence) ; in face o f the fact that the w orld’ s greatest political economist,
Paul LeRoy Beaulieu, o f Paris, France, lately declared “ that the whole w orld’s
pyramid of credit was overexpanded,” I ask in all seriousness is not the “ hand
writing upon the wall ” a sufficient warning to us that conservatism— not further
easy methods o f expanding our currency or credit— should reign supreme? I
challenge any banker or statesman for disproof o f these facts.
W ithout further pursuit o f this subject, and as the new political power is
wrestling with the generally supposed knotty problem, let us aw ait the findings
in hope o f a sound solution.
Permit, therefore, a few logical, general statements o f fact— good in any
event— follow ed by a few o f the many reasons why the independent banking
system o f the United States is not the worst but the best in the world—barring
only relief in times o f pressure— in the hope that it may help enlighten our
pathway.
PANICS ABROAD AND HEBE.
First, permit, regretfully, a reference to statements that have periodically
been sent broadcast throughout the land, which are so seriously misleading that
they ought not to pass without comment.
BANKING AND CURRENCY,
733
W ithin two years I have heard Hon. Robert W. Bonynge, a member o f the
monetary commission, in public addresses reiterate the follow in g:
“ It may be several years yet before the country w ill be ready for a full and
scientific remodeling o f our antiquated banking system. Our faulty banking
system is responsible for the many bank panics that have disgraced us in the
past, and from which all other great commercial nations have been exempt for
practically half a century.”
David R. Forgan, president National City Bank o f Chicago, before the New
York Credit Men’ s Association, January 23, 1913 (see p. 4, pamphlet, H ow to
avoid panics), sa id : ‘ ‘ I say it is nothing short o f a national disgrace that
this is the only country in the civilized world that has had panics (and it has
had about half a dozen) causing general suspension o f the banks within the
memory o f living man.”
The Chamber o f Commerce o f the United States o f America, at Washington,
D. C., January 21, 22, 23, 1913, adopted the follow ing resolutions:
“ Our present banking and currency system, based upon laws enacted 50
years ago, is entirely inadequate for the present needs o f the people and the
business interests o f the country, on which the welfare o f our people depends.
“ That there is no necessity for the continuance o f this condition in the United
States, and for the recurring financial panics it tends to induce, is evidenced by
the absence o f such frequent financial disturbances in other countries.”
These with others o f a like character seem to have imbued the masses with
the idea that panics do not occur abroad. Some stress is laid upon a fine
distinction between the words “ bank ” and “ commercial ” panic. The Standard
Dictionary indicates a distinction like unto tweedledum and tweedledee. As to
the business men o f the chamber o f commerce falling into error on the subject
it may be excusable, because it is not to be expected that they are fam iliar with
the w orld’s history on banking.
As a partial answer to these fallacious statements permit me to quote from
my address o f 1902 before the State Bankers’ Association o f Michigan.
Panic o f 1836 to 1839.— Sumner’s History o f American Currency s a y s: “ In
1836 the Agricultural Bank o f Ireland and the Northern and Central Bank of
Manchester failed.” They had 70 or 80 branches. “ This w as the first blow
o f the crisis which convulsed Europe and America.” According to McLeod
failures continued through 1839 before equilibrium was restored.
Panic o f 181/7.— McLeod, in The History o f Banking in All Nations, quotes
many great bank failures in 1847 all over Britain and sums up by saying the
liabilities were over £15,000,000. Further, it says: “ A complete cessation o f
private discounts follow ed.” Doubtless branch banks went down, but no dis
tinction is noted.
Panic o f 1857.— Again McLeod quotes a long list o f terrible bank failures in
1857, and then says: “ As the failures in London became more tremendous dis
counts became more and more contracted. The stunning news o f the stoppage
o f so many banks created a banking panic. Private banks stopped discounting
altogether. When universal ruin was at last impending, etc.” “ This great
crisis far exceeded in intensity that o f 1847.” The aggregate liabilities must
have been appalling, but are not stated. Mr. Stickney, is his American Bankers’
Association address, stated that “ in 1837 and 1838, also in 1856, there was a
great commercial crisis in Great Britain, but not a bank in England or Scotland
failed.” As I can find no record o f a crisis in 1856, must we not conclude that
this date is erroneous and comment as to failures would be uncharitable?
Panic o f 1866.— In 1866, according to McLeod, at the time Overend, Gurney &
Co. failed for £10,000,000, the bank failures o f Great Britain aggregated the
stupendous sum o f £50,000.000. This sum exceeds the total liabilities o f all the
failed national banks o f the United States since their inception, 40 years ago,
to this date by over £13,000,000.
Panic o f 1878.— In 1878 the West o f England & South W ales Banking Co.
failed for £5,000,000, with 40 or 50 branches. In the same year the City of
Glasgow Bank failed for £14,000,000, with 131 branches. These, with other bank
failures, carried the liabilities to over £20.000,000. The American Encyclopedia
sa y s: “ The year 1878 was marked by deepening financial gloom in England,
aggravated by disastrous financial failures, and the City o f Glasgow Bank
failure amounted to almost a national disaster.”
Panic o f 1890.— McLeod quotes the failure o f the Barings in 1890 for £21,000,000, but for fear o f a general upheaval the great banks o f Britain joined to
gether and liquidated the Barings, thus limiting the disaster materially,
although other failures occurred.
734
BANKING AND CURRENCY.
Hearers, are you tired? I wonder sometimes what “ standard au th orities”
Mr. Stickney studied when at the American Bankers’ Association last fall he
drew such a lovely picture o f the magnificent banking system o f Great Britain,
which we. with “ no system,” ought to adopt to prevent panics and to become
the creditor nation o f the world.
Let us look for a moment at the panics in the United States.
Panic of 1836.— From 1836 to 1839 history would indicate that we, in conse
quence o f the bank war, speculation, etc., were in bad straits as well as Britain.
Panic o f 1851.— In 1857, on account o f w ildcat banking enjoying its widest
freedom, we have no cause for claiming more than parallel conditions compared
with those o f Britain.
Panic o f 1813.— In 1873, on account o f return to normal values after the in
flated prices produced by cheap money during the suspension o f specie payments
on account o f the Civil War, we had a panic, but as to severity it did not com
pare with the cyclonic conditions that struck terror to Great Britain in 1866.
Panic of 1893.— In 1893 we had a panic in the United States. Not because
o f any special unsoundness in the banks o f this country, but because the very
foundation o f the superstructure o f our whole credit system was being under
mined in an effort on the part o f repudiators— thank God, not bankers— to
pay off depositors and all other creditors in 50-cent dollars and to liquidate our
foreign debts by the same dishonorable method, thus aggravating panic condi
tions by the withdrawal by creditors abroad on account o f fright in the first
five months o f the year o f $70,000,000 from our stock o f gold. I f business
paralysis is not certain on an occasion when general repudiation and dishonor
is rampant, then history falsifies the record. Confidence builds up, distrust
paralyzes.
Let us sum up the panic records as to liabilities o f failed banks:
Great B ritain:
1836 to 1839
1847 (o v e r ).
1857________
1866________
1878 (o v e r )1890 (o v e r ).
(’ )
£15,000, 000
(’ )
50, 000,000
20, 000,000
21, 000,000
In less than 60 years aggregate recorded (1836 and 1857 not
recorded) ------------------------------------------------------------------------------ 106, 000, 000
United States (in pounds sterling) :
1836 to 1839____________________________________________________
(*)
1857 (call conditions parallel to those o f Great B rita in )______
(*)
1873National b a n k s____________________________________________
2, 200, 000
(*)
All other banks____________________________________________
1893National b a n k s____________________________________________
6, 000, 000
All b a n k s___________________________________________________ 14,
800, 000
It will readily be seen that Britain has 6 recorded panic dates as against 4 in
the United States in the past 60 years, and that the recorded liabilities are
over £106,000,000 in Britain and but a small fraction o f that sum in the United
States.
According to the 1901 report o f the Comptroller o f the Currency, the total
liabilities 1863 to 1901 o f failed national banks was £37,000,000; 1863 to 1896
o f all other banks in United States, £44,000,000; making a total o f £81,000,000.
This is £10,000,000 short o f the liabilities o f the banks o f Great Britain in the
panics o f 1866, 1878, and 1890 alone, not counting a single intermediate failure
in the past 40 years. When w e come to compare historical facts with unsup
ported assertion, the banking system o f the United States looms up so grandly
that every American should feel proud. I know you will pardon me if I refer
to one more bit o f history, the Australian, which is an offshoot o f Great Brit
ain’s branch banking system. The American Encyclopedia for 1893 says, “ Out
o f 28 banks with 1,700 branches, 13 o f them with 800 or 900 branches failed in
six months ending May, 1893, for the stupendous sum o f £90,000,000,” which
sum in that single swoop exceeds the total liabilities o f all the failed banks in1
1 No record.
3 No record, except “ far greater than in 1847.”
BANKING AND CURRENCY,
735
the United States in the past 40 years, although the banking power o f the United
States was six times that o f Australia at that time. W hat is the cause o f the
financial distress in Germany for the past few years? She has had a branch
banking system, too.
I say, “ W hy do these people insist on reiterating such fa lla cie s ?” I leave
the answer to my hearers.
Here is another that makes a country banker smile. An eminent branchbank advocate openly declared in public lately, “ It is the country banker that
causes a panic, and only the country banker.”
As an answer I will simply ask, “ Did the panic o f 1907 originate in New
York City? I f not, where did it incubate? ”
“ Did ‘ the country banker ’ cause it? ”
“ W ould the banks o f the country, as a whole, have suspended cash payments
if the New York City banks in 1907 had not suddenly wired all banks, city and
country alike, that ‘ No cash w ill be paid on balances on Monday morning ’ ? ”
“ Are panics born in the country or in the city, where great promotions
flourish? ”
“ Did not the * cause ’ in New York produce the ‘ effect ’ throughout the
country as to cash that ‘ You no got ’em, I want ’e m ’ ? The effect simply
aggravated the cause.”
One other point and I am through.
BRANCH V. INDEPENDENT BANKING.
As Canadian branch banking is so often lauded as a model for us, permit a
brief comparison o f the two system s:
First. It requires a capitalization o f not less than $500,000 to start a bank in
Canada. There are now in the chief cities o f Canada 27 great central banks.
These own and control over 2,500 branches scattered throughout the Dominion.
The number o f central banks has been materially reduced in the past 30 years,
and it is a scandalous fact, widely admitted, that the powers controlling make
it about as difficult to get into the select coterie as to get into a safe with a
jimmy. The system evidently borders on a pure monopoly.
Second. The stock o f these central banks— no stock being issued by the
branches— is held largely in London, Liverpool, Quebec, Montreal, Toronto, etc.,
and only a small percentage throughout the Dominion. O f course, dividends
follow the stockholders’ residence.
Third. I understand the stock is assessed where the holder resides and
branches pay a license fee to do business, also taxes on the buildings owned by
the bank, but the owner o f such buildings would likewise pay the tax if rented
by the bank.
Fourth. The branches in the country towns and smaller cities have no presi
dent or cashier and no board o f directors, but are managed practically by figure
heads. One man has general supervision over 10 to 20 branches in separate
localities, and the so-called local managers take orders from him.
Fifth. They take the deposits from one locality and send to others where
interest rates are higher. Canadian banks, I am informed, have millions o f
dollars invested in Mexican and South American public utilities, to the detri
ment o f home demands.
Let us compare conditions in Muskogee and the country generally with like
cities in Canada.
Muskogee has 11 banks and trust companies, with capital and surplus o f about
$1,500,000, the bulk o f which is owned at home. The presidents, cashiers, and
boards o f directors are strong, influential, public-spirited citizens. The local
stockholders are all on the alert to upbuild Muskogee and bring profits on their
stock holdings.
Under the Canadian branch-banking system the Muskogee presidents and
cashiers would be set aside and the directors abolished. There would be com
paratively no stockholders, even o f the central banks, and assistant cashiers
would be the managers o f the branches. As self-interest is the first law of
nature, this wrecking o f the powerful influence for good o f all these elements
would breed indifference.
Again, as taxes are paid in Oklahoma on capital and surplus, Muskogee
would get filched out o f over $30,000 per year in bank taxes. I f the stock is
not all held now in Muskogee, it soon w ill be under your thrifty conditions.
Then, if stockholders get but 6 per cent per annum on their investment of
736
BANKING AND CURKENCY.
$1,500,000, that would mean $90,000 less per annum for distribution in Mus
kogee, plus any undivided profits, all o f which, if the Canadian system were
adopted in the United States, would go to 100 or 200 great central banks o f New
York, Boston, Philadelphia, Chicago, etc., which would have the 25,000 present
independent banks as tails to their big kites. A beautiful and enticing picture
for Muskogee and the country generally. I appeal to you, gentlemen, is it not
a fact that those allied to the ownership and management o f the independent
banks o f the country have been wonderfully instrumental in the onward and
upward progress o f your farm sections, your hamlets, and your cities? I f we
upbuild these, do we not upbuild the great cities and the Nation as a whole?
Contrast these facts with the further ones that Canada, with splendid re
sources, has a territory about equal to the United States, with a population uf
but seven and a half m illions; that her whole banking power is not equal to
that o f Massachusetts alone; that the Monetary Commission reports and other
authorities show that the comparative losses to depositors and stockholders of
Canadian banks, as compared to our national banking system, is as 3 to 1 in
our fa v o r ; that interest rates are neither uniform nor are they lower than in
the United States; that these same reports, as testified to by the general m an
ager o f the Bank o f Nova Scotia, showed comparatively five banks failed in
Canada to one national bank in the United States since 1880; that according
to the same general manager in 1880 there were in Canada 41 banks; incorpo
rated since (to 1906), 7 banks; total,48 banks; that o f this number 12 have failed
and some others saved themselves by amalgamation (to-day but 27 are left) ;
that Canada, notwithstanding she is bolstered up with great floods o f British
capital, invested in her railways, banks, etc., yet she is practically asleep com
pared to the wonderful energy o f our people— and then ask yourselves if I am
not justified in declaring “ the Canadian branch-banking system skims the cream
from the country to enrich the exchequers of the monopolists in the great cities,
while the independent banking system o f the United States helps wonderfully
to upbuild the Nation as a whole.”
In an address at Wausau, Wis., last March I made these statements, merely
in a comparative way, and it seems to have hit the branch-bank advocates in
the solar plexus, as they grew hysterical over it. I f it is a dead issue, why
should they get excited? The country better nail up the cottin if the issue is
dead.
Perhaps a little Canadian testimony will not detract from my contentions.
Therefore permit a short quotation from a 1912 weekly edition o f the Toronto
Star, which has a daily circulation largely in excess o f any o f the other six
dailies there.
Preceding a well-written, logical four-column article, the follow ing strong
headlines appear in the Star: “ Monster banking monopoly a leech at Canada’s
throat, killing local industry, depopulating rural districts— Centralization o f
almost entire financial power o f Dominion in the hands o f a few capitalists has
resulted from our much-vaunted banking system— Almost total extermination o f
local banks.”
I quote but two extracts therefrom, to w it :
“ W hile large capital insures slow, steady transmission o f deposits to
‘ bran ches’ for control and use o f head offices in smart alien centers, local
credit based on local savings is transferred to parasites on whom rests neither
responsibility, object, nor desire to exercise banking functions in support o f
local enterprises. W ith such credit basis lost, not only does the collapse or
absorption o f local bank institutions become inevitable, but local aspirations
and confidence which had sustained local industry are wiped out or made de
pendent on the will and nod o f competitive enterprise. So secretly, so gradually,
does this sequestration o f savings proceed, so insidiously are local enterprises
undermined, that planting o f a ‘ branch ’ to suck out local earnings, to ex
tirpation o f even the last local industry or institution, is embraced by * slowg o in g ’ people with the same artless innocence as a 3-year child fondles a viper.
“ To this accursed system o f concentration o f credit and destruction o f local
industry the Dominion o f Canada stands indebted for a contracted population
o f 7,000,000 in place o f 25,000,000 rightfully due it under decentralized systems
o f banks designed to sustain, to breathe the breath o f economic life through the
remotest as well as the most insulated o f its parts.”
This indictment from a Canadian rather outstrips mine.
Permit one other point not brought out heretofore.
As all ordinary banking functions are carried on in the banks o f the United
States at least as well as in Canada— I should say better, because our State
BANKING AND CURRENCY.
737
banks loan on real estate, and Canadian chartered banks do not— I suppose the
oft-repeated assertion as to the wonderful elasticity o f Canadian bank cur
rency ought to be referred to. It probably is not generally known, but the fact
remains that document No. 583 clearly shows that a hard-money market ob
tained in Canada in 1907. The Canadian banks, with large New York City de
posits and demand loans, reduced both and shipped all the cash they could get
to Canada, and to further aggravate the New York situation these Canadian
banks transferred large amounts o f their New York balances to London. De
posits in Canada declined $30,000,000 and the loans $25,000,000 in the last two
months o f 1907. The Dominion suspended the limitation on issues o f currency
and $5,115,000 o f “ emergency currency ” was issued. I cite these facts to show
that slow-going Canada has her troubles, too. Even if her currency system did
pull her through without cash suspension by her banks, we can not adopt that
system without adopting her branch system with it. For proof, Mr. J. B,
Forgan, who is an ardent advocate o f the Canadian system, in 1902 declared in
an address: “ To me the simple statement that about 10,000 (now double that
number) banks, with capitals running all the way from $25,000 to $25,000,000,
would have the privilege o f issue settles it as impractical and impossible.”
Q uery: Do we wish to surrender our independent system and adopt the
monopolistic, “ cream -skim m ing” Canadian system? Friends, draw your own
conclusions. I refrain from wasting any more powder, although there is abun
dance left.
As a constructive policy is the real issue, I respectfully close with the fo l
lowing :
.
Condemning the best banking system the w orld ever knew, with a small
“ mote ” in it, and glorifying the monopolistic branch banking systems o f other
nations with big “ beams ” in them, w ill not eradicate our single defect. We
can only ameliorate panic conditions, but not through a big bank with many
branches which w ill enter into severe competition with existing banks; not
through acceptance privileges to 7,400 national banks, which would only aggra
vate our already overstrained credit; not by additions to our present inflated
currency. These simply spell monopoly, inflation o f currency and credit. They
are panic breeders and not preventers. On the other hand, we can, if we
will, prevent cash suspensions by banks and thereby ameliorate panic conditions
through either o f these simple methods.
I care not for the method, if results are obtained, barring objections stated.
As the political party in power has turned down the Monetary Commission bill,
I respectfully offer, under first, a new suggestion for earnest consideration and
then mention two others well understood.
First. Permit the banks o f the country to deposit in the Treasury Department
at Washington, or other depository, out o f present reserves, as follow s (esti
mated) : Five per cent o f deposits from the three central reserve cities; 2
per cent o f deposits from the three general reserve cities; 1 per cent o f de
posits from the country banks. This would mobilize, say, $300,000,000 in
cash now held as reserve, and therefore would occasion no loss to any batik.
In ordinary times country banks can obtain rediscounts as they do now—
through their city correspondents. When trouble threatens in any section this
vast reservoir o f ready cash will be open to “ discount freely to all solvent par
t ie s ” at high rates, and the mere knowledge that relief can be had will impart
general confidence. Its operation should be like unto a water reservoir— to put
out a fire in its incipiency and refill again ready for future troubles— not a
money m aker; a servant, not a master.
Second. Extend the privileges o f the Aldrich-Vreeland Act to all banks on a
uniform form o f currency. There are $1,200,000,000 o f bonds now in the banks
o f the United States eligible for use to obtain extra cash in troublous times, and
the Treasury Department holds $500,000,000 national-bank notes for this
purpose.
Third. Legalize clearing-house certificates, on which extra uniform currency
can be had when panic threatens.
Either o f these will cure our single material defect. W e will also maintain
our splendid independent system intact. W e must turn a deaf ear to the siren
song o f those who argue so loudly for complex and compound remedies. They
are worse than the disease.
Brother bankers, why should we not get together by eliminating all complex
and compound matters not germane to the end in view and decide upon a simple
remedy for relief in the day o f trouble? That is all we need, as banks which
738
BANKING AND CURRENCY.
can not take care o f themselves in ordinary times are unworthy to live. This is
the whole thing in a nutshell.
Q uery: It is a maxim that currency is not capital. In developing days the
special privilege o f issuing currency by banks as a substitute for capital seemed
justifiable. To-day that function by banks generally is unjustifiable, because
great accumulations o f surplus capital have cut interest rates to less than onehalf o f those o f 50 years a g o; because our per capita circulation— mostly gold
or gold certificates— more than doubled in that period, and because our credit is
overexpanded n o w ; therefore—
I f a bank extends its loans to the limit o f its assets (total loans are now over
nine times the capital o f all banks), then swaps its printed I O Us without
interest in exchange for its customer’s note drawing 5 per cent interest and
upward, does not that act spell bubble blowing?
Is not a measure for relief in the day o f trouble like unto a governor on an
engine— all we need?
(Thereupon, at 5.45 o’clock p. m., the committee adjourned until
to-morrow, Saturday, morning, at 10 o’clock.)
S A T U R D A Y ,
C o m m it t e e
S E P T E M B E R
on
B
20,
19 13 .
and Curren cy,
U n it e d S t a t e s S e n a t e ,
a n k in g
'Washington, D . 0.
The committee assembled at 10.30 o’clock a. m.
Present: Senators Owen (chairman), Hitchcock, O’Gorman, Reed,
Pomerene, Shafroth, and Bristow.
The C h a i r m a n . Mr. Flannagan, the committee will be glad to hear
you now. Mr. Flannagan is from Montclair, N. J.
Could you state your position and your experience in banking
matters so that it may be embodied as a part of our record ?
STA TE M EN T OF W ILLIAM W . FLANNAGAN, OF MONTCLAIR, N. J.
Mr. F l a n n a g a n . I was formerly cashier of the People’s National
Bank, of Charlottesville, Va., and afterwards the president of the
Southern National Bank, in the city of New York. At present I am
not engaged in any business, but after the severance oi my connec
tion with the Southern National Bank I was engaged a good many
years in private banking.
Senator R e e d . In what year did you cease to be an active banker ?
Mr. F l a n n a g a n . In 1905.
Senator R e e d . Was that when you severed y o u r connection with
the Southern National Bank of New York?
Mr. F l a n n a g a n . N o; I severed my connection with the Southern
National Bank in 1895.
Senator R e e d . H o w long were you president of the Southern
National Bank?
Mr. F l a n n a g a n . Ten years.
Senator R e e d . What was its capital stock ?
Mr. F l a n n a g a n . $ 1 ,0 0 0 ,0 0 0 .
Senator R e e d . Can you tell us what its deposits were?
Mr. F l a n n a g a n . Three and one-half million dollars. Shall I go
ahead with my statement?
Senator R e e d . Y es; I think you may go ahead with your state
ment; I merely wanted that information.
BANKING AND CURRENCY.
739
Senator H i t c h c o c k . Y es; these questions are merely preliminary.
Mr. F l a n n a g a n . I should like to make my statement, and then
any questions that the members of the committee desire to ask me
I shall be glad to answer.
I am firmly convinced that the measure before you, now under
general discussion throughout the country, has in its preparation
been prompted by an earnest and patriotic desire to advance the
best interests of all the people, irrespective of particular localities,
and has not sought to benefit one class at the expense of another.
I consider that the bill displays a high order of constructive ability
in legislation; that it is sound in its fundamental principles, and
that with few changes it will remove the inherent defects which
were inseparable from financial legislation 50 }T
ears ago, necessitated
under the stress of abnormal conditions.
I have read with much interest and benefit the excellent report
made by the House Banking and Currency Committee which accom
panied the presentation of the bill and am impressed with its judi
cial tone and the spirit in which the difficulties of the problem are
considered and the convincing reasons for the adoption of the remedies
suggested.
I have also read the report and recommendations of the currency
commission of the American Bankers’ Association growing out of
the recent meeting at Chicago. No one with an open mind can read
and compare those two reports without being impressed with the
contrast m the pervading idea of the two documents. The “ presi
dents of 47 State bankers’ associations” and “ the representatives
of 191 clearing houses,” “ being invited to attend and unite in an
expression,” “ through their representatives adopt certain resolu
tions,” which in the preamble are generally commendatory of the
bill, but the provisions of which they emasculate in the changes
suggested. These suggested changes are not supported in that docu
ment by any argument or appeal to reason. The signers seem to
rely entirely upon a formidable array of names of the banking insti
tutions and associations which they claim to represent, as if the
“ dictum” of such a quantity and quality of these eminently respect
able bodies should carry conviction and be the last word.
The preamble says that to insure the successful operation of a
new banking law, it must be of such a character as to warrant a gen
eral acceptance of its provisions by existing banking institutions,
and therefore proceeds to tell what these changes must be in order
to meet this approval. This method of securing legislation does not
appeal to the average citizen, and I doubt if it appeals to you. After
such an exhibition of the “ big stick,” it ill becomes these bankers
to complain of the compulsory nature of the bill in question.
I can not doubt the patriotism nor the good faith of men in these
high positions of trust, nor can I doubt, after much reflection, that
what they contend for does not serve the best interests and welfare
of the whole country.
W hat is the explanation ? Can it be the pervading idea which has
afflicted the great managers in the combinations of capital, that they
are the guardians of the Nation’s prosperity, and that such pros
perity is inseparable from their continuing guardianship? Such a
condition of mind may arise, and is apt to arise, where good men
hold the power which directs the destinies of others, especially where
740
BANKING AND CURRENCY.
such men are imbued with the milk of human kindness and have the
love for their fellow man warmly pulsating in their hearts. I have
the greatest respect for the banking fraternity. I have been of it
for many years, and my father was before me.
Banks and bankers are commonly considered dispensers of credit,
this credit constituting more than 95 per cent of the daily financial
and commercial operations of organized society in the supply of
human wants, and yet I am inclined to the opinion that the very
confusion of thought produced through the varied uses of this word
“ credit” accounts for an obsession on the part of many bankers and
is not exclusive to them.
If I sell a man a horse and take his promise to pay in the future in
the form of a note, I extend him credit; he has my confidence that
he will pay. If I sell a bank that promise to pay— that is, have the
note discounted and the proceeds placed to my credit in the form of a
deposit— the meaning of the word is entirely changed. For now I
say, the bank has given me credit, while in the sense of confidence
the contrary is true; I have given the bank credit; I have extended to
the bank my confidence that it will pay and accepted its promise in
lieu of payment.
I am the creditor in both cases, and have exchanged my horse for
the promise of the bank to pay me on demand, and yet I say I gave
the buyer of the horse credit when I sold him the horse, and the bank
gave me credit when I sold the note.
Senator H i t c h c o c k . Mr. Flannagan, may I interrupt you there for
a moment ?
Mr. F l a n n a g a n . Certainly.
Senator H i t c h c o c k . That line of testimony is quite general; but
I am unable to see how you can treat the action of the bank as you do.
When you sold the note to the bank, you did it because you wanted
the funds to use.
Mr. F l a n n a g a n . Y es; I am going to explain all of that, and tell
you exactly how it is a swapping of debts.
Senator H i t c h c o c k . So that although you may start with credit
on the books of the bank, what you are really doing is getting cash ?
It may be only to your credit five minutes. Now, why do all you
bankers maintain that when you borrow money, or a person borrows
money of a bank, he gets a credit on the books, whereas the general
rule is that when he borrows money from a bank he borrows because
he wants to use it, and it goes off the books ?
Mr. F l a n n a g a n . If you will let me get through with mv statement
I will illustrate that proposition to you.
Senator H i t c h c o c k . That is to say, there is no need for credit
being given you on the books of the bank at all. When you borrow
money you go to the bank because you want to get money—*
—•
Mr. F l a n n a g a n . It is an exchange of debts to begin with. It may
be afterwards that the debt is discharged by the substitution of
another debt or by the payment of coin.
Senator R e e d . I think, Senator Hitchcock, that Mr. Flannagan is
arguing for the same idea as you.
Senator H i t c h c o c k . Well, I have literally borrowed hundreds and
thousands of dollars from banks, and when I borrowed money from
them I have never left to my credit in the bank any considerable
amount of money. I have used it at once. I have either taken the
BANKING AND CUBKENCY.
741
cash over the counter or checked it out at once. And yet every
banker who comes here goes upon the theory that when a man bor
rows money from a bank he leaves a credit on the books of the bank.
Mr. F l a n n a g a n . N o w , if you will let me get through with that
point, I will illustrate it.
Senator H i t c h c o c k . Oh, I beg your pardon for interrupting you.
Mr. F l a n n a g a n . I will be glad to discuss that with you, because
I think I can cover that very point to your satisfaction.
They are identically the same form of commercial transactions. In
both instances I have parted with my property and accepted a prom
ise of payment in lieu of payment. In one case I say 1 have given
credit to my debtor, and m the other case that my debtor has given
credit to me.
Is there any wonder that confusion of thought should arise when
we thus use the same word to express entirely different meanings ?
Again, the same word “ credit” is used in an entirely different
sense from either of the above. W e speak of individuals or corpo
rations having good credit, meaning their general standing in the
community, or we say the credit of the United States stands the
highest in the world, meaning the ability to borrow at the lowest
rate of interest. In both cases the meaning of the word is the “ ability
to incur debt” — that somebody or everybody will accept the debt of
the individual, corporation or Government— that is, the promise to
pay instead of actual payment. This ability is not inherent. It
must be conferred by another. Robinson Crusoe, with his owner
ship of everything around and about him did not have the ability to
incur debt, and hence could not have credit. Nor can Rockefeller or
Carnegie, with their untold millions, command or obtain credit unless
they come in contact with some one else who confers it upon them.
In every exchange of property or service where the element of
time enters, a reciprocal relation of debtor and creditor is estab
lished. A debt can not be created unless credit exists, nor can
credit exist without the creation of a debt. So that though we speak
of debt and credit separately, they can not exist separately, as they
are relative terms, and it depends from which standpoint we view
the relation.
Whether by common consent, or whether from the desire and
ability of bankers to inculcate and circulate the idea that they are
always to be associated with conferring credit, I do not know, but
the fact is that the public does reverse the relation of debtor and
creditor when speaking of banks, and instead of looking upon a bank
as it would an ordinary debtor thinks and speaks of the banks’ debt
as a credit.
Every deposit'in a bank is a debt by the bank to somebody; every
circulating note issued by a bank is a debt to somebody. These
“ somebodies” are the creditors, and are the great mass of the people
whom you represent, and whose welfare you purpose to promote.
These deposits and these notes are the debts which are used by the
people as a substitute for coin, and your problem is to legislate so
that the substitution may be safely made, while at the same time
facilitating this mutual relation of debtor and creditor to the advan
tage of both.
We say, and generally believe, and the bankers themselves believe,
that the banks and bankers control the credit of the country, and
742
BANKING AND CUREENCY.
they think they are entitled to do so and to regulate the method of
such control, by reason of their calling. But this is a great fallacy,
and quite the contrary is true. The banks do control the credit
which is represented by an entry on their books, but they do not
control the credit or confidence which must be extended to them in
order that these entries may be made. If they did, we should not
have had financial panics nor the necessity for the legislation which
is now under consideration.
Credit must emanate from the creditor and not from the debtor,
and the banks are primarily the debtors. The credit of the country
is conferred on or extended to the banks by the people, for the banks
create the debts which the people accept in lieu of coin in their
daily interchange of property and service.
Without the credit extended to them in the deposits the banks
receive and in the notes which the people receive and circulate the
banks could not ever assume the position to extend credit to others,
except to the limited amount of their own capital, and with such
limitation they would not, and could not, remain in business.
Of course you know this is true, but it may be well to emphasize
this fact in figures. If you will examine the last condensed state
ment of all the national banks, published by the Comptroller of the
Currency as of August 9, 1913, which I have here, you will find the
total liabilities to be $10,876,852,343.58. Included in this amount
is the capital stock, surplus fund, and undivided profits, aggregating
$2,041,228,571.83, whicn, being deducted, leaves $8,835,623,771.75.
This remainder represents what the banks owe. I am not saying
they have not corresponding assets wherewith to pay, for tnis is
exactly the case; but I do say this amount of upward of 8,835 mil
lions of dollars represents their debt over and above their capital
and profits, and that the creditors are the public.
It may possibly be said that this is not a fair way of stating it,
because of this 8,800 millions of indebtedness 2,100 millions is among
the banks themselves (due to banks), and 108 millions represents
borrowed money from other banks— that is, rediscounts and bills
payable— and hence the public are not the creditors.
This may serve as an argument if you take the banks from the
classification of “ the public/’ but if the indebtedness is reduced by
calling the banks the “ creditors,” instead of the public, then we must
reduce the corresponding assets by the amount of the loans in which
the banks appear as the “ debtors” (due from banks), say, 1,360
millions. The method of pyramiding the indebtedness really makes
it impossible to analyze accurately as between two classes.
But let us consider the statement from the assets side, a favorite
way when we want to “ point with pride” to the great “ banking
power” of the country, as compared with the rest of the world. Out
of the total assets, which, of course, are the 10,876 millions as before
stated, I wish to draw your attention to debts on which the banks
draw interest, as follows (omitting thousands):
Loans and discounts............................................................................................... $6,163, 555
Overdrafts................................................................................................................
18,378
United States bonds.............................................................................................
790,023
Other bonds and securities................................................................................. 1,095,906
Reserve agents.......................................................................................................
769,214
Total debt earning interest
8, 837,076
743
BANKING AND CTJRBENCY.
Assuming that:
Due from other national banks.......................................... .
Due from State banks..............................................................
$408,922
192,214
Being a total of......................................................................
601,136
Does not draw interest:
Deduct—
Capital................................................................................... 1,056,346
Surplus..................................................................................
725, 334
259,549
Undivided profits.......................................................................
Less invested in real estate....................................................
2, 041, 229
284,569
---------------- $1,756, 660
Leaves the capital of others, on which the banks earn profit............
7,080,416
That is to say, tho national banks, operating under a franchise
conferred by the people, are given an earning capacity by reason of
that franchise, sufficient to have doubled the original capital invested,
and that this earning capacity continues on an amount equal to four
times the increased capital thus doubled from profits, and that
$7,000,000,000 thereof, on which they draw interest, represents their
indebtedness to the people— whom you represent.
It therefore follows that in establishing a Federal reserve board,
composed exclusively of Government officials, and in the adoption
of the other provisions approved by your best judgment, and sup
ported by convincing reason, you are exercising your true prerogative
as the representative of the people and conserving their interests,
and not likely to be swerved from your purpose when you are told
by a combination called for the avowed purpose of influencing your
action that without general approval by it of the measure you adopt
such measure can not be carried into successful operation.
While I can not approve the form and tenor of the resolutions
adopted by the Chicago meeting, I do think it is of the greatest im
portance to have the measure meet the hearty and enthusiastic in
dorsement of the banking fraternity.
I do not believe you can reasonably expect this kind of approval
from the national banks in the reserve cities, and to a less degree from
the banks in the central reserve cities. Thev have so long been ac* customcd to having the use of the “ so-called ” reserves of other banks
as ordinary deposits with them, that they naturally feel averse to a
change which deprives them of this source of profit.
Perhaps in many instances they fail to realize that this is the
controlling influence in their opposition. But this loss may be
compensated in other ways, and by making the measure more attrac
tive to country banks (while preserving its fundamental principles)
you can make their approval so overwhelmingly unanimous that
the big banks will of necessity acquiesce.
Now, Senator Hitchcock, if you wish to discuss with me the matter
of credits, we will take it up— or shall I continue ? I am now going
to discuss what the amendments are which I propose.
Senator H itchcock. That was not at all an important matter
that I had in mind, but I notice that almost every, witness that
was ever before the committee, and every banker that I have ever
talked to, goes on the theory that when a man borrows money
he at once, instead of taking the cash across the counter, secures a
credit on the books of the bank.
@FedFRASER