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PROCEEDINGS
OF THE

ACADEMY OF POLITICAL SCIENCE
IN THE CITY OF NEW YORK

Volume IV
1913-1914

EDITED BY

HENRY RAYMOND MUSSEY

23
^3ZS
T H E ACADEMY OF POLITICAL SCIENCE
COLUMBIA UNIVEKSITY, NEW YORK

1014

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p

COTYMSHT BY
THB ACADEMY OF POLITICAL SCIENCE

JUN 2 8 1915

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CONTENTS
PACK

I.

BANKING AND CURRENCY IN THE UNITED STATES

Owen, Hubert L.
Glass, Carter
Bulkley, Robert J.
Aldrich, Nelson W.
Willis, H. Parker
Hepburn, A. Barton
Sprague, 0. M. W.
Reynoldi, Arthur
Noyes, Alexander D.

The Federal Reserve Bank Bill
The Opposition to the Federal Reserve Bank Bill .
The Federal Reserve Act: A Reply to Criticisms .
Banking Reform in the United States
The Federal Reserve Banks
Criticisms of the Proposed Federal Reserve Bank
Plan
The Organization of the Federal Reserve Banks .
Centralization of Banking and Mobilization of
Reserves
Membership and Control of the Proposed Federal
Reserve Bank System
The Economists and the Owen-Glass Bill . . . .

Seligman, Edwin R. A.
Discussion
N. Johannsen, George B. Morley, Mr. Vincent, A. D. Noyes
VanderHp, Frank A.
The Rediscount Functions of the Regional Banks .
Discussion
John A. Perrin, Frank A. Vanderlip, O. M. W. Sprague, W. C. Ford,
Mr. Stein
Johnson, Joseph French The Note-Issue Provisions of the Owen-Glass Bill.
Kemmerer, E. W.
The Bank-Note Issue of the Proposed Federal Reserve Banks
Howe, Edward L.
The Country Banks and the Owen-Glass Bill. . .
Bush, Irving T.
The Business Man and the Note-Issue Provisions
of the Federal Reserve Act
Andrew, A. Piatt
Criticisms of the Note-Issue Provisions of the
Owen-Glass Bill
Discussion
Edward D. Page, I.. Sternberg, Mr. Vincent
Van Deusen, M. W.
The Clearing of Checks at Par
Kent, Fred I.
The Geographical Basis of Domestic Exchange Relations
Talbert, Joseph T.
Gearing-House and Domestic Exchange Functions
of the Federal Reserve Banks
Gardin, John E.
Foreign Exchange Problems and the Protection of
our Gold Supply
Neilson, Jason A.
Acceptance and Foreign Branch Powers under the
Proposed Federal Reserve Act
Discussion
John Perrin, W. C. Ford, Joseph T. Talbert, A Member, J. H. Mitchell,
John E. Gardin, Mr. Stern, O. M. W. Sprague, F. B. Whitney
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CONTENTS

iv

FAGS

II. GOOD ROADS AND CONVICT LABOR
Davis, Charles Henry
Foreword
241
Wilmot, Sidney
Employment of Convict Labor for Highway Construction in the North
246
Whitin, E. Stagg
Prison Industries of the State of Wisconsin. . . . 309
III.

YEARBOOK OF THE ACADEMY

Constitution and By-Laws
Officers of the Academy
List of Members
IV.

33S
339
340-384

ESSAYS ON BANKING REFORM IN THE UNITED STATES
By

PAUL M. WARBURG

Editor's Note
Introduction
Edwin Jt. A. Seligman
Defects and Needs of our Banking System
A Plan for a Modified Central Bank
American and European Banking Methods and Bank Legislation Compared. .
A Central Bank System and the United States of America.
A United Reserve Bank of the United States
Principles that Must Underlie Monetary Reform in the United States
The Discount System in Europe
Circulating Credits and Bank Acceptances
The Owen-Glass Bill as Submitted to the Democratic Caucus
The Owen-Glass Bill: Should there be Four or Eight Federal Reserve Banks .
The Owen-Glass Bill: Gold or Lawful Money, Note Issue, and Government
Bonds

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PROCEEDINGS
OF THE

ACADEMY OF POLITICAL SCIENCE
IN THE CITY OF NEW YORK

Volume IV]

OCTOBER. 1913

[Number 1

BANKING AND CURRENCY IN THE
UNITED STATES

THE ACADEMY OF POLITICAL SCIENCE
Cot UMBIA UNIVERSITY, NEW YORK

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OOFYMOHT BV
THE ACADEMY OF POLITICAL SCIENCE

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CONTENTS
I THE FEDERAL RESERVE BANK PLAN
MOK

THE FEDERAL RESERVE BANK BILL

I

Robert L. Owen
THE OPPOSITION TO THE FEDERAL RESERVE BANK BILL,

I2

Carter Glass
THE FEDERAL RESERVE ACT : A REPLY TO CRITICISMS.

20

Robert J. Bulkley
BANKING REFORM IN THE UNITED STATES

.

.31

Nelson W. Aldrich
THE FEDERAL RESERVE BANKS

92

H. Parker Willis
CRITICISMS OF THE PROPOSED FEDERAL RESERVE BANK
PLAN

101

A. Barton Hepburn
THE ORGANIZATION OF THE FEDERAL RESERVE BANKS.

106

O. M. W. Sprague
CENTRALIZATION OF BANKING AND MOBILIZATION OF
RESERVES

118

Arthur Reynolds
MEMBERSHIP AND CONTROL OF THE PROPOSED FEDERAL
RESERVE BANK SYSTEM

127

Alexander D. Noyes
THE ECONOMISTS AND THE OWEN-GLASS BILL

.

133

.

137

THE REDISCOUNT FUNCTIONS OF THE REGIONAL BANKS.

140

Edwin R. A. Seligman
DISCUSSION OF THE FEDERAL RESERVE BANK PLAN

II THE ELASTICITY OF CREDIT
Frank A. Vanderlip
THE NOTE-ISSUE PROVISIONS OF THE OWEN-GLASS BILL.

150

Joseph French Johnson

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CONTENTS

IV

THE

BANK-NOTE

ISSUE OF THE PROPOSED

FEDERAL

RESERVE BANKS

160

E. W. Kemmerer
T H E COUNTRY BANKS AND THE OWEN-GLASS BILL

.

169

Edward L. Howe
T H E BUSINESS MAN AND THE NOTE-ISSUE PROVISIONS
OF THE FEDERAL RESERVE A C T

174

Irving T. Bush
CRITICISMS OF THE NOTE-ISSUE PROVISIONS OK THE
OWEN-GLASS BILL

177

A. Piatt Andrew
DISCUSSION OF THE ELASTICITY OF CREDIT .

.182

III FOREIGN AND DOMESTIC EXCHANGE
FUNCTIONS OF THE REGIONAL BANKS
T H E CLEARING OF CHECKS AT PAR

.

184

W. M. Van Deusen
T H E GEOGRAPHICAL

BASIS OF DOMESTIC

EXCHANGE

RELATIONS

187

Fred I. Kent
CLEARING-HOUSE AND DOMESTIC-EXCHANGE FUNCTIONS
OF THE FEDERAL RESERVE BANKS

.

.192

Joseph T. Talbert
FOREIGN EXCHANGE PROBLEMS AND THE PROTECTION
OF OUR GOLD SUPPLY

213

John E. Gardin
T H E PROBLEM OF FOREIGN BRANCH BANKING

.

-217

J. A. Neilson
DISCUSSION

OF FOREIGN

AND DOMESTIC

EXCHANGE

FUNCTIONS

223

IV PROCEEDINGS OF THE CONFERENCE

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THE FEDERAL RESERVE BANK BILL 1
ROBERT L. OWEN
United States Senator from Oklahoma, Chairman of the Senate Committee on
Banking and Currency

T gives me very great pleasure to have the opportunity of
presenting to you as briefly as possible the substance of
the pending bill, and the purpose of those who are charged
with the duty of considering and perfecting that bill.
In the first place, I wish to say that the committee of which
I have the honor to be chairman has deeply felt its responsibility. The members have given this question the most careful
and painstaking attention. They have desired to hear from
every part of the country the different points of view of those
who might enable the committee to understand better the great
problem before it, and to accomplish its task in a manner
acceptable to the country.
I realize that the time is brief in which I may properly hold
your attention, and for that reason I shall waste no words in
coming directly to the meaning of this bill, its purpose and its
plan. The great purpose of the bill is to prevent panic and to
give greater stability to the commerce and finance of the United
States, to make more efficient the resources which we have
in the banking world and to put behind the business of the
country the powerful support of the government. The principles of the bill are those which have been worked out successfully in the great civilized nations of western Europe—in
England, Germany, France, Belgium, Holland.
The first and most important feature of this bill, in my judgment, is that it concentrates and mobilizes the banking reserves
of the nation (which are now not concentrated but widely
scattered among 25,000 competing banks), making these concentrated reserves mobile, and more useful to the commerce

I

1

Read at the meeting of the Academy of Political Science, October 14, 1913.
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SECOND CURRENCY CONFERENCE

[VOL. IV

and industry of the nation. This will also protect the banks
against one another in a dangerous struggle for reserves.
The banks of the nation have fifteen hundred millions of
gold, legal-tender notes, and other forms of money, which the
United States by the Act of March 14th, 1900, is obliged to
maintain at a parity with the gold dollar. Those reserves are
held by 25,000 banks. This bill proposes to concentrate a part
of these reserves in twelve reserve banks which are " piped "
together, if I may use such an expression, by a provision that
a Federal Reserve Board consisting of seven officers of the
United States, appointed by the President and confirmed by
the Senate, shall have the right to require a reserve bank with
idle funds to discount for another in need of current funds,
thus meeting the needs of commerce. The amount of this
reserve will be between four hundred and five hundred millions,
after the system has become established, in about three years.
The next important feature of this bill is to permit the issuance of United States notes, treasury notes, called federal reserve notes, to these twelve banks, upon commercial paper,
safeguarded by a gold reserve of 33}^, and by the resources
and double liability of the member banks. The possible issue
of these notes is obviously large.
In addition to these two important features, the mobilization
of reserves, and the issuance of these elastic notes under conditions which should prevent undue inflation and which should
cause automatic contraction, according to the necessities of our
commerce, there are various other minor advantages in this
measure. The most important advantage is that which, as a
necessary corollary, flows from the concentration and mobilization of these reserves and the issuance of elastic currency notes,
and that is a constant, stable market for commercial bills of a
qualified class, which we do not have to a sufficient extent in
the United States, but which has been developed to a very high
degree in the European nations. This system will have the
great advantage of giving protection for the future against
financial panic, and that is one of its great purposes.
There is another important purpose of this bill. At present
the great banks in the central reserve cities are almost of neces(2)

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THE FEDERAL

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sity compelled to carry a large part of the reserves of the nation
as call loans on the stock market. The abatement of this use
of the reserves of the country can be accomplished, to the advantage of the ethically managed banks, and to the advantage
of the great merchants and business men of the country, who
will thus have available for commerce these national reserves,
supplemented by elastic currency, whereas these reserves are
now held largely, and of necessity, as call loans, for the stock
exchange. The effect of this new system will be to stabilize
commerce and finance in the republic, and put an end to the
violent fluctuations of interest rates on the stock exchange,
which have a certain hypnotic effect upon the entire country,
frequently affecting most injuriously the interests of those who
are concerned in the great commercial enterprises of the nation.
Another advantage proposed by this bill is the opening of
this system freely to the state banks and trust companies, just
as far as it can be done with safety.
It will have another effect, namely, the lowering of the bank
reserves, which will be entirely justified under this system.
When the banks carry their reserves in the federal reserve
banks, in case of need they can always obtain—not merely
sometimes, but always—the discount of their qualified commercial paper, and thus use commercial paper to replenish the
reserves in their own vaults.
Another advantage of the bill is that it proposes to protect
the two-per-cent bonds, which is obviously a just and righteous
thing to do, because the banks bought these bonds upon the
understanding that they should have the right to issue currency
against them, and in my judgment the bonds ought not to be
permitted by the United States to go below par, by reason of
any government act or neglect which would lead to such depreciation below par.
Another advantage of the new bill is that it will also lower
the current reserves required to be kept against the savings
deposits in the national banks, and permit those deposits to be
utilized in greater degree in accomodations of an investment
character, particularly in the making of farm loans, which under
proper conditions can be made a marketable security. A
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CONFERENCE

[Vol. IV

market could easily be built up for safeguarded farm mortgages
and in that way we could greatly stimulate the productive
energies of the agricultural sections of the country, upon which
we all largely depend for the prosperity of the nation.
This bill, of course, is only a step in the perfection of the
financial system of the United States. We anticipate that in
the near future a better system can be devised for obtaining
long-time, low-rate loans for the agricultural development of
the nation. But that is another problem, and cannot properly
be involved in a bill of this character.
Another advantage of the bill is that it permits national banks
which are qualified to do so to establish foreign branches, and
in that way to serve the foreign interests of our great merchants
and those engaged in establishing foreign trade for the people
of the United States.
Another advantage of the bill is that of clearing checks at
par; and that means the clearing of individual checks—not
merely the checks of one reserve bank upon another reserve
bank, but the clearing of individual checks—by the reserve
banks through these federal reserve banks. There is a very
large volume of these checks. They are cleared at par in some
places, such as Boston, Kansas City, Atlanta and Nashville, but
under this proposed system these checks would be cleared
through the federal reserve banks everywhere, giving a much
higher velocity to the great credit system of the United States.
Another obvious advantage is the diminishing of the volume of
these current checks by clearing them promptly through the
federal reserve banks.
There are certain objections which have been urged very
strenuously to the provisions of this bill. The first great objection is that the banks of the country are not given representation
on the Federal Reserve Board. The bankers strenuously urge
that since they are required to put their money into the stock
of these banks, and since they are expected to put certain
reserves into these banks, they ought to have the right of representation on the Federal Reserve Board which exercises general supervision over this system. In the bill the banks are
authorized to elect six out of nine directors managing each of
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THE FEDERAL

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BANK BILL

5

the federal reserve banks, while the United States has but three
out of the nine, appointed by the Federal Reserve Board. In
that way the direct management and safeguarding of the funds
in any federal reserve bank is in the hands of men selected by
the banks themselves comprising the membership of that particular reserve bank. The appointment of three directors by
the United States is more than justified, because the United
States is expected to put in its own funds, between two hundred
and three hundred millions, and to furnish its credit and power
to the system. That is another great advantage of this system.
It makes useful to the country from two to three hundred
millions of money now locked up in the vaults of the Treasury
of the United States. The answer to the demands of the
bankers for part of the governmental control is first one of
precedent, based upon human experience. The Bank of Germany, the Reichsbank, which is a great public utility bank, has
its supervisory board, a curatorium, consisting of five men. At
its head is the Chancellor of the Empire, with supreme authority
over the Reichsbank. The Prussian Minister of Finance by
custom is always nominated by the German Emperor as a member of the curatorium. The other three members of the curatorium are three members of the German Bundesrath, corresponding with our United States Senate. The nine directors
who have administrative charge of the Reichsbank are all
appointed by the German Emperor upon the nomination of
the German Bundesrath. The stock is held individually by
private persons who are content with government management.
That bank has the right to issue legal-tender notes, elastic notes
issued against commercial paper, and automatically retired
under a penalty of five per cent interest. That German Bank
is a great public utility bank, protecting the commerce and
industry of the German Empire, and Germany sets a sound
precedent in having its bank a purely government institution.
Nobody ever charges it with being a political institution in an
offensive sense. It would be regarded as scandalous and impossible for the directors to attempt to use the powats of the great
institution for private or partisan purposes. It is impossible to
think of such a thing.
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SECOND CURRENCY

CONFERENCE

[VOL. IV

The French Bank, the Bank of France, is the great public
utility bank of France. Its governor, its sub-governor and the
managers of the 188 branches of the Bank of France are appointed by the President of France upon the nomination of the
Minister of Finance. The stock is held by private persons, but
it is a governmentally controlled bank, so controlled because
intended to protect the commerce and industry of the French
Republic.
The Bank of England in like fashion is a great public utility
bank. It is not so well contrived, in my judgment, as either
the Bank of Germany or the Bank of France; but upon the
board of governors of the Bank of England is no banker, bill
broker, or bill discounter. It has on its board some heads of
acceptance houses, however—men familiar with great commercial enterprises, men trained in the school of commerce.
The reason for this practise of England, Germany and France,
is that these banks are great public utility banks. They are not
exercising the function of making money for their stockholders, but they are safeguarding the commerce and industry
of these nations, stabilizing the interest rate, protecting the
national gold reserve, and giving stability to the business of
those nations.
In the United States these federal reserve banks are not to
be mere private enterprises for the sole purpose of making
money for the stockholders; although it is proposed by this
bill to allow stockholders six per cent (I believe that is the
consensus of opinion). It is not intended that the policy of
these banks, however, should be to make money for the stockholders or directors; their function must be to protect the
commerce of the nation, to stabilize the interest rate and to
give permanency to the prosperity which this country ought to
enjoy continuously, with its wonderful natural resources, and
with the mutual patriotic cooperation of the splendid and powerful men who have been developed in the free atmosphere of
America.
Another objection urged by the bankers to this proposed bill
is that the government should not issue the currency; that the
currency ought to be issued by the banks. The answer to that
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THE FEDERAL RESERVE BANK BILL

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is first an economic one. It may be argued that a bank note
corresponds with a bank deposit, and the argument has validity
as far as it goes—that is, in as far as the depositor of the bank
would be content to receive the note of the bank in exchange
for his deposit, but that does not state the whole truth. Those
notes are made current throughout the United States. The
government of the United States by Act of March 14, 1900, is
compelled to maintain those notes on a parity with the gold
dollar; and ought to be so compelled, because those notes are
current from hand to hand among our citizens, and no citizen
ought to be required to pause for a moment to ascertain the
condition of the bank emitting that note. When he takes a
dollar under the safeguard of this great nation of ours he ought
to be assured that that dollar is as good as a gold dollar. For
that economic reason it is better that the dollar which is issued
should be a dollar issued by the government of the United
States as a direct government obligation. After all, the government is obliged to redeem it under the law. Even the
holder of a national bank note has the right to demand redemption in legal tender, and the holder of legal tender has the
right to demand redemption in gold; and the Act of March
14, 1900, requires the United States to maintain these national
bank notes and all other current money on a parity with gold.
So, since the note of all of the people is better than the note of
some of the people, and since it is obviously a wise economic
policy to have the dollars which are current throughout our
country of the very highest character, the attitude of the administration in having these federal reserve notes government
notes is fully justified. Moreover, the issue of such currency
has a positive money earning power of over one per cent which
ought to belong to and be enjoyed by the United States and
not by private bankers.
There is also a political reason. The Democratic national
platform has three times in the last sixteen years declared
against the issue of the money of the nation by private corporations and in favor of the issuance of the currency by the
nation itself.
The country banks have raised a great cry against the clear(7)

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SECOND

CURRENCY

CONFERENCE

[VOL. IV

ing of individual checks at par by the federal reserve banks.
They say that they will lose money by it. The answer to that
is that this bill provides that they may charge their customers
for these checks. They reply that their " customers will not
stand for it;" that they prefer to have these checks charged to
the merchants of the cities; that is, that when these checks
come back to the country banks for collection they will then
charge collection and exchange to the merchants in the cities,
who receive these local checks and send them for collection,
under the obvious idea that the merchants of the cities are not
aware that they are being taxed in this small way, and under
the idea, I suppose, that the customers of the country banks are
making a profit at the expense of the city merchants, and that
the city merchants have no way of recouping themselves. I
take it that the city merchants are able to take care of themselves in a trade of that kind, and that the charge at last rests
where it belongs, upon the local customer of the country bank.
The bill can easily provide that the Federal Reserve Board
shall fix the rates to be charged upon these checks, and the
country banker need not lose anything he is justly entitled to.
If he transfers funds from a country town to St. Louis, Chicago,
or New York, he performs for the depositor a service for which
he has a just right to charge. The Federal Reserve Board can
fix that charge so there will be no extortion on the one side or
failure to pay justly on the other.
I have given you a brief sketch of this matter, and if because
of the brief time I am privileged to speak I have not covered
certain points so as to be perfectly clear, if any gentlemen
desire to ask me any questions I shall be glad to answer them.
A VOICE: Have you or the administration any objection to
the Federal Reserve Board being appointed for life in a similar
manner to the Supreme Court justices, in order that there may
be no suspicion of political influence? Has that thought been
considered at all ?
MR. OWEN: NO, that thought has not been considered.
Nobody has ever suggested a life appointment. The directors
of the German Bank are appointed for life, but in our country
men live too long to be appointed for life. They may become
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THE FEDERAL

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BANK

BILL

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decrepit. They may become afflicted with mental decadence
or with physical weakness. They may become from a variety
of physical or mental causes unfit to continue in office. But it
has been thought wise to give them a term of eight, ten or
twelve years—a sufficient length of time to make the positions
attractive to great men. No man ought to go on that board
who is not a great man, the equal intellectually, morally, ethically, in every respect, of any man who adorns our great Supreme
Court bench.
A VOICE : Do you think an eight-years' appointment would
bring these great men ?
MR. OWEN : I think it would. We have a great many men
in this country who, having made their own fortunes and having
distinguished themselves in commerce and finance, would be
willing and glad to render public service to their countrymen.
MR. SELIGMAN : A great many people seriously question the
right, or advisability, of the Federal Reserve Board's compelling the reserve banks to discount for one another. That is a
thing that has caused trouble in the minds of a great many
people.
MR. OWEN : The nearest approach we can get to a central
bank with twelve regional banks is to " pipe" the regional
banks under the safeguard of a wise and conservative administration.
MR. SELIGMAN: Is it a safe cooperation?
MR. OWEN : It is as safe as to put the funds in a common
reservoir with no requirement of cooperation needed.
A VOICE: Why should the national banks be compelled to
go into the organization?
MR. OWEN : They are not compelled to come into the organization. They can go out of it if they don't like it. The national
banks of this country have been formed in accordance with the
national banking law. Our banking system has proved to
be a great commercial system for the United States. It has
developed the industry of the little village and of the cross-road.
It has preserved the savings of the people of the small town for
use in that town, and in this way has preserved the unit upon
which the greatness of America must rest and does rest. These
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IV

national banks which have been built up are of necessity supervised by the government, because our system is different from
the branch banking systems of Europe, where one great banking house puts a branch here, there and yonder, and with its
by-laws controls each branch.
Through the provisions of its banking laws and the checks
provided by the comptroller of the currency and his examiners,
the United States government provides for the protection of
the smaller banks against the unwisdom and inexperience which
might easily be found where a few men come together with
$25,000 in a small town and go into the banking business without experience in that business. The government places at
their disposal the large banking experience of the country.
The small banks are instructed continuously against putting
themselves in jeopardy by unwise banking. When the government of the United States establishes this new system, which
has been found necessary to prevent panics, and gives the national banks as well as the state banks and trust companies the
advantage of cooperation, under government safeguard, if a national bank happens to be unwilling to conform to the reasonable and just requirements demanded by the national welfare
and the bank's own best interest, it would be a vital error on
the part of the government to permit this whole system to be
destroyed, by leaving it optional whether a bank avails itself of
it or not. If the indifference of a bank, its lack of understanding, its apathy, its neglect or its ignorance of the law and its
advantages is to be controlling, the system would not be established with any certainty. Men would stand off and say, " Let
others join this ; I will see how it works before I go into it."
The consequence would be that the possible advantages of this
system would not be realized. It is a righteous and just thing
that when the government has worked out carefully the details
of this plan, and after long study is well assured of its advantages, having put the microscope upon the bill with extreme
care to see that it is just and sound in every particular—it is
righteous and just, I say, to make the plan compulsory. Obviously the system itself cannot be permitted to fall by leaving
it merely optional. It ought to be made a success. It deserves
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THE FEDERAL RESERVE BANK BILL

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to be made a success. The national interest requires and therefore justifies it.
A VOICE : It seems to me that there are two viewpoints.
In the first place, if the national banks, which hold about onethird of the banking resources of the country, do not come in,
the state banks are quite apt not to come in. And if the national banks are compelled to come in if they do not want to,
why should not they have the option of having their bonds redeemed at par ? How can the system be a success if only onethird of the banks come in ?
M R . OWEN : The national banks have about eight thousand
millions of resources. The state and other banks have about
nine thousand millions of resources, and they are abundantly
strong to make this system a success. I have not the slightest
doubt in the world that the national banks will as a class almost
unanimously avail themselves of this system. The proper attitude of the government toward the bonds I have already explained.
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THE OPPOSITION TO THE FEDERAL RESERVE
BANK BILL'
CARTER GLASS
Representative from the Sixth Congressional District of Virginia, Chairman of the
House Committee on Banking and Currency

I

T is generally agreed that there is a pressing necessity for
currency legislation in this country. The country itself
thinks so, if any significance may be attached to the
thousands of letters received by the banking and currency committee of the House within the last six months, or to the resolutions passed by hundreds of commercial bodies throughout
the United States, calling for immediate consideration and action
by Congress. From every quarter and from all classes of citizens the demand has proceeded.
For more than a quarter of a century there have been
strong symptoms of an intense dissatisfaction with the prevailing national banking and currency system, and this spirit of discontent has been accentuated as from time to time the utter inadequacy of the system has been made manifest in periods of
financial peril. While the existing system has operated satisfactorily under ordinary business conditions, and while the administration of the system for the fifty years of its history furnishes a high tribute to the integrity and efficiency of those concerned in its operation and oversight, its very best friend is
bound to admit that in time of stress and storm it has broken
down utterly. This has occurred so often, and the ensuing
disaster has been so dreadful as to cause the banking experts
of other nations and practical financiers everywhere to marvel
at our continued failure either to adopt a better system or to
correct the evils of the one we have. While we may boast that
no note holder has ever lost a dollar and that the losses of depositors constitute an inconsiderable percentage of the total
'Read by title at the meeting of the Academy of Political Science, October 14, 1913.
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liabilities of the banks, nevertheless the failure of the system
in acute exigencies has caused widespread business demoralization and almost universal distress. Five times within the last
thirty years financial catastrophe has overtaken the country
under this system, and it would be difficult to compute the
enormous losses sustained by all classes of society—by the
bankers immediately involved, by the merchants whose credits
were curtailed, by the investors whose shops were closed, by
the railroads whose cars were stopped, by the farmers whose
crops rotted in the fields and by the laborers who were deprived
of their wages. The system breaks down in emergencies.
For years, the business and banking mind has been casting
about for a remedy, but into the story of this quarter-century
of ineffectual efforts for reform I have no time to go. Suffice
it to say that all political parties are now committed to a solution of this problem, and the public is demanding prompt action. The chief and everlasting curse of attempted banking
and currency legislation in this country has been the proneness
of public men to procrastinate. When the Vreeland-Aldrich
makeshift was adopted, ex-Secretary Lyman J. Gage warned
the committee and Congress that the bill was " merely a dangerous narcotic to lull the nation to sleep, from which slumber it
would some day awaken in agony." We should no longer,
from habit or timidity, gravely shake our heads and insist that
we " will not be hurried in this matter," that we want further
time for consideration, that we must have other hearings and
additional information. Sometimes I am led to wonder what
sort of information is wanted by the men who continually plead
for delay. There is no theme on earth upon which information may be more readily obtained than upon the currency
question; there is no topic upon which we have more authoritative expert expression; and there are few subjects upon the
general principles of which expert opinions are in greater accord. If it did no other good, the National Monetary Commission, at a cost of approximately one hundred and fifty thousand
dollars, assembled a great library on the subject of banking and
currency reform, which for two years has been accessible to
every member of Congress and to the public. Less than six
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months ago the banking and currency committee of the House
closed exhaustive hearings on this subject, at which representatives of every important known national group testified—big
bankers and little bankers, merchants and farmers, credit men
and manufacturers, currency experts, laboring men and textbook writers. There is scarcely a provision of this pending
currency bill which may not be related to those hearings. They
took the widest range and reflected every conceivable variety
of opinion and there is absolutely no excuse for further delay.
The limited time allotted to me, therefore, I shall devote to
the consideration of the three most prominent criticisms which
have been made against the bill. It is urged: first, that the
bill confers dangerously autocratic powers upon the Federal
Reserve Board, an alleged political board, and that the banks
should be given direct representation upon this board; second,
that it is unjust and confiscatory to require national banks to
join the system on penalty of forfeiting their national charters
if they fail to do so; third, that it is unreasonable and contrary
to the best banking practise to deny to banks joining a regional
reserve bank the privilege of counting deposits with reserve
agents as lawful reserve money.
These are the three criticisms which have been most persistently and vigorously hurled against the bill. If one accepted them with the broad generalizations and predictions of
dire calamity with which they are usually made, he would be
forced to conclude that the very foundations, not only of sound
banking, but also of justice and business morality, were being
assailed. In reality, these features of the bill contain nothing
that is either new or startling.
The Federal Reserve Board is essentially a supervisory
board, and clearly should not represent any section, faction or
type of business interest. It should represent the public as a
whole. There is only one way of securing a board of this
kind, namely, to have it appointed by the President of the
United States, who alone is the elected representative of the
entire nation. That is the way we select the Secretary of the
Treasury and the comptroller of the currency, in whom have
been vested for half a century by the national banking act
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many of the powers conferred by this bill upon the Federal Reserve Board. That is the way we select the interstate commerce commission, whose actual power over the railroads of
the country is much greater than that which will be exercised
over the banks by the proposed Federal Reserve Board.
When the Aldrich plan was before the country, the European
bank which its sponsors most often cited as a helpful example
for the United States and the one to which they gave more
attention in their report than to all the others combined, was
the Imperial Bank of Germany. The following brief description of the control of the Reichsbank is taken from an interview with two of its officers, which was published by the
monetary commission: *
[The capital] is all private ownership. . . . The government owns
no shares. [In our organization] we have, so to speak, three boards:
first, the Curatorium; second, the Direktorium (president and directors); third, the Central Ausschuss [or Central Committee]. The
Curatorium is composed of five members. The chairman is the Chancellor of the Empire. The Emperor appoints the second member,
and it has been the custom to appoint the Prussian Minister of Finance.
The Bundesrath [the upper house of the imperial legislature] appoint
from among their own number three members, which completes the
Board. . . . In the Chancellor lies supreme power although he has
exercised it but once in the history of the bank.
The Direktorium . . . is appointed by the Emperor for life. It
consists of nine members, seven of whom are directors, and two of
whom are the president and vice-president, respectively. The president and the other members of the Direktorium are recommended by
the Bundesrath to the Emperor, who makes the appointment. In the
case of the directors, the advice of the Central Ausschuss is heard.
The third body . . . [namely, the Central Committee] is composed
of fifteen stockholders who are elected at the annual meeting of the
stockholders, together with fifteen alternates, who serve in the absence
of any of the members of the board. . . . The Central Ausschuss
[Committee] are made familiar with the transactions carried on by the
1
Interviews on the Banking and Currency Systems of England, Scotland, France,
Germany, Switzerland and Italy. Publications of the National Monetary Commission. Sen. doc. 405, 61st Cong., 2d sess., pp. 335-7. Brackets indicate explanatory
matter not in original.

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bank, and give their advice and recommendations to the Direktorium
in reference thereto. In practise, their advice is generally carefully
considered and taken. . . . The management is so constituted that
the government has actual and final control through the Curatorium.
The business of the bank is transacted by the second body, the Direktorium.
Here we have one of the most successful banks of Europe—
a bank which possesses practically every power that the bill
before Congress would confer upon the Federal Reserve Board
and upon the regional bank boards combined, and which, in
addition, does a regular banking business with the public, competing with other banks. It has a practical monopoly of note
issue, it is the depository of government funds, it holds the bulk
of the bank reserve money of the empire, and it performs for
banks and public alike most of the transfer and exchange business of the country. Yet this situation is controlled almost
absolutely by politically appointed boards. The administration's plan does not begin to go so far in the direction of
government control, since the real banking functions in the
proposed plan are entrusted to the boards of the regional
banks, two-thirds of whose members are elected by bankers,
the functions entrusted to the Federal Reserve Board being
almost entirely supervisory functions except a few carefully
guarded ones which will be exercised only in times of great
emergency, and then in the searching light of publicity.
Although the members of the Federal Reserve Board will all
be appointed by the President of the United States, the board
will not be a political board in any narrow sense of that term.
It is my earnest conviction, based upon long and serious reflection, that no man can conceive—as none has yet pointed out—
how any part of this system can be perverted to political uses.
In my judgment, if the United States has ever had a President
ingenious enough to do this evil thing, it has never had one
desperate enough and will never have one shameless enough
thus to betray the confidence of the nation. I happened to be
present when an eminent banker suggested such a possibility to
the present occupant of the executive chair, and heard this
banker promptly challenged to show how it might be done. I
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shall not soon forget the emphasis with which the President of
the United States declared that no man would ever be found
willing to imperil his reputation or tarnish his fame by so flagrant a prostitution of his high office. The X-ray of publicity
is turned full upon the operations of the Federal Reserve Board.
There can be nothing sinister about its transactions. Meeting
with it at least four times a year, and perhaps oftener, will be a
bankers' advisory council, representing every regional reserve
district in the system. This council will have access to the
records of the board, and is authorized to give advice and offer
suggestions concerning its general policy. How could we have
exercised greater caution in safeguarding the public interest?
The second criticism of the bill relates to the so-called compulsory feature. Critics allege that it is unjust and confiscatory
to compel national banks to invest part of their capital in a
federal reserve bank, on penalty of forfeiture of their national
charters if they fail to do so. Many of these same critics, however, have been for years criticizing the federal government for
its inadequate and unscientific national banking laws, under
which the country's credit system has again and again broken
down, to the distress of banker, merchant, farmer and laborer
alike. Now the national government is about to effect a thorough-going reform of these same defective banking laws, in the
interest of the entire public. To be successful, the newlycreated federal reserve banks must be strong and must inspire
confidence from the start. If sacrifices are involved in joining
the new system, these sacrifices should be borne by all, not
merely by those bankers who are at once wide-awake and
public-spirited. I ask you in all fairness, is it unreasonable for
the government to say to the national banks, " If you wish to
retain the name ' national,' and to enjoy the privileges which are
conferred upon banks chartered by the national government,
you must assume the obligations which the national government
believes the dictates of sound banking require in the public
interest. If you do not wish to do so, you are perfectly free to
give up your federal charter and to accept the privileges and
assume the obligations which state charters involve. You may
have a year to decide, but if you are to remain permanently in
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the national system, you must expect to play the game according to the national rules."
The real opposition to this bill, however, is not as to gov- .
ernment control, upon which we shall never yield. It is not as
to compulsory membership, which was provided in another way
in the Aldrich scheme, a scheme that was unanimously endorsed by the American Bankers' Association. It is not as to
the required capital subscription or the five-per-cent dividend.
It is none of these. It is as to that most vital requirement of
the bill, that in the future, funds on deposit in other national
banks cannot be counted as legal reserve. This means an immediate loss of profits to many bankers—I say immediate, for
in the long run the change will benefit bankers as well as the
public—and it is the prospect of this loss that explains most of
the organized opposition to the bill.
The fight is to drive us from our firm resolution to break
down the artificial connection between the banking business of
this country and the stock speculative operations at the money
centers. The monetary commission, with more discretion than
courage, absolutely evaded the problem; but the banking and
currency committee of the House has gone to the very root of
this gigantic evil, and in this bill proposes to cut the cancer out.
Under existing law, we have permitted the banks to pyramid
credit upon credit, and to call these credits reserves. It is a
misnomer. They are not reserves, and when financial troubles
come and the country banks call for their money with which to
pay their creditors, they find it is invested in stock-gambling
operations. There is suspension of payment and the whole
system breaks down under the strain, causing widespread confusion and almost inconceivable damage. The avowed purpose
of this bill is to cure this evil, to withdraw the reserve funds of
the country from the congested money centers and to make
them readily available for business uses in the various sections
of the country to which they belong. This we propose to do
cautiously, without any shock to the existing arrangement,
graduating the operation to prevalent conditions, and extending
it over a period of thirty-six months. This affords ample time
to the reserve and central reserve city banks to adjust conditions
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to the reserve requirements of the new system. Out of abundant caution, we have allowed actually longer time than the
best practical bankers of the country have said was needed.
But the complaint of these critics is not as to the time, but as
to the fact. They do not want existing arrangements disturbed ; they are willing to perpetuate a defective, unscientific
system sanctioned by law but condemned by experience and
bitterly offensive to the American people—a system which
everybody knows encourages and promotes the worst description of stock gambling.
In conclusion, let me repeat: the time for action on this
great question is now, while the public interest is alive, and
while we can act with that caution and deliberation which is
impossible when the country is in the throes of a financial panic.
To those who advocate further delay in the hope thereby of
securing legislation which they consider more conservative or
more favorable to the banking interests, I say with all the
seriousness at my command, that they are pursuing a false hope.
The most vigorous opposition to this bill has been from those
who want a more radical measure. If legislation now is postponed until the public is goaded by another panic, you may
rest assured that the resulting legislation will be more radical—yes, far more radical—than that contained in the
present bill.
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THE FEDERAL RESERVE ACT: A REPLY TO
CRITICISMS'
ROBERT J. BULKLEY
Representative from the Twenty-First Congressional District of Ohio, Member of
the House Committee on Banking and Currency

I

T is obviously impossible within the limit of time at our disposal either to explain fully the Owen-Glass bill, or to
discuss fully all the criticisms that have been leveled
against it. I shall assume that the bill has been sufficiently
explained to you already, and that you understand its purpose
and general outline. I desire to treat some of the criticisms
which have been made against the bill and to discuss them from
a point of view slightly different from that which Senator Owen
has adopted.
In selecting the criticisms to be discussed, I have decided to
take up those of the Honorable A. Piatt Andrew, formerly
assistant secretary of the treasury, former secretary of the
National Monetary Commission, and one of the authors of the
Aldrich plan, and the criticisms made by the American Bankers'
Association. I do this because Dr. Andrew is a thorough
student of the subject, and his connection with the Aldrich plan
entitles his criticism of our plan to careful consideration; and
because the American Bankers' Association may be presumed
to represent in the most official way that body of men which is
most directly interested in the bill.
Dr. Andrew insists principally upon three criticisms. He
criticizes the number of the reserve banks which we propose to
establish. He criticizes the provision with respect to note issues,
and expresses the fear that the bill will result in a great inflation. He also criticizes, but does not so much emphasize, the
danger of political control and the so-called compulsory membership of national banks in the federal reserve banks.
'Address at the meeting of the Academy of Political Science, October 14, 1913.
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The American Bankers' Association, on the contrary, suggests the danger of a great contraction. They attack the constitutionality of the measure, but lay particular emphasis upon
the compulsion—the driving of the national banks into membership in this organization—and upon the feature of exclusive
governmental control.
We all know that it is easier to criticize than to construct. It
therefore seems fair that in analyzing the criticisms of this bill,
we should compare the constructive work of our critics with
our own work. I shall therefore take the liberty of comparing
the provisions criticized in our bill with the corresponding provisions of the Aldrich plan, of which Dr. Andrew is one of the
authors, and which was unanimously endorsed two years ago
by the American Bankers' Association in New Orleans.
To take up the criticisms, then,—first, the criticism has been
made of the proposed establishment of twelve regional reserve
banks, and the American Bankers' Association has suggested
that the number be reduced to not more than five. But the
representatives whom they delegated to present their criticisms
to the Senate committee on banking and currency were frank
to say that the real preference of the association was for one
central bank, as provided in the Aldrich plan. They say that
the establishment of as many as twelve regional banks will so
divide up the reserve money of the country that the proposed
mobilization of reserves will not be effective. It is admitted, I
understand, that the power given to the Federal Reserve Board
to compel one regional bank to rediscount for another would
measurably offset the dangers arising from a scattering of the
reserves among twelve regional banks, but it is contended that
this power is in itself a dangerous element because of the possibility that it might be abused for political purposes, which
means, presumably, purposes of partisan politics. In fact, the
power could not be so used, because, by the terms of the bill,
rediscounts may be compelled only upon the unanimous vote
of the Federal Reserve Board, which must have in its membership at least two representatives of political parties not in power.
Let us examine the alternative of one central bank, as provided by the Aldrich plan. Under that plan the central bank
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was to rediscount the paper of the constituent banks through
its branches. It is not clear whether this meant that the paper
offered for rediscount was to be passed upon by the central
board, by the board of directors of the local branch, or solely
by the branch manager, who was to be the representative of
the central bank. Any of these methods would be much inferior to the provisions of the Owen-Glass bill; because if the
central board were to undertake to handle the matter directly,
either it would have to depend absolutely upon the judgment
of its one representative; or if either the board of directors or
the executive committee should attempt to exercise its own
judgment, it would act under the disadvantage of lack of familiarity with local credits and conditions. If this function were
entrusted to the board of directors of the local branch, those
directors would be placed in a position of lending the money of
the central bank to the constituent banks which elected them to
office. In other words, the banks to whom the members of the
local boards owed their positions would be interested ioo^b as
borrowers, and only about jjo as lenders. Thus there would
be a much stronger pressure to accept questionable paper than
if the local board were lending the money of its own constituent
banks.
Each independent regional bank under the Owen-Glass plan
would have a territory approximately equal to that of one of
the branches under the Aldrich plan, and it could therefore be
presumed that the directors would have about the same degree
of familiarity with local credits and conditions as the directors
of the branches under the Aldrich plan, but under the OwenGlass plan their responsibility as lenders would be as great as
their responsibility as borrowers, which would not have been
the case under the Aldrich plan.
Turning now to the question of note issues, the currency
provided for by the Aldrich plan was to consist of notes of the
National Reserve Association, to be issued in the discretion of
the directors of the association. These were to be redeemable
on demand in lawful money, and behind them there was to be
held nominally a reserve of $of> in lawful money. I put some
emphasis upon the word " nominally," because practically the
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reserve required was considerably less than 50^. In the first
place, the reserve was to be held against all demand liabilities,
including deposit liabilities. But from the aggregate amount
of such liabilities there was permitted a deduction of some
$350,000,000 before computing the required 50^ reserve.
Then it was possible for the board of directors to go below the
SOjb reserve in their discretion, the only penalty being the
payment of a graduated tax on the amount of the deficiency.
But, inasmuch as the payment of this tax would not affect the
dividends to be paid to the banks which elected the directors
and would only reduce the amount of profit going to the government, which had only a small minority representation on the
board of directors, it will be seen that there would not be much
inducement to keep up the reserve if the interest of the banks
would be served by letting it go down.
The notes issued by the reserve association would have been
available as reserve money in the constituent banks, and inasmuch as they were to be legal tenders for debts due to the
government and to the banks, there would be practically no
inducement to present them for redemption. And in fact there
would have been no redemption of these notes except as they
happened to come into the central bank in the ordinary course
of business. Therefore the element of elasticity was entirely
lacking, ready means being provided for the expansion of note
issues without check even by any government representative,
and no inducement existing for the contracting of such issues.
Under the Owen-Glass plan the proposed federal reserve
notes will come back for redemption as soon as they have served
their immediate purpose, because they cannot be counted as
reserve money by constituent banks, because the collateral specifically placed behind them will be constantly maturing and
cannot be replaced without the consent of the Federal Reserve
Board, and further, because the federal reserve banks borrowing
such notes will be paying interest upon them, which interest
will be a real charge against the possible profits of their stockholders. Mr. Vanderlip has suggested that the proposed federal
reserve note issue would lack the quality of easy contraction
because the notes would to a large extent become impounded
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in the reserves of state banks not members of the system. He
could fairly have said this—and more—in criticism of the
Aldrich notes, but in saying it about the notes provided in the
pending bill he overlooks the fact that these notes may be
redeemed in the same manner as existing national bank circulation, that is to say, by the deposit of lawful money in a fund
to be held in trust for the redemption of the notes. The impounding of lawful money in such a trust fund has, of course,
the same effect in contracting the circulation as the actual return
and retirement of the notes themselves. The federal reserve
notes of the Owen-Glass plan have, therefore, complete elasticity
—a quality which the Aldrich notes would not have had.
Dr. Andrew says he is afraid of " greenbackism," which
means—if it means anything—the issue of currency upon the
mere fiat of the government, without actual value behind it, and
the danger of it lies in inflation of the currency. Yet the federal reserve notes can be issued only when loojfc of prime
commercial paper plus 33^ of lawful money is actually deposited to secure them; that is, there must be $1.33 of good
security directly hypothecated to secure every dollar of such
notes in circulation. This is very far from fiat money. And
if it be urged that there is still danger of the inflation of such
an issue, I will remind our critics that these notes can be issued
only upon application of the banks themselves. Inflation could
not follow except as the result of the bad judgment of the
bankers of the country. And if it is to be presumed that the
bankers will use bad judgment, what would have saved us from
inflation under the Aldrich plan with its looser requirements as
to security behind the notes ? The Owen-Glass plan, however,
provides a further check against inflation because it gives the
Federal Reserve Board the absolute right to stop it—a safeguard
not contained in the Aldrich plan.
The American Bankers' Association, although it once indorsed the Aldrich plan in toto, has apparently seen new light
since taking that action, and last week in Boston it indorsed the
amendments to the pending bill prepared by its currency commission and adopted last August by the so-called Chicago
bankers' conference. The bankers' association now proposes
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a note issue by the federal reserve banks, with the permission
of the Federal Reserve Board. This permission is an important
check against inflation not provided by the Aldrich plan. As
proposed by the bankers, however, it would only half accomplish the purpose; it would give the Federal Reserve Board the
power to prevent too many notes going out, but would not
enable it to force them in by raising the rate of interest on the
notes or by refusing to permit paper deposited as collateral to
be replaced at maturity. So far as elasticity is concerned, this
note issue proposed by the bankers would be fairly subject to
Mr. Vanderlip's criticism. Notes impounded in reserves of
non-member banks could not be redeemed, and therefore the
issue would not have the same power of contraction as is provided under the Owen-Glass plan.
None of the arguments ordinarily used against a government
note issue is fairly applicable to the plan proposed in the pending bill, and it does seem as though the objections now being
urged are to a large extent sentimental, or else based upon an
unwillingness to recede from a dogmatic position that the government should not issue notes. Nobody seriously contends
that there is the slightest danger of the government ever being
called upon to make good any loss arising from the inability of
the banks to maintain the proposed note issue. Yet it is more
or less seriously suggested that if such an impossibility should
occur, it might be very embarrassing to the government. So
it might; but in such a contingency I do not hesitate to say
that I would prefer to have the government take the loss and
suffer the embarrassment attendant upon it, rather than to have
such a loss fall upon the innocent holders of the notes.
Much has been made of the contention that a bank ought to
have as good a right to supply its customers with credit in the
form of notes as in the form of book accounts. I cannot believe
that this is the real issue: the banks do not want merely the
right to put their promise to pay on a piece of paper and let it
circulate as far as it will. A certified check endorsed to bearer
would accomplish that, but would come back for redemption
too quickly to suit them. What they want is an issue of notes
produced by the government bureau of printing and engraving,
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an issue which the laborer, the farmer, and the people generally, excepting only those technically educated in banking,
will think is money and will hold as money. The distinction
between a bank note and currency is perhaps not very well
founded technically, but practically in this country it is a very
real one, as we have all been brought up to the use of government currency and we all feel a little bit safer when we receive
for our property or services a note with the government's mark
on it. This, too, may be in part sentimental, but it is as well
founded in logic as any uncompromising prejudice against government currency, and it is a sentiment pretty widely felt by
the people of this country.
I hope the members of this Academy will consider the suggestions I have here made with this question in mind: Could
we provide such an adequate system of redemption as we have
here provided, could we provide the same amount of public
satisfaction that the proposed note issue will give, in any other
way than by government currency issued through the banks?
Remember, too, that the Federal Reserve Board cannot bring
about inflation but may always stop it, and may at any time
force contraction. By no possibility can credit or currency inflation occur without the prior application of the bankers
themselves.
Dr. Andrew takes occasion to express the fear that the rediscount provisions of the Owen-Glass bill may result in great
inflation. There is no time to go into figures here, but it may
be conceded that an inflation would be possible under the rediscount and reserve provisions of this bill, though the possible
inflation would not be nearly so great as the inflation made
possible by the corresponding provisions of the Aldrich plan.
Under either plan much would depend upon the discretion and
good judgment of those in control. But this important consideration must always be borne in mind: Inflation would be
impossible under either plan unless the bankers permitted it;
under the Aldrich plan if the bankers wanted to permit it, they
would do so, but under the Owen-Glass plan if the bankers
wanted to permit it, they might still be checked by the government representatives.
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Personally I agree fully with Dr. Andrew's suggestion that
suspension of reserve requirements should be automatic rather
than discretionary, and I am free to admit that in my judgment
our bill allows to the Federal Reserve Board an unnecessary
discretion on this point. Nevertheless, it is still better than the
Aldrich plan which Dr. Andrew advocates, because, as we have
already seen, the tax on deficiencies therein provided was a tax
which would not fall upon those responsible for the deficiency.
Furthermore, the Aldrich plan did not even propose to tax
deficiencies in reserves of the member banks. The pending bill
provides that if the Federal Reserve Board does permit a deficiency in reserves, it must impose a graduated tax upon such
deficiency, and this tax does fall upon those who are responsible
for the deficiency, whether they be federal reserve banks or
constituent member banks.
Turning to the criticisms of the American Bankers' Association, prepared by their currency commission, and recently endorsed by the association at its Boston meeting, the report of
that commission seems to have been written in bad temper and
does not seem consistent with the dignity and fairness which such
a body ought to possess. It states that the pending bill imposes
great hardships on the banks and on the public generally.
Some of the alleged hardships on the banks are specified, but
there is no specification of the hardships which are said to be
inflicted upon the public, except an implication that the bill
would cause capital to be withdrawn from business, or in other
words, that the bill would cause a contraction of credit. The
association seems willing to make this implication, though unwilling to make the direct statement that credit would be contracted. Mr. James B. Forgan of Chicago and Mr. Arthur
Reynolds of Des Moines, president of the American Bankers'
Association, individually predicted a great contraction. Mr.
Reynolds made no argument to support his prediction, and Mr.
Forgan's argument on the subject has already been completely
refuted. Such eminent bankers as Mr. Vanderlip, of this city,
Mr. George M. Reynolds of Chicago and Mr. Sol Wexler of
New Orleans admit that the reserve provisions of the pending
bill are correct in theory and ultimately workable, though I be(27)

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lieve they express some doubt as to whether there may not be
a little embarrassment during the period of readjustment to the
new conditions. In any case, the contraction argument has
been thoroughly exploded.
The report approved by the bankers' association proceeds to
question the constitutionality of the pending measure, on the
ground that the provision requiring national banks to buy stock
in the federal reserve banks amounts to depriving them of their
property without due process of law. The fact is that the
statute under which the national banks are chartered reserves
to Congress the right to alter, amend or repeal. The situation
has been best explained by my colleague, ex-Governor Montague of Virginia, whom I quote:
In this bill no bank is required to enter the banking business under
the new provisions, and there is no confiscation of existing banks upon
failure so to do. It is true there is a dissolution of existing charters
after the expiration of a certain time, a power to impose such a dissolution having been reserved in their charters and accepted by the
existing banks. None of the imaginary hardships and confiscations
predicted can come to any bank unless it voluntarily enters the system
containing these regulatory provisions.
The contract, therefore, is the reserved right of Congress to amend
or repeal these charters—contracts assented to when the several banks
were organized—and if the banks now resist such amendment or repeal
it is they who violate the contract and not the government.
Governor Montague also cites the case of Noble State Bank
v. Haskell,' decided by the Supreme Court of the United States,
which involves almost the identical question here presented.
At a dinner of the Economic Club in Boston last week, I called
these arguments to the attention of the gentleman who was
present as representative of the American Bankers' Association,
and who was a member of the currency commission which prepared the resolutions. I challenged him to say whether his
commission had considered the question, and whether he himself believed that the bill was unconstitutional. His answer was
that he did not know, nor care, whether the provision was
1

219 U. s . 104.

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unconstitutional or not. Possibly the members of the American
Bankers' Association do not care much about constitutional
questions, but when they pass resolutions charging that a bill
publicly endorsed by the President of the United States and
passed by the House of Representatives is an unconstitutional
measure seeking to confiscate their property, they ought to care
whether what they say has any foundation or not.
The final question raised is that of government control.
That is really the big issue, the issue which more than any
other up to this time seems irreconcilable, although the bankers
have come far in admitting that the government ought to have
a majority of the controlling board. I think I should be somewhat lacking in frankness, if I did not say that in my judgment
there is some danger of political control accompanying the
provisions of this bill. I do not wish to be understood as conceding the exaggerated arguments that have been made on this
point, for I think they have been much exaggerated, but I think
that in the course of time there may be some danger of developing under this plan an undesirable political control.
But what is the alternative? It seems to me that it is more
important that the people of this country should be protected
against the threat of the manipulation of credits in private and
irresponsible hands, than that they should be protected against
political danger. The government is always responsible. The
people have the right to see what is going on while it is going
on, and they have the ballot to correct whatever does go wrong.
Let it be admitted that it will be necessary for the people to
watch their servants and hold them to strict account. Eternal
vigilance is still the price of liberty.
That may be admitted, and still we may say that we must
have governmental control. Banking is a public utility. It is
so recognized in the European countries, and it is coming to be
so recognized in this country. It will not do for the bankers to
keep on talking about being permitted to do what they will
with their own. The property under their management is not
all their own. The property belongs primarily to the depositors of the United States. Of course the bankers have the
confidence of those depositors, for the public will not deposit
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with a bank unless they have confidence in it; but they do not
deposit merely because they have confidence in the bank;
they deposit because they must deposit in order to have the
facilities for business. It is a necessity, and it is a public utility
in that sense. A few years ago we heard a great deal from
those in control of the great life-insurance companies on this
subject of being permitted to do what they would with their
own; but their spirit has been very much chastened recently.
The railroads and other public utilities are not allowed, without
let or hindrance, to do what they will with their own, and their
property is more their own than is the property controlled by
the bankers. These public utilities have had restrictions put
upon their right to do what they will with their own, and the
time is coming when the bankers must come to see and expect
this as necessary.
Again I say, there is going to be governmental control, and
I sincerely hope that you gentlemen of the Academy of Political Science and you gentlemen of the Chamber of Commerce,
even those of you who have your daily work in Wall Street,
will recognize the necessity for such control, and will use your
best efforts in cooperating to make that control wise and beneficial to the people of the United States.
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BANKING REFORM IN THE UNITED STATES'
NELSON W. ALDRICH
Ex-Senator from Rhode Island, Chairman of the National Monetary Commission

A

NY intelligent criticism of legislative proposals for banking and monetary reform must be based on a knowledge
of existing conditions and of the present and prospective needs of the country, and a clear understanding of the
defects to be cured and the evils to be avoided, as well as the
nature of the remedies to be adopted. The magnitude of the
interests to be affected favorably or unfavorably by suggested
changes should lead us to exercise the greatest care in the
formation of our judgments, and to see to it that we are not
influenced in our opinions by local or other prejudices.
Statistics are available to show the extent of the banking interests directly affected by monetary legislation, but we cannot possibly measure the magnitude of the interests which
the American people of every community, of every section,
have in the wisdom or unwisdom of suggested changes. The
number of stockholders and depositors in, and borrowers from
our banking institutions is greater than that of the adult
population of the country. The people who have the deepest
direct interest in the efficiency and good management of our
financial institutions are the active business men throughout
the country, whose enterprise has earned for the United States
the first place in the world of industry and commerce. The
people who will suffer most from injurious changes will be
the wage earners and the great mass of people engaged in
productive industries.
CHARACTER AND MAGNITUDE OF OUR BANKING SYSTEM
The current report of the comptroller of the currency shows
that we have in the United States approximately 29,000 state
and national banks (about 22,000 state and 7,000 national),
1

An address at the dinner of the Academy of Political Science, October 15, 1913.

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with resources in excess of 25,000 million of dollars. The
rapid growth of our banking facilities in recent years is shown
by increases from 1900 to 1912 in the number of institutions,
from about 13,500 to 29,000; in banking resources from 10,785
million dollars to 24,986 millions; in loans and discounts from
5,657 millions to 13,953 millions; in individual deposits from
7,239 millions to 17,024 millions. The increase in population
between 1900 and 1912 was twenty-two per cent, while the increase in banking resources was one hundred fifty-eight per
cent. The wise management of these banks, for in the main
the management has been wise, and the judicious use of these
enormous banking resources have been perhaps the most important factors in promoting the growth and securing the unexampled prosperity of our agricultural, commercial, and industrial interests in recent years.
Every community in the United States, large or small, has
one or more banks. The managers of these banks are men
familiar with the wants of their customers and they are usually
accepted as the financial advisers of their neighbors. In all
matters affecting the prosperity of the neighborhood in which
they are located their advice and judgment are often sought
and usually followed. The intimate and important relations
existing between banks and bankers and the people and communities should be carefully considered in any examination of
the provisions of suggested legislation.
GENERAL CONDITIONS DEMAND REFORM

The exceptional record of the successful growth of our banking interests to which I have referred has been coincident with
the unexampled prosperity of the country. We must not, however, lose sight of the fact that our great banking resources
have been found in serious emergencies powerless to avert
general disaster. Our banking system has broken down when
subjected to any very severe strain. While there is nothing in
present or prospective business conditions that should occasion
alarm, we must remember that financial troubles often, in fact
usually, come unheralded. Even the causes that produce
them can never be definitely stated. It is evident that in the
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near future the adequacy of our banking facilities is to be
tested by new demands for credit in addition to our normal
business requirements. In magnitude, the unusual demands
here and abroad for additional credit and for the placing of
new loans by states and industrial organizations have never
been equaled. Demands of this nature, world-wide in extent, impose new and greater burdens upon the banking resources of the world. With the close business and financial
relations which modern conditions have established between
the great commercial nations, each country must bear some
share of these new responsibilities. The need of the states
of the near East for means to fund indebtedness contracted
during the late conflict and to enable them to repair the ravages of war adds largely to the usual European demand.
In Europe, fear that grave political problems may not
always be found capable of peaceful solution, and dread of the
evil effects of an undue expansion of credit in any quarter, are
disturbing elements. The high rates demanded for government and other loans, the impossibility of floating long-time
loans at any rate, are evidences of unsettled and unsatisfactory
conditions in the world's money market. In the United States
our financial institutions will be called upon to meet insistent
requirements of steam and electric railroads and industrial
corporations for new loans to pay for necessary improvements
and extensions, and to refund maturing obligations. Government and other large borrowers will be obliged to pay rates
which a few years ago would have been considered extortionate. The effect of recent tariff legislation on business and
government revenues is yet unknown. These conditions taken
together naturally create a feeling of uncertainty in all financial centers. The enormous shrinkage, amounting to thousands
of millions of dollars, which has recently taken place in the
value of securities and property in the United States, furnishes
evidence, whatever may be the cause, of a want of confidence
in our continued prosperity on the scale of our past achievements.
These among other considerations should lead us to exercise the greatest care in the selection of remedies for admitted
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defects in our banking system. The people of this great country, with all the momentous consequences involved, cannot
afford to venture on untried experiments, or to adopt principles or methods that have been rejected by the teachings of
universal experience. We cannot measure the direful results
which might follow revolutionary changes. Any remedial
legislation should be constructive and not destructive. We
should seek to strengthen rather than weaken the efficiency
of our credit organization. We should supplement rather
than supplant a system which has grown to such enormous
proportions under state and national laws, and to which the
business of the country has with more or less satisfactory results become adjusted.
CHARACTER OF THE REFORM DEMANDED

To secure a wise and comprehensive reform of our banking and monetary system, we require:
1. An efficient banking organization by which bank suspensions and financial crises with their evil results can be
avoided.
2. Means to secure a concentration of cash reserves of the
banks and their mobilization for use whenever and wherever
needed in times of trouble. In times of stress, scattered reserves of banks have been found useless for either defense or
protection. The scramble of 25,000 banks in 1907, each to
take care of its own interests and to increase its own cash
reserves, contributed very largely to the panicky conditions
which led to general disaster. Banks must be furnished with
effective means for replenishing their reserves and increasing
their loaning power at times when the need for credit expansion is imperative.
3. The general cooperation of banks must be secured to
protect their own or the public interests when these are
menaced and when individual or local efforts are ineffectual to
prevent the paralysis of business and domestic exchanges.
4. An organization must be provided that can deal effectively with conditions which imperil the credit and status of
the United States as one of the great financial powers of the
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world. In times of threatened trouble or actual panic, the
power to control the movements of gold and the course of
foreign exchange through raising the rates of discount or
otherwise is essential, from both a national and an international standpoint.
5. We must have an organization whose influence can be
made effective by an advance in discount rates or otherwise in
preventing an undue expansion or dangerous inflation of bank
credits.
6. A currency should be provided that, in character and
volume, in contraction as well as in expansion, will be responsive to normal or unusual demands. Seasonal or unusual
demands for currency or credit for crop moving or other purposes have at times produced very unsatisfactory conditions
in the money market owing to the inelastic and unscientific
character of our monetary system.
7. A broad discount market must be created with recognized and legalized standards of commercial paper. Recent
conditions also impose unnecessary burdens upon business and
production, and hinder the natural development of certain
sections of the country. These evil results are felt more
keenly in new and undeveloped communities. The lack of
such a discount market leads banks in all sections to send
surplus money to New York to be loaned there on stock exchange securities.
The methods necessarily used in raising the enormous sums
required for the production, movement and marketing of our
agricultural and other products, are crude and unnecessarily
expensive to producers. Notes and bills of exchange issued
or drawn for agricultural, commercial, or industrial purposes,
can be discounted only in a narrow, local market, and the result has been that our farmers and all others engaged in productive industries have been obliged to pay higher rates for
their loans and have been placed at a great disadvantage in
securing the credit which they have required and to which
they are fairly entitled, for the growth, retention and distribution of their products. The adoption and use of proper
standards for such commercial paper would enable our banks
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profitably to replace in their portfolios speculative low-rate
loans of all kinds with notes, bills of exchange and acceptances,
based on the products and commodities of the country. If this
change can be made, it will prevent the dangerous congestion
which takes place at times in the great financial centres. It is
difficult to understand, in this connection, why national banks,
which are authorized by the House bill to accept drafts
growing out of transactions involving importation or exportation of goods, are not permitted to accept domestic drafts of
the same character. Why should a bank in Mississippi or
Texas be permitted to accept the draft of a cotton planter on
Liverpool, based on cotton shipments, when it could not accept the drafts of the same planter on a domestic consumer?
Why should an importer in New York have better facilities
than the western farmer who ships his grain to an eastern
market?
EFFECTIVE REMEDIES SUGGESTED BY EUROPEAN EXPERIENCE

While there seems to be a general agreement as to the nature
of the reforms demanded, unfortunately there is no such consensus of opinion as to the methods and machinery which
should be employed in securing the desired results. This is
to be regretted, as it seems certain from the experience of
other nations that simple and effective remedies for defects
are easily within our reach. While we have suffered greatly
in almost every decade of our history from the evil effects of
financial crises, the people of the great commercial countries
of Europe have been entirely free for nearly half a century
from disastrous losses arising from this cause. This exemption may be said to be due solely to the character and efficacy of their credit and banking organization. The experience of England and France, and later of Germany, in this
respect, has led all the important commercial nations of the
world except the United States to follow, in the essential
features of their credit organization, in the footsteps of these
great countries. The adoption within a few years by Sweden,
Switzerland, and Japan of banking organizations along the
lines of the countries I have referred to, completes the adher(36)

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ence of the commercial world, outside of this country, to one
general banking and monetary policy.
CRITICISM OF THE BILL

In considering the character of the remedies proposed by
the bill which recently passed the House of Representatives I
am not unmindful of the fact that it is much easier to criticize
than to construct, and I certainly do not intend by any criticism I may make to increase the difficulties of legislators
charged with serious responsibilities, but rather to call attention to changes which, it seems to me, must be made in the
plan in the interest of wise and permanent legislation. The
authors of the bill having in a majority of cases accepted remedies and adopted ideas based on experience of other countries,
and on sound economic principles, it is all the more to be regretted that in some of the most important provisions of the
bill the lessons of experience have been ignored.
My suggestions with reference to certain provisions of the
bill are made with the hope that they may prove of service to
those who have the bill in charge, in their difficult task of
perfecting the measure. It is certainly desirable that the
American people, whose highest interests are to be affected
favorably or unfavorably by congressional action, should have
as clear an understanding as possible of the nature of the
proposals.
The two features of the bill which are open to the most
serious objection are, first, the provisions which authorize the
issue of government notes to be circulated as money and loaned
on collateral security to the federal reserve banks created by
the bill; second, the provisions which create a government
board which can be accurately described as a government
central bank of an objectionable type.
NOTE ISSUES

The proposals with reference to note issue are radical and
revolutionary in their character and at variance with all the
accepted canons of economic law.
It can hardly be necessary for me to recount in this presence the disastrous results which have inevitably followed the
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issue of paper money by governments or states. I need only
remind you of our own colonial and revolutionary experiences.
That of France at the time of John Law and the French Revolution is equally significant. In exceptional cases, like our
own experience with United States notes, where continuous depreciation has not ended in absolute worthlessness of issues, the
losses arising from the use of a depreciated currency have
greatly exceeded any possible financial benefits which have
resulted from the violation of economic laws. Competent
authorities estimate the greater cost of our civil war, owing to
the use of depreciated currency, at more than five hundred
millions of dollars.
In all cases of government issues, when the resulting expansion and inflation have brought about instability of conditions and values, those dependent upon wages and salaries
and those engaged in agriculture and other production have
been the principal sufferers, while the capitalists and speculators who could take advantage of constantly changing conditions have been the only classes who have been benefited.
This condition has never been better characterized than by
Daniel Webster, who said:
Of all the contrivances for cheating the laboring classes of mankind, none is so effectual as that which deludes them with paper
money. It is the most perfect expedient ever invented for fertilizing the rich man's fields by the sweat of the poor man's brow.
Ordinary tyranny, oppression, excessive taxation, these bear lightly
on the happiness of the community compared with fraudulent currencies and the robberies committed by depreciated paper. Our
own history has recorded enough, and more than enough, of the
demoralizing tendency, the injustice and intolerable oppression on
the virtuous and well-disposed, of a degraded paper currency, authorized by law, or in any way countenanced by government.1
Pelatiah Webster, writing in 1781, after the total volume
of Continental paper money had become worthless, said:
We have suffered more from this than from any other cause or
1

Congressional Globe, 27th Cong., ad sess., app., p. 65.
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calamity. It has killed more men, pervaded and corrupted the
choicest interests of our country more, and done more injustice than
even the arms and artifices of our enemies.1
Leading economists, financiers and statesmen of every shade
of political belief have joined in the condemnation of the use
of the obligations or notes of governments as a circulating
medium. On this subject the views of Alexander Hamilton,
who believed in a centralized national government, were fully
concurred in by General Jackson and Mr. Benton and the
leading statesmen who represented opposite views of government and of currency and banking questions.
Mr. Hamilton said in his report of 1790:
The emitting of paper money by the authority of government is
wisely prohibited to the individual states by the national constitution,
and the spirit of that prohibition ought not to be disregarded by the
government of the United States. Though paper emissions, under
a general authority, might have some advantages not applicable, and
be free from some disadvantages which are applicable to the like
emissions by the states, separately, yet they are of a nature so liable
to abuse—and, it may even be affirmed, so certain of being abused—
that the wisdom of the government will be shown, in never trusting
itself with the use of so seducing and dangerous an experiment.
I will quote the views of General Jackson and Mr. Benton
later.
Among American economists, the position and authority of
Professor C. F. Dunbar will not be questioned. I know of no
political economist of standing in this country who will not
agree that the following statement of Professor Dunbar sets
forth the sound economic doctrines that should control note
issues:
The necessary conclusion from our experience with the legal
tender notes plainly is that a government currency, under our conditions, is an unfit subject for national legislation.
* * * * *
The often-repeated argument that a government issue, being a
loan without interest, results in a saving to the treasury, which is
1

Horace White, Money and Banking, 4th ed., p. 9a.
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lost when the right of circulation is delegated to banks is frequently
resorted to. The experience of the United States presents a complete answer to this penny-wise reasoning. * * * The people
of the United States have lost by shaken confidence, discouraged
enterprise, and the actual ruin of thousands of citizens, resulting
from the mismanagement of their currency, an amount beyond all
comparison with the annual saving made by them at the treasury. * * *
Errors made in the past will be also made by the new men in
the future; and the possibility that, in any moment of popular discouragement or passing delusion, some fresh experiment or abandonment of wholesome limitation may be resolved upon in haste, but
with irreparable results, must continue to be a standing menace to
our credit, public and private. * * *
Experience has shown that we can rely upon no principle or
policy as a safeguard against the caprice or the temptation which
at intervals must surely beset any legislative body having control
of the direct issue of paper.1
Among British economists, Mr. H. D. MacLeod is perhaps
the leading authority on banking and currency questions, and
the view he expresses in the following quotation would be
universally acquiesced in by foreign political economists. He
says :
Governments and states should never issue paper money themselves. When states and governments once begin to issue paper
money, they can never resist the temptation to issue it in boundless
quantities, so that it soon begins to depreciate. They have no power
to redeem it, and the depreciation is incurable.2
Citations of a similar character could readily be made from
the opinions of all leading authorities, from the public utterances of statesmen, from the views of the representatives of
all parties and of all classes.
Note issues in all commercial nations are made through
banks of issue created by the government; all the conditions
of issue, including those relating to character and amount, are
1

C. F. Dunbar, Economic Essays, pp. 219, 225-7.
' H. D. MacLeod, Theory of Credit, v. 2, pt. 2, p. 1105.
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fixed by government. This method of note issue finds universal approval in all enlightened countries.
In the thorough reexamination of banking and monetary
questions which has recently taken place in Germany, Switzerland and elsewhere, no representative of any party and no individual appeared to favor the substitution of government
notes for bank issues.
It is true that in the period from 1814 to 1861, Congress
authorized the issue of treasury notes in limited amounts,
which were in every case issued as evidences of indebtedness
on account of money borrowed to meet deficiencies in revenue
or expenses growing out of wars. These treasury notes were
receivable for public dues and were, with few exceptions, payable at a fixed time with interest, and were usually in denominations that precluded their use as currency.
The power given Congress by the constitution to borrow
money clearly involved the right of issue of securities of such
character and in such form as Congress might determine, and
the right of the government to issue obligations of this nature
was not seriously questioned in any quarter. Our own experience prior to the adoption of the constitution led the framers
of that instrument expressly to forbid the states from emitting
bills of credit, and the doctrine that the issue of notes of the
government of the United States for circulation as money was
not authorized by the constitution, found wide acceptance.
The opinion of Professor Woodrow Wilson was that generally held by statesmen of the period. In his history of the
United States, he says:
It (the constitution) absolutely forbade the state to issue bills
of credit, did not give the federal government power to do so, and
was meant practically to prohibit the use of any currency which was
not at least based directly upon gold and silver.1
The first issues of United States notes with full legal-tender
qualities and intended to circulate as money were made during
the civil war and grew out of the urgent necessities of the gov1

Woodrow Wilson, History of the American People, v. 4, p. 46.

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eminent at that time. The plea of necessity was the only
justification urged for this radical departure from the policies
and doctrines of the founders of the republic. Excessive issues of these notes and the repeal of the right to exchange the
notes for interest-bearing obligations of the United States
produced the usual result of depreciation and discredit.
The reasons for the general condemnation of government
note issues are not difficult to understand. No government
has yet been found strong enough to resist the pressure for
enlarged issues in times of real or imaginary stress, or to meet
some real or fancied exigency in its own affairs or a popular
demand for more money. Issues have been at first limited in
amount and surrounded by proper safeguards as to exchangeability and convertibility, and by what seemed to be ample
provisions for ultimate safety, but experience has shown that
in every case in response to a popular demand these safeguards have been one after another ignored or removed, restrictions as to amounts of issue have been modified or repealed, and the exhilaration which has followed the initial
issues has led to an irresistible demand for continuous inflation, and this has been followed by progressive depreciation,
a necessary destruction of value, and general bankruptcy.
Some of the friends of the House bill who do not like to
be classed as advocates of the further issue of government
notes assert that the notes to be issued are after all notes of
the reserve banks and that the United States occupies the
same relation to them that it does to national bank notes.
The differences are, of course, perfectly obvious and fundamental. The notes to be issued by the House bill are by its
express terms " obligations of the United States " issued for
the purpose of " making advances to federal reserve banks,"
the banks to furnish " collateral " and to pay " interest " on
the loans. National bank notes are in terms and in fact obligations of the national banks. The treasury under the banking law redeems national bank notes for the national banks
and takes as security for any failure of the banks to respond
in payment of advances United States bonds equal in amount
to the total amount of bank-note issues with right to sell at
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any time at public or private sale without notice. In the one
case we have obligations of the United States issued by a
government agent and loaned to reserve banks. In the other
case we have obligations of the national banks with a pledge
of Government bonds to secure their final redemption by the
banks.
EXPERIENCE OF FRANCE

In this connection the experience of France in 1790 and the
years following with the issue of assignats furnishes valuable
lessons. France had confiscated the real property of the
French church, which consisted of valuable estates in town
and country forming about one-third of the real property of
France and having a value of about 4,000 millions of francs
and yielding a yearly income of about 200 millions. The first
issue of notes made in 1790 was limited to 400 millions of
francs, and was based upon a specific pledge of this vast
property. The holders of the notes had a right to exchange
them for the property pledged at perfectly satisfactory prices.
The arguments that were used in support of this issue have a
familiar sound. It was contended:
Paper money under a despotism is dangerous; it favors corruption; but in a nation constitutionally governed, which itself
takes care of the emission of its notes, which determines their number and use, that danger no longer exists.1
It was claimed that paper so limited and so secured was as
good as gold and that, as it could not be issued in excess, there
was no possibility of depreciation. Great stress was placed
upon the fact that entirely different conditions existed in
Law's time, and that with a free government and new conditions only beneficial results could follow; that prosperity and
abundance were assured. A scientific, practical guarantee of
goodness was asserted and in an address issued by the French
Assembly it was said that the paper had no " value derived
from the national authority, but a value real and immutable;
a value which permits it to sustain advantageously a competi1

A. D. White, Fiat Money in France, p. 4.
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tion with the precious metals themselves." In the later discussions it was asserted that the precious metals would soon
be used only in the arts, and a currency of paper, secured upon
the first and most real of all property, would take its place.
A demand was made later for an issue sufficient in amount to
pay the government debt.
No paper currency ever had what seemed to be a more
practical guarantee for its security and value. It was based
upon what was then and is now the highest form of security, a
mortgage on productive real estate of unquestioned value.
The notes bore interest at the rate of three per cent per annum
and this, it was claimed, would insure their retirement when
not needed. Within the next six years 36 billions of assignats
and 2,500 millions of mandats had been issued, and then the
collapse came, and the whole issue was worthless and repudiated. Conditions at the end of this period are thus described by a historian of the French Revolution:
Before the end of the year 1795 the paper money was almost
exclusively in the hands of the working classes, employes and men
of small means, whose property was not large enough to invest in
stores of goods or national lands. The financiers and men of large
means, though they suffered terribly, were shrewd enough to put
much of their property into objects of permanent value. The working classes had no such foresight, or skill, or means. On them
finally came the great crushing weight of the loss.1
AMOUNT OF ISSUE

I believe it will be found that there is no substantial
limitation upon the amount of notes that can be issued under
the House bill except in the requirements for reserve. It is
claimed that the issue is limited to the amount applied for by
the reserve banks, and that the aggregate amount of applications is limited by the amount of paper in the possession of
the banks, and further that the central board has the discretionary power of declining applications. It is impossible
to say what if any restraining effect on the volume of note
1

Von Sybel, History of the Revolution, v. iv, pp. 337-8.
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issues these provisions would have. The demand for currency
in increasing amounts, under ordinary circumstances, as shown
by our experience and that of other countries, is insatiable.
Selfishness is naturally a controlling factor in business corporations. We may be certain if the loan is a profitable one
for the bank, applications will be made and insisted upon. If
a reserve bank could hire money at J/£ per cent or 1 per cent
and loan two-thirds of it to its customers at 4 per cent, 5 per
cent, or 6 per cent, the business would certainly be a profitable
one, and so long as the notes could be kept in circulation the
amount of loans and note issues could be indefinitely increased. The power of the reserve banks to buy in the open
market from private parties commercial paper and bills of
exchange of individuals, firms, and corporations, and to pay
for their purchases in government notes and to furnish the
central board with security for the notes by a deposit of the
paper purchased, provides another method of profitable note
inflation.
It is certain that the central board would find it difficult
to resist importunate demands made on behalf of communities
or the public. There is no limitation in the bill of the amount
of commercial paper that a reserve bank may rediscount or
purchase. The amount of the loans and discounts of all the
banks of the United States is about fifteen thousand million
dollars and the amount of securities held by banks about Ave
thousand millions more. The House committee fixes the
amount that would be available for rediscount by the reserve
banks at about six thousand millions. In my opinion this
amount is likely to be largely increased by the exercise of the
authority given the central board to fix the character of the
loans available for rediscount.
It is, of course, problematical what portion of this vast
amount could, by an insistent demand for money, or by a desire on the part of the reserve banks to increase their profits,
be made available as security for loans of notes from the central board. If notes should be issued in place of national
bank notes this would add seven hundred millions to any
amount otherwise required. The report of the committee
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states that it is intended that the government notes shall
take the place of national bank notes, but the bill is silent
upon the subject. The commercial paper pledged by a reserve bank as the security for loans of notes is delivered to the
chairman of their own board of directors and kept in his
custody in a vault on their own premises. As the notes fall
due, or a change is necessary for other reasons, a substitution
takes place under the direction of the custodian, and, as long
as the necessary amount is kept intact, the loan may go on
indefinitely. It should be remembered in this connection
that, by the various provisions for redemption, the notes issued to any reserve bank are returned to it by other reserve
banks and by the treasury, but that there is nothing to prevent their retention and reissue by the receiving bank, and for
this no new application is necessary, and the transaction can
be repeated.
We may expect that the notes will become a permanent
addition to the currency of the country, as currency of this
character, once issued, by the operation of the Gresham law,
will not be retired, and its amount will constantly increase.
There will be no inducement to retire it. Each one of the
federal reserve banks, by the provisions of the bill, is forbidden to pay out the notes of any other federal reserve bank,
the purpose being, I suppose, to attempt to secure their prompt
redemption. But this provision would not be effective, as no
such prohibition applies to the twenty-five thousand other
banks in the country, or to the business men and people in
whose possession the notes would be found.
With extended use of the new notes, another form of currency would be added to the seven already in existence, and
if the provisions in regard to the use of letters and serial
numbers to distinguish notes which are to be ultimately redeemed by particular banks should give a greater value to
some notes than others, as might be the case if the proposed
earmarking is successful, we should have twelve additional
forms of currency.
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REDEMPTION OF GOVERNMENT NOTES

The method provided by the bill for the redemption of government notes is unsatisfactory. All notes are redeemable on
demand at the treasury of the United States or at any of the
federal reserve banks in gold or lawful money. The banks
are required to deposit with the agent of the Federal Reserve Board, with their application for notes, commercial
paper and bills of exchange equal in amount to the notes
applied for. Whenever any of the notes received by a federal
reserve bank shall be paid out, the bank is required to segregate from its reserves, held against outstanding obligations,
an amount in gold or lawful money which shall be equal to
33^5% °f the amount which is held for the redemption of the
notes. The notes issued to any federal reserve bank are made
a first lien upon all the assets of such bank.
These provisions, if effective in ordinary times when there
is no call for redemption of the notes, would, I believe, fail in
times of trouble. Take a condition of affairs like that in 1907
when so many of the banks of the country suspended payment. At such a time the collateral could not be used for
redemption purposes and the lien upon assets could not be
enforced. The inadequate means of redemption by the reserve banks would fail to insure immediate convertibility and
the treasury might be obliged to assume the entire burden.
But the treasury would have no gold or other lawful money
in its possession available to meet this demand, except a 5%
fund. The general fund of the treasury, which includes its
gold coin and bullion, would be deposited in the suspended
banks, and there would be no alternative but government discredit and repudiation of its obligations.
It is the purpose of the bill to consolidate reserves so that
they could be made useful at any time, but in the case of reserves for note issues these would be scattered at twelve different points. Even if the reserves were consolidated and
held in a manner that would permit their use they would
still be found inadequate, judging by the experience of other
countries.
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The percentages of the average cash holdings of the three
great European banks for the ten years 1901-10 to note issues
and all demand liabilities were as follows:
To note issues
To all liabilities

England
86.6
47.4

France
84.5
72.9

Germany
72.5
50.4

Convertibility of note issues should be insured by adequate
cash reserves, and these should be so placed and held that
they would be at all times available for redemption purposes.
It is difficult to understand why the proposition to make
these new notes redeemable in lawful money, that is, in other
obligations of the United States, was incorporated in the bill.
Bank notes, the obligations of banks, are necessarily redeemable in lawful money, that is, in any form of money which is
made legal tender by the government, but the same rule should
certainly not be applied to government obligations. In colonial times it was quite common, when one issue of notes had
become practically valueless, to authorize their redemption on
some basis in new notes, and this process went on continuously until the final collapse of all issues.
In considering the adequacy of the reserves proposed for
the redemption of the new notes I have not overlooked the
fact that a provision is inserted which gives the central board
the right to require the reserve banks to deposit in the treasury for redemption purposes a fund equal to 5% of the outstanding notes. There is a similar provision in the national
banking law which requires a 5% fund to be deposited in the
treasury, but this fund has been found for years to be entirely inadequate to meet the demands upon the treasury for
redemption of the national bank notes. The Secretary of the
Treasury, in his last report, makes this statement:
Redemptions of national bank notes during the year have been
constantly in excess of the 5% redemption fund required under
section 3 of the Act of June 20, 1874, to be kept by the banks on
deposit in the treasury of the United States for the redemption
of their notes. Consequently, that fund has been overdrawn during the whole year and the treasury has had to advance payment
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for notes as they are presented out of the general fund. The largest
overdraft was $26,900,000 on February 3, 1912.
These serious overdrafts are still going on, and in some conditions of the treasury they might cause serious embarrassment to the government. On October I this account was
actually overdrawn $21,760,000.
If there is to be any redemption fund held in the treasury
it should be not only adequate in amount to meet ordinary
demands but sufficient for all emergencies. The redemption
fund provided in this bill, as well as the redemption fund for
national bank notes, should be substantially increased.
EACH RESERVE BANK RESPONSIBLE FOR REDEMPTION OF TOTAL
ISSUE

Each of the federal reserve banks, notwithstanding an attempt is made to make it responsible only for notes issued to
it, would be practically, and it might be actually responsible
for the redemption of the total issue, as, so far as the public is
concerned, all notes without distinction as to whom they are issued, are entitled to redemption at any one of the reserve banks
as well as at the treasury. For instance, if a thousand millions were issued, any one of the banks would be required to
redeem the whole or any part of this on demand, and this
would apply to a federal reserve bank to which no notes had
been issued by the board. It must be, I think, apparent, that
with any considerable amount of notes outstanding, with reserves for redemption scattered in twelve different banks, any
of the reserve banks or the treasury of the United States
would be likely to find itself in a position where it would be
unable to meet its obligations in gold or lawful money. If
two hundred million dollars in these notes should be sent to
the South or West for crop-moving purposes, one or two reserve banks with $5,000,000 capital might in time of trouble
be called upon to redeem in gold or lawful money notes greatly
in excess of their reserves or resources.
The redemption in specie of the United States notes which
were issued during the war was possible only after the accumulation of one hundred millions of gold coin procured by the
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sale of government bonds, and the continuous redemption U
assured by the one hundred and fifty millions of gold now held
in the treasury as a trust fund. We now have a proposition
to issue an unknown amount of United States notes without
any government reserves of any kind.
NO SECURITY AGAINST FRAUDULENT ISSUES

Heretofore in legislation looking to the regulation of currency or to the issue of government obligations, Congress has
surrounded its authorization with every possible precaution
against fraud. Issues of currency are made through the appropriate bureau of the Treasury Department, and their character and denominations are fixed by the Congress itself. In
the case of the pending bill, the Federal Reserve Board is
authorized to issue obligations of the United States, and to fix
their character, form and tenor. The transfer of this important function of government to a board whose acts are not
subject to the supervision of any department of the government, with requirement for but one annual report, with no
requirement for publicity of transactions, and with no power
on the part of any representative of the government to detect
or punish a flagrant abuse of power, has no precedent in the
history of this or any other country.
If the board should prefer to substitute the notes which it
has authority to issue for other forms of currency to give them
a wider circulation, it might easily do so, by providing for
the issue of the new notes in small denominations of ones,
twos and fives, and thus drive out of circulation and into the
treasury and the banks, silver certificates and United States
notes of equivalent denominations, and give this important
field permanently to this new form of government currency.
RECORD OF THE DEMOCRATIC PARTY ON GOVERNMENT NOTE
ISSUES

The reasons given to justify the extreme pressure which is
being brought upon Congress to enact the administration bill
is that its adoption is necessary in fulfilment of promises
made by the dominant party. The statement would seem to
justify us in an examination of the record of the party to ascer(so)

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tain when and under what circumstances these promises were
made. Prior to the civil war no great leader of the Democratic party advocated the issue of government notes to be
used as money, as proposed in this bill. After the panic of
1873, the efforts of the friends of sound money to secure the
resumption of specie payments and their insistence that the
public credit could be sustained only by the payment of all
government obligations according to their tenor in standard
coin, led to the formation of a party which was opposed to
resumption and demanded the payment of government bonds
in a depreciated currency and declared for the first time in
favor of the issue of United States notes as a substitute for
national bank notes. These opponents of resumption and the
friends of further inflation and of the free coinage of silver
included members of both political parties, but they were not
strong enough in the early stages to induce either of the great
parties openly to espouse their cause in national platforms.
The greenback sentiment was strong enough to secure the
passage of an act in 1875 increasing the limit of United States
notes in circulation. The veto of this measure by General
Grant was an effective check to the first and only post-bellum
attempt prior to 1913 to secure an increased use of government money. The Democratic platform of 1872 contained an
emphatic declaration in favor of a return to specie payments
and a maintenance of the public credit, and denounced repudiation in every form and guise. The failure of the friends of
inflation to secure the formal support of either of the great
parties to their peculiar views led to the formation successively of the Greenback, People's and Populist parties.
The first declaration in the national platform of any party
in this country in favor of a further issue of United States notes
was made by the Greenback convention of 1876, which declared for a United States note issue directly by the government, and convertible on demand into United States obligations.
In 1875 t n e Democrats of Ohio demanded that the policy of
contraction should be abandoned, that the resumption law
should be repealed, and that the volume of currency and
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United States notes should be made and kept equal to the
wants of trade, and that these notes should be substituted
for national bank notes. The notable campaign in Ohio in
this year between William Allen and Hayes resulted in the
defeat of Allen. In the following national campaign the
Democrats repudiated the Ohio idea and nominated Mr.
Tilden for President on a platform which declared that reform was necessary to establish a sound currency, restore the
public credit, and maintain the national honor.
The Democrats in their platform of 1880 reaffirmed the
declaration of 1876 and declared for honest money and strict
maintenance of public faith. The Greenback platform of that
year declared that all money, whether metallic or paper, should
be issued and its volume controlled by the government and
not through or by banking corporations.
The Democratic convention of 1884, which nominated Mr.
Cleveland for President, declared in favor of honest money
and the gold and silver coinage of the constitution. The
Democratic convention of 1888 renominated Mr. Cleveland
and reenacted the provisions of the platform of 1884. The
Democratic platform of 1892 demanded the repeal of the Sherman act of 1890, and demanded that all paper currency
should be kept at par and redeemable in coin, " a policy made
specially necessary for the protection of the farmers and
laboring classes, the first and most defenseless victims of unstable money and a fluctuating currency."
The attitude of leading Democratic statesmen at that time
is shown by the statement of President Cleveland in his message of August, 1893:
The people of the United States are entitled to a sound and stable
currency and to money recognized as such on every exchange and in
every market of the world. Their government has no right to injure
them by financial experiments opposed to the policy and practise of
other civilized states, nor is it justified in permitting an exaggerated
and unreasonable reliance on our national strength and ability to
jeopardize the soundness of the people's money.
Similar expressions representing the views of leading repre(52)

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sentatives and statesmen of the party of the period could be
readily cited.
The Democrats, in the national convention of 1896, which
nominated Mr. Bryan for the presidency, announced for the
first time their adherence to the doctrines enunciated by the
Greenback, Populist, and Farmers' Alliance conventions in previous years. Mr. Bryan received the nomination of the Democrats, the Populists, and the Silver party on practically identical platforms. As the advent of Mr. Bryan as the Democratic nominee marked a new era in the history of the Democratic party, and as it was led under his leadership to
abandon its traditional principles, it is interesting to examine
in detail the proposals of this new political combination. The
Democratic platform declared:
Congress alone has the power to coin and issue money, and President Jackson declared that this power could not be delegated to
corporations or individuals. We therefore denounce the issuance
of notes intended to circulate as money by national banks as in
derogation of the constitution, and we demand that all paper which
is made a legal tender for public and private debts, or which is
receivable for dues to the United States, shall be issued by the government of the United States, and shall be redeemable in coin.
The platform in this form was reported by a majority of
the platform committee, and after a long discussion was
adopted by a vote of 628 to 301. The minority members of
the platform committee, consisting of the representatives of
sixteen states, which included such well-known Democrats as
David B. Hill, of New York, William F. Vilas, of Wisconsin,
Judge George Gray, of Delaware, Lynde Harrison, of Connecticut, and John E. Russell, of Massachusetts, declared that
the Democratic party is a party of hard money and is opposed to legal-tender paper money as a part of our permanent
financial system. They further declared, " We therefore
favor the gradual retirement and cancellation of United
States notes and treasury notes under such legislative provisions as will prevent undue contraction."
The bolting Democratic convention which nominated John
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M. Palmer, of Illinois, for President, declared for such intelligent currency reform as will confine the government to its
legitimate functions, completely separated from the banking
business, and afford to all sections of our country uniform,
safe and elastic bank currency under governmental supervision, measured in volume by the needs of business.
The Democratic platform of 1900, when Mr. Bryan was
again a candidate, reenacted the currency provisions of the
platform of 1896, and demanded the retirement of national
bank notes as fast as government paper and silver certificates
could be substituted for them.
In the Democratic convention of 1904, which nominated
Judge Parker for President, there was a notable contest in the
platform committee which resulted in an agreement that the
platform should remain silent on all monetary questions, on
the theory that these questions had been settled by legislation
and events, and that there were no monetary questions at
issue in the campaign. This agreement was concurred in by
Mr. Bryan, but Judge Parker's telegram to a member of the
convention, saying that he regarded the gold standard as affirmatively and irrevocably established, led to a prolonged discussion in which Mr. Bryan took an active part, but his ideas
with reference to the government issue of notes were not
adopted.
The Democratic platform of 1908, when Mr. Bryan was
again a candidate, in addition to a pledge to secure legislation
for a guarantee of deposits, declared, " We believe that, in so
far as the needs of commerce require an emergency currency,
such currency should be issued, controlled by the federal
government and loaned, on adequate security, to national and
state banks." The Democratic platform of 1912 was silent
upon the question of government note issue.
DOCTRINE OF THE BILL

The theory that the United States should issue currency in
the form of its promises to pay is a populistic doctrine. It
had no standing as a Democratic party principle until the advent of Mr. Bryan as the nominee for the presidency in 1896.
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It was injected by Mr. Bryan into the party platform in spite
of the protests and against the votes of the men who had
been most prominent in the party councils, men who advocated loyalty to the policies and principles to which the party
had adhered throughout its existence. This greenback doctrine has never received the approval of the American people
at the polls and there is every reason to suppose that it would
to-day meet with their positive condemnation if the question
could be submitted to a vote in a national election. It is not
too much to say that the proposals in the bill came to the
country as an absolute surprise. There had been no suggestion that an attempt was to be made to revive the greenback
heresy or to adopt in legislation the rejected theories of the
Populist party. The Democratic candidate for the presidency
was silent upon the subject during the last campaign and he
has not, so far as I am aware, up to this time, publicly expressed his approval of Mr. Bryan's ideas with reference to
note issue. The large majority of the American people who
favor sound money believed that the question of further greenback issues was settled permanently by the elections of 1896
and the following years. If the House bill should be enacted
into a law, Mr. Bryan will have achieved the purpose for
which he has been contending for a decade. It would be
difficult to find in history an occasion where a political dogma
which had never found a permanent place in the tenets of
the dominant party and which had been rejected by unanimous
verdict of the civilized world could be successfully injected
into a great legislative measure as a price for the support of
a faction. It is not surprising that Mr. Bryan should consider the insertion of his peculiar views into the measure we
are considering as of transcendent importance. His views
upon this subject throw such an important side-light upon
this feature of the bill and the reasons for its incorporation
that it seems to me desirable to quote them in full. In a recent
letter to a member of the banking and currency committee
of the House of Representatives, he makes the following
statement:
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The provision in regard to the government issue of notes to be
issued by the banks is the first triumph of the people in connection
with currency legislation in a generation. It is hard to overestimate
the value of this feature of the bill.
In the second place, the bill provides for government control of
the issue of this money—that is, control through a board composed
of government officials selected by the President with the approval
of the Senate. This is another distinct triumph for the people, one
without which the government issue of money would be largely a
barren victory.
The third provision of the bill, which I regard as of first importance, is the one permitting state banks to share with national
banks the advantages of the currency system proposed.
These three provisions are, to my mind, of such transcendent
importance that I am relatively very little concerned as to the details
of the bill.
The letter was written to a member of the House upon the
eve of the democratic caucus called to act upon the bill and
amendments. While this frank and courageous declaration
of Mr. Bryan's had the expected result of solidifying his
followers in the support of the bill, it also, I venture to hope,
opened the eyes of that numerous portion of the American
public which is not and never has been in sympathy with
his opinions on this subject, to the dangerous character of the
proposals he commends so warmly.
The Bryan proposition as now made and accepted furnishes
a plan of distribution of notes that is skilfully devised. The
printing of the notes is a simple matter, but no advocate of
greenback theories has heretofore been able to suggest any
practical way by which they could be put into circulation. Mr.
Bryan himself has not always been clear upon this point. In
a speech made by him in 1894 he says:
If it is said that we must institute banks of issue in order to put
money into circulation, I answer that there is a better way. The
issue of money by the government directly to the people gives a safer
money and saves to the people as a whole the profit arising from
its issue. When a bank issues money you must pay the market rate
of interest in order to get it, but when the government issues money
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the people save the interest, if the money is afterward called in,
and they save the principal also if the money is kept in circulation.
Numerous plans have been suggested for putting this money into
circulation. Some have an idea that a government issue can only
be put forth by loaning it to the people, either directly or through
the agency of banks.
There are, in my judgment, other and better ways. If a limited
amount is issued, and of course the amount must be strictly limited,
and it is loaned to the people, partiality will be shown in its distribution, for only a few, relatively speaking, can be accommodated.
But aside from the danger of placing so great a power in the hands
of the dominant party, there are plans more just and equitable than
that of loaning. The money can be used to pay the expenses of the
government, as the greenbacks now in circulation were used to pay
the expenses of the war. If Congress decides to increase the currency a certain amount annually, say for illustration, fifty millions
a year, it can reduce the tax levy to that extent and the people will
receive the benefit of the issue just in proportion as they pay taxes,
for they will save to that extent the taxes which they would otherwise pay.
Aside from its announcement of general principle there are
two points in this quotation that are worthy of attention. He
says that the amount must of course be strictly limited, and
calls attention to the danger of placing so great a power, that
is, the power to loan money, in the hands of a dominant party.
It would seem that Mr. Bryan's ideas upon the subject are progressive. He certainly could not have anticipated in 1894
that it would be possible for him to secure the adoption of
a plan of distribution much more comprehensive in its character than he at that time thought wise to advocate. Mr.
Bryan, in his letter to which I have referred, reiterates with
increasing emphasis the statement that a government issue of
notes through a board of government officials is a distinct
triumph for the people. If the method of distribution by
loaning notes to a class of banks is a triumph for the people,
why not make the triumph more definite and beneficial by
loans on similar terms to all banks, or to all individuals or corporations doing business, or, better still, directly to all the
people? If the proposals for note issues contained in the
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bill are really in the interest of the people, why not make
them comprehensive and include all the people rather than a
certain privileged class ? Why not give the people the profits
of issue rather than confer them on undeserving middlemen?
If the United States is to engage in the business of loaning its
obligations on collateral, then logically the demand for the
loaning of government money on warehouse receipts issued on
deposits of cotton and grain cannot be resisted.
It is not surprising that Mr. Bryan and his followers should
be but little concerned as to the other details of the bill. I
have no disposition to detract from the credit to which Mr.
Bryan is entitled for the victory he has attained, but I think
we have a right to ask that the American people should be
given an opportunity, under the circumstances, for a full
hearing upon the question before final judgment is rendered
adverse to their highest interests.
The incorporation of the provisions for government note
issues in the administration bill is certainly a great personal
triumph for Mr. Bryan, but it is, at the same time, an emphatic condemnation of the theories of government and the
economic teachings of every great Democratic leader from
Andrew Jackson and Thomas H. Benton to Samuel J. Tilden
and G rover Cleveland. It is undoubtedly true that the support of Mr. Bryan and his followers was necessary to secure
any legislation upon this subject, but it is unfortunate that to
secure this support it seemed to be necessary to sacrifice the
cherished principles and traditions of a great party.
The ascription by Mr. Bryan of transcendent importance to
the issue of government notes by a government board, taken
together with the propositions which have been offered by two
leading members of the Senate committee, to issue United
States notes in place of gold certificates, national bank notes,
and government bonds, indicate that the bill as it now stands
is but the first step in a revolutionary program. The bills I
refer to contemplate the issue of two dollars of United States
notes to take the place of one dollar of gold certificates which
are to be retired, the gold retained in the treasury to be
used as a reserve for the new notes issued on a fifty-per-cent
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basis. The gold upon which gold certificates have been issued
is held as a trust fund by the United States under a solemn
pledge made in the act of 1900 that it shall not be used for
any other purpose. The exchange suggested, if carried to
its conclusion, would result in unbounded inflation.
The policy of issuing gold certificates based on a deposit of
gold was adopted deliberately and with wisdom as a means of
providing a currency absolutely safe under all circumstances,
and was designed to encourage the use of gold through its representatives. To abandon this policy and use the gold through
manipulation of notes for other purposes, not only would involve the good faith of the government, but would be extremely dangerous from the point of view of the public interest
The fact that proposals of this kind have been made by responsible legislators points the way which is sure to be followed
if we once enter upon the policy of government note issue.
THE TYLER PLAN

In the proposals to create a Federal Reserve Board and to
provide for the issue of government notes, the authors of the
House bill followed a plan submitted by President Tyler to
Congress in 1841 for the creation of an Exchequer Board.
It is quite natural, perhaps, that Virginians should follow a
Virginian President in the preparation of a plan but the selection made is a matter of surprise. President Tyler, after
having vetoed, on constitutional grounds, a bill to establish a
fiscal bank and another to create a fiscal agency, in his annual
message suggested a plan to establish a Board of Control. This
he described as a plan which rests on powers acknowledged
in practise to exist from the origin of the government, which
will at the same time furnish the country a sound paper
medium, and afford all reasonable facility for regulating the
exchanges. Following this suggestion, Secretary Forward
submitted to Congress, December 21, 1841, a plan for the
creation of an Exchequer Board, the designation having been
changed from a Board of Control. The Exchequer Board
was to be composed of the Secretary of the Treasury for the
time being, the treasurer of the United States for the time
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being, and three commissioners to be appointed by the President, with the advice and consent of the Senate, one of the
commissioners to be appointed for two years, one for four
years, and one for six years, and vacancies subsequently occurring to be filled at the end of every period of two years.
The board was authorized and directed to cause to be prepared and issued treasury notes of a denomination of not less
than five dollars or more than one thousand dollars which
were to circulate as money. These notes were redeemable in
gold or silver on demand. The amount of the notes was
limited to fifteen millions of dollars unless otherwise provided by law. They were made receivable for all dues to
the United States and it was provided that the central board
and all of its several agencies should keep on hand at all
times a gold and silver reserve which should equal one-third
of the amount of outstanding notes. The board was also authorized to establish agencies for the transaction of its business in different parts of the country, and to purchase and sell
domestic bills of exchange payable in another state from that
in which they were drawn. The purpose of this provision,
it was claimed, was to facilitate domestic exchanges, which
for some time had been in a most demoralized condition, being dependent upon state banks in different parts of the country, most of whom had suspended specie payments and whose
notes were at a large discount You will notice the wonderful resemblance between the two plans—the same kind of a
board with the same power over the currency, except that the
amount of the notes to be issued was limited to fifteen millions
of dollars in the Tyler plan; but, with the same proportion
of reserves, the redemption power was to be in gold and silver
alone. None of the enormous powers granted the Federal
Reserve Board to loan money and control the banking system of the country are, however, to be found in the Tyler
plan. This plan was presented to Congress at the beginning
of the December session in 1841. It was discussed at some
length in both houses and finally referred to friendly committees in each house. The terms of this original plan, the
character of the men who discussed its provisions, and the
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final disposition of the measure, all have the strongest possible interest for us in the consideration of the Democratic
caucus bill. The senators who took the leading part in the
discussion in the Senate were James Buchanan, Thomas H.
Benton, John C. Calhoun, Levi Woodbury and Robert J.
Walker, men whose right to speak for their party and its
policies were not then doubted and cannot now be called in
question by the friends of the enlarged Tyler plan which we
are now considering. It was apparent upon the presentation
of President Tyler's plan that it had few friends or even
apologists in either house. The principal discussion occurred
before the reference of the bill to the committees.
In the Senate, Senators Buchanan and Benton led the opposition to the measure. I feel justified in quoting from the
debate at length on account of its illuminating qualities.
Senator Buchanan, in his speech of December 29, 1841, as reported in the Congressional Globe, said that
he had viewed the plan submitted by the Secretary in every aspect
and he could see nothing in it but a great government bank. They
(the Exchequer Board) were to put in circulation a government
paper currency not exceeding $15,000,000 in notes of a denomination
not lower than five nor higher than one thousand dollars and they
were expressly authorized, according to the rules of banking, to
issue three paper dollars for every gold and silver dollar in their
possession. Then it was a bank of issue. Was it also a bank of
discount? Could any man doubt it? * * * Mr. Buchanan
therefore took it for granted that it could not and would not be
denied that this Exchequer Board was a bank. * * * How
could it possibly be supposed that any honorable senator belonging
to the party with which it was Mr. Buchanan's happiness to act
could ever adopt a plan of this description? * * * What would
the President become, according to this plan? He was already the
great fountain of political patronage; and he was to become the
head of an immense moneyed institution. Protesting always that
no remarks he should now make had the remotest application to
President Tyler, he put the case of an ambitious and dangerous
man being at the head of the government—an Aaron Burr being
in the chair—and let him have it in his power to control the
whole of the public revenue; let him have at his disposal all the
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money of the people, with which to purchase the services of political
partisans on the eve of a great presidential election, and what would
become of the national liberty? All they had formerly heard about
a union of the purse and the sword was mere idle declamation; but
here was that union in reality, and without a veil. All the money
of the people was to be subjected to the executive disposal, and the
President was to become at once the fountain of individual wealth
as well as of political power. The treasury bank was to be completely and exclusively under the control of the government; and an
able, who should be at the same time a bad man, would be in circumstances, by the use of this double power, both political and fiscal,
to spread unbounded corruption throughout the community, to subsidize the venal to the purposes of his ambition, and so to corrupt
and to impair the liberties of his country, that they would be no
longer worth preserving.
* * * * * *
These exchequer notes constituted in every respect a government
paper money, and what had the past history of the world invariably
demonstrated to be the fate of such money? Was there one country
under the sun which ever had tried it and had not been a sufferer
from the experiment? Everywhere its value had depreciated from
day to day, until at length it had sunk to nothing. The two most
striking examples of this were to be seen in the assignats issued
during the French revolution, and the continental money of our own
Revolutionary days. In both cases, indeed, the paper accomplished
a glorious purpose—it established and sustained public liberty, and
enabled each of these nations to resist and overcome a despotic power;
but as a currency, as money, it sank and sank until at length it lost
all value. And should we, in these piping times of peace, when
the people were abundantly able to pay all the expenses of government, resort to an expedient suited only to the most desperate emergency, and of so tempting and seducing a character as to have been
abused by every government that had resorted to it? *
The part which Mr. Benton took in the discussion was even
more important and significant He said:
In his (Hamilton's) report on a national bank in 1791, he ran a
parallel between the dangers of bank paper and government paper,
assigning to the latter the character of far greater danger and mischief—an opinion in which I fully concur with him.2
1

Congressional Globe, 27th Cong., 2d sess., app., pp. 43-4(6a)

* Ibid., p. 65.

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After quoting the report he says:
I can add nothing to the force of these sentiments by adding my
own concurrence in them. I fully concur in the sentiment that government issues of paper are far more dangerous than bank issues—
as much more so as the power and sphere of action of a government
is greater than the power and sphere of action of a bank. * * *
The point of difference between them is a government bank and
government paper on one hand, and a banking company under a
national charter, issuing bank notes, on the other. This is the point
of difference, and it is a large one, very visible to my eye; and I
am free to say that, with all my objections to the national bank and
its paper, I am far more opposed to government banking, and to
government issues of paper money.1
And again:
A great number of our American people * * * * *
have
become possessed of a fixed idea that paper money is the summum
bonum of human life. Possessed of this idea they direct all their
thoughts to the erection of a national institution—no matter what
—to strike paper money, and circulate it upon the faith of the credit
and revenues of the union. No argument, no reason, no experience
of our own, can have the least effect in dislodging that fixed and
sovereign conception. To this we are indebted for the cabinet plan
of the federal exchequer and its appurtenances, which has been
sent down to us.2
Senator Calhoun, in the course of his speech, said:
There were many and decisive objections to the scheme proposed.
They had been clearly and strongly pointed out by the senator from
Pennsylvania (Mr. Buchanan). He agreed with him that it would
be a government bank, not only in effect, but in reality. * * *
* * * He also concurred with the senator that it would, at no
long interval, become a mere machine for issuing irredeemable paper.
The report, itself, among its admissions, states that there is an
almost irrepressible tendency on the part of banks to excess in their
operations. It is true, but not the less so, that there is the same
1

Congressional Globe, 27th Cong., 2d sess., App., p. 66.
*T. H. Benton, Thirty Years View, p. 392.
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tendency in all paper circulations; and, if possible, stronger in most
of its forms than that of the banks themselves.1
Senator Woodbury said in debate:—
When what is called money rests for its character on naked legislation or inadequate means in specie to redeem every dollar of the
paper due, affairs might, to be sure, go on confidingly while no
deficiencies were threatened, no extravagant expenses incurred, or
no great fallings-off in resources apprehended. * * * Let a
scheme like this be tested by such panics and over-trading as have
characterized the few years past—and the whole would explode in
a single month.
All the evils of old Continental money and French assignats, and
all the ravages inflicted by colonial paper, before the Revolution,
would be probable, if not inevitable. * * * * In such a panic
as that in 1834, or 1837, or 1840,—and many more which might
be named, contrary to the views in the report, that they are only
few and far between—and the Fiscal Agency would be broken in
a single day.*
More important even than the discussion in the Senate were
the expressions of Andrew Jackson with reference to this
Tyler plan for an Exchequer Board. In his message proposing the plan, President Tyler had claimed that the plan he
proposed was similar to that which had been advocated by
President Jackson, and Senator Rives of Virginia had made
a similar claim in the Senate. These claims having been
brought to the attention of Jackson, he wrote two letters to
William B. Lewis, his intimate friend and the man who had
been the chief of his kitchen cabinet In the first of these,
he said:
I informed you in my last, that I regretted that part of the
President's message that recommended a paper currency of treasury notes, and as the President has observed that it was shadowed
forth by my message of 1830, I sincerely regret that he did not
fully embrace the propositions therein set forth. Turn to it and you
will find that there is no expression there that will justify the idea
1

Congressional Globe, 27th Cong., 2d sess., p. 70.

2

Ibid., app., pp. 55-6.

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of Congress making a paper currency of any kind, much less by
issue of treasury notes—and it is impossible to make out of any
paper system a sound circulating and uniform currency.1
In the second letter, written two weeks later, he said:
I discover that Mr. Rives has adverted to my message of 1830
in support of the measures recommended. I regretted to see this—
it shows him uncandid, because there is no likeness between them.
* * * * * * My explanatory remarks show this. * * * * *
The word bank was used by me in its proper sense to distinguish
it from an incorporated bank—a place where the money of the government was to be kept, to clearly show that it was to have no stockholders, no power to issue paper, discount or exchange and if Mr.
Rives will read all my messages and my farewell address which was
intended to give my full views on banking he will find he has done
me great injustice in referring to my messages, as authority for the
fiscal plan proposed by President Tyler. Every one who knows me,
must be aware of my universal hostility against all government paper
currency. The old continental currency was sufficient to convince
me that a greater curse could not visit a nation than a paper currency.'
After these discussions, the bill was referred to committees
as I have already stated. In the house report, the committee
of which Caleb Cushing was chairman recommended a change
requiring gold and silver to be held equal to the amount of
notes issued, making them substantially coin certificates. They
held that it was no part of the business of the federal government to carry on, directly or indirectly, a business of discounting notes or bills or otherwise lending money, or to
furnish funds to be so lent. The committee of the Senate
recommended changing the formation of the board by leaving
out the ex-officio members. They also provided that the
amount of note issue should never exceed the actual amount
of specie on hand, dollar for dollar, stating that the committee were of the opinion that no paper should issue on the
credit of the government to circulate as money, and that such
issue would be in violation of a great, fundamental principle.
Even in the modified form proposed, the bill found no sub' \V. G. Sumner, Andrew Jackson, pp. 286-7.
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stantial support in either house and the Tyler plan went down
into oblivion with the unanimous disapproval of the men of all
parties, only to be restored three quarters of a century later
as a Democratic party measure. Every criticism made by the
great leaders of the Democratic party in 1841 of the Tyler
plan would apply with even greater force to the plan of the
bill we are considering. It seems somewhat singular that a
Democratic administration should have selected the plan of
John Tyler for the creation of an Exchequer Board as a model
for their plan of a Federal Reserve Board.
FEDERAL RESERVE BOARD A GOVERNMENT CENTRAL BANK

I have stated that by the establishment of the Federal Reserve Board Congress would create a government central bank.
The board is a bank of issue, as all the government notes
authorized by the bill are issued by it. It is a bank of discount as it makes loans of government notes to Federal Reserve Banks, taking commercial paper as collateral at a rate of
discount fixed by the board. The following recital in outline of the powers granted and functions assigned by the bill
to the Federal Reserve Board fixes its character as a central
bank. The imperial powers improvidently granted, and the
authority given the Federal Reserve Board over reserve banks
and their members, are vastly greater than those exercised by
any central bank in existence. The reserve banks and their offices
scattered throughout the country are for many purposes merely
branches of the central board. This board is described by
the committee which reported the bill in the House as a
" general board of management intrusted with the power to
overlook and direct the general functions of the banks referred to."
The Federal Reserve Board has authority to create and
readjust districts within which federal reserve banks are to be
located. It may permit state banks to become members, and
may also suspend such banks from membership at its discretion. It may establish branches of the federal reserve
banks within each federal reserve district and prescribe their
management. There might possibly be 200 of such branches(66)

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in the United States on this basis. The board fixes the compensation of all the directors of the federal reserve banks.
Of the nine directors of the reserve banks six, three representing the shareholding banks and three representing the commercial and other interests of the district, are elected by the
member banks acting in groups which are established by the
agent of the Federal Reserve Board, and the elections are
held under the supervision of the same agent who, by various
provisions, becomes an important, if not a controlling factor
in all elections. The central board appoints three of the nine
directors, and it has the power to remove three others, if in
its opinion they are not proper representatives of the commercial interests of the districts. The central board appoints
the chairman of the board of directors of each reserve bank,
who is evidently intended to be the manager of the bank, and
who is also the agent of the central board for the transaction
of its business. He reports all acts to the central board,
which fixes his salary and can remove him at any time without notice and appoint another in his place. The directors
of the bank have no control over him or his acts. The central board has an office in the reserve bank in charge of its
agent, the chairman of the board. These provisions taken
together give the central board a potential voice in the management of the reserve banks.
The central board has the right, subject to an exception, to
determine or define the character of paper eligible for discount
by the federal reserve banks; to fix the conditions under which
member banks may discount 120-day paper; to review and
determine the rate of discount which can be charged by federal
reserve banks; to require, or, on application, to permit any
federal reserve bank to rediscount paper of any other federal
reserve bank. With reference to reserves, the power of the
central board over the reserves of the federal reserve banks
and of all national banks is plenary. It is authorized to suspend any and every provision of law with reference to the
reserves of reserve banks or national banks, except that having reference to note issue. It has the power to add to the
number of cities classified as central reserve cities, to reclassify
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central reserve or reserve cities,.and to designate any of the
banks therein as country banks, at its discretion. The central
board is authorized to issue, without any limitation as to the
amount, obligations of the United States and to loan these on
collateral to the reserve banks. The agent of the central
board, who is also chairman of the board of the reserve bank,
acts in the double capacity of applicant for loans and custodian of the collateral offered as security for the loan of government notes which may be made at any time, and has charge
also of changes in collateral. The central board may, at its
discretion, require a deposit by the federal reserve banks of a
redemption fund of five per cent of the notes issued, and it
can fix the rate of discount, not however less than one-half of
one per cent per annum, for the loans of government notes
to the reserve banks.
It may, at its discretion, suspend the operations of any
federal reserve bank and appoint a receiver therefor. The
routine business of the federal reserve banks is also under
the control of the central board. It may make regulations
governing the transfer of funds between the federal reserve
banks. The central board may itself act as a clearing house
for federal reserve banks or may require, at its discretion,
the federal reserve banks to act as clearing houses for shareholding banks. It may remove officials of the banks for incompetency; it may require the writing-off of doubtful or
worthless assets upon the books of the reserve banks; it may
levy semi-annual assessments upon the reserve banks for the
expenses of the central board.
The central board is given the power to exempt national
banks from those provisions of law which restrict the character
of their investments, and may reduce the number of cities
within which national banks are permitted to make loans upon
real estate. It is given not only the power to regulate the
savings departments of national banks, but it can fix the character of their investments, which may differ in different parts
of the country. The central board may fix the terms upon
which national banks may apply for authority to establish
branches in foreign countries, and it may reject any applica(68)

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tion on the ground that its approval would be inexpedient.
By an unusual provision, the central board is authorized to
perform all the duties, functions and services implied by the
act in addition to those that are specified. How extensive
this grant of power may be, it is impossible to say. By another provision, extraordinary in its character, the central
board is authorized to levy taxes on all banks, national, state,
or reserve, whenever their reserves fall below a point to be
fixed by the board. There is no limit fixed for the amount of
the levy and no rule laid down which is to be followed in
making the assessment. It will not be possible for me in the
time I have at my disposal to take up and examine in detail
this long list of powers granted to the central board. It must
be evident that it contains more than one grant of legislative
power which, upon principles heretofore declared by the
courts, would be pronounced unconstitutional.
By the different provisions of the bill with reference to reserves it might happen that one bank in the city of New York
or any other reserve city would be required to have 18%
reserve, another one 12% and another no reserve at all. The
mere existence of this power of discrimination might, in
itself, have a very persuasive influence, political or otherwise,
upon the attitude of all the banks towards an administration
which could dispense favors and impose penalties of this
nature.
The Federal Board is given the power to review and determine each week, or as much oftener as required, the rate of
discount to be charged by each reserve bank for each class of
paper. This provision contemplates different rates for different sections of the country and different rates on different
classes of paper. In other words, the board sitting in Washington will be called upon to review and determine, at least
once a week, 48 rates of discount covering the entire country,
and to fix these rates—in the language of the bill—" in view
of accommodating the commerce of the country."
The fixing of this miscellaneous collection of rates could
not possibly be made effective for any of the purposes for
which bank rates are fixed and changed in other commercial
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countries. There can be no justification for fixing a different
rate of discount to be charged by a government institution,
supposedly created in the public interest, on the same class of
paper in one section of the country as distinguished from another. The bill evidently contemplates a higher discount rate
in the South and West than in eastern or central localities. In
other words, the rate might be 4% in New York and 6 or 8%
in Nebraska or Texas.
It should be borne in mind that we are dealing with official
rates and not commercial rates, which are controlled more or
less by local conditions. Any substantial difference in rate
fixed for federal reserve banks would send standard commercial paper from one district to another by direct or indirect means, to secure the benefit of the lower rates. In my
opinion it is of the very highest importance to the people of
the South and West that there should be a uniformity of
rates in all the reserve banks for identical classes of paper.
Any other course would result in an unjust discrimination by
the national authority between sections. Uniformity of rates
is most important from the standpoint of the desirability of
securing approximate equality of rates and facilities to every
section of the country. There is no use in establishing standards for commercial paper if paper representing the products
of the South and West is to be discriminated against by a government agency in contrast with paper representing the products or industries of the East One of the principal purposes
for which this government machinery is to be erected is to give
the paper representing the products and industries of the
country a new and better status in our own markets and those
of the world. Can this be accomplished if we declare that the
securities of great sections of our common country are not
entitled to the credit which is accorded to those of other
sections in government banks ?
One of the main purposes of creating the federal reserve
banks is to secure such a concentration of reserves as will
permit their prompt use in any amount and in any part of the
country to establish confidence and avoid panics. I think it
must be evident to anyone familiar with conditions that the
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creation of these twelve or more federal reserve banks will
not accomplish this purpose.
The Federal Reserve Board, an organization without capital
or financial responsibility, has no reserves of its own and is
given no control over the reserves of the reserve banks. It
has power to increase, at its discretion, the demand obligations
of the United States, but it has no power, in times of stress,
to keep the banks or the Treasury on a gold basis, or to prevent
suspension of domestic or international exchanges. It is
given, improvidently, autocratic powers over business of the
banks—which can only be successfully managed by the men
who own and control existing institutions and who are familiar
with all local conditions. It is granted powers that can be
properly exercised only by trained bankers, and it can take no
effective action for relief in times of national or international
crises. In great emergencies when some sustaining power is
necessary, it will be powerless. It can take no steps in the
interest of the country at large to control the movement of
gold or to increase the supply of gold through negotiations
with the great banks of Europe or otherwise. It might be
able to control elections and insure the success of a political
party, but, in times of stress, it would have no power to preserve public or private credit. It would be able to loan government notes to impecunious banking friends or to deposit
government funds in " pet banks," but it would be unable to
assist a bank or a community in time of serious trouble. It
would have no status in the commercial world, and its standing
at home would be fixed by its importance as a political machine rather than as a force in financial circles.
JACKSON'S GOVERNMENT BANK

Friends of a government central bank quote General Jackson
as one of its advocates. It is true that he suggested on several
occasions that it might be desirable to establish a government
bank, but these suggestions were always more or less vague in
character, and he never committed himself in detail to any
definite plan. His opponents, however, claimed that General
Jackson intended by these indefinite suggestions to advocate
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the creation of a government central bank under political control, and that the effect would be to place the whole banking
power of the country at the mercy of the President I think it
may be said that this claim did not fairly represent General
Jackson's views and that he intended merely an institution
like the independent treasury that should take over government business alone. The quotations which I have already
made from his letters to William B. Lewis are confirmed in
this respect by his statement with reference to the removal
of the public deposits as follows:
It is the desire of the President that the control of the banks of
the country shall, as far as possible, be entirely separated from the
political power of the country as well as wrested from an institution
which has already attempted to subject the government to its will.
In his opinion the action of the general government on this subject ought not to extend beyond the grant in the constitution, which
only authorizes Congress " to coin money and regulate the value
thereof;" all else belong to the states and the people, and must be
regulated by public opinion and the interests of trade.1
The suggestion, however, led to a prolonged discussion on
the merits of a government central bank.
The objections to the creation of a government central bank
were never, perhaps, more clearly and forcibly stated than in
the report of the House committee of ways and means, of
which Mr. McDuffie of South Carolina was chairman, in
1830. In the course of this report, the following statement
was made:
It will be difficult to find any warrant, either in the letter or the
spirit of the constitution, for the creation of this tremendous engine
of pecuniary influence. It may, indeed, be doubted, whether all
the branches of the legislative authority united have any constitutional power to lend the public revenue either to individuals, corporations, or states, without reference to the objects to which it
shall be applied. But, whatever may be the power of Congress on
this subject, it appears to the committee to be inexpedient, in every
view of the question, that the government should be converted into
1

F. N. Thorpe, Statesmanship of Andrew Jackson, p. 280.
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a great money lender. There is no species of trade in which it
would be wise for the government to embark; but of all the variety
of pursuits known to human enterprise, that of lending money by
the government to the citizens of the country, would be fraught with
the most pernicious consequences. * * *
In the first place, it is a business to which, in the very nature of
things, no government is adapted, and least of all, a popular government. There is no employment of capital that requires a more
vigilant and skilful superintendence. * * *
Nothing that has not happened can be more certain, than that
every unfavorable vicissitude in trade, every period of commercial
distress and embarrassment, would give rise to importunate and
clamorous calls for indulgence, and for an injudicious extension
of discounts, which no administration would have the firmness to
resist. * * *
The government would have scarcely any faculty of resistance,
when appeals for indulgence should come from all quarters of the
Union, sustained by the strong plea of public distress and embarrassment. * * *
But the inevitable tendency of a government bank to involve the
country in a paper system, is not, in the opinion of the committee,
the greatest objection to it. The powerful and, in the hands of a
bad administration, the irresistible and corrupting influence which it
would exercise over the elections of the country, constitutes an
objection more imposing than all others united. No matter by
what means an administration might get into power, with such a
tremendous engine in their hands it would be almost impossible to
displace them, without some miraculous interposition of Providence.
Deeply impressed with the conviction that the weak point of free
government is the absorbing tendency of executive patronage, and
sincerely believing that the proposed bank would invest that branch
of the government with a weight of moneyed influence, more dangerous in its character, and more powerful in its operation, than
the entire mass of its present patronage, the committee have felt
that they were imperiously called upon, by the highest considerations
of public duty, to express the views they have presented, with a frankness and freedom demanded by the occasion.1
1

M. St C. Clarke and D. A. Hall, Bank of the U. S., pp. 758-q.
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NATIONAL BANKS

It is sought to make the control of the Federal Reserve
Board over the national banks of the country effective by
compelling national banks to subscribe within a year to the
stock of the federal reserve banks a sum equal to twenty per
cent of their capital under penalty of dissolution in case of
failure or refusal. The national banks are further required
to deposit with the reserve banks a portion of their reserves.
These drastic provisions disclose a lack of confidence on the
part of the authors of the bill in the wisdom of its methods.
The banks are now acting under charters for a fixed period
under certain definite conditions which have been faithfully
lived up to with the result that note holders have suffered
no loss, and that depositors and shareholders have lost only
infinitesimal amounts. The United States is bound by every
equitable consideration to protect the banks from serious losses
on their investments in government bonds.
I submit that it is not fair to impose upon these institutions as the price of their continued existence new, onerous,
or impossible conditions, especially in legislation enacted
ostensibly to assist them the better to discharge their duties to
the public in times of trouble. The conditions imposed are
of such a character that unless changed they cannot be accepted by the smaller banks which form a large majority of
the national banks, without serious losses and dangerous impairment of their resources and their ability to serve the public. It will be noted that the penalty of dissolution goes into
effect in one year, even if it has not been possible within that
time to organize a single federal reserve bank with the requisite
capital. It would seem that the only method by which a
national bank could avoid the serious consequences of this
legislation would be to take out a state charter and transfer
its business through voluntary liquidation.
It does not seem possible that the authors of this bill can
have considered the dreadful consequences that would ensue
if the national banking system is broken up by enforced dissolution or liquidation. The national banks have outstand(74)

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ing $742,000,000 of circulating notes and banks going out of
existence must deposit lawful money in the treasury for
their redemption. These banks hold $685,000,000 of 2%
bonds. A state bank could not afford to hold these for investment and their sale would mean a large loss to the owners,
and the credit of the United States would suffer unmeasured
injury. It is safe to say that the serious disarrangement of
credits, the contraction of circulating medium and the destruction of confidence that would certainly arise from a transfer
of any considerable amount of the banking business of the
country from the national to the state system would end in a
financial panic such as has never been seen in any country.
RESERVES OF NATIONAL BANKS
Under the provisions of the national banking act establishing the character and amount of reserves for national banks a
system has grown up which in the main under normal conditions is satisfactory to both the banks and the public. It has
been found ineffective in times of crisis, and the rigid provision forbidding discounts whenever the legal limit of reserves is reached is unsatisfactory in operation, but there has
been no popular demand for a reduction of the amount of
reserves required. As authorized by law country banks
maintain balances with reserve agents in local centers and
in central reserve cities. This arrangement affects favorably
the convenience and the revenues of banks of all classes.
Banks are obliged to maintain balances with correspondents or
reserve agents for exchange and collection as well as reserve
purposes. Banks in reserve cities have been able to use a
portion of the deposits of country banks, and this use has assisted in the development of important business centers in
various parts of the country.
The relations between country banks and their reserve
agents have been usually of an intimate character. The
banks which act as reserve agents are, in almost every case, important institutions of large capital and resources, and in
ordinary times amply able to respond to any demands for the
reserves in their custody, as well as to furnish assistance and
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support to their country correspondents in cash or credit
whenever required.
The country banks receive a revenue from their deposits
with reserve agents and can invest a portion of their capital
more profitably than in the capital of the reserve banks. If
the bill should pass in the form proposed it would take away
from the country banks an important part of their revenue
by the requirement that reserve banks shall accept checks and
other collection items at par. But these results are unimportant compared with the fact that their deposit in reserve
banks might not be available even in the ordinary times for
reserve purposes, as the scheme of the bill contemplates making the reserve banks mere discounting machines which may
be kept in perpetual operation to their full capacity, in order
to prevent a contraction of credits. The framers of the bill
evidently not only intend that the reserve banks shall make
loans to their members to the extent of their deposits, but it
is suggested that they may loan them the money to pay for
their subscriptions to the capital of the reserve banks. Banks
that do not borrow money for loaning purposes would find that
their reserve had disappeared in loans to rival institutions.
It should not be forgotten that the United States has a first
lien upon all the assets of the reserve banks as security for
government deposits and for issues of government notes which
have been loaned to them. In cases of large losses by the
banks this preference would be a serious matter for the bank's
creditors.
The change from the old system to the new involves a
direct loss to the country banks and imperils their investments
and deposits. National banks are required, upon penalty of
dissolution, to submit to the losses and inconvenience I have
referred to.
The principal advantage which national banks have over
state banks is in the profit they derive from their note circulation and the fact that they are permitted to share at times
in the benefits of government deposits. Both of these advantages are practically removed by the bill, one to take effect
immediately and the other by the progressive reduction in
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national bank note issues. Country banks hold a much larger
proportion of their capital in United States bonds than city
banks. These bonds have been bought in many cases within
the last ten or twelve years, and bought with the belief that
the national banking system was to be permanent and that they
were not likely to be deprived of their charter rights. The
losses on their holdings of government bonds, unless Congress
shall take effective means for their relief, will be a serious
matter to these institutions. 59% of the national banks have
less than $100,000 capital; 91% have less than $250,000
capital. Of state banks the proportion of small banks to the
total number is much greater.
We should not lose sight of the fact that the national banks
in many localities have not been able to compete successfully
for business with the state banks. In 1912 67% of the individual deposits of the country was in state institutions.
The number of these institutions is practically three times
as great as that of national banks. The remarkable growth
of state banking institutions has been largely owing to advantages growing out of more liberal reserve requirements
and out of the fact that they have been able under state laws
to transact business which is forbidden to national banks.
With reference to state reserve requirements, ten states
have no provisions at all for reserves. In almost every state
the provisions are more liberal than the national requirements
In all states national bank notes can be counted as a part of the
reserves of state banks, and in some states the reserves may
consist in part, and in one state wholly, in securities. The
laws of all the states leave the banks almost entirely free to
deposit their funds in the banks of the great commercial centers. In most states they are entitled to keep a larger proportion of their reserves in the hands of reserve agents than
is permitted by the banking act or the proposed bill.
With legislation depriving national banks of the advantages
which they now have and imposing upon them new and onerous
burdens, and with the state institutions retaining all the advantages which they now have, it is not unreasonable to expect the decline if not the extinction of the national system.
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It is impossible to predict the effect which the radical reduction in the amount and change in the custody of the reserves of
national banks will have upon the business of the country. It
is certain that the effect at first will be to create confusion
and uncertainty, and that the readjustment of credits and
withdrawal of deposits will lead to credit contraction. Just
what amount of credit expansion will take place later owing
to reduction of reserves depends upon whether the national
banks accept the legal limit of cash reserves fixed by the bill
as a basis for their future credit operations. One of the
witnesses who appeared before the Senate committee estimated that the national banks hold 12.75% of their net deposits in cash. He estimated that under the House bill a cash
reserve of 6.8% will be required. If the national banks should
continue, notwithstanding the provisions of law, to maintain
a cash reserve of 12.75% against their liabilities, the result
of the changes proposed by the bill would be a contraction
of credits. If on the other hand the credit business of the
national banks is to be conducted hereafter on a 6.8% cash
basis, this, taken in connection with an expansion of note issues, would certainly lead to indefinite and destructive inflation.
One of the purposes of the proposed legislation, as stated
by its friends, is to take from the bankers the control of the
banking and monetary interests of the country and to place it
in the hands of a Federal Reserve Board, and to prevent the
concentration of money in New York and other great financial
centers by the creation of twelve federal reserve banks. The
reserve banks are to take over and hold reserves now held by
the banks in reserve and central reserve cities, with a view of
weakening, if not of destroying, the supremacy of the money
power, or of the money trust, as it is sometimes described by
political reformers. To aid in the accomplishment of this
purpose, the new system of reserves as well as of reserve banks
is proposed. Keeping these purposes in mind, it is desirable
to examine somewhat in detail the methods proposed for their
accomplishment. The cash reserve of the banks in the central reserve cities is reduced from twenty-five to nine per cent
The change in the custody of the reserves is more apparent
than real.
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59% of the national banking capital of the country is located
in thirteen states, classified in the comptroller's report as
eastern and middle western states, while the other thirty-six
have 41% of the capital. The thirteen states have 67% of
the banking resources of the country, while the other thirtysix have 33% of these resources. The capital of the federal
reserve banks is fixed by a percentage of the capitalization
of the national banks. It follows that 59% of the capital of
these banks will be located in the thirteen states. The deposit
of the reserves in these thirteen states, outside of government
deposits, will be 67% of those of the country. If we assume
that the central board will not exercise the powers of control
over the management of the reserve banks and that the banks
in these states will have the potential voice in the management of the reserve banks in their section that some of the
friends of the measure claim, the supremacy of the money
power of the East will be strengthened rather than weakened
by the House bill. A portion of the capital and resources of
the section are transferred from one class of organization to
another without change of ownership. A new machine to be
operated by the same men is set up with government approval.
The banks in different sections are not controlled by conflicting interests, but if they were, this legislation would only
emphasize existing conditions.
If four reserve banks should be located in these thirteen
states they would, on the basis that all national banks assented, have a capital of about fifteen millions each. The
eight located in the remaining thirty-six states would have a
capital of about five millions each. The reserve bank in New
York would have a larger capital and much greater resources
than the three that might be located in the thirteen southern
states.
It is true that a very large amount will be withdrawn, by
the operations of the bill, from the banks in the reserve and
central reserve cities, but at least two-thirds of this amount
will be redeposited in the reserve banks in the thirteen eastern
and middle western states. If we assume that these reserve
banks are simply adjuncts of existing institutions, this process
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will consist largely of taking money out of one pocket and
putting it into another.
The treatment of bank reserves in the central reserve cities
is interesting. They now hold cash reserves amounting to
407 million dollars, this being 25% of their net deposits, and
this must be held in their vaults and cannot be used for any
other purpose. By the terms of the bill they would be required
to hold only 146 millions in cash and 261 millions would
be released for other purposes; but 146 millions might be
deposited in a reserve bank where it would form a basis for
discount, leaving 115 millions available as a basis for credit
expansion. If cash reserves are accepted as the basis for
credit expansion, the banks in the central reserve cities will
be able to increase their loans in the proportion of 9 to 25
under the new law as compared with the old. If the bankers
of New York and other central reserve cities should consult
their selfish interest they would be found earnest advocates
of the new plan.
It was undoubtedly intended that the reserves concentrated
in the reserve banks should be made available for the assistance and support of any bank or banks in time of serious
trouble. Heretofore, scattered reserves have been found useless and panics precipitated by a general scramble of banks
throughout the country to increase their cash reserves. The
trouble, I am sure, would be intensified rather than relieved by
the creation of this new class of banks. In addition to 29,000
banks, each looking out for itself, we should have twelve reserve banks of varying size and importance, each trying to
protect its own reserves and the interests of its own section.
The great disparity in the financial strength of these banks
would give some great advantage over others in this contest.
New York and Chicago, with their immense resources and
foreign connections, if relieved from responsibility for other
sections of the country, as proposed, could easily obtain the gold
necessary to protect themselves and enable them to meet their
obligations. Other sections might not be so fortunate. That
the authors of the plan believe that it could not be relied upon
in emergencies and that it would fail when a real concentra(80)

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tion of reserves and resources was necessary, is shown by the
provision that the central board may require one reserve bank
to rediscount the commercial paper of another. It would be
almost impossible to put this plan of relief into operation
without doing more harm than good. Its wise administration
would necessitate an intimate knowledge, on the part of the
central board, of the financial condition and loaning power of
each of the reserve banks; otherwise the transaction might
of itself precipitate a crisis.
The other method by which it is proposed to afford relief
to banks or communities in trouble is by a transfer of government deposits from one reserve bank to another. The government cannot afford to maintain a large surplus for the purpose
of transferring it from one section to another for relief purposes. This method would be equally perilous with the other.
Transactions of this character, as well as the enforced discounts, would appear in the weekly reports of the reserve
banks, and the knowledge that a bank in any section of the
country was in such need of assistance as to demand help on
such terms, would be likely to cause a run upon the advertised institution and the attempt to relieve might not only
prove futile, but productive of serious results. The deposit of
treasury funds in 1907 was efficacious in helping to restore
confidence, but in that case the money was taken from the
treasury, and not withdrawn from one bank to be deposited
in another; otherwise the beneficial results would have been
lost.
The suggestion of these questionable methods of making
the resources of one reserve bank available for the relief of
another discloses the inherent weakness of the plan. To be
effective, the capital and resources of reserve banks must be
concentrated under the control of some central organization.
CONTROL OF FEDERAL BOARD

As I have shown, by the terms of the bill national banks
are obliged to furnish the capital and the deposits of the
federal reserve banks, the only other depositor being the
United States. They are obliged to invest a part of their
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funds and to place a considerable part of their resources
beyond their own control or to submit to a sacrifice of their
property and business. This large contribution of national
banks is placed under the control of political appointees, the
majority of whom of necessity cannot have the knowledge or
experience to qualify them for the important duties assigned
to them.
The national banks are forced into the position of stockholders and principal creditors of the reserve banks. The
reserve banks are forced to conduct their affairs under instructions from the central board, and yet neither the reserve banks
nor the national banks are allowed to participate in any way
in the management of the central board. It is not a question
whether the banks are to be permitted to control the board
created to supervise their transactions, but whether they shall
have any voice whatever in the management of their own property. There is nothing in our form of government, the basic
principles of democracy, or the equitable principles which
should govern the organization of society, which warrants
any such exclusion. If this usurpation of the rights of property of protesting citizens is not without warrant in our constitution, it certainly is in violation of every principle of equity.
The attempt is made by the friends of the measure to
justify this exclusion from the councils of the proposed government central bank by a reference to the means by which
central banks of Europe are controlled, but a comparison of
the manner in which the central banks of the three most important commercial nations of Europe are controlled with that
suggested for this government central bank would show that
no precedent can be found in European practise for the action
contemplated in this case. The question at issue is what, if
any, voice shareholders have in the management of any European central banks. European central banks have no control
whatever over the joint stock banks or their management.
A comparison of the manner in which the central banks of
the three most important commercial nations of Europe are
controlled with that suggested for this government central
bank, is of interest to us. With a very few exceptions (Russia
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and Sweden are the only important ones) the central banks of
Europe are private institutions, in the sense that their shares
are held entirely by private owners, but the character of their
management varies.
In the case of the Bank of England, the government has no
voice in its management, nor does it own any stock in the
bank. The supreme control is vested in the governor, deputy
governor, and 24 directors, all elected annually by the shareholders. It is the custom of the shareholders to elect merchants, representatives of important business houses, to membership on the board, and to exclude bankers, directors of
joint stock banks and brokers. This custom is undoubtedly
a proper one and is, I think, adopted universally in other
institutions of a similar character. I have never heard of
any suggestion that a different course should be followed in
this country. The inclusion, however, of merchants as the
principal directors of the Bank of England admits to membership representatives of all the greatest banking houses of the
world. These merchant houses are called banking houses in
this country, and on the board of directors of the Bank of
England are found the representatives of houses like the
Rothschilds, Barings and Morgans. The case we are considering is not one as to who should be selected by shareholders on a board of direction, but whether shareholders
should have any representation in the management.
The Bank of France is a private establishment and the
government owns no shares. The management of the bank
is in the hands of a governor and two deputy governors, who
are appointed by the Chief of State and a board of fifteen
regents (five of the regents must be chosen from the commercial and industrial classes), and three censors (auditors)
who are elected annually at a meeting of shareholders. The
regents correspond practically to the board of directors of
our banks. They decide upon all important matters of policy
and management, including the fixing of the bank rate.
The administration of the Imperial Bank of Germany is
carried on by three boards: ( I ) The Curatorium, consisting
of the Chancellor of the Empire, one member appointed by the
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Emperor, and three elected by the Federal Council from its
own members. The board meets once in three months and
very rarely interferes in the actual management of the bank.
(2) The Directorium or Directorate, or board of managers,
consisting of the president, vice-president, and seven others,
who are the active managers of the different departments of
the bank and who are appointed for life. These are recommended to the Emperor by the Federal Council and appointed
by him. In their appointment the Central Ausschuss are consulted. (3) The Central Ausschuss. The powers and functions of this board are defined by the Vice-President of the
Reichsbank, Dr. von Glasenapp, as follows:
The third body, the Central Ausschuss (which takes the
place of our directors) is composed of 15 members, who are
elected at the annual meeting of the stockholders, together
with 15 alternates, who serve in the absence of any of the
members of the board. This body meets once a month. From
among their numbers they appoint a sub-committee, known as
deputies of the Central Ausschuss, of 3 members and 3 alternates. The deputies meet weekly with the president and
managers. The Central Ausschuss are made familiar with the
transactions carried on by the bank and give their advice
and recommendations to the Direktorium in reference thereto. In practise, their advice is generally carefully considered
and taken. In the fixing of the bank rate, it is their custom
to call a special meeting, if need be, of the Central Ausschuss,
who always confer in regard to the advisablity of a change
in the bank rate.
MANAGEMENT OF BANKS

The experience of banking institutions generally establishes
the fact that the best results are obtained by leaving the
practical management of banking affairs to men of tried
capacity and experience, whose positions are of a permanent
character, and whose services in most cases command large
salaries on account of the nature of their responsibilities.
Successful banking on any considerable scale can be carried
on only in this way. There is a clear distinction between
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the actual managers of a great bank, that is, those who have
charge of its technical banking business, and the directorswho pass in a more or less perfunctory way upon the action
of the managers, and who decide upon important questions
of general policy affecting the bank. This distinction is rarelydefined by law, but it exists in all well managed bankinginstitutions. It is sufficient to say that there is no important
banking institution in existence that could prosper under the
sole management of a political board whose membership was
certain to be changed at least once in four years.
SOCIALISTIC CHARACTER OF THE BILL

I am aware that there seems to be a marked tendency in
recent years, in some quarters, to abandon the doctrine that
states have still any virile powers under our form of government, and to assent to the concentration of all powers and
authority in the national government, to be exercised through
Congress, or in later days, through agents of the executive.
But this is, I think, the first attempt to give a government
board the right to manage a great business, which is more
important in its intimate relations to all the people than
any other. If the attempt is successful it will be the first and
most important step toward changing our form of government from a democracy to an autocracy. No imperial government in Europe would venture to suggest, much less enact,
legislation of this kind.
It will be remembered that the Federal Reserve Board consists of three members of the President's official family and
four others to be appointed by the President and confirmed by
the Senate. One of the four members is made manager and
executive officer of the board, and acts under the supervision
of the Secretary of the Treasury, who is made chairman of
the board. It is provided that not more than two of the appointed members shall be of the same political party. These
provisions taken together fix the character of the board as a
political organization. Every change in administration means
a change of four, and probably five, of seven members of
the board.
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As I have shown, the powers granted to this central board
are intended to give it the control of the functions and the
business of the reserve banks by arbitrary, direct, or indirect
methods. It is clearly intended that the government of the
United States, through these instrumentalities, shall be placed
in a position where it can control and manage the banking
business of the country. It is further intended that government obligations shall ultimately take the place of all other
forms of note issues. This general purpose is either illy
concealed or openly announced by the promoters and advocates of the plan.
The creation of this board, with its improvident grants of
executive and legislative authority, is repugnant to every
fundamental principle of popular government. No instrumentality could be further removed from popular control. The
functions of the board are exercised in secret and there is no
provision for publicity of any kind, except an annual report
to Congress. There can be no review of its opinions and no
appeal from its decisions. It is doubtful whether its members could be impeached for flagrant abuse of power. They
are appointed by the President and are apparently responsible
to him alone for the manner in which they discharge their
duties. This attempt to give to a political oligarchy the power
to control the banks and currency of the country, to be exercised at its discretion, with no means of preventing or punishing abuses, is promoted by the same men who are proclaiming
their purpose to destroy monopolies and to repeal all grants
of special privilege. No monopoly or grant of special privilege could be so great, so far-reaching in its consequences, as
that proposed by the bill under consideration.
The proposition that our government has the power, or
could properly exercise the right, to take possession and control, through its agents, of the private business of its citizens,
has never before been seriously advocated in this country.
No reason can be given why the United States should take
over and manage the banking business of the country which
does not apply with equal force to any of our important industries or business organizations. In other countries the
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doctrine of state socialism has found vigorous support from
a limited class, but the experiment of managing private business by government agencies has not yet been tried.
The creation of this board, however, is clearly a favorable
response to socialistic demands. The aims of socialism were
recently defined as follows by an acknowledged authority:
" It demands that the machinery of wealth-creation be taken
from the individual capitalist, and placed in the hands of the
nation to be organized and operated for the benefit of the
whole people." There could be no more accurate description
of the proposals we are considering.
It is urged in answer that the President, having only the
public interests in view, would appoint men of the highest
class, men whose patriotism and loyalty to the public interests
would be unquestioned, and that therefore no evil results
could follow. Good appointments will undoubtedly be made,
but legislators are bound to take into account the possibility
that an ambitious man in the presidential chair might use the
great powers of this organization to advance the interests of
a political party or to perpetuate an administration. A President who had the power to dominate his party and to dictate
to Congress, if he were at the same time ambitious for the
succession, might be tempted to use for personal or party
purposes an organization of his own creation whose influence
for this purpose would be irresistible.
The President has not as yet, I believe, expressed his concurrence with Mr. Bryan as to the transcendent importance of
government note issues. In his earlier days he was enthusiastic in his defense of the Second Bank of the United States.
He said:
Only a great commanding bank, everywhere known, whose notes
really and always represented gold could supply paper worth its
face value in all places or keep exchanges from chaos. Such an
agency of adjustment and control the Bank of the United States
had proved itself to be. It had not only served its purpose as a
fiscal agent of the government to the satisfaction of the treasury,
but had also steadied and facilitated every legitimate business transaction and rid the money market of its worst dangers. But many
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of the men to whom General Jackson was accustomed to listen
believed, or affected to believe, that it had done much more, that its
power was used to serve a party and to keep men who were no
friends of the people or of popular rights in a position to manage
and corrupt the whole politics of the nation.1
The President will undoubtedly concede that we cannot
adopt the Bank of the United States as a model, but we should
certainly seek to secure the qualities and results which he so
eloquently ascribed to the bank. The accusation that the
Second Bank of the United States advanced money on the
paper of its political friends, and used its control over credits
to perpetuate its existence and to defeat General Jackson had
more effect in arraying public opinion against the bank than
any other cause.
The bill we are considering was, it is said, prepared by
three Virginians. I commend to these gentlemen the serious
admonition of a distinguished son of Virginia, the friend and
biographer of Jefferson, Professor George Tucker, of the University of Virginia. He said:
Those who administer the federal government must be always
expected to have a vigilant and active opposition; in other words,
there will always be two great political parties in the country, one
of which will be in favor of the administration, and the other will
be opposed to it. Now, it is contrary to all experience to suppose
that those who have so powerful a machine under their control as
the whole banking power of the country, and which would be ten
times as great as at present, by being undivided, would not be disposed to use it in favor of one party, and against the other; and, if
skilfully used, what might it not achieve? The power of the late
bank of the United States, with a capital of only $35,000,000, was
thought, by some, to be formidable to the government as well as to
the state banks, and this was one of the principal reasons assigned
for putting it down; but what was its power, when exerted against
that of the government, and of numerous rivals, commonly equal
to itself in any one place, compared with what would be the power
of all the banks united, when added to that of the government?
If the people were capable of being bought, of trafficking away
1

Woodrow Wilson, History of the American People, v. 4, p. 63.
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their rights and liberties, a government, provided with such means,
might be able to purchase them; and, though that should not be
the fatal result, such an accession to the power and patronage of
the government would make the will of its party resistless; and we
know that no tyranny is more merciless and unprincipled than that
of party. We every day see the men who compose it, tolerate and
approve what, as individuals, they would revolt at. We may then
infer, that such potent means of influence would not be conferred by
any people possessing the smallest degree of discernment, or jealousy of power, and that in this country the experiment will never
be made until the love of civil freedom shall cease to find a place
in the hearts of the American people.1
I feel sure that it is not necessary to remind the Senate
committee who have the responsibility of recommending proper
legislation upon this subject, that no credit can attach to any
Congress or administration unless the legislation adopted shall
prove wise and effective. The features of the bill to which
I have called attention are of such a character that they should
not be accepted. I have tried to show that the House bill
has serious defects. It appeals to the populists by adopting
their plan of note issues; to the socialists by seeking to place
the management of the most important private business of
the country in the hands of the government; it seeks the support of bankers in great centers by its unexpected discrimination in their favor, but its dangerous doctrines and unwise
methods do not appeal to the sound judgment of the American people. The bill as it stands with its partly ineffective
and partly dangerous provisions would be detrimental to the
interests of banks, with the exception, perhaps, of the great
banks in the central reserve cities. Its objectionable features
have neither the support of public opinion nor the approval
of the banking fraternity. They are contrary to the teaching
of economists and they are not supported by the judgment of
practical men. Its immediate enactment is urged by its
sponsors upon the plea that it will create confidence and furnish remedies. It just falls short in its beneficial features of
1

Geo. Tucker, Theory of Money and Banks Investigated, pp. 366-8.
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accomplishing a wise purpose and by the radical character of
its objectionable provisions it threatens to upset business and
to produce the evil results which it was projected to cure. Its
authors have not ignored the lessons of experience, but are
apparently afraid to make their legislation conform to its
teachings, on account of the declarations of a party platform.
For centuries the world has witnessed recurring waves of
popular delusion with reference to the magical power of paper
money and the belief that wealth could be created by the
stamp of the government upon pieces of paper. The losses
occasioned by the folly of one generation have not deterred
their successors from trying the same experiment and with the
same results. It is, however, a source of satisfaction to the
philosophic student of history to realize that no matter how
severe the attack of monetary mania may be, sooner or later
sanity will return and intelligence regain its control. We
should keep in mind that any departure from sound economic
principles will surely invite new disaster. There can be no
permanent and satisfactory solution of this great problem, so
fraught with momentous consequences, until the American
people shall be satisfied, after careful investigation or experience, that any plan proposed or adopted will surely respond
to their reasonable demands for banking and monetary reform.
Questions of this character cannot be finally settled by the
majority of a party caucus or by the mere force of executive
dictation. There are much broader questions involved than
how best to secure an advantage to a political party. Any attempt to construct a plan for monetary reform upon a basis of
sectional or political prejudices must fail. The enactment of
legislation having this basis will raise an issue that will surely
overshadow every other in future political contests.
No large part of the American people had any idea that the
election of 1912 involved a reopening on the part of Mr. Bryan
and his friends of the controversies of the past and an endeavor
to secure, by partisan legislation, the triumph of the doctrines
and principles which had received the repeated condemnation
of the American people at the polls. This should be a fight
in the open. The party in power has no accredited mission to
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reverse these repeated judgments and to fly in the face of
the concurrent judgment of the people of every commercial
nation, based on universal experience.
Unless the teachings of an unbroken line of great statesmen
are to be ignored, the features of this bill that I have discussed
must be rejected. The administration that should force upon
the American people by arbitrary methods an unwise solution
of this problem will merit and sooner or later receive the
condemnation of thoughtful men of all political parties.
It is the irony of fate that in a measure whose sole purpose
should be to give strength and stability to our banking institutions and to furnish the people with a currency whose value
could never be questioned, it should be found necessary to
sacrifice the principles of a great party and to make the national banks the unwilling instrument in the work of their own
destruction in order that Mr. Bryan may proclaim to the world
a triumph of transcendent importance for his monetary and
governmental theories.
Let us hope that the sober second thought of the national
legislature may lead it to reject false doctrines and with a
patriotic spirit to construct a plan of banking reform which is
worthy the intelligence of a great people and which will
serve their highest interests.
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THE FEDERAL RESERVE BANKS'
H. PARKER WILLIS
City Editor, Journal of Commerce and Commercial Bulletin

T

HE federal reserve banks proposed by the pending currency bill may be briefly described. They are bankers'
banks and they are intended to do for the banker what
he himself does for the public. They are to economize and
systematize his funds and his dealings, to facilitate his communication with his associates and rivals, and to supply him
with accommodation when he needs it. If this is what the
so-called regional banks are to do, and if they can successfully
do it, they need neither explanation nor defense, for both their
purpose and their method are as old as modern business.
Indeed, there is nothing new about the idea of the regional
reserve banks. Some students of the currency question have
traced them back to the fatherhood of ex-Senator Aldrich of
Rhode Island. They have been said to be identical in organization and in purpose with the central reserve association to
which his name has been attached. But these are superficial
students of the situation. They should carry their studies at
least as far back as the Fowler federal reserve bank bill of 1908,
or the Muhlemann central reserve bank plan of several years
earlier. Better still, they might consider the type of organization of our clearing houses and the conditions under which the
latter have for years past aided and perfected the operations of
their member banks. There is no idea in the Aldrich bill that
can properly be claimed as a distinct novelty nor is there any
fundamental idea in those phrases of the new currency bill relating to the organization of the federal reserve banks which
was either drawn from the Aldrich bill as such or is original
with itself. The merit of the Aldrich bill and of the new
measure lies in the fact that both seek to apply familiar and
1

Read at the meeting of the Academy of Political Science, October 14, 1913.
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accepted ideas with reference to cooperation in banking. We
can neither impute it unto the new bill for righteousness that it
contains some ideas identical with the Aldrich plan nor can that
fact be used to condemn it. Efforts in both of these directions
have been failures thus far and will continue to be so.
Inasmuch as the idea of combined reserves and of united
bank resources, controlled and administered in the interest of
their owners and of the whole community, is neither new nor
open to controversy, we may accept the broad, basic idea of the
so-called regional banks as definitely settled. All that I am
justified in presenting to you, therefore, is some matter relating
to the detail of the plan for creating the proposed institutions.
With reference to this matter of detail there are a few interesting points, most of which, however, have already received
some attention.
The first in logical order, perhaps, is the capitalization of the
banks. Gloomy predictions have been made concerning the
inadequacy of the capital suggested. The new bill requires
every member bank to contribute ten per cent of its own capitalization in current funds and it provides that no regional bank
shall be organized with a capital less than $5,000,000. Many
who have computed the probable working of this scheme have
noted that owing to the great concentration of bank capital in
the eastern states the proposed reserve banks in the South and
West would have small capitals, some of them probably not
much over the $5,000,000 minimum. Since the total capital
of the reserve banks would be only about $105,000,000 they
have argued that the twelve banks suggested would have an
average capitalization of less than $9,000,000 each and that
with the smallest the danger would be great that they would be
unable in times of stress to fulfil their function. Those who
thus argue fail to understand the fundamental elements of the
proposed plan. The plan is essentially a scheme for combining
reserves. It provides that when the various reserve banks have
been organized their members shall place with them a specified
minimum amount of their reserves while it is made an inducement to them to deposit an additional amount. Assuming that
the total deposits of the national banks of the United States
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subject to reserve requirements are $7,500,000,000, the amount
which would be placed with these banks were they to comply
with the requirement that at least five per cent of their outstanding deposits shall be balances with the reserve banks
would be $375,000,000, while it is probable that in addition
enough more to make the sum around $600,000,000 might be
left with the new institutions. If the latter should prove to be
the actual cash held by the reserve banks in trust for other
banks, after the amount of rediscounts to be granted had been
settled and adjusted, the average to each of the proposed twelve
banks would be $50,000,000. In addition to this would be
their capital and their share of the government deposits. The
latter would probably average at least $15,000,000 per bank so
that a representative of the new reserve institutions would start
with from $65,000,000 to $75,000,000 of cash resources. Now
I submit that a bank possessing $65,000,000 of clear cash is by
no means a puny or weak institution. A comparison with some
foreign banks bears out this view. Moreover, it must be evident that in any district or region of territory, if it be true that
the resources of the reserve-holding bank of this kind are too
small, the meaning simply is that the member banks ought to
keep larger reserves. The basic error of those who complain
of the reserve banks' capital is this: they seem to suppose that
the banks are to be organized on a competitive business basis.
Nothing of the kind is true. Indeed, it might serve well enough
to organize the new banks without any capital or with only a
nominal capitalization. Their strength and the whole test of
their fitness and sufficiency depends upon their success as reserve holders. Their capitalization is of relatively little importance, except for the purpose of making a start and furnishing a buffer against possible loss.
A second matter, which is closely interrelated with the capitalization of the proposed banks, and to which considerable
attention has been given, is the question of stockholders.
Under the proposed plan every national bank must join the
system or cease to be a national bank within a year. Much
has been made of this so-called compulsory provision, and
many severe epithets have been applied to it. It has been
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called " socialistic," but unfortunately socialism is no longer a
name to conjure with. It it were socialistic, perhaps the fact
would make as many friends for the scheme as it would enemies.
To us I suppose the interesting thing is whether the so-called
compulsory provision is a good one or not. Let me say frankly
that I think this matter is an open question. Certainly it would
be very desirable if every bank called national were a member
of a truly national system, subject to national jurisdiction, performing national duties and entitled to national support. But
the other way of handling the situation has its advantages. In
drafting the pending currency bill it was supposed that the
banks would not care to have non-bankers operating the reserve
banks, and so after much travail of spirit it was determined to
yield this point and to have the new banks organized by bankers
only. But strange to say, this was a case where, as the poet
has expressed it, " A man's loss came to him from his gain,
darkness from light, and from knowledge, ignorance." No
sooner had the measure been promulgated than it was objected
to upon this very score. It is probable that by making membership in the reserve banks voluntary and by throwing open to
the general public the right to subscribe to the capital an object
would be attained which was earnestly sought by the framers
of the Aldrich bill in the multitude of cumbersome provisions
by which that measure attempted to get business cooperation.
In other words, a real interest on the part of merchants would
be secured in the way referred to—by throwing open the subscription to the public. I believe that my audience is composed
at least in part of merchants, and to them I wish to say that I
believe it right for them to have a share in the control of the
reserve banks. Perhaps a direct subscription to capital stock
with a limited voting power would be the best way to get it. But
would the banks themselves, which now complain of the compulsory features of the new plan, be satisfied with a scheme in
which they had to deposit their reserves, whether stockholders
or not, in the new reserve banks, while the latter were in part
at least controlled by merchants and business men ?
A third point with reference to which much mystery has
been made and regarding which many abstruse screeds have
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been written is the question whether the proposed reserve
banks are too numerous. This is not merely a matter of capitalization. It has been asserted that the banks in question if
organized to the number of twelve would be unable to do the
work assigned, would be unable to control gold movements, would
act inharmoniously, and would in various other ways prove to
be a broken reed for the community to lean upon. This is a
matter in which a limited amount of common sense is needed
and very little more. Suppose we look at the continent of
Europe. We find there the banks of France, Germany, Russia, Austria-Hungary, Italy, Belgium, Switzerland, Spain and
various others. Some of these banks have very large resources,
others relatively small ones. They are not more widely separated from one another by distance than the institutions of
Maine and California or of Florida and Alaska. The difference
of climate and of business methods is hardly greater between
the north and south of Europe than between the north and
south of the United States. Now suppose that through some
historical course of development this continent had been broken
into a variety of national areas. Would it have been impossible to establish a cooperative central banking institution in
each such area? Would it have been feasible for such institutions to regulate the supply of gold going into and out of those
areas and to control the credit supply in each ? Why should it
have been necessary to organize one single reserve-holding
institution for the whole continent? Again, we see to-day north
of our northern border twenty-seven strong institutions with
hundreds of branches operating effectively and soundly and
controlling the reserve resources of Canada in a satisfactory
and efficient manner. Are there too many of them ? If there
are, the number will be reduced as in times past it has been.
If Canada can support at present twenty-seven such institutions,
can the United States not support twelve reserve-holding institutions? There is no argument from experience, no analogy
from conditions in other countries that can be taken even remotely to sustain the demand for the consolidation of the
reserve banks into one. How many there should ideally be,
experience only can absolutely determine. It is fundamentally
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necessary, therefore, that, whatever be the number with which we
start, the way to the creation of more institutions of the kind
shall be kept open. Neither should they be chartered for too
long periods nor should their number be limited in any rigid
manner nor should their charters be irrepealable during their
life. Experience should dictate how large a group of banks is
necessary to act together and yet get the benefits of cooperation and how large a group is likely to become unwieldy, overcentralized and difficult to control. For the present, investigation shows that twelve such banks may be a convenient number,
while later experience will furnish the conclusive evidence
whether the number should be increased or diminished.
Fourth, much attention has been lavished upon the relation
which should exist between federal reserve banks. The pending bill proposes to make them independent of one another,
except in so far as exchange balances may have to be kept in
order to facilitate inter-bank payments. In time of emergency,
the bill provides that the Federal Reserve Board shall have
power to intervene and to require a given bank to rediscount
under very stringent and limited conditions the paper of another, or to permit one to make such a rediscount at will if it
desires. This provision also has been described as " socialistic,"
and has been condemned on that score, it being asserted that
such an authority takes the control of the bank's own funds out
of its own hands. Strangely enough, such criticism comes primarily from those who would like to see a single central reserve
association established, notwithstanding that rediscounts between
different parts of the country would be the staple business of
such a reserve association. They seem also to ignore the past
action of clearing-house banks in making their resources a common fund in case of disaster. And, strange to say, they are
identical with those who want permission to have the reserve
banks deal freely with one another. Consistency is important
in banking as in everything else. Essentially the answer to this
question of relations between reserve banks is found in the
fundamental query, what are the reserve banks for? Not to
make money beyond a fair moderate profit; not to compete
with member banks beyond the point where such competition
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is necessary to fulfil their purposes. Regular business with one
another should be out of the question. There is no reason
for altering that provision of the pending bill which forbids
them to do any such business except in transferring funds.
There is a fifth point that, because of the space that has been
given to it in some recent discussions of the subject, is worthy
to be noted. This is the function of the so-called regional
banks in handling domestic exchange. The bill provides that
the banks shall accept certain checks on deposit from their
stockholders without charge for exchange or collection and that
member banks may if they choose make a charge to their
customers for their services in transmitting funds. The object
of this provision is evident. It would substitute a system of
clearing country checks for the present method of collecting
them and it would establish parity of exchange between all
places in a federal reserve district and then between the federal
reserve districts themselves. The banks could charge any fees
they choose for exchange services, but in fact they would not
do so. They would have to give their customers the advantage
of the collection system thus introduced. Upon this seemingly
innocent provision has been vented an immense amount of
criticism. Most of it is simply reducible to a statement on the
part of banks that they need the income they now derive from
exchange services, a frank and blunt way of meeting the proposition that hardly needs discussion. I do not think it will
appeal to the broad-minded banker who views his profession as
a semi-public occupation. If we devote attention solely to the
genuine theoretical aspect of this matter we shall arrive at a
truer conception of the principles involved than if we look at
the question through the distorting glass of commercial selfishness. Many years ago, when bank loans were made almost
entirely by the issue of notes, this same problem was raised on
account of the excessive charges for the transmission and redemption of notes to which the holders thereof were subject.
The struggle through which the community then passed was
closed by a unanimous agreement that henceforward the banknote currency of the country should invariably be redeemable
throughout the area of the nation at par. This general agree(9»)

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ment found expression in the national bank act, which provided
for the compulsory receipt by every national bank at all times
of the notes issued by every other national bank. The consequence has been that the national bank notes have invariably
been received throughout the United States absolutely at
par and without any charge for collection. Now after a
long period of development we are engaged in revising the
banking laws of the country, and we are confronted by the
same question as in former times. But to-day the currency of
the country consists essentially of credit instruments. The
notes have become a minor matter relatively unimportant to the
active business man, save under peculiar conditions. But the
principles in the one case are exactly the same as those that
controlled in the other. Fundamentally they indicate that
whenever a banker creates an instrument of circulation it is his
duty to maintain that instrument at par throughout the territory
in which it circulates in order that no one may lose by a discount upon the credit currency thus provided. If in this process of maintenance at par the banker incurs expense, then he
should charge a sufficient sum for the service he performs in
creating the credit to warrant him in his action, and he should
do it at the time he establishes the credit. The federal reserve
banks will operate to bring about this end, and in so doing they
will perform the same service for the credit instruments of the
country that was rendered in former times by the Suffolk Bank
of Boston, when after great trial and tribulation New England
institutions were practically compelled to keep a deposit with
the Suffolk for the redemption of their notes.
One final point in connection with the organization of the
federal reserve banks is worthy of special note. It has been
suggested that the effect of the creation of these reserve banks
would be to bring about a very serious contraction of credit.
To go in detail into the question whether such a contraction is
reasonably to be feared or not under the proposed plan would
take very much more than the limited time at my disposal and
I cannot therefore venture to undertake it. Let me say in brief
that the most careful computations thus far made show that there
would be no such contraction as has been feared, even if the
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reserve called for under the plan were to be established by
making direct cash deposits with the federal reserve banks.
Were the deposits to be made in that way, the result would be
to call in perhaps $100,000,000 of net cash not now in the
banks or at all events not now used by banks for reserve requirements. This however would be much more than offset by
the immediate effect of the placing of the government funds in
the banks and their consequent availability for immediate use.
When the added power of credit extension due to the introduction of the rediscount system is considered, there is no comparison between the possibilities of the proposed reserve bank
plan and that of the present banking system. The reserve
banks would be able, if they saw fit, to increase by an enormous
amount the accommodations now granted to the public. It has
been computed that this possible extension would be $2,000,000,000. Whether to grant such an extension or not is a
question of policy which the management of these banks could
be expected to settle wisely and in the interest of the public as
well as in their own. That they would permit any contraction
to take place is, I think, out of the question.
In short, the reserve bank plan proposed furnishes a workable
method of attaining the objects for which currency and banking
reformers have so long striven. There is nothing in it that is
unworkable or that may not reasonably be accepted by those
who believe in the general principle of economy and combined
control of bank reserves. If in their judgment there are
elements in the plan which may prove clumsy, efforts should be
directed to smoothing these defects away. It can be successfully done without altering either the general plan or the purpose of the bill now proposed. It would be strange indeed if
the chance of attaining within a very short time what has been
sought for years should be discarded merely because the method
of reaching it was not in all respects to the liking of those who
are to put it into operation.
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CRITICISMS OF THE PROPOSED FEDERAL RESERVB
BANK PLAN'
A. BARTON HEPBURN
Chairman of the Board of Directors, Chase National Bank

T

HE administration's currency bill as it now stands in
the Senate embodies many features that are fundamentally sound and consonant with the best traditions
of banking theory and practise; such, for example, as the
creation of a central bank with branches, the recognition of
bank assets in the form of commercial paper as the normal
and proper basis for bank-note currency, and the provision
for the keeping of the current funds of the government in active use istead of locking a large part of them up in the subtreasuries. Despite these great merits and the substantial improvements that have been made in the bill by recent amendments, it still contains certain glaring defects which threaten
its permanent usefulness. Inasmuch as helpful criticism of
the defects of the measure rather than commendation of its
merits is what is needed at the present time, I shall confine
the brief time at my disposal to a consideration of the chief
of these defects.
While a central authority has been created with more power
than we should have expected the government to give to a
central bank, the measure is defective in that it creates twelve
central banks. Although it has been the commendable purpose of the bill to mobilize reserves and to prevent that
scramble among banks for reserve money in times of danger
which has been the bane of our present decentralized banking
system with its rigid reserve requirements, this purpose clearly
cannot be realized by the creation of twelve separate institutions. The method resorted to would divide the cash reserves
of the country into as many different ownerships as there
'Read at the meeting of the Academy of Political Science, October 14, 1913.
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are regional associations, thus nullifying the true aim of this
whole measure.
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, except by the importation of
gold or by the occasional receipt of funds from the United
States treasury. In the same way, no one of the regional
reserve banks will be able to strengthen its cash reserves without drawing from and reducing to the same extent the reserve
of one of the other banks, unless it imports gold. Government funds will all be in these regional banks. There will inevitably be competition among the regional reserve banks and
among the twelve sections of the country in time of money
stringency, just as to-day under similar conditions each of the
twenty-nine thousand banks begins competing with the others
to strengthen its cash reserves. Furthermore there is the possibility that this condition would exist among the individual
banks as well. It appears that the framers of the measure
realized the danger; but that they failed to meet it is shown
by the provision authorizing the Federal Reserve Board
arbitrarily to force one reserve bank to loan to another. This
seems an open confession of the inability of the system automatically to adjust itself to the needs of the country. Thi9
shifting of funds could hardly be accomplished without ostentation and without notoriety; if the Federal Reserve Board
should require, as it might do under this proposed law, one
federal reserve bank to loan money to another, that could not
be done without attracting attention to the borrowing locality
in a way that would operate to the prejudice of that locality.
There is strong probability that in exercising the authority
to compel such a loan, the Federal Reserve Board would
create a distrust that would endanger the smooth working of
the whole plan.
It is wisely and properly provided that the regional reserve banks may extend their activities through the establishment of branches, providing only that the number of branches
shall not exceed one for every $500,000 of capital of the
federal reserve bank of which the branch is a part.
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Would it not be far better if the law should create one
central bank with branches wherever there is commercial
need for them ? Would not such a plan be simpler, less cumbersome and more efficient than the present plan of granting
the Federal Reserve Board power to direct one section of the
country to loan money to another? With all deposits in one
central bank, they would naturally flow to the localities where
most needed. Should danger arise at some point in our vast
fabric of credit, would not one vast reserve be much more
powerful to overcome it than twelve smaller reserves?
Under the proposed law the country is divided up into
twelve districts, each to have a federal reserve bank and all
to be under the general control of the Federal Reserve Board.
That board is to consist of seven members—the Secretary
of the Treasury, Secretary of Agriculture, comptroller of the
currency, and four others to be appointed by the President
and Senate, only one of whom must needs have had banking
experience. The most serious objection to the organization
of the board lies in the method of selecting its members.
That a board so appointed would be dominated and controlled
by political expediency is obvious. The three ex-officio members would owe their positions to their political affiliations, if
not to their political activities. That the framers themselves
recognize the difficulty of keeping the other four appointments free from party connection is shown in the provision
stipulating that not more than two of the members should be
selected from the same political party. Subjected as they are
to all the whims of party favoritism, the members have not that
attribute of independence that should attach to a board of this
character. Its members, with a single exception, need have
no previous experience in, or knowledge of, the banking business, the destinies of which are to be placed in their hands—
a proposition which is its own best commentary upon their
qualifications for handling intelligently so delicate a mechanism.
The Federal Reserve Board by its very nature will be nothing more nor less than a department of the administrative
branch of the government charged with the direction and
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control of the banking destinies of the country. In the event
of a district desiring some special favors at the hands of the
Federal Reserve Board, it would be in a position to make use
of present political methods to secure the influence of senators
and representatives in favor of that particular district The
banking community, as a class, has no representative on the
Federal Reserve Board. This, together with the additional
fact that, as a class, bankers have only a minority representation on the boards of the regional banks themselves, makes it
manifestly unjust to require the banks to surrender so large a
portion of their resources to the regional banks. To some extent, the regional banks will be competitors with the banks for
business. Is it not going too far to expect that the banks
should furnish one-fifth of their capital to an institution which
will be a competitor?
National banks, and trust companies in New York, are required to make certain investments as a condition precedent
to incorporation. Never before has it been specifically directed what investments going banks shall make; as, for example, that all national banks should invest twenty per cent
of their capital in federal reserve bank stock, or that one
regional bank should loan to another regional bank. Such
legislation is clearly an invasion of the field of credit. Never
before has such a power been conferred on any central bank.
If the government may direct the disposition of a bank's
resources to a limited extent, the question may well be raised
whether it may not dispose of these resources in their entirety. Banks operating under charters, which have ever been
regarded in the nature of a contract, are hereby forced to make
this subscription, and it is doubtful if under our constitution
Congress can take away the charter of a bank in this summary
manner, because of the bank's refusal to make a coerced investment. This proposition of the government to take the
bank's capital in the manner provided, carried to the extreme,
might easily accomplish, so far as national banks are concerned, one of the fundamental tenets of socialism and transfer ownership to the government.
The Federal Reserve Board will have power to issue treas(104)

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ury notes to the federal reserve banks upon the segregation
of specified current assets of such banks as security. In addition to parting with its assets to an amount equal to the notes
received, a federal reserve bank will have to maintain a
33/^% gold reserve against such notes. The redemption of
these notes becomes further a prior lien upon all the assets
of the bank to which they have been issued. All this security would seem to make the notes good without necessitating the further obligation of the government. There appears
no justification for creating a situation by which at some future
time the credit of the government might be imperiled. With
the balance of trade against us, making gold shipments necessary, a general crop failure, or war, the reserves of these
federal reserve banks might be reduced below the point of
safety. Whenever their reserves were brought to a point that
warranted any criticism, the credit of the government itself
as to its ability and purpose to redeem all notes in gold upon
presentation would be called in question.
Should the proposed policy of treasury notes be adopted,
and the obligations of the government immediately redeemable in gold thus be largely increased, there would be every
reason to apprehend, under similar circumstances, a repetition
of our experience of 1893, when our national credit was subjected to so severe a strain.
The government should unquestionably coin and furnish
metal money; that is, the money of ultimate redemption, but
the experience of the world proves that paper currency, redeemable in metal money, may better be furnished through a
bank like the Bank of France or the Reichsbank of Germany,
separately incorporated, under strict government control or
regulation, but possessing current assets which have an everyday market at a price, and upon which it may at any time, if
need be, realize. The provision making the government responsible for the treasury notes to be issued is fundamentally
wrong, and this policy will inevitably invite future disaster.
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THE ORGANIZATION OF THE FEDERAL RESERVE
BANKS'
O. M. W. SPRAGUE
Edmund Cogswell Converse Professor of Banking and Finance, Harvard University

C

OMPETENT management is one thing absolutely indispensable if our banking system is to be bettered by
means of the new machinery for which provision is
made in the Glass-Owen bill. A new class of banks is to be
established having large powers to extend credit in the form
of notes as well as in that of deposits. Upon these institutions is to be placed the heavy responsibility of safeguarding
the entire credit structure of the country. To accomplish this,
they must always keep themselves in strong condition, so as to
be able at any time to relieve financial strain by supplying
additional credit. They must also so handle their affairs as
to be able to secure additional resources or at least check the
depletion of such resources as they may possess. To accomplish this last result, they must be able to make their rates of
discount effective. This cannot be accomplished unless they
are able to exert some restraining influence over other dispensers of credit Such restraining power is also requisite to
lessen the dangerous tendency toward over-expansion of credit
which may manifest itself when the other banks have these
institutions to fall back upon in emergencies. The problems
which will have to be solved by the management of the federal
reserve banks are novel and in many respects distinctly unlike those with which our bankers have familiar experience.
It is of course true that the particular kind of mechanism
to be established, the power of the management and the legislative restrictions designed to prevent unwise action are all
important, but they are of secondary significance compared
with the character of the management. Competent men can
1

Read at the meeting of the Academy nf Political Science, October 14, 1913.
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get results working with very imperfect means; unwise management will wreck the most highly developed organization.
No legislative restrictions can do much here. Indeed, in seeking to prevent mistakes they are pretty certain unduly to
hamper the management in the exercise of a wise policy.
Notwithstanding the widely different powers and organization of the various European central banks and the widely
different economic conditions in the various countries in which
they are established, these banks all seem to work well. This
is due primarily to the character of their management and to
the experience which has been acquired and the precedents
which have been established in the past After a generation
of experience, or even ten years, it will be a far simpler matter
than at the outset to handle the federal reserve banks. At
the beginning, until complete confidence in them has been
gained and until wise precedents are established, the character of management is above everything else of supreme importance. It is, therefore, clearly most vital that the legislation regarding the selection of the management of the federal
reserve banks should be framed in such a way as to give every
possible certainty that it shall be placed in competent hands.
But legislation regarding organization cannot be framed with
this end solely in view.
Writing some four years ago, I said:
The present juncture is an unfavorable moment for the establishment of a central bank, because men having the experience required
for its management can hardly be found outside the circles of those
who, as a class, have been the subject of widespread and exaggerated
doubt and discredit. It is to be feared, especially if the bank is to
be one of imposing magnitude, that in order to allay alarm, the details of organization would be prescribed and the powers of the management restricted in ways which might seriously impair its usefulness.1
This feeling of distrust is vastly stronger now than it was in
1908, and it has inevitably found expression in the GlassOwen bill. Men with wide banking and business experience
1

Banking Reform in the Untied States, p. 14.
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must be selected to manage the federal reserve banks, but
they must be selected in such a way that the mass of people
will have confidence in their fairness and in the disinterestedness of their motives and policy. Even those who are convinced that a wiser and more capable management would be
secured through arrangements such as those in the bill of the
National Monetary Commission must realize that in the present state of public opinion, whether rightly or wrongly, large
numbers of people would not have confidence in a board thus
chosen. Provision must be made for a very considerable share
of governmental influence in selecting the management of any
institution such as that proposed in the bill of the National
Monetary Commission or in the Glass-Owen bill. Otherwise
there is little likelihood of legislation and even less likelihood
of securing and maintaining that public confidence which is
indispensable. If competent management cannot be secured
by arrangements providing for a large measure of governmental control, then legislation of the sort which is being considered here to-day should not be attempted.
The arrangements in the Glass-Owen bill for selecting the
management are simple, but the number of boards and the
division of powers between them makes it most difficult to
determine what their respective duties and influence will be
in practise and even more difficult to forecast the quality of
the boards themselves.
Each federal reserve bank is to have a board of nine directors, six of whom are to be chosen by the member banks, the
remaining three by the Federal Reserve Board. The Federal
Reserve Board is also to have the power to remove at any time
three of the directors chosen by the banks—the three who,
according to the bill, are fairly to represent agricultural,
manufacturing and commercial interests, if in its judgment
they do not fairly represent those interests. This power of
removal at any time thus lodged with the Federal Reserve
Board is objectionable in principle and indefensible from any
point of view. If the three directors who are fairly to represent the various interests mentioned above do not so represent them, this should be evident at the time of their election.
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Their appointment might well be made subject to the consent
of the Federal Reserve Board, following in this respect the
constitutional requirement of confirmation by the Senate of
appointments of federal officials. In any event, the Federal
Reserve Board can only by the exercise of its power of removal make it necessary for the member banks to select
successors. The majority of the board of each federal reserve
bank, therefore, remains definitely the choice of the banks.
Entirely harmonious action by the boards of these banks
might at times be lacking, because of the presence of the three
governmental directors. The three could not, however, control the policy of any regional bank.
These boards of directors of the regional banks will be
the most important part of the entire organization. All the
loans of the regional banks are to be made by the boards of
those banks. All rates of discount are in the first instance to
be fixed by them and, though subject to review by the Federal
Reserve Board, the decision of the regional boards in this
matter is reasonably certain to be accepted in all ordinary
cases. There is absolutely no possibility of loss of the funds
entrusted to the regional banks by member banks and by the
government, except from unsound banking by these boards,
a majority of whose members are chosen by the member
banks. Nothing that the Federal Reserve Board can do can
by any possibility endanger the assets of a regional bank,
unless the regional board concurs with the Federal Reserve
Board; and there is no means of compelling such concurrence. The Federal Reserve Board is given large powers of
restraint over the regional banks, but practically no power
over the disposition which shall be made of their resources.
The Federal Reserve Board may, for example, refuse to
grant the request of the regional board for bank notes; but
this will not endanger the assets of the bank; it will simply
lessen its power to expand its operations. The Federal Reserve Board might, it is true, insist upon a lower rate of discount than was deemed wise by the directors of a given regional bank, but this could not endanger assets since the regional board would still determine the amount of the accommo(109)

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dation which it might safely grant to member banks at this
enforced low rate. The Federal Reserve Board may require
one regional bank to lend to another, but only by a unanimous
vote of its members, at least five of the seven being present,
and at a rate at least one per cent higher than that prevailing
with the borrower or the lending bank. Under these restrictions, compulsory inter-regional loans are most unlikely at
any time, and in any case the board of the lending regional
bank would have the right and duty of passing upon the
security offered by its borrowing neighbor.
There would seem to be only one means by which the
Federal Reserve Board might be able to exercise pressure
upon a conservatively managed regional reserve bank. It
might threaten to withdraw from it its share of government
deposits. This is, however, a means of compulsion altogether
unlikely to be resorted to. It is a power which has always
been possessed since the establishment of the national banking
system by the Secretary of the Treasury, but it has never been
used. Remote possibilities of this sort should not excite alarm
and do not require serious and detailed consideration.
With the change already suggested regarding directors
representing commercial interests, the provisions in the GlassOwen Bill seem admirably adapted for securing wise and
competent management of the regional banks, and they insure
a sufficient measure of government representation to give confidence among those people who are distrustful of banks and
bankers. It should, however, be noted in this connection that,
if the number of regional banks were somewhat smaller than
the twelve for which the bill makes provision, there would be
rather more certainty that the boards of the regional banks
would be made up of men of wide experience and conservative
tendencies. The time at my disposal, however, does not permit detailed consideration of this suggestion.
If the regional banks are well handled, they will husband
their resources in ordinary times and will need to apply but
seldom to the Federal Reserve Board for notes. The Federal
Reserve Board will probably then have comparatively little
to do. It will be an active force only if it should prove
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necessary to restrain excessive expansion by the regional
banks. To exercise a restraining influence over the regional
banks is the primary function of the Federal Reserve Board
and it should be clearly recognized that it is only in this direction that any considerable amount of power has been
lodged with it. The large number of people who have become alarmed over the possible consequence of an unwise
or incompetent Federal Reserve Board have in general totally
misconceived the nature both of its functions and of its powers.
It may fail to exercise much-needed restraint over the regional banks but, if that is needed, it will be owing to the
selection of incompetent regional boards by the banks themselves. I repeat once more—if the regional banks, a majority
of whose boards are chosen by member banks, are being
wisely handled, it does not much matter what the character
of the Federal Reserve Board may happen to be. The proper
and only test to which the method of selecting the Federal
Reserve Board itself should be subjected therefore, is this:
Is this board, in part made up of officials chosen for other
functions, entirely constituted by the President and a majority of it reconstituted at the beginning of every presidential term—is such a board likely to exercise that conserving
and restraining influence which will be needed if regional
banks themselves are being unwisely handled?
Looking toward the probabilities of the situation from the
point of view which I have taken, it seems to me that the
method of selecting the Federal Reserve Board is not entirely
satisfactory. No board, however selected, should from time
to time be subject to so great a change as is involved by the
appointment of a majority of new men at one time. The
board also has an unduly large proportion of government
officials selected for other reasons. These objections to the
provisions in the bill regarding the board do not touch the
burning question or whether it should be appointed entirely
by the President It has been urged that the banks should
be allowed to choose a minority of the members of the board.
Personally I should be glad to see that concession made to
banking opinion and believe that it would strengthen the
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board, because the distinguished bankers who would doubtless
be selected would be pretty certain to possess the necessary
ability and experience—and what is of even more importance,
would make the board a more conservative body than might
otherwise prove to be the case. I do not, however, regard
a change of this nature in the bill as vital; and further, it
seems to be one which is beyond the range of practical possibilities. In all directions there is to be noted a strong drift
of public sentiment toward public control, wherever large
powers are exercised in the economic world. I question
whether complete confidence and freedom from political attack could be secured for an institution lacking this feature
of complete government control of the Federal Reserve Board.
If the board acts wisely, that is all bankers require. This is
not enough, however, to give that general confidence among
the people which would free the system from the danger of
persistent political attack.
It may reasonably be presumed that the boards of the federal
reserve banks will be more conservative bodies than the
Federal Board itself, because a majority of their membership
will be selected by bankers, and because they will be directly
responsible for the funds deposited with the regional banks
by the government and by member banks. The Federal Reserve Board will be more susceptible to general public opinion,
to which such valuable banking qualities as caution and conservatism do not make a strong appeal. On the other hand,
the weight of responsibility resting upon the board may be
expected to have not a little salutary restraining influence,
especially if the bill is so changed that a majority of new
members will never be appointed at any one time. Additional
influence of conservative tendency upon the Federal Reserve
Board may be exerted through another part of the proposed
organization, the advisory council. This council, it must be
admitted, does not promise to be a very efficient body if the
provisions in the bill regarding it are not materially changed.
Each federal bank board is to select a member representing
its district to serve on the council. So far, the proposal seems
entirely satisfactory, judged from the point of view taken in
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this paper. It can hardly fail to be a body of conservative
and experienced men. The council is to meet at stated intervals, four times a year, and may be called in special session
by the Federal Reserve Board. The council may call for
information from the board and formulate suggestions, and
there its powers and duties end. It has no means of keeping
in continuous touch with the Federal Reserve Board, and cannot assemble at the volition of its members, however desirable
that might seem to be. It has no means of securing information except by formal application. Even with these very restricted powers and duties, the council might prove exceedingly helpful to the Federal Reserve Board, which can hardly
fail to feel the limitations upon its knowledge of business and
credit conditions throughout the entire country. The importance of the council can, however, be vastly increased without lessening the powers of the Federal Reserve Board, or
going counter to the principles embodied in the measure.
In a paper on the bill of the National Monetary Commission,
commenting upon the complete control of the National Reserve Association by bankers, I said:
There seems to be a general tendency to attach undue importance to
the question of the organization of the proposed bank; limited almost entirely to advances upon commercial paper, and working
always very much in the public eye, there is little likelihood that
under any form of organization its resources would be used for selfish
purposes whether individual or sectional.1
The danger of selfish or sectional use of the funds of the
regional banks is clearly reduced to a minimum under the
form of organization proposed in the Glass-Owen bill. The
danger is that these resources will not be used with caution
and restraint. For this reason, I strongly believe that the
advisory council should be made a more effective part of the
organization.
Its chairman, or in his absence its vicechairman, should have the right to sit on the Federal Reserve
Board, but without a vote. He would thus secure intimate
knowledge of the grounds for the policies adopted by the
1

American Economic Review, 1911. p. 263.

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[VOL. IV

board, and if he possessed the added power of calling the
council together at any time, that body would be able to
make suggestions and formulate criticisms in season to be
effective and of practical value.
This plan for a more effective advisory council is not based
upon distrust of the intentions or character of the men who may
be appointed to the Federal Reserve Board. It is urged in
the belief that it will tend to make more effective conservative influence in the management of the federal reserve
banking system, the vital necessity of which has been emphasized throughout this paper. This fear that the management may not, at least until after the consequences of its absence manifest themselves, exhibit sufficient caution and restraint in using their vast powers to extend credit, is not
imaginary or fanciful. It is the inevitable conclusion which
one must reach from an examination of many of the reasons
which have been brought forward during the last few years
to secure popular support for the method of banking reform
exemplified both in the bill of the National Monetary Commission and in the Glass-Owen bill. Although I may seem
to be going somewhat beyond the proper limits of my subject,
I hope I may be pardoned if I indicate some few of the unfounded hopes which have been raised in the minds of the
people during the discussion of the last few years—hopes
which will make much trouble for those who may be entrusted
with responsibility for the successful operation of the federal
reserve banks.
The bill of the National Monetary Commission contained a
provision requiring the National Reserve Association to discount at a uniform rate through the country. This requirement was contrary to sound banking principles and altogether
impracticable in a country in which such diverse financial and
economic conditions coexist as in the United States. It is
one of the most satisfactory results of the regional bank plan
that this uniform rate ceases to be even politically necessary.
In urging the merits of both the Glass-Owen bill and
that of the monetary commission, large claims which cannot
possibly be realized have been made to the effect that if the
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bill were enacted, rates for loans would be materially reduced
and borrowers would secure largely increased accommodation. One well-known and enthusiastic advocate of the GlassOwen bill, whose knowledge of law it is to be hoped is more
profound than his understanding of banking principles, has
been endeavoring to convince the public that the banks would
borrow back the entire amount of their subscription to the
capital of the federal reserve banks at the ridiculously low
rate of two per cent, thus netting three per cent by this trick
of legerdemain. Further, it is assumed by this plausible
adherent of the measure that the banks will of course at once
rediscount to the extent of two-thirds of their deposited reserves and of the government balances and at about the same
rates; and then further rediscount still more, taking out the
proceeds in the form of notes issued by the Federal Reserve
Board. Unlimited credit expansion is here brought forward
to secure the acceptance of a kind of banking institution the
primary object of which must be to restrain credit excesses.
This case is obviously extreme. Such influences certainly
will not prevail in the management of the federal reserve
banks, and in any event, banks will not be so foolish as to accept such lavish accommodation, even if it were available.
This idea, however, that the federal reserve banks will be
able vastly to increase the supply of credit is very generally
held and is in itself sufficient to show the vital need that the
management shall be in conservative hands.
Even in quarters where one might look for a clear insight
into the fundamentals of credit and banking, a number of
misconceptions are rife which if followed will inevitably involve the federal reserve banks in serious difficulties. That
it is desirable that commercial paper should be made a more
liquid asset than collateral loans is generally admitted. But
it has been contended on all sides during the last few years
that commercial paper was from its very nature liquid and
further that credit could therefore safely be granted to an
extent limited only by the amount of such commercial paper.
Both of these contentions are hopelessly fallacious. No kind
of loan is liquid to any considerable extent in an emergency.
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You cannot suddenly deprive any kind of business of the
amount of credit to which it has become adjusted. If the
volume of business falls off, or if prices fall, the volume of
loans can be easily reduced. It is indeed often said that
loans based upon a commodity entering into general and
necessary consumption can be quickly liquidated. This can
be done as regards any particular loan, but supplies for the
immediate and distant future must be in process of production and they will require a new batch of loans. If shoe
factories shut down, of course no new loans are required, but
the fundamental purpose of the bill before us is so to improve our banking machinery that this will not happen. Consequently, the volume of loans in that as well as in other
lines of business will not be reduced except in consequence of
lessened production due to other than credit influences.
The view that credit can be safely granted to the full extent of merchandise in process of distribution if not in process
of manufacture is equally fallacious. Credit affects prices.
Liberal discounts may cause speculative advances in commodity prices, stimulating excessive purchases by wholesalers,
jobbers and retailers as well as by speculative holders pure
and simple. There is no mechanical or statistical test of
the amount of credit which may be safely granted whether
the loans are commercial or collateral. Over-expansion is
possible in both instances.
Again, it is argued by many that note issues if subject to regular redemption will automatically adjust themselves to
business needs and be kept within entirely safe limits. Checks
are certainly cleared with uniform regularity and yet on frequent occasions this has not prevented the over-expansion
of deposit credit. Regular redemption or clearing does limit
the process of expansion by a single bank. When all banks
are expanding, however, such measures are absolutely ineffective. Nothing but restraint in granting loans can by any
possibility check the expansion of credit in periods of active
business and general optimism. To determine when such
restraint is necesary requires the highest judgment, especially
in a country in which gold exports are not and do not seem
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likely to become in the near future a sensitive barometer of
the business and credit situation.
This brings me to the last of the fallacies which seem to
have become generally accepted in the course of the discussion of the last few years. It is the idea that by means of
a broad discount market we should be able to secure abundant
foreign funds in periods of financial strain. In the case of a
small country, this view is entirely sound. It has proved,
for example, quite feasible in the case of Belgium, where the
National Bank of Belgium relies almost exclusively upon its
holdings of Paris and London bills to meet requirements for
cash. The larger the country and the greater the magnitude
of its credit structure, the less the reliance that can be placed
upon this resource. We do not wish, I presume, to become
a sort of appendage of European financial centers and it would
not be possible in any case. This has been to some extent
of late the situation of Berlin with reference to London
and Paris, but it is not considered to be a situation advantageous to the Fatherland. For a year or more now, the policy
of the Reichsbank has been directed toward securing a larger
gold reserve, one result of which will be to place the German
banking structure upon a more independent footing. When
we have sufficient capital to finance our own trade, domestic
and foreign, and some of the trade of other countries in addition, then a considerable amount of foreign funds employed
in our domestic short loan market will be entirely safe. This
is the position of London, where a considerable amount of
foreign funds are thus employed, but an amount which falls
far short of the English capital employed in financing the
trade of other nations. In any period of general liquidation,
London can readily liquidate a sufficient amount of its funds
thus employed to offset the withdrawal of foreign funds from
the London market. Until we reach that enviable condition, we must maintain large gold reserves and should not
rely upon the possibility of foreign borrowing as an
important means of strengthening our financial machinery in
emergencies.
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CENTRALIZATION OF BANKING AND MOBILIZATION
OF RESERVES'
ARTHUR REYNOLDS
President Des Moines National Bank

B

ANKING centralization may be discussed apart from
all considerations of time and place, but as we are now
considering the establishment of a partially centralized
system of banking, we may most profitably concentrate attention on our own particular conditions.
As early in our history as 1791 Alexander Hamilton obtained from Congress after lengthy discussion legislation authorizing the foundation of what is now referred to as the
First Bank of the United States. The Act of Congress approving the Second Bank of the United States was passed in
1816; the charter was not renewed on expiration, and after
operating for some time under a charter from the state of
Pennsylvania, the bank liquidated in 1841.
The government owned one-fifth of the stock of these banks,
and while they were organized as public institutions, their
main purpose seems to have been that of gain, as the government itself realized fifty-seven per cent profits in eleven
years on its stock in the first bank.
In both of these instances, inherent weaknesses incident to
the organization were the cause of ultimate dissolution. In
the case of the first bank, personal differences and disagreements about federal patronage brought the question of renewing the charter into politics. In the second, rivalry in
the matter of note issues between the bank and the state banks,
who had retained their right to issue notes, led to retaliatory methods in some of the states, which taxed the circulation
and endeavored by other means to hamper the operation of
the Bank of the United States. Under this pressure, in 1829,
1

Read at the meeting of the Academy of Political Science, October 14, 1913.

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President Jackson inaugurated a political campaign against
the bank which eventually forced it out of existence. Neither
of these banks represents centralized banking as understood
to-day, and any bank organized upon such a plan as they were
would fail to meet present requirements.
Centralization of reserves plus the delegation of credit
control to a central organization, according to the experience
of other nations, and even according to the consensus of
opinion here, seems to be necessary to any plan which shall
meet the approval of the people and at the same time accomplish the desired economic end.
The mere formation of an institution with immense capital
and authority to hold the reserves will accomplish centralization and concentration. In a way, indeed, we have this in
our present system; but instead of considering it a benefit, we
complain of it as an abuse and a disturbing factor. This
suggests the error in present popular conceptions relative to a
central bank. The people regard the main feature of such
an institution as purely centralization and therefore they fear
its power, whereas, when properly organized and administered, its main feature is responsibility and disinterested public service. This fact is clearly shown by experience in other
countries extending over a long term of years.
In this view, centralization, in order to be effective, must
present possibilities of more disinterested public service than
does the present administration of the banking business in the
central reserve cities of the country. In every system recently
proposed, the limitation of profit to be distributed to the stockholders of such an association has been tacitly admitted.
When that point of distribution has been reached, profit should
become secondary to scientific administration to accomplish
the purposes of organization.
The hope of some, that our present system could by some
changes be reinforced to withstand the pressure to which it
is periodically subjected, has gradually been dispelled by
broader knowledge. We now see the necessity of centralizing
the power of our present ineffectual units in an association
whose principal object shall be service to its constituent parts
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and the general business of the country rather than gain in
dollars and cents. With salaried, competent men having no
pecuniary interests as stockholders, the incentive of profit,
which in most business is the motive of action, would give way
to a feeling of responsibility and disinterested service.
An association such as this could exist in this country only
through the cooperation of the government and the banks.
In that form, free of political or interested individual control,
its functions would embrace the conservation and distribution
of credit through concentration and control of the reserve
money of the country, and in this sphere it would be effective
as a preventive of stringency and disaster.
No more effective argument in favor of the proper centralization of banking power through cooperation can be urged
than the beneficial action in various emergencies of the clearing house associations, representing in each instance the centralized power and credit of the members composing them.
The government in its proposed plan recognizes the necessity
of this cooperation, and endeavors to compel a large number
of the banks of the country, under penalty of dissolution of
their charters, to join in organizing the proposed system.
Though the doctrine of centralization is accepted in part, however, the benefits to be derived from its accomplishment are
illogically destroyed by diffusing the power into twelve separate associations.
The weakness of our present system has many times been
charged to the want of concerted action among so many
isolated banks, each striving to care for its own interest without regard to the common good. If this want of unity has
proved a defect in the past, what good reason can be adduced
for the establishment of twelve competing banks, only partially
concentrating capital and reserves, when a single institution
would furnish greater stability in a more economical manner?
A centralized association organized on the theory herein
set forth would be a bank for banks and for the government.
In the latter capacity it would relieve the finances of the
country from the alternate expansion and contraction now
resulting from the government's operations in collecting its
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income and disbursing its funds. These operations, bearing
only a slight relation to business itself, have long been recognized as a disturbing factor in our business, and by reason
of them the Secretary of the Treasury has frequently been
called upon to constitute himself the arbiter of credit extension to the business interests of the country by relieving
stress through deposits of government funds.
In addition to this, such an association, not being conducted
primarily for profit, would be differently situated than any
other bank, and hence could carry at all times a large amount
of cash on hand for the assistance of its member banks. This
feature in itself would have a steadying influence upon business, and assist in maintaining confidence.
But the functions of such an organization would be of more
importance to the business of the country as a regulator of
credit extension than in any other capacity, as it would have
at its command the means of checking over-expansion of
credit in easy times by the sale in the open market of foreign
bills of exchange, or even by borrowing funds in that market,
and thus accumulating cash on hand for use when the situation was reversed. In addition to this, it would have at command the more powerful means of raising or lowering the
rate of discount to meet varying conditions, and it must be
noted that this method is not an experimental one, but has
been in effective use elsewhere for more than a century.
Its ability to serve its stockholder banks by rediscounting
their good available assets would furnish them a market for
such form of credit in case of need. By the issue of its circulating notes it would be enabled to expand credit whenever
that course was desirable, and through its relations with its
constituent banks, when necessary, it could compel a contraction of that credit by forcing the retirement of the notes. It
will be observed that the exercise of the two functions last
named would enable it to introduce into our circulating medium that elasticity long considered desirable.
From the intimate relations that such an association would
establish with its component members, it would always have
the means of information concerning conditions in all parts
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of the country. Such information would serve as a basis
for the actual administration of its policies.
The scattering of the reserves under our banking system
among 29,000 banks is a violation of a principle adopted by
every great system of banking in the world and is recognized
as our principal source of weakness. In other countries, reserves are accumulated and concentrated in institutions organized for that purpose. When a scarcity of money occurs
through over-expansion or otherwise, the central bank exerts
its power and maintains business by mobilizing the reserves
to aid in liberal credit extensions and by promoting confidence in the general situation. Other countries are able also
to build up their reserves by raising the discount rates, which
invites a flow of gold to the point in need of i t The reverse
is true under our method of handling the reserves, for upon
the first intimation of stringency, reserves which have accumulated in money centers are withdrawn and hoarded.
The system we have has proved satisfactory in fair weather.
In ordinary times, the fanner, merchant or manufacturer can
go to the bank with reasonable assurance that his requirements will be met; but when clouds gather the public, remembering the experiences of 1873, 1893 and 1907, begin to
question their ability to secure credit and even money itself.
Banks seek to replenish their reserves, which can be done
only by decreasing the reserves of other banks, which are
themselves endeavoring to strengthen their position by securing a greater amount of reserve money. Banks begin to
call loans in an effort to build up their reserve. A general
scramble is on between the people and the banks, and among
the banks themselves, in an effort for self-protection, each
struggling for a stronger position, which resembles the mad
rush for safety at the theater where the cry of " Fire!" has
been heard. Then we realize that the reserves of the country
ought not to be scattered among 29,000 banks, forbidden by
law from using their reserves to extend credits. The reserve,
which by its very nature should be a bulwark in time of need,
becomes useless for the purpose for which it was intended.
What we need and must have is a more flexible condition, for
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such disturbances as outlined almost invariably occur in seasons following our greatest prosperity. The farmer and merchant must know that they can secure such accommodations
as they may need at all times, based, of course, upon the products of the country. Banks must be in a position to loan
freely and pay out money freely. To be compelled to contract or call loans at the very time when loans should be made
brings about the condition we seek to prevent.
What we need, then, is a centralized reserve agency, separated and made distinct from the interests now controlling the
large amounts of capital and reserves, through which agency
credit may be extended at all times when required by the
necessities of business. This can be accomplished only by
massing such a proportion of our reserves in a central institution as will always provide a market for the paper represented
by commercial transactions.
The gold reserve of any country, whether its banking system
is reinforced by a large central institution or is based upon
the scattered reserves as under our custom, is ultimately the
basis upon which credit is extended, and hence the foundation
upon which the stability of business rests. We have gold
enough in this country to establish the proper basis for credit
and at the same time to meet the need for cash. The banking business is a credit business, hence the element of confidence is an important one. The business of the banker is
to accept deposits and loan money; both of these functions are
required in every community. It is not the banker's fault
if his depositors all seek to obtain their money at the same
time out of the reasonable course of business; nor has the
public any reason to anticipate that all loans must be paid at
one time to meet such demand of depositors. Hence the element of confidence must play an important part in every
banking system in the world.
The secret of a proper banking system is to use the least
possible cash and the greatest amount of credit which will
provide a safe method of transacting business with the public.
Other countries extend in the aggregate larger credits on a
smaller proportionate basic gold reserve than we, owing to
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the fact that this reserve in their cases is massed and controlled as a whole. Herein lies the secret of the confidence
of the people of those countries in banking so conducted.
In times of need, it is demonstrated that banks in other
countries pay out their cash to aid their customers and prevent
trouble while banks here call loans to benefit their own situation. Their experience has been different from ours, and they
have acquired this confidence because their central banks continually ward off disturbances by precautionary measures,
while we, acting as separate units of an equally great whole,
have no guiding hand to bring into harmonious action the
same or greater resources.
The conduct and methods of these great central institutions
may be compared to those of a vessel anticipating a storm
and approaching the rocks and the shoals. The prudent captain throws out his anchor and remains in the open against
the time when the storm may come. His ability to protect
what is entrusted to him lies not so much in what he may be
able to do when driven ashore as in the safety he seeks before
that dread event happens. We, on the contrary, are at sea
without anchor, and as the increasing gale carries us inshore,
each man naturally makes a mad effort to save himself.
It may be said that there is, under our present system, a
way open to the bank needing assistance by the rediscount
of its negotiable assets, but the general situation is not helped
by this process, for the bank which increases its reserve, and
hence its ability to pay out cash or extend credit, does so only
at the expense of the bank extending the accommodation, and
when all are called on at the same time, the impossibility of
all being assisted is at once apparent. With New York
banks carrying net deposits from banks of about $500,000,000,
it will be seen that we have at the present time a mobilization
of our reserves, but in privately controlled banks subject at
all times to their own selfish interests. When it is known that
in ordinary times about one-third of all the money in the
banks in the country is held in the vaults of the New York
banks, with very little regulation or restriction, it must be
admitted that our present system of banking under the na(124)

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tional bank act tends toward concentration and centralization
as well as individual control and power. The vast sum of
money held in New York would, if properly regulated, afford
a reserve sufficient for our banking system, and is a larger
amount than is found necessary to cover the requirements of
the Bank of England in its world-wide operations.
There is at present no cooperation between the great number
of medium-sized banks of the country to maintain the source
of credit, no agreement in case of trouble. The result is that
when they should stand united, the effort for self-preservation makes their interests antagonistic.
The difficulty of the situation which at present confronts
us arises from the fact that the accumulation of our reserves
in the central reserve cities, more or less under individual
control, is caused by the regular and ordinary course of business, and the law under which the national banks hold their
reserve makes their concentration in this way not only possible
but legal. Under present conditions of competition for business it is unprofitable for the banks at central reserve points
to hold idle from one season to another even a small proportion of the loanable part of this vast amount of capital.
In this connection, it must be remembered that under the
statutory reserve requirement one-fourth must remain idle
in the form of lawful money. Banking to be continuous and
safe must be profitable, and the banker naturally seeks an
investment which brings a profit in interest
Foreign systems of banking provide for massing of reserves
with the central banks and the purchase of paper of international character based on products soon to be consumed,
which can be sold at all times and bring in gold against
which commercial credits can be extended to meet the requirements of banks, thereby creating a liquid money market.
We do not have such a liquid money market in this country,
the nearest approach being the loan made upon stock-exchange
securities. In ordinary times, such securities can be readily
converted into cash, and hence in times when money is easy,
usually in midsummer, such loans attract much of the surplus
reserve arising in reserve centers from commercial deposits.
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However, when depression occurs and large numbers of individuals seek to transform bank credits into cash at the same
time, loans made on stock-exchange securities can not be
collected because the securities cannot be sold. Then we have
a collapse of our reserve system and trouble comes.
If, now, a centralized agency were established, it would
represent the united cooperation of all the banks of the country; it would prevent the accumulation of the reserve money
of the country in the reserve cities; it would open a market for
the handling of the foreign bill of exchange; it would be an
agency through which the credits of the banks could be utilized
when emergency threatened, without awaiting its actual arrival, and the concentration of reserves, now a menace to business, would come to be regarded as a safeguard for the commercial interests of the country.
We must, then, have such concentration and mobilization
of reserves as will accrue with equal benefits to all the banks
of the country. Every banking system in the world demonstrates the necessity of concentration in some central place
where all may be served in an effective and scientific manner.
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MEMBERSHIP AND CONTROL OF THE PROPOSED
FEDERAL RESERVE BANK SYSTEM'
ALEXANDER D . NOYES
Financial Editor, New York Evening Post

T

HE resolutions at last week's bankers' convention at
Boston have directed attention to two special points
of controversy over the pending banking bill, and to
these I shall limit what little I have to say. They are the
creation of compulsory membership of banks in the new system, with compulsory subscription by such banks to the stock
of the regional reserve banks, and the question of membership in the national board of supervision. The first of these
questions, in my judgment, is of less vital consideration than
might at first glance be supposed. In principle the banks
have a strong argument against it, on the ground clearly set
forth by Mr. Hepburn this afternoon, that such compulsion
amounts to violation of their charter rights. But compulsion
in the matter is scarcely necessary to the government's plan.
A national bank, even as the bill now stands, may refuse to
participate and may surrender its national charter. If it be
said that this would leave the bank to deal with the problem
of its holdings of United States bonds, which would still be
left upon its hands, even so the situation would still differ
only in degree from the situation created by the Aldrich
plan in regard to banks which should elect not to participate
in subscription to the central institution provided by that
plan. The Aldrich plan did not make the subscription compulsory upon the bankers, but that plan restricted to banks
in the membership the advantages of the provisions whereby
bond holdings of such banks would be cared for through the
medium of the central reserve bank. Under the system proposed, it is plain that these bond holdings ought to be
1

Discussion at the meeting of the Academy of Political Science, October 14,1913.
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absolutely protected in one form or another, and it is perfectly
feasible that some such provision should be made by the government. It will probably have to be, however, a wide and
far-reaching provision. The condition of the bond market at
the present time is a matter of interest to the government in
other directions quite as immediately as through its concern
in the success of the new banking system.
As regards the second point of controversy, that of membership in the national board, there is this much to be observed:
both parties to the controversy want to accomplish the same
thing, namely, to concentrate reserves, to furnish a broad
field for rediscount, to relieve the extreme pressure on
the money market in the active seasons of the year and
deal promptly and effectively with financial crises, and
to provide facilities for a bank currency sound and universally acceptable, capable of expanding when expansion
of the medium of exchange is required by trade activity,
and of contracting when such trade requirements are at
an end. On the essential points of the banking plan there
is substantial agreement between the government and the
bankers, but each side particularly mistrusts one thing in the
general position of the other side, as we have plainly seen
through the discussion this afternoon. Each side expressly
mistrusts one consideration, one fact, in the position of the
other side. Congress looks with special disfavor on any
proposition which would seem to facilitate the use of the new
banking system and its control by any small body of powerful
banking interests, and the bankers mistrust any proposition
which would appear to facilitate the use of the system in the
interest of politics. The apprehension of each may be exaggerated, but the apprehensions of neither can be considered
groundless.
Now the plan of the House of Representatives unquestionably allays misgivings regarding possible selfish domination
by banking interests. The national board is to be made up
exclusively of political appointees, only one of them being
required by law to be a trained banker. There can be little
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ing domination: but in achieving this end, the question is certainly left open, whether the proposed arrangement may not
have gone to the other extreme and opened the door to possible political influences, to political domination. This under
certain circumstances might be equally michievous. The
episode of Jackson and the United States Bank is the classic
case cited to prove and explain the feeling of the general
public against banking domination by a central bank. Not
much attention is always given to the other side of that episode,
which illustrates equally well the opposite danger of political influence.
From a very high authority on the history of that period I
will read the following description of what happened after
the Jackson administration had assumed control of certain
disputed ground in the banking situation:
The pet banks, as they were promptly dubbed, to which the
deposits of the government had been transferred, were selected upon
party principles—were one and all Democratic banks in the South
and West, whose directors were of the President's party. * * *
This, that, or the other influence of interest or persuasion obtained
the patronage of the government for banks not at first favored with
a place on the list.
This extract, which is from the History of the American
People, by Woodrow Wilson, does not by any means prove that
the same condition is likely to occur to-day. Exactly the
same situation could not possibly recur under the bill as it
now stands, but there are certain possibilities in the longer
career of a system of this sort which it is only fair to keep
in view—notably the conceivable yielding by the central board
to political pressure from a certain section, rather than from
a given party. This danger still exists; to resist it the national
board will require the greatest expert wisdom in the exercise
of its large powers, especially in times of emergency. We
have felt the operation of this force, sometimes sectionally,
sometimes in moments of excitement; and it has exerted influence on everyone, especially in the last two decades.
How can this at least conceivable danger be best avoided
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in the bill now before the country, supposing it is to be submitted to amendment? Several suggestions have been made.
Some say, deprive the national board of the large powers
which the government confers upon it regarding rediscounts,
the fixing of bank rates and the suspension of reserve requirements for individual banks. A little reflection upon the bill
will convince us that the very nature of the system and the
existence of regional banks require the existence of some central power to be used in times of emergency in order to insure
the harmonious action of the system.
Another suggestion is to abandon the regional bank idea
and return to the Aldrich plan of one central institution. If
you will reflect a moment, it seems to me that you will reach,
as I have reached, the conclusion that this would solve nothing
at all, but would only increase the precise difficulty before us,
since the national board would then be the directorate of a
central bank, conducting and directing all the operations of
the system, a duty which now rests primarily in the hands of
the regional banks, of the members of whose boards the bankers select the majority. It is scarcely to be supposed that if
the powers of the national board were to be thus extended,
Congress would be any less strict in the selection of the board
(which would then be the directorate of the central bank) or
any more inclined to grant a controlling influence on that
board to the banking interests; for the board would then control the whole country and would itself conduct all the operations of the system, operations which are now under the law
to be made compulsory. With the power now largely in the
hands of the regional banks, where the bankers select the
majority of the boards, it seems to me that it would be a step
from the frying pan into the fire to adopt the proposed expedient.
Then there is the plan proposed in the Boston resolutions
of last week; a minority representation in the national board,
to be chosen by the regional banks. For this plan there is
undoubtedly much to say. It would insure competent discussion before any important action by the board was taken;
yet after all, a minority would be a minority, and it is ques(130)

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tionable whether the constant presence in the board of a
minority that only the turn of circumstances could convert
into a majority would be wholly happy in its results, and beyond this, it is yet to be seen how far Congress will be willing
to yield its general theory that the supervisory power at
large should be exercised wholly by the government.
There is one possible change of plan, with which I will close,
and which I think has not received the attention it deserves.
Provision is already made in the bill for an advisory council,
to be chosen by the regional banks and to consist of one member for each regional bank, which council shall have power to
offer advice or counsel to the national board at any time. Its
function is limited, as Mr. Sprague has explained to you. It
may call for information, may procure advice or information,
and yet no powers distinct or decisive are conferred upon this
council. The paragraph creating this advisory council
was stricken out in the Boston resolutions. I cannot help
thinking that this action was a mistake. The real problem
of the national board, in my opinion, is not so much the
composition and membership of the board as the absence of
proper restriction on the exercise of its large and sweeping
powers, powers the mistaken exercise of which at a time of
financial crisis might do unlimited harm. In this regard the
practise of the Imperial Bank of Germany is extremely interesting, especially in view of the fact that in Germany also
there is provided a directorate for the central bank made up
wholly of political appointees. There, too, is an advisory
council, known as the.Central Ausschuss, consisting of fifteen
members who are chosen by the shareholders of the central
bank. The fifteen regularly appoint a sub-committee of three,
which sub-committee meets each week with the president and
directors of the bank to discuss policies with regard to questions that may come up. The testimony of the vice-president
of the Reichsbank before the Aldrich committee stated that
in practise their advice is generally carefully considered and
taken. They have also certain direct veto powers. It appears to me that the development of an advisory council along
these lines, where we have already a model before us, or at
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any rate a distinct suggestion in the practise of the Bank of
Germany, might solve what promises to be in other respects
a deadlock between the bankers and the government. Effectively carried out, it would transform this central supervisory
council, possessing merely the right of casual inquiry or suggestion, into a body whose voice must necessarily be heard
before any general action of the executive board is taken.
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THE ECONOMISTS A N D THE OWEN-GLASS BILL'
EDWIN R. A. SELIGMAN
McVickar Professor of Political Economy and Finance, Columbia University

I

N E E D not emphasize the fact that this meeting is one of
uncommon significance, inasmuch as it brings to the front
the fact of the fruitful union of practise and theory.
We have before us in the audience to-day not only representatives of those specially interested,—the bankers themselves
—but also, in addition to the general public, the thinkers or
the theorists who have made a specialty of this topic. If we
look at the situation as it existed in similar critical times
abroad, we shall find that the best legislation on this question,
as well as on many others, has been achieved by this combination of the practical man and the theorist. When the celebrated Peel's Bank Act was passed in England, it was primarily the thinkers of the day who, in combination with the
great bankers, succeeded in persuading the government that
the welfare of the public would be best served by the adoption
of their theory. When, after the Franco-Prussian War the
German system was reorganized, and the Reichsbank was
initiated, it was again the thinkers, the professors, the publicists, who outlined the scheme in conjunction with the great
business interests of Germany, and it was their recommendation which prevailed in the formulation of the new law. So
again in France, when, as you remember, there had been for
years a heated discussion on the very points about which we
are talking to-day,—it was there again the university professors who acted in unison with the great bankers and influenced the government to wise action. In every one of these
cases what was done has been permanent. It came to stay.
Why? Because there was no mistake in principle; because
1
Introductory address as presiding officer at the meeting of the Academy of Political Science, October 15, 1913.
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the theory as it was elaborated by the thinkers and tested by
the practical men proved to be a sound theory. That is why
Germany, France and England have been a generation ahead
of us, and why they are to-day far in advance of us. Therefore we welcome this meeting to-day because it brings—
perhaps I would not say for the first time—but, at all events,
in a significant way to the front, this combination of sound
theory and of practise which must unite in order to achieve
anything permanent.
I am sure that we all recognize the skill, the assiduity and
the patriotism with which the framers of this bill have been
working in Congress and doing their utmost to bring about
a bill which should meet these two requirements — which
should be in harmony with sound theory, and should at the
same time recognize the well-considered interests—not the
private, but the public interests of the bankers. At the same
time we cannot refrain from expressing a word of regret that
in this country alone among all the great countries of the world
which have attempted to solve this problem, the question
should be approached not from the point of view of the interests of the whole country, but rather from that of the interests of a political party. It makes no difference whether we
have the one party or the other party, but what we have not
been able to accomplish has been to rise above party, as England did, as Germany did, as France did, and to come together
on a theory which would appeal to everyone in the interests of
the whole country.
That leads me to call attention to a remark in one of the
papers or addresses that you heard yesterday, which I am
bound to say was, I think, unfortunate. It was there stated
by one of the distinguished leaders in our legislative halls
that the real opposition to this bill came from the bankers because their profits were threatened. That seems to me to be
both an ungenerous and an inaccurate statement. I for one
do not believe it is true. I believe that the heads of our
banks, large as well as small, are not actuated simply by their
own self-interest and the thought of profit. More and more
the big men of this country are realizing that they occupy
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positions of trusteeship, and I should be very sorry to believe
that the gentlemen among whom I number acquaintances and
friends should be so lacking in patriotism and in public spirit
as to base their criticisms upon the narrow ground of their
own immediate interests.
This brings me to the last thought which I venture to express to-day. Ably as the preparation has been made, admirable as are many of the provisions of this bill, excellent as has
been the cooperation of the various committees with the men
best competent to judge, and welcome as is the acceptance of
some of the teachings of science on this subject—granting all
that, I still must voice in the name of the Academy of Political
Science and in the name of the guild of scientists and economists, whom, I think, in this respect I have the right to represent—I must voice my very pronounced disappointment that
in some of the fundamental features of this bill there has been
no attempt made to follow the teachings of sound theory. In
England, Germany and France there was not a single departure in any fundamental point from the teachings of sound
theory; but in this bill what do we find ? Passing over a number of minor points which this would not be the place to discuss, because of lack of time, I shall simply call attention to
the fundamental fact that the proposition of twelve regional
reserve banks flies in the face of all sound theory. I venture to
assert without fear of contradiction that if the economists and
the thinkers of this country were called together in conclave
to-day, there would scarcely be a dissenting voice on this
point, and there would certainly be an overwhelming majority
to the effect that this proposition—the fundamental proposition, in most respects, of the bill—is incorrect, and if persisted
in will make the whole measure either a failure, or, at all
events, very largely impotent to bring about the results
which we all desire. To go into the details is not my function
to-day. But it is proper to voice this sentiment, that the
sound opinion of the expert theorist in this country is in this
respect in harmony with the expressed opinion of the bankers,
and that if you accuse the bankers of opposition because of
a threatened loss of profits, you cannot accuse the professors
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or the theorists of any such shortcoming. It is indeed true
that we heard only the other day that the professors or thinkers are the minions of capital and represent the capitalists.
That is an old tale, an accusation to which we have been accustomed for many a year from the socialists. But, on the
other hand, we are in the fortunate position of being attacked
equally from the other side, and of being declared by many a
narrow-minded practical man to be socialists and to represent
only the one side, that of labor. I think, therefore, that we
have nothing to fear in this respect of partisanship and when
we say, as we do, that this bill sins in a glaring way against
some of the fundamental tenets of economic science and of
experience, we have a right to hope that in this country also,
as in England, in Germany, and in France, the warning will
not go unheeded.
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DISCUSSION OF THE FEDERAL RESERVE
BANK PLAN
MR. N. JOHANNSEN:

According to the bill now pending the national banks will be
compelled to make large payments to the federal banks, amounting
to 461 millions, whereas they have only 133 millions to spare, and
no possibility of obtaining the deficiency of 328 millions except by
borrowing it from the federal banks by rediscounting commercial
paper. The loss of interest caused thereby may seem to be a single
expense and evidently is being considered so by all concerned; but as
a matter of fact this expense will constantly repeat itself, involving
an annual loss of 13 millions to the national banks, figuring the
discount at 4%.
On June 4 the national banks held deposits amounting to 7124
millions, and against this a legal reserve of 1420 millions, consisting of 877 millions in cash and 543 millions in the shape of deposits
with reserve banks. According to the new bill the legal reserve
required will be reduced from 1420 to 1065 millions; but this latter
amount must be kept all in cash (either in the banks' own vaults, or
in the vaults of the new federal banks), whereas they have only the
above amount of 877 millions to spare for reserve purposes, making a shortage of 188 millions. To this must be added 35 millions,
consisting of cash in the redemption fund, which the banks will not
be allowed to figure as cash assets any longer (though really consisting of cash); also 105 millions which they are required to contribute as capital fund to the federal banks—making a total deficiency of 328 millions.
This is not 328 millions of mere capital—which the banks might
arrange for by means of their credit facilities—it is 328 millions
actual cash. Can they draw this amount out of the country's
money supply? No; this money supply is all absorbed, partly in the
circulation, partly as reserve in the financial institutions.
How is it proposed that the banks shall raise the money to
pay their assessments to the federal banks? By rediscounting commercial paper with the latter! The federal banks, instead of first
providing a cash basis on which to start the issuing of credits, are
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to issue their credits on the basis of credits—the old fundamental
error of the Aldrich bill.
If the national banks could keep those 328 millions of commercial
paper in their own possession they would, as the paper gradually
matures, obtain the funds for making further loans to their customers
and keep up the business; but if they want to continue in business,
they must borrow the money they need from the federal bank by
rediscounts and must keep on doing so right along, to the extent
of 328 millions, to recover the money they now have. This constant
rediscounting, to that large amount, will entail a steadily recurring
loss to the national banks, in the shape of interest, of about 13
millions per annum.
MR. GEORGE B. MORLEY :

As a country banker, I should like to ask according to what precedent it is proposed to allow the government to issue the notes instead of the banks? Is there any large civilized country to-day,
with a Congress such as the United States has, where the government
issues the notes instead of the banks? If the banks should issue the
notes under government control, would not that mobilize the currency
of the country and adapt it to the wants of the people?
MR. VINCENT:

I should like to ask Mr. Noyes a question. What would be the
effect upon the assets of the national banks if they decided not to
go into the federal reserve banks? They would have to close their
doors as national banks and retire their circulation. I should really
like to know how much it would cost a bank to go out of the business.
MR. NOYES:

The answer to that question depends upon two points. First, if
the bank elects to sell its bonds, how rapidly can it sell them? Next,
what is the market price for the bonds?
MR. VINCENT:

We will assume that a bank wanted to dispose of all of its
bonds at one time and go out of business as a national bank.
MR. NOYES:

The cost to it would depend upon how many other banks might
desire to go out of business at the same moment, which would of
course have a considerable effect on the market.
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MR. VINCENT:

If many of them wanted to go out, it would cause a fall in the
price of the bonds?
MR. NOYES:

Yes, of course.
A VOICE :

That is the club which the government holds over the banks to
drive them into the federal banks. The banks have the bonds, and
have paid their money for them. They cannot dispose of those
bonds except at a loss, and naturally they do not want to suffer that
loss. So the government virtually says to them, " You go in or you
lose your monev."
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THE REDISCOUNT FUNCTIONS OF THE
REGIONAL BANKS'
FRANK A. VANDERL1P
President, National City Bank

W

E heard Chairman Owen say yesterday that among
other things it will be the function of the twelve regional banks proposed to be established by the bill
which bears his name to loan to member banks, through rediscounting for them. Not sometimes, but always and under all
circumstances, we are told, the member banks will be able
to rediscount at the federal reserve bank. That is a very
alluring proposition to a banker. A banker who can look
into the future and know with absolute certainty that under
any circumstances, he can rediscount commercial paper in his
portfolio will have removed from his life a good deal
of fear. If this measure will do that, do it continually, persistently, it is a marvel that any banker is opposed to it, because the advantage accruing would certainly be very great.
Let us see what it means. It means that commercial paper
will become the most liquid asset in the bank's portfolio. According to the practise of American banks, a loan once made to
a commercial borrower must remain in a bank's portfolio until
the loan matures. The exception to that is in the case of
country banks which may rediscount to a limited extent with
their city correspondents; but the large banks cannot rediscount. Not only is there no place for them to go, but it would
be considered an exhibition of weakness. Hence a loan made
to a commercial borrower by a large bank is a complete absorption of that portion of the bank's loanable funds until the
maturity of the loan. If banks in the future, under this
measure, can always borrow, then the type of commercial
1

Address at the meeting of the Academy of Political Science, October 15, 1913.
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paper that the bill permits as collateral for such loans becomes
the most liquid asset that the bank could have.
Another result will however come from this. At the
present time, as I have said, a loan must be held until
maturity. One of the great needs of this country is a
discount market, a market in which we can buy and sell commercial paper that has been endorsed by banks, so that the
credit of the original maker is not taken much into consideration. We need to create a situation so that banks will buy
and sell commercial paper in that market; so that they may
buy one day and perhaps sell another day soon after, as we
now make call loans one day and possibly call them the next
day if our position changes. The existence of a discount market of that character would, I believe, be of the utmost importance to commerce as well as to the banks of the country.
It is impossible to have such a discount market here without a
central bank fully qualified to meet the responsibility that a
central bank should bear; that is to say, in the last resort to
rediscount commercial paper. We are willing to invest
our funds in commercial paper under that condition. If we
know that when we need partially to liquidate our portfolio,
and the market will not repurchase commercial paper, we can
go to the central bank and have that paper rediscounted, we
can then afford to buy it. It is the ability to go ultimately to
the central bank for discounts that will create the discount
market.
The advantage of a discount market will be that we
shall no longer have to keep a great amount of funds
in call loans based on stock-exchange collateral. With a
minimum reserve fixed by law, all banks naturally run
pretty close to that minimum. This means that they must
have some part of their loanable funds in a form in
which they can readily convert them into cash; that is what
we call the line of secondary reserve. To-day we are
forced to carry this line of secondary reserve in loans upon
stock-exchange collateral, because that is the only type of loan
which is immediately convertible into cash. That type of loan
is all right in ordinary times, because it is immediately conver(141)

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tible into cash. It is however exactly the opposite of the ideal
bank loan in that it has no self-liquidating quality. The only
way the loan can be paid is by shifting it, either directly or
through the sale of the collateral. There is no self-liquidating
quality about it, and while it is satisfactory in ordinary times,
it is full of the gravest danger at a time when it becomes
impossible to shift it. If we rediscount commercial paper
in the way Senator Owen has outlined, we shall no
longer feel under the necessity of carrying large amounts of
stock loans; there would be liberated for commercial uses
here in New York several hundred millions of dollars. Money
now devoted to stock loans belongs to the loanable funds of
both New York and out-of-town banks, for many out-oftown banks come into our call-loan market, their loans reaching two or three hundred millions.
A discount market will at times attract foreign capital, because it will create paper of a form suitable for the use of
foreign banks. At present there is practically no loaning of
foreign capital on American commercial paper.
That it is very desirable to create a central bank or banks
that will have the power always to loan to member banks, is
obvious. If this measure will accomplish it, it will bring
lower commercial rates for the whole business community of
the United States. It will accomplish a leveling process;
rates will go up somewhat in the cities and down in the country
districts; that is to say, there will no longer be the funds
devoted to the very low rate stock-exchange loans that we
now have, and those funds, going into commercial borrowing,
will tend to lower the general level of the commercial rate.
It will become easier to transfer funds from one community
where there is an overflow of loanable funds to another where
there is strain. All these results would be accomplished, not
because banks would continuously go to these central banks
and borrow money, but because they would have a place
to which they could go as a last resort. They would not
want to go there normally; they would not expect to borrow
money at a low rate from the central banks and re-loan it at
a higher rate; but the ability, in the last resort, to go there,
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would give a liquid character to commercial loans, and that
liquid character would bring the improvements that I have
outlined.
So much for the theory. Does the bill meet the specifications? Are the principles that must be involved in legislation
to accomplish this thing in regard to rediscounts, embodied
in this bill? I do not believe they are. You have already
heard something in regard to the twelve regional banks. I
think no clear-minded student of this subject can possibly
arrive at any other conclusion than that you must have in
effect a single central reservoir. You may have twelve regional banks that are so piped together with a force pump,
as Senator Owen said yesterday, that in effect they become a
central reservoir. But that is the thing we must have—a
single central reservoir, whether we get it through twelve or
four piped together, or whether Congress does what the best
minds there must know they ought to do, were it not for a
party platform, and give us a single central bank.
There are other defects in this bill which I want to refer
to only in the briefest way, because my attention is to be directed simply to the rediscount portion of the measure; there
are however other defects in the bill which would prevent the
banks from being able to meet their full responsibility for
rediscounts. I think perhaps the most important of these other
defects is the character of the note issue, to say nothing of the
absolute unwisdom of having these notes issued by the government and of involving the credit of the government unnecessarily. I do not believe that the note issue as planned will,
for a good many years at least, give an elastic quality to our
currency. We have to-day ample currency for normal times.
The creation of a new note issue of elastic quality will not give
elasticity to the total volume of our currency, unless we retire
a sufficient amount of the existing volume to give play to the
elasticity of the new issue. I believe that at least half of the
present bond-secured national bank notes should be retired if
we are to give by this new note issue a truly elastic character
to the whole body of currency, and an elastic note issue is an
essential if the central bank is properly to discharge its rediscount responsibilities.
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I doubt the wisdom of the present plan of forming the
Federal Reserve Board. Powers are given to that board which
are obnoxious. The particularly obnoxious part, the power
that nearly all bankers object to, is, I believe, an absolutely necessary one, if we are to persist in the error of having more than one federal reserve bank. Bankers object to
the power given the Federal Reserve Board to compel one
federal reserve bank to loan to another. Here is a body of
men having no financial relation to the capital of the bank,
who have the power to compel one bank to make a loan to
another bank. That is obnoxious; it is against all our ideas of
a proper safeguarding of credit; but it is absolutely essential if
we are to have in effect one reserve reservoir. If you have
twelve regional banks you must bring about this one reservoir
by piping these banks together, and to do that you must give
to the Federal Reserve Board power to compel loans.
Whether or not banks will accept a plan which puts this
power, both obnoxious and necessary, into the hands of such a
political board, remains to be seen. It cannot be a success
without the cooperation of the banks. Not only must enough
banks go into the system so as not to destroy the present
national system, and give a sufficient membership to lend character and standing to the new scheme, but they must go into
it with some fair idea that it will be a success, not with
the temper of mind that will lead them to run at the very
first indication of anything going wrong with the system.
It would take me too long to go into the details of my
various objections to the bill, and I do not want to give you
an idea that I object to it in toto. As a matter of fact, I
am extremely favorable to about eighty per cent of it. I
believe it is of the utmost importance to the country—more
important to borrowers and laborers than to bankers—to have
some correct legislation. I think the principles have been
pretty well understood by the framers of this bill. I think
in the main they have followed them, but not followed them
to a conclusion. They have recognized the need of a central
reserve reservoir and have given us twelve reservoirs with a
forced joining together. They have recognized the desir(M4)

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ability of a bank-note issue and have given us a federal note
issue to be loaned to the banks.
I think the bill can be
amended so that it will accomplish the thing that Senator
Owen said a central bank ought to accomplish,—the creation
of a bank or banks that can always discount for the
member banks. As the measure stands this will not be accomplished.
It provides that ninety-day paper, created in commercial
operations, shall be the basis of this rediscount. This I believe
is a correct provision. Under certain favorable conditions of
the reserve held by the federal reserve bank, one hundred
and twenty day paper may be rediscounted, and permission is
given to rediscount one hundred and twenty day paper up to
fifty per cent of the paper so rediscounted. This percentage
is too high. Not over twenty-five per cent, at most, of the
paper in a bank's portfolio should be one hundred and twenty
day paper.
The exclusion of stock-exchange loans from rediscount is
an absolutely correct principle. If bankers were selfish, if
they were looking at this thing from the point of view of
profit rather than from the standpoint of correct economic principles, they would not say that; but I believe bankers almost
universally recognize that it is only loans of the self-liquidating character that may properly go into the portfolio.
There is embodied in the bill a clearing-house scheme which
I believe can be made of enormous importance. It is the
cause of objection on the part of some country bankers.
I think possibly the charge that this objection is made
for fear of a loss of profit is justifiable.
On the whole,
however, I believe this national clearing-house scheme is workable. It will entail great detailed responsibility upon the
federal reserve banks, but it can be worked and it will be a
great economy to commerce and to the country at large.
The provision for acceptances seems to me wise, but it should
be extended to domestic transactions as well as those transactions connected with the importation or exportation of goods.
I can only repeat in conclusion my belief in the incalculable
value to all the people of this country of sound legislation
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accomplishing what is sought to be accomplished by this
measure. The measure is not framed to-day to accomplish it.
It will need a great deal of alteration so that there will be a
fair chance that it will accomplish it, and I am hopeful that
the necessary alteration will be made.
DISCUSSION or MR. VANDERLIP'S ADDRESS
MR. JOHN A. PERRIN:

There are obvious difficulties in carrying out the suggestion which
you make of the retirement of half the national bank circulation.
Would not some measure of elasticity arise by reason of the absorption of the gold in circulation through the current transactions
of the individual banks with the federal reserve bank,—a stream
of money running into the bank carrying some gold and a stream
out of the bank never carrying gold, except in negligible instances?
This would result in a considerable retirement of the gold certificates
that are now serving the uses of paper money. Would there not
in that way be created a void into which the new notes would be
injected, and would they not be issued in volume sufficient to permit
of possibly as much elasticity as through the retirement of half the
national bank circulation ?
MR. VANDERLIP:

I do not believe so. Of course there would be a tendency for
gold to flow into the federal reserve bank, and for bank notes to
flow out. But remember that we have now a total volume of currency absolutely ample for every ordinary need we have. There is
nothing on which legislation will have so little influence as on the
volume of currency in the pockets of the people. The people
determine that. That currency ought to be a bank-note currency,
almost wholly or wholly. The gold ought to be in the reserve,
and the amount in the pockets of the people, which is a variable
amount, but which is not varied by legislation, ought to be varied
by the redemption of bank notes and the issue of hank notes as the
need of the people for pocket money increases or decreases. You
have suggested a great difficulty in retiring half the national bank
notes. Instead of there being great difficulty, I believe that such
a change offers a great opportunity to give to these federal reserve
banks a security almost essential to their successful operation.
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MR. PERRIN:

The difficulty is in getting legislation to bring that about.
MR. VANDERLIP:

The legislation should be embodied right in this bill, and I am
very hopeful that it will be. I had the honor of presenting a bill
to the committee last week which, briefly, was this: that federal
reserve banks should purchase from national banks one-half of the
two-per-cent bonds now in circulation; that they should exchange
these for new three-per-cent one-year notes of the government,
agreeing to renew these notes at maturity each year for twenty
years. When these two-per-cent bonds were purchased, two hundred millions cr thereabouts in amount, that volume of national
bank notes would be retired; it would be replaced by the new
federal reserve treasury notes which the federal reserve banks would
issue, having as the basis for these notes at first the new one-year
treasury notes, and ultimately putting paper in place of the treasury
notes, thus leaving the treasury notes free in their portfolio. A one
and one-half per cent tax would be levied on these notes, which
tax might have a lien prior even to the dividend right of the
stockholders. That tax would reimburse the government for the
loss of the one-half per cent on the tax of the present national
bank notes and the one-per-cent increase in rate upon two-per-cent
one-year notes. This would accomplish, first, the retirement of a
sufficient volume of national bank notes to leave room for true
elasticity; but, of quite as much importance, it would accomplish
this—it would put into the hands of the federal reserve banks a
bankable paper of the highest type; that is, a government note of
short maturity, which would be available in any market of the
world, which they could use in our domestic markets by selling to
check expansion, thus drawing in to themselves the reserve from
outside banks, and which would be an ideal thing to use for bringing
in gold, or checking an export movement, thus controlling the exchange situation. I believe there is an opportunity to do these essential things in this one act.
MR. PERRIN :

May I ask one other question? The paper is obviously only as
good as its character makes it. To make paper eligible for rediscount does not necessarily make it liquid paper. Very much of
the paper—practically all of the paper in the banks at the present
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time throughout the country generally—is accommodation paper.
Is it possible, if the privilege of a domestic acceptance were accepted and included in the bill, that the type of bank acceptances,
or acceptances upon large insurance policies could be brought into
existence in any considerable volume so that it might form a reasonable percentage of the paper in the portfolio of banks generally?
MR. VANDERLIP:

Your statement that nearly all the paper in the banks to-day is
accommodation paper you hardly mean, I suppose. In answer to
your question, I think there is a strong probability that the banker
in the course of his business would become accustomed to this new
privilege of acceptances and that we should do a business similar
to the business done in England in acceptances.
PROFESSOR SPRAGUE :

The backers of the idea of many regional banks are constantly
referring to the fact that there are a number of central banks in
different countries in Europe, and for the sake of record I should
like to have Mr. Vanderlip explain the nature of the difference
between a number of regional banks in this country and a number
of central banks in the different countries of Europe, chiefly with
reference to the practicability of this proposal for the United States.
MR. VANDERLIP:

Professor Sprague's familiarity with European conditions is so
much greater than mine that I hesitate to answer that question.
We have a homogeneous population. Banking conditions are affected by the same influences the country over. European countries
are far more distinct in their financial relations than are different
portions of the United States. I have no doubt that a single
European bank would be an advantage over seven. That a number,
one to each country, is workable, means that political boundaries are
in a measure the boundaries of business; they are not altogether,
but they are very much so, which would not be the case with us.
MR. W. C. FORD:

You tell us that only as a last resort is rediscounting necessary.
You also tell us that the big banks have no means of rediscounting.
Did not the clearing house rediscount seventy-five millions of commercial paper here in 1907? Why is not that inevitable?
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MR. VANDERLIP:

The exercise of that power is inevitable under present conditions.
We certainly ought to provide by law that we shall never have to
use that power.
MR. STEIN :

In your judgment, how will the dividends of the national banks
be affected by the proposed law?
MR. VANDERLIP:

That is a question that embraces the entire range of the subject.
I might hazard a guess; I believe it would be safer not to do so.
In reply to a question concerning the effect of the bill on
bank deposits,
MR. VANDERLIP:

Just a word on this general subject. The National City Bank
has some seventy millions of country bank deposits. I estimate,
as I said to the committee in Washington, a loss of fifty millions
of such deposits. Fifty millions would mean the loss of all the cash
we have in the vaults. What are we going to do? In the first
place, a reduction of fifty millions in our deposits will reduce our
reserve requirements proportionally. Second, the new law drops
our reserve requirement from twnty-five to eighteen per cent. We
should still be obliged either to reduce loans or to rediscount at the
central bank. I believe there will be very considerable strain felt
on the three central reserve cities in the first sixty days. I believe,
however, that it will not be so great but that they can stand it.
After that period, of course, the measure provides for great expansion, possibly too great.
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THE NOTE-ISSUE PROVISIONS OF THE
OWEN-GLASS BILL'
JOSEPH FRENCH JOHNSON
Dean of the School oi Commerce, Accounts and Finance, New York University

O

N the 28th of September, 1840, Daniel Webster came
to New York city and made a speech " On the Currency " before " The Merchants Meeting" in Wall
Street. When I first read his address, I was impressed not
only by its wisdom and intimate knowledge of the subject, but
also by the fact that much of what he said would be pertinent
and appropriate if it were delivered to-day. Here, for instance, are his words with regard to banking control, which
would apply to the conditions of 1913 just as they did to those
of 1840:

In discounting notes in its own bills, a bank adds to the circulation
of the country. In the absence of all government control and
supervision, the wisdom and discretion regulating the amount of
money afloat at any time is but the aggregate wisdom and discretion
of all the banks collectively considered, each individual bank acting
from the prompting of its own interests without concert with others,
and not from any sense of public duty. In my judgment such a
regulator, or such a mode of regulating the currency and deciding
what should be the amount of money in the community, is unsafe
and untrustworthy, and is one to which we can never look to guard
us against those excessive expansions and contractions which have
been the source of such injurious consequences.
Webster believed in a central bank and in its control by the
government, and some of you, I am sure, will agree with me
that Webster was right. None of us have had the opportunity
to watch the operations of such a bank, yet many of us are
convinced that the Second Bank of the United States, which
was a mighty regulator of the currency, would have endured
1

Read at the meeting of the Academy of Political Science, October 15, 1913.
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to the present day if from the beginning it had been under
government control. That the coinage of money—the most
important commodity in the world, used by every citizen in
his daily affairs—should not be left to competition, but should
be the exclusive privilege of the government, has long been
conceded. It follows logically, therefore, that any issue of
bank credit in the form of bank notes, since these are universally accepted by the people as the equivalent of money, should,
like the coinage of money, be performed either by a government institution or under conditions over which the government has absolute control.
I am in sympathy, therefore, with the underlying intent of
the Owen-Glass bill, namely, that bank notes in this country
shall be supported by government credit, just as bank notes
are in Germany, France and many other countries; and for
six months I have been hoping that the framers of this bill
would finally draft a workable measure to accomplish this
purpose. To-day, with great reluctance, I must state my conviction that they have failed. The Owen-Glass bill creates
an entirely new kind of banking machine. Nothing like it has
ever been tested by this or any other country. In many of
its details it resembles established banking institutions, but in
its essentials, in its anatomy so to speak, it resembles no bank
with which the world has had experience. If by mandate of
Congress it were put into operation, I believe that within two
or three years it would bring this country into a period of
credit expansion that would terminate in panic and the utter
collapse of our banking system.
The reasons which have led me to this pessimistic verdict,
so far as they relate to the issue of notes, may be grouped
under three heads: First, the bill will lead to a confusion of
money with bank credits. Second, it provides for an incompetent and inadequate control. Third, there will be fatal
division of responsibility.
I assume that you are familiar with the framework of the
Owen-Glass bill, and with the conditions under which notes
are to be issued. They are the obligation of the United States;
receivable for all public dues; redeemable at all the regional
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banks and at the United States treasury, in which a five-percent gold redemption fund must be maintained; protected by
a gold and lawful-money reserve of thirty-three and one-third
per cent; taxed at the discretion of the central board at the
rate of at least one-half of one per cent per annum; protected
by a deposit of short-time commercial paper. The notes must
bear a distinctive letter and serial number, showing through
which federal bank they were issued, and no federal reserve
bank under a penalty of ten per cent shall pay out the notes
of any other bank, it being expected that such notes will be
sent home or to Washington for redemption. All these things
are details that have no effect whatever upon my argument.
To avoid cacophonous repetition of the words " federal reserve banks," I shall speak of the federal reserve banks as
the regional or sectional banks.
Although it is exceedingly difficult to foresee what will
happen under hypothetical conditions, we must nevertheless
make the attempt. I shall first discuss the conditions under
which the sectional banks would issue notes and acquire a
mass of commercial paper. A new issue of notes, it seems to
me, may be at the instance either of a member bank or of the
sectional bank itself, for a member bank may wish to obtain
more currency through the discounting of some of its shorttime paper, or the sectional bank itself may wish to increase
its supply of notes in order to be able to meet the demands
of its depositors drawing upon their balances. Thus it will
prevent the reduction of its gold and lawful-money reserve.
Second, a sectional bank will obtain its supply of commercial
paper from member banks as the result of two separate circumstances : first, because the discounting bank wishes a larger
supply of currency; or second, because the discounting bank
wishes to increase its reserve balance with the sectional bank.
Either operation, it should be noted, unless the sectional
bank already has on hand a sufficient supply of federal reserve
notes, will result in the increase of its required reserve by onethird the amount of the paper discounted.
Let us see how the system will operate. Every bank will
pay out federal reserve notes, if it has any, in preference to
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paying out lawful money, whether over the counter or through
the clearing house; for thus it will protect its reserve of
gold and lawful money. For the same reason every bank
will add to its reserve all the gold certificates and other lawful money which come to it over the counter or through the
clearing house. Only in this way can the sectional banks increase their power to rediscount or to issue more notes. The
inevitable result will be that lawful money will be drawn out
of circulation into bank reserves, its place in the circulation
being taken by the federal reserve bank notes—a twentiethcentury illustration of Gresham's law.
This result will lead to inflation in one of two ways. First,
the banks will lend more freely in their respective districts,
causing local or regional inflation; or second, the banks will
send idle money to New York to be loaned in Wall Street, thus
stimulating speculative prices.
In either case, the foreign exchanges will be adversely affected, and gold will be exported. The gold exporting houses
—which are now located in New York city and will continue
to be located there, for that city will be the greatest foreign
exchange market—will obtain gold for export, not from those
regional banks whose issues have been excessive, but by the
presentation of federal reserve notes, or greenbacks, or gold
certificates, or all three, at the federal reserve bank in New
York city or at the national treasury in Washington. In
other words, the banks that have been guilty of over-expansion
and overissue will not pay the penalty, or be held responsible.
On the contrary, since the inflation will almost certainly cause
speculative excitement in the market for securities, we may
confidently predict that all the mischief will be blamed on Wall
Street and its bankers. This bill will certainly not put a coat
of white paint on Wall Street.
Inasmuch as there is now in circulation, in use as pocket
and till money, at least $500,000,000 of lawful paper money
in denominations ranging from ten dollars to one hundred
dollars, it is quite conceivable that the federal reserve banks
may get into permanent circulation an amount of notes equal
to this sum, and at the same time increase their reserves and
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the reserves of member banks by an equal amount. Thus we
have to face a possible, if not probable, credit expansion of
some $2,000,000,000 and that would be enough to drive all
our gold out of the country.
The friends of the bill apparently believe that an overissue
of notes is impossible provided the security is short-time commercial paper. They argue that the notes will not remain
long in circulation, because they must be retired upon the
maturity of the paper deposited as security. This is evidently
a mistaken view. The bill itself provides for the easy substitution of other securities in the place of those originally
deposited, and such provision is absolutely necessary; for
otherwise the expansion and contraction of the medium of
exchange would be subject to arbitrary circumstances having
no connection whatever with the need for currency.
If this country, like Canada or France, had no other form
of paper money in circulation than bank notes, and if adequate
facilities for daily redemption were provided, it would then be
quite true that bank notes issued against commercial paper
would expand and contract in response to the needs of business.
Let us next examine the forces which must be depended
upon to counteract inflation. I find but one, namely, the
Federal Reserve Board—seven men in Washington who are
not bankers. How are they going to know whether or not inflation is anywhere in process? They are not bankers, and
are not in the banking business. They take no deposits, they
make no loans. They do not even redeem the notes the issue
of which they authorize. They are not in daily contact with
business men. They know nothing at first-hand about the
needs of business. They are not able to judge when an apparently prosperous industry is verging on the precipice of
over-production, or to distinguish between the red blood of
health in trade and the hectic flush and excitement which
forebode collapse. Indeed, if the bill permitted the President
to put on the board the seven best bankers in the country,
I doubt if they would dare assume the responsibility, for their
own experience would convince them that they could not at
long distance wisely regulate the operations of twelve big,
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competing banks in different sections of this great country,
each section supremely confident in its own resources and
clamorous for all possible aid from the national institution.
The board, to be sure, has the power to examine into the
affairs of the federal reserve banks, and is required to obtain
and publish once a week a statement of their separate and
combined assets and liabilities. Unhappily, wise bank management cannot be predicated upon statistics. A bank president must be in daily touch with his subordinates, and must
aid them with his judgment when they are in doubt. The
bank statement is a mere bookkeeping record of what has been
done, and contains not the slightest hint as to the real character or significance of the transactions recorded.
It is evident that the central board must rely on the information it gets from the federal reserve agent. This officer,
it seems to me, is the most important one provided for in the
whole system. He is the man who must pass on applications
for the issue of notes, and he must judge the quality of the
paper offered as security. But this man will know nothing
about conditions prevailing in other sections or districts, or
about the imperative needs of other sectional banks. Naturally he will be most impressed by the dominant sentiment
of his own environment, and will be inclined to do his utmost
for the people with whom he is in daily contact. Yet he is the
man upon whom the central board must rely for information.
How can they learn from him when a regional bank is overissuing ? They will not see the results or feel them; neither
will the federal reserve agent nor the managers of the offending regional bank. Finance has wireless avenues of transmission and communication. Fire and earthquake in San Francisco may cause the rate of interest to rise in Shanghai. If an
embarrassing demand for gold for export arises, how will the
central board know which regional banks are responsible for
the inflation ? Will they not in their despair of understanding
the situation, but knowing that inflation exists somewhere, order an advance of the rate of discount in all sectional banks,
and so cause undeserved contraction and distress in many
quarters ?
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We cannot get a clear idea of the way in which the new
system would probably work unless we consider just how this
central board and the federal reserve notes would be regarded
in different sections of the country. We know that in some
quarters there is always an unsatisfied demand for capital.
Many country bankers feel that they could lend safely much
more money than is deposited with them. In prosperous times
there is sharp competition between sections to get possession
of idle funds in the East. The great difficulty has been the
lack of avenues for credit transmission. This has been due
to the local character of our banks and to the prohibition of
branch banking. No matter what the commercial needs of the
West and South, no matter how good the local credit of merchants, nor how sound their paper, eastern banks have been
and still are unable to be of much service to the West and
South. One of the strongest arguments for the establishment of these federal reserve banks is undoubtedly found in
the expectation that they will be able through the rediscounting process to bring about a more equal distribution of
the loanable funds of commercial bankers.
But we must not forget that the sectional sentiment in this
country is exceedingly strong. We are all proud of being
citizens of the United States, yet the average American takes
greatest pride in the section where he has his home, his friends
and his business interests. Cities and sections are advertising
their advantages and their prospects in order to attract both
population and capital. This is all friendly competition, but
it is none the less real competition.
The Owen-Glass bill sets up in each of these sections a
practically autonomous banking institution, managed by citizens of the section and having the power to get money from
Washington in exchange for the indorsed promissory notes
of local merchants. Financially speaking, this bill incorporates the different sections of this country. To the people and
to the bankers of these sections, the central board at Washington will loom up brightly as a golden pyramid. It seems to
me inevitable that the local boards of the regional banks will
be under constant and tremendous pressure to obtain all the
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" money " possible from Washington; and the members of each
board, being themselves citizens of the section, will be inclined to share in the general optimism. So the chances are
that the central board will receive urgent applications for the
issue of notes in excessive quantities, and, as I have already
pointed out, they will not be in a position clearly to determine
when the issues pass beyond the limits of prudence. Such
excessive issues, since they will become a permanent part of
the circulation, displacing various forms of lawful money,
will not have the natural effect of reducing bank reserves.
On the contrary, bank reserves will be increased, and the
country will have every appearance of unbounded prosperity,
as is always the case on the eve of panic.
It is morally certain that from several of the twelve districts
there will come a steady and insistent demand for more
" advances." The hunger for money will spring eternal in
the regional stomach, and to the people of the United States
the federal reserve board will seem to be an inexhaustible
well of real money, in duty bound to " gush " whenever the
right kind of collateral security is presented.
I am well aware that the advocates of this bill maintain that
it contains all the excellent features of the great banking systems of other countries. I cannot in a few minutes point out the
weakness of this contention, but I beg you to compare the control for which this bill makes provision with that which now
exists in the banking systems of Canada, France and Germany.
Canada, for example, has twenty-seven banks, of which twelve
are exceedingly strong; but no one of these banks is sectional
in character. Each is national—its operations extending over
the entire dominion. The managing officers of a Canadian
bank pay immediately the penalty for any error of judgment.
If they overissue or overlend, the unerring dial of the clearing house gives them instantaneous warning. As a result,
they practise infinite caution, for they know the perils in their
path. All the men at the helm have had lifelong experience
in the delicate, intricate and difficult business of banking.
In Germany and France, where the central banks are under
government control, the same conditions prevail. The policies
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of the two great banks of those countries are directed by men
who have had training as bankers, and who feel that they must
at all hazards protect the national credit and keep their institutions safe from disaster. In all countries where banking
is centralized the mighty stimulus of self-interest is enlisted
for the preservation of banking credit, and the bank managers have plenary powers of control and regulation. They
are in the closest possible touch with the details of management, and humanly speaking, are in the best possible position
to check inflation and over-expansion.
What, then, is the fundamental defect of the Owen-Glass
bill, the removal of which will make it a safe and workable
measure? If I have clearly expressed myself, I believe you
will agree with me as to the truth of the following proposition.
A safe and elastic bank currency is impossible in a country in
which lawful paper money is in circulation, of the same denominations as the bank notes, unless the issuing institution
is responsible for the redemption of both the lawful paper
money and the bank notes.
If you grant the truth of that proposition, then you must
admit that some single institution must be created which shall
be required to redeem on demand not only its own bank notes,
but also all other forms of paper money including gold and
silver certificates. That being true, it follows necessarily that
this institution must be controlled absolutely by the government of the United States, for it must take over into its vaults
all the gold now held by the government in its various redemption funds. The Owen-Glass bill would add one more
kind of paper money to our kaleidoscopic media of exchange;
whereas, the establishment of the institution which I believe
the situation calls for would put all forms of credit money on
an equal footing, would make them all the liabilities of a
bank controlled by the government, and would eventually
give us only one kind of paper money, namely, the notes of
the great and unbreakable Bank of the United States.
In conclusion, let me quote from a man who solved financial
problems with a surer touch than even Daniel Webster. In
1790 Alexander Hamilton, then only thirty-three years old,
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submitted an immortal document to the Congress of the United
States, in which he recommended the creation of a national
bank. Realizing that self-interest had been throughout the
ages the mainspring of human progress, he wrote as follows:
The keen, steady, and as it were, magnetic sense of their own interests as proprietors, in the directors of a bank—pointing invariably
to its true pole, the prosperity of the institution,—is the only security that can always be relied upon for a careful and prudent administration. It is, therefore, the only basis on which an enlightened,
unqualified, and permanent confidence can be expected to be erected
and maintained.
Hamilton's thought was fundamentally sound, but he erred
in its practical realization, for he planned a government bank,
and then left its control in the hands of private citizens. Experience has taught us what we now need, namely, a national
bank in which private citizens shall have a moneyed interest,
and in the operation of which they shall have some voice,
while over its conduct the government shall be dominant.
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THE BANK-NOTE ISSUE OF THE PROPOSED
FEDERAL RESERVE B A N K S '
E. W. KEMMERER
Professor of Economics and Finance, Princeton University

T

HE chief criteria by which we judge the success of a
bank-note system may be expressed in three questions: ( i ) Are the notes well secured? (2) Are
they promptly convertible into standard money at convenient
places? (3) Does their circulation readily expand and contract with the needs of trade? Let us subject the note-issue
provisions of the Glass-Owen bill to this threefold test of
ultimate security, prompt convertibility, and elasticity.
I
The security behind this bank-note issue will consist of the
following items: (1) An amount of notes and bills of exchange, with short maturities, arising out of commercial
transactions, which shall be equal to the amount of bank notes
issued; these commercial assets to be segregated, in the custody
of an official of the bank appointed by the Federal Reserve
Board, for the protection of the bank-notes.2 The segregated
notes and bills must all represent commercial transactions of a
type approved by the Federal Reserve Board, and must bear
in addition to the names of the men or concerns who issue
and endorse them, the name of at least one member bank.
(2) Additional security without limit which may be required
at any time by the Federal Reserve Board to protect the notes.
(3) A segregated lawful-money reserve fund of not less than
ZVA%(4) A first and paramount lien on all the assets of
the issuing bank. (5) Acceptability for all taxes, customs,
and other public dues. (6) What amounts to an absolute
guaranty by the United States government.
1

Read at the meeting of the Academy of Political Science, Octolier 15, 1913.

'Sees. 17 and 14.
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It is to be remembered that in addition to all this security,
the amount of the issue is subjected to the two limitations
that notes can be issued only when applied for by the boards
of directors of regional banks, and that such applications
must in every case receive the approval of the Federal Reserve Board. There would seem to be, therefore, absolutely
no question of the safety of the notes. They will be even
more secure than the present bond-secured national bank notes
—and the safety of these no one questions.
The chief criticism of this feature of the bill relates to the
government's responsibility for the ultimate redemption of
the notes, a corollary of which is that the notes should be
issued to the regional banks by an official or body representing
the government It is urged that this provision of the bill
has a strong smack of greenbackism, that it is unscientific and
sets a precedent in the direction of the issue of government
paper money. Critics argue that the government's guaranty
is useless, the notes being adequately protected without it,
and that in time of great national danger the government's
responsibility for the note issue might greatly impair its
credit. Obviously it is self-contradictory to argue, first, that
the government's guaranty is of no value in protecting the
notes since they are fully protected without it, and second,
that such a guaranty would be dangerous to the national welfare in time of war because it would impair the credit of the
government. Assuredly the government's guaranty could not
impair its credit unless it supported the credit of the bank.
In normal times the government's guaranty would undoubtedly
add little or nothing to the public's confidence in the notes,
and per contra would make no draft upon the government's
credit. But it is not for normal times that the government's
guaranty is asked. It is for times of great emergency, when
the stability of the note issue is threatened, and when we are
in danger of being forced to a depreciated currency basis.
Then, and then only, is the government's credit liable to be
called upon. In such an emergency, it is difficult to imagine
any purpose more important for the exercise of the government's credit than to keep the country upon a specie-paying
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basis. Have we forgotten how the depreciation of the greenbacks demoralized business, played fast and loose with the
equities between debtor and creditor, impaired the nation's
credit, and increased by hundreds of millions of dollars the
cost of the civil war? In times of great emergency the
government can afford to increase many fold its tax burden,
and to borrow money at exorbitant rates of interest. It cannot afford, except as the price of national existence itself,
to let its circulating medium become debased.
But suppose the provision making the government ultimately responsible for the bank notes be stricken from the bill.
Will the government thereby be freed from the responsibility?
A lawyer, with his eye on the letter of the law, might say yes.
A statesman or a social philosopher would unhesitatingly say
no. When the government gives to a politically appointed
body like the Federal Reserve Board great power, it assumes, through that board, great responsibility. If the
notes depreciate or even threaten to depreciate, that fact
will be proof that the Federal Reserve Board has failed
to exercise properly and effectively its great regulating
and conserving powers. The government would be morally
responsible for the integrity of the note issue even without any legal responsibility, and the public would hold
it so. The force of this responsibility is made more evident
when we remember that these notes are receivable for all
taxes, customs and other public dues; that they will presumably be held as legal reserve money by non-member banks,
and that the banks issuing them are the sole depositories of
government funds and the fiscal agents of the government
With or without the guaranty the government's credit is at
stake. Why is it so dangerous to admit it frankly and to make
the obligation legal as well as moral ?
This government responsibility is not a new thing: our
present national bank notes are issued by the government to
the banks and the government assumes an unlimited liability
for their payment. Have these facts led to an overissue of
the notes or impaired the government's credit?
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II
Does the bill provide adequately for prompt convertibility
of the notes into standard money at convenient places?
The places at which the notes are redeemable call for no
criticism on the ground of public convenience. These places
are: (1) The Treasury Department at Washington, where
the Federal Reserve Board is authorized to require the issuing
banks, as at present, to keep a five-per-cent gold redemption
fund in the United States treasury, and (2) the offices of all
the regional banks, which presumably include all the branches.
Much has been said in criticism of the bill for not making
the notes redeemable specifically in gold, instead of in lawful
money. In this respect, the bill follows the present practise
as regards national bank notes, and it will be recalled that
the Aldrich plan likewise called for redemption in lawful
money. In my judgment, the bill would be strengthened if
both notes and deposits were made payable in gold. The
fact that deposits in regional banks count as reserves of member banks, while bank notes of regional banks cannot be
counted as reserve money by member banks, makes it especially
desirable that the deposits as well as the notes be made redeemable in gold.
In support of the claim that the notes should be redeemable
in lawful money, it may be plausibly argued that all of our
present lawful money (»'. e., lawful reserve money for national
banks) except the silver (and the minor coins) is specifically
redeemable in gold on demand at the United States treasury,
and that the Secretary of the Treasury is under a legal obligation to maintain the parity of all kinds of money with
gold; furthermore, that the proportion of our total lawful
money and of the total money in the country of all kinds, consisting of gold, has been very rapidly increasing in recent
years. In 1900, 49% of the lawful money in the country was
gold. By 1913, the percentage of gold had risen to 63%.
While the gold lawful money of the country has increased
108% since 1900, the other lawful money has increased but
16%. From such figures it may be argued that greenbacks and
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culating media, and that, as a consequence, the problems they
formerly raised are solving themselves.
This argument carries much weight. But in its application
to the question as to whether the obligations of the regional
banks should be made specifically payable in gold or not, it
contains one doubtful assumption. It is the assumption that
after the enactment of the new bill, the same large proportion
of gold will be continued. One of the great merits of the
proposed legislation is that it will render more efficient our
monetary and banking mechanism. Great economies in the
use of money and credit will be effected. Our reserve money
will be more efficient because better mobilized. There will
be important economies in exchange transactions between different sections of the country and much less money will be
kept in transit Many millions of dollars now hoarded in the
sub-treasury vaults will be released for active circulation.
Provisions for greater currency and credit elasticity will relieve us of the necessity of keeping much idle money in slack
periods of the year in order to be prepared for the demands
of the active seasons like the crop-moving period. And
finally, outside of the bank reserves of member banks, the new
federal reserve notes will perform every money function now
performed by gold certificates, a fact that will almost certainly
result in the substitution in general circulation, on a considerable scale, of federal reserve notes for gold certificates—that
is, a paper money with a minimum lawful-money reserve of
33j4% f° r o n e with a minimum gold reserve of 100%. A
regional bank can withdraw gold certificates from circulation,
thereby making a vacuum in the paper-money circulation,
for federal reserve notes, can present these certificates to the
treasury for gold, and use the gold as a 33/4% reserve against
the federal reserve notes issued to fill the vacuum created by
the withdrawal of the gold certificates. The result will be
great and valuable economy in the use of gold and other
money, leading to an outflow of that money which has become
relatively redundant. Inasmuch as gold is the only money
which has a world market, the outflow of redundant money will
be in the form of gold. Of course, this will represent a real
social economy. We shall have a less expensive but equally
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safe and more efficient money and credit system. The released gold will bring back to us approximately its equivalent
value in goods. But an incidental result will be that a larger
proportion of our currency will be non-gold money and a
smaller proportion gold. An effective method of preventing
this transformation from going too far would be to require
the legal minimum reserves of the regional banks to be held
in gold. This demand, together with the demand for gold
for the cash reserves of member banks, would assure an adequate gold basis for our circulation.
Another defect in the bill is the small minimum reserve
requirement for regional banks, namely, 33j3%. This is an
absolute minimum for notes, but merely a normal minimum
for deposits, and the reserve against deposits may be reduced
below zzyi% upon payment of a tax on the deficiency. This
minimum reserve requirement is too small, both for notes and
for deposits. The reserves of the regional banks will be chiefly
reserves against bankers' deposits, which deposits are themselves reserves. Upon the reserves of the regional banks as a
foundation, therefore, will rest a very substantial part of the
current bank credit of the country. If a minimum legal reserve requirement is to be made at all—and conditions in the
United States seem to demand it—that requirement should be
large enough to inspire confidence.
There is no legal minimum reserve requirement for the
Bank of England or the Bank of France, but the former
normally keeps from 45 to 55% against its deposits, and at the
present time has approximately 60%, while the latter normally keeps from 70 to 80% against both notes and deposits.
For the Reichsbank, there is a minimum reserve requirement
against notes of lzYi%, but the Reichsbank normally keeps
more than twice this minimum legal reserve against notes
and from 50 to 60% against all demand liabilities. Doubtless most of the regional banks would normally maintain reserves well above the legal requirement, but the tradition
among bankers in this country is to run close to the lawful minimum reserve, and it is not unreasonable to expect that some of the regional banks might be disposed
to follow this tradition. It is easier to reduce a legal
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reserve requirement than to raise it, and it would be well at
the beginning to avoid fixing it too low. Perhaps the 50%
reserve proposed in the National Monetary Commission's
plan is too high, but it is believed that it would be unwise to
make the normal minimum less than 40% for both notes and
deposits.
This increase to 40% is made the more urgent since the bill,
by recent amendments, has made such substantial reductions
in the total reserves required of national banks and in the
requirements for cash on hand.
From the standpoint of reserves, both deposits and notes
should be treated alike, each being a demand liability of the
regional bank, and I can see no need of segregating the reserve against notes or of treating it otherwise than that against
deposits. The peculiar interests of the noteholders are amply
protected in other ways, namely, by the segregated commercial-paper assets, the prior lien and the government liability.
Ill
The third criterion by which to judge a note issue is that
of elasticity. Will the proposed federal reserve notes
promptly expand and contract according to the needs of trade,
as do the notes of the Canadian chartered banks, or will they
prove rigid and unresponsive to trade demands, like our present bond-secured notes?
The facts that these notes are issuable only against rediscounted commercial paper with short maturities, that they
cannot be counted as reserve money of member banks, and that
when the notes of any regional banks are received at the head
office or branches of any of the other eleven banks or at the
United States treasury, they cannot be paid out again, but
must be returned to the issuing bank, alone will provide an
adequate elasticity. Under such regulations, notes can be
kept in circulation only when trade conditions demand them,
and their continual return to the issuing bank will prevent a
redundant circulation.
I can see no justification for the provision of the bill l
•Sec. 13, page 3*, 11, 14 to 17.
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requiring the Federal Reserve Board to fix a " rate of interest " of not less than J/£ % upon the federal reserve notes turned
over to regional banks. Such a tax—it is in reality a tax
and not an interest rate as the bill terms it—would add nothing to the effectiveness of the mechanism already mentioned
for preventing a redundancy of note circulation. If the burden of this tax should fall directly upon the regional banks,
it would probably come largely out of the government's share
of the profits. If it should be shifted to the ultimate borrower, through higher rediscount rates on the part of the
regional banks and resulting higher discount rates on the part
of the member banks, it would fall upon those borrowers who
took the proceeds of their loans in deposits, as well as upon
those who took them in notes, and would be a needless burden
on commerce. The borrowing bank has its choice as to the
form of credit, deposit or bank notes, in which it will take the
proceeds of its rediscounts. On both forms, the rate of discount is the same. A deposit credit and a note credit with a
regional bank are interchangeable on demand; the notes may
be deposited, or the deposits may be checked against for
notes. Inasmuch as the deposit can be counted as lawful reserve money by member banks and therefore serve as the basis
of further credit expansion, while the note credit cannot, the
danger of an over-expansion of credit is more likely to be in
the form of deposit credit than of note credit. Furthermore,
to strike out this tax provision would result in eliminating a
possibily dangerous arbitrary power in the hands of the
Federal Reserve Board.
The best method of putting on pressure to check an overexpansion of credit is to apply a graduated tax to reserve deficiencies, measured against both notes and deposits. This
brings the pressure to bear upon both forms of credit expansion, and applies it at the crucial point, namely, the reserve. The rate of such a tax should be specifically fixed in
the law, so that the regional banks, the member banks and
the public can foresee its application and adjust their affairs
to it in advance. In any such institution as the one proposed,
a certain amount of arbitrary power must be given to the
governing body. The presumption, however, is always in
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favor of devices that work automatically. They function more
smoothly, and since it is possible to anticipate their workings,
they will be less liable to produce sudden shocks. In the
world of finance, there is no truer adage than the old one,
" Forewarned is forearmed." I would suggest that the deficiency reserve tax be fixed at, say, l}4% for each
2j4% or fraction thereof that the reserve falls below 40%,
until the reserve reaches 30%, and then that the tax be
doubled. But there should be no absolute stone-wall limit
beyond which the reserve could not be reduced, providing
the tax were paid.
With the adoption of these minor changes, I should expect
the Glass-Owen bill to provide a bank-note circulation that
would meet well the three great tests of a good bank-note—
ultimate security, prompt convertibility, and elasticity.
In this paper I have confined myself to these three fundamental features of the note issue. The question of what shall
be done with the present two-per-cent bonds is an important
one, and one now urgently demanding from the administration
prompt assurances of a fair answer. It does not fall properly
within the scope of this paper, but I cannot leave the subject
without saying that in the interest of the future credit of our
government, and much more in the interest of that sense of
generous honesty and fair play which we all like to attribute
to the nation we honor, the government should make ample
provision to assure the holders of the two per cents, for whatever purpose they were bought, of receiving full par value for
their bonds. I believe firmly that national banks should be
compelled to come into the new system. If they wish to enjoy
a national charter and the privileges such a charter confers
they must expect to play the game according to the national
rules. They are given a year to decide. If they do not wish
to avail themselves of the privileges and to assume the obligations which the government requires in the public interest for
banks under federal charters, they should retire from the national system. It would be petty and wrong, however, for
the government to enforce such a compulsion by a financial
penalty that involves the repudiation of a clearly implied moral
obligation. I cannot believe for a moment that the government will adopt such a course.
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THE COUNTRY BANKS AND THE OWEN-GLASS
BILL1
EDWARD L. HOWE
Princeton Bank, Princeton, N. J.

T

HE purpose of my remarks is to indicate the probable
effect of the pending Owen-Glass currency bill on the
country banks, and the attitude of those banks to that
measure should it become a law as it now stands.
The Owen-Glass bill is an improvement on our present law,
as it creates a note issue based on commercial needs and contemplates the gradual retirement of our present bond-secured
notes, which by their character and limitations have been and
are so largely responsible for our financial ills. The experience of both this and other countries points conclusively to
the fact that the issue of notes is not a government function but
a bank function. Bank notes, when issued under proper
safeguard, have never been a cause of loss to the holder. On
the other hand, more money, it can safely be said, has been
lost by the holders of government notes than by holders of
any otl\er single investment that the world has ever known.
The fact that the government of the United States has never
defaulted on any of its obligations does not alter the fact that
in principle the issue of circulating notes by a government is
wrong. It is only necessary to look back to the time of the
civil war to realize the immense loss incurred by holders of
government notes when compelled to convert them into gold.
The notes should be the notes of the regional reserve banks
issued under the closest government supervision and control.
The country banker remembers that in 1907 when his depositors became alarmed over financial conditions and demanded their deposits, they wanted cash. When he in turn
attempted to get the cash from his reserve bank, it came hard
'Read at the meeting of the Academy of Political Science, October 15, 1913.
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and sometimes not at all. He also knows that the reserve
bank was perfectly sound and would have been glad to send
him currency to meet his needs, but that this was not possible,
as there was no process of law which enabled either the reserve
bank or the country bank to exchange its good assets for a
circulating medium with which to satisfy the demands of
frightened depositors. The country requires two things, elasticity of currency and credit and mobilization of reserves.
The purpose of the latter is to prevent individual demands
from weakening the situation. This it proposes to do through
the creation of a common fund, which by its strength would
in itself insure confidence. The elasticity of currency and
credit means that the depositor can have something which will
be accepted as money without question, while the banker can
expand his credits without encroaching on his reserves. The
vital thing is that the volume of notes provided under the
Owen-Glass bill shall automatically expand and contract to
meet the requirements of trade. Whether this will be the case
is a subject for serious doubt. Many believe, and I agree with
them, that the expansion provided for in this bill may be entirely used up in an inflation of credit, so that when the pressure comes the new system will break down just as the present
system has done in the past.
Moreover, the Owen-Glass bill, instead of resting content
with the provision of elasticity and mobilization, would revolutionize our national banking system. This is neither necessary nor desirable from the standpoint of either the bank or
its customers. Whether avowed or not, the effect of the
Owen-Glass bill will be to destroy the existing relations between the reserve bank and the country bank.
The reserve carried with the reserve bank is gradually to be
reduced and after three years all reserves must be carried in
cash or in the federal reserve banks. This will result in
severing the relations which have grown up between the bankers in the small towns and cities of the country and the banks
of large cities. The attempt to dislodge the large amount of
money now on deposit in the reserve cities is not necessary
in order to reform our banking system and will not be effective
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even under this bill. The moment that the connection of mutual benefit between the country banks and the reserve banks
is broken, the latter will have the desire and will be in a position to compete with the former for the cream of their business.
Every advantage except location and the personal
equation will be in favor of the larger institutions. Some of
the large city banks may take out state charters and withdraw
from the national system. For example, under the law of
New York, branches are permitted with certain restrictions
as to locality. The Corn Exchange Bank of New York demonstrates the possibilities of this system. If this law were
broadened it is easily seen how the business of the state could
soon be handled by a few large institutions with hundreds of
branches all over the state. Most of the branches would result from the enforced absorption of the present national and
state banks. There is no reason why the same transformation
should not occur throughout the country. The effect of this
would be, first, and perhaps most important from the standpoint of the country banker, a radical change in his business,
and at best a modification of his present independence; second,
and more vital to the country as a whole, the creation of two
systems, one under state control, managed by bankers, the
other under federal control and subject to the danger of
political influence in its management. Not only would these
two systems have few bonds of common interest but they would
be intensely competitive. Would this not, instead of unifying
and strengthening the banking situation, interject a new element of division and weakness?
The proposal of the government to revoke the charters of
those banks unwilling to comply with the requirements of the
new law would amount to confiscation unless opportunity
were given banks withdrawing from the national system to
be relieved at par of the government bonds which they own.
The banks now hold $700,000,000 of these bonds on which
the interest rate is 2%, a rate due not to the value of the
bonds as an investment but to the circulation privilege attached thereto. There should be no compulsion to join the
new banking system. The banks should be left free to act
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IV

as their best business judgment dictates and not be coerced
by the danger of financial loss into an unwilling acceptance
of a position of which they do not approve. The conditions
involved in membership under the Owen-Glass bill should be
such as to commend themselves to every banker in the country.
Then even if there are grounds to expect a slight decrease in
earnings under the proposed system, enough bankers would
join to make it an immediate success. With such a system
once in operation it is hard to believe that every banker in
the United States would not seek membership.
The bill provides that the federal reserve banks act as
clearing houses and accept at par checks drawn on their country depositors. This puts the burden on the country bank
and is all to the advantage of the banks in large cities. It
has been referred to as an attempt to run water uphill. A
check is an order on a bank in a definite place to pay money
at that place and there always will be some expense in transmitting to some other place the money which the check represents. The burden, if any, should be on the collector. If the
holder of a check is unwilling to pay the expense of collection
he should demand payment of his bill in funds current in his
own place of business.
As to the clause requiring the segregation of savings deposits, the result would in many instances be a curtailment
of the local usefulness of the banks. Funds in so-called savings accounts are now very largely used for commercial purposes, and any attempt on the part of the government to require the investment of these funds in a restricted class of
securities would divert this money from its present safe use
in building up the community in which it originates. There
would be the added danger that too large a proportion of
these funds would be invested in real-estate mortgages, not a
liquid asset.
The doctors have diagnosed our trouble as a bad circulation,
but to relieve the patient they propose to perform an operation
on the heart, severing the mutually beneficial relations which
have grown up between bankers all over the country, rather
than stimulate a proper flow of blood by a healthy exercise of
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i73

the different functions of the body economic. Not only that,
but should the patient recover, further minor operations are
contemplated. As an officer of a state institution, a country
bank which will be free to accept or reject the new system
on its merits, I have endeavored to show some of the defects
of the bill and have referred but little to its many merits.
With but a few amendments, the Owen-Glass bill can be
made a measure which will give to this country a safe and
sound banking system.
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THE BUSINESS MAN AND THE NOTE-ISSUE PROVISIONS OF THE FEDERAL RESERVE ACT'
IRVING T. BUSH
President, Bush Termin*l Company

T

HE Owen-Glass currency bill has so many excellent
features that I believe comment upon it should be
limited to constructive suggestions, with a view to so
improving the bill as to make its passage possible and desirable. The laws under which our present banking and currency machinery is operated are workable only in fair financial weather, and the present bill is so nearly acceptable that
destructive criticism which will prevent any legislation seems
most unwise. My remarks are limited to the note-issuing
provisions of the proposed bill.
Conservative bankers object to the method of note issue
prescribed in the bill, on the ground that the credit of the
government should be kept entirely free from the danger of
becoming involved in the banking transactions of the country.
They claim that as the notes are to be secured by the assets of
the regional bank to which they are issued, and also by the
specific pledge of high-class short-term commercial paper and a
reserve of 33j^% of lawful money, they are secured absolutely
beyond any peradventure, and the placing of the credit of the
government behind them is unnecessary, and does no possible
good. They admit that the danger to the government under
normal conditions is insignificant, but argue that should international complications arise the fact that government guarantee is placed behind a large volume of notes may seriously
interfere with its credit and ability to sell bonds.
Those in favor of the method suggested in the Owen-Glass
bill contend that the federal reserve notes, while perfectly
secured by the collateral pledge and the assets of the regional
'Discussion at the meeting of the Academy of Political Science, October 15,1913.
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THE BUSINESS MAN

*75

banks, will command much more ready acceptance in all parts
of the world, if the guarantee of the government is behind
them, and claim that the guarantee can be given without involving the government in the slightest risk.
Much harm has been done by the extreme statements made
by some of those who are radically opposed to all features of
the bill, and who claim that the federal reserve notes are
strictly a government issue, and will be merely the forerunner
of an unlimited government issue of treasury notes. There is
nothing to justify these statements, but many citizens who have
given only casual attention to currency and banking legislation have received an unfortunate impression from them.
It is unfortunate that compromise is ever necessary, in treating great subjects of this character, but in a country three
thousand miles across, and containing a population of nearly
one hundred million people, it is frequently impossible to
crystallize public sentiment into ideal legislation. In the
present instance, the note-issuing provisions of the OwenGlass bill are undoubtedly a compromise, but if a compromise
be necessary, the one arrived at in this case reflects credit
upon the authors of the bill, for it preserves the best features
of both the conservative and the radical school of financial
thought, without the introduction of absolutely unsound
methods.
It is true that the proposed notes will be issued by the government, but this function of issue is not different from the
method used in our present bank notes, and consists chiefly of
a central engraving and printing establishment under government control. The notes cannot be forced into circulation by
the government, and can be issued only at the request of the
regional banks, a majority of whose directors are selected by
the local banks of the country. The notes are secured by the
pledge of commercial paper, and by a reserve of 33j^% of
lawful money. From the standpoint of the method which
brings them into circulation, and of the security behind them,
they are not government notes, but bank notes. It is inconceivable that the security upon which their issue is based should
prove inadequate, and there is considerable force to the argu<i75)

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SECOND CURRENCY CONFERENCE
ment that if there is to be established so large a number of
regional banks as is proposed, the final guarantee of the government will create in foreign countries a confidence in the
notes which might not otherwise exist.
What should be the attitude of the business man to this
question? I am told that there are rated by Dun and Bradstreet agencies 1,700,000 business men and approximately
25,000 banks. The final burden of a defective banking or
currency system is really borne by the business men of the
country. Surely they should have something to say upon
this subject, and surely their views should carry some weight.
The Owen-Glass bill in its note-issue features is' undoubtedly a compromise, but I believe that the business community
should recognize the almost insurmountable difficulties which
Mr. Glass and Senator Owen have been compelled to overcome, difficulties which few can realize who have not been
brought into direct contact with them. There is so much
that is good in the bill that criticism should be confined to
constructive suggestions as to how the bill can be made as acceptable as possible. Mr. Vanderlip has said to-day, from his
standpoint as a banker, that at least 80% of the bill is good.
The tearing to pices of the bill and leaving nothing in its
place seems to me most unwise. Business men should make
only such suggestions as will be helpful in creating a better
bill. For myself I am free to say that the note-issue function
is satisfactory, and I am not at all sure, although I have been
brought up in the school which believes that notes should be
issued only by banks—I am not at all sure that the method
which the framers of this bill have found, in putting the real
responsibility for the redemption of the notes upon the banks,
but in the eyes of the world placing the guarantee of the government behind them, is better than the method of note issue
by the banks alone.
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CRITICISMS OF THE NOTE-ISSUE PROVISIONS OF
THE OWEN-GLASS BILL*
A. PIATT ANDREW
Former Assistant Secretary of the Treasury

T

HE real trouble with the House banking bill in my
opinion is that its framers have not been content to
try and remedy the crucial defects in our banking
system, but have tried also to remedy conditions that have no
essential relation to that system. Among these conditions for
which they seem to imagine that our banking arrangements
are responsible and for which they have endeavored to provide
a remedy is the lack of sufficient capital from which they
think that the world is suffering.
The committee in their report inform us that " legislation
was never more urgently demanded than it is today " " which
will furnish loans upon an inexpensive (sic) but absolutely
safe basis." The framers of the bill accordingly have not
merely sought means of preventing the collapse of credit and
means for making currency and credit available in emergencies and during limited periods of stress. One can detect
all through the bill an effort to make currency and credit
" more available " and " less expensive " all the time.
The bill provides for a vast extension of credit both
in the form of ledger balances and in the form of notes,
and it provides no effective mechanism to secure subsequent
contraction. It therefore does not insure real elasticity. As
regards the extension of credit in the form of deposits or
ledger balances, the bill offers to reduce the required cash
reserve of the New York city banks from 25 to 9%, or in
other words from approximately $300,000,000 to about $100,000,000. It would reduce the required cash reserve of Chicago
and St. Louis by the same percentage, or by about $100,• Discussion at the meeting of the Academy of Political Science, October 15,

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[VOL. IV

000,000. It would reduce the cash requirements of the national banks of the country as a whole by about $380,000,000
(I base these figures upon the comptroller's report for June
14, 1912.) If this cash, along with the $200,000,000 or so
of government funds, were turned into the reservoir of the
federal reserve banks, as the bill contemplates, these reserve
banks in their turn could extend their credit threefold, as they
are to be required to hold in cash only a normal reserve of
iiVi% against their deposit liabilities. In other words, according to the terms of the bill, such a situation would allow
an expansion of credit by the reserve banks to the individual
banks of over $1,100,000,000.
I believe that such additional reserves of lending power
ought not to be put at the disposal of the banks in normal
times, but ought rather to be kept available as means of relief
in periods of disturbance. I believe therefore that the reserve ordinarily to be held by the reserve banks ought to be
far higher than 33^5% but that of course a provision should
be included which would make possible the use of any and all
reserves in periods of stress. This could easily be accomplished by means of a tax upon the deficiency in the reserves
below the normal minimum proportioned either to the amount
of the deficiency or to its duration.
Again, no restrictions are specified in the bill as to the
powers of a member bank to rediscount its commercial paper
with a reserve bank save in the character and maturity of
this paper. The character of the paper is loosely described
as including not only all notes and bills the proceeds of which
have been used for agricultural, industrial or commercial purposes, but also all bills and notes which " may be " so used.
There are few bills and notes which conceivably " may " not
be so used, and as Secretary McAdoo has recently shown, the
majority of the paper held by national banks complies with
the maturity requirements of the bill. While the banks ought
to be enabled to rediscount practically without limit in times
of crisis, in order to prevent immediate and permanent inflation there ought to be some provision which would limit
the amount of rediscounts under ordinary conditions.
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179

But above all, the note-issue provisions of the bill are
inflationary. The government is to be allowed to issue its
notes without any other limit than the provision that they
shall not exceed three times the amount of lawful money held
by the federal reserve banks, and it is not clear from -the
law that a reserve bank may not count as reserve for this
purpose the same 3 3 ^ % of lawful money which according
to another section of the bill it must hold against its own
demand liabilities. In any case this provision allows the
issue of additional government notes to the extent of hundreds
of millions of dollars and against these notes the government
is not only not required, but it is not allowed, to hold any
reserve whatever beyond a 5% gold fund which the bill authorizes the Federal Reserve Board at its option to require
the reserve banks to provide. As the Treasury is obliged to
deposit all of its general funds and revenues in the reserve
banks it is legally estopped from holding more than this 5%
reserve for the redemption of these notes. No other gold reserve is required to be held even by the reserve banks, for although they must ordinarily hold " lawful money" to the
extent of 33j^% of the notes deposited with them, the lawful money may consist of silver or greenbacks. In other
words, the reserve to be held by the federal reserve banks to
redeem the new government notes may consist entirely of
other government notes.
Some of the members of the committee have argued that inflation is sufficiently guarded against in the bill by the provision in section 17, incorporated during the discussion in
the House, that no reserve bank shall pay out notes issued
through another reserve bank. They assume that this provision will prevent any more than a temporary addition to the
currency through the new government notes, but as such notes
issued through one reserve bank may not find their way to another reserve bank for years, and even when received by another reserve bank are to be returned at once to the reserve
bank through which they were originally issued, and so may
be immediately reissued, and as the tax to which they are
subject may amount to no more than J^ % per annum, there is
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[VOL. IV

no reason to expect that contraction will follow any expansion
of these notes. There is nothing to prevent their repeated
reissue and their continuance in circulation to the extent of
hundreds of millions if only the bank through which they are
issued retains lawful money to one-third of their amount, and
an equal quantity of commercial paper.
Some of the committee also seem inclined to the view that
if inflation does tend to result from this new issue of government notes it will be offset by the retirement of national bank
notes. But there is no assurance that these notes will be
retired before the expiration of twenty years, and furthermore
under the terms of section 4 the reserve banks are given power
" to perform all those acts and to enjoy all those privileges "
conferred upon national banks by section 5136 of the Revised
Statutes, which privileges include "obtaining, issuing and
circulating notes " according to the provisions of the national
bank act. The federal reserve banks are apparently thus authorized not merely to act as agencies for the issue of the government federal reserve notes, but also to purchase government bonds and to issue their own notes in the same manner
as national banks. If the adoption of the bill were to result
as many predict, in important withdrawals from the national
banking system and the sale at much lowered prices of the
government twos, one may anticipate that many of the released bonds would be purchased by the reserve banks and
that notes would be issued by them to take the place of the
notes relinquished by the national banks.
The House committee therefore propose to make a real and
permanent addition to our already redundant money supply
of hundreds of millions of government paper money with provision for only a 5% reserve of gold, which moreover is to be
held only at the option of the federal reserve board.
One of the most important functions of government is to
create and maintain the monetary standard, the measure of
value by which all of the exchanges and payments and obligations of the country are settled, and the monetary history
of this and every other country testifies to the dangers to
which this standard is subjected by the issue of government
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l8l

paper money. No foreign government has ever undertaken to
issue notes without at some time overissuing them and so
degrading the standard of value, and the leading governments have therefore long since abandoned the issue of fiat
money. The experience of this country with such money from
earliest colonial days abundantly points the same lesson. It
is unnecessary, however, to hark back to the lamentable experiences of colonial and revolutionary times. From the date
of our last issue of government notes fifty years ago almost
to the present day the outstanding government paper money
has been a source of unsettlement to business and at repeated
intervals even within the recollection of men not yet old
these notes have menaced the very solvency of the treasury.
Generation after generation of sound-currency advocates have
sought to get rid of them, and the effort to do so has subsided within the last decade only because with the lapse of
fifty years since their issue the amount of the remaining
greenbacks has become relatively unimportant. No lesson of
our history is plainer than that the government ought not to
jeopardize its own credit and the people's standard of value by
the issue of note obligations that are not covered dollar for
dollar by gold. With the disgraceful and costly history of
greenback and silver legislation so freshly in mind it would
indeed be folly to begin again the issue of government credit
notes at the present day. To attempt it with only a $% gold
reserve in the treasury such as the House bill proposes but
does not even require, would be an unbelievable folly.
It is doubtful whether in any other civilized country to-day,
including Central America and the Balkans, so nondescript
and precarious a note currency could be found—an issue of
government notes which it is expected will amount to several
hundred millions of dollars against which absolutely no reserve of gold is required to be held, and against which the
issuing and responsible government is by law not allowed under any circumstances to hold a reserve of any kind of more
than 5%.
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[VOL. IV

DISCUSSION OF THE ELASTICITY OF CREDIT
MR. EDWARD D. PAGE:

Mr. Bush has stated the great interest that is being taken in this
question. It is, as he has stated, a very serious matter. I have
approached from a little different angle the question of whether these
notes should be the obligations of the government. For seven
years I conducted business under the very distressing conditions that
prevailed after the panic of 1873, and as a merchant I saw the distress and agony that resulted from the issue of government paper.
The dangers of government currency were well indicated by
Pelatiah Webster a century and a quarter ago:
" We have suffered more from this than from any other cause or
calamity. It has killed more men, perverted and corrupted the
choicest interests of our country more, and has done more injustices
than even the arms and artifices of our enemies."
That was absolutely true of the currency which this country
put out during the civil war. I saw men die by scores during that
terrible period—business men, heartbroken by their inability to meet
the conditions of the day. I sincerely hope that I shall some time
have an opportunity to lay before the committee in Congress the
real objection to this most perilous proposition.
MR. STERNBERG:

We all seem to be agreed that one central bank would be much
better than the twelve federal banks, on the geometrical principle
that there can be only one center to a circle; but I realize that it is
impossible to convince Congress on this point, and we must make
the best of the things we can get. We are to have twelve banks,
and they are to be co-central, not independent and not competing
with one another.
MR. VINCENT:

As a business man, I want to ask one question about this bill.
I am interested in the coal-mining business. I am also a farmer.
I sell $5,000 worth of horses on credit and take a straight note.
I sell $5,000 worth of my stock in this coal mine and I take a
sixty-day note for that. I go to my bank with these two notes and
want to realize the money on them. The banker takes the horse
note, but refuses the mining-stock note. Why? Because under
the provisions of this bill the mining-stock note can not be rediscounted in the regional bank. Inasmuch as ninety per cent of the
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OF CREDIT

183

business of the country outside of agriculture is done by corporations, why must this currency bill outlaw safe, sane, business transactions that are carried on by them every day?
T H E CHAIRMAN :

That brings up the entire question of how far a credit system can
afford relief to all members of the public. This bill does not attempt to afford any relief to the farmers of the country, because
that is sought to be provided for in a future bill. It is perfectly
possible that other sections of the community may have to be relieved in a similar way.
(183)

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THE CLEARING OF CHECKS AT PAR1
W. M. VAN DEUSEN
National Newark Banking Co., Newark, N. J.

I

WISH to draw your attention for a few minutes to that
part of the proposed currency bill which provides for
the " parring " of certain checks; I refer to the latter
portion of section 17.
The immense volume of checks used in the commerce of
the country makes it appropriate that some action should be
taken in the proposed revision of the currency to improve the
methods at present adopted for their collection; and the insertion of the provision for their collection in the note-issue
section of the bill is also most appropriate, for in a general
way the problems involved are similar. Checks, like bank
notes, are a substitute for money and perform their function
most perfectly when their circulation is as free as possible and
their redemption is easily and promptly accomplished. If
the proposed section of the currency bill will aid the circulation and redemption of checks it will greatly benefit all those
engaged in the commerce of our country.
The checks on country banks are at present collected at
great expense, often by roundabout routes and with much
unnecessary labor. The reason for their being handled other
than directly is to be found largely in the charges made for
their collection by the banks on which they are drawn. These
charges, usually called exchange, range from V10 to J4 of
one per cent of the amount of the checks and occasionally go
higher through the practise of some banks charging so much
for each check instead of remitting for the total of all the
checks enclosed in a letter, with a minimum charge of from
10 to 25 cents per check even though it may be for only a
dollar. These charges are often not affected by competition
•Discussion at the meeting of the Academy of Political Science,October 15, 1913.
(184)

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THE CLEARING OF CHECKS AT PAR

185

because of an agreement among the banks of a city fixing the
rates and even agreeing to pay exchange to the bank on which
the check is drawn. These charges are not always made in
cash, but are secured by an arrangement on the part of the
collecting bank to remit for the checks at certain periods, in
the meantime holding and using the money. These charges
are defended on the ground that it costs the remitting bank
to provide funds in the large centers to cover remittances for
the checks, and that compensation should be made for the
postage and labor of handling remittances. It is also claimed
that a check is payable at the bank on which it is drawn and
that this provision of the bill would make it payable elsewhere,—that is, at the office of the federal reserve bank.
The result of this expense of collection is that many banks
send their checks by devious routes in the hope of saving or
lessening the charges. Consequently it is often a considerable
time before a check is presented for redemption, and in the
meantime fictitious balances are created in the banks through
which it passes, and much unnecessary work is done. Often
the reserve balances of banks held by them in reserve cities
are used entirely to compensate the reserve city bank for the
collection of the various checks of the depositing bank, thus
confusing the subject of reserves with that of compensation
for other services.
Many attempts have been made to find a remedy for the
situation which has developed in the handling of these checks.
The most successful of all is the system used in Boston for
the collection of New England checks, which is modeled after
the old Suffolk system for the redemption of bank notes. I
have not time to go into the details of this system but must
note a few of its main features. The checks on the country
banks of New England received by the Boston banks are sent
by them each day to the clearing house, which sorts them
according to the bank on which they are drawn and sends to
each bank all checks drawn on it. The country bank on
receipt of its checks sends a par remittance to the Boston
clearing house for the checks it receives, the remittance being
in either Boston or New York exchange or in currency at the
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expense of the clearing house. Payment for the country
checks is made to the Boston bank on the second day after it
sends them to the clearing house. The result is that almost
all of the checks on New England banks, especially those used
in New England, are presented for payment within a few days
after they are drawn, and at a minimum of expense. As a
consequence New England checks are more readily received
throughout the country than checks on any other section.
Practically all the banks in New England have agreed to the
Boston clearing-house arrangement. There have been attempts made to use the Boston system in other parts of the
country, and while none of these attempts have attained the
success of the Boston arrangement, yet all of them have resulted in an improvement over the old conditions. A somewhat similar system for clearing country checks is in use
in London.
The new currency bill proposes that each regional bank
shall act as a clearing house for its member banks and shall
also take on deposit at par checks on other regional banks.
If this part of the bill can be put into successful operation
and the banks of the country in large numbers join the regional reserve banks, it will result in the division of the country into a number of collection districts and the checks on the
banks in those districts can be handled in much the same way
that New England checks are now handled in Boston. This
cannot help being of benefit to the banks as a whole and to the
commerce of the country. It would mean the direct and
speedy collection of checks, would reduce the labor caused
by handling checks many times oftener than necessary, and
would eliminate false balances. The cost of providing cover
in the reserve center for checks drawn on a country bank
would be less than now on account of the proximity of the
regional bank or agency. The success of this method of collecting checks would depend largely on the question whether
most of the banks of the country found it to their advantage
to join the regional banks, as this system of collecting the
checks would be of little value if only a moderate proportion
of them could be handled in this way.
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THE GEOGRAPHICAL BASIS OF DOMESTIC
EXCHANGE RELATIONS'
FRED. I. KENT
Bankets Trust Co., New York

T

HE course of domestic exchange in the United States
of America is governed by three conditions: first, the
fact that the original settlements were on the eastern
coast and that they were peopled from the European countries; second, the fact that Europe, with its many nations so
closely allied to us in manners and customs, lies to the east
across the Atlantic Ocean, and the Orient with its strange
peoples, modes and habits lies to the west across the Pacific
Ocean; and third, the topography and geographical position
of the United States itself. These three conditions all work
together to make New York city the natural and economic
reserve center of the country. The eastern coast, having been
settled first, and having resources capable of meeting all the
needs of man, is to-day the wealthiest and most thickly populated section of the country. It consequently supplies capital,
necessities and luxuries to the later developed and developing
West and South. Standing between the West and South
and the countries of Europe, where pur greatest trade naturally lies because of common manners and customs, the East
has become at once the gateway and reservoir of our commerce. Its greatest city has grown about its greatest harbor,
and because this harbor is situated at the most convenient
point for reaching both West and South, that city has become
one of the great clearing places of the world. Our trade
with the Orient has been secondary, and probably will be for
generations, first, because our western coast was settled last,
and second, because our people and those of Asia and Australasia can only exchange unusual commodities instead of
1

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staples, on account of the wide differences in dress and modes
of life. Even the Far West therefore continues to draw upon
the East for its every-day requirements and through the East
from Europe, and so New York city is the focus of the principal lines of trade to and from all points in the United States
and all points in Europe. Our great internal trade has developed largely to take care of our foreign trade, and consequently the centers of our internal trade all have direct communication with New York city. Thus we see a closer relationship between the cities of Texas and New York city than
between those cities and St. Louis, between the cities of the
Pacific coast and New York city, than between such cities and
Chicago, and so on throughout the country. Expressed in
terms of domestic exchange, this means that it might be easier
for one in Nashville to pay a bill in Louisville in New York
exchange, which could be purchased in Nashville and would
be acceptable in Lousiville, than to do so in Louisville exchange.
The United States is divided into many zones of clearly
marked special productions or activities, such as the cotton,
wheat, corn, fruit, lumber, coal, iron and various manufacturing territories. To be sure, some wheat and corn are grown
in the cotton country, and mining districts are covered with
small farms and diversified industries here and there, but in
the main where one product is the staple that part of the
country producing it must import the other necessities of life
in exchange for its specialty. It is only by such division of
labor that it is possible to feed and clothe our vast population.
Every commercial, producing and manufacturing district,
therefore, becomes of the utmost importance to every other,
and for its own and the public good each should be contented to take the part for which it is best fitted, and should
not cast envious eyes upon the success or business of its neighbors. New York city, because of its position, gathers together wealth from many regions where it is not needed, and
distributes it to other regions where it is needed. Every
city and town does this also to a certain extent, but New
York is the center that is to other cities and towns as they
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are to their own communities. The result is that New York
exchange is the universal domestic exchange, if it may be so
called. The flowing into and out of New York city of the
money and credits of the country constitutes our principal exchange movement, and this is the reason that the greatest
market for stocks and bonds in the United States is in New
York city.
It is just as important for the farmer that he have railroads upon which to move his grain as it is for him to be able
to raise a larger amount of grain than he needs for his own
use. It is also just as important for the farmer to have industrial concerns financed that can develop and improve harvesting machinery as it is to be able to borrow money that will
enable him to grow a larger crop than he could otherwise do.
The market afforded by the stock exchange is consequently
of as great value to him as the money market outside of it.
If funds were not to be had for the purpose of making a
market for the industries upon which he must needs depend in
order to increase, harvest and transport his crop, his opportunity for profit would be greatly curtailed, and he might be
obliged to return to diversified farming, which alone would
make it possible for him to have his family live off that
which his own farm supplied, as was true in the days of the
pioneer. In such case the city would cease to exist; for
starvation would spread its population over the length and
breadth of the country. This is, of course, the impossible
extreme, for the tendency would be stopped after it had gone
far enough to cause sufficient suffering to bring about a reaction. There is just as much reason for legislation to compel the cotton farmer to grow only sufficient cotton for his
own needs and to divide up the rest of his land into wheat,
corn and vegetables, until he can supply only himself and
his family, and the grower of wheat to reduce his wheat area
and re-plant similarly, as there is to endeavor to split up into
small units the money and credits of the country.
For these reasons and many others, it is necessary for the
prosperity of the people of our country that no funds be withdrawn from New York city which natural trade conditions
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require there. It is true, however, that such funds as may
have gone to New York, because our currency system could
not contract when business demanded, can be taken away from
that city with benefit to all concerned. A proper currency
system, which would take up the slack in times of easy money,
would undoubtedly of itself solve this problem, and no artificial means would be required. The regional banks should,
therefore, act as reserve agents for only a part of the reserve
required of member banks, and the money that bankers must
of necessity maintain in New York, in order to meet their business requirements, should be counted as reserve. Legislation
should leave as much freedom as possible for business to be
consummated naturally; otherwise unnecessary friction and expense will occur.
Reasons similar to those which make New York city a receiver and distributor of credit apply to Chicago, St. Louis,
and many of the present reserve cities—that is, their geographical position gives them a business that if left to be carried on along the lines of least resistance makes their exchange valuable to certain communities.
The regional banks would not be able to transfer funds
from one part of the country to another with the same
facility as a central bank. If a central bank had branches
in New York and Chicago, for example, money could be paid
into the Chicago branch and paid out of the New York branch
until the supply in the New York branch was at the lowest
point that the business of that branch would allow. This
might make it possible for the central bank to take care of
all such transfers without the shipment of currency until the
tide turned and money was deposited in New York to be paid
out in Chicago. The natural seasonal requirements of this
country are very marked, and cover several different periods
with much regularity. If a central bank were able to count,
as reserve, money held in both its New York and Chicago
branches, its strength would never be affected by such transfers. In the case of distinct regional banks, however, this
would not be true, and it will probably be necessary for such
institutions, if organized, to ship currency bank and forth say
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DOMESTIC EXCHANGE RELATIONS

between the New York and the Chicago federal reserve bank
much more often than would be true in the case of a central
bank.
While legislation may be able temporarily to force domestic
exchange to run counter to its natural course, yet it would
entail unnecessary expense, and there is no doubt whatever
that such legislation would ultimately have to be repealed.
It would seem wise, therefore, to recognize immediately rather
than after expensive experiment the part that each portion
of this country plays in its growth and prosperity, and not
delude ourselves with the belief that any one industry can
prosper by itself or that we can with impunity destroy the
natural power of any community without injuring all the
rest. Every part of our country depends to a certain extent
upon the success of every other part, and if we would continue
our development with the greatest benefit to all, we must work
together without jealousy or animosity, let each community
do that which it is best fitted to do, and allow our operations
in domestic exchange to follow the lines of natural trade.
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CLEARING-HOUSE AND DOMESTIC - EXCHANGE
FUNCTIONS OF THE FEDERAL RESERVE BANKS •
JOSEPH T. TALBERT
Vice-President, National City Bank

T

HE proposed plan to reform the American banking
system presents a number of interesting and difficult
problems. Few of these deserve more serious and
thoughtful consideration, and none appear to have received in
public discussions of the pending bill less attention than those
involving the domestic-exchange and clearing-house functions
of the federal reserve banks. For the most part, the problems
presented are new. They arise from an intricate combination
of the powers and provisions contained in the bill which have
not heretofore existed in banking practise anywhere. Their
solution, therefore, must be worked out slowly in the light of
experience yet to be gained.
This is particularly true of questions relating to the exchange functions of the proposed regional banks. Many unsuspected difficulties may, and doubtless will, present themselves. Much uncertainty is occasioned by our inability to
determine in advance the extent to which the federal reserve
system will be supported by existing banks, and especially
what classes of banks will lend their support.
No vital principles of banking would be violated in granting the proposed functions to regional banks respecting the
clearance of checks. Indeed, the plan seems to be a timely
attempt to extend in wider circles certain useful principles already thoroughly established and approved. If a practical
way to accomplish this object could be found, great economic
benefits no doubt would be derived by commerce and be shared
by members of the federal reserve banks through the application of the clearing principle to country-wide checks, instead
1

Read at the meeting of the Academy of Political Science, October 15, 1913.
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of having that invaluable aid to business limited as it is now
to use in particular cities and in restricted localities. But the
two practical difficulties in the way of a universal extension
of the principle are the questions of the costs involved and
of the place where the burden of these costs shall be laid.
Bankers for years have faithfully studied the question, and
have found no satisfactory solution except by applying the
clearing principle in a limited way within nearby and easily
accessible regions.
When clearing houses were first proposed many objections
were made and strongly pressed against the method of
swapping checks, which is, in effect, the principle of offsetting
debts one against another. Difficulties were overcome gradually, and dangers and possibilities of abuse were reduced by
the adoption of rules which grew out of experience, so that
now, although the total volume of clearings is enormous, the
risk is practically nil. Certainly the losses actually incurred
in handling so large a volume of business through clearing
houses are very much less than would be the case were settlements made in cash. Probably in this country ninety-five per
cent of the total volume of business settlements is effected by
checks. Certainly the settlements of balances resulting from
clearings do not as a rule require more cash than five per cent
of the total amount cleared. Consequently, in all centers
where large payments are made, settlements through clearings
are of much greater utility than would be the use of money
itself, and quite as indispensable. It follows, therefore, that
if the costs of extending this principle throughout the country
be not so great as to become prohibitive, and if the burden
of these costs can be justly distributed, all good reasons for
opposing an extension of the idea to checks other than local
will be removed. But it is a far simpler matter to make this
statement than to suggest the means for its accomplishment.
Here it may be well to draw attention to the distinction between offsetting a debt as accomplished through clearing
houses and the actual payment of that debt. The passing of
items through the clearing house does not constitute payment.
All items cleared are under the rules returnable within time
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limits. This must be allowed for a number of reasons. Actual
payment of an item does not take place, and cannot be considered to have taken place, until that item shall have been
received at the paying bank and sufficient time allowed to examine the check and endorsements in order to determine
whether or not they are correct and the check is good.
In order that we may have clearly in mind during this discussion the apparent intentions of the framers of the new
bill respecting the clearance of checks, the extension of the
par privilege and the classes of items which shall be included,
it may be well to quote in full the portions of the bill as
written relating to domestic exchange and making provision
for the exercise of clearing-house functions by the Federal
Reserve Board and for the delegation of these powers. They
are:
(1) It shall be the duty of every federal reserve bank to receive
on deposit, at par and without charge for exchange or collection,
checks and drafts drawn upon any of its depositors or by any of its
depositors upon any other depositor and checks and drafts drawn
by any depositor in any other federal reserve bank upon funds to
the credit of said depositor in said reserve bank last mentioned, nothing herein contained to be construed as prohibiting member banks
from making reasonable charges to cover actual expenses incurred
in collecting and remitting funds for their patrons. The Federal
Reserve Board shall make and promulgate from time to time regulations governing the transfer of funds at par among federal reserve banks, and may at its discretion exercise the functions of a
clearing house for such federal reserve banks, or may designate a
federal reserve bank to exercise such functions, and may also require each such bank to exercise the functions of a clearing house
for its member banks.
(2) Among the powers of the Federal Reserve Board
specially enumerated is the following:
To perform the duties, functions, or services specified or implied
in this act.
The powers here conferred are ample and exceedingly
broad. They are so sweeping that the Federal Reserve Board
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may at its pleasure assume either directly or through federal
reserve banks a large part of the clearing-house functions of
the whole country, so far as member banks are concerned, and
thereby reduce all existing clearing-house associations to
minor organizations for clearing the remaining volume of
checks on banks not members of the system. Elsewhere in
the bill the intention seems clearly to be implied that this shall
be done. At least, we find that the power of clearing houses,
which has been so effectively invoked to stop panics through
the use of clearing-house loan certificates, is to be abolished.
The intention seems clear that each federal reserve bank shall
effect for its own members the free clearance of all checks and
drafts drawn by individuals and others on a member bank,
or drawn by a member on itself or on another member, and
also the same classes of items drawn by any bank located in
any other district, on the federal reserve bank of its own district. This would include, and cause to circulate at par
throughout the country, practically all classes of checks and
drafts in common use for making trade payments, except those
of three kinds. These are:
(1) Checks drawn on banks not members of any federal
reserve bank.
(2) Checks circulated by individual depositors and drawn
on banks in other federal reserve districts.
(3) Checks drawn by a member of one federal reserve
bank on a member bank in another district.
In the practical operation of the plan the heavy discrimination here made against these three classes of checks would
cause them soon to disappear. Easy means, however, would
be found to evade the discriminating charges in the cases of
classes 2 and 3, while in the case of class 1 non-members of
reserve banks might and would arrange to draw their checks
on other banks which were members, and thus secure at least
within the districts of their location the free clearing privilege.
For all practical purposes, therefore, we may consider that
it is the purpose of the bill not merely to facilitate clearing
of checks between the members of a district federal reserve
bank, but also to relieve commerce as a whole of tolls in the
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way of exchange charges heretofore imposed by the banks
and found by them to be necessary because of the costs involved in handling the business. .This inference is further
warranted by the fact that it is made the duty of the federal
board to promulgate regulations governing the transfer of
funds at par among federal reserve banks.
The exception permitting banks to make reasonable charges
" to cover actual expenses incurred in clearing and remitting
funds for patrons " is comparatively unimportant and relates,
of course, to shippers' drafts and similar documents drawn in
the course of the collection of trade debts. These instruments
are not circulated or employed in making trade payments.
Under this permissive clause exchange charges could be extended, at most, only to include collection items and drafts
on correspondents in other cities sold by the banks over their
own counters. Under the proposed plan, however, drafts of
the latter class necessarily would quickly disappear. Their
place would be filled by cashiers' checks or drafts drawn by
members on the federal reserve banks, because these instruments would serve the same purpose and would, of course, be
free of exchange charges.
If the saving of exchange tolls on trade, which in the aggregate amount to an enormous sum annually, can be effected through the machinery of regional banks, and if the
business can be cleared as expeditiously as it is now handled,
and if the federal reserve banks shall be able to absorb and
bear the costs which will fall upon them, the plan should be
made effective by all means, despite the opposition of individual banks or of any sectional group or association of
them. It will be found that opposition to the plan will not
come from banks located in reserve and central reserve cities.
All such banks will rejoice at the proposed undertaking. The
contention which the city bankers have steadily made, that they
have struggled with this problem in good faith, that they have
always handled the business at a loss, or at least with returns
entirely incommensurate with the amount of labor and risk
involved, will quickly be demonstrated. Insurmountable opposition may be expected from country banks, because of the
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EXCHAXGE

197

taking away from them of the imposition of exchange charges.
This has long been a source to them of legitimate and well
earned revenue, and they should not be called upon to give it
up. 1 cannot state the fact more plainly than by saying that
if free clearance of checks be forced upon country banks they
will not, in my opinion, join the federated system. These
bankers may be mistaken in their views, but they will first
have to be shown how they shall be relieved of their burdens
before they can be expected to assent to free collections and
the absorption of the costs to them involved. It should be
borne in mind that the burden falls upon country banks, and
to a very large extent also upon banks in ordinary reserve
cities, of paying the cost of shipping money back and forth
seasonally. The country bank pays the express tolls and
loses interest on money in transit outward, when currency is
needed in the interior, and back again to the reserve cities
when the currency movement reverses. Banks in ordinary
reserve cities at their own expense perform the same service
in and out from larger centers. In all agricultural regions,
where the supply of cash is insufficient for the seasonal needs,
the banks are obliged to transport the necessary funds in
large amounts. Take the movements of cotton during the
active season—small banks are required daily to pay out in
many cases an amount of cash greater than their capital stock.
This money is moved at their own expense. They are at the
same time required to receive and give credit daily for drafts
against cotton shipments. These drafts are credited and the
proceeds are thus made subject to check, the bank being
obliged to make cash payments against them. The drafts
are carried as " exchanges in transit " until they reach a larger
central point, and there they are credited to the interior bank,
against which further currency may be drawn. These operations involve large credit risks as well as large actual cash
outlays. For both of these items a local bank is entitled to
reimbursement. The services are indispensable to the crop
movement. The splendid manner in which the country banks
have supplied this service from year to year has become so
much a matter of course as to attract no attention and elicit
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no praise. The only way in which the country bank is able
to reimburse itself for these heavy burdens is, under the existing scheme, to compel the producer or tradesman who needs to
have the money brought out from centers to absorb the transportation charges by paying exchange on the drafts which he
deposits for collection and credit. Later on, the merchant,
whose needs in the payment of purchases cause this self-same
money to be sent back again to trade centers, must be required to pay that cost in the way of exchange on drafts
purchased by him.
This is the reason why the interior merchant prefers to use
his check on a home bank. He thus evades the cost as well as
gains time to meet the check. The country bank does not
object, because its rightful charges are deducted when the
check is presented eventually and remittance made for it.
The city bank is obliged in the end to absorb the charge or
throw it upon its depositor. While admittedly a desirable
thing to be accomplished, it will be seen that the proposed
plan to throw this burden at once upon the federal reserve
banks without first knowing and carefully counting the irreducible cost, would constitute a risky experiment. This
burden might be so great as to absorb the net earnings of
federal reserve banks and even to involve the integrity of
their capital.
The cost of the physical transportation of money is increased
because of the wide extent of the producing regions of this
country geographically and because of the annual ebb and flow
of currency to meet seasonal requirements. The movement is
a natural one, and while the burden of it may be shifted in
the manner proposed, a certain fixed cost cannot be escaped
either by legislative enactment or by human ingenuity. It is
as much a necessary item of expense as is freight paid for
transporting merchandise, and like it, must fall somewhere.
Trade practise naturally and very properly has placed it upon
the recipient of the benefit.
If we could have one central bank with numerous branches,
the cost of effecting not only the normal currency movement,
but also the universal clearance of items of the classes named
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might be so greatly reduced as to become negligible by resorting in the case of checks to book entries made at the head
office and affecting the accounts of branches. Such entries
would of course affect the reserves of the member banks concerned, but they would not affect the reserve of the federal
bank itself, every liability created by the deposit of a check
being immediately offset by a corresponding debit to the
account of the drawee. It would not matter, either, in the
case of currency movements, if there should be an accumulation of funds at one branch for a considerable time. There
these funds might remain and be counted as reserve quite as
well as if they were held at the head office. Neither would
it matter if a large amount of bank notes should be presented
for redemption at a branch. Such notes could be redeemed,
retired and held on hand at the branch without cost or transportation charges until they might again be required. This
economical arrangement cannot be established where there are
twelve independent units in the system, each struggling under
the necessity always of maintaining its own equilibrium of
reserves and liabilities. In the case of every federal reserve
bank, should a system of inter-district clearings be attempted,
the actual transportation of reserve money back and forth
would become inevitable. At first, the plan might be tried
out in a limited way between the members of a single regional bank, all of which necessarily maintain balances at the
reserve bank. With a federal reserve bank as the center, and
with the banks constituting its members taken as a whole, the
organization might be considered a miniature or localized
central banking system, wherein the principle of clearing
might easily be applied successfully amongst the members.
But even such an arrangement, although apparently both
practicable and just, would be greatly to the advantage of
city banks, and decidedly to the disadvantage of country banks.
However, it is not a matter of profit and loss to the member banks which is to be considered so much as it is a question
of the practicability from the point of view of the federal reserve banks themselves, and of the means by which, if at all,
the business can be undertaken by them and successfully carried on.
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In view of the position of the country bank, which I have
endeavored to state clearly, it would seem that the plan must
be made sufficiently attractive to induce the interior banks to
support it. Certainly, without their support in large numbers the scheme would fail, because the volume of business to
be collected is so large that the existing scale of exchange
charges could not possibly be absorbed by the federal reserve
banks.
The considerations raise the following questions:
1. How shall the objections of the country banks fairly be
met ? How shall the costs they now bear be so shifted that the
country banks may be able to support the plan ?
The provision that these banks shall be allowed to charge
exchange on documentary drafts and collections is good, and
it is abundant to take care of that portion of the business. In
addition to this, however, all transportation charges on bank
notes to and fro, for whatever purpose shipped, should be
borne by the federal reserve banks. Under the law, the reserves maintained at federal reserve banks may not be distributed, in any event. In consequence, it will become necessary, if the proposed plan shall be made effective, for every
member in providing funds for clearing checks through its
regional banks to maintain much larger balances than mere
reserve requirements demand. The maintenance of these increased balances will involve either their borrowing at federal
reserve banks or decreasing their loans at home, and consequently this cost might fairly be offset by the free transportation of bank notes. Finally, interior banks should be permitted to carry at least one-third of their required reserves
permanently with reserve agents so as to entitle them to receive the benefits of special reciprocal arrangements which
will be effected by nearly all banks in reserve cities with those
in other reserve cities for the clearance of checks drawn on
non-members of regional banks. Arrangements of this kind,
where not already existing between banks, will become necessary in any event. Such inducements as are here suggested,
coupled with the advantage of speedy conversion of current
checks into reserve funds, and the fact that the maintenance
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of reserves would become easier and the lending power of the
banks be increased in consequence, would bring into the system nearly all the interior banks.
II. The second and equally important question is, how
these concessions, if granted, will affect the federal reserve
banks.
The estimated normal annual movement of currency from
reserve centers to the intrior for crop-moving purposes is between $200,000,000 and $250,000,000. The movement varies
according to circumstances. The return movement at seasons'
ends is substantially the same, so that the total movement to
and fro is approximately not less than $400,000,000 annually.
The average cost of transporting currency by express for all
distances in this country is probably about forty cents per
thousand dollars. Making allowance, however, for short
hauls, and for shipments of currency by registered mail under
insurance, the cost of transportation may be conservatively
estimated at twenty-five cents per thousand dollars (exclusive
of interest on money in transit). This would amount, therefore, to an annual minimum charge on the federal reserve
bank — if it should assume these charges — of not less than
$100,000. Let us suppose that twice as much more currency
should be moved back and forth in the course of a year by
members located in manufacturing and industrial centers, for
pay-rolls, exchange and reserve purposes, at an equal average
cost. Then we should have a total yearly expense incurred
by federal banks in currency movements of not less than
$300,000. If this were the end of the matter, such a charge
would be of no consequence and could easily be absorbed.
But a far heavier burden would lie in the cost of handling
the items collected. This involves labor, postage, stationery
and, in the case of checks on other federal banks, loss of time
(which is usually expressed by banks in terms of interest for
the average number of days required to receive returns). In
clearings between the members of a district alone, no such
loss of time would be incurred; but in inter-regional clearings
the interest loss actually suffered would be measured by the
gold reserve required to be carried against the credit balance
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created by the deposit in one regional bank of checks on other
regional banks. It is difficult to compute this cost, but it
would be very heavy unless each federal reserve bank should
be permitted to have an account with every other such bank,
and to offset the balances " due to " and " due from " other regional banks before computing their required reserves. This,
of course, would materially reduce the cost of inter-district
clearings. But, it would be open to the same objections,
if not to all the abuses of the existing practise of " doubleheaded" accounts between individual banks.
Fourteen years ago, after careful investigation, the New
York clearing-house association ascertained the actual cost to
its members of clearing out-of-town checks or, as they are now
called, " inland exchange." A schedule of charges estimated
then to be sufficient to cover the actual cost, but no more, was
adopted and under penalties was made obligatory on all members. Certain nearby cities and towns were placed on the
discretionary list, which meant that the members of the clearing house should have the privilege either of exacting a charge
or of clearing checks on such discretionary points free; and as
a result, in actual practise checks on all discretionary points
(except under most unusual circumstances involving very
large amounts) have been handled free. Charges of onetenth of one per cent (one dollar per thousand) were imposed
upon checks drawn upon banks within a region roughly defined as that part of the United States east of the Mississippi
and north of the Ohio; a charge of one-quarter of one per
cent (two dollars and a half per thousand) was imposed on
checks drawn on banks west and south of the territory named.
The plan worked satisfactorily and with the exception of
special interpretations and rulings made by the clearing-house
committee remained unaltered for thirteen years. During
this time, naturally, the volume of business largely increased,
new and better methods were adopted in the handling of collections, mail and transportation facilities were improved, so
that it appeared to the members of the association early last
year that the time had arrived for a careful investigation of
the whole subject, with a view to a revision of the schedule of
charges if it should be found desirable.
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A committee was appointed for this purpose in April, 1912,
began its work immediately, and continued without intermission for six months or more. The members of the committee
approached the subject with open minds, and after procuring
all necessary data from the members themselves and having
the presidents or other officers of member banks before them,
as well as receiving deputations from bankers' associations of
nearby states and from neighboring cities, reached their conclusions and made a report showing that the gross volume of
out-of-town checks cleared by members of the New York
clearing house for the year 1911 was approximately $4,859,187,900; that the gross income of the members from exchange
and collection charges imposed on the business handled was
$2,139,551. From this there was deducted exchange paid to
other banks, amounting to $1,176,162; cost of postage, rents,
stationery, salaries, etc., $569,461.78; estimated loss of inter-"
est (through giving in special cases immediate credit for items
in process of collection) $296,460; total costs $2,042,083.78;
net income, $97,467.22, which, distributed between sixty-four
active members of the clearing house, represented an annual
increment of income to each of about $1,500, or an average
of about two cents per thousand dollars. The report also
showed that of the total volume of out-of-town checks handled
by the members, 71 per cent was drawn on the discretionary or
free points; 24 per cent on points costing V10 of 1 per cent,
and only 5 per cent on cities involving a cost of % of 1 per
cent. It was further shown that the average time consumed
in the collection of all inland checks, including those on the
free list, was 4.19 days. This time varied from 2.95 days
for Washington, D. C , and 3.24 for Baltimore, all the way
up to 8.93 days for Los Angeles, 8.92 for Seattle, and 9.40
for San Francisco.
As a result of these painstaking and thorough investigations the sub-committee found that the existing scale of
charges certainly did not do much more than bring the banks
out without loss, even if that were done; and they consequently
reported that the charges were not excessive. They recommended that the main body of the rules and regulations of
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the clearing house in respect to exchange charges outside of
New York city remain unchanged. They suggested, however, that within certain restricted territories easily accessible
to New York, and for reasons which in each instance were
peculiar to the areas involved, the rules should be modified
so that outside of the discretionary points already existing all
banks and trust companies in the states of Massachusetts,
Rhode Island, Connecticut, New Jersey and New York which
should engage themselves to remit to the members of the New
York clearing-house association at par in New York funds,
on the day of receipt of the items, should likewise be placed
on the discretionary list. The report was adopted and the
new rule went into effect.
As evidence that the interior banks were better satisfied
with the old arrangement, it may be stated that out of a total
of 1,827 banks located in the new discretionary region only
306 thus far have availed themselves of the privilege afforded
for the free circulation of their customers' checks in the city
of New York. It is only fair to make the statement, however, that the interior banks concerned insisted that the New
York clearing house should adopt the Boston system, so that
they should be obliged to make only one par remittance, and
that to the clearing house daily, instead of making numerous separate remittances to individual members of the clearing
house. This is where the rub came, and their contention is
not without merit Nevertheless, it appears that the average
interior bank prefers to make its own arrangements with New
York banks whereunder it shall make remittances, and to stipulate its own tolls, rather than have the checks of its customers
circulated free under conditions that involve labor and expense to the bank. This, no doubt, is a fact, and it would be
no less true were the terms imposed by a federal bank instead of by associated banks. The interior banks will not
absorb the cost in either case, nor can they afford to do so
without reimbursement in some form.
It will be seen from the foregoing figures that the average
cost to New York banks of collecting out-of-town checks is
about forty-two cents per thousand dollars, including, of
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course, checks on discretionary points which actually were
handled free. By far the greater part of this cost is represented by exchange and collection charges imposed by interior
banks. This amounted during 1911 to $1,176,162, or an average of about 24 cents per thousand on all checks collected.
If checks on discretionary points be excluded, and only those
be considered on which the New York banks themselves imposed an exchange charge, then the average cost would be
$1.45 per thousand. For our purposes it is correct to include
the whole volume of business handled, for in no other way
can we arrive at a fair estimate of the cost of handling such
items by the federal reserve banks.
Under a widely supported system of regional clearings the
exchange item of costs could be very greatly reduced and probably nearly eliminated. For our purposes we shall consider
that it is entirely eliminated, leaving only loss of time and
the cost of what might be termed " overhead charges," including the operation of the business. The time loss in the
case of New York banks amounts to only about six cents per
thousand dollars, because for the most part, although credit is
immediately given, interest is not paid on balances until the
items deposited have been collected. In the case of regional
banks, this charge, if considered at all, would be higher because of the larger reserves of gold required to be carried
against deposit liabilities. It would amount probably to eight
cents per thousand dollars. But this charge could be eliminated by permitting each federal bank to offset balances due
" to " and " from " other federal reserve banks before computing its reserve. If these two items of cost should be thus
removed there would remain the single item covering labor,
postage and stationery, and this would constitute the irreducible minimum, which in the case of New York banks is
approximately twelve cents per thousand dollars, and in the
cases of certain large banks, as much as fourteen cents, by
actual tests.
The experience of New York banks, as revealed by the investigations of the inland exchange committee, was surprising
in that the average cost of collecting inland checks apparently
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had not been reduced within thirteen years, although the
banks employed more efficient methods and enjoyed the advantages of more rapid transportation and better mail facilities.
Apparently these advantages were about evenly offset by the
constantly increasing scale of exchange charges imposed by
interior banks and the increasing volume of business handled,
despite the restraining influence of the charges imposed by
New York banks. The charges collected by interior banks
began to increase in 1898, when a stamp tax was imposed on
checks, and these charges have continued steadily to increase.
The rule among interior banks is to impose a minimum charge
per item in the case of single items, regardless of the amount
involved, and also a minimum charge of so much per hundred
dollars where several checks are involved. The result is appreciably to increase the average cost of collection of checks
per thousand dollars, because the average trade check is much
less than that amount, while during the period under consideration the established scale of charges imposed by the New
York clearing house remained at a fixed rate per thousand dollars. Outside of its own members, this is a condition against
which every federal reserve bank would soon find itself contending in respect of inter-district clearings, and one which
the Federal Reserve Board would find much difficulty in regulating at par without preparing to absorb heavy costs.
We have made reference to the system which is in effect for
the handling of New England checks in Boston by a bureau
attached to the clearing house. In this system we find as near
an approach as could be imagined to the actual working conditions under the most favorable circumstances which could
exist in a federal reserve bank clearing checks for its own
members only. It may be well, therefore, to describe the
system as affording a practical example of the lowest attainable overhead charge in handling checks on numerous banks
in a small and densely populated region.
Briefly, under this system all checks on New England banks
are received by Boston banks at par. They are (or may be)
collected at par through the clearing house, where the checks
are received, recorded and forwarded for collection to the
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banks on which they are drawn.1 The checks are remitted
for at par, credit being given the members of the Boston
clearing house in the clearing on the second day following the
despatch of the items. Interior banks are permitted to make
remittances at par in New York exchange, if more convenient;
or they may ship currency, when necessary, at the expense of
the Boston banks. The system has been in effect for a number of years, and works with perfect satisfaction to all concerned.
The cost of handling checks in this manner is figured on
New England items only to be approximately seven cents per
thousand dollars. This is exceedingly low, and there are
several reasons of a special nature for the allowance of so
low an estimate. These reasons are not applicable generally
among banks, and would not be in the case of a federal reserve bank. Several of the larger banks in Boston estimate
that the actual cost to them is approximately nine cents per
thousand. Despite the manifest advantages offered by this
system, and the exceedingly low costs obtained, the fact remains that less than ten per cent of the total volume of New
England checks received by Boston banks is handled through
the clearing house. The competition among Boston banks for
the reserve accounts of interior banks compels them to handle
ninety per cent of the business directly through their own correspondents, on terms of course more favorable to the interior
banks than the clearing-house arrangement. Assuming, from
the estimates of the larger banks, that the cost averages nine
cents per thousand dollars, it will be observed that this is
within one cent per thousand dollars of the actual net cost
experienced by New York banks on all checks. This, beyond doubt, is very near—as near, in fact, as it is possible
to calculate—the irreducible minimum of overhead charges in
handling inland exchange.
Inquiries made by wire to all reserve cities of the United
•The advisability of sending checks to the banks on which they are drawn
is open to question from a legal point of view, bat it is universally done
among banks, and with no greater risks than if sent to other banks, except
in the legal risk assumed.
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States for information of a nature similar to that upon which
the figures for New York and Boston are based have brought
to hand a mass of reliable data sufficient to confirm the substantial accuracy of the estimated cost of handling items by
banks of the whole country. I am convinced that the experience of New York banks, and of those in Boston, Philadelphia, St. Louis, Chicago and all other central reserve and reserve cities, constitutes a fair basis for estimating the cost of
handling this business as it necessarily would be conducted by
regional banks. In all cases where the same or similar methods of computing the costs are employed, there is remarkable
uniformity in the percentage which the daily total receipts of
inland items bears to the total deposits of the banks in those
cities; and also in the average time required to receive returns
on inland checks, and consequently, also, in the relative proportion which the totals of the accounts carried by the banks
representing " cash items in process of collection " bear to
the total deposits of the banks. There is likewise surprising
uniformity in the estimated fixed amount of overhead charges.
Wherever discrepancies appear they invariably incline toward very much greater, and never toward less, costs than
those here estimated. I am of the opinion that for a time at
least, and perhaps for many years, the regional banks could
not effect collections so cheaply, except between their own
members, as the banks now do through private reciprocal arrangements made on a large scale. The estimated cost, therefore, to the regional bank is probably under, rather than over,
that which would actually be incurred in such operations. A
large volume of checks is handled by trust companies in the
reserve cities and by many banks in smaller places (data of
which are not accessible) through special reciprocal arrangements. Such arrangements consist of the mutual exchange
of checks within certain territory or of checks drawn on certain specified points which are handled at par; the use of
" double-headed " accounts; balances carried by one bank with
another bank free of interest; the remittance of accumulated balances at par in exchange on central points at stated
intervals; and the employment of various other schemes in(208)

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volving an evasion of direct charges and outlays in the way of
exchange paid, but entailing, nevertheless, cost in some form.
Leaving these out of account, we may safely estimate that the
minimum cost of handling inland checks (other than local
checks which pass through clearing houses) excluding the
time equation and actual exchange paid (which items the regional banks might possibly escape in the manner already
shown) would be not less than ten cents per thousand dollars;
that the average time required to receive returns would be
not less than 3J4 days on nearby points (24 per cent of the
total) and 5 days on more remote points (5 per cent of the
total) ; and that the total volume of items always afloat would
be not less than 5 per cent of the total deposit liabilities of
the banks.
Without going into a bewildering maze of figures, it will
be seen from the foregoing data that the actual cost to regional banks, if each such bank should undertake to assume
the clearing of checks among its own members, and each also
to clear checks drawn directly on all other regional banks, as
is contemplated in the proposed bill, would be approximately
as follows: Total deposits of the banks of the United States
(state and national), $17,000,000,000. Five per cent of this
amount would be $850,000,000, representing the amount of
unpaid items always outstanding. The average time to collect
being not less than 4 days, all inland items included, we estimate $212,500,000 as the daily average amount of " inland "
checks which would be received and credited by federal reserve banks; or an annual total (figured on'a basis of 300
business days a year) of sixty-three billion, seven hundred and
fifty million dollars. On the low basis of ten cents cost per
thousand dollars this would amount to an annual cost to the
federal reserve banks of $6,375,000 in actual overhead
charges. To this should be added at least $300,000 annual
expense for movements of currency. Even these enormous
charges take no account of the actual bookkeeping and clerical
costs involved in effecting the clearance of purely local checks
between members such as that which now takes place through
clearing houses. In the aggregate, the amount of these clear(209)

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ances is very much larger, but the clearing cost would be
inconsiderable. Among all the proposed federal banks the
total would probably not amount, in actual cost for clearing
local checks, to more than $2,000,000 additional, or to a total
for all clearances and charges of $8,675,000, or 4.17 per cent
annually upon the total capital of the federal reserve banks
if every national and state bank in the United States should
join the system. It should be remembered, also, that the
volume of business cleared through the regional banks would
speedily be increased, and that this enormous charge would be
multiplied for three compelling reasons:
(1) The quick convertibility of current checks into lawful
reserves.
(2) The removal of the necessity now existing for reciprocal
arrangements between banks for any checks except those on
non-members, and the diversion of the great volume of business thus handled from present channels into the federal reserve banks, for reserve reasons.
(3) The natural inclination of every person to ride a free
horse.
Even the government itself would suffer in its revenues because of the easy availability of free exchange as against the
cost of postoffice money orders, and the readiness with which
individual checks could be negotiated at par in the trade centers of every federal district. The enormously increased use
of checks and their free circulation would, of course, correspondingly decrease the requirements for bank notes. Whereever a check is used it displaces or, rather, satisfies a temporary need for the actual use of an equivalent amount of
currency; and if the use of checks be free, the incentive is,
of course, to use checks. Consequently, in exactly the ratio in
which federal reserve banks made possible the free use of
checks, those banks would be working against their own interests and depriving themselves to that extent of the opportunity to keep their notes in circulation. The natural tendency,
and probably the ultimate result, of the proposed plan if the
federal reserve banks should assume on a large scale the clearing functions would be to make that particular function the
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chief business of the federal reserve banks; and, naturally, as
in the case of existing clearing houses, that business would be
conducted for the convenience of the members and not for or
at a profit.
The conclusion, therefore, seems warranted, that, however
desirable in theory the proposed plan may be, however beneficial it might be to individuals, to trade in general and to the
members of the federal reserve banks in the large cities, it is
impracticable, its cost to federal banks prohibitive, and its
operation contrary to the interests of the small interior banks.
The scheme should not be enforced against those banks unless the concessions suggested shall be granted them.
Finally, the plan is not to be commended because it would
tend to relieve trade generally, and individuals in particular,
of the burden of paying a fair compensation for the use of
credit, which is a trade facility and a trade necessity. The
use and enjoyment of these necessarily entails a cost somewhere for benefits supplied and for services rendered. If this
burden shall be assumed by the federal reserve banks, the cost,
or a large part of the cost, in the end will fall upon the government itself, and will be reflected in the reduced profits derived by the government from the operation of federal banks.
So far as the trading public is concerned, no necessary or
desirable economic end will be attained through the establishment of a free system of collecting checks. In the interest of
trade, the abolition of fair exchange charges—those now imposed do not seem to be unfair or excessive—and the substitution of an unlimited use of checks to be cleared free by
regional banks, is no more desirable or necessary, or in fact,
more practicable, than would be the free extension of credit
and the abolition of interest charges. One is as logical as
the other.
I may say that a strong objection to the plan lies in the
fact that under it inflation of credit is possible through kiting
of checks; * for every check deposited in a regional bank and
1

" Kiting" is the mutual exchange or loan of checks between two or more
individuals or corporations, whereby temporary credits may be enjoyed through
fictitiously created balances.
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drawn on another regional bank, or deposited by one member
of a regional bank on another member of the same regional
bank, becomes at once convertible into reserve money and may
be so computed irrespective of whether such checks on presentation shall prove to be good or not, or whether the credits
were created by " swapping checks." This indeed approaches,
if it does not go beyond, the limit of even problematical soundness in the theory of banking.
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FOREIGN EXCHANGE PROBLEMS AND THE
PROTECTION OF OUR GOLD SUPPLYJOHN E. GARDIN
Vice-President, National City Bank

T

HE most serious problem confronting us to-day in our
international relations, particularly in view of the
pending changes in our banking system, is the protection of our gold supply.
During the course of the year, the country was startled by
announcements that gold was being taken for France in blocks
of two million dollars at a time. This continued until something like a total of $36,000,000 had been exported. The exchanges were J4 to Y\Jo below the gold export point, and
the question arose how it was possible to export gold under
such conditions. The answer always was that it was a special
transaction, which is simply a generic explanation of anything
that one knows nothing about. The truth of the matter, however, was that the Bank of France was fortifying its position
and was buying the gold in this market, just as a merchant
would buy potatoes, cotton or any other commodity, and paying therefor a premium expressed in the rate of exchange.
This reveals a weak spot in our system and one that should
properly be covered, in order to protect our gold supply. It
would be fundamentally wrong to place undue restrictions
upon the flow of gold when used in the settlement of international balances, but it is perfectly proper to have a system
of brakes, capable of being applied in order to prevent the
wheels from going too fast.
The United States is the only absolutely free market for
gold in the world, and we have to suffer for our liberality.
When South American exchanges are against Europe, the
1

Read at the meeting oi the Academy of Political Science, October 15, 1913.
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burden is thrown upon us; this applies also to the exchange
relations of France and England, and we have no remedy.
If conditions are normal and exchanges are against us, it
would be neither wisdom nor good business policy to place
any restrictions upon the export of gold at all, but if we can
see that an export of metal under such circumstances would
still further aggravate an already strained condition, it would
be perfectly proper to apply the brakes, particularly so as
recent legislation has made it easier to obtain bars than formerly. How to do this is the question. We could add a
premium to the cost of the bars, but this premium could not be
placed higher than %%, as that is about the difference
between bars and coined gold.
This premium could be made on a sliding scale with a
maximum of %%• This is about the limit of arbitrary action.
Of course, all this is predicated upon a legitimate export demand on the basis of exchange rates. If the demand, however, is an arbitrary one, such as recently took place in connection with gold shipments to Paris, the President of the
United States should be empowered to proclaim an export
duty on all gold exports unless it can be shown that the export is taking place strictly on the basis of prevailing exchange
rates. This power probably would never be invoked but it
would have a deterrent effect.
The best protection for our gold supply on the part of the
central reserve association is to hold a foreign portfolio, and
this feature has wisely been recognized by the framers of the
bill. The value of this protection cannot be overestimated.
A further means of protection would be the extension of the
privilege of the banks of this country to accept time bills
drawn on the basis of domestic commercial transactions.
Provision has been made in the law, as it is now laid before
Congress, to permit banks to accept time drafts having as a
basis commercial transactions covering the importation or exportation of merchandise. This power is of no value whatsoever as regards exports and it will be used only to a very
limited extent as regards imports, owing to the fact that there
is no regular market for American exchange in foreign countries except in the principal financial centers of Europe.
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The privilege of accepting time drafts based on domestic
transactions should be freely granted. Such a privilege would
add to the means of protecting our gold supply along natural
lines. At times, when the balance of trade is against us and
their own needs are not pressing, the European banks, with
discount rates and exchange rates favorable, would gladly
take good bank paper into their portfolios and thus relieve
us of an unnecessary exportation of gold. They would use
this American paper as a protection to their own holdings just
the same as we would hold our foreign portfolio, and in this
way there would be established an exchange market for
American remittances, which market would gradually spread
throughout the world. It will be years before such a thing
can be brought about, but there is no reason why a ninety-day
bill, drawn on New York, should not command as favorable
a rate of exchange as a ninety-day bill on London. With gold
at the export point and discounts obtainable at a very high
rate of interest, an investment in prime American bills would
be an attraction that very few foreign banks could resist.
Several years ago a law was passed, authorizing the Treasury Department to retain as bullion foreign gold coin coming
into the country. This privilege should be extended to the
banks of the country, authorizing them to count such coins at
their minting value in their reserve.
We should also follow England's example and abolish our
usury laws as far as they relate to commercial transactions.
I would recall Jeremy Bentham's famous epigram that brought
about that wonderful reform in mercantile life which made
Great Britain the greatest commercial country in the world.
The production of gold during the last four years has remained practically the same but there is every indication that
it is on the wane. This is a very serious problem that confronts us, inasmuch as we are absolutely dependent upon that
metal as the basis of credit. We may be a wealthy nation but
wealth alone does not produce fast enough. Consequently,
we must have credit to supplement wealth, and credit must be
based upon a generally recognized value, and that is gold.
The principal danger to our gold supply is the enormous absorption in the arts and industries.
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It is estimated that during the last fifty years over $3,000,000,000 worth of gold has disappeared, East India alone
during the last twelve years having absorbed $500,000,000.
Egypt also absorbs a great deal. The average annual consumption of the arts and industries is, according to the estimates of the director of the mint, about $175,000,000. This
would leave an annual supply, if it continues the same as
at present, of only $286,000,000—not enough for our needs.
On the generally accepted ratio of credit to capital, of five to
one, this would mean that $875,000,000 worth of credit is destroyed. To what extent we are in need of capital can be
inferred from the requirements in this respect of London alone
during the last nine months. London is estimated to have
needed $750,000,000 for new work. No estimate is made of
the requirements of Germany, France, the United States,
Canada, Brazil, the Argentine or Africa, but they must be
enormous. Hence the question comes foremost in our mind
—where is the capital to come from? It is absolutely necessary that our store of gold be jealously guarded and that it
be used only in payment of our just debts.
A further feature must be borne in mind in connection with
this subject, and that is the danger of the invisible balance
of trade, which is always against the United States. This
invisible balance is variously estimated from $500,000,000 to
$2,000,000,000, and up to the present time the deficiency has
been made up by investments of foreign capital. When
this country ceases to be an attractive field, which can very
readily happen now that new domains are being exploited in
Europe, Asia and South America, the danger will then become imminent. Should China, with its four hundred million inhabitants, ever go on a gold basis, then may the Lord
have mercy upon us!
From the foregoing it is evident that we must have a scientific system of protection for our gold supply, but never for a
moment must we lose sight of the fact that our just debts
have to be paid in gold.
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ACCEPTANCE AND FOREIGN BRANCH POWERS
UNDER THE PROPOSED FEDERAL
RESERVE ACT 1
JASON A. NEILSON
Brown Brothers

I

T is venturesome to offer a decided opinion of the manner
in which the foreign exchange functions would work out
under the federal reserve act of 1913. The ordinary
citizen who is but a casual observer and who has taken no intimate part in the actual framing of the law finds some parts
not clear. Remarks at this time as to these functions of the
federal reserve or national banks will therefore be most useful
if they serve to open real public discussion, to the end that
the banker and the merchant may through study obtain a
clearer idea of the intentions of the law makers and of the
possibilities of financing foreign trade under the proposed
law. Attention should also be given to the matter in order
that decisions may be obtained from the Federal Reserve
Board as early as possible after the banks have agreed that
it is possible for them to work under the new law.
Aside from the measures providing for the protection of
the gold stock, the bill revised to September 18, 1913, contains other foreign trade items in sections 14 and 28.
Section 14 reads:
Any national bank may, at its discretion, accept drafts or bills of
exchange drawn upon it, having not more than six months' sight to
run, and growing out of transactions involving the importation or
exportation of goods. No bank shall accept such bills to an amount
equal at any time in the aggregate to more than one-half the face
value of its paid-up and unimpaired capital.
Upon the endorsement of any member bank, any federal reserve
bank may discount acceptances of such (member) banks which are
1

Read at the meeting of the Academy of Political Science, October 15, 1913.
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based upon the exportation or importation of goods and which
mature in not more than six months and bear the signature of at
least one member bank in addition to that of the acceptor. The
amount so discounted shall at no time exceed one-half the capital
stock of the bank for which the rediscounts are made.
Section 28 reads:
Any national banking association possessing a capital of $1,000,000 or more, may file application with the Federal Reserve
Board for the purpose of securing authority to establish branches
in foreign countries for the furtherance of the foreign commerce of
the United States. * * * such application shall specify * * *
the amount of capital set aside for the conduct of its foreign business at the branches proposed. Every * * * association shall
conduct the accounts of each foreign branch independently.
The acceptance privilege, or borrowing power, granted
national banks for foreign trade bills, seems to stand out as
the key to the changes in our national banking system which
bear upon foreign trade. Incidental thereto are (a) the facilities for the rediscount through the federal reserve banks of
bills bearing such acceptance and (b) the foreign branch privilege. Other American banking concerns have possessed the
acceptance privilege, but up to this time, national banks have
been forbidden to incur contingent liabilities in a direct manner
by lending their credit in this way. There is danger that
some who are not familiar with the uses of this class of credit
power may avail themselves of it in a way that will injure
our present foreign trade credit facilities. They may also see
a chance to open an office in London and sell their acceptance
in sterling, thus competing with friends in a field already well
covered.
If a merchant has access to first-class financial advice, he
knows that at the present time imports of merchandise can be
freely and economically financed by anyone in proper credit,
by means of the sterling commercial credits system. There is
no lack of facilities.
The use of these facilities, however, involves the use of
London acceptances and in this connection it has often been
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said that we should not have to pay tribute to English bankers
for this service, but should perform it for ourselves.
Of course, American banks can establish branches under the
new law in London and if they desire they can usually sell
their acceptances in sterling to a limited amount, but the
economy of such action is doubtful. On the average, this
method would be at least as wasteful as the present system,
and therefore, the country as a whole would not be benefited.
In order to get sterling acceptance business, such branch
banks would have to cut the rate below that quoted by their
foreign competitors. Experience has shown that the present
rates quoted by the joint stock banks in London are the very
lowest possible. In fact, it has been claimed that competition
has made them unfair to the acceptor, and that the present
level will have to be raised eventually. The risks of the business demand at least that no further concessions be made if
stability, profit and safety are to be considered. Suppose,
however, that an American importer succeeded in buying an
American bank's sterling acceptance at a commission rate below the English bank's quotation. He would find that the
seller of the goods would not get so favorable a price for
the bill as he would if it were drawn on one of the prime
English banks or the important accepting houses of England.
The seller of the goods would therefore have to raise his price,
include the loss in his invoice, or get the difference out of
the buyer in some other way. Thus the buyer would really
pay the full English commission in an indirect manner for
a credit not so favorable.
The time bill in sterling on a branch of an American national bank in London, would not bring so good a price as a
bill on an English name, not only because the world's traders
do not know it so well, but also because the London discount
market would look upon such as foreign bills, and would receive them usually at a higher rate of discount in only limited
amounts, and quite often, in critical times, not at all. They
would not be available for rediscount in the Bank of England,
they would be handled simply on the basis of a loan, and the
line of the endorser with the negotiator would be reduced accordingly.
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Another reason why Americans as a nation should consider
carefully the question whether or not they shall use their
new acceptance privilege in any national bank branch established in London is that the price we as a nation pay for
foreign capital under the existing acceptance system is an extremely reasonable one. If we had the power to take over
to ourselves the present American business of this sort, would
it be wise to do so ? We are a growing nation, with need for
foreign capital and with much in the way of undeveloped
resources in our own land. Would not our invasion of the
English market probably result in some restriction being
placed on the present liberal lines of credit granted American
banks and merchants by the London banks and discount
houses? If so, it is of first importance that every effort
should be made by American bankers and merchants to discourage any attempt to spoil the English acceptance business
by means of cut rates, and to allow present relations in that
market to remain undisturbed as far as possible.
On the other hand, some say that we could instruct sellers
to draw in dollars on American banks in America, at say
two, three, four or six months' sight, and not complicate matters by introducing another currency. In most of to-day's
transactions, this would be working contrary to the great currents of trade and would be a handicap to our merchants.
London is the clearing house for almost all the important
international commercial operations of the world, occupying
a position which is impregnable at present and which cannot
be altered until the accumulation of a larger amount of capital
at some other center has made a change possible. England's
capital, which she has kept constantly employed in this business for many years, the volume of her foreign trade, her long
established commercial connections and her reputation for
conservatism, honor and fair trading, make sterling still the
world's best commercial medium of exchange. The franc,
mark and dollar exchanges are secondary, and while useful
under special conditions, they do not always find the wide
market that exists for sterling.
Bankers and merchants
everywhere have accounts in London, and deal in London
funds. They figure more closely on sterling than they will
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do on any other currency. Everybody everywhere knows the
value of sterling. It is the most favorable of the exchanges
and has the greatest stability. The minds of traders in all parts
of the world have been trained to it for generations. The
buyer and the seller in most places can get together on a closer
basis through its medium than in any other way as things stand
to-day, and until conditions radically change sterling is dominant in the world's trade. Other methods should be adopted
to make the new acceptance privilege really serve the people
of America.
Dollar acceptances are most promising from the viewpoint
of developing a new field which will be permanent, on a fair
trading basis, and truly our own. If they are ever to be received by the world on a high credit basis, they will have to
be carefully introduced and their use will have to be properly
restricted by the acceptors. The line of least resistance will
be for us to try to conform with the customs of trading used
by the rest of the world. If we find that our merchants can
trade to advantage by the use of our dollar acceptance system,
and that it has value in a certain part of the world, then we
should introduce our system gradually in that part of the
world and there only. We should by all means avoid any
effort to force dollar acceptances. When the time comes that
America has capital to spare from domestic enterprises for
the financing of foreign trade, and when our position in trade
in the world's markets is such that the men of other places
think prices in dollars, when they have close relations with
us, and when an active exchange market for dollars exists,
then, but not until then, to any great degree, will dollar
acceptances be economical and useful, and will find their field.
The real economic use for dollar acceptances will be found
in financing trade with the countries in which dollars are the
dominant exchange. The exceptionally long tenor of the foreign trade bills the federal banks will take, indicates that
the framers of the bill have recognized this and have specially
desired to help finance the long-time credits which our merchants have to give to meet German competition in LatinAmerican countries. These countries seem to be the most
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change, and here exists a chance to make a most satisfactory
use of dollar acceptances, a use that will conform to the intention of the law makers and one that will be perfectly
natural.
As to foreign branches — the spirit of these privileges is
that such branches are to be established only where it is
shown to the Federal Reserve Board that they will further the
commerce of the United States. It would seem that the present method of reciprocal relations covers fairly well trade
naturally clearing through Europe, but possibly a few of the
largest banks may believe that their special interests make it
desirable for them to have branches in London, Paris and
Berlin. If such branches are conducted conservatively and
for the good of the nation's trade, it may prove a difficult
task to make them pay, inasmuch as reciprocal relations are
partly destroyed and retaliation is invited. It is doubtful if
many will find it worth while if they confine their activities
to commercial banking.
The places on the American hemisphere, where our natural
opportunities along this line appear to lie, will probably be
ignored at first, and while branches might be useful in some
of these places even at the present time, it is true that ventures
in such countries are fraught with considerable danger when
not manned by experts, and they should be entered into most
carefully. There must be a good deal of business done by
our merchants before it will be profitable to establish American banks in Latin-American countries. If there had been a
quantity of profitable business in view, there are financial
institutions already in existence who could have entered the
field ere this, but few have done so.
The proposed acceptance and branch bank measures, therefore, may prove dangerous to our foreign trade if unscientifically used, but if they are carefully regulated by the Federal
Reserve Board and confined by the national banks to their
proper sphere of usefulness, they will work for good. It
will take time to instal them in this way, however, and
the present methods of financing imports and exports, which,
after all, have a great many compensating advantages, will
not change radically at once.
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DISCUSSION OF DOMESTIC AND FOREIGN
EXCHANGE RELATIONS
MR. JOHN PERRIN:

I should like to touch upon two points connected with the
matter of internal exchanges, since they form the basis of the
very strong objection on the part of country bankers to the acceptance of the provisions of this bill. That subject has been
gone into here so thoroughly that I wish simply to raise two
points that did not seem to be touched upon. In the discussion last week before the Economic Club in Boston, Mr. Samuel
Untermyer made a statement that the profits of country national banks were seventy-two million dollars last year, of which
about one-fourth came from exchange charges upon checks sent
for collection and remitted. These charges, he said, constitute
an unjust burden upon commerce. It is rather important to
consider the exact ultimate result of such charges. I assume
that the number of banks in the cities of the South and the
West, and in sparsely settled districts generally, depends upon
the profits which may be made in operating these banks. If
they make one-fourth of their present profits from these exchange charges, then the result of doing away with the charges
must be some liquidation of the banks, and less bank facilities
for those sections that require them. At the present time those
charges are absorbed largely either by city bank or city merchant. The ultimate consequences of the elimination, then,
will be not simply the abolition of the charge which is now
being paid by city banks and city merchants, but the lessening
of bank facilities in country districts.
The other point was suggested in connection with the clear
and searching paper presented by Mr. Talbert. In conversation
with Mr. Butler, of the House banking and currency committee, I asked the question: " Is it to be understood that checks
accepted for collection by the federal reserve bank are to be
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plied, " I suppose so." How can a member bank in the interior
know what checks are being charged against its balances?
Each bank should have the right to take absolute control of its
own balances. Under the proposed provision it would be required to carry a balance sufficient to meet unknown collection
charges. Mr. Talbert's deduction that the plan would be impracticable is further emphasized by this point.
MR. W . C . F O R D :

Under the methods of the Boston check clearing house a
bank as close to New York as Stamford, or even closer, perhaps,
is expected to clear through Boston. Does not that naturally
come into the New York district?
MR. TALBERT:

Yes; during the investigation of the sub-committee of the
clearing-house committee, on which sub-committee I had the
honor of serving under Mr. James G. Cannon, among other
things we looked carefully into the question as to what points
should be free points. We came to the general conclusion that
for the benefit of trade the New York banks could well afford
to let in free any bank within twenty-four hours of New York
or any bank from which returns could be received on the morning of the second day from the time we cash a check, provided
always that they would remit New York funds without charge.
So we should have made that recommendation but that a large
number of the members of the New York clearing house were
conservative men, well along in years, and opposed to radical
changes. We could not get any other concession than to open
up the New England territory and New Jersey, a good part of
which is really suburban to New York. The Connecticut banks,
having a greater need for New York than for Boston funds,
wanted to come in, and bring to us forty millions of dollars that
are now carried in Boston, Baltimore and Philadelphia. We
gave them the option of coming in, but they have not come, because they cannot afford to. The small banks, in order to exist,
must exact a reasonable toll to cover their own expenses in remitting. The Connecticut banks, however, made the proposal
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that they would accept our terms on the condition that we would
establish a bureau similar to that used in Boston, but we were not
willing to do so. They offered to give us direct eight or nine
cents a thousand, which they would have to pay through the
clearing house anyway.
A MEMBER :

Now you are gradually moving to the point where every depositor in an American bank will be made to pay something for
the privilege of keeping his account.
MR. TALBERT :

He certainly ought to. I picked up an example last winter.
Ann Arbor has about five thousand students and probably almost half of them keep bank accounts. The banks charge all
those students a moderate fee for keeping their accounts. The
large banks in some cities estimate that it costs them a dollar a
month to handle small accounts.
A MEMBER :

I do not understand Mr. Talbert's point concerning the value
of the clearing system to commerce. You state that the Boston
system is the most perfect yet developed, and that it has reduced the cost of collection to probably seven cents a thousand
dollars. Nevertheless only lojfe of the bank clearings go
through by that method. Manifestly some other clearing
method is more beneficial either to the banks or to the community.
MR. TALBERT:

It is more beneficial to the interior bank. The meat of the
whole cocoanut is this—the actual final transportation of a certain amount of money is necessary for the maintenance of reserves. Also, there is a certain amount of expense in the way of
clerk hire, postage, stationery, rent, salaries, and other unavoidable charges for conducting a business. The country
banker is exposed to those charges quite as much as we are in
the great places, and perhaps the charges are greater in proportion to the volume of his business. It is therefore necessary
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for him to impose this small exchange charge. It is not very
much on each transaction, but in the aggregate it amounts to
an enormous sum. He is bound to impose that or suffer a loss.
What advantage is it to his bank, he argues, that every customer of all the other banks of his town can have their checks
circulated either in Boston or in New York ? If they want to
make a payment there, let them pay hiin ten or fifteen cents for
a draft. Being deprived of that legitimate charge he takes it
off the check, and commerce pays the charge, no matter how it
comes in.
MR. J. H. MITCHELL:

I should like, if I am not out of order, to refer to Section 15
of the bill, which provides for open-market transactions. I
have been informed that the object of that is to protect the gold
reserve of the regional reserve banks; for that reason I think it
is proper perhaps to bring the matter up at this time. The
wording of this section gives the regional reserve bank the right
to go into the open market and purchase bankers' bills, also to
deal direct with farmers, corporations and individuals, and to
purchase such bills as are eligible for rediscount. I should like
to ask if, by this section, the reserve banks have the right to
purchase commercial paper in the open market in competition
with the member banks?
MR. GARDIN :

No; that relates solely to foreign transactions. I think it
goes a little bit too far in permitting the federal reserve banks
to go into the open market, because I do not think they can do
it successfully. But such privilege is an absolute necessity in
order to protect the gold supply. The member banks probably
need it for their own purposes, as they would refuse to hand
their paper over to the federal reserve bank unless at exorbitant
rates. Therefore the federal reserve bank must have the right
to make a bid itself. I think it is a wise provision, though from
a selfish standpoint I should rather not see it in the bill. It will
prevent any extortion on the part of the member banks in selling exchange to the federal reserve bank when it needs to am(226)

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plify a foreign portfolio.
tion?

RELATIONS

227

Does that quite answer the ques-

Mr. MITCHELL:

Not exactly.
foreign bills.

It certainly does not confine the transaction to

MR. GARDIN :

I think a previous section, however, provides that a reserve
bank can give out paper only for its member banks; therefore
it stands to reason that it cannot go out into the open market
and buy domestic paper.
A MEMBER :

Mr. Mitchell, you have in mind, of course, what we term
commercial paper in this country. Is that what you had in
mind?
MR. MITCHELL:

Yes.
A MEMBER:

They could not purchase that. We have really no commercial paper in this country; we call notes on manufacturers' dealings commercial paper. The money borrowed may be used for
commercial purposes, but I have known cases where it was used
for building houses and doing other things of a permanent nature. They could not buy that kind of paper.
MR. MITCHELL :

That is what we hope it means, but does it?
A MEMBER :

Even if it did not, as Mr. Gardin points out, the federal reserve banks would not have the facilities for gaining credit information necessary to compete successfully with commercial
banks in buying domestic paper; consequently they would prefer
to buy paper that comes within the purview of the law. As
Mr. Gardin says, it is absolutely essential that the reserve bank
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for its own protection should be permitted to go out into the
open market in competition with members and the private
bankers. The regional banks could not control the gold movement merely by changing the discount rate; they would have
to protect themselves by purchasing exchange in the open
market.
MR. TALBERT :

The sense of that whole section, it seems to me, is that they
can buy no paper of any kind, domestic or foreign, or at any
rate, no domestic paper, without the endorsement of a member
bank.
A MEMBER :

I had the same impression that Mr. Talbert has when I first
read the section, but my attention was called to the fact that
another construction was possible. I went to Mr. Glass, chairman of the banking and currency committee of the House, and
asked the question: " Are the reserve banks under Section 15
permitted to buy commercial paper? " His reply was that that
was the intention of the bill and that the purpose of the provision was to equalize and reduce rates. Section 15 is one of
the most important sections af the bill and one that ought to be
thoroughly understood. It should contain absolutely no ambiguity.
MR. STERN :

I desire to be enlightened about one important point of the
bill. Acceptances, reserves and deposits are all interdependent,
are they not? We have a section in the bill defining what reserve shall be held against deposits. Are the banks to hold reserves against acceptances, which are contingent liabilities ?
O. M. W. SPRAGUE, Harvard University:
The bill provides that the reserve shall be on outstanding demand liabilities. An acceptance is not a demand liability, but
it matures in the future. No reserve is required against time
liabilities.
PROFESSOR

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MR. GARDIN :

An acceptance is an obligation of the bank's customer, and
that is a protection. If the acceptance were made by the bank
in order to borrow money, then it would be a different thing.
Then, properly speaking, a reserve ought to be called for. But
as it is a liability of the customer, his financial condition is
closely inquired into before a bank gives its acceptance. Hence
the possibility of any loss consequent upon this acceptance liability is so remote that it would be absurd to call for a reserve
against it.
A MEMBER :

Must not the banks keep a reserve against deposits on certificates, though they are time liabilities ?
PROFESSOR SPRAGUE :

The bill refers to the institutions to be established; they have
no right to take time deposits. In speaking of the reserve of
national banks it is necessary to use the term "deposits," but
when speaking of the federal reserve banks the law very properly uses the expression " demand liabilities," since the federal
reserve bank may not receive time deposits.
F. B. WHITNEY, Waukegan, 111.:
The United States has a favorable balance of trade exceeding
a half billion dollars. Cotton and petroleum products, provisions and breadstuffs, copper and tobacco furnish half of our
exports.
Foreign countries must buy these products from the United
States; in fact, about three-fourths of our exports sell themselves and tend to control their own terms of sale and delivery;
generally f. o. b. port export and cash against documents or
rarely to exceed ninety days' payment. However, the marketing of the immense crops of cotton, wheat, corn and other
staples often produces great anxiety in financial and business
circles and sometimes causes such a tight money market that
the government comes to the aid of the embarrassed bankers in
the crop districts.
MR.

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If the United States had one or more powerful foreign trade
banks, they could aid materially in financing the movement of
the crops from the field to the foreign buyer.
It is in the export of finished manufactures, however, that we
most need the services of American branch banks abroad.
England and now to an important extent Germany has rich
trading concerns and banks with branches in every part of the
world. In London alone there are nearly one hundred foreign
and colonial banks. Hence England and Germany are masters
of foreign credits, and herein lies one secret of their success in
exporting finished manufactures in competition with the United
States.
Europe will sell manufactures in foreign lands, c. i. f. import
port, draft to be accepted upon arrival of the shipment in port,
shipping documents to be delivered upon acceptance of draft
and payment, to be made as necessary in either 60, 90, 120,
180, or 270 days after acceptance, depending upon the character
of the goods and the import country. German banks through
accounts current give personal credit to exporters who are allowed certain amounts of overdrafts from which they may pay
cash to the German manufacturers. Both England and Germany with their innumerable foreign merchants and banks to
give quick reliable information as to the daily standing of foreign buyers extend large open credits throughout the world.
Probably the average credit based upon documents does not exceed ninety days, but whenever necessary credits are extended
even to a year. The banks discount this long-time paper.
Probably drafts not exceeding ninety days will sell and finance
the greater proportion of the United States' exports of finished
manufactures; but we lose annually sales that aggregate immense sums because the United States has not seen fit to grant
the longer credits given in Europe. This conservatism is at
present inevitable; for the average United States export manufacturer has no available means to secure quickly proper trade
information regarding the standing of prospective buyers. No
great expansion of our exports of manufactures can be hoped
for as long as we depend upon English and German banks to
finance the marketing of them.
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The federal reserve bill furnishes the discount facilities needed
to extend foreign trade, but the benefits may be more apparent
than real because New York will naturally try to continue her
monopoly of the foreign exchange business. It might be prudent to insert in the act provisions that will permit any great
section of the country to marshal its banking forces to protect
its special interests abroad. The South might well be benefited
by having a great " cotton " bank in England, and thereby cut
out middleman commissions and eliminate certain abuses that
injure the planter.
There are many ways to establish a great foreign trade bank
or banks. Economically the ideal would be a system in which
the federal reserve banks jointly owned a great foreign trade
bank with branches throughout the world. Let the national
local banks negotiate the exchange business in each district and
then turn it over to the jointly owned reserve bank, which in
turn could refer the business to the jointly owned foreign trade
bank. This bank could face London with the accumulated
power of the United States behind it. The federal reserve
board can establish liberal regulations and modify them as experience dictates. Let the bank and the traveling man enter
into foreign markets side by side; the result will gratify the
American workman and manufacturer.
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PROCEEDINGS OF THE SECOND CONFERENCE ON
CURRENCY REFORM HELD IN NEW YORK,
OCTOBER 14 AND 15, 1913
In view of the probability that important legislation on currency and banking would be enacted by Congress during the
latter part of the year 1913, it was decided by the executive
committee of the Academy of Political Science in the spring of
that year to devote its fall meeting to the subject of currency
and banking legislation. The wide interest awakened by the
conference held in 1910 led to the belief that a second meeting
of the same general character would have a considerable educational value.
GENERAL COMMITTEE

The following gentlemen consented to serve as a general
committee for the organization of the conference:
John H. Finley, Chairman
Frank B. Anderson, San Francisco, Calif.
A. Piatt Andrew, jr., Boston, Mass.
Nicholas Murray Butler, New York city
John Claflin, New York city
Henry P. Davison, New York city
Davis R. Dewey, Boston, Mass.
Cleveland H. Dodge, New York city
Fred. W. Fleming, Kansas City, Mo.
A. Barton Hepburn, New York city
Henry L. Higginson, Boston, Mass.
Edmund J. James, Urbana, 111.
Jeremiah W. Jenks, New York city
Samuel McCune Lindsay, New York city
Robert J. Lowry, Atlanta, Ga.
Henry Morgenthau, New York city
John Perrin, Pasadena, Calif.
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Lawrence C. Phipps, Denver, Colo.
Carl C. Plehn, Berkeley, Calif.
Julius Rosenwald, Chicago, 111.
Charles F. Scott, Iola, Kansas
Henry R. Seager, New York city
E. R. A. Seligman, New York city
William F. Slocum, Colorado Springs, Colo.
Robert W. Speer, Denver, Colo.
James Speyer, New York city
Benjamin Strong, jr., New York city
Frank Strong, Lawrence, Kansas
E. F. Swinney, Kansas City, Mo.
Frank W. Taussig, Cambridge, Mass.
Frank Trumbull, New York city
Theodore N. Vail, New York city
Frank A. Vanderlip, New York city
Henry Walters, New York city
Paul M. Warburg, New York city
Harry A. Wheeler, Chicago, 111.
H. Parker Willis, New York city
EXECUTIVE COMMITTEE

The services of Professor E. W. Kemmerer of Princeton
University were secured as secretary, and the arrangements for
the meeting and the drawing up of the program were in the
hands of the following executive and program committee:
Henry P. Davison
A. Barton Hepburn
Joseph French Johnson
Alexander D. Noyes
George A. Plimpton
Henry R. Seager
E. R. A. Seligman
Theodore N. Vail
Paul M. Warburg
H. Parker Willis
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Samuel McCune Lindsay, Chairman ex-officio
E. W. Kemmerer, Secretary
Edward J. Bullwinkel
David M. Heyman
Thomas H. Watson, jr.
Assistant Secretaries
STATE DELEGATES APPOINTED BY GOVERNORS

The following delegates were appointed by the governors of
the states named:
Delaware.—John S. Rossell, L. Scott Townsend, Sylvester
D. Townsend, Caleb M. Sheward, Otho Nowland and Ezekiel
Cooper, Wilmington.
Iowa.—Robert J. Fleming, Des Moines; R. O. Green, Fort
Dodge; J. L. Waite, Burlington; Geo. W. French, Davenport;
Ben Bear, Decorah; Geo. E. McLean, Dubuque; B. P. Hoist,
Boone; L. A. Hamill, Keokuk; Lee Nagle, Red Oak; Harry J.
Green, Decorah; Thomas D. Foster, Ottumwa; J. H. Darrah,
Chariton.
Maryland.—J. H. Hollander, Robert Garrett, B. H. Griswold, Waldo Newcomer, H. F. Baker and W. H. Maltbie,
Baltimore.
Michigan.—E. H. Doyle and B. F. Davis, Lansing; George
B. Morley, Saginaw; George E. Lawson, Detroit; George H.
Young, Bay City; F. H. Williams, Allegan.
Minnesota.—N. F. Banfield, Austin; F. A. Chamberlain,
Hovey C. Clark, E. W. Decker, C. M. Harrington, F. E. Kenaston, F. M. Prince, E. P. Wells and F. G. Winston, Minneapolis;
Geo. A. DuToit, Chaska; E. H. Bailey, John H. Mitchell,
Geo. H. Prince and J. W. Wheeler, St. Paul; A. D. Stevens,
Crookston.
Mississippi.—J. F. Flournoy, jr., Canton; F. W. Foote, Hattiesburg; Oscar Newton, Jackson; Walter Broach, Meridian;
W. Thomas Rose, Vicksburg.
Nebraska.—?. L. Hall, Lincoln; J. H. Millard, Omaha; J. W.
Wilson, Stromsburg; C. F. Gund, Blue Hill; Geo. Kingsley,
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Minden; Patrick Walsh, McCook; A. L. Clarke, Hastings; J.T.
Trenery, Pawnee City.
New Jersey.—Robert D. Foote and A. G. Evans, Morristown; William C. Heppenheimer, Hoboken; E. I. Edwards,
Jersey City; Uzal McCarter, Newark; B. H. Minch, Bridgeton ; Frank A. Fetter, Princeton.
New Mexico.—E. A. Cahoon, Roswell; M. W. Flournoy,
Albuquerque; H. J. Jones, Tucumcari; John W. Harris, Las
Vegas.
New York.—Ledyard Cogswell and John A. Becker, Albany;
James G. Cannon, Willard V. King, J. W. Jenks, Willard D.
Straight and Thomas W. Lamont, New York city; Ansley
Wilcox, Buffalo; Merwin K. Hart, Utica; Pliny T. Sexton,
Palmyra; Norman Mack, Buffalo; Simon Hessburg, Albany;
Walter F. Willcox, Ithaca.
Pennsylvania.—Henry Tatnall, Joseph Moore, jr., Levi L.
Rue, Edward M. Malpass, Richard L. Austin, Alba B. Johnson
and Edward Sherwood Meade, Philadelphia.
Rhode Island.—George H. Newhall and Marsden J. Perry,
Providence.
South Carolina.—Louis Appelt, Manning; D. S. Henderson,
Aiken; Fred. D. Dominick, Newberry; Samuel J. Nicholls,
Spartanburg; Claude N. Sapp, Lancaster; D. Gordon Baker,
Florence; W. A. Stuckey, Bishopville; W. J. Talbert, Parksville; J. R. Vandiver, Anderson.
Tennessee.—Frank J. Harle, Cleveland; W. K. Armstrong,
Rogersville; W. B. Greenlaw, Columbia; H. J. Bowers, Tracy
City; T. J. Taylor, Martin; S. F. Thomas, Brownsville; F. M.
Mayfield, Nashville.
Texas.—W. W. Collier and E. P. Wilmot, Austin; B. L.
Gill, New York city; E. O. Dunlap, Waxahachie; E. O.
Tennyson and J. B. Adoue, Dallas; J. S. Rice and H. M.
Garwood, Houston; John Sealy, Galveston; R. L. Warren,
Terrell; Sidney Webb, Bellevue; K. M. Van Zandt, J. S.
Spencer, Noah Harding, Ben O. Smith, W. H. Eddleman,
John Sparks, T. B. Yarbrough, E. E. Bald ridge and W. B.
Newby, Fort Worth.
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West Virginia.—B. W. Peterson, N. B. Scott, W. B. Irvine
and H. C. Ogden, Wheeling; A. B. Fleming and L. M. Davis,
Fairmont; V. L. Highland, Clarksburg; A. B. White, Parkersburg; John L. Dickinson and F. M. Staunton, Charleston;
C. W. Dillon, Fayetteville; J. L. Caldwell and Taylor Vinson,
Huntington; Isaac T. Mann, Bramwell; S. D. Camden, Parkersburg; William E. Arnett and Blaine E. Elkins, Morgantown; W. L. Smith, jr., Chester; Wells Goodykoontz, Williamson ; V. Skye Straley, Princeton; Felix Elliott, Kingwood.
Mr. John T. Manson attended as the official delegate of the
New Haven Chamber of Commerce.
In addition to delegates and members of the Academy, many
prominent bankers and students of financial affairs attended the
meetings of the conference.
Five sessions were held. By the courtesy of the New York
Chamber of Commerce its hall was placed at the disposal of the
Academy for its meetings on October 14th, and between the
sessions a luncheon was served to those in attendance.
Hon. Robert L. Owen of Oklahoma, Chairman of the United
States Senate Committee on Banking and Currency, and Hon.
Robert J. Bulkley of Ohio, member of the House of Representatives Committee on Banking and Currency, addressed the
first session of the conference, explaining and defending the
provisions of the proposed Owen-Glass bill. Hon. Carter Glass
of Virginia, Chairman of the House of Representatives Committee on Banking and Currency, who had accepted the invitation of the Academy to be present, was detained by illness.
His paper was read by title, and appears elsewhere in this
volume (page 12). A large number of leading New York
bankers listened to these addresses.
Two sessions were held at Earl Hall, Columbia University, on
October 15, and in the evening a large dinner meeting, presided
over by Dr. John H. Finley, President of the College of the
City of New York, was held at the Hotel Astor. The members
of the House and Senate Committees on Currency and Bank(236)

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No. i l

PROCEEDINGS

OF THE

MEETING

237

ing were guests of honor. Professor Karl Rathgen, Kaiser
Wilhelm Professor for the year 1913 ; Professor Josef Schumpeter, Austrian Exchange Professor in Columbia University;
and Sir Courtenay Ilbert, Clerk of the House of Commons,
also were present as guests of honor. The address of the evening was delivered by ex-Senator Nelson W. Aldrich, Chairman
of the National Monetary Commission.
Prof. Samuel McCune Lindsay, President of the Academy,
presided at the first and fourth sessions; Prof. £. W. Kemmerer, of Princeton University, at the second session; and Prof.
E. R. A. Seligman at the third session. The program follows:
FIRST SESSION
Tuesday, October 14, 1913
New York Chamber of Commerce, 65 Liberty Street
THE FEDERAL RESERVE ACT

Address of Welcome by John Claflin, President of the
Chamber
Speakers
Hon. Robert L. Owen, Chairman of the United States Senate
Committee on Banking and Currency
Hon. Carter Glass,1 Chairman of the House of Representatives Committee on Banking and Currency
Hon. Robert J. Bulkley, member of House of Representatives Committee on Banking and Currency
General discussion
SECOND SESSION
Tuesday, October 14, at three o'clock
New York Chamber of Commerce, 65 Liberty Street
1

Address read by title.
(237)

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238

SECOND

CURRENCY

CONFERENCE

[VOL. IV

THE CENTRALIZATION OF BANKING AND MOBILIZATION OF
RESERVES

I. Scope and Organization of the Proposed Regional Banks
H. Parker Willis
0. M. W. Sprague
A. Barton Hepburn
2. The Mobilization of Reserves
Arthur Reynolds
Discussion: Alexander D. Noyes
General Discussion
THIRD SESSION
Wednesday, October 15, at ten-thirty o'clock
Earl Hall, Columbia University
THE ELASTICITY OF CREDIT

1. The Rediscount Functions of the Proposed Regional Banks
Frank A. Vanderlip
2. The Note Issue
Joseph French Johnson
E. W. Kemtnerer
Discussion: Edward L. Howe,* Irving T. Bush and A. Piatt
Andrew
FOURTH SESSION
Wednesday, October 15, at two-thirty, Earl Hall
FOREIGN AND DOMESTIC EXCHANGE FUNCTIONS OF THE
REGIONAL BANKS

1. Domestic Exchange Problems
IV. M. VanDeusen
Fred. I. Kent
Joseph T. Talbert
1

Address read at afternoon session.
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No. i ]

PROCEEDINGS

OF THE

MEETING

2. Foreign Exchange Problems
John E. Gardin
J. A. Neilson
General discussion
FIFTH SESSION—BANQUET
Wednesday evening, October 15, at Hotel Astor
BANKING REFORM IN THE UNITED STATES

Address by Honorable Nelson W. Aldrich
(*39)

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PROCEEDINGS
OF THE

ACADEMY OF POLITICAL SCIENCE
IN THE CITY OF NEW YORK

Volume I V ]

JANUARY, 1914

[Number 2

GOOD ROADS AND CONVICT LABOR

THE ACADEMY OF POLITICAL SCIENCE
COLUMBIA UNIVERSITY, NEW YORK

1914

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COPYRIGHT BY
T H E ACADEMY OP POLITICAL SCIENCE

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CONTENTS
FACE

I FOREWORD
Charles Henry Davis

i

II EMPLOYMENT OF CONVICT LABOR ON ROAD
CONSTRUCTION IN NORTHERN STATES
Sydney Wilntot
INTRODUCTION

The Engineer and Contract Labor

.

.

.

6

ROAD CONSTRUCTION BY CONVICT LABOR

The Prison Situation .
.
Good Roads
.
.
.
Convict Labor and Roads

.
.

.
.

.
.

.
.

6
8
IO

CONVICT ROAD WORK IN THE NORTHERN STATES

Historical .
The Honor System
History by States
Cost Data

.
.

.

.

11
. 1 2
17
39

PRESENT STATUS

Advantages of Convict Work on Roads
Competition with Free Labor . . . .
Effect on Prisoner
Advantages to the State
Payment of Wages .
.
.
Operation of System .
.
.
.
Honor System
.
.
Uniforms, Food, Camps, Choice of Work .
Estimates and Records
Administration

•
.

45
46
48
51
S 3
55
5 5
56
57
58

POSSIBLE FUTURE DEVELOPMENT

Concrete Bridge Work
.
.
.
.
.
Modern Pavements
E a r t h w o r k . . . . . . . .
SUMMARY

60
62
62
63

BIBLIOGRAPHY

65
iii

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CON7EN7S
PACK

PRISON INDUSTRIES OF THE STATE OF
WISCONSIN
E. Stagg Whitin
Location
.
.
.
.
.
.
.
.
72
Working Capital
.
- 7 3
Management
Jf
Raw Material
.
.
.
.
.
.
.
80
Labor
83
Equipment
84
Manufacture .
.
.
.
.
.
.
.
86
Selling
87
Adaptation to Wisconsin of German Ideas
.
89
Recommendations
90
Bibb'ography
91

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FOREWORD
" Truth for Authority, not Authority for Truth "
CHARLES HENRY DAVIS
President, National Highways Association

S

OCIETY has, for centuries, manufactured more criminals
than human nature of its own accord produces. The
more fortunate, but not necessarily less criminal, have,
almost universally, cruelly punished those less fortunate brothers caught in their so-called crimes. Correction, instruction,
forgiveness, kindness have played but a small part in dealing
with the " criminal " or " convict." Would that we might
call him by a kindlier name! For many of us now think and
talk of him as of a different breed, forgetting that he is, after
all, a man. We cry out against slavery, yet legalize it for tens
of thousands. We scorn revenge, yet mete out vengeance in
the name of the law. We remove from society offenders
against society and forcibly detain them, for years, in surroundings as much unlike real society as is possible. We then
once more thrust them upon society untaught, revengeful,
weak, broken in mind and body, and wonder why they fall
again! Why should they not ? Has not society done its utmost to prevent their rise? And yet society places the responsibility upon these poor unfortunate beings! Most of
them are mentally deficient and should have our care and help
—not our contempt. Many of them have been sorely tempted
without ability to run from temptation. And all of us must
run! Some have led honorable and useful lives and would
continue to do so did society have the forbearance and
forgiveness of the parent towards the child. And society should have such forgiveness and thus restore men to
society and not brand them as criminals. Our modern prisons
are barbaric. They typify the medieval prisons, so loathsome
to our imagination, and yet we call them modern. They are
(*M>

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2

GOOD ROADS AND CONVICT LABOR

[VOL. IV

not. They still hold men in abject slavery, in idleness worse
than death. Without sun. Sometimes without light. With foul
air and fouler companions. Does this treatment, even of the
convict, produce repentance ? No, a thousand times no! Revenge, insanity, more crime are the inevitable results.
As in many other activities, our laws and their administration are fifty years behind the times. Once there, how many
of us could resist the debauching influences? How many of
us could resist the degrading example of those associates more
steeped in crime and hardened by their previous contact with
still earlier criminals? How many of us could return to the
life outside without a feeling of bitterness, or resentment,
against our whole social structure ? We have abolished negro
slavery, a paradise to that of criminal slavery. We maintain
institutions little better than the torture chambers of ancient
times. They are not designed for reform, tuition, enlightenment. They offer little incentive to right living, high ideals.
They are not places where erring humanity may be schooled
and trained to become good citizens. They are more fit to
drag and trample down into the mire the poor unfortunates
sent there for their " first offense." There, even plant life
does not exist. The grass, the plants, the flowers, the trees
do not grow within their yards. How much less does man!
Could there be greater shame to our nation than thus to cling
to the ancient custom of depriving men of their freedom,
shutting them up within four walls, leaving them to their fate ?
" Men are but children of a larger growth." But do we treat
our children in this wise? Do we not believe in pointing out
to them and making attractive and possible the road to virtue?
Do we rather enslave and chastise them unmercifully for
having failed to find it out themselves? We used to when
parents held the lives of their children in their hands! The
state now so holds the lives of its citizens. When shall we
take such power away? In our criminal procedure we now
have the spirit of punishment, cruelty, unkindness, physical
force, slavery, confinement, isolation, darkness, silence and all
the resultant evils thereof, resistance, revenge, sullenness, depravity, hopelessness, insanity.
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No. 2]

FOREWORD

3

We should turn on the light; we should give men the
sunshine, the free air and fields of the country. We
should have, and thus give, hope, faith, help. We should
correct, not punish. We should be kind and square and our
" pals" will respond most wonderfully. Children are not
controlled by physical force. Deliberate, low-voiced, firm
kindness and square doing gain their obedience. So it is with
their larger brothers. What results to be attained by such a
change—change in our moral acknowledgment of the wrongs
we have done to the convict! We have been too long blind
to this wrong thinking and doing. We have had too much
pride, too little charity. We have admired too long the public
prosecutor. We have delayed too long the coming of the
public defender.
How can we do all this? We must do something with
those who violate the rules. Yes! But that something should
be to help them not to break the rules again. Temporary
exile, into a temporary society as nearly as possible like the
one they left, would seem the best solution. They would thus
be learning to play the game according to the rules. Responsibility, during their temporary exile, would increase the desire to play so well, so fairly, that they could go back from
whence they came. To do this we must get them " Back to the
land." But how? One way is via good roads, although some
prefer railroading! To have Good Roads Everywhere
throughout these United States will mean more to this nation
than any other development since our Declaration of Independence. During all ages it has been of primary importance
to provide a people with means of intercommunication. People, like water, must move or stagnate. They must run and
play like the brook itself or become sluggish and dull—to
themselves as well as to others. Of the seven modes of intercommunication—water, roads, post, railroad, telegraph, telephone, and wireless—only one, roads, is free to all the people
of the earth. Roads are the most universally used and are
therefore the most beneficial to the greatest number of people.
The importance of Good Roads Everywhere is paramount—
their benefits are all-embracing.
(«43)

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4

GOOD ROADS AND CONVICT LABOR

[VOL. IV

There are 18,000,000 children who endeavor to attend
school. There are over 30,000,000 who should attend school.
Why don't they ? Largely because during much of the school
term a considerable part of the 2,000,000 miles of our roads
is impassable. This is shown by the fact that only nine-tenths
of one per cent (0.9%) of the urban white population of the
United States of native parentage is illiterate, while rural
illiteracy is six hundred per cent greater in the same class of
inhabitants. How can we have or get good schools in the
rural districts if we have not the good roads to reach them at
all times and in all seasons? If we do not have good schools,
and illiteracy results, then we help—in the best possible way—
the growth of the criminal classes.
The relation of good and bad roads to illiteracy, and thus to
crime, is indicated by the following table:

Native White of
Per cent
Native Parentage Improved
Roads
Total Population
(»909)
(1910)

Per cent of Illiterate
Native Whites of
Native Parentage
(1910)

Total
Mew England:
Maine, New Hampshire,
Massachusetts, Rhode
Island, Connecticut
South Atlantic:
Delaware, Maryland,
Virginia, West Virginia,
North Carolina, South
Carolina, Georgia,
Florida
Pacific:
Washington, Oregon,
California
West South Central:
Arkansas, Louisiana,
Oklahoma, Texas

2,135,801

Urban Rural

22.2

0.7

0.5

6.7

8.0

2.2

9.8

14.2

0.4

0.3

0.6

2.6

5.6

1-4

6.8

6, SS2.681
5.397.864
12,194,895

1,684,658
4,192,304
4,101,510
8,784.534

This table does not of course include foreign-born, nativeborn of foreign parentage, or negroes, all of whom are ex(*44)

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No. 2]

FOREWORD

s

eluded for obvious reasons. Illiteracy is eleven times greater
in the South Atlantic States than in New England, while the
percentage of improved roads (such as they are) is less than
one-third. Similar figures for the Pacific and West South
Central are: fourteen times greater illiteracy, while the percentage of improved roads is less than one-fifth as much. The
excess of illiteracy in rural over urban New England is only
one hundred and forty per cent, while in the South Atlantic
States this excess is nearly four hundred per cent, due to the
lower percentage of improved roads. This difference is
slightly greater in comparing the other two groups in the table.
The children of today are the electors, the representatives,
the senators, the judges, one of them the President, of tomorrow. The population is increasing by leaps and bounds.
If education means liberty, and if poor roads mean illiteracy
or worse, have we a right not to build good roads, even if they
would not pay for themselves well within the generation which
builds them ?
To-day we have preventive medicine. Instead of waiting
to cure people of disease we are bending every effort to prevent
disease. Why not profit thereby? Crime is a crime? Idleness more than any other one thing produces moral deterioration and crime. The building of " Good Roads Everywhere "
by the nation, the state, the county and the town will give constant employment to the army of unemployed. This will tend
to prevent crime if we apply it rightly.
What better thing than to employ those temporarily withdrawn from our society, in the building of " Good Roads Everywhere?" Such a policy will be of vast economic advantage to
the nation. It will give brawn, brain and heart to those most
needing it. It will give them freedom of mind and body. It
will give them inspiration, hope. Tear down our prison walls,
and rear no more, for they are festering places for our fellow
beings. Let us no longer go back on those of our own mold!
Let us rather, from now on, give our " pals " a " square deal!"
We can be sure they will answer in kind!
(*45)

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USE OF CONVICT LABOR FOR HIGHWAY
CONSTRUCTION IN THE NORTH 1
SYDNEY WILMOT, B. S. IN C. E., A. M.

T

HE engineer is, or should be, a many-sided man; yet his
relation to the problem of convict labor is not apparent
to the casual observer. His interest in the matter is
not of his own choosing. Ever since the working of state
convicts on public roads has been advocated, opponents have
questioned its feasibility in actual operation. Assurance is
demanded of the success of the scheme in every particular
case, before its trial will be sanctioned. Can the convicts do
the work required under the peculiar conditions in each case?
How can they do it? And especially, will it pay? Answers
to these problems are demanded of the highway engineer.
CONVICT LABOR AND GOOD ROADS

It is unnecessary to go deeply into the need of a change in
the present system of dealing with convicts; penologists and
prison reformers have proved this necessity beyond a peradventure. Convicts are the property of the state to be used
as the state in its own wisdom and sovereign authority sees
fit. This is sanctioned by the constitution—legalized slavery.
Early it was seen that idleness is detrimental. Even to-day
in many prisons " solitary confinement" is the severest disciplinary measure in use. Prisoners have often been known
to develop insanity under its influence.2 " Satan finds some
mischief still for idle hands to do "—in this case, it is brooding, the aggravation of the desire for revenge, rather than the
consciousness of guilt.
1
An essay submitted in partial fulfilment of the requirements for the Degree
of Master of Arts in the Department of Highway Engineering under the
Faculty of Pure Science of Columbia University in the City of New York.
1
In the Ohio penitentiary during inactivity, eight men were transferred to
the prison asylum in one month, the previous average under contract labor
being about one per month.—New York Evening Sun, February 7, 1911.
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USE OF CONVICT LABOR IN THE

NORTH

7

History shows that through the evolution of our social institutions
the convicted man has been treated in two ways, both economic.
When economically valueless he has been killed; when economically
valuable he has been enslaved. In this country when the industrial
revolution created a demand for laborers, the children were seized
and thrown into the mills; a similar fate bef el the prisoner. In the
South the convict was turned over bodily to a lessee who clothed and
fed him and worked him as he willed. In the North, to meet the
demands of the public that big institutions be built, and to supply
the needs of the prisoners, the lessee was admitted into the prison.1
This system has rapidly degenerated until to-day its former
advantages are completely buried beneath the abuses to which
it is subject. Our prison shops have become the channel
through which the earnings of the prisoner have been diverted
from his family and the state to furnish public graft and
private profit. Methods of supervision patterned after those
of the old Roman galley are in vogue. The system produces
broken-spirited, distrustful, revengeful, and physically weakened men, who, by their condition and disposition are often incapable of earning an honest living, and who, by their appearance and manner, are unlikely to get the chance. The resultant
increase in our prison population and the multitude of offenders who repeat their offenses are incontrovertible proofs
of the inadequacy and absolute failure of our methods of
treatment.
Moreover, not only does the state suffer, but free outside
labor is brought into unfair and disadvantageous competition,
since the prices paid for prison labor are very low. Organized labor has not been slow in appreciating these facts or
backward in pressing its claim for the prevention of such
competition. Nor is this all; the prisoner's family, dependent
upon him for support, is deprived of the barest necessaries of
life. The shortcomings of the system have been two-fold: the
convict, the person most seriously affected, has been least considered ; and the innocent have been made to suffer instead of
1
Prison Labor, by E. Stagg Whitin. An address delivered before the
Woman's Department of the National Civic Federation at Washington, January, 1914.

(*47)

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8

GOOD ROADS

AND CONVICT LABOR

[VOL. IV

the guilty. The case against the whole system is succinctly
stated in a recent report:
Briefly summarized, the objection, then, to contract labor is that it
is not only a form of slavery, but an unjustifiable form of slavery,
because it is a delegated form in which the responsibility and authority are divorced. It is the exploitation of the helpless convict,
not for the profit of the state, but for the profit of a private corporation. It is the wrongful surrender and abandonment of the control
and jurisdiction over the person of a prisoner either to a greater or
less degree. It furnishes opportunity for convicts to communicate
with the outside world in violation of the rules of the institution and
to receive opium, morphine, cocaine and other forms of " dope," if
the employes of the contractor are subject to improper influence or
even unduly sympathetic. It furnishes opportunity for corruption
between the contractors and prison officials and officers of the law,
and subjects prison officials to criticism regardless of whether there
is any foundation in fact for the charges. It tends to destroy discipline, it impairs reformation and destroys hope on the part of the
prisoner; it is injurious to the manufacturer employing free labor;
it is unfair competition to free labor because it tends to destroy
the living wage and lessens the opportunity for labor, and on the
whole is uneconomically unsound.1
The contract-labor system, as such, is on the decline. Many
states have seen its iniquities and have legislated it out of
existence. The present problem is to find a suitable substitute.
The work done must fulfil the following conditions:
(1) It must not compete with outside free labor.
(2) It must be of benefit to the convict himself.
(3) It must be a benefit to the state.
(4) It must provide the means to rehabilitate the convict in
society after his release, or at least partially to sustain his
family and dependents during his imprisonment.
Turning to the other side of our problem, there is no need
to advocate good roads. Their usefulness is universally recognized and their need generally acknowledged. Lord Montague of Beaulieu says, " Road traveling is of far more importance than all other forms of locomotion combined." 2 Our
1
Report of the Committee Appointed to Investigate the Management of the
Iowa Penitentiary at Fort Madison, 1912.
* International Road Congress, Paris, October, 1908.

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No. 2]

USE OF CONVICT LABOR IN THE NORTH

9

country has fostered its industries by a protective tariff; has
developed its railway communication by land grants; has expended millions on its harbors, canals and inland waterways;
is issuing bonds for reclamation and conservation to increase
the productivity of its land; while its highways, the basic
means of communication between industrial communities and
the farm, have been left for local development. Our roads,
in comparison with our needs and resources for improvement,
are the worst to be found in any modern civilized country.
The advent of the motor vehicle brought the demand for
more roads and the necessity for better roads to suit changed
conditions. This fact has long since been self-evident, but the
satisfactory financial solution of the road problem remains to
be worked out in actual practise. Many conservative engineers and economists doubt the propriety of saddling unborn
generations with our road bonds. Whether or not it is right
to incur road obligations which do not become due until the
roads they represent have long since worn out, it will always
be economically desirable to secure roads as cheaply as is
possible consistently with serviceability, and to pay for them
as soon as possible after they are built or at least within the
life of the improvement.
The road situation was well explained by ex-Congressman
William Sulzer in his speech before the House of Representatives on July 12th, 1912 :
The plain people of the land are familiar with the truths of history. They realize that often the difference between good roads and
bad roads is the difference between profit and loss. Good roads have
a money value far beyond our ordinary conception. Bad roads constitute our greatest drawback to internal development and material
progress. Good roads mean prosperous farmers; bad roads mean
abandoned farms, sparsely settled country districts and congested
cities where the poor are destined to become poorer.
Good roads mean more cultivated farms and cheaper food products
for the toiler in the cities; bad roads mean poor transportation, lack
of communication, high prices for the necessities of life, the loss of
untold millions in wealth, and idle workmen seeking employment.
Good roads will help those who cultivate the soil, and feed the multitudes; and whatever aids the producers and farmers of our country, will increase our wealth and our greatness, and benefit all the
people.
(»49)

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IO

GOOD ROADS AND CONVICT

LABOR

[VOL.

IV

We cannot destroy our farms without final decay. They are today
the heart of our national life, and the chief source of our national
greatness. Tear down every edifice in our cities and labor will rebuild them, but abandon our farms and our cities will disappear forever.
One of the crying needs of this country, especially the South and
West, is good roads. The establishment of good roads would, in a
measure, solve the question of the high price of food and increasing
cost of living. By reducing the cost of transportation it would enable the farmer to market his products at a lower price and at a
larger profit at the same time. It would bring communities closer
together and in touch with the centers of population, thereby facilitating the commerce of ideas as well as of material products.
When the agricultural production alone in the United States for
the past eleven years totals $80,000,000,000, a sum that staggers the
imagination, and when we consider that it cost more to take this
product from the farm to the railway station than from such station
to the American and European markets, and when the saving in cost
of moving this product of agriculture over good highways instead of
bad would have built a million miles of good roads, the incalculable
waste of bad roads in this country is shown to be of such enormous
proportions as to demand immediate reformation and the exercise of
the wisest and best statesmanship.
But great as is the loss to transportation, material, industrial and
farming interests, incomparably greater is the material loss to the
women and children and the social life, a matter as important as
civilization itself. The truth of the declaration of Charles Sumner,
fifty years ago, that " the two greatest forces for the advancement of
civilization are the schoolmaster and good roads," is emphasized by
the experience of the intervening years and points to the wisdom of
a union of educational, commercial, transportation and industrial interests of our country in aggressive action for good roads.
Even the most ardent advocates of convict labor on public
roads do not think it a solution for all the problems of prison
labor and good roads. They do maintain that it has thus
far been uniformly successful when tried under fair conditions.
This contention they substantiate by citing the experience of
several states. In order to make possible a comparative study
upon a fair basis, the northern states have been selected for
treatment in this discussion.1
1
The remaining states, whose problems differ from those of the northern
states, are being treated in a supplemental thesis now in preparation under the
Department of Highway Engineering of Columbia University and the National
Committee on Prison Labor.
(250)

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No. a]

USE OF CONVICT LABOR IN THE NORTH

11

DEVELOPMENT OF CONVICT ROAD WORK IN NORTHERN STATES

It has been said that no treatment of the road question is
complete without some allusion to the old Roman highways.
These ancient thoroughfares are today the wonder of modern
engineers; and they were built by slaves, of whom a large
number were "servi poenae," (slaves of punishment), *'. e.,
convicts.1 It might almost be said that we are only beginning
to rediscover the best use for our prisoners, which Justinian
knew fourteen hundred years ago.
From the " servi poenae " of the Romans and the serfs of
the middle ages down to the convicts of today, society has always had a class in involuntary servitude, and has been face
to face with the problem of finding something for the prisoners
to do. Lacking the mine and galley, banishment or hanging
often solved the question. In later times, the government assumed all responsibility for the criminal class by building
prisons and keeping law-breakers therein. America, in need
of colonists, relieved the overcrowded English prisons until
African labor became cheaper and more adaptable for our
needs. Later, Australia formed an outlet for the rapidly increasing criminal class in England. In this country, as in the
mother country, conditions became deplorable so that the state
sold the labor of its convicts to greedy and unscrupulous
private individuals, hoping thereby to build and improve its
own institutions.2
It is from this form of slavery that we are only today
turning. The convict has had little chance, nothing to look
forward to, except despair. Now we are giving him an opportunity to make good and a reward for well doing. Lincoln
well expressed the difference when he said, " Free labor has
the inspiration of hope; pure slavery has no hope." By the
" honor system," our criminal " slaves " are allowed comparative freedom and every inducement is offered them to work
out their own salvation. Inasmuch as this feature is an
essential one and not restricted in its present use to any one
1
1

New American Encyclopedia, 1863, vol. XIV, p. 700.
Penal Servitude, by E. Stagg Whitin.

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locality or form of convict labor, although most highly developed in the West, it may well first be explained in full.
The unique characteristic of the honor system is the absence
of armed guards. At the beginning a makeshift, a matter of
economy, it has since become an essential. The expense of
guarding convicts is heavy and offsets all the other savings of
the system of production by convict labor. Moreover, the
presence of arms has a depressing mental and moral effect on
prisoners, lowering their spirits and working against efficiency,
increasing their suspicion and their desire for shirking and
escape. The honor system, when successful, is advantageous
in two ways. It lessens cost, because the guarding expense
is decreased and the output of the men increased; it develops
manhood, because the men are happier and more responsive, a
state making true reform possible. A certain measure of faith
in the prisoners has always been shown toward " trusties,"
but the present features of the honor system far outdo anything
of a similar character tried heretofore. Success depends upon
two factors, viz., the personality and attitude of the superior,
the warden of the penitentiary, with his subordinates, and the
discreet choice of the prisoners for the work. The warden
should be a student of human nature, open in manner and fair
in dealing, capable of showing and begetting trust, and, moreover, should exemplify " the square deal " in all things.
The prisoners are chosen after close and extended individual
study, the governing factor being temperament and capacity
for responsibility rather than nature of the crime and length
of sentence. It is not claimed that all prisoners receive benefit
from the honor system. The aim is, in every case, to do the
man good. To this end, his degree of liberty is dependent on
his estimated fortitude against the temptation to break his
word. Road work should be the type of labor granted to the
highest class of convict and should be the reward of good conduct and honest endeavor in less desirable employment. It
should be attended with special privileges, such as commutation of sentence and bonus in wage, which will tend toward
efficiency and good deportment.
The procedure is usually as follows: The honor system
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being known and the prisoner having expressed his willingness to try it (acceptance should be voluntary), the warden
gives him a heart-to-heart talk on manhood, expresses his
faith in him, and tells him he is about to get a chance to make
good. The man promises that he will faithfully comply with
all the rules of the camp, that he will not attempt to escape,
and that he will do his utmost to prevent other prisoners from
escaping. He is then committed to the road gang.1 Such is
the well deserved popularity of the honor system in road work
among the convicts themselves that a prisoner's friends and
relatives often voluntarily guarantee his good behavior, and
promise if possible to prevent his escape.
In operation, the highway camp can hardly be distinguished
from that of free laborers. There are no stripes; khaki or
blue is the uniform. Nominally, there are guards, but their
real function is superintendence. Eight or ten hours' work,
as the law allows, and three square meals, is the daily routine.
Apart from this, the prisoner's time is his own, usually until
nine o'clock, when lights are extinguished. The camp may
be of tents or temporary wooden structures, as need and length
of stay determine, without fence or barrier, except possibly of
barb wire, in self-defense. The night guard only, often a
convict, as in Colorado,2 is allowed a gun for protection, and
sometimes not even that. In a camp of thirty to fifty men, the
ordinary number, usually three guards, two for day and one
for night, are sufficient, and hence the combined cost of superintendence and guarding is little higher than the supervision
of free labor.
Other privileges beside that of freedom are often accorded.
Almost always a commutation of sentence is made, varying
from five to ten or even to thirty days for every month. This
" good time," being cumulative, is deducted from the regular
sentence, or from the minimum, in the case of an indeterminate one, so that under favorable conditions, six or eight months
only for every year's sentence need be served. Of all favors,
1
Governor Shafroth, of Colorado, in Kansas City Star, May 22, 1911.
*San Antonio {Tex.) Daily. Express, November 25, 1911, letter from Governor Shafroth, of Colorado.
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this is the most appreciated, as, under the honor system, the
men feel their humiliation more keenly and prize their complete freedom more highly. A small amount of money each
week, for tobacco or other luxuries, the opportunity to write
home, distinctive features of attire as a mark of honor, music
and outdoor sports after work,—these all add to the attractiveness of the road camp over other forms of imprisonment.
The position of road superintendent is no easy or enviable
one. The coordination of the work of men of different habits,
temperaments, ideals and stations of life, demands the utmost
of tact, persistence, patience and care.1 To these men, in
direct charge, is largely due the moral and financial success
of the experiment.
While the saving in money has been considerable, as noted
later, this is not the most important saving; the honor system
saves men. It is hard to realize that life-prisoners are left
hundreds of miles from the prisons without guards, but such
is the case. The most hardened criminals, dangerous men,
and often the worst behaved under surveillance, are said to be
the very best workers and to cause the least trouble on the
road.2 A criminal often is a good man gone wrong, a victim
of misfortune, a person of great capabilities misdirected. The
" square deal," here shown, simply attempts to change his
goal in life, to redirect his misapplied energies, and to restore
his faith in mankind. A large measure of the success achieved
is due to a convict's temperament, a responsiveness to kind and
fair treatment, such as any free person would show, but in his
case more appreciated because of its unusualness; and most
of all, it is a result of a peculiar sense of honor, exemplified
by the rule of the underworld, " To be square with a pal is
the only law I know." Warden Tynan of Colorado says,
" You can trust them better than outside men, because of a
peculiar honor. They are loyal because honest, not through
fear, if they are treated honestly." One of the camp rules,
" I am my brother's keeper," is taken literally by putting two
1

Good Roads, June 26, 1913, p. 722.
Biennial report of Warden Tynan of Colorado Penientiary for period ending November 30, 1910.
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men in a room together, each partially responsible for the
other.1
One or two typical examples show the results. In Colorado,
under the honor system, for the biennial period ending November 30, 1910, the percentage of successful escapes was reduced to twenty-four per cent from sixty-four per cent.* This
showing must be credited largely to the alertness of the convicts in keeping their fellow-prisoners from escaping. In
Oregon, after the recapture of an escaped inmate at Governor
West's personal expense, the other prisoners requested that
they be allowed to pay all costs out of their own bonus money,
alleging that the offender had " double-crossed " them by casting suspicion on the system and the individual prisoners.
From Colorado comes the account of an escaped prisoner
voluntarily offering to come back to complete his sentence.
The prison officials doubted the sincerity of this proposal; but
ten minutes before time for the gates to be closed, the man put
in his appearance. He admitted that it was not the escaping
that worried him, but the consciousness of having broken his
solemn oath. He paid his own railroad fare back to the
prison.8
Not all states favor this method. Press reports * state that
in Utah it was given a trial and that with insufficient guards
several escapes occurred. Thereupon this so-called " honor
system " was voted unsuccessful. This is only what might
have been expected. If it is necessary to have armed guards,
have enough of them; if not, do away with them altogether.
Records show no concerted efforts on the part of convicts
to escape from camps where the honor system is real. Further
than that, there is positive evidence of a great reduction in the
number of attempts over the number under the old system.
In Colorado, during four years, with over eighteen hundred
convicts, there was less than one per cent who broke faith,*
1

Better Roads, October, 1912, article by Charles R. McLain.
Colorado State Prison report for biennial period ending June 30, 1910.
'Kansas City Star, May aa, 1911.
*Salt Lake City News, December ai, 191a.
* Annals of the American Academy of Political and Social Science, March
1913. P- 592

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and the number is decreasing. In Arizona, during eight
months, of one hundred and eighty convicts, American and
Mexican, there were five escapes, six other attempts, and no
deaths; while during the previous six months, under the
former system, there were two escapes, two other attempts,
and seven deaths. Thus it is seen that the placing of convicts
on honor has not resulted in wholesale escapes, as was predicted. In Oregon, during 1911, there were on an average
about one hundred men employed in crushing stone, and of
these only one attempted to escape; he was quickly recaptured.1
In Nevada, the honor system has been used for the last two
years, and, according to the state prison report, of eight attempted escapes, five proved unsuccessful; no data as to the
total number of men are given.2 In New Mexico, the experiment of dispensing with armed guards has proved successful.1
Of five hundred convicts on honor in Oregon during fourteen
months, only three succeeded in making their escape; in all,
fifteen tried to gain their freedom, but of this number, nine
returned of their own accord, and three were recaptured.*
Even in the East, efforts to place convicts on their honor
have met with success. For several years, Sheriff Frank H.
Tracy of Washington County (Montpelier), Vt., has allowed
his prisoners to work outside the jail, the convicts returning
each night. They pay the state one dollar a day for their
keep, the rest of the money they earn (about seventy-five cents)
being retained for their own use. During the first four years,
with eight hundred prisoners, there were but two attempted
escapes. Both from the standpoint of the reformation of the
convict, and of financial gain to the state, the method met
with favorable results.5 New York's newest prison, at Great
Meadow, is without walls. The utmost liberty and wide
privileges are allowed. A few of the guards carry guns,
but weapons are considered useless; for, in a year, the only
1

Good Roads Year Book, 1 9 " . PP- «93-4* Biennial Report of State Prison, 1911-12, p. 8.
* Annual Report of State Prison Warden, November 30, 1912.
4
5
Tulsa {Okla.) World, May 6, 1912.
Atlantic Monthly, August, 1911.
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two escapes were by men not ordinarily allowed outside the
prison.1 There were two hundred and sixty-two convicts at
Great Meadow during 1911.
Form the above statements, which are representative of conditions wherever the honor system is in vogue, it is evident
that this method of handling prisoners is a decided success,
and the reason for its approval among keepers and convicts
alike is apparent.
WASHINGTON
For the four years preceding the spring of 1911, convicts
were used in road construction in Washington. Beginning
in 1909, convicts were used to run state rock-crushing quarries,
furnishing rock for state and county roads. Since 1911, the
convicts have been used in five large rock-crushing quarries.
The highway work is of interest, as it was not under the
honor system. Balls, chains and stripes were not used, but
the men were housed within a prison stockade, watched by
armed guards day and night. The authorities were careful
to provide plenty of good food and clothing. Some of the
stockades were large enough for eighty-four men, and were
made collapsible for easy removal. The usual number of men
in a camp was fifty or a hundred—" first-termers " as a rule.
At first, to promote order and efficiency, the camp superintendents and highway officials had power to give commutation
of time for good conduct, but, as this method was not successful, the men were sent with a definite assignment of one year,
with ten days per month commutation. Men eligible for
employment on the roads were those who had served their
minimum sentence, if indeterminate, and second-termers not
under the indeterminate act. In 1910, during the time that
392 male prisoners were sent out, 356 were pardoned from the
camps, so that the population of the camps must have been
fairly uniform. The state jute mill was closed in the summer
of 1910 to give more men for the road work, about two hundred being so employed on the highways and in quarries.
The work was successful, especially in the case of heavy rock
1

New York Times, Sunday, December 29, 1912.
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work. Presumably, this was because a greater number of men
could be worked close together, reducing the expense of
guarding. The men were healthy and enjoyed the work, but
the percentage of escapes was high. From May 1909 to
September 1910, there was a total of 501 sent to the camps,
and of these, thirty-five escaped; probably the average number
working at one time was considerably less than 500; in October 1910 there were 241. This poor showing as regards
escapes is attributed to the fact that chances were being taken
with hardened criminals. It is claimed, however, that under
the honor system especial success can be attained with such
prisoners.
Upon the failure of the 1911 legislature to appropriate funds
for the continuance of road work, it was stopped about April
of that year. At that time, there were about two hundred men
on the roads and one hundred in the quarries. Since then,
many convicts have been employed in the state quarries, furnishing crushed stone at nominal prices to private parties,
mostly for road construction. Prisoners are still kept under
armed guard and are housed in stockades.
As to efficiency, the men are credited with one-third more
than free labor. This is due not to compulsion, but rather to
fear of being taken back to the penitentiary. The authorities
are said to favor resumption of road work, and it is hoped
that the work may be continued.
OREGON
Commencing early in 1904 and continuing until 1908, state
convicts were used on the roads of Marion County, Oregon,
the county in which the state penitentiary is located. On this
work, which was provided for by a special act of the legislature, only as many convicts were employed as one superintendent could conveniently handle. The work of the convicts
was supplemented by that of residents of the vicinity. On the
whole, the experiment was considered successful.
This work was recommenced in Marion County, under the
honor system, in January 1911, the new governor (Oswald
West) overcoming the lack of suitable legislation by taking
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the prison situation into his own hands. Although a bill for
convict labor on roads was defeated in the state legislature in
February 1911, the agitation continued during the following
spring and summer, and in September the governor offered
state convicts for use on the road from Medford, Oregon, to
the Crater Lake National Park. This work was the beginning
of the construction of state highways by state prisoners. Honor
road camp no. 1 was established and work commenced November 1, 1911. Since then, the work has been continued and
developed along similar lines in other parts of the state.
The honor system is used in its most extreme form; there
are no guards, chains or stripes; one man from the county is
given jurisdiction over the camp, similar to that of the warden
inside the prison; an engineer directs the work, but often one
of the prisoners acts as foreman. The state provides the clothing which the men wear when they begin the work, but the
county supplies further articles, such as shoes, from time to
time, as they are needed. The county pays the railroad fare
from the penitentiary, boards the men, furnishes all material,
and, in addition, pays twenty-five cents a day as wages to each
prisoner. During the first six months of honor work, of one
hundred and fifty men, only three broke their word and attempted to escape. During a similar period, two years before,
ten men, all under heavy guard, escaped from inside the prison
walls, while shortly afterwards, in an attempt to work the
men outside, eighteen got away; still later, six escaped at one
time, of whom two were killed before all were recaptured.
Comparison of these facts does much to indicate the efficiency
of the honor system.
In 1911 the prisoners were employed almost entirely in
quarrying and crushing stone, in preparation for the next
year's work. During the past year, one of the principal
pieces of work has been the state road from Hood River toward Portland, along the south side of the Columbia River.
This road will give an outlet to all other branches from the
back country, and will be of inestimable benefit to that part
of the state. Such has been the success of the experiment
that at the last election an initiative bill was passed provid(259)

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IV

ing for road work by state and county prisoners, thus vindicating the whole system, in spite of much previous adverse
criticism.
CALIFORNIA
The laws of California do not permit state convicts to labor
on roads, except within six miles of San Quentin prison. An
average of about twenty-five men was employed in this way
during 1912, under a foreman and two armed guards. This
work is considered healthful and otherwise beneficial to the
prisoners, and their labor compares favorably with that of
free laborers.
For about the last fifteen years, the state has employed its
convicts at rock-crushing in Folsom Prison, turning out in all
about 70,000 tons of rock. According to the state comptroller's report (1910), the comparative cost of rock-crushing is
high, due to inferior equipment and the low price obtained
for the output. He contends that private companies in the
vicinity are selling much larger quantities at higher rates.
But Folsom Prison cannot sell its rock on the open market.
The prison report for the same date (1910) gives the net
profit for the year as ten cents per ton, against an average of
only seven cents per ton for the whole fourteen years. Less
than one hundred prisoners are employed in the rock-crushing.
The industry is not considered important enough to warrant a
new plant to replace the present one.
The question of state convicts for road construction came up
during March 1911, in the shape of a bill authorizing such
action. It was rejected by the legislature largely owing to
the opposition of organized labor.
NEVADA
For the past two years, barring the month of May 1912,
when a change took place in the state prison administration,
Nevada convicts have been employed on state roads. They
are prohibited from building bridges and culverts, in order to
protect skilled outside labor. The prisoners are detailed to
this work upon request of the county commissioners, the cost
of maintenance being equally divided between state and
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county. The state is allowed, out of the prison appropriation,
fifty cents a day per man for keep while on the road, which
sum, although only one-third the actual cost, is more than
would be necessary to maintain prisoners in the penitentiary.
In addition, the convicts receive a wage of twenty-five cents
a day, and extra commutation of ten days a month.
Work has been almost wholly in Ormsby and Washoe
Counties, and, during the latter half of 1912, about thirty
prisoners were at work. An average of thirty-seven were employed in this way during 1911-12. These men, together
with others on the farm, in all about forty per cent of the
total prison population, which averaged one hundred and fiftyfive, are on their honor. No authoritative statements as to
the success of the work or probability of its continuance are
available.
ARIZONA

During the year 1911, no convicts were used in road-building in Arizona, but commencing in June, they were employed
at Tempe in constructing a 1500-foot reinforced concrete archbridge across the Salt River. In all, about three hundred and
fifty men were at work, exclusive of free laborers, the foreman and a few carpenters. The prisoners were housed in a
stockade under guard. They worked eight hours as a rule, and
a credit of two days on the sentence was given for each day
worked. The efficiency was estimated at about two-thirds that
of free labor. This low efficiency was attributed to the fact
that sixty-five per cent of the prisoners were inexperienced
Mexicans. However, the prisoners were very healthy and
were better contented than when in jail. During 1912 this
bridge work was continued, and it has recently (in 1913) been
completed.
In addition, there has been some state highway construction
along other lines. Fart of this work was on a road through
the mountains to connect the great copper mines at Ray with
the city of Globe. The rest of the work consisted of the
construction of thirty-five miles of state highway to connect
the town of Florence with the capital city, Phoenix.
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IV

The honor system is very similar to that of Oregon. While
in prison, the convict stands on his record. Stripes are
abolished, and otherwise the authorities treat the convict much
like a free man. The convicts wear gray suits, are allowed
an unlimited incoming and outgoing daily letter mail, and
are given the privilege of the daily newspapers. Many of the
foremost papers in the country are subscribed for by the state
for the reading-room, and all the popular magazines are taken
by the prison authorities for the use of all the prisoners.
Musical and literary societies exist, also a mutual improvement
league, formed and officered by inmates for the mutual benefit
of all the prisoners. As prisoners prove themselves worthy of
trust, greater freedom and more responsibilities are accorded
them.
Finally, after successful trial, they are made honor men on
road work, and are absolutely without guard. No firearms
are allowed in the honor camps. One day's work, eight hours,
counts for two days off the sentence. After work is done and
on Sundays, a prisoner's time is his own. It has been found
advisable to separate Mexican from American prisoners. In
one instance, the foremen over both gangs were men serving
life and twenty-year sentences. There are now two men
acting as watchmen in the temporarily abandoned camp in a
very isolated spot in the Pinal Mountains, who are both lifetermers. As a rule, the only civilian in camp is the engineer
who directs the construction.
While there have been some objections to the system, it
now appears to be firmly established.
The saving to the taxpayers on labor in the construction
of the thirty-five miles of completed highway between the
towns of Florence and Higley, the three miles of the GlobeRay highway which has been completed, the two miles of
sewer at Florence and the bridge across the Salt River at
Tempe, which is now under construction, is figured at $45,858.
This represents 30,572 days' actual service rendered, figured
a t a minimum wage of $1.50 per day per man.
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NEW MEXICO

New Mexico claims the distinction of being the first state
to adopt the honor system, and successfully work prisoners
on public highways by this means, the " honor system " in this
instance taking the form of reduction of time for good behavior, in addition to the reduction ordinarily allowed. The
working of prisoners on state roads was first authorized by an
act of 1903, which provided that they be employed on a road
between Santa Fe and Las Vegas. Road construction has been
continued ever since that time. For the past three years, four
camps of about thirty convicts each have been employed on
roads, some free laborers recruited from the vicinity working
with the convicts. In 1912, an average of seventy-four prisoners were employed on the roads, and of them, twenty-three
were in Bernalillo County. The expectation is that the convict force can be increased to about one hundred in the
near future.
The selection of prisoners for work in road camps is not
confined to short-termers alone. The sentences of the prisoners in road camps range from one year to life. The superintendent has a personal talk with each prisoner selected for
road work, and the prisoner must promise on his word of honor
that he will obey the rules and make no attempt to escape.
Only a small percentage prove unfaithful to their promise.
In addition to the reduction of time for good conduct, ten
days per month may be earned on road work. The division
of cost between state and county is as follows: the state furnishes prisoners with clothing and supervision; the county
provides equipment and all camp expenses. The convicts
receive no wage.
Road work is declared to be very beneficial, as to both
health and character. The efficiency of the labor has been
greatly increased by the abolition of armed guards, and is now
equal to free labor if properly handled. Continuation of the
system under present methods is assured.
Since 1909, all prison sentences in New Mexico have been
indeterminate. Having served his minimum sentence vi'itYi(*63)

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out infraction of the rules of the penitentiary, the prisoner is
paroled, after suitable employment has first been secured for
him with some respectable and responsible person. He is required to report monthly, the report setting forth the number
of days under pay, number of days idle, and the reason therefor, amount on hand the first of the month, amount earned during the month, and expenditures.
UTAH

Contract convict labor is prohibited by the constitution of
Utah. The bill for use of prisoners on public roads was introduced in January 1911, and passed in March. Actual work
started in June of the same year and has since been continued.
As noted before, a modification of the honor system, with
few guards, was tried unsuccessfully, so practise reverted to
the use of armed guards in camps. The majority of the convicts employed on road work are long-term prisoners. In one
case, they were housed in a stockade, equipped with arc lights,
the men having individual beds and khaki uniforms. Each
guard is held responsible for ten prisoners. The state provides
guards, clothing and tools. Extra commutation of ten days
per month is given for good conduct.
The plan was considered extremely successful during 1911
and 1912. During the year just passed, about fifty long-term
prisoners have been in use on state roads. For these there are
eight armed guards. Most of the work (about twenty-nine
miles in all) has been in Washington and Davis counties, for
which costs will be given later. Construction is under the
direction of state road engineers. The convicts are said to
accomplish as much as ordinary laborers; yet the cost, on account of the expense of guarding, must be greater than under
the honor system. Because of the success of the system, most
of the counties desire the assistance of convicts in building
their roads, and the continuance of the system seems assured.
COLORADO

Colorado, in extent of development of convict road work,
takes precedence over all other western states. Although pro(»64)

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vided for by law as far back as 1905, a start was not made
until 1908, and the bulk of the progress has been during the
present prison administration, since 1909, under Warden
Thomas J. Tynan.
The law provides that upon request of a majority of a
county's road commissioners, the warden of the state penitentiary at Canon City may, at his discretion, allow a squad of
convicts with competent overseers to do road work in that
county. The state furnishes clothing—blue or khaki—while
the county provides for all feeding and housing of men and
teams, for tools, materials and additional charges of guarding.
Construction work is under the supervision of the warden or
his proper representative, the state highway department performing the engineering service.
Convict road work started in May 1908, under armed
guards. About April 1909, the honor system was introduced,
and is still in favor. During 1909 and 1910, there were about
100 convicts working on an average. In 1911 this number
was increased to about 200, and toward the end of the year to
300. At present, fifty per cent of the penitentiary inmates
are at work outside on the roads or on a farm adjoining the
prison, and the warden estimates that seventy-five per cent of
ordinary prison inmates could be so used. During the biennial period ending November 30, 1910, about fifty miles of
roadway was constructed, and in the succeeding period ending
November 30, 1912, about 300 miles, the increase being due
to added numbers, greater efficiency, and better working conditions. One of the most noted pieces of roadwork was accomplished on the now famous skyline drive, extending some
six or eight miles from Canon City along the crest of a " hogback," and almost overlooking the Royal Gorge of the
Arkansas. This and other roads, notably the new Santa Fe
trail, have opened up some of the scenic wonders of the state.
A real honor system is in vogue; and to this the success of
the work is largely credited. Camps of from thirty to fifty
men usually, or even as many as one hundred, are under one
or two overseers, with subordinates, and such camps have been
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tiary. All vestiges of physical restraint—guns, stripes and
stockades—are absent. The convicts themselves prefer to do
this kind of work rather than any other. As an extra inducement, there is given a regular commutation of sentence amounting to as much as ten days per month, and, in addition, a
month further reduction for the first year's road work, two
months for the second, and so on to a maximum of six months.
The penalty for breaking faith is the return of the convict to
prison, and loss of all credits.
The health of the men is considered well-nigh perfect.
Work is continued the year round, new detachments of convicts being continually sent out to make up for those who are
paroled from camps. It is estimated that the men are fully
as capable and efficient as free labor. The authorities consider convict road work a success in every way, and anticipate
its continuance and enlargement.
MONTANA

The contract system for convict labor in the state penitentiary was abolished in Montana in June 1908. To provide
some employment for the prisoners and to relieve congestion
in the buildings, which were so overcrowded that one-quarter
of the inmates had to be housed outside the walls, several plans
were inaugurated during the spring of 1910, among them that
of using convicts on public roads. This highway work has
been continued since that time.
In the two and one-half years the honor system has been
practised, results satisfactory from the standpoints of reformation and of public economy have been effected. An allowance of fifty cents per convict per day is made by the state to
cover maintenance, guards and other expenses; the counties
pay for equipment, materials and all excess costs over that
met by the state. Firearms are not allowed in the camps.
For squads of from fifty to one hundred men, three guards,
two for day and one for night, provide the only surveillance,
which partakes in character more of the nature of supervision of work. The eight-hour day is in vogue. There is
no artificial restraint. Clothing is of cadet blue, the food is
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of good quality, and the shelter is under tents. In addition
to the " good time " allowed by law, there is an extra commutation of ten days for each month's work.
In spite of the out-of-date machinery used, a remarkable
showing for the work has been made; this is attributed to the
vigor and enthusiasm of the workers. Up to May 1912 about
forty-eight miles of road had been built, much of it through
solid rock. The importance of some of this work is apparent
from the fact that in one case road distances between important
points were shortened forty miles by means of seven miles of
difficult construction; and in another, sixty miles were eliminated by building thirteen.
The number of men employed has varied, usually being
about one-third of the total number in the penitentiary. In
1913 the force numbered 225. During the first two years, the
percentage of escapes averaged less than one per cent—last
year, the loss was six. Ninety-five per cent of the paroled
prisoners make good, a much larger proportion than in most
states. Repeated requests by counties for the road-making
convicts indicate the favor in which the whole system is held.
At present, an effort is being made to invoke state aid for
counties in order to provide for the continuance of convict
road work under the honor system.
OTHER WESTERN STATES
East of Colorado, various states are moving to inaugurate a
system of convict labor on public highways. Some little work
has been done in Kansas, Oklahoma, Minnesota, Missouri and
Iowa, which may now be briefly described.
In Kansas, the law allows road construction by penintentiary
inmates, but little has been done under this provision, because
the prisoners are already so advantageously employed in
other state industries. The output of the prison mine and
brick yard is used for the various state institutions, while the
products of the farm help feed the prisoners. Some income
is realized from the twine plant. Previous to 1911 nine miles
of road had been built, and since then about two miles of
macadam have been added. Mention is also made of three
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and one-half miles of brick road from Lansing to Leavenworth, built by about thirty convicts on the honor system, and
also the road from Kansas City to Lansing, on which about
twenty-five prisoners were worked during 1912. The present
intention is to continue prisoners in the twine factory and the
brick yard, in the mines and on the highways, the last being
the goal to be earned by good conduct. It is also intended to
give two-thirds of the prisoner's earnings to the state, and
one-third to his family. Of 850 men in the state penitentiary,
about one hundred could be trusted without guards under the
honor system. Twenty-six men have been so used during the
last year.
For some time, state convicts in Oklahoma have been used
in stone quarries, and during 1911 county prisoners also
were used in some districts. In August 1911, when a plan
was on foot to utilize the prison population in building a
cross-state road from Kansas to Texas, the governor offered
to exercise .his pardoning power in giving one day in four
off their sentences for prisoners so employed, although the
state itself could not commute the sentences in this manner.
During 1912 many prisoners were used on roads near the
penitentiary at McAlester, living in tents, and getting supplies
direct from the prison. In the fall the force amounted to 150
men, under one officer (white) and with a prisoner as watchman at night. There were no armed guards, and only one
escape was recorded. Little attempt at scientific road work
was made, as there was no engineer. The main purpose was
to keep the workers busy.
The Minnesota law authorizes the crushing of stone at the
state reformatory at St. Cloud, for use by the counties, on
payment of the transportation charges. During the biennium
just finished 6248 cubic yards were delivered for state roads,
at 25 cents a yard, although to outside buyers from $1 to $2
per yard was charged according to the grade.
IOWA

In Iowa in 1912 a special committee was appointed to investigate the management of the penitentiary at Fort Madison,
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which committee recommended " that under revised laws, from
50 to 75 state prisoners could be profitably employed on the
highways; that they should be carefully chosen by the warden
from those who have served the longer part of their term,
such selection being conditioned on satisfactory prison record,
good habits and willingness to do road work; that they should
be placed on their honor and receive a wage, but not be allowed the use of intoxicants nor association with free
citizens." 1 Prior to this time the only road work was the
preparation of material, but as the result of the investigation
a statute was enacted to the following effect:
Any able-bodied male prisoner may work on the roads unless his character or disposition make probable his attempt to
escape or unless he is likely to be an ungovernable prisoner or
to violate any of the laws of the state while engaged in such
work or unless his health would be impaired by such labor.
No prisoner who is opposed to working upon the highways
shall be required to do so. The prisoners are at all times under the jurisdiction of the warden of the institution, even when
performing service under the honor system, the warden designating guards, officers and agents to direct and supervise
such prisoners. The highway department shall supervise the
work, but may cooperate with the boards of supervisers and
local officials in the performance of the work. The board of
control and the warden shall prescribe the condition and
manner of keeping and caring for the prisoners while away
from the institution. Whenever a county board of supervisers
or other local officials desire to use prisoners upon the highway
within their jurisdictions, they may apply to the state highway commission, specifying the number of men desired, the
character of work and the amount they are willing to pay for
the labor. If the highway commission can supervise the work
and believe the prisoners can be safely and advantageously
employed at said place, it shall submit the matter to the board
of control. The board of control and the warden shall ar1

Report of the Committee Appointed to Investigate the General Management of the Iowa Penitentiary at Fort Madison, 1912, pp. 35-37.
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range details with the local officials, including the compensation to be paid the state for the use of such prisoners. Local
officials authorized to make road improvements are permitted
to employ prisoners and to pay for such services from any
funds available for road or bridge work, whenever in their
judgment such prisoners may be employed advantageously.
The board of control is authorized to allow prisoners working
upon the highways of the state such part of their earnings as
the board shall deem just and equitable over and above the
cost of maintenance of such prisoners and may deduct a part of
such earnings and forward direct to families or persons dependent upon such prisoners for support. The board of control
and warden may also provide for the deposit of earnings of
such prisoners in a bank or banks to be given said prisoners
upon release, except such part as may be allowed for current
expenses. Prisoners working upon the highways shall not
be required or permitted to work in clothing which shall make
them look ridiculous or unduly conspicuous.
Although but few months have elapsed since the passage
of the statute, Attorney General George Cosson, in a letter to
the National Committee on Prison Labor in November 1913,
reports:
We have a little prison camp doing work near the state agricultural
college at Ames under the supervision of the highway commission.
These men are on the honor system. We will send you if possible some
photographs of the camp. The contract provides that the men shall
receive two dollars per day and if it develops that they do the equivalent amount of work performed by free labor, they shall receive $2.50
per day. This beats working under the contract system at sixty cents
per day or eighty cents as the men at Anamosa receive.
Up to date the money, in addition to paying their maintenance, has
been funded for the use of the prisoners. We had one escape by a
young fellow who was not quite right in his head. He was recaptured and there is some suggestion of sending him to the institution
for feeble minded. It was a mistake to put the fellow on the job.
Aside from that there have been no escapes at all and the men have
been very well contented. They are working under almost normal
conditions except of course that they are kept in their camps at night
and not permitted to mingle with free citizens.
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As I said before, they are paying their own maintenance, and a
very substantial amount will still be left for themselves and families.
ILLINOIS
Illinois was a pioneer among the northern states in employing its convicts on public works. Inasmuch as sentiment
has always been against the exposure of prisoners to the public
view, they have been used only in stone crushing within the
penitentiaries at Chester and Joliet, as authorized by law in
1905. Since that time stone has been crushed sufficient to
cover about 400 miles of road. The material is furnished
free at the penitentiaries, the townships paying the freight
charges. These charges, although less than the regular rate,
still limit the usefulness of the stone on account of the expense
of carrying it to more distant districts.
The convict force employed at the Chester penitentiary,
being larger than at Joliet, produces cut stone and fertilizer
(pulverized limestone) as well as crushed rock. At the Joliet
penitentiary, where only stone for the road work is crushed,
the limit of capacity has been reached, except in case of a
car shortage, which frequently occurs. Here the machinery
is the controlling factor. The combined output of crushed
rock by both penitentiaries for the last five years has been as
follows: 1908, 120,240 cu. yds.; 1909, 136,789 cu. yds.; 1910,
103,309cu. yds.; 1911, 152,165 cu. yds.; 1912, 154,032 cu. yds.
Although the amounts of stone crushed have thus been successfully increased, the demand has always exceeded the supply. Not all the prisoners are physically fit for this work and
those who are able to do it perform only one-third the amount
that free laborers would.
Continuation of this work is assured by its present success.
In addition, the new governor 1 has put himself on record as
in favor of convict labor in actual road construction under
the honor system as in Colorado.
MICHIGAN
The Michigan laws of 1911 provide that state convicts may
1

Gov. E. F. Dunne. Inaugural address, Jan. 13, 1913.
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be employed on the public roads or in the quarries of the
county which bids highest for their services. If guarding is
necessary, its cost is borne by the prison authorities, but other
expenses, as transportation, equipment and subsistence, are
met by the county. No state prisoners have ever been used
under this act, but county convicts, especially in Kalamazoo
County, have been so employed with great success.
Under this system, it was predicted by the originator, Mr.
William M. Bryant, chairman of the county road commission,
that crime could be reduced by half and the tramp nuisance
eliminated; this has been accomplished. Work started in the
fall of 1909. At first the men were boarded by a nearby
farmer and sheltered in a rented house. In six weeks the
jail attendance fell off to such a marked degree that two
gangs of 35 to 40 each were reduced to one gang of only
2 prisoners. During the first five months the decrease in
the number of vagrants amounted to over 2300. In one
month only 1 vagrant was arrested, and for six months the
total arrests numbered only 10. The difficulty with this work
has been the lack of prisoners, reinforcement by free labor
being necessary to make up a single gang. As all are shortterm prisoners, no guards are necessary. The men are on
their honor, and similar in appearance to free laborers. As
a reward, $1.50 per week is allowed for satisfactory work.
The success of the Kalamazoo system has induced other counties to adopt similar methods.
OHIO

Ohio's only experiment in employing convict labor in actual
highway construction was made in the summer of 1912 on a
road south of Columbus under the direction of the state highway department In this work from 17 to 25 colored convicts
were employed, conveyed seven miles from the penitentiary to
the work and back by an auto truck which during the remander of the day was otherwise used. The road was built of
brick, by various methods, so that a representative performance by the prisoners was difficult, on account of the frequent
change of operations, but where there was a fair chance, in(27a)

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telligent and efficient work resulted. One unarmed guard accompanied the men, directing the work. Even though the
gang stretched out at times for half a mile along the road,
no attempt at escape occurred. All the men, of whom several
were life termers, were on their honor. Under an arrangement with the state board of administration, the highway department paid $i per day for the services of each convict,
none of which was credited to the prisoners.
Public sentiment is now in favor of paying a wage, and a
bill is pending providing for an allowance of a daily wage for
each convict. Making due allowance for the handicaps under
which the work was conducted, the results have caused widespread satisfaction, so that the authorities favor working all
the prisoners except the most dangerous. A bill has been
brought before the legislature providing for this development,
and it is said to have strong support from the governor.
There has also been some stone crushing by state prisoners,
as provided by law in 1911. During the past year, 33 convicts have been kept busy at the state quarry, all under the
honor system. The results are highly satisfactory from the
standpoint of the moral effect on the men. Both highway
construction and stone quarrying with convict labor seem to
be permanent features and destined to rapid development in
Ohio.
NEW YORK

State convicts have never been worked on state highways in
New York, but a few counties have employed their prisoners
on the roads, notably Onondaga County, in which Syracuse
is located.
By the laws of 1912 it was provided that state convicts could
be used near the Clinton and Great Meadow prisons, and
$10,000 was appropriated for that purpose. It is stated that
the men accomplished $6,000 worth of work at a cost of $700.
There has also been considerable road work near the new
Great Meadow prison as previously noted. According to the
latest report, 25 men have been employed near Dannamora,
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living in tents about seven miles from the prison, and of these
but one man escaped.
For the past two seasons, Onondaga County has conducted
a very interesting experiment to determine the feasibility of
using the county convicts on road construction. During the
year 1911, work was carried on from August 24th to November 24th. Conditions for a good showing were unfavorable;
the weather was poor; eleven rainy days occurred in October.
Construction was difficult; the work was heavy and partly in
quicksand; supplies had to be imported; it was necessary to
ship stone at the highest rates; the supervision was inexperienced; and the location was distant from the penitentiary.
Admittedly, this stretch of road, between Amboy and Warners,
was chosen because of the difficulties attending its construction.
The men were sheltered in a farm house which they themselves
repaired, making it habitable. Half a dozen did the housework, cooking and laundry work.
The average number of men was about 35. The working
day was 8 hours, with 1^4 hours for dinner. The guards
were for supervision rather than discipline, and the men
themselves were unhampered by chains. Although over 100
different men were employed, no attempt at escape occurred.
From the standpoint of the convicts there was much encouragement, as they remained healthy and willing to work, although
inexperienced and receiving no wage. So satisfactory was the
trial that the board of county supervisors determined to continue it the next year, which plan was carried out, the work
being on a larger scale.
For the work of 1912 the arrangements included:
1. The payment of 7j4 cents per convict hour to the penitentiary out of the county road fund, for work on the road.
2. The use of not more than 5 keepers for a road gang of
60 prisoners.
During the working season of 6J4 months (173 working
days) the convicts built about 4 miles more of the AmboyWarners Road. Construction along lines similar to the previous year resulted satisfactorily. While the prison popula(*74)

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tion of Onondaga County decreased 22.6% in the two years,
that of surrounding counties increased 12% and 25%. Evidently road work tends to diminish the number of criminals,
as Kalamazoo County, Michigan, discovered. Disciplinary
measures were not found necessary; the stone quarry back at
the penitentiary was always a possibility for misbehavior. The
prisoners were healthy and worked well. One man escaped
and two more attempted escape. One of them was brought
back by a farmer and the other returned voluntarily.
Instead of the farm house, a combination of portable farm
buildings was erected by the county at a cost of $1,500. These
buildings were made of good-quality lumber and were arranged in panels, with all parts interchangeable, capable of
being readily collapsed and moved as occasion required. They
were well lighted and ventilated, and proved to be very satisfactory throughout the season. In the latter part of the fall,
stoves were installed, and the prisoners were kept in comfort
at all times. Although in the midst of a busy farming community and near three school houses there was no complaint
of misconduct during the whole season.
As a result of the year's work, the special committee appointed to investigate and report, recommended:
1. That the work be continued upon a larger scale.
2. That the number of guards be decreased and an honor
system be established, discarding the stripes except for discipline.
3. That the working day in the quarry be decreased to 8
hours, exclusive of traveling time to and from the penitentiary.
4. That as a result of satisfactory conduct and conscientious
work, an improvement in rations be accorded, and possibly the
use of crockery instead of metal dishes.
The recommendations were adopted. These considerations
together with the complete cost data, discussed elsewhere,
throw very interesting light on the convict road question. The
Syracuse experiment is the most advanced yet attempted in the
East and will be watched with interest. Great credit is due
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the officials for their persistence and for their success in the
face of opposition and skepticism.
State Superintendent of Highways Reel, before his recent
retirement, expressed himself as favoring convict labor for
roads under state management thus saving the commonwealth
" millions of dollars." Certainly from the data at hand regarding convict labor and from the consideration that in a few
years New York will have expended a hundred millions on
improved roads, such a statement appears within the bounds
of possibility.
NEW JERSEY
Up to December 1913, state convicts had never been used
on roads in New Jersey. It was thought that the prisoners
would not work because they knew the authorities could do no
more than return them to the penitentiary. Mercer County
had used a few in its stone-crushing quarry to some advantage. In Essex County penitentiary also there was some stone
crushing attempted by hand labor, the average earning of the
convict being about 15 cents a day.
Following the lead of Colorado, other western states, and
Onondaga County, New York, New Jersey in the spring of
1912 enacted laws provided for working her prisoners on the
public roads, thus becoming the pioneer among eastern states
in using convict labor as she had previously been in inaugurating her state-aid system. It was expected in this manner to
relieve the congestion of the state prison, where there were
but 1300 cells for over 1450 men. The bill, passed in April
1912, provides that the state commissioner of public roads or
board of chosen freeholders of any county may make application for state prisoners, designating the number desired.
The prison labor commission, in conjunction with the governing body of the penitentiary, may then decide the number to
be allowed, cost of transportation, maintenance, and compensation, and may so enter into an agreement with the counties.
Funds for the highway work may be expended in housing and
feeding these prisoners.
In September the state road commissioner requested men
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for work in Burlington County. This was refused by the
board of prison inspectors on the ground that the responsibility for escape was not fixed. This objection was well taken.
The authorities assigned finally 16 men for work in Mercer
County, where the state penitentiary is located, so as to return to that institution every night.
The work started in the middle of December near Trenton
under one foreman with two deputies carrying concealed
arms,—grading clearing, cleaning and general repairs. The
crew travels to and from the penitentiary in a large stage and
is fed on the road, working about 8 hours a day. Instead of
prison stripes or chains, the uniform is gray. The men are
for the most part long-term prisoners, with good records, having only a few months more to serve. Although unaccustomed to this work, they have given great satisfaction, appreciating the opportunity for outdoor work, so that after two
months the authorities are enthusiastic in demand for a more
general adoption of the system.
Present plans anticipate the employment of about 200 to 250
prisoners during the coming season, on both repairs and construction, thus materially relieving the overcrowded jail conditions and saving many thousands of dollars. For this the
state is to pay 50 cents per convict per day. The anticipation
is that auto trucks will be used for transportation near the
penitentiary and camps established in more remote localities.
It is urged that although the work is paid for at a low rate
(labor being actually worth about $1.75 per day) the counties
could not afford to expend more; nor could outside workers be
obtained, so that free labor is not injured at all.
It is planned that the amount paid by the road department
for labor shall go to the convicts' families in case of married
men or those having others dependent on them, and in other
cases shall be held as a fund for the benefit of the convict at
release, but not necessarily to be paid to him in a lump at
that time. It is also planned to parole good men for work as
patrolmen on the highways.
This state work, together with that authorized for the counties about the same time, will receive the close attention of all
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who are interested in the welfare of convicts or the development of the public roads. Its success and the cost data obtained may influence policies of many other northeastern states
in regard to convict road work.
In the foregoing accounts, little attempt has been made to
comment on more than the most important cases. Except in
one or two instances, no reference has been made to the work
of counties—and there are many of them that have employed
their convicts on roads. The truth is that county attempts
have not been so thorough as those of the states. The counties have lacked a sufficient number of suitable prisoners to
form an efficient gang, as well as adequate and experienced
supervisors, and funds to furnish camps and provide equipment Above all, they have not had strong enough public
sentiment to prevent mismanagement and abuses.
County administration is crude at best; county boards of
supervisors are seldom run with any idea of efficiency, and the
rules and regulations laid down by them have not been affected at all by the movement which has improved our city
governments. The convicts, whether under a sheriff, a justice
of the peace or a specially appointed warden, are of all kinds
and sorts. Classification is almost impossible unless a number
of the counties combine together and pool their convicts.
Petty politics, petty graft and petty oppression mark the attitude of county administration in things penal. A few striking instances of county road work may be cited; in Massachusetts, men from the Worchester jail built roads for a camp on
Mt. Wachusett,1 and in Lawrence County, Pennsylvania, convicts were employed on the roads.2 Granted that the plan of
county work has already shown marked success elsewhere, it
is unpopular in certain sections, because of the differences
in climatic and geographical conditions, character of prisoners, and sentiment. Yet all are glad to see some other community try the scheme. Hence, advocates of road building
by county convicts are united in crediting New Jersey and
1

Boston Post, May 26th, 191a.
* Newcastle (Pa.) News, July 26th, 1911.
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Onondaga County, New York, not only with common sense
but with courage and consideration for their convicts.
COST DATA

While the employment of prisoners on roads is a matter of
character-building rather than financial gain or loss, adoption
or rejection of the plan has been made contingent upon cost.
Inevitably we must consider whether the scheme involves a
credit or deficit in the public treasury. For convenience, the
cost data have been collected for comparison and discussion.
They are given in tabulated form below.
It is unfortunate that the information of actual cost is often
generalized, meager and indefinite, rather than itemized. The
table represents practically all that has been gathered from
official reports, newspaper clippings, and private correspondence in the files of the National Committee on Prison Labor.
In justice, it must be presupposed that more complete records
have been kept—the misfortune is that they are not available. Forty-six per cent of the items recorded are from Washington and Colorado; the remaining fifty-four represent nine
other localities.
The unit costs are obtained by the four following methods:
(1) By comparison of the actual cost with the value of the
work, estimated according to the probable expense if done by
free labor. The latter cost is calculated according to the
relative natural efficiency of convicts and free laborers, some
students being of the opinion that convicts are naturally men
of a lower grade than free laborers.
(2) By comparison of the resultant costs with the average
costs for similar localities and conditions where work has been
done by private contractors.
(3) By obtaining previously or subsequently a contractor's
bid on the work, and then comparing this with the cost.
(4) By ascertaining the value of the work done, computing
it from the engineer's measurement of qualities and prevalent union prices for the locality and conditions, and then
comparing with the actual costs.
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[VOL. IV
CONVICT LABOR

Cost 1 er convict
per day
Location of work

1 Lyle, Wash.
2 Wash. State,
| 1909-10
3 Method Kv.,
I Wash.
4 Lyle, Wash.
5 Lyle. Wash.
6 State K1I.,1 No. 6,
I Wash.
7 Oregon; Medford
I to Crater Lake
8 Oregon, 1911
9Tempe, Ariz.,
I Sail K. bridge
10 New Mexico, 1912

No. nf
convicts

5o(?)

Guarding

$.478

13 Mesa Co , Colo.
I
14 Ute Tass, Colo.

!

• 5 Colorado, 1909-10
I
16 Colorado, 1911
17 Wyoming, 1911

$.636

84
84
•30

$ -75

•50
So

•563

.478

I.09

36

I
I

Per convict
per day

30

11 Utah
12 Elkhom, Colo.

Subsistence

Total cost

35

•*S

30-60

22 s

•36
.30

.50

.29

.387

18 Missoula, Mont.
19 Sanders Co., Mom
20C.I0 Co., Mo.
21 Green Co., Mo.

.46
.40

22 Kalamazoo, Mich,

.40

23 Onondajja Co.,
N. Y., 1911,
1912

35
50

.412

24 Clinton Co., New
J York, JulyI N o v , 1913
25 New Jersey, Camp
I No I, 1913
26 Camp No, 2
jCamps 1 and 2

161

.234

•*77

1

Economy of convicts an open question in this case.
Two miles at $1,972 a mile.
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COST DATA

Value of work

Saving
References

Per convict
per day

Per job

$119,110

Per convict
per day

$3-69

Per job

$82,265

Good Roads, June 26, 1812, p.
722.
Spokane (Hash.) Spokesman
Review, April 14, 1911.
Good Roads, January, 1012.

».556
2,430

Good Roads, July, 1910, p. 274.
Had.
Report of State Highway Commission, Srpt. 30, Hyio.
Sunset, San Francisco, April,
1912.
Good Roads Year Book, 1912,
p. 2Q4.
Official correspondence.

3-95
4.03
3>«*3
4.3"
$2.50

1.66
2.60
1.50

64,969

38,919

Warden's Annual Report, Novemlier jjo, 1912.
93,117 Sail Lake Cily Xewt, December
21, 1912.
Salem (Oregon)
Statesman,
January 29, 1913.
Tress reports.

198,682
$2-3

«-75

8.354
212,160
2.00

1.50

12,816
171,400

5.933-°a
3,042.00
8,975.02

Colorado Springs Gatette, May
13. »9>iReport,
157,660 Warden's Biennial
Novemlwr 30. 1010.
Good Roads Year Book, IQI2,
p. 2S5.
Good Roads Year Boot, 1912,
P. 298.
11.535.69 Address of Ally.-Gen. Galen at
Montana Good koads Congress,
Anaconda, Mont., July 8, 1912.
162,601.91 Address of Atty.-Gen. Galen at
Montana Good Koads Congress,
Anaconda. Mont., July 8, 1912.
Official Correspondence.
Good Roads Ye»r Book, 1912,
p. 291.
Engineering Record, February
24, 1912, p. 223.
Engineering Contracting, FebNone
ruary 28, mi 2
Kepnrt ol special committee to
None
Board of County bupeivUors.
4.951

None
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108.97
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The first process may be illustrated in the following manner:
If the prisoners seem to work as hard as free laborers, who
are worth $2 a day, they, too, are considered worth that much,
and if the gross costs for their keep are $1, a clear saving of
$1 is indicated. The inaccuracy of this method lies in its
assumption of the equal efficiency of convict and free labor.
It guesses at a figure which may easily be obtained exactly.
The correct order of reasoning is exemplified in the other
three methods. Items number 7, 12 and 14 in the cost data
table are figured by this first method.
The inaccuracy of the second method, though less than that
of the first, lies in the possible errors of judgment in gauging
the relative expense of construction in two " similar" locations, and in allowing for the inequalities. For this reason,
the actual gain or loss in the Onondaga experiment with convict labor cannot be estimated. It is impossible to tell from
the accounts just how much the stretch of road built by the
prisoners would have cost if done by free labor.
In the third case, which is really the same as the fourth,—
the two are the same problem—the cost with free labor is
actually obtained, that is, the lowest contractor's bid for the
work becomes the standard with which the costs with convict
labor are compared. (The costs for Colorado during 1909
and 1910 were obtained in this manner.)
In the last method, these actual free-labor costs are found
from the engineer's quantities (which the contractor in the
third case would need for making his bid), the unit costs being assumed by the engineer, probably as accurately as the contractor could assume them. This method does not involve the
trouble of advertising for bids, or the unfairness of putting
the contractor to the expense of figuring the costs without any
intention on the part of the state of letting the contract. (The
costs of work in the state of Washington are obtained by this
method.)
The whole problem of cost-keeping for convict labor on
roads resolves itself into the accuracy of securing the costs by
free outside labor, as a basis of comparison with the costs
actually found by using the prisoners.
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In compiling the table, the items were sometimes obtained
by information from more than one source. Newspaper clippings, although not always reliable, furnished much information, which, on account of the lack of other data, has been
included. The matter of interest and depreciation for equipment has evidently received scant consideration. Apparently,
the common method has been either to deduct this whole cost
from the first season's outlay, or to ignore it entirely. In the
latter case, costs and profits have been figured as gross sums.
Indeed, this is all too common a method. Whenever a definite
understanding regarding the manner of computing the costs
was given, the necessary corrections for interest and depreciation, evidently only approximate, have been applied, so
that it is felt that the table is essentially correct, at least
enough so for the purposes here intended. However, it would
seem desirable that more complete results be published in
future. It is necessary for the state prison or highway authorities to know in just what manner their money is being
expended; or else, a gross waste in one class of work may be
covered by economy in another, so that a surplus or saving for
the work as a whole may be shown. Public work of this sort
differs from that of private individuals, in which a contractor's
figures of costs are to him as much a part of his stock in trade
as the manufacturer's patented processes. But in this case,
where convict work is almost in its infancy, the attitude should
be that of cooperation, for only by comparing results and
profiting by the mistakes of others can the states make rapid
progress.
The fallacy of any conclusive deductions from the cost of
road per mile is clear. Thus, the work of item number one,
at Lyle, Washington, is apparently high, $24,000 per mile, yet
the engineer's estimate shows that it would probably have been
230 per cent higher if it had been done by contract. This
same example also illustrates the fallacy of any mere estimate
of work done, even by an expert, without the substantial data
being given, as in this case, showing the exact yardage of excavation and masonry. In this particular instance, there was
also given the average expense incident to working one convict
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one day, including superintendence, guarding, subsistence,
clothing, camp equipment, explosives and building materials.
These figures are very handy for computing the average saving per convict per day and also for use in subsequent estimates of gross costs; but for this discussion they need not be
considered.
As will be noted, little attention has been paid to work done
by counties, which has usually been on so much smaller a scale
that it would tend to give misleading impressions. It was also
necessary to discard some of the published results of state
work, notably in the case of one state prison report where two
widely separate and inexplicably different figures were given
indicating the cost per man to the state for each convict one
day on the road.
However, the main facts regarding the costs of road work
by convict labor stand out clearly. The column showing the
saving indicates generally more than a mere balance in favor
of convict labor against other methods of construction; it shows
a large profit. Besides the direct economy indicated, there is
often an indirect one resulting from the fact that much of the
money laid out for the state highways finds its way into the
funds of the penitentiary. Inasmuch as both the roads and
the state institutions are supported publicly, an increase in
income for the prison benefits the state as much in the reduction of tax as does the decrease in the cost of highways.
Hence the two together should be credited as resulting from
the use of convicts on roads.
The unit costs of guarding and subsistence, while by no
means complete, at least indicate a fair degree of uniformity.
The average cost of subsistence is found to be $.40 per day
per man; while the expenditure for guarding in those cases
where costs were given averaged $.484. The striking thing
about these figures is that the expense of guarding is 20%
more than that of feeding. This tends to bear out the statement of the advocates of the honor system, viz., that the
expense of guarding takes away all the profit that might otherwise accrue from the employment of convicts on roads.
In justice to the facts of the Onondaga work, some ex(284)

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planation of the figures for 1912 is due. For this work the
overhead charges due to superintendence and guarding were
unduly high, because there was a small working force of
prisoners. Increasing the number 50% would result in practically no additional fixed charges, and so would decrease the
cost of the work 10%. Likewise an increase in length of
working day from eight to nine hours (the usual number of
hours on state road work is ten) would reduce the cost for
both labor and teaming by an additional 10%, making a 20%
saving in all. These changes with other suggested savings
in the operation of the county road quarry, which might affect
county and private road contractors alike, would cause considerable reduction in cost. In spite of the apparent lack of
pecuniary gain, the system achieved sufficient success to secure
the hearty approval of the authorities and a recommendation
for its continuation on a larger scale. The other items require no further comment, inasmuch as the published details
of surrounding conditions give little more information than
that shown in the table.
The significant deductions from the study of these tabulated
results as a whole are:
(1) That there is a general and considerable saving in the
use of convict labor for road work over other methods of construction, this saving being quite independent of locality and
types of construction, although influenced by the size of gang
employed.
(2) That the cost of feeding convicts on road work is uniform for all those cases in which data are available, and averages $.40 per prisoner per day.
(3) That the cost of guarding alone has amounted to about
$.48 per convict per day, this item being 120% of the average expenditure for subsistence.
UTILITY OF CONVICTS FOR ROADS
The experience of states where the system of convict road
building has received a trial enables us to answer quite positively the query as to whether this work is a suitable substitute
for methods of employment now in vogue. It has been shown
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that the present method is wrong; it remains to indicate why
the proposed one is right.
The question of competition with free labor comes first, not
because of any added importance over the other considerations
but rather because it has been made the issue in so many legislative battles wherein the contract system has been abolished.
The lawmakers, while rather blind to the wrongs of the prisoners, are keen enough to appreciate the grievances of free
labor, their constituency.
The stand of organized labor is against " unfair competition." In common with other students of the convict-labor
problem, the trade unions also urge humanitarian reasons for
a change in the contract system. But with labor it is a question of more than passing interest; it is a matter of selfprotection, and almost of commercial life and death. Convict labor is bound to work some hardship to free laborers.
The problem is to find the kind of work providing a maximum
of benefit to the prisoner and the state while at the same time
causing a minimum of friction with free labor.
The " unfair competition " is most easily explained by an
example: Prisoners are employed in making articles of clothing to supply all the institutions of the state, i. e., the state
itself becomes the preferred market for their commodity. This
replaces the work of an equal number of free laborers but affects only a small percentage of the total workers. Against
this plan, let the prison-made goods be placed on the open
market by private contractors in competition with articles
manufactured outside and the whole market becomes disturbed. Instead of the small percentage injured, the whole
trade suffers.
As expressed by one of their writers,1 the dissatisfaction of
the unions is on account of these " methods by which prison
labor when performed for the benefit of private contractors,
places the convicts' labor on the market and thereby forces
reductions in wages upon large numbers and by so doing,
lowers their standard of living." Instead, the solution by
1

John P. Frey, Proceedings of National Conference of Charities and Cor-

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work in the open air is offered, benefiting the prisoner in
health, in mind, and in morals. " There are highways to
build, there is farm produce to be provided, and the convicts
can do all of this with a minimum of competition with free
labor and with no injury to the farmer." The same writer
sums up for labor in the following words:
Briefly reviewed, the trade-union attitude towards prison labor is:
(1) that its first object should be the prisoner's reformation and
under no circumstances should any element of private profit enter
into consideration; (2) that the labor performed by the prisoner
should be of a useful nature; (3) that for this labor the convict
should be paid for the benefit of those dependent on him and for his
own assistance upon regaining freedom; and (4) finally, that the
principal object of the state should be to protect itself from the
vicious and the unfortunate, to give them an adequate opportunity
for reformation, and not to derive profit from their labor.
Road work does not compete with free labor. Rather it
benefits the working class in common with all others. The
improvement of roads, which are public property, can be of
advantage to one class more than to another only to the extent that it uses them more. Indirectly, the betterment must
help everybody, in decreased costs of transportation for food
and commercial products, and opportunities for social intercourse. At present, the labor on our highways is almost entirely foreign, and in amount not enough to meet the needs.
Even in New York city, where many of the aliens enter,
Italian labor for street construction is hard to get in the busy
season. Convict road work may conceivably tend toward a
slight decrease of immigration—not an undesirable effect.
The possible increase of our road mileage to meet even the
present need is not yet in sight. There will always be work
to do. Where native Americans are now employed in road
building, it is a matter of expediency rather than preference
on their part, resulting from the necessity of obtaining the
highways and the scarcity of suitable labor to do the work.
The special committee reporting on the convict work in
Onondaga County, New York, in February, 1913, 1 after ex1

Journal of Ike Board of Supervisors of Onondaga County, February 3,

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haustive investigation stated: " It is conceded by those who
have made a study of the question of the employment of
prison labor that the use of said labor in quarry and road
work conflicts with free labor in a lesser degree than in almost
any other line of employment." Opinions of the daily press
and of the officials who have tried the convict road work corroborate the above view.
From organized labor itself and from a spokesman no less
authoritative than Samuel Gompers, President of the American Federation of Labor,1 comes a more sweeping approval.
He says: " It is my opinion that the least possible competition
of prisoners as against free labor would ensue in the building
of roads which would not only be beneficial to the prisoners,
but would to some extent relieve the taxpayer."
Does the convict deserve or should he receive any special
consideration as to his incarceration? If so, what? Public
opinion has heretofore denied any such right. The prisoner
has violated the laws of the state and must be punished. He
has caused the state considerable expense for arrest, conviction and then usually for imprisonment. He should pay the
debt. He is a moral degenerate and hence should be imprisoned, that he may not further injure or contaminate others.
This is all very true from the viewpoint of the state, but what
of the prisoner? We realize now that although his indebtedness is great, financial and moral, we are under even greater
obligation to ourselves, through him, for his reformation.
When his term is served, his debt is paid—so the law assumes.
But wherein is society benefited if he still has the weakness of
mind, the inclination or desire to do evil? Morally he is sick,
as much as before; he is bound again to transgress the law
and to find his way back to the penitentiary, causing an added
expense to the state. To get at the root of the trouble, we
must " create a new heart" and substitute a " right spirit."
In short our attitude is now that of reformation and not punishment.
1
In letter to State Labor Bureau of Montana. Helena (Montana) Record,
May 19, 1911.
(288)

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The physical cure should preceed the moral. In New
Jersey at least 50% of the delinquents have some physical or
mental weakness.1 In the case of the convict, the authorities
realize that the man should first be made healthy.
This emphasizes the need of work in the open air, thus
making preferable labor on the farm or road. For many
reasons the highways are the more suited; there is greater need
of roads than of farm produce; there is practically no competition such as might occur were all employed in raising produce; and the results are more directly beneficial to all the
people. Physically the effect of road work on the convicts has
been remarkably beneficial, as results from all the states show.
The cost of medical attendance has decreased and almost vanished. After one or two months of hard work in the open air,
with good healthy meals, the men have become brown and
hardened, really enjoying the work and preferring it to any
other form of labor.
Health regained, the moral cure is possible by means of
the honor system. With men's minds on their work and with
no opportunity to brood, the desire to escape decreases.
Gradual increase in freedom and responsibilities gives added
power to resist temptation. Self-respect comes back and with
it self-confidence. Knowledge of work well done, of trust
faithfully fulfilled, of being a producer instead of a parasite,
gives ambition for even better things. Conscience aroused
and desire for reform instilled, the redemption of the criminal
is half accomplished. Instead of escape there is in some cases
a positive desire to stay, and discharged prisoners often request and are given re-employment. That the men make good
is also attested by the number who are afterward employed
nearby on farms.
Financial results as shown in the table of cost data are
eloquent proof that the road work is popular among the convicts. No such work has been accomplished except through
zeal on the part of the laborers. Even contract labor with
1

Dr. Frank Moore in Annual Report, New Jersey State Reformatory, 1913.
(See Annals American Academy of Political and Social Science, March, 1913,
" Prison Reform in New Jersey," by C. L. Stonaker.)
(289)

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all its driving (under the stimulus of narcotics) with a boasted
efficiency equal to free labor, has not effected such economy.
The work is hard, intentionally. Otherwise the regaining of
full health is difficult. But with good health comes the ability and usually the desire to do honest work after release. To
offset this rigorous discipline, the food is improved in quality
and unlimited in quantity. The men do justice to three square
meals a day.
Nor is the road work without actual pleasure. After work
sports, games, music, reading and social intercourse give the
men something to look forward to. Under proper supervision
there results a mental improvement greater than is usually
attained in the shops. On Sundays it is possible to hold religious meetings and so attend to the spiritual welfare of the
men.
Heretofore the public has been averse to employing exconvicts, often because of unwarranted prejudice. The same
feeling has caused condemnation of the exposure of convicts
on public roads. But the convicts are inconspicuous in their
gray or khaki uniforms working like free men without guard,
and the prejudice is soon overcome. This is bound to help
the prisoner. To be treated like an honest man is encouraging, while to be made subject to suspicion and distrust causes
antagonism.
The convict's chance for subsequent employment is improved
by such occupation. As has been pointed out,1 most of
the men would have been nothing more than day laborers in
any event. There is, however, opportunity for the more
skilled to develop along the lines of roller engineers, blacksmiths, masons, carpenters and other useful trades connected
with road and bridge work. Competent road foremen are
always in demand, and under the expert supervision recommended, no better training could be conceived. Such cannot
be claimed for farming and prison manufacturing. In addition, road work has this invaluable advantage: it tends not only
1

Joseph Hyde Pratt, Annals of American Academy of Political and Social
Science, March, 1913.
(290)

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5*

to supply the training for useful occupation, but, more important, the physical strength and inclination to follow it.
The prime advantage to the state of any form of convict
employment must be its moral effect on the prisoner; this cannot be measured in dollars and cents. The facts with reference to road work are so well authenticated and corroborated
in different localities, that they are indisputable. Oregon
reports 85 per cent reformed among those employed on
road work.1 In Syracuse the saving in character alone is considered to do far more than offset any possible monetary loss.2
This reformation certainly lowers the number of second
offenders. It thus lessens state expense for policing, imprisoning, and maintaining prisoners, to say nothing of the
moral and financial effect of decrease in crime. It makes unnecessary the expense of increasing prison accommodations.
In addition, road work acts as a deterrent for some forms of
offense, notably vagrancy, as shown in Kalamazoo, Michigan.*
If there is anything a tramp would avoid, it is the physically
strenuous labor of road work. Onondaga County, New York,
found that even the more serious classes of crime were lessened.*
The vagrant and tramp avoid these communities and the prison
population decreases in proportion. This is contrary to the
condition that exists under the prison contract system as cited
by Governor Hadley of Missouri.5
The convict's wife and children are benefited by the payment of a wage, as discussed later. The family should not be
deprived of the necessary material support, with the attendant
possibilities for education and pleasure. Upon reformation,
the family relationship is restored and the father's influence
becomes one for good instead of evil.
1
Estimate made by Governor West of Oregon as reported in the Tulsa
(Oila.) World, May 6, 1912.
2
Minutes of Board of County Supervisors, Onondaga County, Feb. 3, 1913,
pp. 42-3.
8
Outdoor Work in Michigan, by William K. Bryant. Annals of American
Academy of Political and Social Science, March, 1913.
* Ibid., pp. 41-42. Syracuse Journal, April 8, 1913.
8
New Theory as to Punishment of Crime, by Herbert S. Hadley. Annals of
American Academy of Political and Social Science, March, 1913.
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It need not be feared that the conditions may be made too
favorable, so as to be actually attractive. Even on the highways, the tendency has been toward over-severity rather than
leniency. No man would undergo the ignominy and disgrace
of a public trial even to gain a reputed irresponsibility and
ease in work on the public roads. On the other hand, there
are many who believe that the court proceedings, with their
humiliation, are punishment enough and further effort should
tend solely to reformation.1
The advantage and necessity of securing good roads at
cheap cost have already been shown. It is submitted that
in view of the results already obtained as witnessed by the
cost data, roads cost less to the state when built by convict
labor than by any other mode of construction at present employed. Convicts and roads both being state property, the
maximum of efficiency is possible through their joint operation.*
The gangs are permanent. Although they change constantly in personnel through expiration of sentence and
pardon, the changes are in small units only and they do not
destroy the organization of the working force, since they can
be readily anticipated. The state may be sure of the workers; there are no strikes. Thus a definite continuity of work
is effected. In any construction work organization is of prime
importance. In this respect the road work would be fortunate. The men are naturally of a higher type of intelligence than the average road immigrant laborer and hence the
various tasks, quite simple in themselves, are readily learned,
and by continued use perfected. New men are broken in as
they come, a few at a time, without disturbance. The work
itself being done for the state and by the state, the friction
which sometimes develops in ordinary road contract work is
obviated.
The choice of labor for convicts, considering its effect on
their health, lies between the farm and the road. It requires
1
Julian Hawthorne in New York Times, Sunday, Jan. 18, 1914. Marshalltown {Iowa) Republican, April 25, 1911.
* Making Roads Through Prison Labor, by E. Stagg Whitin. The Review,
February, 1911.

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only a part of the prison population to grow sufficient produce
for the state institutions alone. More than this number, if
used, would give a surplus which would need be disposed of
to the disadvantage of the free farmer. Moreover it is inconceivable that the amount thus earned could be converted
into any permanent, tangible public property of as great value
and serviceability as the public highway resulting from the
same expenditure of prison labor. It is easy to get sufficient
farm produce with relatively few men; it is difficult to obtain
sufficient public road mileage. Moreover the roads need not
be sold to the detriment of the very persons who should be
protected. Instead they benefit the public alone and impartially.
The convict should receive wage. This is not charity, but
justice. If he has a family, they should get their just proportion; if not, his wage should accumulate until his release.
Someone must provide for the prisoner's dependents. If
their own efforts fail, charity or the state must take a hand
or crime and disease will result. It is a short-sighted policy
where punishment of one crime involves the committing of
others, or where justice toward the prisoner results in injustice
toward the innocent already too much injured. Yet this is
the plan we have been following. In some states, as New
Jersey and Ohio, there is provision for a state pension in such
instances. This may be advisable sometimes but in the case
of an able-bodied prisoner it is fundamentally wrong. A man
has the responsibility for those dependent upon him even
though he be in prison. Commission of crime may forfeit
civic rights, but it does not remove or shift responsibility for
those the criminal has pledged himself to protect and provide
for. He should not be allowed to forget this. Nor is such
an obligation unrecognized by the prisoner ofttimes. Can th«
state refuse the prisoner the privilege of supporting his family
while in prison?
There is another side to the question, viz., that the increase
in production following the allowance of wage more than
justifies its payment. This is an economic situation quite
apart from the sociological. The wage should be in propor(»93)

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tion to the value of the man's services and the cost of his maintenance should be deducted from it. It should increase in
proportion to the increased efficiency of the road group, while
the method of standardization of labor costs should be worked
out. Quite universally this plan of allowing a wage is regarded as practicable, and many states, as Oregon, Nevada
and others, use it successfully. Nearly all the states favor it
and there is no doubt that it is an economical as well as an
equitable feature.
At the same time the prisoner has already caused the state
expense enough so that the wage should not exceed his net
earnings. The payment of a wage presupposes a form of
employment by which the convict can earn it. Since road
work shows large net earnings on the part of the prisoner,
it follows that the wage is made possible by this method.
And since the earnings are large, such pay is of relatively
small expense to the state.
If he helps support his family, the prisoner must have some
feeling of pride. A balance to his credit on the prison book
at any time acts as a check on his conduct during the remainder of his term, a guarantee of continued satisfactory
service. Upon release it need not all be delivered over to him
at once. The amount withheld serves to check extravagance,
and provides a rein over his actions until it is finally withdrawn. This money permits, first, the purchase of wearing
apparel so that the discharged prisoner need not be handicapped by appearance. It then provides assurance of a livelihood until permanent work is found, and eliminates worry
on that score. Further, the possession of cash creates a feeling of independence and self-confidence. With the health
resulting from outdoor road work, the training for manual
labor received, the reform accomplished in so many cases under
the honor system, the renewed self-confidence and inclination
toward real work, and the cash available to tide over the
difficult period following release, the released prisoner should
be equipped to earn an honest living and lead an upright life.
The striking thing about convict road work in the North
is its wide range of application. The well authenticated re(«94)

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ports of state work to date show that it is capable of use under
varying conditions. Washington, Arizona, Colorado, Kansas,
Ohio and Onondaga County, New York, present climatic and
geographical conditions as varied as is possible in the northern
states. All classes of prisoners have been used, from mere
misdemeanants to life-termers. The system has been tried
in the wilds of Washington and Colorado and in the deserts of
Arizona, in the suburbs of Cincinnati, Ohio, and Trenton, New
Jersey, and through the farm lands of central New York.
There are parts of New York state and Pennsylvania very
similar to the country in Colorado and Washington, and these
sections need good roads. The class of prisoners differs, it
is said, being of a less dependable type in the East than in the
West. Yet the numbers here are greater. Surely of all the
large prison population some can be found as well suited for
road work as in Colorado. It cannot be claimed that all are
fitted for employment on the highways; some must always be
under close watch and others are physically incapable. But it
is claimed that the success of Colorado may be duplicated
in New York; that the physical conditions and the classes of
convicts employed in the two cases need not be radically different; and that the intelligence and capability of our public
officials make the harmonizing of convicts and road work as
much a possibility here in the East as in the West.1
The evidence available indicates the advisability of following the honor system, for the good oNboth the convict and
the state. The privileges given should be such as to make
road work the goal of the prisoner's endeavors. These privileges should be:
1
Editorial Engineering Record, Dec. 16, 1911, p. 697.
Newark (New Jersey) News, Jan. a, 191a.
Herbert S. Hadley, Ex-Governor of Missouri, in St. Louis Globe Democrat,
Nov. ia, 1911.
Johnstown (Pa.) Tribune, Oct 17, 1910.
Reading (Pa.) Telegram, Dec. 6, 1912.
Recommendations of Committee on Industries to legislature, to work convicts
in New York state on the roads, as reported in New York Press, Oct 8, 1913.
Albany Argus, Oct. 8, 1913.
Plattsboro Press, Oct 9, 1913.
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(1) Absence of guns and chains.
(2) Substitution of plain uniform for stripes.
(3) Commutation of sentence.
(4) Better food.
(5) A wage.
(6) Freedom after work hours.
The uniform may be gray or khaki although any color which
does not attract attention is suitable.
The commutation of sentence should be in addition to what
is allowed ordinarily and in amount from ten to thirty days
per month's work. It ought to be enough to make a real inducement and yet not so much as to free the prisoner before
he has had a chance to repay his debt to the state. In the
West ten days a month is the usual amount. This works
satisfactorily and appears to be about the reasonable allowance.
Improvement in quality of food over regular prison fare is
necessary because the work is harder. In the country districts where the camps are located, it is quite easy to get
wholesome farm produce. Many camps have an expert cook
employed. Experience shows that it is economy to take care
of the food rather than rely upon the doctor.
The camps must be made clean, and the sanitary rules
strictly enforced. A supply of good water is essential. For
well organized work on a large scale, tents make an especially
good camp for summer, giving excellent ventilation and being
easily packed and moved. Collapsible wooden houses are
suitable for more rigorous climates. Where the work is in
small jobs, a bunk wagon is convenient, holding a dozen or
more men, with sides interchangeable for summer and winter.
All these styles of camps have been successfully used; the
choice among them depends upon local conditions.
The prisoner should be made to do some work, but choice as
to its nature should be optional. There has been no difficulty experienced in getting a full complement for the road
gang, its advantages being well recognized. All the convicts are not physically fitted for the work; a physician's examination will indicate this fact. As to the choice of men
to whom the option of joining the honor road camp shall be
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extended, the basis must be that of the possibility of doing
them good. On this basis the short-termer and the lifetermer, the misdemeanant and the murderer have an equal
chance according as they show a capability for trust and indicate the possibility of reform.
Payment of a wage is essential, providing that the prisoner
really earns something. The latter feature is of great importance. It cannot be expected that the state should pay for
services not rendered, especially when the prisoner's debt is
already heavy. It is impossible to know how much the prisoner earns, or whether he earns anything, without an accurate
estimate of the work done and its value. Guesswork as heretofore used is folly. It is essential to have the exact amount
from which the money value may be deduced. The engineer's
estimates and monthly progress reports, while useful in adjusting the wage, are also good business policy. What contracting company would dispense with them? The state is
surely as big an organization as most business concerns and
can well attempt to follow the same line of economy and scientific supervision.
Close watch of the work not only will give the profit to the
state but will show the exact state of progress, the probable
time of completion, the need of various supplies, the possible
use of additional laborers, and the date at which other provisions for employment of the road gang must be made. In
short, this method makes possible a rational supervision from
the office to suit the actual conditions in the field. Further,
it gives a close estimate for later work of similar character,
and enables the profiting from mistakes and from improvement in methods.
The cost data ought also to give the expenditures for subsistence, materials and equipment. Sudden changes from
month to month may then be investigated. Such supervision has a salutary effect on the officials; waste is minimized
and machinery is carefully handled. Since public reports
have to be made, a good showing is essential to the continuance of the work. The public has a right to know how its
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edly by unit prices. By this means the costs are reduced to
terms which may be compared with practically all other work
on a common basis. Knowledge of the expense incident to the
use of one convict a day, including subsistence) materials and
supervision, is also useful, especially in estimating the amount
of money necessary to run the camp in future similar work.
Total costs are necessary from the standpoint of accounts, but
otherwise are misleading since they do not take into account
the variation of amount and kind of work. In justice to the
state itself, to the taxpayer out of whose pocket the funds come,
to the convict who does the work and should receive his share
of credit, and on the ground of good business principles,
the cost data should be fully and carefully kept.
The question of administration is an important one. This
discussion has been confined almost wholly to work suitable for
state convicts. Likewise the roads to be improved would best
be state roads, that class of highways constructed entirely at
the expense of the state. In this way the state alone is involved. In many states the construction of roads in conjunction with the counties is illegal, since it is then necessary
to enter into a contract, which arrangement is enjoined by the
law abolishing every form of contract labor for prisoners.
With county prisoners on county roads the same considerations
apply. It is necessary that prison accounts be settled immediately since they are usually balanced every year, and the
appropriations allowed do not permit extended credit. With
state prisoners on state roads, the bills are readily paid by a
simple transfer from the account of the state highway department to that of the penitentiary. The state and county arrangement means cash payment. Failure to pay promptly
causes trouble to the prison department.
The work must necessarily be under the joint supervision
of the state prison and highway departments.1 Primarily the
workmen are prisoners; they should be in charge of prison representatives to whom belongs the responsibility for proper
work and discipline as much as when within the penitentiary
1

See state histories supra, pp. 17-39.
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walls. At the same time the construction is a part of the state
road work and since the highway department provides the
funds, it should provide the supervision under a competent
representative to see that the construction is carried on economically and scientifically. The guards then become foremen,
directing the workmen under the superintendence of the state's
engineer. These two phases of authority need not conflict,
inasmuch as the duties are quite separate. The attitude would
be one of cooperation rather than antagonism, since the end
of usefulness and economy is common to both. A similar
arrangement exists in all municipal contract work, where the
city or state engineer directs the work of the contractor.
Attempts have been made to combine these two duties by
stipulating that the prison " guard " shall be a " competent
road builder." Such a requirement is difficult to meet. Practical roadmen have few aspirations to become penitentiary
guards, and guards have not had experience in highway construction. Moreover, the salary is not usually enough to attract good men. The state, however, employs competent road
engineers. It has a definite system for its work and definite
standards of construction. The prison organization is also
satisfactory. By thus combining the two there is no reason
why good results should not be obtained. This plan has already proved satisfactory and is recommended for future use.
In various states there are different methods of dividing the
cost of the work. In some, where the law does not prevent,
the counties arrange for the payment of a specified portion.
The state usually furnishes the guards and engineering services, and the county the materials and equipment. No fixed
rule governs the payment for transportation and subsistence;
sometimes the county and sometimes the state provides one or
both. In other cases the county pays a flat rate per convict
day in consideration of these items. Where the state gives
more than would be expended if the prisoners were kept in the
jail, it really amounts to a form of state aid. It would seem
a more equitable arrangement for the counties to pay a definite
percentage of the total cost, in this way putting all localities
on the same footing. The state might require a county to
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raise its pro rata amount before the convicts would be sent.
In this way difficulty in final settlement would be partly obviated. This relieves the county also. It would be uneconomical for a county to go to expensive outlay for equipment, for instance, unless there were some reasonable assurance that similar work could later be continued on as large a
scale. The state, however, could well afford a more extensive
and complete set of tools to be moved with the road gang.
Local conditions of necessity govern individual cases.
Where possible, state convicts should be employed on state
roads, and county convicts on county roads. If some arrangement has to be made with the counties, it should be such as to
insure prompt payment to the state penitentiary; it should
give all counties an equal chance to obtain the benefits of
convict labor at the same proportionate cost; and it should be
economical in operation.
The honor road camps will provide for only a portion of
the penitentiary inmates; for the others several possibilities
are open. The state quarries have been almost universally
successful with the class of prisoners who require armed
guards, and the output from them has seldom been equal to
the demand. These two kinds of work connected with roads
are correlated and need not interfere with each other, since
they use totally different classes of prisoners.
There is still another form of employment which has not
been fully recognized as yet, but which offers great possibilities, viz., concrete culvert and bridge work. In many states,
this is the only form of road work not permitted, on the ground
that it requires skilled labor. This, while true in part, is not
a valid objection. The bridge is a fundamental part of the
road; it is as much the property of the state as the traveled
way and it benefits the public just as much as the highway
itself. Has not the state the right to use its own property
(convicts) to improve its own property (roads), irrespective
of the class of workmanship required?
The question of drainage is the first and pricipal one in road
work. It affects the fundamental part of the road, the foundation, and should be provided for first, even if it takes all the
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available funds. A dirt road, well drained, may be a good
road the year round, while a macadam road, ill drained, may
be almost impassable part of the time. Many a road, otherwise serviceable, has been rendered unfit for use through lack
of suitable drainage. It is evident that convicts could not be
employed on work of greater advantage to the cause of good
roads than in building bridges to remove water from the highways, at the same time improving the surrounding property.
The objection to such use evidently arises in consideration
of the competition with skilled labor. Carpenters, masons,
and possibly blacksmiths might be classed as " skilled " but the
large bulk of the workmen used would still be manual laborers
only and " unskilled." The use of convict labor in much
larger numbers for the construction of many prison buildings
has seemed justifiable, so that the antagonism in the case of
bridge building rests upon comparatively trivial grounds.
The work itself, on the other hand, is of a nature in many
ways specially adapted to the employment of prisoners. It
would take care of a comparatively large force of men within
narrow limits. This means economy of supervision and also
of guarding, if required; facility in providing for the keep of
men and animals; and the elimination of much transportation to and from the work or of the necessity of frequently
moving camp. Bridge building can be carried on independently of the rest of the work, and in advance of it. The
camp may be of a semi-permanent character, remaining in one
location from start to finish until a shift of force becomes
necessary.
According to the size of the culvert or bridge, the number
of men in the gang will be determined. If only a few are
needed, in which case guarding would be unduly expensive, the
honor system would find its most advantageous use. All conditions from this to the employment of a large force under
heavy guard in extensive work would be encountered, so that
the system would provide for various classes of convicts.
A special advantage is that concrete work is more interesting than the general run of highway construction and at
the same time requires a higher grade of labor even among
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the unskilled. It demands a man capable of doing more
than wielding a shovel. By designating a part of the prisoners for this work alone, an efficient organization would soon
develop and it is believed that as gratifying results from the
standpoint of costs and saving would obtain. In conjunction
with the quarry and the highway proper, the bridge construction would afford a full complement of work, providing elasticity to the whole system, whereby almost every class of convict labor would find the opportunity of doing good work
for the state.
The road of a few years ago, built of telford, macadam, or
gravel, cannot be economically used today in many sections
of the country, because of rapid deterioration under heavy
automobile traffic. Instead, brick, cement, concrete or some
sort of asphaltic pavement is used. That convicts can be
useful in building brick highways has been shown by the Ohio
experiments already mentioned, but as far as is known, no
attempt has yet been made to utilize them for constructing
bituminous pavements and surfaces. It seems that they could
not be so efficiently used in constructing the latter type of
highway for three reasons: ( i ) The bituminous and other
materials are so costly that they form a large percentage of
the outlay, and the labor, which the convicts must perform,
constitutes a correspondingly smaller part. (2) The use of
improved machinery has reduced to a minimum the amount
of manual labor required. (3) Many patented processes or materials are controlled and used only by authorized private
representatives. This disability as to convict labor applies
only to work on the wearing surface, and does not necessarily
prevent the building of the bridges and subgrade by prisoners,
even in the case of bituminous roads. Whatever the type of
road, the state prisoners could at least care for the grading,
thereby saving the state a large amount for that item. While
the wearing surfaces are subject to deterioration, and therefore are of more or less temporary value only, the drainage
work and grading, properly done, are of lasting benefit with
no decrease in value.
Humanitarian motives demand that a convict be worked in
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the open at strenuous manual labor. Utilitarian considerations indicate that the preference be given to road work
rather than to the farm. The economic aspects of the case
determine the particular class of road work. The commodity
which the convict has to offer is manual labor. The question
is, in what way can this manual labor be turned to best account for the state? Naturally, it is in that direction where
it can earn most. The experience of various states shows the
greatest earning power when used in the direction of earth
moving, that is, in grading. This item, especially throughout
those mountainous western states where convicts have been
most used, amounts to the major part of the cost in the type of
roads built. It is significant also that in the important case,
(Onondaga County, New York) where other items, such as
stone, formed a substantial part of the cost, the saving was
little if any and the financial economy was negligible. It is
unfortunate that the data are so meager and the evidence is so
inconclusive on this point, but it is safe to say that the greatest amount of money saved up to the present time through
convict labor has been in the item of earthwork. The passing of the old and the advent of the new or higher type of
road still leaves the opportunity for utilizing convict labor,
since the cost of excavation and embankment forms a considerable part of the expense of all types of roads, and bridge
work is essential for either the old or the new type.
This study of the convict labor problem as applied to the
northern states suggests the following conclusions. Convicts
should have some work to do. Labor on public highways
provides the best form of employment for prisoners because:
(1) It is healthy out-of-door work.
(2) It improves morals and helps reformation.
(3) It is uniformly attractive to the men.
(4) It enables the payment of a wage.
It is the best use from the standpoint of the state and society, because:
(1) It competes least with free labor.
(2) It benefits all the people with a needed improvement at
least cost.
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(3) By reformation of the lowest class, it elevates the whole
social order.
(4) It provides revenue to the state instead of causing expense.
(5) It decreases the amount of crime.
(6) Of all the present forms of convict employment, it
gives the largest returns in money value.
Experience shows that:
(1) The system can be successfully applied under varying
conditions of climate, location, and class of prisoners.
(2) As far as possible the honor system should be used
and commutation of sentence allowed.
(3) The choice of convicts for honor road work should be
based upon temperamental fitness rather than upon nature of
crime and length of term, but acceptance should be voluntary
on the part of the prisoner and dependent on his satisfactory
physical condition.
(4) Of all kinds of convict employment, that on the highways should be most attractive in wages and privileges.
(5) A wage should be paid not to exceed the net earnings of
the prisoner.
(6) Accurate data should be kept to show all unit costs,
together with the engineer's estimates of the amount and value
of the work done.
(7) The prisoners should be under the prison representatives
acting as foremen, and construction work should be under the
highway department acting as engineers.
(8) Concrete bridge work, grading and drainage present a
very useful form of work and should be generally employed.
Although the eastern states are faced by many differences
in conditions from those states where this innovation has been
so successfully tried, the difficulties are not insurmountable.
The utilization of state prisoners to build up road systems
should prove a general benefit and a public economy in the
East as it has already done in the West.
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ACKNOWLEDGMENT

Acknowledgment is due to the highway and prison officials
of all the states herein mentioned, for kindness in making
corrections and additions to the state histories. All accounts
except that of Iowa are as of March, 1913. In Iowa, such
definite progress has been made during the past few months
that it has been included. The files of newspaper clippings
and correspondence of the National Committee on Prison
Labor furnished much valuable information.
BIBLIOGRAPHY
ARIZONA

Official Correspondence.1
Clippings:
Burlington (Vt.) Free Press, Oct 33, 191a.
St. Louis (Mo.) Post-Dispatch, Sept. 39, 191a.
New York World, Dec. as, 191a.
AskevUle (N. C.) News, Oct ai, 191a.
CALIFORNIA

Report of State Comptroller, 1910.
Report of State Prisons, 1910.
Official Correspondence.
COLORADO

Good Roads Year-Book, 191a, pages 383-385.
Good Roads, Nov. 4, 1911, article by Thos. J. Tynan.
Clippings:
Salem {Ore.) Statesman, Jan. 39, 1913.
Burlington {Iowa) Gazette, Mar. 31, 1911.
Kansas City (Mo.) Star, May 33, 1911.
Pueblo (Colo.) Star-Journal, April 3,1911; May 14, 1911; Dec. 39,1911.
St. Paul (Minn.) Pioneer Press, July 39, 1911.
Colorado Springs (Colo.) Gazette, May 13, 1911.
New York Telegram, May 33, 1911.
Denver (Colo.) Times, Aug. 13, 1911.
Portland (Ore.) Oregonian, Mar. 36, 1911.
San Antonio, (Tex.) Daily Express, Nov. 35, 1911.
State Prison Report, biennial period ending Nov. 30, 1910.
Better Roads, Oct, 1913.
ILLINOIS

Good Roads Year-Book, 1913.
Penitentiary Report, Sept, 1910.
Official Correspondence.
1

The words " Official Correspondence" refer in every case to official
correspondence in the files of the National Committee on Prison Labor.
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IOWA

Report Iowa State Board of Control, G. S. Robinson, Dec., 1912.
Official Correspondence.
Warden's Report, June 30, 1912.
Clippings:
Burlington {Iowa) Gazette, Mar. 31, 1911.
Des Moines {Iowa) Register Leader, April 2$, 1911.
Marskalltown {Iowa) Republican, Oct 19, 1912.
KANSAS

Official Correspondence.
Clippings:
Municipal Engineering, Sept 26, 1912.
Iota {Kan.) Register, Dec. 17, 1912.
MICHIGAN

Engineering Record, Feb. 24, 1912.
Official Correspondence.
MINNESOTA

Report of the State Reformatory,
Official Correspondence.

1911-12.

MISSOURI

Good Roads Year-Book, 1912, pp. 291-292.
Official Correspondence.
Clippings:
St. Louis {Mo.) Globe-Democrat, Nov. 12, 1911.
MONTANA

Address of Attorney General A. J. Galen, at Montana Good Roads Association, July 9, 1912.
Official Correspondence.
Clippings:
Great Falls {Mont.) Tribune, Jan. 20, 1912.
Helena {Mont.) Record, May 19, 1911.
NEVADA

Report of the Warden of the State Prison, 1912.
NEW JERSEY

Good Roads, Dec. 28, 1912.
Official Correspondence.
Clippings:
Newark {N. J.) News, Jan. 2, 1912; Dec. 24, 1912; Jan. 25, 1913.
Baltimore {Md.) News, April 8, 1912.
NEW MEXICO

Good Roads Year-Book, 1912, p. 293.
Report of Superintendent of the Penitentiary, 1912.
Clippings:
El Paso {Tex.) Herald, Oct. 19, 1912.
NEW YORK

Engineering-Contracting, Feb. 28, 1912.
Minutes of the Board of County Supervisors, Onondaga County, N. Y.,
Feb. 3. 1913. PP- 4»-43Official Correspondence.
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Clippings:
Albany (N. Y.) Knickerbocker Press, Oct. 27, 1911.
Syracuse (N. Y.) Post-Standard, Nov. 22, 1912; Feb. 4, 1913.
OKLAHOMA

Report Iowa State Board of Control, G. S. Robinson, Dec., 1912.
ORBGON

Good Roads Year-Book, 1912, p. 293.
Report Superintendent State Penitentiary, 1905-1911.
Clippings:
Nashville (Tenn.) Banner, Dec. 4, 1912.
Tulsa (Okla.) World, May 6, 1912.
Sunset, San Francisco, April, 1912.
UTAH

Good Roads Year-Book, 1912, p. 293.
Report of the State Superintendent of Penitentiary, 1912.
Clippings:
Salt Lake City (Utah) Tribune, June 20, 1911.
Salt Lake City (Utah) News, Dec. 21, 1912.
WASHINGTON

Good Roads Year-Book, 1912, p. 297.
Engineering-Contracting, June 26, 1912.
Good Roads, July, 1910.
State Highway Report, 1910.
Report of State Board of Control, 1911.
Clippings:
Spokane (Wash.) Spokesman-Review, April 14, 1911.
Portland (Ore.) Oregonian, March 12, 1911.
GENERAL
Penal Servitude, E. Stagg Whitin, Ph. D. National Committee on Prison
Labor, Colombia University, 1912.
The Caged Man, E. Stagg Whitin, Ph. D., Bulletin of Social Legislation of
the Henry Bergh Foundation for the Promotion of Humane Education,
no. 1, pp. 1-117.
Prison Labor, Annals of the American Academy of Political and Social Science,
vol. xlvi, no. 135.
The Attitude of Union Labor Toward Prison Labor, John P. Frey, Proceedings of the National Conference of Charities and Correction, 1912.
Prisoners' Work, E. Stagg Whitin, Ph. D., American Unitarian Assn., Social
Service Series, Bulletin no. 27.
Publications of the National Committee on Prison Labor as follows:
Leaflets No. 2, Making Roads through Prison Labor.
No. 3, Prison Labor in Party Platforms of 1910.
No. 4, Prison Labor in the Governors' Messages of 1911.
No. 5, The Prison Labor Movement of 1910-1911 as shown by
Party Platforms, Governors' Messages, and Legislation.
No. 6, Trade Unions and Prison Labor, E. Stagg Whitin, Ph. D.
Reprinted from Case and Comment, September, 1912.
No. 7, Prison Labor in the Party Platforms of 1911-12.
No. 8, Prison Labor in the Governors' Messages of 1912-13.
No. 11, The Wage Earner and the Prison Worker, John Mitchell.
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No. 12, Prison Labor and Prisoners' Families, Jane Addams.
No. 13, Why I could not Pardon the Contract System, G. W.
Donaghey.
No. 14, Prison Labor on Public Roads, Thomas J. Tynan.
No. 17, The State-Use System, Collis Lovely.
No. 18, Prison Labor and Social Justice, F. Emory Lyon.
No. 19, Prison Labor Reform in New Jersey, C L. Stonaker.
No. 30, The True Foundation of Prison Reform, Thos. M. Osborne.
Good Roads Year-Boot, 1912, 1913.
Engineering Record, Dec. 16, 1911; June 17, 1911; Feb. 10 and Feb. 24, 1912.
Economics of Convict Labor and Road Construction. Good Roads circular
no. 97, North Carolina Geological and Economic Survey. Jos. Hyde
Pratt, Feb. 18, 1914.
Substitute for the Convict Lease System, article by E. Stagg Whitin, Ph. D.
in The Southern Workman, March, 1914.
The Contractor, Oct. I, 1911.
American Motorist, Feb. 1912.
Southern Good Roads, Feb., 1912.
Public Officials' Magazine, Sept. and Oct., 1910.
Better Roads, Feb., 1912.
Good Roads, Aug. 5 and Nov. 4, 1911; Jan. 6, 1912.
Engineering-Contracting, Jan. 18, 1911; Feb. 5, 1913.
Report of the U. S. Commissioner of Labor, 1905.
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PRISON INDUSTRIES OF THE STATE OF WISCONSIN'
E. STAGG WHITIN
Chairman Executive Board, National Committee on Prison Labor

T

HE state has a property in the labor of the prisoner.*
The thirteenth amendment to the constitution of the
United States provides that neither slavery nor involuntary servitude shall exist, yet by inference allows its continuance as punishment for crime, after due process of law .a
This property right the state may lease or retain for its own
use, the manner being set forth in state constitutions and acts
of legislatures. To make this right of material value the prisoner's labor must be productive. The distribution of the product of his labor inevitably presents the problem of competition, and the unfair competition between prison-made goods
and those produced by free labor has overshadowed the fundamental evil inherent in penal servitude and has caused confusion in the thought underlying prison-labor regulation by
legislative enactment.4
The usual penological analysis of prison labor5 into lease,
contract, piece-price, public-account and state-use systems is
impossible to use in an economic analysis of the labor condi-

1
Governor Francis E. McGovern, as Chairman of the Board of Public Affairs of
the State of Wisconsin, appealed, through Professor John R. Commons, to the National Committee on Prison Labor for help in reorganizing the labor of the convicts
in the penal institutions of the state. Investigations were conducted during 1912 and
the constructive recommendations filed with the Board of Public Affairs, December
1912. By resolution, October 1913, the Board commended the National Committee
on Prison Labor and accepted the findings, suggesting their publication.

'The opening paragraphs of this report are drawn from the writer's work, Penal
Servitude, published by the National Committee on Prison Labor.
"'Neither slavery nor involuntary servitude, except as a punishment for crime,
whereof the party shall have been duly convicted, shall exist within the United States
or any place subject to their jurisdiction." Constitution of the U. S., 13th Amendment.
4

Labor Legislation of 1911, American Labor Legislation Review, v. i, no. 3,p. 122.
' Henderson, Charles Richmond, Penal and Reformatory Institutions, pp. 198-203.
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tions involved. Economically two systems of convict production and two systems of distribution of convict-made goods
exist: production is either by the state or under individual
enterprise; distribution is either limited to the preferred stateuse market or through the general competitive market. In the
light of such classification the convict-labor legislation of recent
years shows definite tendencies toward the state's assumption of
its responsibility for its own use of the prisoners on state lands,
in state mines, and as operatives in state factories; while in distribution the competition of the open market, with its disastrous
effect upon prices, tends to give place to the use of labor and
commodities by the state itself in its manifold activities. Improvements like these in the production and distribution of the
products mitigate evils, but in no vital way affect the economic
injustice always inherent under a slave system. The payment
of wage to the convict as a right growing out of his production
of valuable commodities is the phase of this legislation which
tends to destroy the slavery condition. Such legislation has
made its appearance, together with the first suggestion of right
of choice allowed to the convict in regard to his occupation.
These statutes still waver in an uncertain manner between the
conception of the wage as a privilege, common in England *
and Germany,* and the wage as a right as it exists in France.1
The development of the idea of right of wage, fused as it is
with the movement toward governmental work and workshops, cannot fail to stand out in significance when viewed from
the standpoint of the labor movement.
In a word, the economic progress in prison labor shown in
recent legislation is toward more efficient production by the
elimination of the profits of the lessee; more economical distribution of the products by the substitution of a preferred
market where the profits of the middleman are eliminated, in
place of the unfair competition with the product of free labor
in the open market; and finally, the curtailment of the slave
1

Henderson, Prison Systems, p. 128; 57th Congress, 2d sess., House docs., v. 92.
' Lombroso, Cessxe, Crime, Its Causes and Remedies, pp. 337-9.
'Roux, Roger, Le Travail dans les Prisons, p. 31.
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system by the provision for wages and choice of occupation
for the man in penal servitude.
The problem thus stated finds its explanation in the history
out of which it has grown and its solution in an analysis of the
conditions existing today in connection with the control of
penal institutions, the use of the labor of convicts in their own
maintenance and in the distribution of marketable commodities,
and the methods of distribution. The educational and social
value of methods at present in vogue must lead inevitably to
social and constructive reform, based upon modern ethical conceptions as to the duty of the state to the individual.
Progress in the prison-labor movement during the past year
has been largely in the way of administrative development to
meet new legislative enactments. The frame of state government itself has had to be altered to make possible efficient
business methods of prison production for departmental consumption. Discussions as to methods ot adaptation have been
had at the House of Governors at Richmond in December, the
American Prison Association meeting in Baltimore in November, the American Institute of Criminal Law at Milwaukee in
September, and the convention of the National Conference of
Charities and Correction in June. In the actual readjustment
have been enlisted the Board of Public Affairs in Wisconsin,
the Efficiency Commission in Massachusetts, the Board of
Administration in Ohio, the Board of Control and Supply in
Rhode Island, and various governor's commissions and special
commissions in the states of New York, Maryland, Iowa, New
Jersey, Virginia and California. In other states governors,
unaided by such agencies, have resorted to the pardoning power
to remedy evil conditions. The direction of the movement has
been shaped by the appearance of a little volume entitled Penal
Servitude, prepared under the direction of the National Committee on Prison Labor and enthusiastically approved by the
American Federation of Labor. Theodore Roosevelt included
this program in his social-justice plank; Woodrow Wilson presented it as an important part of his labor record; while in
numerous states the platforms of all four parties declared for
the principle. The introduction of a federal-jail-commission
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bill into Congress by Attorney General Wickersham marks the
effort of the Taft administration to secure an accurate investigation by a competent commission, while the passage of the
Booher Bill by the lower house places Congress on record
against the contract convict-labor system.
In this movement away from slavery by means of scientific
efficiency there is no state better qualified to lead the way than
Wisconsin.
THE PRISON AS A BUSINESS ENTERPRISE

Why is the prison not self-supporting? This question has
been asked by the members of each successive legislature during the last fifty years. To answer it in the light of the present
movement for scientifically efficient prison management requires
an analysis of prison conditions from a new standpoint. An
answer to the question postulates the examination of the prison
as a business enterprise. The efficiency engineer in an industrial plant must inquire as to the history of the plant's location ; its working capital; the personnel of the management of
its manufacturing, its selling, and its supply departments. He
must know the nature and quality of the labor and the available
assets of the plant in buildings and machinery. If there are
reasons for failure, they must lie in the lack of development of
one or more of these features, or failure to coordinate them.
The examination of Waupun prison, and incidentally of the
state reformatory, must be made from this standpoint.
THE LOCATION

The location of the prison at Waupun in 1851 was made
against the protest of a special commissioner who was authorized
to investigate the management of similar institutions in the east.
He held that the town had no claims and had the disadvantage
of a long cart trip for supplies. He argued for the location of
the prison at Madison, saying that " the seat of government
would afford a means of profitably employing convict labor in
and about the construction of such buildings as may be required,
and of employing the convicts in mechanical pursuits with more
advantage to the state than is claimed for the location se(3")

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lected."1 Waupun was selected because of the urgency of
another prison commissioner, the accounts proving that he
profited by the long cart trip.* Again in 1875 a resolution was
introduced into the legislature to the effect that " we very much
doubt whether the state prison can be made to support itself
under any system of management while located at Waupun;
that its present location is too far removed from supplies and
from available markets for manufactured goods, and submit to
the legislature in its wisdom to determine whether it is good
policy for the state longer to continue the prison at Waupun at
such an immense expense to the treasury."3 The resolution
further suggests that the buildings be used for the insane hospital and that the prison be removed nearer to a commercial
center/ A commission was authorized by the legislature to
select a more suitable site, but by " oversight" the bill was
never signed.5 The building of the railway to Waupun and the
increase of its facilities for handling freight and merchandise
has done away with the inconvenience incident to the trucking,
though the expense of the long freight haul is still a definite
item which must be charged against the location of the institution. At the time of the development of the reformatory at
Green Bay railroad facilities had been secured, which have been
further improved recently by special agreement with the railroads. Thus the location which proved an embarrassment to
the efficient development of the prison industries at Waupun,
an embarrassment continuing up to the time of the introduction
of the present contract system at Waupun, has now partially
been mitigated by railroad facilities at both Waupun and Green
Bay, and it seems probable that through the interest of the
railroad commission still better rates and communication can
be secured.
WORKING CAPITAL

Appropriations for the carrying on of prison enterprises have
been made at intervals by the legislature, but in indefinite and
1

Journal of the State of Wisconsin, 1852, app., p. 228. Report State Prison Com.
»/S.,p. 253.
* Journal, 1876, p. 190.
*/*.
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restricted form. The original appropriations were for buildings
and for the work upon these buildings, the convict labor adding
to the value of the investment but producing no marketable
goods whereby capital could be secured and made available for
future industries. In the construction of the plant a number of
small industries developed, but upon its completion, no capital
being available to continue them, contractors were permitted by
legislative act to take over these construction shops. * The ingenuity of a clever warden in 1858 found capital in broom corn
raised on the farm, and by the incidental saving around the
plant, began the development of a public account system, * from
which came the state-use feature, or the sale to the state institutions of certain of the commodities manufactured at the prison.»
Owing to the demand for goods during the civil war, a start was
made in a number of industries. The small shops developed
rapidly and efficiently, but the close of the war with its attendant lawlessness crowded the prisons with many more men than
the meager equipment could profitably employ.4 The need of
a capital fund was brought directly home to the legislature,
which, however, failed to provide such a fund. There followed
a break in the market and a prison fire; the result was disaster.
The appropriation in 1868 of money sufficient only for the
rebuilding of the institution, and the legislature's order that the
convicts be used thereon,5 destroyed the industries without providing the means for their revival. The building had just been
completed when the panic of 1873 occurred. As a result the
Corn Exchange Bank failed in 1875 with the prison moneys on
deposit.6 The failure of the state charitable organizations at
the same time to pay for the goods which they had purchased
involved the prison in bankruptcy, and forced the leasing of
the convicts as a direct result of the failure to establish a capital
x

yournal,

1856, Report of Prison Commissioners.

* Wis. Pub. Docs., 1859, pp. 11-17.
* Lams 0/1863, c. 348; Laws 0/1867, c. 55.
4
Governor's Message and Accompanying Documents, 1866, pp. 420, 422.
%
lb., 1867, Report of Prison Commissioners, p. 324.
* Report of the Prison Directors, 1876.
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fund adequate to carry out the provisions of the state-use law.*
The state industries, crippled by lack of capital, were confronted by the contract industries which were organized in 1878
with ample private capital at their disposal. The decline of the
state industries was a logical result. The agitation against the
contract system that swept the country in 1887 under the leadership of the Knights of Labor again brought out the state's
responsibility for supplying capital to state industries. To meet
the demand for the establishment of state-use and public account industries, $100,000 was appropriated,3 $20,000 of which
was used in the establishment of the knitting and tailor-shop
funds at Waupun.J In the knitting shop were placed the
feeble-minded, the insane and the aged, so that it was only
natural that the warden should be glad to accept a piece-price
bid from the Paramount Knitting Co.4 for this shop instead of
continuing it as a state industry as had originally been planned*
although by the piece-price agreement the shop netted the
1

Laws of 1875, c 300.

* Wis. Pub. Docs., 1905-6, v. 3, p. 13.
%
Laws of 1887, c. 437.
Sec. 1. The stale board of supervision of charitable, reformatory and penal institutions is hereby authorized, whenever in the opinion of such board it is best for the
interest of the state to establish in the state prison the business of manufacturing, to
create a debt in a sum not exceeding one hundred thousand dollars, under the provisions of section three of chapter 289 of the laws of 1880, for the purpose of purchasing machinery and materials to carry on the business of manufacturing within
such prison. But no such debt shall be created or purchase made until the approval
of the officers named in said section 3, chapter 289, of the laws of 1880, shall have
first been obtained.
Sec. 2. Whenever such board of supervision shall obtain the consent before mentioned, and shall determine to commence the manufacture of goods, wares and merchandise within such prison, such board shall file written estimates of the materials and
cost of same desired to be purchased, and upon the approval of said officers the secretary of state draw his warrant on the treasury for the amount necessary to carry into
effect the provisions of this act, not exceeding the sum of one hundred thousand
dollars.
Sec. 3. In case of the manufacture of goods under sections I and 2 of this act, the
state board of supervision shall dispose of said goods to the best interests of the
state, and at the best price obtainable.
Sec. 4. This act shall take effect and be in force from and after its passage and
publication. (Approved April 12, 1887.)
4
Wis. Pub. Docs., 1893-4, v. 2, pp. 12-3.
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state only seven and three-quarters cents per man per day.1
The tailor-shop, with its own working capital, and manufacturing largely for the state institutions, became the most profitable
shop in the institution, earning fifty-seven cents per man per
day.*
The contrast between the contract shops and the state-use
shops was marked and would have suggested the further development of the state-use system, but at this juncture the
board of control successfully killed the profitable plant. With
the opening of the Green Bay reformatory many of the boys
who had worked in the tailor shop were transferred. At Green
Bay they worked on the construction of the buildings and in a
chair factory, but the task of building the institution and carrying on the industry was too great for the warden in charge and
the request was made that the profitable tailor shops be removed to Green Bay despite the fact that the capital fund could
not legally be transferred with the shops.3 We soon find, therefore, that this profitable shop, removed to Green Bay without
capital, was turned over to a prison contractor for the manufacture of shirts; the original fund, amounting to $20,000,
which had been used to establish the knitting and tailor shops,
remained as a capital fund though it was unused for upwards of
twenty years when, by appropriation by the legislature of 1907,
it went into the construction of a wall and a woman's prison.*
The remaining $80,000 of the fund appropriated in 1887 has
never been used and is available today. The board of control
makes mention of these funds in 1903 and suggests them as
available for a new industry.5 While part of these funds had
been appropriated for other purposes than was the intent in
1887, and although there was a balance of $80,000 still available for the use of the prison industries, the legislature in 1907
appropriated an additional $125,000 for the erection of the
binder-twine plant.6 Even with this fund the development of
this project has been slow, since the money had to be spent for
1

Wit. Pub. Docs., 1895-6, v. 2, pp. 19-20.

%

n., 1909-10, v. 3, p. 449.
*Ji., 1905-6, v. 3, p. 13.

• lb., 1897-8, v. I, pp. 243-4.

* n., 1907-8, v. 7, p. 23.
•/»., 1907-8, v. 7, p. 23.
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1

a building suitable for the manufacture of binder-twine. An
additional capital fund for the further development of the
binder-twine plant was appropriated by the legislature in 1911.
It amounted to $450,000, one-half of which was to be paid
January 1, 1912, and one-half January 1, 1913.' This, with
the $80,000 undrawn appropriation remaining from the fund
established in 1887, remains available as a capital and rotating
fund—the smaller sum of $80,000 being available for any industry the board of control decides to establish. If the capital funds now available had been available in the earlier days
of Wisconsin prison administration, it seems clear that they
would have prevented the bankruptcy and other embarrassments which forced the introduction of the contracting interests into the prison system. At a recent (1912) congressional
hearing3 the state board of control mentioned the embarrassment incident to the lack of capital. Such embarrassment is
due to three facts: first, that the larger fund is limited to the
binder-twine industry; second, that the expenditure of the
$80,000 would make possible only the beginning of new industries; third, that the appropriation is unavailable for the
reformatory at Green Bay. It is clear that the moneys appropriated at present are sufficient for the development of an adequate prison system, provided the legislature make the fund
available for the use of the prison industries as a whole at the
discretion of the governor and the board of control.
THE MANAGEMENT

The management of a manufacturing enterprise must necessarily be in the hands of persons not only competent to carry
on the enterprise, but empowered to do so, and supplied with
assistants equally competent. At its organization in 1852,
Waupun prison was placed under the management of a commissioner elected for that purpose and responsible to no one
unless it were the political powers. The only check upon mis1

Wis. Put. Dots., 1907-8, v. 7, p. 449.
* Laws of 1911, c. 377.
* Hearing on Booher BUI (H. R. 5641) before the Senate.
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management was at the polls, a situation which resulted in the
choice of a new commissioner at each election; notable exceptions proved the rule. The report of 1874' notes that the old
commissionership, from the foundation of the prison, had been
a money-making office and adds, " It was presumed that the
commissioner would take money out of the office." Under the
circumstances it was to their credit that one or two commissioners rose above the popular conception of the office.
The uncertainty of the management of the prison under the
commissioner system, coupled with the fire in 1870, resulted in
the establishment in 1871 of the state board of charities and
reform as a supervising body with no direct power of control.
As a result of an examination by this board, and on the heels
of the Corn Exchange failure, came an attempt in 1875 t o es "
tablish direct control over the prisons. Over the warden, who
was placed in control of the institution, was placed a board of
directors, who reported to the state board of charities and reform. The addition of a sales agent in that year to the management was also significant, although the office was relieved of
certain of its duties by the introduction of the contract system
by statute in 1875 and in actual practise in 1878. The growth
of managerial power vested in the board of directors, the
warden and the sales agent of the prisons, soon pointed out the
lack of power which the state board of charities and reform
possessed. Furthermore, the introduction of the contract system, bringing an extraneous force into the prison, made clear
the need of more power in the board at the capitol. By the
laws of 1880* the state board of supervision was instituted, with
power of control over the warden of the prison; the old board
of charities and reform was continued, but its functions were
limited to the supervision of the semi-state institutions and jails.
The anomaly of the two boards continued for eleven years,
until in 1891 the state board of control was constituted, which
combined the powers of both the former boards, controlling the
state penal and charitable institutions and supervising and in1

Report ofDirectors, 1874, p. 24.
* Laws 0/1880, c. 287.
(318)

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specting the jails and semi-state institutions. Since that date
the state board of control has labored under this burden of responsibility, with a further addition to its duties of the parole
work of the state. The theory in regard to the state board of
charities and reform was that it should be merely a board of
visitors, who personally would use their good offices to correct
conditions over which they had no actual power. The function
of the state board of supervision had been to direct through its
accredited agents the business management of the institutions
over which it had power. The board of control in combining
these functions .has at times confused them. The theory still
prevails that the board is a board of visitation, and an attempt
is made by the members to inspect innumerable jails and semistate institutions over which it has visitorial powers, as well
as to inspect as a board, and in that way control, the state institutions. The attempt to visit in this way was probably possible
in 1891, when the board was created, but today it is physically
impossible. The growth of state institutions in the last twelve
years, while a credit to the state, has added to the burdens of
the board. Furthermore, the board has not been free from
politics, the appointments in all but a few instances having been
made on more or less political lines. The low salaries paid
have necessitated the appointment of incompetent men; or if
they were competent, they donated valuable services to the state
without adequate reward. No business enterprise could be
successfully conducted under such conditions.
The placing of the management of the binder-twine plant
under the board, thus constituted, with the difficulties of the
purchasing and selling departments and of supervision over the
superintendent of the shop, has already demonstrated that if
this work is to be carried on successfully, the inspection of the
jails and the charitable institutions required by law, as well as
the mass of other details which now falls to the board, must be
delegated to inspectors and clerks under it.
Thus at this time the reorganization of the board seems imperative, even if the present industrial prison system with its
imperfections is to continue. For the development of any new
and adequate system such reconstitution is still more necessary.
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In the reorganization of the board by statute, salaries should be
provided sufficient to induce skilled men and women to serve.
The board should be constituted of experts representing the
different lines of management in the several institutions under
it. It should consist of an alienist or other medical man, cognizant of psychology and medicine; a lawyer cognizant of
criminal and administrative law; an educator competent to
view the functions of the board from the broad standpoint of
the alleviation of conditions which necessitate correctional institutions, and the direction of the institutions to their proper
end; a man of business training who has definite connections,
official if possible, with the purchasing of supplies for all state
institutions; and finally the governor, or his direct representative from the board of public affairs, who shall keep the board
of control in touch with the constructive movements going on
in the state and who shall aid in the coordination of the state
functions. The board should be given funds and powers to
attach to itself the accountants, inspectors, and clerks necessary
to meet the ever-growing functions which it will be required to
perform. To it should be given broad powers over the capital
funds, and the board, not the warden, should be bonded for the
proper management of that fund. The board should report to
the legislature, and its members should be appointed by the
governor with the consent of the senate for five years, no more
than two of the appointed members to be confirmed at the same
session of the legislature. A valuable interlocking of official
positions would be possible. The educator might be appointed,
not only to this board, but to the industrial education commission, and the legislature might establish the position of state
purchasing agent, the appointee to which position would serve
as the business expert of the board of control.
RAW MATERIAL

Until the introduction of the centralized system of purchase
under the board of control, materials used in manufacture at
the prison were purchased locally by the prison commissioner
and the prison warden. Such a practise is never free from
embarrassment, whether it be that of political partiality or
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simply rivalry between dealers with the attendant charges of
favoritism. These embarrassments the early commissioners
and wardens had to contend with. The difficulties attendant
upon the purchase of wood—the material most extensively
used—have recently been discussed in the reports of a special
prison investigation in New York state.1 Under these circumstances, it is little wonder that the piece-price and contract
system found their way into the institutions, the raw material
being supplied by those who eventually disposed of the goods.
With the installation of the binder-twine industry, difficulties
in the purchase of the raw materials have again presented
themselves. Thus far they have been met by the clever purchasing ability of the chairman of the state board of control
and the superintendent of the factory, who took advantage of
the market conditions in the year 1912 to purchase such materials in South America. According to Warden Wolfer of the
Stillwater Prison in Minnesota, where the only successful state
binder-twine plant is operated,* success in the manufacture of
binder twine depends upon the purchase of the raw material,
which is always a matter of pure speculation.3 Speculation by
the prison authorities in a falling market in chairs in 1875
forced the prison industries into bankruptcy. To avoid the
dangers incident to binder-twine speculation an attempt has
been made to grow the raw material on the farm at Waupun,
but the success of the enterprise will depend upon the ability to
make twine from this material. There is grave doubt of the
value of this home-grown product, even as a mixture. The
attempt, however, to secure raw material from the state's own
property is a step in the right direction. The dangers incident
to the fluctuations of the market and the inevitable element of
human failure are thus avoided; for even the most conscientious officials, engaged in speculating in an uncertain market
always dominated by a strong commercial interest, must sooner
1

Report of Special Commission to Investigate the Department of State Prisons,

1911.

* Report of Bureau of Labor and Industrial Statistics, Wis., 1909, p. 168.
%

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202.

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or later encounter a failure. The binder-twine enterprise has
already been launched and must be carried through until it can
be discontinued without loss. But the state should not wait
until an off season or an unsuccessful purchase of materials
forces a shutdown in the plant (as has happened in many
states) before providing a system free from the inherent difficulties of the present one.
The state at present owns extensive woodlands in the northern
regions. It is also endeavoring to sell a large number of stump
lands. In the stumps removed from the land is a source of raw
material for manufacturing purposes,' while the increase in
value by clearance of the land would more than compensate for
their removal. The state forests must be cared for and certain
timber removed; increased value again will compensate for the
wood loss, while the roads built to carry the stumps and trees
to the railroad will give additional value to the state lands.
Material for wood-working and for pulp could thus be got from
the state's own possessions to the state's advantage yet without
cost to the prison department. This material would be delivered to the permanent prison camp, situated on a railroad,
where a saw-mill and a pulp-mill would be located. The mills
would supply both the camp and the prison at Waupun with
raw materials similar to the kind which in former years were
successfully used. The cost of transportation between the two
prisons would be the only large item of expense beyond the
labor of the prisoners. Finally the consumption by the state
of the paper would make possible the return of the used paper
to the prison to be used again as pulp, a permanent supply of
raw material thus being created.
The reformatory at Green Bay, in its development of small
workshops for supplying state needs, will require raw materials
to carry on the work. This material at present is supplied
partly by the board of control and partly by a prison contractor.
In the broader development of the board of control to include
a state purchasing agent, the material can be supplied directly
through the agent with the institution simply doing the work
1

Duncan, R. K., The Chemistry of Commerce.

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thereon. The advantageous features of the present system
would thus be continued, with the gain to the state of the
profits which under the present system are diverted to private
pockets.
LABOR

The population of the prison at Waupun on the first day of
January, 1913, was 708 convicts. Of these, one hundred can
be employed profitably in the manufacture of binder twine or of
paper. Four hundred men are at present under contract with
the Paramount Knitting Company at 65 cents per day. Although the contract itself does not expire until January 15,
1914, yet three hundred men can be withdrawn on three months'
notice; upon six months' notice the board of control is empowered by the law to terminate the contract. The superintendent
of the binder-twine plant has figured that the convicts employed are worth from $1 to $1.50 per day, and has noted
the increased efficiency and the satisfaction of the men at employment by the state rather than by the contractors. For the
small wood-working plant which has been established temporarily in the binder-twine plant, the same figures hold. In
the forests and on the roads the value of the labor varies from
$1.50 to $2 per day in the various parts of the state. The experience of those using convict labor in this way shows it to be
equal in value to free labor, providing the physical defects of
the convicts are carefully regarded, and sufficient incentive is
given the men through the honor system and other educational
features. These features have been introduced in the immigrant labor camps in many parts of the country.
Under a management imbued with ideas that have been
proved psychologically correct, whereby men are trusted and
put on their honor, there is no reason why at least sixty per
cent of the population of Waupun cannot be trusted in a limited degree. An honor system would be sufficient to retain
these men with few guards in the wood-camp prison suggested,
while thirty per cent, or half this number, could be trusted
further and sent off into the forests and stump lands. If Colorado and Oregon can do this successfully with sixty per cent of
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their prisoners, direct from the prison itself, surely Wisconsin
can do it with an intermediate camp colony. In the winter the
men could be kept busy with stone crushing and mixing work,
together with wood-work. New recruits would be retained at
Waupun engaged in maintenance work until the spring. The
permanent camp should be equipped for lectures and class
drills and should have a library supervised by the state library
commission. The commission should also have supervision of
the libraries at Waupun and Green Bay. In the winter the
permanent camp should assume much of the attitude of the
camp work schools for boys and young men which have been
established in Indiana and elsewhere.
Labor efficiency would be secured by incentives such as time
reduction for good behavior, and a system of money credits
for the value of the labor performed. It would be increased
by every humane incentive, by the correction of physical ailment, by education, and by the general stimulus of competition
between groups. The actual expense of the maintenance and
guarding of each man should be charged against him. This
system is at present in use at the reformatory. In addition, it
should be further modified by statute, so that the earnings
credited to the prisoner may be drawn upon in case of need by
those dependent upon him.
EQUIPMENT

The permanent equipment of the institutions for manufacturing purposes has suffered from the lack of capital and
foresight in purchase—a natural outcome of the decentralized
management during the institutions' early development. In
the early days hand tools were all that the wood-working shops
required. The maintenance shops for cobbling, tailoring, and
laundry work required no machines, and while machinery was
introduced by the contractors, first in the boot industry and
then in the knitting and shirt industries, no equipment was thus
added to the state's possession. The building operations required special equipment but this was disposed of after the
completion of the buildings. Even today, with the institutions
under the board of control, some of the construction work at
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Waupun is let out to building contractors on the excuse that
there are not enough tools to equip the prisoners, although the
completion of the buildings at Green Bay released equipment
and made it available for just such work. Cooperative ownership of such equipment under the board of control would save
expense and increase the opportunities for construction work.
The appropriations for binder-twine manufacture contemplated and resulted in the purchase and installation of a large
quantity of valuable machinery in a building perfectly appointed
and erected for a definite purpose. This outlay in binder-twine
machinery can always be turned into ready capital by its sale or
exchange for other machinery to be used for a different purpose. The equipped shops will employ from one hundred to
one hundred and fifty men, leaving the others to be employed
either by contractors or by the state. The larger the element
of hand labor, the less the cost of equipment. Work in the
forests, on the stump lands, and on the roads, requires the
minimum of equipment. The cost of the few tools would be
small, as would be the cost of erection of the wood-camp with
its saw-mill, crusher, and pulp machines. Less than half the
unused appropriation of 1887 would probably cover all.
The introduction of wood-working machines into the prison
at Waupun would be only the outgrowth of the small shop already established. The cellar of the binder-twine building has
been so constructed that it can readily be adapted as a foundry
incident to the needs of furniture manufacture. The shops at
present used by the contracting firm, while ill-suited to their
present use, could be made available without much difficulty or
much cost. The balance of the fund of 1887 would equip these
shops sufficiently for the beginning of a new industry. The
rotating capital fund, broadened in its application to the general state industries, would supply the other needs.
At the reformatory at Green Bay the ingenuity of the superintendent has already developed a number of small shops moderately equipped—with tools institution-made. These shops,
which were first needed for construction work, are now being
fitted for the manufacture of commodities for state needs.
Each addition to these shops will increase the value of the plant
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to the state. The use of the credit of the capital fund and
better enforcement of the state market regulation would admit
of the more rapid development of these shops, and the elimination of the piece-price shirt contract and the machinery owned
by the contractors.
MANUFACTURE

The actual production of goods in a factory, or the accomplishment of work on a highroad, or in a forest or stump
clearing, depends not only upon capital, management, labor
force, and equipment, but upon the supervision of the business
detail by those immediately in charge. Competent foremen
must be secured, and sufficient remuneration given them to
secure them permanently in the work. They must establish
the work on that basis of efficiency which constitutes definite
discipline for both labor and supervising force.
The conditions of labor, both indoors and out, must be made
similar to those under which free labor is worked. In the contract shops guards sit in lofty idleness, watching the hard-working foreman and convicts, always contrasting the dignity of
idleness with the dignity of labor. The working guard with the
road gang, or in the woods, develops a spirit that gets the work
accomplished, while the guard perched on the fence with a gun
on his shoulder proves a veritable scarecrow to drive efficiency
away. It is to the credit of the new binder-twine foreman at
Waupun that he is developing that plant without idle guards
and with foremen who work. The elimination of this waste
inherent in the contract system will therefore add to the state's
profit. Scientific management should be introduced both in
the state shops and in the road gangs, while a system of checking of the goods, of blocking out the work and holding the
individual responsible for it, as well as giving definite reward
for work well done, is necessary. The system of efficiency
checks, established by the board of public affairs for the road
department of the state, need only be applied to the convict
camps, to Waupun and Green Bay.
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PRISON INDUSTRIES OF WISCONSIN

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SELLING
The selling of prison products has been a matter of no little
difficulty. The principle was established in the year 1863 that
the state superintendent of public property should act as agent
for the state departments in buying the goods manufactured in
the prison, although the articles manufactured and purchased
were limited to certain wooden articles and furnishings. In
1867 all institutions were instructed to buy these articles and a
large number of other articles which might be manufactured.
In 1875 they were required to secure these things from the
prison. This law is still in force (under statute 1898 s. 608),
and applies to all state institutions and others getting state money,
requiring them to notify the prison of their needs. The difficulty with these statutes lies in the fact that there is no one to
compel their being fully carried out. The commissioner or the
warden gets orders again and again under these provisions, but
as has been seen, the goods were frequently not paid for by the
the departments which ordered them. The board of control
has become the natural sales agent between the several institutions under its supervision, though the idea of exchange of
commodities has been lost sight of at times because of the
makeup of the board. As an example, the board at one time
refused to buy chairs which were to be used in the insane hospital directly from the Milwaukee workhouse, only to buy the
same chairs later after they had passed through the wholesale
house and added the middleman's profit.
The cost of selling is probably the largest item in the bindertwine industry. This responsibility now confronts the board of
control. The sale of paper to the state would be without this
expense. The output of a small unit paper plant would conform with the annual amount purchased by the state. The
paper at present used by the state of Wisconsin is manufactured
outside the state, and the middleman's profit alone, according
to his own testimony, amounts to $17,000 annually. While the
constitution provides that bids must be placed for this paper,
the warden of the penitentiary or the chairman of the board of
control, who surely cannot be said to be making personal profit
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GOOD ROADS AND CONVICT LABOR

[VOL. IV

from such bidding, should outbid all others and sell the paper
to the state.
The law requires that the prison be notified by all state institutions receiving state moneys as to their needs. This presents
another opportunity for the direct sale of commodities by the
penal institutions, without resorting to the middleman or sales
agent. The confusion in administration has limited this field,
as has been shown above. Under this head comes the sale of
goods to institutions and departments which the reformatory at
Green Bay will soon be able to supply.
The market in school-desks and other school furnishings,
furniture for the departments and state institutions and the general wood-work for the same, can be secured only by gradual
working up through the board of control or the proposed sales
agent, but its extent can be ascertained from the following:
The public school enrolment of the state amounts to 460,000
children, while the forty new high schools add still more to the
number. It is impossible to ascertain the annual purchase of
desks, but their average life is less than twenty years and there
is at present a definite need for new equipment. It would be
safe to estimate the annual demand at 50,000 desks. These
desks cost from $1.75 to $2.25, making an average of $2 a
desk or $100,000 as the annual investment in desks. There
are 25,000 teachers whose desks average ten years of use, making an annual need of 2500 pieces of the better grade of school
furniture. To these must be added the high-school equipment
in sloyd benches, general benches and physics tables, also some
ten thousand little chairs for kindergartens, sashes and doors
for new school houses, and gymnasium equipment, such as
Indian clubs. During the year 1911-12 the university purchased furniture to the amount of $16,766. To this must be
added the purchases by the board of control, the superintendent of public buildings and other officials.
The failure to enforce the present statutes and to coordinate
the various departments is due to the lack of a state purchasing
agent, who should be a member of the board of control. Such
an office should be created if possible in connection with the
board of public affairs, and given powers adequate for the
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PRISON INDUSTRIES

OF WISCONSIN

89

carrying-out of the broad coordination necessary if the state
government is to perform its functions in an efficient manner.
ADAPTATION TO WISCONSIN OF GERMAN IDEAS

The recommendations already noted naturally grew out of
the present conditions and the present needs of the prison
workshops and of the opportunities which are at hand in the
state. Novelty is not claimed for any of the suggestions. The
idea of prison production for state consumption has been embodied in the Wisconsin law from the very outset and is similar
to the principle that has been followed in Germany since 1877.1
At that time the Prussian Ministry of the Interior, under Chancellor Krohne, acting on the recommendations of the German
chamber of commerce, which had made a detailed investigation
into the subject, adopted the principle and applied it gradually
to the furnishing of supplies to the district authorities, to the
army, the navy, the postal department, the railroad and the
courts. In 1894 New York state, under the leadership of Elihu
Root, embodied the same principle in its constitution. Ohio
in 1911 adopted it in a bill recommended by Governor Harmon, only to place it in its constitution in 1912. The legislature of New Jersey on the recommendation of Woodrow Wilson
passed a similar statute, while Missouri under Governor Hadley, Wyoming under Governor Carey, and California under
Governor Johnson also have adopted the principle. This is a
German idea being adapted to American conditions. More
recent developments in Germany have extended the idea of
state use to the employment of convicts on public works and
ways, in the development of canals, in the reclaiming of marsh,
in reforestation, and in the larger phases of agriculture.
France has successfully employed convicts in reforestation
for many years, and a recent visit of Governor Dix of New
York to these reforestation camps resulted in their establishment in New York state. Governor Johnson of California also
conducted them successfully during 1912.
1

Die GefSngnisarbtit, Vortrag gthalttn am a6 Juli, 1900, von Dr. Front V.
Lint, ord. Fro/etsor dtt Stehls in dtr Universif&t Berlin.
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GOOD ROADS AND CONVICT

LABOR

[VOL.

IV

In many states convicts are employed on the roads and in
crushing stone, while in Wisconsin and several others the farm
project is already recognized. The manufacture of school
desks and furniture for the state has been authorized by the
Wisconsin legislature since 1867, while furniture of some kind
has been manufactured at Waupun during about half the years
of its existence. The introduction of printing is already an
accomplished fact in the reform school at Waukesha, in the
prisons of New York, and in the prisons of a number of other
states. It is here suggested that printing be introduced at
Waupun for life-termers only. This would be desirable, as they
would become trained workers and yet would not be discharged
to compete with other workers in this trade. The manufacture
of paper is a new idea in this country, but it is one that has
been successful at the workhouse at Brauweiler in Germany.
RECOMMENDATIONS

1. That a bill be passed by the legislature reorganizing the
board of control so that it may be a board of experts representing the several phases of its activity, with a state sales agent
attached thereto, together with a force of clerks and inspectors
sufficient to conduct the work of the board, and with sufficient
appropriations to pay adequate salaries.
2. That the board of control and the officers of the state departments see to the enforcement of statute 1898, s. 608, which
provides for the manufacture and exchange of commodities between the prison and penitentiary and the other departments,
institutions and districts. To the reformatory at Green Bay
the board should assign the manufacture of all articles except
those of wood, which should be retained for manufacture at
the state prison at Waupun.
3. That a stone-quarry site be selected upon the state land
in the northern part of the state, abutting upon a railroad,
where a permanent camp could be constructed, equipped with
machines for crushing rock, and with a pulp factory for the
preparation of wood products. The camp, once constructed,
should be connected by roads with the state timber lands and
the state stump lands. All prisoners who can be placed on
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PRISON INDUSTRIES

OF

WISCONSIN

91

their honor should be sent to this camp, where a second selection of those still more trustworthy should be made. This
latter group should be used to clear the stump lands, and to do
reforestation work in the state forest lands. The stumps and
the wood cleared from the lands should be brought down to
the pulp factory, and the crushed stone taken back for the
further extension of the roads.
The pulp and the boards from the wood-camp should be
shipped to Waupun, where there should be established a schooldesk and state furniture factory, a paper mill, and a printing
shop. In the printing shop life-prisoners should be used. The
products of this plant should be delivered to the several parts
and departments of the state; the warden of the prison should
place a bid for the state printing, excepting the legislative, and
should secure the same according to the rules laid down by the
constitution. Waste paper gathered from the departments of
the state should be returned to the prison and used again as
pulp.
4. That a law be passed authorizing the payment to the convict of a wage based on his productivity, which should be increased by the most scientific medical care and the correction
of physical defects, together with such regulations for education
in prison and road-camp as shall prove an incentive to better
living and better work. The actual expenses of the maintenance and guarding of the convict should be charged against
him and deducted from the allowance credited to him on the
basis of the free man's work. By law, the balance should go
to his wife, children and other dependents.
A SELECTED BIBLIOGRAPHY
Penal Servitude, by E. Stagg Whitin, Pb. D. Published by the National Committe
on Prison Labor, 1911.
Report of the Committee on the Investigation of the Iowa Penitentiary at Fort Mad
ison, by George Cosson, Attorney General of Iowa, 1912.
Report of the Commissioners to Examine the Department of State Prisons, New
York, by William Church Osbom and George E. Van Kennan, 1911.
Die Arbeit in den Strafanstaiten und GefSngnissen des Ministeriums des Innen, by
Regitz, vol. 1.
Die Unveroesserliehen und ihre Bestrafung, by Mittelstadt, vol. t.

(330

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GOOD ROADS AND CONVICT LABOR
Ltkrbuth der Gefdngniskunde, by E. Krohne. Stuttgart, 1889. Especially pp.
3S7 etseo.
Die Gefingnisarbeit, by Dr. Franz v. Liszt, Berlin, 1909.
Prison Labor in Ae Party Platforms, 1910, 1911, 1912. National Committee on
Prison Labor.
Prison Labor in Ae Governors' Messages, 19/1, 1912, 1913. National Committee
on Prison Labor.
Prison Labor Legislation, 1911; American Labor Legislation Review, vol. I, no. 3 .
Prison Labor Legislation, 191a; American Labor Legislation Review, vol. 1, no. 4.
Prison Labor; Annals American Academy of Political and Social Science, March,
«9«3Trade Unions and Prison Labor, by E. Stagg Whitin, Case and Comment, September, 1913.
The Treatment of the Offender, by O. F. Lewis, Ph. D., Sixty-Seventh Annual
Report New York Prison Association, 1911.
The Caged Man, by E. Stagg Whitin, Ph.D., Bulletin of Social Legislation, published by the Bergh Foundation, Columbia University, 1913.
(33a)

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PROCEEDINGS
OF THE

ACADEMY O F POLITICAL SCIENCE
IN THE CITY OF NEW YORK

Volume IV]

APRIL, 1914

[Number 3

YEAR BOOK OF THE ACADEMY
CONSTITUTION, BY-LAWS AND LIST OF
OFFICERS AND MEMBERS

T H E ACADEMY OF POLITICAL SCIENCE
COLUMBIA UNIVERSITY, NEW YORK

1914

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THE ACADEMY OF POLITICAL SCIENCE
IN THE CITY OF NEW YORK

EXECUTIVE OFFICES
KENT HALL, COLUMBIA UNIVERSITY, NEW YORK
TELVHONK, MonnxcsiDB 140a

(334)

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CONSTITUTION AND BY-LAWS

CONSTITUTION
I—Name
The name of this association shall be " The Academy of Political Science in the City of New York."
ARTICLE

II—Objects
The objects of the Academy are the cultivation of the political
sciences and their application to the solution of social and political problems. These objects shall be prosecuted in such manner
as the Board of Trustees shall from time to time direct, either
by the encouragement of research, the holding of public meetings or lecture courses, the establishment of a library, or in any
other way the Board may approve.
ARTICLE

III—Headquarters
The headquarters of the Academy shall be in the City of New
York, and the Academy shall be affiliated with Columbia University in such manner as the Board of Trustees may be able to
arrange with the Trustees of Columbia University.
ARTICLE

IV—Membership and Dues
The Board of Trustees shall prescribe the qualifications of
members, and establish such classes of membership, whether life,
active, associate or otherwise, as it may deem wise, define the
privileges of members and fix the amount of the annual dues or
life-membership fees to be paid by the members.
ARTICLE

V—Government
The management of all the affairs of the Academy and the
trusteeship of all its property are vested in a Board of Trustees
composed of nine directors elected by the members of the Academy, and the officers elected by the Board of Directors. Three
directors shall be chosen at the annual meeting each year for a
term of three years each.
ARTICLE

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CONSTITUTION AND BY-LA WS

[VOL. IV

At the annual meeting at which this constitution is adopted
nine directors shall be elected, and those persons so chosen shall
at their first meeting, to be called within one week from the date
of the annual meeting by the secretary of that meeting, cast
lots so that the terms of service of three directors shall expire
at the next annual meeting, three at the second, and three at
the third annual meeting from the one at which the nine directors were chosen.
The directors and the officers together constitute the Board
of Trustees and any five of them shall constitute a quorum.
The Board shall meet at the call of the President of the Academy, who shall be ex officio the Chairman of the Board. At any
time at the written request of three members of the Board the
President shall call a meeting.
In the event of the death or resignation of a director, the
Board shall fill the vacancy until the next annual business meeting of the members when the members shall elect a person to
fill the unexpired term.
VI—Officers
The officers of the Academy shall be a President, two VicePresidents, a Secretary and a Treasurer, who shall be elected
annually by the directors at the first meeting of the Board subsequent to the annual business meeting of the Academy. They
shall be elected for a term of one year and shall serve until
their successors are chosen and shall perform the duties usually
pertaining to their respective offices and such as may be prescribed by the Board of Trustees.
ARTICLE

ARTICLE

VII—Meetings

The meetings of the Academy shall be held at such times
and places and for such purposes as the Board of Trustees may
direct, except that at least once a year in the month of December
or January the Board shall fix a date for the annual business
meeting for the election of directors and the presentation of
reports on the work of the Academy from its officers or from
the Board of Trustees, or both, and notice of such meeting
shall be mailed to all members at least ten days prior to the
date so fixed. Such members as are present shall constitute a
quorum.
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CONSTITUTION AND BY-LAWS

5

ARTICLE VIII—Advisory Council
The Board of Trustees may elect an Advisory Council to be
composed of men distinguished for public service, whether
members of the Academy or not, provided they are interested
in its work and willing to give counsel in the formulation and
execution of its policies.

IX—By-Laws and Amendments
The Board of Trustees shall have power to adopt by-laws not
inconsistent with this constitution for the better transaction of
its business, and amend the same at pleasure and this constitution may be amended by a majority vote at any annual business
meeting or at any regularly called special business meeting of
the members of the Academy provided notice of such meeting
has been mailed to all members at least ten days prior to the
date of meeting, and provided further, that all amendments
shall have the approval of a majority of the Board of Trustees,
or otherwise must be considered at two consecutive business
meetings of the members of the Academy before they can be
put to vote.
ARTICLE

BY-LAWS
t
.'-' r

i. The Board of Trustees shall meet at the call of the President, and five members shall constitute a quorum. On written
request of three members of the Board the President shall call
a meeting of the Board.
2. Any person interested in the work of the Academy and
signifying a desire to promote its objects shall, upon application
to the Secretary and upon payment of dues for the ensuing year,
be enrolled as a member.
3. Members of the Academy shall pay annual dues in the
amount of five dollars, payable in advance. Said payment
shall date from the first day of the quarter (January—March,
April—June, July—September, October—December) in which
such members were enrolled, except that the membership of
persons enrolled in March, June, September and December shall
date for the payment of dues from the first day of the following month.
4. Any member may compound his annual dues by the single
payment of one hundred dollars and thereby be enrolled as a
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6

CONSTH UTION AND BY-LA WS

Life Member and be exempt from further payment of annual
dues.
5. The President shall have executive control of the business
offices of the Academy. He shall appoint an " Assistant to the
President" subject to the approval of the Board and at a salary
to be fixed by the Board, and shall prescribe the duties of that
officer.
6. The President shall approve all bills incurred for the Academy and transmit them for payment to the office of the Treasurer, together with a copy of, or reference to, the resolution of
the Board under which the expense was incurred, except that
incidental office expenses in an amount not to exceed one hundred dollars ($100) a month, and bills for temporary service in
the offices of the Academy, or for purposes (services, material,
traveling expenses, etc.) connected with the regular routine
business of the Academy, or the work of any of its committees,
in amounts not exceeding one hundred dollars ($100) may be
paid by the Treasurer upon the approval of the President without special resolution of the Board, provided, however, all such
payments be reported to and approved by the Board at its next
meeting.
7. These by-laws may be amended at any meeting of the Board
of Trustees by a majority vote, provided at least eight members
of the Board vote in favor of such amendment or subsequently
record in writing their consent thereto.
(338)

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OFFICERS OF THE ACADEMY
PRESIDENT

SAMUEL MCCUNE LINDSAY
Professor of Social Legislation, Columbia University
VICE-PRESIDENTS

ALBERT SHAW
Editor of " The Review of Reviews "
PAUL M. WARBURG
Kuhn, Loeb & Company
SECRETARY
HENRY RAYMOND MUSSEY

Associate Professor of Economics, Columbia University
TREASURER

GEORGE A. PLIMPTON
Ginn ft Company, New York
ASSI8TANT TO THE PRESIDENT

EMMA S.

LAKE

TRUSTEES

ROBERT ERSKINE ELY
League lor Political Education

HENRY R. SEAGER
Professor of Political Economy,
Columbia University

A. BARTON HEPBURN
President Chase National Bank,
New York

EDWIN R. A. SELIGMAN
Professor of Political Economy,
Columbia University

THOMAS W. LAMONT
J. P. Morgan & Company, New York

MUNROE SMITH
Professor of Comparative Jurisprudence,
Columbia University

THOMAS REED POWELL
Associate Professor of Constitutional Law,
Columbia University

FRANK A.

WILLIAM R. SHEPHERD
Professor of History, Columbia University

VANDERLIP

President National City Bank, New York

ADVISORY COUNCIL

NICHOLAS MURRAY BUTLER
President of Columbia University

ELIHU ROOT
United States Senator from New York

FRANCIS LYNDE STETSON

New York Bar
CDITOR POLITICAL SCIENCE QUARTERLY

EDITOR PROCEEDINGS OF THE ACADEMY

THOMAS REED POWELL

HENRY RAYMOND MUSSEY

(339)

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HONORARY MEMBER
Bryce, The Right Honourable Viscount James
Camden Hill Square, London
LIFE MEMBERS
Bacon, Robert L.
14 Wall Street
Brackenridge, George W.
San Antonio Natl. Bank, San Antonio, Texas
Carnegie, Andrew
2 East 91st Street
Chamberlain, Joseph P.
Columbia University
Clark, Stephen C.
149 Broadway
deForest, R, W.
30 Broad Street
Dryden, Forrest F.
Prudential Insurance Co., Newark, N. J.
Dunham, Edward K.
35 East 68th Street
Eidlitz, Otto M.
489 Fifth Avenue
Elkus, Abram I.
170 Broadway
Fish, Stuyvesant
52 Wall Street
Frankland, Frederick Wm.
"Okataine", Foxton, Manawatu, New Zealand
Goodnow, Frank J.
Johns Hopkins University, Baltimore, Md.
Griffin, Frederick iR.
Sherbrooke and Simpson Sts., Montreal, Canada
Guthrie, William D.
28 Park Avenue
Halsey, Frederic R.
22 West 53d Street
Hammond, John Hays
71 Broadway
Hewitt, Herbert H.
i n Broadway
Huntington, Archer M.
1083 Fifth Avenue
Hyams, Godfrey M.
P. O. Box 5104, Boston, Mass.
lies, George
Park Avenue Hotel
Kahn, Otto H.
52 William Street
Lamont, Thomas W.
23 Wall Street
Leeds, Mrs. Warner Mifflin
n East 65th Street
Lewisohn, Adolph
42 Broadway
Columbia University
Lindsay, Samuel McCune
Macy, V. Everit
68 Broad Street
Marshall, Louis
47 East>72d Street
Columbia University
Mitchell, Wesley C.
165 Broadway
Morgenthau, Henry
Morris, Newbold
115 East 73d Street
60 Broadway
Pinchot, Amos R. E.
70 Fifth Avenue
Plimpton, George A.
Columbia University
Powell, Thomas Reed
Quesada, Ernesto
Libertad 946, Buenos Aires, R. A.
19 Cedar Street
Riker, John J.
(340)

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LIST OF MEMBERS
Seager, Henry R.
Seligman, Edwin R. A.
Shaw, Albert
Smith, S. L.
Vail, Theodore N.
Warburg, Felix M.
Warburg, Paul M.
Williams, John Skelton
Woerishoffer, Mrs. Anna

9

Columbia University
Columbia University
30 Irving Place
1013 Woodland Avenue, Detroit, Mich.
26 Cortlandt Street
52 William Street
52 William Street
801 East Main Street, Richmond, Va.
IV Bramsplatz 6, Vienna, Austria

* MEMBERS

V

Abbott, E. G.
14 Deering Street, Portland, Me.
Abbott, Edwin M.
700 Land Title Bldg., Philadelphia, Pa.
Abbott, Lyman
287 Fourth Avenue
Acheson, Edward G.
Niagara Falls, N. Y.
Ackerman, Ernest R.
506 West 8th Street, Plainfield, N. J.
Ackerman, William
2218 Eighth Avenue'
Adams, A. E.
5th Avenue & Broadway, Youngstown, O.
Adams, Edward D.
71 Broadway
Adams, Henry Sherman
152 Montague Street, Brooklyn, N. Y.
Adams, Samuel B.
Savannah, Ga.
Adkins, Jesse C
Chevy Chase, Md.
Adriance, Benjamin
254 Van Brunt Street, Brooklyn, N. Y.
Agar, John G.
31 Nassau Street
112 Lenox Avenue
Albert, S.
Warwick, Providence, R. I.
Aldrich, Nelson W.
Castle Point, Hoboken, N. J.
Alexander, Mrs. A.
Winston-Salem, N. C.
Alexander, Joseph E.
31 Nassau Stieet
Alexander, J. S.
80 Maiden Lane
Alexander, William H.
126 Fifth Avenue
Allen, Ethan
63 Wall Street
Allen, Frederick H.
55 Cedar Street
Allen, Frederick L.
Allen, George W. H.
Box 538, Cazenovia-on-Lake Owahgena, N. Y.
Allen, Mrs. George W.
Box 188, Bayden, Cazenovia, N. Y.
Allen, Stephen H.
501 Jackson Street, Topeka, Kansas
385 Central Park West
Allen, William H.
Rochester, N. Y.
Ailing, Joseph T.
National Nassau Bank
Ailing, Newton D.
10 Wall Street
Altschul, C.
Altschul, Richard
Anglo London & Paris Natl. Bank, San Francisco, Calif.
12 West 44th Street
Alvord, Andrew P.
III Broadway
Alvord, Dean
80 West 40th Street
Anderson, A. A.
* In addresses giving street and number only, the city is New York.
(341)

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IO

YEAR BOOK OF THE

ACADEMY

[VOL.

IV

Anderson, Charles W.
156 West i32d Street
Anderson, Frank B.
Care of the Bank of California, San Francisco, Calif.
Anderson, JoHh
81 Maiden Lane
Anderson, Mrs. J. Scott
Torresdale House, Torresdale, Philadelphia, Pa.
Anderson, Thomas T.
4241 Folsom Avenue, S t Louis, Mo.
Andrew, Mrs. Harriet Fisher
Box 23, Trenton, N. J.
Andrews, A. C.
83 Cedar Street
Andrews, Arthur Irving
Tufts College, Mass.
Andrews, Constant A.
1 Maple Avenue, White Plains, N. Y.
Andrews, W. H.
130 East 67th Street
Apple, Harry E.
2,7 West 36th Street
Archbold, John D.
26 Broadway
11 West 91st Street
Archer, Mrs. G. C.
165 Broadway
Arend, Francis J.
i n Fifth Avenue
Arents, George, jr.
Armstrong, Dwight M,
1150 Eastmoreland Avenue, Memphis, Tenn.
Armstrong, Russell
60 Broadway
Armstrong, S. T.
Katonah, N. Y.
Arnold, Carrington G.
30 Broad Street
Arnold, Joseph A.
22 William Street
Arnold, Lynn J.
22 Beaver Street, Albany, N. Y.
Arnstein, Leo
City Hall
Arvine, E. P.
42 Church Street, New Haven, Conn.
Aspegren, John
New York Produce Exchange
23 West 26th Street
Astor, Vincent
Astruck, J. Harry
7-9 West 18th Street
195 Broadway
Atkins, George W. E.
Great Falls, Mont.
Atkinson, Franklin Pierce
25 Broad Street
Atwater, Richard M., jr.
290 Broadway
Atwood, Kimball C.
290 Broadway
Atwood, Kimball C, jr.
68 East 86th Street
Auchincloss, Gordon
60 Broadway
Auchincloss, James C.
Auerbach, Joseph S.
34 Nassau Street
Auerbach, Louis
842 Broadway
Austin, Charles
23 West Street, Battle Creek, Mich.
Avery, Samuel P.
61 Woodland Avenue, Hartford, Conn.
Babbott, Frank L.
346 Broadway
Babcock, H. D.
20 East 52d Street
47 West 16th Street
Bachia, Richard A.
500 Chestnut Street, Emaus, Pa.
Backenstoe, J. M.
2 Wall Street
Bacon, Edward R.
135 East 39th Street
Bacon, Mrs. Francis McN., jr.
115 Broadway
Bacon, George Wood
14 Wall Street
* Bacon, Robert L.
542 Fifth Avenue
Baettenhaussen, Theodore
Harrisburg, Pa.
Bailey, Charles L.
* Life Member
(343)

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LIST OF

MEMBERS

II

Bailey, Frank
175 Remsen Street, Brooklyn, N. Y.
Baillieu, C. L.
Heathfield, Toorak, Melbourne) Australia
Baird, F. C.
224 Frick Building, Pittsburgh, Pa.
Baker, A. G.
Care of G. & C. Merriam Co., Springfield, Mass.
Baker, Alfred L.
141 South LaSalle Street, Chicago, 111.
Baker, Charles Adkins
52 Broadway
Baker, George F., jr.
2 Wall Street
Baldwin, Frank V.
170 Prospect Place, Brooklyn, N. Y.
Baldwin, William D.
175 West 58th Street
Baldwin, William H.
1415 Twenty-first Street, Washington, D. C.
Bandler, S. W.
134 West 87th Street
Barber, James T.
Eau Claire, Wis.
Barber, Major William
52 Beaver Street
Barbour, Edmund D.
610 Sears Building, Boston, Mass.
Barclay, R. G.
S East 78th Street
Baring, Charles
97 East 58th Street
Barlow, Peter T.
Board of City Magistrates
Barnes, Edward W.
70 Worth Street
Barnes, George M.
Commercial National Bank, Syracuse, N. Y.
Barnum, William M.
62 Cedar Street
Barron, Charles S.
1119 Pickins Street, Columbia, S. C.
Barry, Charles D.
17 State Street
Barstow, George Eames
Barstow, Texas
Barthelemy, Louis C. J.
10 Wall Street
Bartlett, J. Kemp
2100 Mt. Royal Terrace, Baltimore, Md.
Bartlett, Philip G.
62 Cedar Street
Baruch, Bernard M.
i n Broadway
Baruch, Emanuel de M.
57 East 77th Street
Bassett, Acton Civill
165 Broadway
Bates, Mrs. Lindon W.
784 Fifth Avenue
Battelle, John Gordon
Columbus, O.
Batten, George
93 Union Street, Montclair, N. J.
Battle, George Gordon
37 Wall Street
6-9 Hanover Street
Baumann, F. W.
Bayley, George W.
442 Jamaica Avenue, Brooklyn, N. Y.
135 Broadway
Bayne, Howard
Beaman, George Herbert
2232 Massachusetts Avenue, Washington, D. C.
Beard, Curtis J.
41 West 34th Street
Beardsley, Samuel A.
54 Wall Street
Bechhoefer, Charles
847 Ashland Avenue, St. Paul, Minn.
Davenport, la.
Bechtel, George M.
3008 Benvenue Avenue, Berkeley, Calif.
Beckwith, Holmes
inBroadway
Bedell, Louis
52 William Street
Beekman, Charles K.
Beekman, Gerard
35 East 38th Street
329 West 71st Street
Beer, G. L.
Milchinsel, Leipzig, Germany
Beer, Ludwig
39 West 38th Street
Bell, Frederick D.
Shenandoah, Pa.
Bell, James J.
(343)

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12

YEAR BOOK OF THE

Beller, William F.
Belmont, August
Belmont, Mrs. O. H P.
Beman, Lamar T.
Bend, Miss Beatrice
Bendix, Ludwig
Benedict, L. C.
Benjamin, Eugene S.
Benjamin, G. G.
Benjamin, M. W.
Bensel, J. A.
Benton, A.
Beran, Theodore
Bernard, G. H.
Bernheim, Isaac W.
Bernheimer, Charles S.
Bertram, H. Henry
Bertschmann, J.
Berwind, Edward J.
Best, Harry
Bettman, Alfred
Betts, Charles H.
Betts, Robert M.
Bevin, W. D.
Bhandarkar, V. G.
Bickford, Herbert J.
Bidstrup, J. F.
Biggs, Albert W.
Biggs, Charles
Bijur, Nathan
Bilgram, Hugo
Billquist, C Edward
Bing, Alexander M.
Bishop, James C
Bishop, Samuel H.
Bixby, W. H.
Black, Mrs. Elmer E.
Black, Hugh
Black, William H.
Blades, J. B.
Blagden, Arthur C.
Blair, Mrs. C. Ledyard
Blake, Edwin M.
Blake, Maurice C.
Blakeley, William A.
Blanchard, Irwin T.
Bliss, C. N., jr.
Bliss, William H.
Bloch, Adolph

ACADEMY

[VOL.

IV

51 East 123d Street
23 Nassau Street
477 Madison Avenue
East High School, Cleveland, O.
563 Park Avenue
S Nassau Street
7 Wall Street
440 Lafayette Street
University of Pittsburgh, Pittsburgh, Pa.
43 West 88th Street
Albany, N. Y.
79 Wall Street
So Central Park West
Glasco, Kansas
Louisville, Ky.
Pitkin Avenue & Watkins Street, Brooklyn, N. Y.
116 West 14th Street
P. O. Box 418
1 Broadway
14 Livingston Place
1514 First National Bank Building, Cincinnati, O.
29 Holly Street, Lyons, N. Y.
Cornucopia, Ore.
iog Leonard Street
RacecourseRoad, Baroda, India
100 St. Marks Place, New Brighton, S. I.
42 Jerome Street, Brooklyn, N. Y.
Tennessee Trust Building, Memphis, Tenn.
13 Astor Place
160 West 75th Street
1235 Spring Garden Street, Philadelphia, Pa.
11 Broadway
505 Fifth Avenue
33 Pine Street
500 West i22d Street
735 Southern Building, Washington, D. C.
512 Fifth Avenue
109 Lorraine Avenue, Upper Montclair, N. J.
18 East 28th Street
New Bern, N. C.
176 East 70th Street
Peapack, N. J.
Room 1406, 1 Liberty Street
Magdalen College, Oxford, England
1237 Oliver Building, Pittsburgh, Pa.
Woodland, N. C.
117 Duane Street
6 East 65th Street
911 Park Avenue
(344)

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LIST OF

MEMBERS

13

Blount, Henry F.
"The Oaks", Washington, D. C.
Blount, Walter E.
Bluemont, Va.
Blum, Charles
Jacksonville, Fla.
Blum, Edward C.
424 Fulton Street, Brooklyn, N. Y.
Blumenthal, Mrs. George
23 West 53d Street
Blumenthal, Hugo
5 Nassau Street
Blumenthal, Sidney
305 West ooth Street
Bodine, Samuel T.
Broad & Arch Streets, Philadelphia, Pa.
Bogat, P.
714 St. Nicholas Avenue
Bollinger, James Wills
524 Locust Street, Davenport, la.
Bolster, Wilfred
Court House, Boston, Mass.
Bomar, Horace L.
Spartanburg, S. C.
Bond, James A. C.
Westminster, Md.
Bondy, Joseph
910 Irving Avenue, Syracuse, N. Y.
Bonn, M. J.
Gaussstrasse, Munich, Germany
Bontecou, Frederic T.
150 Highland Avenue, Orange, N. J.
Booraem, Alfred W.
204 Lincoln Place, Brooklyn, N. Y.
Borah, William E.
United States Senate, Washington, D. C.
Borchard, Edwin M.
Library of Congress, Washington, D. C.
Borchard, Paul
42 Amsterdam Avenue
Bordwell, Percy
602 N. Dubuque Street, Iowa City, la.
Borg, Sidney C.
20 Nassau Street
Borges, Esteban Gil
Caracas, Venezuela, S. A.
Boudin, L. B.
302 Broadway
Boudinot, George S.
30 Church Street
Bourne, Frederick G.
149 Broadway
Bouvier, John Vernon, jr.
141 Broadway
Bowman, D. Arthur
Third National Bank Building, S t Louis, Mo.
Bowman, Harold M.
32 Nassau Street
* Brackenridge, George W.
San Antonio Natl. Bank, San Antonio, Tex.
Bradbury, Harry B.
141 Broadway
Bradley, Robert S.
92 State Street, Boston, Mass.
Brady, James B.
7 West 86th Street
Brady, Nicholas F.
54 Wall Street
Braley, Henry K.
151 Kilsyth Road, Brighton, Mass.
Braman, Chester A.
70 Worth Street
Brandow, Morris
488 Peachtree Street, Atlanta, Ga.
Brannan, Miss Eleanor D.
n West 12th Street
Braswell, James C.
Rocky Mount, N. C.
Breed, R. E.
30 Church Street
Bremer, Paul G.
1344 Summit Avenue, St. Paul, Minn.
Brennan, John F.
16 South Broadway, Yonkers, N. Y.
Brentano, Simon
225 Fifth Avenue
Brewer, Mrs. M. Dryden
4«> Riverside Drive
Brewster, William T.
Columbia University
Brice, W. Kirkpatrick
693 Fifth Avenue
Briesen, Arthur von
25 Broad Street
* Life Member.
(345)

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14

YEAR BOOK OF THE ACADEMY

[VOL. IV

Brimmer, George E.
Rawlins, Wyoming
Brinsmade, John C.
The Gunnery School, Washington, Conn.
Bristol, George W.
20 Broad Street
Bristol, John I. D.
45 West 74th Street
Britton, Alexander
1419 F. Street, Washington, D. C.
Brock, Alfred T.
424 California Street, San Francisco, Calif.
Brock, James E.
Mississippi Valley Trust Co., St. Louis, Mo.
Brockett, Orlando Mitchell
1502 West 9th Street, Des Moines, la.
Brody, Joseph M.
62 West 92d Street
Bronner, Harry
5 Nassau Street
Bronson, Ira
614 Colman Building, Seattle, Wash.
Brookings, Robert S.
Ellwood Place, St. Louis, Mo.
Broomhall, Allen
31 Nassau Street
Brown, Charles C.
Kenosha, Wis.
Brown, Charles T.
60 Wall Street
Brown, Charles Paul
141 Broadway
Brown, Charles S.
146 Broadway
Brown, Dickson Q.
160 West 59th Street
Brown, Edward W.
28 Beaver Street
Brown, Frank L. Care of Palmer Union Oil Co., Sisquoc, Santa Barbara, Cal.
Brown, Franklin Q.
33 Pine Street
1421 Chestnut St., Philadelphia, Pa.
Brown, Francis Shunk
State Bank Building, Tonopah, Nevada
Brown, Hugh Henry
Berlin Mills Co., Portland, Me.
Brown, H. J.
789 Park Avenue
Brown, James
56 Munn Avenue, East Orange, N. J.
Brown, Lowell H.
350 Post Road, San Francisco, Calif.
Brown, Philip King
Scottsville, N. Y.
Brown, Seldon S.
45 Wall Street
Brown, Walston H.
114 East 30th Street
Brown, William Adams
The Berkeley School, 270 West 72d Street
Brown, William H.
1 West 72d Street
Browning, J. A.
Manila, P. I.
Bruce, Edward B.
55 Wall Street
Bruere, Miss Mina M.
52d Street & Sunset Drive, Kansas City, Mo.
Brundrett, E. L.
495 Broadway
Bryant, Charles E.
200 Fifth Avenue
Bryant, W. Sidney, jr.
Bryce, The Right Honourable Viscount James
Camden Hill Square, London, England
1400 Continental Building, Baltimore, Md.
Buck, Walter H.
141 Broadway
Buckley, William W.
26 Broad Street
Buckner, M. N.
Omaha National Bank, Omaha, Neb.
Bucholz, W. H. .
32 Nassau Street
Budington, Ernest G.
135 Central Park West
Buenz, K.
260 Fourth Avenue
Buhler, Conrad
Canton, Pa.
Bullock, Charles E.
40 Wall Street
Bullock, George
42 Broadway
Bullwinkel, Edward J.
97 Hudson Terrace, Yonkers, N. Y.
Bunker, Albert
(346)

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LIST OF

MEMBERS

15

Bunker, George R.
421 North Broadway, Yonkers, N. Y.
Bunn, Charles W.
549 Portland Avenue, St. Paul, Minn.
Burbank, A. N.
30 Broad Street
Burchell, Durward E.
149 Broadway
Burden, James A.
Troy, N. Y.
Burdick, F. M.
Columbia University
Burdick, William
602 Continental Building, Baltimore, Md.
Burges, William H.
2 Republic Building, El Paso, Texas
Burgess, John W.
323 West 57th Street
Burke, Thomas
408 Burke Building, Seattle, Wash.
Burns, William J.
811 First National Bank Building, Chicago, 111.
Burr, A. G.
Rugby, N. D.
Burr, Mrs. Winthrop
7 Wall Street
Bush, Irving T.
100 Broad Street
Bustamante, Antonio S. de
Apartado 134, Havana, Cuba
Butler, Charles Stewart
32 Nassau Street
Butler, Joseph G., jr.
Youngstown, O.
Butler, Nicholas Murray
Columbia University
Butler, William W. S.
Stockton, Calif.
Byard, James J.
Cooperstown, N. Y.
Byrne, James
24 Broad Street
Cahn, Arthur L.
27 Pine Street
Cahn, William L.
i n Broadway
Calder, John
129 Ferry Avenue, East, Detroit, Mich.
Caldwell, R. J.
129 Orange Road, Montclair, N. J.
Calfee, Joseph S.
Mechanics-American National Bank, St. Louis, Mo.
Calhoun, Patrick
30 Broad Street
Calkins, John U.
2347 Prospect Street, Berkeley, Calif.
Cammann, Herman H.
84 William Street
Camp, Frederick A.
Waldo Avenue, Riverdale, N. Y.
Canfield, George F.
49 Wall Street
Cannon, James G.
Fourth National Bank
Capen, Edward Warren
146 Sargeant Street, Hartford, Conn.
Capper, Arthur
1035 Topeka Avenue, Topeka, Kansas
Carlebach, Emil
136 West 86th Street
Carlebach, Walter M.
136 West 86th Street
Carlesmith, Carl S.
Hilo, Hawaii
•Carnegie, Andrew
2 East 91st Street
Carnochan, William E.
52 William Street
Carolan, Edgar A.
640 Madison Avenue
Carrigan, Andrew
140 Kansas Street, San Francisco, Calif.
Carrington, A. B.
200 Broadway
Carter, J. M.
Texarkana, Arkansas
Carter, Jarvis P.
52 William Street
Casady, Simon
Care
of
Central
State
Bank,
Des Moines, la.
Castle, Alfred >L.
P. O. Box 349, Honolulu, Hawaii
Chadbourne, Thomas L.
14 Wall Street
KChamberlain, Albert H.
43 Irving Street, Cambridge, Mass.
(347)

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16

YEAR BOOK OF THE ACADEMY

* Chamberlain, Joseph P.
Chandler, Alfred D.
Chandler, Percy M.
Channing, J. Parke
Chase, George
Cheney, 0 . H.
Chew, Ng Poon
Childs, Edwards H.
Childs, R. S.
Childs, S. W.
Childs, William H.
Chisholm, B. Ogden
Choate, Joseph H.
Cillis, Hubert
Claflin, John
Clancy, Frank W.
Clancy, John ;R.
Clare, William F.
Clark, David T.
Clark, Emory W.
Clark, Grenville
Clark, Herbert W.
Clark, John Bates
Clark, J. M.
Clark, LeRoy
Clark, Lyman K.
Clark, Russell Porter
* Clark, Stephen C.
Clark, V. V.
Clark, Walter E.
Clark, William A.
Clark, W. R.
Clarke, E. A. S.
Clarke, Lewis L.
Clarkson, David A.
Cleveland, F. A.
Cleveland, J. Wray
Clews, Henry
Close, F. N. B.
Coffin, C. A.
Coffin, William
Coffin, W. E.
Cogswell, William Browne
Cohen, Arthur J.
Cohen, Benno
Cohen, Henry L.
Cohen, Julius Henry

[VOL. IV

Columbia University
Brookline, Mass.
3d & Walnut Streets, Philadelphia, Pa.
5 Broadway
309 West 74th Street
78 Madison Avenue
809 Sacramento Street, San Francisco, Calif.
59 Wall Street
23 Fifth Avenue
14 Wall Street
17 Battery Place
16 East 53d Street
60 Wall Street
20 Nassau Street
224 Church Street
Santa Fe, New Mexico
1010 West Belden Avenue, Syracuse, N. Y.
Suite 916, 135 Broadway
Williamstown, Mass.
1740 Jefferson Avenue, Detroit, Mich.
500 Madison Avenue
East Las Vegas, New Mexico
407 West 117th Street
Amherst, Mass.
114 Liberty Street
Ayer, Mass.
52 Grove Street, Stamford, Conn.
149 Broadway
444 Henry Building, Seattle, Wash.
824 St. Nicholas Avenue
20 Exchange Place
2717 North Broadway, Los Angeles, Calif.
2 Rector Street
128 Broadway
659 Fifth Avenue
261 Broadway
176 Broadway
15 Broad Street
7 Wall Street
30 Church Street
American Consulate, Jerusalem, Palestine
902 Seventh Street, Des Moines, la.
Syracuse, N. Y.
45 Wall Street
308 West 94th Street
808 West End Avenue
i n Broadway

* Life Member.
(348)

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No. 3 ]

LIST OF

MEMBERS

17

Cohen, William N.
22 William Street
Coker, F. W.
The Ohio State University, Columbus, O.
Colby, Howard A.
Plainfield, N. J.
Cole, Charles L.
49 Wall Street
Cole, Edward F.
301 West io6th Street
Colgate, Gilbert
199 Fulton Street
Coleman, C. P.
57th Street & Broadway
Coler, Bird S.
43 Cedar Street
Collier, Barron G.
Flat Iron Building, Broadway & 23d Street
Colt, LeBaron B.
United States Senate, Washington, D. C.
Colvin, D. Leigh
655 West 177th Street
Colvin, George A.
320 Broadway
Conant, Charles A.
34 Nassau Street
Conkey, H. M.
83 Cedar Street
Conklin, Roland R.
1 Wall Street
Connor, H. G.
Bruton and Gray Streets, Wilson, N. C.
Connor, Washington E.
Onteora Club, Tannersville, N. Y.
Conover, Louis W.
54 William Street
Conway, Eustace
127 East 35th Street
Conyngton, Thomas
20 Vesey Street
Cook, Alfred A.
123 West 79th Street
Cook, Mrs. Madge Can302 West 77th Street
Cook, Walter W.
University of Chicago Law School, Chicago, 111.
Cook, William W.
44 Wall Street
Copeland, Charles C.
250 Academy Street, Jersey City, N. J.
Cord, J. F.
Carlotte Hall, Md.
Cordley, F. R.
324 West 103d Street
Corey, William E.
14 Wall Street
Cornell, William H.
34
Nassau Street
Corning, C. R.
36 Wall Street
Corrigan, J. E.
122 East 82d Street
Corwin, Edward S.
US Prospect Avenue, Princeton, N. J.
Coshow, O. P.
Roseburg, Ore.
Coster, Miss Helen
37 East 37th Street
Cotton, Joseph P , jr.
14 Wall Street
Couden, Elliott R.
Ridgewood National Bank, Brooklyn, N. Y.
Coulter, Elmer Dean
261 West 44th Street
Cowperthwait, J. Howard
2222 Third Avenue
Cox, Raymond B.
20 Nassau Street
Cox, Robert Lynn
1 Madison Avenue
Crain, Thomas C. T.
121 West 75th Street
Cram, Ralph Adams
15 Beacon Street, Boston, Mass.
Crandell, H. L.
The Bank of Long Island, Jamaica, L. I.
Crane, Alexander B.
55 Wall Street
Crane, Charles R.
31 West 12th Street
Cravath, Paul D.
52 William Street
Crawford, Miss Caroline
Middlebury College, Middlebury, Vt.
Crawford, W.
10 West 20th Street
Creel, Enrique C.
3a de Londres, No. 40, Mexico City, Mexico
(349)

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18

YEAR BOOK OF THE ACADEMY

[VOL. IV

Crider, George A.
1415 South 58th Street, Philadelphia, Pa.
Croll-Blackburne, Mrs. Ida P.
519 South 41st Street, West Phila., Pa.
Croly, Herbert
Windsor, Vt.
Crook, J. W.
Amherst, Mass.
Crow, Allen B.
357 Ninth Street, Brooklyn, N. Y.
Culbertson, John J.
Paris, Texas
dimming, Joseph B.
The Hill, Augusta, Ga.
Cummins, Albert B.
United States Senate, Washington, D. C.
Curtis, Bracey
Nogales, Ariz.
Curtis, W. E.
30 Broad Street
Cutcheon, F. W. M.
24 Broad Street
Cutler, James G.
Cutler Building, Rochester, N. Y.
Cutler, Otis H.
30 Church Street
Cutting, Elizabeth B.
37 Madison Avenue
Cutting, R. Bayard
32 Nassau Street
Cutting, R. Fulton
32 Nassau Street
Dailey, John E.
35 Wall Street
Dakin, Arthur H.
6 Beacon Street, Boston, Mass.
Dana, Paul
1 Fifth Avenue
Dashew, Leon D.
80 St. Nicholas Avenue
Davey, W. N.
584 Central Avenue, East Orange, N. J.
Davidson, Walter V.
Care of The Sweeney Co., Buffalo, N. Y.
Davies, Julian T.
32 Nassau Street
Davies, Milton J.
175 Steuben Street, Brooklyn, N. Y.
Davis, Andrew McF.
10 Appleton Street, Cambridge, Mass.
Davis, Charles Q.
790 Riverside Drive
Davis, Daniel A.
52 West 57th Street
Davis, David T.
55 Liberty Street
Davis, Harold S.
735 Exchange Building, Boston, Mass.
Davis, Harrison M.
75 Ames Building, Boston, Mass.
Davis, Horace A.
73 Tremont Street, Boston, Mass.
Davis, J. Lionberger
Third National Bank Building, S t Louis, Ma
Davis, John
3801 Holmes Street, Dallas, Texas
Davis, John A.
375 Park Avenue
Davis, Pierpont V.
851
North
Broad
Street,
Elizabeth, N. J.
Davis, Robert E.
Gainesville, Fla.
Davis, Vernon M.
194 Lenox Avenue
Davison, H. P.
23 Wall Street
Daw, George W.
202
Cannon
Place,
Troy, N. Y.
Dawson, Edgar
Normal College
Dawson, Miles M.
141 Broadway
Debevoise, Thomas M.
62 Cedar Street
DeBoer, Joseph Arend
Montpelier, V t
Decker, Gustav F.
700 Security Building, St. Louis, Ma
Decker, Mrs. J. W.
51 West 54th Street
Decker, Martin S.
Public Service Commission, Albany, N. Y.
de Coppet, E. J.
314 West 85th Street
de Forest, H. W.
30 Broad Street
(350)

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LIST OF

MEMBERS

19

* de Forest, Robert W.
7 Washington Square
De Kay, John W.
i n Broadway
Delmar, Eugene
17 Battery Place
Delafield, Frederick P.
20 Exchange Place
Delahunty, John
Murray Hill Hotel
DeLano, S. S.
165 Broadway
Delano, William Adams
4 East 39th Street
Deming, Horace E.
IS William Street
Demorest, William C.
60 Liberty Street
Demuth, Leopold
600 West End Avenue
Denison, John D., jr.
Bradley Building, Dubuque, la.
Dennis, Alfred L. P.
518 Wisconsin Avenue, Madison, Wis.
Dennis, John B.
P. O. Box 1792
Depew, Chauncey M.
27 West 54th Street
Derby, James Lloyd
969 Park Avenue
deRoode, Albert
52 Wall Street
DeSanno, A. P.
1232 Race Street, Philadelphia, Pa.
Devine, Edward T.
607 Kent Hall, Amsterdam Avenue & 116th Street
Dick, J. Harry
20 East 53d Street
Dimock, George E.
907 North Broad Street, Elizabeth, N. J.
Dinkins, Lynn H.
Interstate Trust & Banking Co., New Orleans, La.
Dirnberger, M. F., jr.
178 Lancaster Avenue, Buffalo, N. Y.
Dodd, Allison
307 Belleville Avenue, Bloomfield, N. J.
Dodd, W. F.
University of Illinois, Urbana, 111.
Dodge, Cleveland H.
99 John Street
Dodge, Miss Grace H.
262 Madison Avenue
Doherty, Henry L.
60 Wall Street
Dommerich, L. W.
314 West 75th Street
Dominick, Gayer G.
US Broadway
Donald, James H.
Hanover National Bank, 9 Nassau Street
Donovan, H. W.
7 Wall Street
Dorr, Goldthwaite H.
521 West 1 nth Street
Dougherty, J. Hampden
27 William Street
Douglas, James
99 John Street
Douglas, Walter
Bisbee, Ariz.
Dow, Miss Caroline B.
135 East S2d Street
Dow, Fayette B.
136 West 44th Street
Dowell, E. S.
Hedding College, Abingdon, 111.
Dowling, Robert E.
165 Broadway
Dowling, Victor J.
27 Madison Avenue
Dows, Tracy
Rhinebeck, N. Y.
Draper, George Otis
1 Madison Avenue
Draper, Mrs. William P,
Hotel Gotham, 5th Avenue & 55th Street
Drayton, J. Coleman
829 Park Avenue
Dreicer, Mrs. Michael
1046 Fifth Avenue
Dreier, Miss Mary E.
Drury, Frank A.
118 East 54th Street
Merchants National Bank, Worcester, Mass.
* Life Member.
(351)

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20

YEAR BOOK OF THE ACADEMY

* Dryden, Forrest F.
DuBois, Charles G.
Dulaney, Henry S.
Dulles, William
Dummer, Mrs. W. F.
Duncan, R. D.
Dunham, Carroll
* Dunham, Edward K.
Dunn, Henry E.
Dunning, William
Dunstan, J. S.
Dupuis, Charles W.
Duret, Miguel Lanz
Durham, Knowlton
Duval, H. Rieman
Dwight, John E.
Dymond, John, jr.
Dynes, Miss Sarah A.
Earle, Lewis
Earp, Edwin L.
Easley, Ralph M.
Eastman, George
Eastman, Joseph
Eastman, Lucius R., jr.
Eastman, Samuel C.
Eastman, Sidney Corning
Eaton, Arthur W.
Eaton, Frederick H.
Eckstein, M. Maurice
Eddy, Charles B.
Eder, James M.
Edison, Thomas A.
Edmonds, Dean S.
Edmonds, Franklin S.
Edwards, Daniel M.
Edwards, Stephen O.
Egleston, Melville
Ehrhorn, Oscar W.
Ehrich, Samuel W.
Ehrich, W. J.
Eickhoff, Henry
Eidlitz, Ernest F.
* Eidlitz, Otto M.
Eisman, Max
Eisner, Sigmund
Elder, Charles B.
Eldridge, Frederick L.

[VOL. IV

Prudential Insurance Co., Newark, N. J.
IS Dey Street
517 West Lombard Street, Baltimore, Md.
220 Fifth Avenue
679 Lincoln Parkway, Chicago, 111.
Care of State Trust Co, Little Rock, Ark.
Irvington-on-Hudson, N. Y.
36 East 68th Street
S3 East 79th Street
Columbia University
42 Broadway
Second National Bank, Cincinnati, 0 .
2a San Augustin 51, Mexico City, Mexico
1 Gramercy Park
32 Nassau Street
38 Mount Morris Park West
339 Carondelet Street, New Orleans, La.
State Normal School, Trenton, N. J.
135 Madison Avenue
Drew Forest, Madison, N. J.
1 Madison Avenue
330 East Avenue, Rochester, N. Y.
71 Broadway
375 Washington Street
Concord, N. H.
Kenilworth, 111.
Pittsfield, Mass.
165 Broadway
258 Riverside Drive
62 Cedar Street
251 West 95th Street
Orange, N. J.
166 West 72d Street
7818 Lincoln Drive, Philadelphia, Pa.
208 Salina Street, Syracuse, N. Y.
170 Westminster Street, Providence, R. I.
26 Cortlandt Street
15 William Street
25 Broad Street
67 Exchange Place
604 Mills Building, San Francisco, Calif.
31 Nassau Street
489 Fifth Avenue
1 West 70th Street
Red Bank, N. J.
79 West Monroe Street, Chicago, 111.
580 Fifth Avenue

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LIST OB

Eldridge, Herbert R.
Eliot, Ellsworth, jr.
* Elkus, Abram I.
Ellis, George W.
Ellis, Ralph
Ellison, William B.
Ellsworth, Mrs. Magee
Ellsworth, William W.
Elmslie, Mrs. William Gray
Ely, Robert E.
Emery, Thomas
Engelhardt, Theobald
Ensign, Charles S., jr.
Erb, Newman
Erbsloh, R.
Erdmann, Albert J.
Erhart, W. H.
Essing, Arthur
Estabrook, A. F.
Estabrook, H. D.
Evans, Rowland
Ewing, Thomas, jr.
Eyer, George A.
Fairbanks, Charles W.
Fairchild, Charles S.
Fairley, William
Fairlie, John A.
Fallows, Edward H.
Fancher, B. H.
Farley, Terence
Farnam, Henry W.
Farnsworth, Fred. E.
Farquhar, A. B.
Farr, George W.
Farrell, Mrs. John Truitt
Farrell, James A.
Farrelly, Stephen
Fay, Charles R.
Fayant, Frank H.
Fechheimer, Charles M.
Fenwick, Charles G.
Ferguson, Mrs. F.
Ferguson, Henry
Ferris, Frank A.
Ferris, T. Harvey
Ferry, Mansfield
Field, E. B.

MEMBERS

2i

55 Wall Street
34 East 67th Street
170 Broadway
149 Broadway
22 West 57th Street
165 Broadway
55 East 77th Street
33 East 17th Street
7 East 73d Street
21 West 44th Street
Grand Central Station
678 Willoughby Avenue, Brooklyn, N. Y.
30 Court Street, Boston, Mass.
42 Broadway
564 Broadway
30 Broad Street
81 Maiden Lane
44 West 91st Street
15 State Street, Boston, Mass.
115 Broadway
221 Federal Building, Indianapolis, Ind.
67 Wall Street
37 Wall Street
Indianapolis, Ind.
35 Fifth Avenue
195 Kingston Avenue, Brooklyn, N. Y.
University of Illinois, Urbana, 111.
30 Church Street
530 Fifth Avenue
Hall of Records
43 Hillhouse Avenue, New Haven, Conn.
11 Pine Street
York, Pa.
Miles City, Mont.
59 West 45th Street
71 Broadway
182 West 58th Street
19 Montague Street, Brooklyn, N. Y.
55 West 44th Street
P. O. Box 278, Chickasha, Okla.
2 Jackson Place, Washington, D. C.
Box 71, Halesite, Suffolk County, N. Y.
123 Vernon Street, Hartford, Conn.
262 Mott Street
Homestead Aid Building, Utica, N. Y.
31 Nassau Street
P. O. Drawer 1708, Denver, Colo.

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YEAR BOOK OF THE ACADEMY

[Vol.. IV

Fieldman, Sol
108 Northern Avenue
Findley, William L.
2 East 45th Street
Finley, John H.
Albany, N. Y.
Fischer, W. J.
National Bank of Commerce Building, St. Louis, Mo.
Fish, Frederick P.
84 State Street, Boston, Mass.
Fish, Mrs. John C.
19 South Broadway, Shelby, O.
•Fish, Stuyvesant
52 Wall Street
Fisher, Irving
460 Prospect Street, New Haven, Conn.
Fisk, Everett O.
2a Park Street, Boston, Mass.
Fisk, Pliny
62 Cedar Street
Fiske, Haley
1 Madison Avenue
Fitzpatrick, Charles
Supreme Court, Ottawa, Canada
Fitzpatrick, Miss Mary C.
885 Kent Avenue, Brooklyn, N. Y.
Flack, Horace E.
City Hall, Baltimore, Md.
Flagler, J. H.
200 Broadway
Fleming, Henry S.
1 Broadway
Fleitmann, Frederick T.
490 Broome Street
Fletcher, Austin B.
165 Broadway
Fletcher, Isaac D.
17 Battery Place
Flexner, Bernard
Louisville, Ky.
Flint, Charles R.
4 East 36th Street
Floyd, Mrs. Nelson
Syosset, L. I.
Follett, A. D.
St. Clair Building, Marietta, O.
Forbes, Allen B.
56 William Street
Forbes, W. Cameron
Boston, Mass.
Fordham, H. L.
i n Broadway
Fordyce, S. W.
703 Commonwealth Trust Building, St. Louis, Mo.
Forsyth, Ralph K.
41 Pearl Street, Kingston, N. Y.
Fort, John Franklin
Essex Building, Newark, N. J.
Fosdick, Raymond B.
119 West 71st Street
Fowler, Mrs. Anderson
60 East 68th Street
Fowler, Carl H.
55 Liberty Street
Fowler, Clarence
1133 Broadway
Fowler, John C.
622 West Onondaga Street, Syracuse, N. Y.
Fox, Alan
50 Pine Street
Fox, George L.
7 College Street, New Haven, Conn.
109 East 15th Street
Fox, Hugh F.
602 West 157th Street
Fox, Thomas Francis
303 Grand Avenue, Waukesha, Wis.
Frame, Andrew J.
15 East 48th Street
Frankfort, M.
Bureau of Insular Affairs, Washington, D. C.
Frankfurter, Felix
* Frankland. Frederick William
" Okataine," Foxton, Manawatu, New Zealand
Franklin, Fabian
527 West 110th Street
Franklin, George S.
33 East 38th Street
Franklin, Thomas H.
San Antpnio, Texas
Franks, Robert A.
Home Trust Co., Hoboken, N. J.
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LIST OF

Frantz, J. F.
Fraser, George C.
Freiberg, Maurice J.
Frelinghuysen, G. G.
French, John
French, Nathaniel
Frew, Walter E.
Frick, Henry C.
Friedman, H. G.
Fries, F. H.
Frissell, A. S.
Froment, Frank L.
Frothingham, John W.
Frueauff, Charles A.
Fuerstman, Joseph A.
Fuller, Paul
Furnya, M.
Gabriel, John H.
Gallaher, E. Y.
Gallatin, Albert
Gallatin, Francis D.
Gammell, William
Gans, Mrs. Howard S.
Garanflo, W. H.
Gardiner, Robert H.
Gardner, Henry B.
Gardner, Rathbone
Gardner, William J.
Garfield, H. A.
Garner, James W.
Garrett, Robert
Garst, Julius
Garvan, Francis P.
Garvin, William E.
Gaston, George H., jr.
Gattell, Beno B.
Gavegan, Edward J.
Gavegan, Mrs. Edward J.
Gazzam, Joseph M.
Geddes, Joseph A.
Geer, Mrs. Walter
Gerard, James W.
Gettell, Raymond G.
Giberga, Eliseo
GifTord, James M.
Gilbert, Alexander
Gilbreth, Frank B.
Gildersleeve, Ferdinand
Gillespie, Robert McM.

MEMBERS

23

25 Maple Avenue, New Rochelle, N. Y.
20 Exchange Place
3576 Alaska Avenue, Cincinnati, 0 .
32 Liberty Street
59 Wall Street
Davenport, la.
13 William Street
640 Fifth Avenue
66 West 94th Street
Winston-Salem, N. C.
630 Fifth Avenue
52 East 74th Street
14 Wall Street
60 Wall Street
222 Washington Street, Newark, N. J.
2 Rector Street
216 Second Avenue, South, Seattle, Wash.
1218 Downing Street, Denver, Colo.
814 West End Avenue
7 East 67th Street
119 East 38th Street
50 South Main Street, Providence, R. I.
401 West End Avenue
State National Bank, Little Rock, Ark.
Gardiner, Me.
54 Stimson Avenue, Providence, R. I.
10 Weybosset Street, Providence, R. I.
162 'Ralston Avenue, South Orange, N. J.
Williams College, Williamstown, Mass.
Urbana, 111.
506 Continental Building, Baltimore, Md.
Worcester, Mass.
903 Park Avenue
4221 Westminster, St. Louis, Mo.
The Apthorp, Broadway and 79th Street
115 Broadway
303 West End Avenue
303 West End Avenue
80 Maiden Lane
530 West 123d Street
246 West 72d Street
United States Embassy, Berlin, Germany
74 Vernon Street, Hartford, Conn.
Prado 10, Havana, Cuba
5 Nassau Street
Market & Fulton National Bank
77 Brown Street, Providence, R. I.
Gildersleeve, Conn.
8 West 53d Street
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24

YEAR BOOK OF THE ACADEMY

[VOL. IV

Gillette, King C.
1566 Beacon Street, Boston, Mass.
Gillies, Edwin J.
245 Washington Street
Gillin, John Lewis
209 Highland Avenue, Madison, Wis.
Gilpin, William Jay
77 Cedar Street
Gilsey, Peter
214 Riverside Drive
Giltner, E. E.
418 West 118th Street
Girelius, Charles G.
Vineland, N. J.
Glasson, William H.
Trinity College, Durham, N. C
Gleason, Charles J.
170 Broadway
Glenn, John M.
136 East 19th Street
Glyn, W. E.
42 East 67th Street
Goan, Mrs. Orrin S.
226 West 59th Street
Goetz, Jacob H.
531 Schenck Avenue, Brooklyn, N. Y.
Goetze, Frederick A.
Columbia University
Goldberg, Samuel W.
310 West 99th Street
Golding, John N.
9 Pine Street
Goldman, Henry
60 Wall Street
Goldzier, Morris
657 Broadway
Gompers, Samuel
801 G. Street, N. W., Washington, D. C
Gonzalez, Antonio C.
32 Broadway
Gonzalez, Teodosio
Bermeys 321, Asuncion, Paraguay
Goodhart, Mrs. Albert E.
2 East 55th Street
Goodhart, Philip J.
96 Broadway
* Goodnow, Frank J.
Johns Hopkins University, Baltimore, Md.
Goodrich, George S.
Bronxville, N. Y.
Gordon, Armistead C.
Staunton, Va.
Gordon, F. E.
West Main Street, Conneaut, O.
Gordon, W. S.
68 Leonard Street
Gorton, Adelos
Maple Glen, Montgomery County, Pa.
Gould, E. R. L.
IS West 38th Street
Gould, Horace S.
37 Wall Street
Gould, J. W. DuB.
30 Church Street
Govin, Antonio
70 Dragones Street, Havana, Cuba
Gowan-Stobo, John
1735 McCormick Building, Chicago, 111.
Grab, Mrs. Helen F.
61 Locust Hill Avenue, Yonkers, N. Y.
Grace, H. H.
867 West 5th Street, Superior, Wis.
Grace, Joseph P.
1 Hanover Square
Graham, Arthur Butler
412 West End Avenue
Gram, Jesse P.
34 Nassau Street
Grant, Percy Stickney
7 West 10th Street
Grant, Rollin P.
Irving National Bank, 92 West Broadway
Grant, William T.
106 Central Park West
Graves, Nelson Z.
22 & 24 South Third Street, Philadelphia, Pa.
Gray, E. McQueen
University of New Mexico, Albuquerque, N. M.
Gray, R. S.
Gray, William J.
3535 Telegraph Avenue, Oakland, Calif.
Green, Herbert
924 Ford Building, Detroit, Mich.
1023 Peoples Gas Building, Chicago, Ilk
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LIST OF

MEMBERS

25

Green, James M.
State Normal School, Trenton, N. J.
Green, Warren L.
70 Broad Street
Greene, Jerome D.
Short Hills, N. J.
Greene, John Arthur
234 West 99th Street
Greene, J. Warren
i n Broadway
Greene, Richard T.
544 West 114th Street
Greene, William H.
Arch & 16th Streets, Philadelphia, Pa.
Greenhut, Benedict J.
6th Avenue and 18th Street
Greeno, F. L.
909 Wilder Building, Rochester, N. Y.
Greenough, William
55 Wall Street
Gregory, R. H.
463 West Street
Grenfell, Wilfred T.
14 Beacon Street, Boston, Mass.
Greve, Charles Theodore 530 Maxwell Avenue, Vernonville, Cincinnati, O.
* Griffin, Frederick R.
Sherbrooke & Sunpson Streets, Montreal, Canada
Griffin, J. C.
Hollis, L. I.
Griggs,. Edward Howard
Spuyten Duyvil, N. Y.
Griggs, Herbert L.
48 Wall Street
Grinnell, E. Morgan
36 East 50th Street
Griswold, Chester
1733 Broadway
Grossman, Moses H.
115 Broadway
Gubelman, Oscar L.
15 William Street
Guggenheim, Simon
165 Broadway
Guinzburg, A. M.
593 Broadway
Guinzburg, Victor
725 Broadway
Gunther, Franklin L.
391 Fifth Avenue
Guthrie, W. B.
515 West 1 nth Street
* Guthrie, William D.
28 Park Avenue
Gutierrez, Valeriano
11 Broadway
335 Convent Avenue
Guy, Charles L.
44 West 69th Street
Guye, Charles Henry
2 Rector Street
Gwinn, Ralph W.
545 Mt Prospect Avenue, Newark, N. J.
Gwinnell, William B.
29 Broadway
Gwynn, Joseph K.
Bunkie, La.
Haas, W. D.
7 East 69th Street
Hass, Kalman
31 Union Square
Hackett, Corcellus H.
Leonia, N. J.
Haeselbarth, Adam C.
Roswell, New Mexico
Hagerman, H. J.
1818 H. Street, Washington, D. C.
Hagner, A. B.
Fraternity Building, Lincoln, Neb.
Hainer, E. J.
1059 Lake Avenue, Rochester, N. Y.
Hale, George D.
Capitol, Albany
Hale, Ledyard P.
537 West 121 st Street
Hale, Robert L.
37 Wall Street
Halff, Mayer L.
Tarrytown, N. Y.
Hall, Fred. J.
107 East 65th Street
Hall, Henry B.
100 Broadway
Hall, John R.
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26

YEAR BOOK OF THE ACADEMY

[VOL. IV

Hall, Thomas C.
700 Park Avenue
Halladay, Reginald
Englewood, N. J.
* Halsey, Frederic R.
22 West 53d Street
Ham, Arthur H.
130 East 22d Street
Hamburger, L,
91 Fifth Avenue
Hamilton, Foster
Care of The Bank of Alabama, Ensley, Ala.
Hamilton, John L.
Hoopestown, 111.
Hamilton, H. A.
New Bank of Commerce Building, St. Louis, Mo.
Hamlin, Philip
Telephone Building, Denver, Colo.
Hammill, C. W.
71 Broadway
Hammond, Henry B.
51 Chambers Street
* Hammond, John Hays
71 Broadway
Hammond, Mrs. John Hays
2315 Massachusetts Ave., Washington, D.C.
Hammond, John Henry
40 Wall Street
Hammond, W. W.
699 Lafayette Avenue, Buffalo, N. Y.
Hanaman, Charles E.
P. O. Box 527, Troy, N. Y.
Hanbridge, W. D.
99 John Street
Handy, Parker D.
22 Pine Street
Han ford, H. B.
633 Cooper Street, Camden, N. J.
Hansmann, Carl A.
96 Broadway
Harbeck, Charles T.
306 Lexington Avenue
Hardon, Henry W.
315 West 71st Street
Hardy, Sarah B.
419 West 118th Street
Hare, Montgomery
109 East 64th Street
Harkins, Walter S.
Presbonsburg, Ky.
Harkness, W. L.
12 Broadway
Harmon, William E.
261 Broadway
Harned, Franklin M.
266 Lincoln Road, Brooklyn, N. Y.
Harper, R. A.
2936 Bainbridge Avenue
Harriman, Mrs. J. Borden
35 East 49th Street
Harrington, Howard Sawyer
64 Wall Street
Harris, Albert H.
13S Central Park West
Harris, John F.
IS Wall Street
Harrison, W. Z.
Commercial Club, Salt Lake City, Utah
Hart, Albert Bushnell
5 Quincy Chambers, Cambridge, Mass.
Hart, Hastings H.
105 East 22d Street
Hartshorn, Stewart
Short Hills, N. J.
Hartzell, Charles
San Juan, Porto Rico
Harvey, A. M.
1405 Polk Street, Topeka, Kansas
Harvey, George
Care of Harper Brothers, Franklin Square
Hasbrouck, Isaac E.
364 Carlton Avenue, Brooklyn, N. Y.
Haskell, J. Amory
Room 1609, 140 Cedar Street
Haskell, Mrs. W. P.
80 Morningside Drive
Haskin, Lincoln B.
58 Main Street, Hempstead, N. Y.
Hasse, Miss Adelaide R.
476 Fifth Avenue
Hasslacher, Jacob
100 William Street
Hastings, H. S.
S t Mary's, Elk County, Pa.
•Life Member.
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LIST OF

MEMBERS

27

Hastings, W. G.
Station "A," Lincoln, Neb.
Hatch, A. J.
20 Broad Street
Hatch, Edward W.
37 Wall Street
Hathaway, Charles
45 Wall Street
Havemeyer, F. C.
34 East 37th Stieet
Hawkins, Eugene D.
Si East 67th Street
Hawley, J. S., jr.
3530 Third Street, San Diego, Calif.
Hay, Woodhull
164 East 61 st Street
Haynes, James B.
748 Omaha Natl. Bank, Omaha, Neb.
Hazeltine, H. D.
Emmanuel College, Cambridge, England
Hazard, F. R.
P. O. Box a, Syracuse, N. Y.
Hazen, George H.
381 Fourth Avenue
Healy, A. Augustus
70 Gold Street
Heaney, Frank J.
502 Broadway
Heath, James E.
Law Building, Norfolk, Va.
Hebbard, Edgar C.
28 Nassau Street
Hecker, Frank J.
915 Union Trust Building, Detroit, Mich.
Hedges, Job E.
165 Broadway
Heffner, William Clinton
Lock Box No. 57. Toledo, O.
Heine, M. Casewell
Kinney Building, Newark, N. J.
Heller, William H.
400 West End Avenue
Hellier, Charles E.
57 Equitable Building, Boston, Mass.
Henderson, Edward C.
52 William Street
Hendren, W. M.
520 Spring Street, Winston-Salem, N. C.
Hentz, Henry
22 William Street
Hepburn, A. Barton
83 Cedar Street
Hepburn, Mrs. A. Barton
205 West 5 7 * Street
Herczeg, Josika
28 West 10th Street
Herrod, H. E.
1631 Unity Building, Chicago, 111.
Hershey, Omer F.
Mt Washington, Md.
Hertenstein, Frederick
3870 Reading Road, Avondale, Cincinnati, O.
Herzog, Paul M.
Woolworth Building
Hess, Walter L.
450 Fourth Avenue
Hessberg, Albert
57 State Street, Albany, N. Y.
* Hewitt, H. H.
i n Broadway
Heyman, David M.
314 West 87th Street
Hibben, Paxton
121 East 21 st Street
Hicks, F. C.
7 Wall Street
Hiester, A. V.
320 Race Avenue, Lancaster, Pa.
Higby, Chester P.
210 Newton Street, Fairmont, West Va.
Higginson, Henry L.
44 State Street, Boston, Mass.
Hill, Edward Finch
333 Nelson Avenue, Peekskill, N. Y.
Hill, James J. Room 415,
Great Northern Railway Building, St. Paul, Minn.
Hill, William Burr
Hillard, C. W.
160 Broadway
Hillhouse, James
71 Broadway
Hillhouse, Mrs. James
Sachem's Wood, New Haven, Conn.
Sachem's Wood, New Haven, Conn.
* Life Member.
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28

YEAR BOOK OP THE ACADEMY

[VOL. IV

66 University Building, Milwaukee, Wis.
Hinckley, T. L.
115 Broadway
Hinds, Roger
2 Wall Street
Hine, Francis L.
52 William Street
Hines, W. D.
160 Broadway
Hirsch, Morris J.
Stamford, Conn.
Hirsch, Robert B.
401 West 118th Street
Hirth, Friedrich
Box 202, New London, Conn.
Hitchcock, Frederick S.
16 Fiske Street, Waterbury, Conn.
Hoadley, Horace G.
16 William Street
Hoagland, Joseph C.
Hochschild, B.
P. O. Box 957
Hodgman, George B.
806 Broadway
Hoe, Arthur I.
Bedford Hills, N. Y.
Hoe, Mrs. Robert
180 West 59th Street
Hoffman, Frank S.
2 College Grounds, Schenectady, N. Y.
Hoffman, Frank S.
The Prudential Insurance Co., Newark, N. J.
Hoggson, W. J.
7 East 44th Street
Holbrook, Percy
The Lucerne, 79th Street & Amsterdam Avenue
Holcomb, Alfred E.
IS Dey Street
Holden, Arthur J.
Bennington, V t
Holden, Mrs. Edwin B.
323 Riverside Drive
Hollister, George Clay
New Rochelle, N. Y.
Hollister, Granger A.
Rochester, N. Y.
HoIIoway, Harry D.
508 Land Title Building, Philadelphia, Pa.
Holly, Miss Mary Kissara
252 West 76th Street
Holmes, D. A.
20 Broad Street
Holmes, J. M.
Pierce Building, St. Louis, Mo.
Holt, Lucius H.
West Point, N. Y.
Holter, Edwin O.
Mount Kisco, N. Y.
Holstein, George M.
61 Broadway
Homer, C. S.
West Townsend, Mass.
Homer, Francis T.
40 Wall Street
Hopkins, Arthur T.
Care of Mechanical Rubber Co., Cleveland. O.
Hopkins, George B.
42 Broadway
Hopkins, W. J.
821 College Avenue, Racine, Wis.
Hopper, John J.
215 West 125th Street
Hornblower, William B.
S East 89th Street
Horsey, Charles Lee
Pioche, Nevada
Horst, George D.
Reading, Pa.
Hotchkiss, William H.
55 Liberty Street
Hothorn, E. G.
42 Broadway
Hottenstein, Marcos S.
Commonwealth Building, Allentown, Pa.
Hourwich, Isaac A.
180 Hewes Street, Brooklyn, N. Y.
Howard, Frederick B.
56 Arlington Street, Brockton, Mass.
Howe, Edward L.
Princeton, N. J.
Howe, Frank E.
Troy, N. Y.
Howe, James B.
22 West Highland Drive, Seattle, Wash.
Howell, Mrs. John White
211 Ballantine Parkway, Newark, N. J.
Howell, Usher B.
Riverhead, N. Y.
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LIST OF

MEMBERS

29

Howell, Wilson S.
Pleasantvilte Station, Westchester County, N. Y.
Howison, George H.
2631 Piedmont Avenue, Berkeley, Calif.
Hoyt, Allen G.
49 Wall Street
Hoyt, Arthur S.
90 West Broadway
Hoyt, F. C.
66 Third Avenue
Hoyt, Henry M.
Goldfield, Nevada
Hoyt, Theodore R.
72 Gold Street
Hubbard, Walter C.
Coffee Exchange Building
Hubbard, W. P.
901 Schmulbach Building, Wheeling, West Va.
Hudson, Sydney D. M.
Bryn Mawr, Pa.
Hulet, J. R.
Holbrook, Ariz.
Hull, George H.
Tuxedo Park, N. Y.
Humphreys, Alex C.
Stevens Institute of Technology, Hoboken, N. J.
Hunley, W. M.
University of Virginia, Charlottesville, Va.
Hunt, Mrs. Leigh
563 Park Avenue
* Huntington, Archer M
1083 Fifth Avenue
Huntington, Francis C.
54 William Street
Huntsman, Owen B.
165 Broadway
Hutchinson, Edward S.
34 South State Street, Newtown, Pa.
Huyler, Coulter D.
260 West 76th Street
* Hyams, Godfrey M.
P. O. Box 5104, Boston, Mass.
210 East 18th Street
Hyde, Henry St. John
Hyde, Justus C.
1488 East 14th Street, Brooklyn, N. Y.
Hyde, Wesley W.
325 East Fulton Street, Grand Rapids, Mich.
49 West 56th Street
Hyman, Miss Louise
519 West 149th Street
Hyslop, James H.
SS Wall Street
Ichinomiya, R.
Park Avenue Hotel
*Iles, George
301 West 75th Street
Imbrie, James
195 Broadway
Imhoff, C. H.
New Brighton, N. Y.
Ingalls, C. H.
Algona, la.
Ingham, William H.
80 Irving Place
Ingraham, Arthur
44 Court Street, Brooklyn, N. Y.
Ingraham, George S.
San Diego, Calif.
Irwin, 1.1.
711 Fifth Avenue
Iselin, Adrian, jr.
745 Fifth Avenue
Iselin, Mrs. W. E.
1328 South Pennsylvania Square, Philadelphia, Pa.
Isman, Felix
27 William Street
Ivins, William M.
824 Kansas Avenue, Topeka, Kansas
Jackson, Fred S.
43 Cedar Street
Jackson, Percy
21S Montague Street, Brooklyn, N. Y.
Jacobs, Ralph K.
92 Park Avenue
James, Mrs. Arthur Curtiss
17 West 54th Street
James, Walter B.
17 West 54th Street
James, Mrs. Walter B.
4 Post Office Square, Boston, Mass.
Jaquith, Harry J.
66 Broadway
Jarvie, James N.
* Life Member.
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3o

YEAR BOOK OF THE

ACADEMY

[VOL.

IV

Jay, Delancey K.
26 Liberty Street
Jefferson, Howard McN.
80 Downing Street, Brooklyn, N. Y.
Jeidels, Otto
Nehrenstr. 32, Berlin, Germany
Jenkins, Mrs. Helen Hartley
232 Madison Avenue
Jenks, Jeremiah W.
13 Astor Place
Jennings, Frederick B.
86 Park Avenue
Jenswold, John, jr.
407 Palladio Building, Duluth, Minn,
Jess, Stoddard
2133 Harvard Building, Los Angeles, Calif.
Jewett, George L.
20 Fifth Avenue
Johnes, William F.
2428 Lorillard Place
Johnson, Bradish G.
829 Park Avenue
Johnson, Charles P.
Navarre Building, St. Louis, Mo.
Johnson, Mrs. Eastman
65 West 55th Street
Johnson, Frederick
42nd Street Building
Johnson, F. Coit
n o Worth Street
Johnson, Grafton
Greenwood, Indiana
Johnson, J. Augustus
460 Scotland Road, South Orange, N. J.
Johnson, Rankin
37 Madison Avenue
Johnson, Remsen
187 Broadway
Johnston, Allen W.
500 State Street, Schenectady, N. Y.
Jonas, Stephen
60 Wall Street
Jones, Breckinridge Care of Mississippi Valley Trust Co., St. Louis, Mo.
Jones, James H.
Box 69, R. F. D. No. 1, Lakeland, Fla.
Joy, Edmund Steele
26 Halsey Street, Newark, N. J.
Joy, Russell T.
155 Montague Street, Brooklyn, N. Y.
Judson, Harry Pratt
The University of Chicago, Chicago, 111.
Judson, Henry I.
96 Broadway
Juillard, A. D.
70 Worth Street
Kagey, C. L.
Beloit, Kansas
* Kahn, Otto H.
52 William Street
Kakiuchi, T.
55 Wall Street
Kalaw, Teodore
Paco, Manila, P. I.
Kaul, John L.
Birmingham, Ala.
Kayser, Julius
45 East 17th Street
Kebabian, George S.
60 Wall Street
Keedy, Edwin R.
31 West Lake Street, Chicago, 111.
Keenan, Thomas J.
Binghamton, N. Y.
Keep, Charles H.
60 Broadway
Kehew, Mrs. Mary Morton
29a Chestnut Street, Boston, Mass.
Kelley, David J.
1925 Seventh Avenue
Kelley, James E.
34 Montrose Street, Somerville, Mass.
Kellogg, Joseph A.
Glens Falls. N. Y.
Kellor, Miss Frances A.
118 East 54th Street
Kemmerer, E. W.
Princeton University, Princeton, N. J.
Kemmerer, Roy C.
922 Eastern Parkway, Brooklyn, N. Y.
Kempner, Otto
44 Court Street, Brooklyn, N. Y.
Kennedy, J. A. C.
620 South 38th Street, Omaha, Neb.
•Life Member.
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LIST OF MEMBERS

31

Kenney, James W.
234 Seaver Street, 'Roxbury, Boston, Mass.
Kent, Fred I.
7 Wall Street
Kenyon, Albert J.
165 Broadway
Kenyon, Robert N.
49 Wall Street
Keppelman, John Arthur
540 Court Street, Reading, Pa.
Kerr, David S.
46 Arlington Avenue, Westmount, Montreal, Canada
Kerr, Walter
52 Wall Street
Kidder, Edward H.
17 Battery Place
Kienule, J. P.
256 East n t h Street, Erie, Pa.
Kilner, Samuel E.
115 Broadway
Kilroe, Edwin P.
5 Beekman Street
Kimball, Charles E.
52 William Street
Kimball, Everett
Smith College, Northampton, Mass.
King, Miss Elizabeth G
48 College Street, Providence, R. I.
King, Landreth H.
Grand Central Station
Kingsbury, 'Herbert D.
200 Fifth Avenue
Kingsley, Darwin P.
346 Broadway
Kingsley, W. M.
45 Wall Street
Kinsey, Oliver P.
Valparaiso, Ind.
Kiplinger, John H.
Rushville, Ind.
Kirchberger, M.
380 Second Avenue
Kirchwey, George W.
Columbia University
Klar, A. Julian
130 Montague Street, Brooklyn, N. Y.
Knapp, Joseph P.
19th Street & Fourth Avenue
Knapp, Mrs. Harry K.
34 East 3 5 * Street
Knapp, Martin A.
Interstate Commeroe Commission, Washington, D. C.
Knauth, Antonio
39 West 76th Street
Knauth, Mrs. Percival
302 West 76th Street
Kneeland, George J.
784 East 179th Street
Kneeland, Yale
117 East 60th Street
Knevels, Miss M. E.
48 Wheeler Street, West Orange, N. J.
Knox, Arthur
198 Broadway
Knox, Herbert Allen
198 Broadway
Kohlmann, Hugo
30 Broad Street
Korff, S. A.
University of Finland, Helsingfors, Finland
Korsmeyer, Frederick A.
Glen Cove, L. I.
Kountze, W. de Lancey
51 East 51st Street
Kramer, A. Ludlow
Roslyn, L. I.
Krech, Mrs. Alvin
26 West 58th Street
Kudlich, H. C.
233 Broadway
Kuhn, Arthur K.
308 West 92d Street
Kume, M.
450 Fourth Avenue
302 Broadway
Kursheedt, Manuel A.
321 Chestnut Street, Philadelphia, Pa.
Kurtz, William B.
Bernardsville, N. J.
Kuser, Anthony R.
82 Beaver Street
LaBoyteaux, G. B., jr.
Lacy, Graham G.
The Tootlfr'Lemon National Bank, St. Joseph, Mo.
LaFollette, Robert M.
United States Senate, Washington, D. C.
LaFollette, W. T.
Siloam Springs, Ark.
(363)

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32

YEAR BOOK OF THE

ACADEMY

[VOL.

IV

Laffey, J. P.
1114 Rodney Street, Wilmington, Del.
Lafrentz, F. W.
100 Broadway
Lake, Emma S.
300 West 93d Street
Lamar, Lucius Q. C.
P. O. Box 1729, Havana, Cuba
Lamb, Anthony
Syracuse, N. Y.
Lambert, Adrian V. S.
168 East 71st Street
* Lamont, Thomas W.
23 Wall Street
Landy, George
281 East Broadway
Langeloth, Jacob
P. O. Box 957, Riverside, Conn.
Lapham, Mrs. J. J.
46 East 67th Street
Largey, M. S.
State Savings Bank, Butte, Mont
Larremore, Wilbur
32 Nassau Street
Lathrop, Alanson P.
40 Wall Street
Lathrop, Gardiner
1011 Railway Exchange, Chicago, 111.
Lauer, Edgar J.
624 Madison Avenue
Lauterbach, Edward
22 William Street
Lauterbach, Mrs.
761 Fifth Avenue
Lawler, Thomas B.
70 Fifth Avenue
Lawrence, William W.
9 East 89th Street
Lawson, John Davison
University of Missouri, Columbia, Mo.
Lawson, Victor F.
15 Fifth Avenue N., Chicago, 111.
Leach, A. B.
149 Broadway
239 Washington Street, Jersey City, N. J.
Leake, Eugene W.
1053 Fifth Avenue
Leary, Mrs. George
173 West 87th Street
Leary, William V.
LeBosky, Jacob C.
Room 820, 127 North Dearborn Street, Chicago, 111.
Leckie, A. E. L.
Southern Building, Washington, D. C.
Lee, E. A.
Oakland Road, South Orange, N. J.
59 Pearl Street
Lee, H. M.
11 East 65th Street
* Leeds, Mrs. Warner Mifflin
52 William Street
Leffingwell, R. C.
59 Wall Street
LeGendre, William
Port au Prince, Haiti
Leger, J. N.
63 Board of Trade Building, Chicago, 111.
Legg, Chester Arthur
16 William Street
Lehman, Arthur
County Court House
Lehman, Irving
40 Exchange Place
Leland, Arthur S.
New York County National Bank
Leland, Francis L.
101 Milk Street, Boston, Mass.
Leland, Lester
Collinsville, 111.
Lemaghi, Louis F.
670 Broadway
Lesher, Arthur L.
149 Broadway
Lesinsky, Albert R.
53 Devonshire Street, Boston, Mass.
Leverett, George V.
105 West 40th Street
Levi, Julian Clarence
Cotton Exchange Building
Levy, Charles E.
268 West 94th Street
Levy, Felix H.
51 Chambers Street
Lewis, Burdette G.
•Life Member.
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LIST OF

MEMBERS

33

Lewis, Charles S.
217 Fletcher-American National Bank Building, Indianapolis, Ind.
Lewisohm, Adolph
61 Broadway
Lewisohm, Sam A.
61 Broadway
Lichtenstein, Alfred
171 West 71st Street
Liddle, Joseph G.
33 Clinton Place, Hackensack, N. J.
Liebeskind, Solon J.
Liberty Tower
Liebman, David
40 East 72nd Street
Light, John H.
South Norwalk, Conn.
Lightner, Clarence A.
001 Penobscot Building, Detroit, Mich.
Limburg, H. R.
160 Broadway
Lincoln, Jonathan T.
Fall River, Mass.
Lincoln, Lowell
345 Broadway
Lindsay, C. Seton
Room 407, 346 Broadway
Lindsay, John D.
34 West nth Street
Lindsay, L. Seton
346 Broadway
* Lindsay, Samuel McCune
Columbia University
Lines, George
Pabst Building, Milwaukee, Wis.
Lingley, Richard T.
527 Fifth Avenue
Linton, Charles C.
40 East 41st Street
Lipe, Walter ri.
Canajoharie, N. Y.
Lipman, F. L. Care of Wells Fargo Nevada Natl. Bank, San Francisco.Calif.
Lippitt, Costello
Norwich, Conn.
Lisman, F. J.
30 Broad Street
Littauer, Lucius N.
715 Broadway
Littleton, Jesse M.
Chattanooga, Tenn.
Littleton, Martin W.
2 Rector Street
Livermore, Arthur L.
30 Broad Street
Livingston, Robert E.
1 Madison Avenue
Lockwood, Stephen O
17 East 57th Street
Loeb, C. M.
52 Broadway
Loeb, Isidor
University of Missouri, Columbia, Mo.
Loeb, Jacob M.
29 South LaSalle Street, Chicago, 111.
Loeb, James
52 William Street
Loeb, Otto S.
35 Wall Street
Loesch, Frank J.
Room 1540,10 South Lasalle Street, Chicago, 111.
Loeser, Vincent
320 West 108th Street
Loewenthal, Max
414 Wilcox Block, Los Angeles, Calif.
Loewy, Benno
208 Broadway
Lombardi, C.
"The News," Dallas, Texas
Loomis, Guy
817 Carroll Street, Brooklyn, N. Y.
Lord, Chester S.
57 South Portland Avenue, Brooklyn, N. Y.
Lough. W. H.
13 Astor Place
Lovejoy, Owen R.
105 East 22nd Street
Lovett, Robert Scott
Locust Valley, L. I.
Low, Seth
30 East 64th Street
Low, William Gilman, jr.
Bristol, R. I.
•Life Member.
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34

YEAR BOOK OF THE

ACADEMY

[VOL.

IV

Lowden, Frank 0 .
Oregon, 111.
Luce, H. J.
4 East 52nd Street
Luce, W. A.
Elmhurst Inn, Sewickley, Pa.
Ludington, Arthur C.
56 West 10th Street
Ludlum, Charence A.
57 Highland Avenue, Jamaica, L. I.
Lumtnis, Miss Eliza O'B.
324 West 103rd Street
Lundien, E. M.
Dayton, Iowa
Lustgarten, W.
68 William Street
Ly, Juwan Usang
8 Kow Dow Lane, Canton, China
Lyall, William L.
349 Aycrigg Avenue, Passaic, N. J.
Lybyer, Albert Howe
153 South Cedar Avenue, Oberlin, Ohio
Lydig, Philip M.
38 East 52nd Street
Lyons, Samuel Gay
Louisville, Ky.
Maas, Charles O.
87 Nassau Street
Mabon, James B.
59 West 70th Street
MacArthur, Arthur F.
11 Pine Street
MacDonald, Charles B.
71 Broadway
MacDonald, George
315 West 90th Street
MacDuffie, Rufus L.
Bronxville, N. Y.
Macfarland, Charles S.
215 Fourth Avenue
Machen, Arthur W., jr.
Central Savings Bank Building, Baltimore, Md.
Mackay, Clarence H.
253 Broadway
MacKelvie, N. Bruce
25 Broad Street
Maclay, Mark W., jr.
830 Park Avenue
MacLean, Charles F.
5th Avenue and 130th Street
MacLean, James A.
University of Manitoba, Winnipeg, Canada
Macleod, William A.
Westwood, Mass.
MacVeagh, Franklin
194 North Wabash Avenue, Chicago, 111.
Macy, Carleton
Hewlett, L. I.
Macy, Miss Carroll
Birch Corners, Hewlett, L. I.
* Macy, V. Everit
68 Broad Street
Madeira, Mrs. Percy C, jr.
Jenkintown, Pa.
Mahoney, Stephen A.
630 Dwight Street, Holyoke, Mass.
Main, William A.
214 Broadway
Mairs, Mrs. E. H.
Irvington-on-Hudson, N. Y.
Malkenson, Arthur L.
102 Bowery
Mandlebaum, Miss M.
205 West 57th Street
Manning, William T.
27 West 25th Street
Manning, W. W.
70 State Street, Boston, Mass.
Mansfield, Howard
49 Wall Street
Marden, Francis Skiddy
449 Park Avenue
Markle, John
Jeddo, Pa.
Markle, Mrs. John
723 Fifth Avenue
Marks, Laurence H.
Lawrence, L. I.
Marks, Marcus M.
687 Broadway
Marling, Alfred E.
35 West 47th Street
Marrone, Joseph M.
Utica, N. Y.
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LIST OF

Marsh, Robert McC.
* Marshall, Louis
Marshall, W. H.
Marston, Edgar L.
Marston, Edwin S.
Martin, Bradley, jr.
Martin, John
Martin, Newell
Martin, R. W.
Martindale, J. B.
Marvel, Josiah
Marx, Otto
Masters, Miss L. B.
Mather, Samuel
Mathews, Charles T.
Mathews, George Brewster
Mathewson, Charles F.
Matienzo, Jose Nicolas
Matthews, Albert
Matthews, C. B.
Matthews, T. A.
Maurice, William G.
Maxwell, Robert
Mayer, Julius M.
Mayer, Levy
Mayhoff, Mrs. Carl von
McAdoo, W. G.
McAllister, Henry, jr.
McAneny, George
McBain, Howard Lee
McCall, John C.
McCamic, Charles
McCarty, Barclay E.
McCausland, George C.
McCleary, James T.
McClement, J. H.
McCormick, Mrs. Harold F.
McCready, N. L.
McCrum, Lloyd G.
McDavitt, Clarence G.
McDonough, Charles A.
McElderry, H. L.
McEnerney. Garrett W.
McGarrah, G. W.
McGinley, J. R.
McGrath, Miss Madge
McGraw, James H.

MEMBERS

35

45 West n t h Street
47 East 72d Street
135 Central Park West
24 Broad Street
16 William Street
6 East 87th Street
Grymes Hill, Stapleton, S. I.
20 Exchange Place
25 Nassau Street
270 Broadway
Wilmington, Del.
Birmingham, Ala.
Dobbs Ferry, N. Y.
Western Reserve Building, Cleveland, O.
30 West 57th Street
830 Delaware Avenue, Buffalo, N. Y.
55 Wall Street
3770 Calle Santa Fe, Buenos Aires, R. A.
Hotel Oxford, Boston, Mass.
Union Trust Building, Cincinnati, O.
165 Broadway
Hot Springs, Ark.
334 Fourth Avenue
Post Office Building
Blackstone Hotel, Chicago, 111.
59 East 34th Street
30 Church Street
1880 Gaylord Street, Denver, Colo.
19 East 47th Street
Columbia University
346 Broadway
Wheeling, West Va.
3 South William Street
Maplewood Farm, Woodstock, Vt.
30 Church Street
135 Broadway
1000 Lake Shore Drive, Chicago, 111.
38 Wall Street
103 Park Avenue
50 Oliver Street, Boston, Mass.
18 Tremont Street, Boston, Mass.
Talladega, Ala.
1277 Flood Building, San Francisco, Calif.
50 Wall Street
5000 Forbes Street, Pittsburgh, Pa.
2134 Napoleon Avenue, New Orleans, La.
239 West 39th Street

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36

YEAR BOOK OF THE

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[VOL.

IV

176 West 105th Street
McGuckin, William G.
Mcllvaine, Tompkins
52 William Street
Mclntyre, John F.
30 Broad Street
Mclntyre, William H.
970 Park Avenue
McKenna, Thomas P.
41 Wall Street
McKeon, John C.
Hempstead, N. Y.
McLaren, Kenneth K.
37 Wall Street
McLean, A. W.
Lumberton, N. C
McMahon, J. Sprigg
Dayton, O.
McMillin, Emerson
40 Wall Street
McNeir, George
S7S Fifth Avenue
McNulty, William D.
141 Broadway
McPherson, Logan G. Bureau of Railway Economics, Washington, D. C
McQueen, W.
Ludowici, Ga.
McReynolds, J. C.
Department of Justice, Washington, D. C.
McRoberts, Samuel
SS Wall Street
Mead, Joseph H.
The County Trust Co., White Plains, N. Y.
Meagley, George C.
The Sherman, Washington, D. C.
Mehan, William A.
Balston Spa, N. Y.
Meldrim, Peter W.
Savannah, Ga.
Melville, Frank, jr.
28 Monroe Place, Brooklyn, N. Y.
Melvin, E. C.
Selma National Bank, Selma, Ala.
Mereness, Newton D.
569 West 173rd Street
Mercer, Hugh Victor
2617 Lake of Isles, Minneapolis, Minn.
Merkel, William F. C.
842 Broadway
Mershon, Ralph D.
65
West
54th Street
Metcalf, E. P.
Atlantic National Bank, Providence, 'R. I.
Metcalfe, J. G.
273 South Street, Morristown, N. J.
Metz, Herman A.
122 Hudson Street
Meyer, Mrs. Aubrey Edgerton
The
Castle,
Whitehall, N. Y.
Meyer, Ernst C.
Room 224, Custom House
Meyer, Eugene, jr.
7 Wall Street
Meyer, Hermann H. B.
Library of Congress, Washington, D. C
Milburn, John G.
16 West ioth Street
Miller, Charles R.
Times Building
Miller, E. C.
US Bank Street
Miller, George N.
811 Madison Avenue
Miller, Henry F.
44 Pine Street
Miller, Samuel H.
121 East Union Avenue, Bound Brook, N. J.
Miller, W. B.
Chattanooga, Tenn.
Mills, Ogden L.
IS Broad Street
Mills, W. McMaster
7S3 Fifth Avenue
Mitchell, Edward Page
"The Sun" Office
* Mitchell, Wesley C.
Mix, M. W.
Columbia University
Moebius, Charles
Mishawaka, Ind.
Mohrenstecher, G. A.
95 Madison Avenue
Long Beach, Calif.
•Life Member.
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37

Monroe, Robert Grier
26 Liberty Street
Montgomery, Robert H.
SS Liberty Street
Moonan, John
Waseca, Minn.
Moore, John Bassett,
Columbia University
Moore, John W.
The Citadel, Charleston, S. C.
Moot, Adelbert
45 Erie County Savings Bank, Buffalo, N. Y.
Morawetz, Victor A.
44 Wall Street
Mordecai, T. Moultrie
Broad & State Streets, Charleston, S. C.
More, C. E.
318 Home Insurance Building, Chicago, 111.
Morgan, Miss Anne
219 Madison Avenue
Morgan, George Wilson
32 Liberty Street
Morgan, William Fellowes
Arch 5, Brooklyn Bridge
* Morgenthau, Henry
30 East 42d Street
87 Nassau Street
Morgenthau, J. C.
115 East 73d Street
•Morris, Newbold
Morris, William R. 1020 Metropolitan Life Building, Minneapolis, Minn.
Morrison, George Austin
27 Beaver Street
Morrow, Dwight W.
62 Cedar Street
Morse, Anson D.
Amherst College, Amherst, Mass.
Morse, A. E.
223 Fourth Street, Marietta, O.
Morse, Edmund H.
117 West 58th Street
Mosby, Thomas Speed
Jefferson City, Mo.
Mott, Howard S.
16 Wall Street
Moulton, Irving F.
2199 Devisadero Street, San Francisco, Calif.
Munn, John P.
18 West 58th Street
Englewood, N. J.
Munroe, Vernon
224 McWhorter Street, Newark, N. J.
Murphy, Franklin
R. F. D. No. I, Tacoma, Wash.
Murray, Charles A.
Muschenheitn, Mrs. Frederick A.
218 West 45th Street
Columbia University
Mussey, Henry Raymond
135 Central Park West
Myers, Nathaniel
44 West 77th Street
Myers, Theodore W...
20 Market Street, Amsterdam, N. Y.
Myers, W. Fenton
Federal Building, St. Louis, Mo.
Nagel, Charles
815 Central National Bank Building, St. Louis, Mo.
Nardin, William T.
Montgomery, Ala.
Neal, Emmett O.
Trenton, Tenn.
Neil, M. M.
59 Wall Street
Neilson, Jason A.
160 Fifth Avenue
Nevius, David
National Exchange Bank, Baltimore, Md.
Newcomer, Waldo
371 North Broad Street, Norwich, N. Y.
Newton, Howard D.
1 East 39th Street
Nichols, Morton C.
32 Nassau Street
Nicholson, John
346 Broadway
Nicholson, J. Lee
23 East 39th Street
Nicoll, DeLancey
501 West 120th Street
Noble, Alfred
First National Bank, Reading, Pa.
Nolan, Edward C.
* Life Member.
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38

YEAR BOOK OF THE ACADEMY

[VOL. IV

Northrop, Charles P.
Norton, Charles D.
Nottingham, William
Noyes, Henry T.
Nunemacher, F. C
Oakman, Walter G.
Obermayer, C. J.
O'Brien, Thomas J.
Ochs, Adolph
Odom, P. H.
Oeland, Isaac R.
Ogden, Rollo
O'Gorman, Richard
Ogg, Frederic A.
Olin, Stephen H.
Olney, Peter B.
Olney, Richard
Olsen, Harry

49 St. Nicholas Place
36 East 36th Street
701 Walnut Avenue, Syracuse, N. Y.
Rochester, N. Y.
30 Church Street
62 Cedar Street
502 Eighth Avenue, Brooklyn, N. Y.
Grand Rapids, Mich.
New York Times
Jacksonville, Fla.
189 Montague Street, Brooklyn, N. Y.
ao Vesey Street
51 Chambers Street
401 Broadway, Cambridge, Mass.
32 Nassau Street
68 William Street
710 Sears Building, Boston, Mass.
917 City Hall, Chicago, 111.
Onozuka, K. 36 Kobinata-Daimachi-Nichome, Koishi Kawa, Tokyo, Japan
Opdyke, William S.
20 Nassau Street
Oppenheim, Edward L.
104 East 65th Street
Oppenheim, J. D.
29 West 86th Street
Oppenheimer, Henry S.
11 East 43d Street
Ordway, Samuel H.
27 William Street
Ortiz, Fernando
Aguiav 68, Havana, Cuba
Orton, Philo A.
Darlington, Wis.
Osborn, Mrs. Henry Fairfield
850 Madison Avenue
71 Broadway
Osborn, William Church
526 West 150th Street
Osgood, Herbert L.
1876 Broadway
Otto, Henry S.
11 Broadway
Outerbridge, E. H.
Citizens Trust Building, Savannah, Ga.
Owens, George W.
289 Clinton Avenue, Brooklyn, N. Y.
Owens, W. W.
County Court House
Page, Alfred 'R.
Oakland, N. J.
Page, Edward D.
32 South Broad Street, Philadelphia, Pa.
Page, Howard W.
66 Liberty Street
Page, William H.
718 Land Title Building, Philadelphia, Pa.
Paine, George H.
62 Cedar Street
Palmer, A. Wheeler,
334 Canal Street
Palmer, Henry B.
50 East 63rd Street
Palmieri, F. L.
71 Broadway
Pam, Max
52 Wall Street
Parish, Edward C.
52 Wall Street
Parish, Henry
Waco, Texas
Park, M. C. H.
Esopus, N. Y.
Parker, Alton B.
330 West 85th Street
Parker, Ashton
81 Fulton Street
Parker, 'Robert A.
52 William Street
Parsons, Herbert
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39

Parsons, John E.
52 William Street
Parsons, W. L.
Rockingham, N. C.
Partridge, Frank <H.
140 West 69th Street
Paskus, Benjamin G.
128 Broadway
Patteson, Robert A.
Tarrytown, N. Y.
Patterson, John L.
Roanoke Rapids, N. C.
Patterson, W. J.
60 Broadway
Paul, Amasa C.
504 Ridgewood Avenue, Minneapolis, Minn.
Payne, James M.
1210 Virginia Street, Charleston, West Va.
Pearson, F. S.
115 Broadway
Peaslee, Edward H.
17 Washington Square North
Peckitt, Leonard
Catasauqua, Pa.
Peek, Burton F.
Moline, 111.
Peierls, Siegfried
260 Fourth Avenue
Penman, John Simpson
" Holywell," Katonah, N. Y.
Penrose, Stephen B. L.
41 College Avenue, Walla Walla, Wash.
Perkins, George E.
10 East 41st Street
Perkins, George W.
71 Broadway
Perkins, Thomas N.
Westwood, Mass.
Perrin, John
480 South Orange Grove Avenue, Pasadena, Calif.
Perry, E. R.
Pocantico Hills, N. Y.
Perry, Mrs. William A.
7 East 56th Street
Peters, William R.
SS John Street
Peterson, J.
50 Union Square North
Pettitt, Franklin
2 Wall Street
Phelps, Ansel
29 Wall Street
Phelps, Mrs. Marion von R.
70 West 49th Street
Philips, Frederic D.
15 William Street
Phillips, Louis S.
49 Broadway
Phoenix, Lloyd
21 East 33rd Street
Pickett, William P.
215 Montague Street, Brooklyn, N. Y.
Pickhardt, Carl
1042 Madison Avenue
Pierce, Winslow S.
115 Broadway
Pierson, Lewis E.
Irving Exchange National Bank
Pilat, Oliver I.
562 West 183rd Street
60 Broadway
* Pinchot, Amos R. E.
Bloomington, 111.
Pingrey, Darius H.
103 Franklin Street
Pinkus, Frederick S.
Dongan Hills, S. I.
Pinney, Miss Elizabeth
Grand Central Station
Place, Ira A.
20s West 57th Street
Piatt, Edward T.
242 West 74th Street
Piatt, Mrs. Frank H.
120 William Street
Plaut, Albert
120 William Street
Plaut, Joseph
70 Fifth Avenue
* Plimpton, George A.
3700 Grand Avenue, Des Moines, la.
Polk, H. H.
7 East 36th Street
Polk, William M.
* Life Member.

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YEAR BOOK OF THE ACADEMY

[VOL. IV

Pollak, Francis D.
49 Wall Street
Pollock, J. S.
606 West ad Street, Little Rock, Ark.
Pom pan, Maurice A.
203 Broadway
Pond, Oscar L.
1109-12 Law Building, Indianapolis, Ind.
Pool, Solomon C.
313 West 57th Street
Poor, Ruel W.
200 Fifth Avenue
Porras, Belisario
Panama, Panama
Porter, William H.
23 Wall Street
Post, Abram S.
81 Fulton Street
Post, James H.
129 Front Street
Potter, Mrs. Blanche
180 West 59th Street
Potter, Frederick
71 Broadway
Potter, Mrs. Gilbert
239 East 60th Street
Potter, William P.
Room 458, City Hall, Philadelphia, Pa.
Pound, Roscoe
Harvard Law School, Cambridge, Mass.
Powell, Mrs. Alma Webster
915 President Street, Brooklyn, N. Y.
Powell, Lyman P.
Hobart College, Geneva, N. Y.
Powell, Omar
206 Broadway
Powell, R. J.
634 Security Bank, Minneapolis, Minn.
* Powell, Thomas 'Reed
Columbia University
Powell, William H.
1170 Broadway
Pratt, Mrs. Herbert
213 Clinton Avenue, Clinton, N. Y.
Pratt, Mrs. John T.
11 East 61 st Street
Prendergast, E. A.
Northwestern Telephone Exchange Co., Minneapolis, Minn.
Prentice, Ezra P.
32 Nassau Street
Prescott, Arthur T.
739 North Street, Baton Rouge, La.
Preston, Harold
605 Lowman Building, Seattle, Wash.
Price, Albert S.
310 Lake View Avenue, Jamestown, N. Y.
Price, Theodore H.
24 South William Street
Prim, C. A.
Banifay, Holmes County, Fla.
Prince, John D.
Sterlington, Rockland County, N. Y.
Prince, Theodore
20 Broad Street
Proctor, Mrs. Charles E.
Great Neck, L. I.
Prosser, Seward
389 Fifth Avenue
Prout, Henry G.
30 Church Street
Pruyn, Robert C.
60 State Street, Albany, N. Y.
Pryer, Charles
P. O. Box 647, New Rochelle, N. Y.
Puffer, W. M.
Kalamazoo, Mich.
Puig, Miss Louise M.
40a Hampton Place, Brooklyn, N. Y.
Pulitzer, Ralph
17 East 73d Street
Purdy, W. E.
83 Cedar Street
Quackenbush, James L.
362 Riverside Drive
* Quesada, Ernesto
Libertad 946, Buenos Aires, A. R.
Quimby, Charles E.
278 West 86th Street
Quinn, John
31 Nassau Street
Quinn, Thomas J.
2345 Valentive Avenue
•Life Member.
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Radcliffe, Samuel J.
Larimore, North Dakota
Ransom, Rastus S.
338 West 77th Street
Ransom, William L.
550 Riverside Drive
Raper, C. L.
Chapel Hill, N. C.
Rappard, William £.
Valavran, Switzerland
Rascovar, James
26 Beaver Street
Ratcliff, J. B.
Cunningham, Kansas
Raven, A. A.
864 President Street, Brooklyn, N. Y.
Ravenel, Gaillard F.
20 Exchange Place
Raymond, Daniel V.
100 Broadway
28 Nassau Street
Read, William A.
145 South Oxford Street, Brooklyn, N. Y.
Redding, Miss Helen E.
576 Fifth Avenue
Reed, Alfred Z.
120 Riverside Drive
Reed, Frederic H.
Reese, Richard
Equitable Guarantee & Trust Co., Wilmington, Del.
55 Liberty Street
Reeves, Herbert
Roswell, New Mexico
Reid, William C.
11 Broadway
Reisinger, Hugo
37 Wall Street
Remick, William H.
Riverdale-on-Hudson, N. Y.
Revell, Fleming H.
72 West Adams Street, Chicago, III.
Reynolds, George M.
66 Beaver Street
Rhoades, John Harsen
1206 Citizens Building, Cleveland, O.
Rhodes, R. R.
5 Nassau Street
Rice, Isaac L.
6 Hanover Street
Rice, Louis J.
15 West 67th Street
Rice, William M. J.
18 Fairview Heights, Rochester, N. Y.
Rich, Burdett A.
320 Fifth Avenue
Rich, Charles A.
Cooper Union
Richards, C. iR.
Huron, South Dakota
Richards, R. O.
Mendota Block, Madison, Wis.
Richmond, T. C.
182 William Street
Ridder, Herman
19 Cedar Street
•Riker, John J.
745 Calvert Building, Baltimore, Md.
Ritchie, Albert C.
32 Nassau Street
Rives, George L.
35 East 64th Street
Robb, Mrs. N. Thayer
415 Broome Street
Robinson, George B.
26 Exchange Place
Robinson, George Henry
541 West 124th Street
Robinson, Mrs. Gilbert
567 West 113th Street
Robinson, James H.
45 William Street
Robinson, Nelson L.
26 Broadway
Rockefeller, P. A.
Rogers, F. Theo
Care of " The Philippines Free Press," Manila, P. I.
27 Cedar Street
Rogers, John S.
1017 Sixteenth Street, Washington, D. C.
Rojas, P. Ezequiel
101 East 57th Street
Roome, William J.
231 West 39th Street
Root, Charles T.
* Life Member.
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YEAR BOOK OF THE

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[VOL.

IV

Root, Elihu
Washington, D. C.
Rosen, Felix
25 Broad Street
Rosenbaum, M.
603 South 3rd Street, Philadelphia, Pa.
Rosenblatt, Leo G.
150 West 70th Street
Rosen feld, Edward L.
35 South William Street
Rosenfeld, 'Henry L.
165 Broadway
Rosenwald, Julius
Care of Sears, Roebuck & Co., Chicago, 111.
Ross, Edward A.
University, Madison, Wis.
Ross, f. San ford
277 Washington Street, Jersey City, N. J.
Rossbach, Jacob
55 Frankfort Street
Rossiter, Van Wyck
Nyack-on-Hudson, N. Y.
Rothbarth, H.
30 Quex Road, West Hampstead, London, N. W., Eng.
Rounds, Arthur C.
96 Broadway
Rowe, Louis Cass
40 East Utica Street, Oswego, N. Y.
Rowe, William V.
133 East 38th Street
Rublee, Mrs. Juliet Barrett
Washington, D. C.
Rudd, Channing
15 Wall Street
Rumsey, Mrs. Charles
Wheatley Hills, Glen Head, L. I.
Ruppert, Jacob, jr.
1639 Third Avenue
iRush, Thomas E.
71 East 90th Street
Rushmore, Charles E.
40 Wall Street
Rushton, Ray
Montgomery, Ala.
Ryle, Arthur
225 Fourth Avenue
Sabin, Charles H.
140 Broadway
Sachs, Bernard
116 West 59th Street
Sachs, Harry
60 Wall Street
Sachs, Julius
Teachers College
Sachs, Ralph L.
28 West 22nd Street
Sachs, Samuel
46 West 70th Street
Sage, Dean
49 Wall Street
Saggu, Mohammad Khairuddin
Bahawalpur, India.
Saklatvala, P. D.
83 Grand Street
Salomon, Alberto
P. O. Box 1197, Lima, Peru
Samson, C. F.
20 Broad Street
Sanders, J. C.
Fourth Street, Fort Madison, la.
Sanguinette, S. S.
542 West 124th Street
Sargent, William D.
90 West Street
Satterlee, Herbert L.
37 East 36th Street
Saul, Charles R.
149 Columbus Avenue
Saunders, Bertram A.
104 Gray Street, Paterson, N. J .
Saunders, Charles G.
95 Milk Street, Boston, Mass.
Saunders, William E. G.
Emmetsburg, la.
Schefer, Carl
40 West 37th Street
Schermerhorn, F. Augustus
25 Liberty Street
Scherr, Harry
Williamson, West Va.
Schiff, Jacob H.
27 Pine Street
Schiff, Mortimer L.
William & Pine Streets
Schley, Grant B.
80 Broadway
Schmid, John F.
16 Wall Street
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Schmidt, Gustave
71 Nassau Street
Schmitt, Arthur J.
1127 Vine Street, Cincinnati, 0 .
Schniewind, H., jr.
18 West 18th Street
Scholefield, E. O. S.
Legislative Library, Victoria, B. C. Canada
Schreiber, George G.
55 Liberty Street
Schubring, E. J. B.
Badger Block, Madison, Wis.
Schurz, Miss Agatha
24 East 91st Street
Schuster, Edward
2a Capuchinas 48, Mexico City, Mexico
Schwarz, Herbert F.
255 West 108th Street
Schwarzenbach, Robert J. F.
470 Fourth Avenue
Scoville, Mrs. Helen M.
2042 Fifth Avenue
Scudder, Edward M.
59 Wall Street
Scudder, Townsend
112 Willow Street, Brooklyn, N. Y.
Scull, Charles O.
Roland Park, Md.
* Seager, Henry R.
Columbia University
Seaman, Alfred P. W.
147 West 87th Street
Seaman, Louis L.
247 Fifth Avenue
Sears, J. H.
35 West 32d Street
Seelig, S.
5025 McPherson Avenue, St. Louis, Mo.
Seevers, George W.
Metropolitan Life Building, Minneapolis, Minn.
Seggerman, Mrs. Victor
422 West 144th Street
Seko, Konosuke
25 Madison Avenue
* Seligman, Edwin R. A.
Columbia University
Seligman, Mrs. Henry
30 West 56th Street
Seligman, Isaac N.
1 William Street
Seligman, Jefferson
1 William Street
Selover, George H.
McKnight Buiding, Minneapolis, Minn.
Sessoms, E. M.
R. F. D. No. 1, Caryvlle, Fla.
Severance, C. A.
32 Merchants National Bank Building, St. Paul, Minn.
Sexton, J. S.
Hazelhurst, Miss.
Sexton, Lawrence E.
34 Pine Street
Shackleton, James H.
Fidelity Trust Co., Newark, N. J.
Shaffner, Henry F.
403 High Street, Winston-Salem, N. C.
Shattuck, Henry L.
60 State Street, Boston, Mass.
*Shaw, Albert
30 Irving Place
Shaw, Charles H.
Lawton, Okla.
Shaw, William N.
165 Broadway
Shearer, James D.
Minneapolis, Minn.
Shearn, Clarence J.
140 Nassau Street
Sheehan, William F.
14 Wall Street
Sheets, E. A.
480 North Broadway, Yonkers, N. Y.
Sheldon, George R.
24 East 38th Street
Shelton, Thomas Wall
Norfolk, Va.
Shepherd, W. R.
468 Riverside Drive
Sherman, Gordon E.
Ogden Place, Morristown, N. J.
Shientag, Bernard L.
165 Broadway
Shipman, Henry R.
Princeton, N. J.
•Life Member.
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YEAR BOOK OF THE

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[VOL.

IV

Shoemaker, Herbert B.
i n Broadway
Shove, Benjamin J.
365 Green Street, Syracuse, N. Y.
Sidenberg, George M.
45 East 49th Street
Silliman, Reuben D.
609 West 158th Street
Simkhovitch, V.
26 Jones Street
Simmons, W. D.
Care of Simmons Hardware Co., S t Louis, Mo.
Simpson, George W.
51 Chambers Street
Simpson, John W.
62 Cedar Street
Sioussat, St. George Leakin
Vanderbilt University, Nashville, Tenn.
Sirrine, William G.
Greenville, S. C.
Slade, C. C.
83 Cedar Street
Slee, J. Noah H.
42 Broadway
Sleicher, Reuben P.
225 Fifth Avenue
Sloan, Benson Bennett
38 Wall Street
Sloane, William M.
163 East 74th Street
Sloper, A. J.
New Britain National Bank, New Britain, Conn.
Smith, C. P.
Burlington Savings Bank, Burlington, Vt.
Smith, Eugene
39 West 68th Street
Smith, Frederick M.
P. 0. Box 255, Independence, Mo.
Smith, Harry T.
58 St. Michael Street, Mobile, Ala.
Smith, Henry E.
1710 Broadway, Nashville, Tenn.
Smith, Howard C.
45 Wall Street
Smith, Munroe
169 East 70th Street
Smith, Nelson
151 West 49th Street
Smith, R. A. C.
100 Broadway
Smith, Sam Ferry
Union Building, San Diego, Calif.
* Smith, S. L.
1013 Woodward Avenue, Detroit, Mich.
Smyth, Herbert C.
15 Wall Street
Smyth, John W.
372 Lexington Avenue
Snite, Frank J.
112 West Adams Street, Chicago, 111.
Snow, Elbridge G.
56 Cedar Street
Snyder, V. P.
155 West 58th Street
Sommer, Frank H.
738 Broad Street, Newark, N. J.
Sommerich, Edwin
626 Broadway
Sondheim, Phineas
49 Wall Street
Soper, Alexander C.
Lakewood, N. J.
Emmetsburg, la.
Soper, Erastus B.
Southworth, Constant
816 First National Bank Building, Cincinnati, 0 .
2640 Woodley Place, Washington, D. C.
Spalding, E. W.
Spearing, J. Zach
Masonic Temple, New Orleans, La.
Spence, Miss Clara B.
30 West 55th Street
Spencer, A. H.
90 West Street
Spencer, Charles W.
114 Fitz Randolph Road, Princeton, N. J.
Ohio State University, Columbus, 0 .
Spencer, Henry R.
40 Pine Street
Speranza, Gino C.
Spiegelberg, F.
36 West 76th Street
Sprague, Frank J.
165 Broadway
•Life Member.
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LIST OF

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45

Stangeland, Charles E.
Department of State. Washington, D. C.
Stanley, Edward O.
176 Broadway
Starr, William J.
Eau Claire, Wis.
Starace, Achille
32 Broadway
Stason, Edwin J.
Sioux City, la.
Staton, Henry
80 Broadway
Stauffen, Ernest, jr.
119 Fifth Avenue
Steele, Charles
23 Wall Street
Steele, G. F.
1358 East 47th Street, Chicago, 111.
Stein, Leo
37 West 90th Street
Steinman, Edward S.
52 William Street
Steinkamp, William H.
34 West 190th Street
Steinman, H. G.
Cullom, 111.
Sterling, Miss Ada
58 West 57th Street
Stern, Edgar B.
5115 St. Charles Avenue, New Orleans, La.
Stern, Leopold
68 Nassau Street
Sternberg, L.
245 West 99th Street
Sterne, L. H.
210 West noth Street
Sterrett, J. E.
54 William Street
Stetson, Francis Lynde
15 Broad Street
Stetson, Will H.
43 Cedar Street
Stettinius, Edward R.
t n Broadway
Steuer, Max D.
55 West 88th Street
Stevens, George W.
71 Broadway
Stevens, Mrs. Joseph S.
Kerby Hill, Jericho, L. I.
Stevens, Richard
1 Newark Street, Hoboken, N. J.
Stevenson, Eugene
530 Park Avenue, Paterson, N. J.
Stewart, Bryce M. Westminster Hall, 1600 Barclay Street, Vancouver, B. C.
Stewart, John A.
50 Church Street
Stewart, Mrs. Percy H
563 West 8th Street, Plainfield, N. J.
Stewart, William R.
31 Nassau Street
Stickney, Charles D.
512 Fifth Avenue
Stiger, William D.
62 William Street
Stiger, William E.
138 West 73d Street
Stillman, Charles
21 West 48th Street
Stimson, Henry L.
32 Liberty Street
Stockton, Philip
17 Court Street, Boston, Mass.
Stoddard, Elliott J.
607 Moffat Block, Detroit, Mich.
Stoddard, Ralph
306 West i02d Street
Stokes, J. G. Phelps
100 William Street
Stone, Alfred H.
Dunleith, Miss.
Stone, Harlan F.
49 Wall Street
Stone, I. F.
100 William Street
Storer, Mrs. A. H.
Ridgefield, Conn.
Story, William
Salt Lake City, Utah
Straight, Mrs. Willard
17 East 70th Street
Strang, S. Bartow
Hamilton National Bank Building, Chattanooga, Tenn.
Straus, Percy S.
34th Street & Broadway
Straus, Simon W.
Straus Building, Chicago, 111.
(377)

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YEAR BOOK OF THE ACADEMY

[VOL. IV

Strauss, Albert
i William Street
Strauss, Charles
317 West 75th Street
Strauss, Frederick
1 William Street
Strauss, Oscar
Crocker Building, Des Moines, la.
Strawn, Silas H.
First National Bank Building, Chicago, 111.
Strong, Benjamin, jr.
7 Wall Street
Stroock, S. M.
30 Broad Street
Strouse, Alex L.
Pereles Building, Milwaukee, Wis.
Stubbs, Francis P., jr.
Central Savings Bank Building, Monroe, La.
Sturgis, F. K.
17 East 51st Street
Styer, David
Bordentown Military Institute, Bordentown, N. J.
Sullivan, J. J.
Central National Bank, Cleveland, O.
Sulzberger, Cyrus L.
516 West End Avenue
Sussman, Otto
52 Broadway
Sutphen, D. D.
76 East 54th Street
Suzzallo, Henry
525 West 120th Street
Swan, Mrs. Joseph R.
1 Lexington Avenue
Swan, 'Robert
25 Broad Street
Swayne, Francis B.
149 Broadway
Swayze, Francis J.
765 High Street, Newark, N. J.
Sweetser, George A.
84 State Street, Boston, Mass.
Swetland, Mrs. Horace M
151 Central Park West
Swift, William H.
1309 Delaware Avenue, Wilmington, Del.
Taber, E. J. L.
Elko, Nevada
Taft, Henry W.
36 West 48th Street
Taft, William H.
New Haven, Conn.
New Canaan, Conn.
Taggart, Rush
41 West 76th Street
Taintor, Charles N.
550 West 173d Street
Takamine, Jokichi
Talbert, Joseph T.
55 Wall Street
Utica, N. Y.
Talcott, Charles A.
14 Liberty Street, Catskill, N. Y.
Tallmadge, Josiah C.
Talmage, Mrs. Edward H.
925 Park Avenue
Taylor, Carl
24 Broad Street
Taylor, Frederick C.
Stamford, Conn.
Taylor, Henry R.
30 Pine Street
Taylor, Samuel M.
2626 Broadway
Taylor, William H.
1815 Whitehall Building, 17 Battery Place
Teele, Arthur W.
30 Broad Street
Tefft, Erastus T.
5 Nassau Street
Tenney, Levi S.
27 William Street
Terhune, N.
32 Nassau Street
Terry, Charles Thaddeus
100 Broadway
Tesla, Nikola
Waldorf-Astoria Hotel
Teter, Lucius
5637 Woodlawn Avenue, Chicago, 111.
Thacher, Thomas
62 Cedar Street
Thaw, A. Blair
135 East 66th Street
Thayer, H. B.
15 Dey Street
Thitchener, W. H.
30 Broad Street
(378)

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47

Thorn, Alfred P.
1300 Pennsylvania Avenue, Washington, D. C.
Thomas, Albert A.
90 Pearl Street, Middleboro, Mass.
Thomas, Allen M.
35 West 54th Street
Thomas, Augustus
New Rochelle, N. Y.
Thomas, John W.
76 William Street
Thomen, Otto J.
33 Pine Street
Thompson, Mrs. Frederick F.
283 Madison Avenue
Thompson, G. W.
Connellsville, Pa.
Thompson, Holland
17 Lexington Avenue
Thompson, William B.
14 Wall Street
Thompson, William G.
1134 Tremont Street, Boston, Mass.
Thome, Edwin
19 Cedar Street
Thorne, Jonathan
19 Cedar Street
Thome, Robert
683 Park Avenue
Thornton, W. D.
42 Broadway
Thurston, Edward Sampson 1212 S. E. Fifth Street, Minneapolis, Minn.
Titus, Frank
901 New York Life Building, Kansas City, Mo.
Tobin, R. M.
Hibernia Bank, San Francisco, Calif.
Todd, Albert M.
Kalamazoo, Mich.
Tomlinson, John C.
35 Wall Street
Tompkins, Leslie J.
32 Waverly Place
Toulmin, H. A., jr.
Schwind Building, Dayton, O.
Towne, Henry R.
121 Madison Avenue
Troescher, A. F.
29 West 73rd Street
Trube, Miss Jessie Maud
Bella Sylva, Hastings-on-Huduson, N. Y.
Truman, Henry H.
56 Highland Avenue, Orange, N. J.
Trumbull, Frank
71 Broadway
Tucker, H. St. George
Lexington, Va.
Tuckerman, Alfred
University Club
Tupper, G. W.
74 Pleasant Street, Brookline, Mass.
Turnbull, Arthur
38 Wall Street
Turner, William L.
84 Cotton Exchange Building
Turnure, George E.
64 Wall Street
Turrell, Edgar A.
76 William Street
Twombly, Mrs. Arthur B.
27 East 55th Street
Tyler, William S.
30 Church Street
Ullman, Joseph
160 Broadway
Urban, George, jr.
Pine Ridge, Buffalo, N. Y.
Usera, Jose Hernandez
Sup. Court of Porto Rico, San Juan, Porto Rico
* Vail, Theodore N.
26 Cortlandt Street
Van Amringe, Guy
31 Nassau Street
Van Beuren, F. T.
65 Fifth Avenue
Van Beuren, Michael M.
7 Wall Street
Van Cortlandt, R. B.
30 Pine Street
Vanden Berg, Y.
32 Nassau Street
Vanderbilt, Alfred G.
Grand Central Terminal
Vanderbilt, Harold S.
Grand Central Terminal
* Life Member.
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YEAR BOOK OF THE ACADEMY

[VOL. IV

Vanderlip, F. A.
55 Wall Street
Van Ingen, Philip
125 East 71st Street
Vannote, Howard B.
13 Vandewater Street
Van Vorst, Mrs. Frederick B,
11 Euclid Avenue, Hackensack, N.J.
Von Yvagenen, Bleecker,
443 Fourth Avenue
Vaughan, Athelstan
185 Newtown Avenue, Long Island City
Ver Planck, William Gordon
149 Broadway
Vezin, Charles
409 Palisade Avenue, Yonkers, N. Y.
Victor, Royall
49 Wall Street
Vierling, Frederick
201 North Fourth Street, St. Louis, Mo.
Villard, Oswald Garrison
20 Vesey Street
Vitale, Ferruccio
527 Fifth Avenue
Vogel, Edwin C.
15 Broad Street
von Mayhoff, Mrs. Carl
59 East 34th Street
Voorhees, John H.
Sioux Falls, S. D.
Wacker, Charles H.
1431 North State Street, Chicago, 111.
Wade, G. K. B.
155 East 72d Street
Wagner, Edward E.
Sioux Falls, S. D.
Wait, William Cushing
194 Forest Street, Medford, Mass.
Walker, Paul E.
Topeka, Kansas
23 West 54th Street
Walker, William Hall
115 Broadway
Walker, Roberts
54 Wall Street
Wallace, James N.
Omaha National Bank, Omaha, Neb.
Wallace, William
418 Richmond Terrace, New Brighton, N. Y.
Walser, Guy O.
The Highlands, Washington, D. C.
Walsh, T. J.
52 Broadway
Walter, W. J.
52 William Street
* Warburg, Felix M.
52 William Street
* Warburg, Paul M.
32 Liberty Street
Ward, George Cabot
208 Fifth Avenue
Ward, Owen
15 Broad Street
Wardwell, Allen
New York Life Building, Minneapolis, Minn.
Ware, John R.
Jamaica, N. Y.
Warnock, William A.
34 Nassau Street
Warren, Charles H.
16 East 47th Street
Warren, Lloyd
267 Fifth Avenue
Washington, William DeHertburn
14 Wall Street
Waterbury, John I.
Hall of Records
Watson, Archibald R.
P. O. 163. Honolulu, Hawaii
Watson, E. M.
105 East 22d Street
Watson, Frank D.
Montpelier, V t
Watson, John H.
165 Broadway
Watson, John J., jr.
Ellendale, N. D.
Webb, George T.
32 Burling Slip
Webb, Silas D.
464 Elm Street, Richmond Hill, N. Y.
Weber, A. F.
P. O. Box 7, Boston, Mass.
Webster, Frank G.
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Weeks, W. Holden
Weil, Edward A.
Weinstein, Edward M.
Weitling, William W.
Weiss, W. F.
Welch, S. C.
Welldon, Samuel A.
Welling, Richard
Welwood, John C.
Wertheim, Maurice
Westcott, Clarence L.
Weyl, Walter E.
Wheat, Alfred A.
Wheeler, Everett P.
Whinery, C. C.
Whipple, Sherman L.
White, Andrew D.
White, Archibald S.
White, Horace
White, John B.
Whitin, E. Stagg
Whitin, Frederick H.
Whitlock, Brand
Whitlock, Victor E.
Whitman, Malcolm D.
Whitney, Fred Brown
Whitney, George
Whitridge, Frederick W.
Whitten, Robert H.
Whittlesey, Walter Lincoln
Wiborg, F. B.
Wickes, Edward A.
Wier, Frederick N.
Wilcox, Ansley
Wilcox, Delos F.
Wild, Frank G.
Wiley, J. S.
Willard, Daniel
Willard, Eugene S.
Willcox, W. F.
Willcox, W. R.
Willets, Elmore A.
Willett, George F.
Willoughby, W. F.
Williams, Arthur
Williams, Clark
Williams, Edward T.
Williams, Frank B.
Williams, George C. F.

MEMBERS

49

789 Madison Avenue
70 Gold Street
Public Bank, Delancey & Ludlow Streets
College Point, N. Y.
170 Broadway
Waynesville, N. C.
2 Wall Street
2 Wall Street
320 Central Park West
Cos Cob, Conn.
100 Broadway
175 Second Avenue
32 Nassau Street
735 Park Avenue
35 West 32d Street
Warren Street, Brookline, Mass.
Ithaca, N. Y.
Fourth & Plum Streets, Cincinnati, O.
18 West 69th Street
1111 Long Building, Kansas City, Mo.
Columbia University
501 West 113th Street
City Hall, Toledo, O.
32 Nassau Street
876 Fifth Avenue
414 Julian Street, Waukegan, 111.
52 Broadway
59 Wall Street
864 East 21st Street, Brooklyn, N. Y.
400 Riverside Drive
57 Greene Street
15 Broad Street
42 Eleventh Street, Lowell, Mass.
684 Ellicott Square, Buffalo, N. Y.
75 Sixth Street, Elmhurst, N. Y.
277 Broadway
15 Dey Street
Belvidere Hotel, Baltimore, Md.
52 William Street
College of Arts and Sciences, Ithaca, N. Y.
165 Broadway
Belmont, N. Y.
248 Summer Street, Boston, Mass.
Princeton University, Princeton, N. J.
55 Duane Street
293 Madison Avenue
54 William Street
55 West 44th Street
990 Prospect Avenue, Hartford, Conn.
(38i)

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[VOL.

IV

Williams, Harrison
60 Broadway
Williams, Henry D.
141 West 122nd Street
Williams, John Skelton
801 East Main Street, Richmond, Va.
Williams, P. L.
177 13th East Street, Salt Lake City, Utah
Williams, Richard H.
1 Broadway
Williams, Roger H.
31 West 12th Street
Williams, Stephen G.
30 Broad Street
Williams, T. E.
Aurora, Neb.
Williams, Timothy S.
Huntington, L. I.
Williams, Waldron
220 Eleventh Avenue
Williamson, Charles C.
476 Fifth Avenue
Williamson, Clifton P.
127 Riverside Drive
Willson, Frederick
P. O. Box 295, Reading, Pa.
Wilson, Henry F., jr.
7 Wall Street
Wilson, Hugh M.
375 Park Avenue
Wilson, J. E.
528 South Fifth Avenue, Chicago, 111.
Wilson, James Harrison
1305 Rodney Street, Wilmington, Del.
Wing, Daniel G.
First National Bank, Boston, Mass.
Wing, Thomas E.
37 Wall Street
Winthrop, Bronson
23 East 33rd Street
Wise, Edmond E.
15 William Street
Witherbee, F. S.
4 Fifth Avenue
* Woerishoffer, Mrs. Anna
IV Bramsplatz 6, Vienna, Austria
Wolf, W. Irving
511 East 72nd Street
Wolfe, S. Herbert
1038 Fifth Avenue
Wolff. Emil
171 West 71st Street
Wolff, Mrs. Lewis S.
12 East 70th Street
Wood, Frederick A.
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PROCEEDINGS
OF THE

ACADEMY OF POLITICAL SCIENCE
IN THE CITY OF NEW YORK

Volume IV]

JULY, 1914

[Number 4

ESSAYS ON BANKING REFORM IN THE
UNITED STATES
BY

PAUL M. WARBURG

TBX ACADEMY OF POLITICAL SCIXNCI
COLUMBIA UNIVERSITY, NEW YOKX

1914

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COPYRIGHT By
THE ACADEMY OF POLITICAL SCIENCE

>

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CONTENTS
MOB

EDITOR'S NOTE

i

INTRODUCTION

3

Edwin R. A. Seligman
Defects and Needs of our Banking System
A Han for a Modified Central Bank

.

.
.

.
.

.
.

7
23

American and European Banking Methods and Bank
Legislation Compared

30

A Central Bank System and the United States of
America

57

A United Reserve Bank of the United States.

75

.

Principles that Must Underlie Monetary Reform in the
United States

116

The Discount System in Europe
Circulating Credits and Bank Acceptances

129
.

.

.

159

The Owen-Glass Bill as submitted to the Democratic
Caucus

173

The Owen-Glass Bill: Should there be Four or Eight Federal Reserve Banks?

204

The Owen-Glass Bill: Gold or Lawful Money, Note Issue,
and Government Bonds

220

iii

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EDITOR'S NOTE

T

H E essays collected in this volume originally appeared as
follows: Defects and Needs of our Banking System, in
the New York Times Annual Financial Review, January
6, 1907;' A Plan for a Modified Central Bank, privately printed,
November 12, 1907; American and European Banking Methods
and Bank Legislation Compared, an address delivered at Columbia University and printed in The Currency Problem and the
Present Financial Situation : Columbia University Press, 1908;
A Central Bank System and the United States of America, an
address delivered before the American Economic Association
on December 30, 1908, and published in American Economic
Association Quarterly, 3d series, vol. x, no. 1; A United Reserve Bank of the United States, an address delivered before
the Finance Forum of the Young Men's Christian Association
of New York, March 23, 1910, and published in the Proceedings
of the Academy of Political Science, vol. I, no. 2 ; Principles that
must Underlie Monetary Reform in the United States, an address delivered before the Academy of Political Science, November 12, 1910, and published in the Proceedings, vol. I, no. 2 ;
The Discount System in Europe, prepared for the National
Monetary Commission, and published as Senate doc. no. 402,
61st Cong., 2d sess., 1910; Circulating Credits and Bank
Acceptances, an address delivered before the convention of the
American Bankers'Association, November, 1911, and printed
in the Commercial and Financial Chronicle, December 2 , 1 9 1 1 ;
The Owen-Glass Bill as Submitted to the Democratic Caucus,
in the North American Review, October, 19x3; Should there
be Four or Eight Federal Reserve Banks? privately printed,
December 5, 1913.
The thanks of the editor are extended to the New York
Times, the Columbia University Press, the American Economic
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2

EDITOR'S NOTE

Association, the William B. Dana Company, and the North
American Review Publishing Company, owners of the copyright of the first, third, fourth, eighth and ninth essays respectively, for their courteous permission to reprint the same.
(386)

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INTRODUCTION

T

HE essays which are here collected and published in book
form not only are valuable in themselves but form a
landmark in the history of American contributions to
the banking problem. It is in a general way known to the
public that Mr. Warburg was in some way connected with the
passage of the Federal Reserve Act, and his appointment to his
present responsible position on the Federal Reserve Board was
acclaimed on all sides with a rare degree of approval and congratulation ; but I fancy that it is known only to a very few exactly how great is the indebtedness of the United States to Mr.
Warburg. For it may be stated without fear of contradiction
that in its fundamental features the Federal Reserve Act is the
work of Mr. Warburg more than of any other man in the
country.
Up to a very few years ago, virtually all the efforts of the
banking reformers in this country were directed to securing
what was called elasticity of the currency, through the abolition
of the bond reserve for bank-note circulation. Neither the report of the Indianapolis Monetary Conference nor the schemes
of the committee of the New York Chamber of Commerce a
decade later attempted to do anything more than that; and no
single plan seemed to approve itself to the country. The two
new ideas which were injected into the discussion by Mr. Warburg were, first, the shifting of the emphasis from the currency
problem to the reserve problem, and second, the advocacy of
the principle of rediscounting a new kind of commercial paper.
The first point is fully explained in the essay on the United
Reserve Bank of the United States. Mr. Warburg recalled to
our mind what had been forgotten by most of us, that the real
pith of modern banking is the question of the reserve, and that
the essential weakness of the American system was the extreme
decentralization of resources, resulting in the time of stress or
trouble in every individual bank attempting to secure its own
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4

INTRODUCTION

[VOL.

IV

solvency in disregard either of the welfare of other banks or of
the needs of the business community. In essay after essay Mr.
Warburg hammered on this one idea until he got it firmly fixed
in the opinion, first of the experts and then of the general public. Without some method of combining the scattered resources
of the individual banks it was clear that no essential progress
could be made.
The second point was equally new to the American public,
although, like the first, it was a familiar achievement of modern
banking reform abroad. Mr. Warburg pointed out that the absence of proper two-name commercial paper and the non-existence of any central bank or banks at which such paper could
be instantly rediscounted for cash, compelled the banks either
to invest their money in illiquid securities or to loan the funds
on the stock exchange, thus producing the remarkable variations in the money rate and bringing about the periodical
stringency in the money market. After his lucid exposition of
what might be accomplished by a rediscounting and thus introducing into the United States the so-called discount policy of
European countries, it was gradually realized that this was the
second essential feature of banking relorm.
Mr. Warburg also called attention to the advantages of a new
currency not based upon the deposit of government bonds, but
he made it clear that this reform, which was the sole objective
of all previous schemes, was of only minor importance and that
it would follow as a necessary consequence from the adoption
of the two fundamental points mentioned above. These two
principles form the real backbone of the new Federal Reserve
Law. When the Aldrich commission was appointed it was not
long before Senator Aldrich—to his credit be it said—was won
over by Mr. Warburg to the adoption of these two fundamental
features. The Aldrich bill differed in some important particulars from the present law. It went further in the direction of
centralization and it involved less control by the government of
banking operations. The new act is in some details superior to
the Aldrich bill; in others inferior. The concession in the
shape of the twelve regional reserve banks that had to be made
for political reasons is, in the opinion of Mr. Warburg as well
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No. 4]

INTRODUCTION

5

as of the writer of this introduction, a mistake; for it will probably, to some extent at least, weaken the good results which
would otherwise have followed. On the other hand, the existence of the Federal Reserve Board creates, in everything but in
name, a real central bank; and it depends largely upon the
wisdom with which the board exercises its great powers as to
whether we shall be able to secure most of the advantages of a
central bank without any of its dangers.
In many minor respects also the Federal Reserve Act differs
from the Aldrich bill; but in the two fundamentals of combined
reserves and of a discount policy, the Federal Reserve Act has
frankly accepted the principles of the Aldrich bill; and these
principles, as has been stated, were the creation of Mr. Warburg
and of Mr. Warburg alone.
It is this fact which gives especial interest to the present collection of essays which are printed just as they were originally
published and which show the gradual development, in unimportant points, of Mr. Warburg's thought. In weighing the
merits of these essays it must not be forgotten that Mr. Warburg
had a practical object in view. In formulating his plans and in
advancing slightly varying suggestions from time to time, it was
incumbent on him continually to remember that the education
of the country must be gradual, and that a large part of the
task was to break down prejudices and remove suspicions.
His plans therefore contain all sorts of elaborate suggestions
designed to guard the public against fancied dangers and to
persuade the country that the general scheme was at all practicable. It was the hope of Mr. Warburg that with the lapse
of time it may be possible to eliminate from the law not a few
clauses which were inserted, largely at his suggestion, for educational purposes.
As it was my privilege to say to President Wilson when originally urging the appointment of Mr. Warburg on the Federal
Reserve Board, at a time when the political prejudice against
New York bankers ran very high, England also, three-quarters
of a century ago, had a practical banker who was virtually responsible for the ideas contained in Peel's bank act of 1840. Mr.
Samuel Jones Lloyd was honored as a consequence by the
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6

INTRODUCTION

British government and was made Lord Overstone. The United
States was equally fortunate in having with it a Lord Overstone.
And while it is not the custom for America to confer peerages
upon its distinguished citizens, it is fortunately beginning to
become the practise to induce them to accept positions of great
public responsibility in which they can at once serve the community and honor themselves.
It is my especial pleasure to be able to write these few words
of introduction, because it was in my study that Mr. Warburg
first conceived the idea of presenting his views to the public.
When he began to chat familiarly on the subject he at once impressed his listeners by the importance and novelty of his views.
His modesty and his shrinking from public controversy were so
pronounced that it was only with the greatest difficulty that he
was persuaded to put his ideas on paper. But having once set
out on the task, there was no stopping, and from year to year
essay upon essay flowed from his facile pen, giving more precision and point to his fundamental principles, until he was
recognized as the real leader in the new movement. The
Federal Reserve Act will be associated in history with the name
of Paul M. Warburg, and the Academy of Political Science
deem it a rare privilege to be able to present to the public this
volume of his collected essays.
EDWIN R. A. SELIGMAN.
LAKE PLACID, NEW YORK, August,

1914.

(390)

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DEFECTS AND NEEDS OF OUR BANKING SYSTEM
HE question of the reform of the currency system is
uppermost in the minds of all, not only in our own
country, but in Europe as well; for Europe also is
vitally interested in the problem. So much has been said and
written on this subject that it is almost a presumption to seek
to add any new thoughts. There is, however, one point which
has not as yet been sufficiently emphasized, but which appears
to lie at the very root of the problem. This is the question of
our commercial paper.
It is a strange fact that, while in the development of all
other commercial phenomena the United States has been foremost, the country should have progressed to so slight an extent in the form of its commercial paper. The United States
is in fact at about the same point that had been reached by
Europe at the time of the Medicis, and by Asia, in all likelihood, at the time of Hammurabi. Most of the paper taken by
the American banks still consists of simple promissory notes,
which rest only on the credit of the merchant who makes the
notes, and which are kept until maturity by the bank or corporation that discounts them. If rediscounted at all, they are
generally passed on without indorsement, and the possibility
of selling any note depends on the chance of finding another
bank which may be willing to give the credit. The consequence is that, while in Europe the liquid assets of the banks
consist chiefly of bills receivable, long and short, which thus
• constitute their quickest assets, the American bank capital invested in commercial notes is virtually immobilized.
In Europe—as for instance in England, France, or Germany—there are scores of banks and private banking firms
which give their three-months' acceptance for the commercial
requirements of trade, or which make it their specific business
to indorse commercial bills. A commercial borrower in these
countries who does not get a cash advance will do one of two

T

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8

BANKING

REFORM IN UNITED STATES

[VOL IV

things. He will either sell to his bank or his broker his own
three-months' bill drawn on a banking firm willing to give him
this credit, or he will sell the bills drawn by him on his customer (in payment for goods sold to them), which bills will
be subsequently passed on with the indorsement of the banker.
This banker's acceptance, or this indorsed paper, can be readily
negotiated by the buyer at any time whenever there is a profit
to be derived, or whenever the holder desires to realize on the
bill. The holder will always be able to dispose of it, either
through private discounting or, in case of need, by selling, as
the case may be, to the Bank of England, the Banque de
France, or the German Reichsbank. In any event, the firm
or corporation which buys this paper can secure its equivalent
at any time. The quality of the bills, assured by the established credit of the acceptor or by the various indorsements on
the bill, is such as practically to eliminate the question of
credit, and the conditions of the sale will depend only on the
rate of interest.
The value of the existence of thousands of millions of such
standard paper, as it is found in all the important European
financial centres, can scarcely be sufficiently emphasized. Just
as the check system is a method of clearing bank cash credits,
thus helping largely to prevent unnecessary absorption of the
currency, so modern commercial paper, through the additional
safety which is secured by the banker's indorsement, acts in
like manner as a clearing of credits on time not only within
the community, but, what is just as important, among the various nations as well.
If money tightens in Europe, let us say in Germany, France
and England will immediately invest in German bills. They
could not buy the paper of individual German merchants,
whom they do not know, but they do and must know the value
of the acceptance or indorsements of the German banks which
offer and indorse or accept this paper. By a well organized
system of such bills of exchange the credit of the whole nation
—that is, of the farmer, merchant, and manufacturer—is
joined to that of the banker and becomes available as a means
of exchange both within and without the country.
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DEFECTS AND NEEDS OF OUR SYSTEM

9

Under present conditions in the United States, on the other
hand, instead of sending an army, we send each soldier to fight
alone. With us the borrower receives money from the bank
and his note becomes an illiquid asset in the bank's portfolio.
If the bank desires to raise money, it must use its own credit,
instead of adding its own credit to that of the borrower, thus
making the dead note a live instrument of exchange. The
only modern bills in our country are the so-called " foreign
e x c h a n g e " bills, drawn on European banks and bankers,
which are indorsed and which always have a ready market.
But what an anomalous position! Instead of having the
credit of the entire country available in the shape of millions
upon millions of modern paper which Europe might and would
buy, we must rely on the willingness and the ability of a few
banks and bankers to use their own credit by drawing their
own long bills on Europe. This is a costly and most unscientific mode of procedure, which is in no way adequate to the
necessities of the situation. For there is, as a matter of course,
a limit to the amount which the American banker can draw
and which the European banker will and can accept.
Recent events have shown the inefficiency of this system.
In spite of unwise provocation the government banks of Europe
would not and could not have made a stand against us (as
they have done during these past few months by raising their
rates of discount and by discriminating against our so-called
finance paper) had we been able to send our legitimate commercial paper instead of forcing the banks and bankers to
draw their own bills. These bills, it is true, indirectly help
commerce, for a bank which requires money in order to accommodate its merchant customers will call its stock-exchange
loans, while bills drawn against stock-exchange collateral will
in turn provide the money that has thus been called.
But such bills must inevitably bear a financial character,
and will not be regarded so favorably as commercial paper
would be. Moreover, since the drawers and, to an even greater
extent, the European acceptors, are comparatively few, the
European banks must at times feel that they are getting too
large an amount of paper drawn on and indorsed by the same
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BANKING

REFORM IN UNITED STATES

[VOL. IV

firms. As these bills, drawn, as the case may be, in pounds,
francs, or marks, sell normally at the same rate of private discount as all the other long bills in the country, the European
banks find no particular inducement to purchase them. When,
therefore, there is an excessive amount of these American
bills offered, the consequence is discrimination, and, what is
worse—owing to the financial aspect of the bills—a feeling of
uneasiness and distrust.
If instead of this unfortunate method of financing we could
offer American paper drawn in dollars, showing its commercial
origin and indorsed by and drawn on American banks or
banking firms, we should vastly multiply the avenues leading
into the portfolios of the European banks, and our bills would
be well spread instead of going into a few channels which can
so easily be closed. We should create a new and most powerful medium of international exchange—a new defense against
gold shipments. This is no visionary theory. In view of the
fact that a great many millions of even Russian bills are constantly held by French, English, and German banks, institutions and capitalists, there is no reason whatsoever to doubt
that these same avenues could be readily opened to American
paper.
In order thus to make our paper part and parcel of the
means of the world's international exchange, it needs, however, as a preliminary condition, to become the foundation on
which our own financial edifice is erected. It must always have
a ready home market, where it can be rediscounted at any
moment. This is insured in nearly every country of the world
claiming a modern financial organization, by the existence of
some kind of a central bank, ready at all times to rediscount
the legitimate paper of the general banks. Not only England,
France, and Germany have adopted such a system, but all the
minor European states as well—and even reactionary Russia
—have gradually accepted it. In fact, Japan without such an
organization could not have weathered the storm through
which she has recently passed, and could not have achieved
the commercial success which she now enjoys.
Our methods are just the reverse of the European system.
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DEFECTS AND NEEDS OF OUR SYSTEM

\\

With us call money does not go into the bill market. Every
American bank, since it cannot count on reselling the notes
which it buys, must necessarily limit the amount which it can
properly invest in American paper, and as a consequence
almost all the call money is invested in demand loans on the
stock exchange. The result of this is that the overflow of
money of the entire country, from the Atlantic to the Pacific,
is thrown into the stock exchange, making stock-exchange
money easy and stimulating speculation when trade is relaxing, while on the other hand, as soon as demand for money
for commerce and industry increases, the funds to provide for
the needs of the whole country are called from the stock exchange, causing a disturbance there.
Our whole elasticity is built up on the bond and stock
market. Banks can issue notes on government bonds, and call
money is kept in stock-exchange loans. In Europe the situation is reversed; banks issue notes primarily against their purchases of bills of exchange, and the reserves of the country are
kept primarily in bills of exchange.
In Europe banks and bankers invest against their deposits
chiefly in bills of exchange, short and long, and only to a
comparatively small extent in fortnightly o r monthly settlement money on the stock exchange or in call loans on stockexchange collateral. If call money becomes easier, it is in the
first instance the rate for short and long bills that goes down,
and since this rate is practically the same all over the country,
a withdrawal or an influx of money, instead of being felt
primarily by the stock exchange, is borne equally by thousands
of millions, the grand total of all money invested in such bills
being a great many times larger than the comparatively small
amount employed in stock-exchange loans. It is like throwing a pebble into a pond; the ripples will slowly spread in concentric circles, until in the end they are scarcely perceptible.
With us it is like casting a stone into a small basin; the entire
surface is suddenly and violently agitated for a short time.
To explain briefly the workings of a European central bank,
to show how little political power need attach to it and how
little it interferes and need interfere with the business of the
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BANKING

REFORM IN UNITED STATES

[VOL. IV

general banks (except to act as a general brake on the market,
if it over-extends, and to provide for the needs of the country,
as long as they are legitimate) it may be well to say a few
words about the German Reichsbank, admittedly the most perfect organization of its kind.
The capital stock of the German Reichsbank is owned
partly by the government and partly by the public. The
Reichsbank has a central board in Berlin, consisting of the
foremost men in financial and commercial circles. The president of the bank is a salaried officer, a trained banker (no
politician) who retains his position irrespective of the party
in power, like the president of any private bank who remains
in office as long as he does his work well. The Reichsbank has
its branches in every important town similar to our central
reserve and reserve cities. Each branch has its own board of
directors, consisting of ten or twenty men, representing the
best financial and commercial men in the locality, while each
branch has its own salaried president, responsible to the board.
The chief duty of the bank, leaving all other details not bearing upon our subject aside, is to buy at the published bank
rate legitimate paper, which must bear the acceptance or indorsement of at least two well-known banks or bankers. This
bars the Reichsbank from doing a general commercial business, and converts it practically into a bank for the other banks.
Moreover, the published rate of the Reichsbank is, as a
rule, from J4 of i% to i% higher than the private discount
rate at which the other banks buy paper. Since, however, the
central bank has branches in every town, the banks use it
chiefly in the normal course of events for the collection of bills
throughout the entire country as they fall due. The bank has
its established rules for such collections, deducting at its published rate from five to ten days' interest, according to the distance of the towns on which the bills are drawn, but not charging any commission.
According to this system, for instance, a Hamburg bank,
owning a bill on Munich, would sell the bill to the Reichsbank
five days before it falls due, simply rediscounting the last
five days at the bank rate. A Munich bank having a bill on
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DEFECTS AND NEEDS OF OUR SYSTEM

13

a Hamburg bank would do the same, both getting the money
immediately, while the Reichsbank, as the general clearing
house, would simply transfer on its books the credits of the
one branch to those of the other. Through a system of this
kind it is possible to avoid the constant remittance of cash and
the locking up of money by the banks. The advantages that
a system of this kind would bring to the United States are
obvious.
When money tightens in Germany the banks rediscount
through the Reichsbank their short bills which have a little
more than five days to run, and as the private discount rate
throughout the country rises, the bills that the banks rediscount will gradually be longer and longer. While this process
is in progress, the private discount rate and the bank rate will
be approaching each other. If rates are comparatively low,
the general tendency of the Reichsbank will be to advance its
rate, so as not to be forced to put out too large an amount of
notes issued in payment for the bills. For, as is well known,
the bank is compelled to pay a tax when its note circulation
exceeds a certain limit. After a normal amount of its notes is
out, the Reichsbank will, therefore, tend to keep its rate well
above that of the ordinary banks until the rate of interest received in discounting paper is high enough to indemnify the
Reichsbank for the payment of the tax.
As a consequence the Reichsbank, as a rule, keeps its rate
high enough to leave to the ordinary banks the general business and the fixing of the rates at which this business is conducted. By raising or lowering its rate, however, the Reichsbank indicates the general trend and exerts a moral and practical influence on the tendency of the banks to extend or to restrict business. If money is low in Germany and high in other
countries, with a natural consequence that German capital
would leave the country, and gold as a result be exported, the
Reichsbank will work for a higher rate of interest as a precautionary measure, and the general banks will, as a rule, follow
the Reichsbank's lead.
In the opposite case, however, when money is becoming very
scarce in Germany, there is no fear at any time of a money
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squeeze, as the Reichsbank, on paying the tax, can issue a virtually unlimited amount of notes as long as safe and legitimate paper is offered for discount. In times of very high
money the Reichsbank will at a certain point cease to keep its
own rate above the private discount rate of the banks, and at
such times the ordinary banks will often rediscount with the
Reichsbank not only the short bills, but even the long ones.
Thus the duties of the Reichsbank are, on the one hand, to
counteract the influence of too abundant a money supply, and
on the other hand, to furnish at legitimate rates all the money
that the country legitimately may require.
It should be added here that the Reichsbank also makes
loans on collateral. There is, however, a fixed rate for this,
namely, i% above the bank rate. This is, as a rule, a much
higher rate than that at which the general banks will furnish
the money, and in addition there exist very strict regulations
as to the kind of securities on which the Reichsbank is permitted to advance money and as to the percentage of the
market value of the securities which it may loan. Since these
rules are much more rigid than those of the general banks,
nobody would under normal circumstances apply to the
Reichsbank for a loan on collateral. When money becomes
scarce, however, the banks or the bankers can always count on
the Reichsbank to fall back upon, and in case of a crisis this
is readily done.
The ability of the Reichsbank to advance against securities
is, however, of minor importance as compared with the fact
that the existence of such an institution forms the foundation
on which is erected the whole system of financing the business
interests of the empire on bills; for this results in an elastic
system, expanding and contracting, according to the requirements of trade and industry.
Reason, as well as the experience of all other nations, tells
us that we in the United States should attempt to reorganize
our present system of issuing and handling commercial bills,
in order to create the basis necessary for a modern system of
currency and finance. Not only, however, should we endeavor
to make such bills the medium of equalizing the daily demand
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for and supply of money, but we should also by all means try
to break with the other system, which makes call loans on
stock-exchange collateral serve for this purpose.
Let us next consider another point of some importance.
The principal stock exchanges in Europe have their dealings
for fortnightly or monthly settlements, while on the New York
stock exchange all transaction are for daily cash settlements.
The advantages of the European system are obvious; it avoids
unnecessary duplication of work and unnecessary outlay of
money, and it assures a greater stability.
In Europe the " positions " are " carried " from one settlement to the next; that is to say, the broker borrows or lends
the money from the end or the middle of the month to the
next settlement day at a rate of interest agreed upon in advance. Unlike his unfortunate New York brother, he need
not find his money from day to day, and he need not fear that
money rates will jump from 4% to 100%, or that, even at such
rates, he may not be able to secure the money at all.
In Europe the amount employed on the stock exchange is a
fairly constant one. The daily plus and minus of the demand
for or the supply of money is adjusted in the bill market, and
if more money is required on settlement days and the rate of
settlement money rises, the normal consequence is that more
money will go from the bill market to the stock exchange, and
be employed there until the next settlement. This process
takes place year in and year out practically without any serious disturbances; fluctuations and exorbitant money rates
such as we have so frequently witnessed in this country are not
only unheard of, but absolutely inconceivable in Europe.
From settlement to settlement in Europe the broker and the
customer are safe; the stock-exchange loans remain unchanged.
If such a system of settlements should be established on the
New York stock exchange—for which case it would be advisable, in order not to stimulate gambling, to provide in some
way for putting up margins to protect the contracts—several
objects would be achieved. In the first place, individuals
would be in a position to secure money for a reasonable time
and at reasonable rates, and panicky fluctuations, so frequent
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at present, would become rare. Secondly, the regulation of
the daily supply and demand of money would be forced from
the stock exchange into the bill market.
It should be added here that our present system of cash
dealings on the stock exchange is forced upon us as the result
of the unreasonable usury law of the state of New York,
which, although making it unlawful to take more than 6% on
time loans, is in reality the direct cause of an almost confiscatory rate being charged from day to day for weeks at a time.
That the usury law should provide a maximum rate for
pawn shops or for small individual loans is defensible, but for
large business transactions most of the European laws do not
limit the rate. Even in those countries which still retain some
form of usury laws, in order to constitute usury it must be
proved that the party taking the money was in dire stress and
that the party loaning the money designedly took advantage
of the debtor's helpless position to exact an exorbitant rate.
If the hight of the rate is to be the deciding factor in judging
whether usury has been exacted, the law ought to state the
maximum amount permissible in excess of the ruling interest
rate of the country (like, e. g., the bank rate abroad).
But for the large transactions of a country one fixed maximum rate cannot be laid down by law. It is preposterous to
extend such a principle to the business of large solvent houses,
and to prevent them from making a legally binding contract
for time money at more than 6% in the face of the fact that
such a loan at 7% or even 8% might be of the greatest benefit
to them, while the impossibility of securing money except on
call at ridiculous rates might cause the most severe loss of
money and of business. Conditions like the present show the
absurdity of such a system; when money in Europe is worth
more than 6% on time—as happens to be the case just at present—the consequences can only be that under present circumstances some people will loan at more than 6% on time, and
take the risk of such illegal action. As there are, however,
comparatively few, the call rate must rise to such an abnormal
hight as is necessary to keep money from going abroad or to
attract a new supply to our country. But as this exorbitant
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rate for call loans may break from day to day, in consideration of the resulting risk of exchange connected with the transaction, one might say that the rate for short money, in order to
attract foreign capital, will rise about 10% to 20%, where the
rate for time money would have to rise only 1%.
With no modern paper to offer, with the usury law limiting the legal time rate to 6%, and with an unwritten law, observed by many banks, not to charge their regular customers
more than 6%, even on call loans, our only primitive means of
protecting the country are either an immense rate for call loans
in the open market or a violent break in the price of our securities, as a rule the consequence of such shortage of money. This
break must bring our securities down to a level where Europe
will buy, and ultimately results in a relief of our money market
by reason of remittances from abroad for such purchases.
Such are the consequences of the perpetuation of an absurd
system which has been abandoned everywhere else. Banks
and bankers may by manipulation sometimes exaggerate the
disgraceful conditions which exist in our money market, but
the direct cause is our present system, which makes these
occurrences, as it has been endeavored to make clear, absolutely inevitable.
Our immense national, resources have enabled us to live
and prosper in spite of our present system, but so long as it is
not thoroughly reformed it will prevent us from ever becoming the financial centre of the world. As it is, our wealth
makes us an important but dangerous factor in the world's
financial community, with immense resources indeed, but without a central organization of our own, using and sometimes
abusing the financial organization of Europe in order to atone
for our own shortcomings; unable effectively to put on the
brakes ourselves, we compel the government banks of Europe
to take measures for the regulation of our own household.
In closing, a few words may be said about the propositions
now before the country with reference to currency reform.
At the outset we were between Scylla and Charybdis; on the
one hand the tendency to give unlimited power to the Secretary of the Treasury—a political officer, possibly untrained in
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the banking business and one who, although probably in most
cases unselfish and wise, may also be selfish and unwise; and
on the other hand the movement of the bankers' association
to take all power from the treasury, forcing it to put out its
money at a fixed rate and practically vesting its power in the
national banks. The one tendency appears to be as bad as the
other; it is dangerous to give so much power to one individual
who is not in business, but it is equally dangerous to give so
much power to men who are all in business. The bills recently introduced in Congress show a material improvement
on these first attempts.
The one bill, known as the Elkins bill, which empowers the
Secretary of the Treasury to deposit with the national banks
against collateral all moneys received—including custom-house
revenues—leaving the rate of interest, however, to be fixed in
his discretion, deserves unqualified indorsement. It leaves a
vast discretionary power with the Secretary, but this is a necessary evil as long as we have no central bank. To make the
treasury an automatic institution and practically to transfer
its powers to the national banks would be worse; for it is impossible to see how any concerted action could be taken by
these banks to protect the country (as a central government
bank would do by increasing the rate of interest or by supplying money at moderate rates) if such a course proved to be
contrary to their interest. They are, after all, money-making
concerns—not public institutions—keenly competing against
one another, and they cannot be forced to cooperate in any
way that may injure their own business. There must be some
power capable of taking an unselfish and larger point of view,
for otherwise the country would be without any financial protection whatsoever. This function must be left for the time
being to the treasury, which, by increasing or decreasing the
rate at which it deposits the government funds in the banks,
can put on the brake to a certain extent and thus protect the
country and its gold.
It is to be feared that any scheme which attempts to establish a concentration of control of note issue by the national
banks and to create a joint guarantee of such notes will fail
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of adoption or will not work, in the long run, for the reason
that each individual bank will be unwilling to submit to control or interference, and that the conservative banks will
sooner or later feel that they are shouldering the burden for
the less careful sister institution, which, if it fails, would inflict losses, to be borne by the joint guarantee fund contributed
by all the banks.
The second bill which has been introduced meanwhile is
the bill of the House committee on banking and currency,
which urges that authorization be given to any national bank
to issue unsecured notes to the extent of 25% of its capital, on
paying a tax of 3%, and an additional 12J/2% on paying a tax
of 5%. This bill is undoubtedly an improvement on the proposition of the bankers' association, as through the higher tax
there is more probability that the notes would be redeemed
from time to time, since it would pay the banks to keep even
the lower-taxed notes in circulation only as long as money
is worth at least 4j4%. The rising scale, however, previously
recommended by the chamber of commerce appears to be the
safer plan, as with the almost stationary rate of 6% for commercial paper, some of the country banks might otherwise be
tempted to keep the lower-taxed notes outstanding nearly all
the time. This, instead of elastic circulation, would mean increased circulation, which is not needed. But the chief objection to this bill and all similar recommendations is that it is
a wrong principle to allow any bank giving unsecured commercial credits to issue unsecured notes. Besides, if a bank is
allowed to issue, as a net result, about 28% (37% less the
25% reserve) of its capital in unsecured notes, does it not
simply mean that the bank, on paying a certain tax, may infringe upon its reserve to this extent? Should we not through
such a measure place our national banks on a less conservative
basis than they were heretofore, when they were not allowed
to issue unsecured notes? Undoubtedly our system would
gain in elasticity, and the guarantee fund might grow to take
care of the notes of many a bank that might fail, perhaps just
in consequence of the greater latitude offered to it by the present bills, but the principle remains bad all the same.
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I strongly believe that banks issuing unsecured notes which
are to pass as the people's money should be restricted to buying paper that is endorsed by other banks or banking firms,
and that they should be restricted also as to the kinds of loans
to be made by them; in short, they should not be allowed to
take the same risks as every general bank or banking firm.
To meet, however, the needs of the hour it might be advisable to authorize the banks to issue notes, on paying a tax as
proposed by this bill, but to secure these notes by a deposit of
paper bearing at least three bona-fide signatures, of which at
least two would have to be those of banks or bankers.
This course would commend itself for several reasons.
1. It is more conservative and would make the banks and
the notes safer.
2. It would force the banks to apply the money to be received from additional circulation to the purchase of commercial bills; it would prevent the money from being used directly
for stock-exchange loans, as it could be under the present bill.
3. It would further the creation of modern paper, since, if
such a law were enacted, modern paper which could be deposited would be taken in preference by the banks.
4. Certain committees would have to be appointed in every
reserve and central reserve city in order to scrutinize the bills
deposited as security by the banks. These committees might
be the predecessors of future local committees of a central organization.
5. We should lay the foundation to modernize our financial
structure, a foundation that would carry in itself the elements
of a central system built up on the trade, commerce and industry of the country, an end which at present is far out of our
reach.
The scope of the issue of secured notes can be safely enlarged from time to time, especially since a guarantee fund
of secured notes would grow rapidly with comparatively few
losses, while the bill of the House committee would be limited
in its scope, and would be only a makeshift, endangering the
safety and soundness of our currency.
Whether a cential bank will be eventually owned by the
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national banks is impossible to foretell, nor can it be predicted
whether the business of accepting and rediscounting will become the domain of the trust companies and the general banks,
or whether new discount companies, like those in England,
will be started for this purpose. It is, however, not beyond
the bounds of imagination that a wholesome line of demarcation between the business of national banks and that of other
financial institutions might gradually be reestablished through
such a development. Such paper could eventually be admitted also as collateral against the deposits of treasury money.
That a central bank is the ideal solution of the difficulty
and that it must finally come—though, perhaps, we may not
live to see it—is my firm belief. None of the reasons advanced against it are tenable.
It has been argued that a central bank would be dangerous,
as, in fact, it was in the past, because it might become the
tool of politicians, and it has been frequently stated that " we
do not want politics in business." But the powers which the
Secretary of the Treasury, a political officer, must exercise
now are much vaster than those that any single officer of a
central bank would ever enjoy, and these officers could be
appointed in such a way—for instance in part by the government, by the national banks, by the courts, by the chambers of
commerce—that the constitution of the board would be taken
entirely out of politics. Are we not unduly depreciating ourselves by saying that we should not be able to find a set of
business men of sufficiently high standing to form the central
and local boards of such a central bank, and that we could not
secure salaried officers competent to fill the post of managers
of the central bank and of the branch offices ?
I think that we are greatly mistaken if we believe our country so entirely different from all others that we should be
obliged to continue to do the opposite of what is done by them,
while the system of all other important nations has proved to
be excellent, and ours has proved to be defective.
We have reached a point in our financial development where
it is absolutely necessary that something be done to remedy
the evils from which we are suffering, and it would be a thou(40s)

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sand pities if our legislative bodies did not meet the situation.
Let us, however, be careful clearly to recognize the cause of
the evil before we act, so that we may not be found repairing
the roof while the foundation is rotten.
Meanwhile there remains important work to be done by the
banking community itself, without any aid from Washington.
At present our bankers look with scorn on rediscounting and
accepting American bills. They should recognize the fact
that these two branches of business are not only most legitimate, but most necessary for the nation's development.
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HE appalling panic which we have experienced during
the last few weeks will do more, I suppose, to bring
home to the public the absolute necessity of a change
in our present banking and currency system than all the
efforts that have hitherto been made to warn the nation of the
imminent danger. It is to be expected that Congress will take
some action on this question at its next session, but it is sincerely to be hoped that it will not follow the line of least resistance by adopting some paltry palliative, but that the question will be approached in a bold and broad spirit.
As I tried to prove in a previous paper on " Defects and
Needs of Our Banking System," which The New York Times
published in its Financial Supplement in January last, nothing
short of a modern central bank will effect a final solution of
the problem, but, as was also indicated in that paper, we are
still so far removed from the fundamental conditions which
would have to be created in order successfully to establish a
central bank on the European basis that the attempt to take so
far-reaching a step would involve material and harmful delay.
There are grave objections, however, to the scheme, advocated by so many, of creating an emergency currency by permitting each national bank independently to issue unsecured
notes up to a certain percentage of its share capital, subject to
a tax sufficiently heavy to insure the prompt withdrawal of
these notes when times again become normal. If issued individually by each national bank, without a joint guarantee by
all the national banks, such notes would add a new element of
danger in times of panic.
Let us imagine what would have happened during the last
few weeks when one of the national banks became somewhat
involved, if notes of this kind had been outstanding. It stands
to reason that the panic which caused a run of the depositors

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would have been carried into the ranks of the noteholders,
and it might easily have intensified the distress by creating a
general lack of confidence and wholesale discrimination
against national bank notes, thus aggravating the general
hysteria and increasing the withdrawal and hoarding of legaltender currency as well as gold. It is, moreover, not at all
improbable that the emergency notes of this bank and those
of a majority of the other banks would have been in circulation before the real pinch came, as a great many people
thought that the culminating point had been reached when, as
a matter of fact, the crisis was only beginning.
Further, it is bad practise to allow a bank to issue unsecured
notes, which are to pass as current money, against investments in single-name commercial paper or against loans of
all kinds, as, for instance, in this case, on inflated copper and
bank stocks. No European central bank would be allowed to
proceed in this way. There are strict regulations as to the
loans which these note-issuing banks are permitted to make;
and as to their purchases of commercial paper additional guarantees (generally three good signatures) are required.
It is very doubtful whether the stronger national banks
would consent to a joint guarantee by all the national banks
for the entire amount of unsecured notes issued by the national
banks. This could be done safely only if they could exercise
a material control over their sister banks.
As a way out of the difficulty, the following plan is suggested—a plan which does not purport to cover the situation
fully, but embodies a general sketch of what might possibly
be tried. The scheme adopts some of the good features of the
European system, while it seeks to avoid those parts of the
European machinery which could not well be adapted to our
present conditions.
It is proposed to create at Washington a bank, to be called
hereafter the Government Bank, endowed with a capital of
from $50,000,000 to $100,000,000, possibly paid up only in
part, the share capital to be owned, if feasible, half by the government and half by the national banks, and the management
to be in the hands of a salaried president or presidents, who
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are to be appointed for an indefinite period by the board of
directors. The board of directors is to consist of delegates of
the various clearing houses of the central reserve and reserve
cities; the Secretary of the Treasury and the controller of
the currency are to be members ex officio, and some additional
directors are to be appointed by the stockholders, by the Supreme Court, and by the chambers of commerce of, let us say,
New York, Boston, Philadelphia, and Chicago.
This is only a rough outline, susceptible of easy modification, intended merely to show how it is possible to create a
board which would be independent of politics, which would
comprise men of business knowledge and experience, and
which, by its composition, would afford a reasonable guarantee
that it would not be swayed by selfish motives in its actions.
The Government Bank would receive the treasury's moneys,
and the deposits of these moneys with the national bank9
would in turn be made by this bank. The Government Bank
would have the right to issue legal-tender notes, not to exceed
a certain multiple of its capital and its holdings of gold or of
gold notes. The bank would, in the main, be limited to transactions with the clearing houses of the various cities of the
United States and with the clearing-house members.
The Government Bank would be allowed to deposit moneys
with the clearing-house institutions and national banks in the
country against collateral, taking United States government
securities at 90% of their market value, municipal securities
at 80% of their market value, and railroad bonds at 60% of
their market value. (The percentages above given are again
only illustrative of the way in which government moneys,
through the medium of the government bank, could safely be
put out against good securities on a plan similar to the European mode of handling government moneys.)
The bank would establish a general rate of interest for such
deposits, such rate to be modified from time to time, very
much as is done under like circumstances by the European
government banks.
The bank would be allowed to advance money against
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clearing-house certificates of the banks of the central reserve
and reserve cities of the United States.
It would further be allowed to buy paper running for a
period not to exceed three months, made out in dollars or in
sterling, francs, or marks, such paper to be strictly commercial paper and to bear at least three signatures, of which one
must be that of a well-known bank, trust company, or banker.
The privilege of buying such foreign paper is proposed in
order to enable the government bank to accumulate a reserve
of long bills having a gold basis, as is done by the European
government banks. Such bills would be used to meet and to
counteract, as far as possible, demands for gold which might
be made upon us from time to time by other countries.
The authority for the government bank to buy three months'
dollar paper, also bearing at least three signatures, including
a bank's or banker's indorsement or acceptance, is added for
the purpose of encouraging the creation of such paper, the lack
of which is largely the cause of the immobilization of the resources of our banks.
It would probably suggest itself that a limit be set to notes
issued tax-free by the Government Bank, and that a penalty
be paid for notes issued in excess of this limit.
The general scheme as roughly outlined above has this advantage, that the control of the clearing houses over the individual banks would be strengthened, while it would, on the
contrary, be weakened through the general emergency-currency plan. The clearing house would, as a matter of course,
examine the collateral against which a national bank proposed
to take out currency from the Government Bank by means of
the clearing-house certificate. The clearing house would thus
be able, to a certain degree, to prevent the moneys so received
from Washington from being used for any but strictly legitimate purposes.
The clearing-house committee would have the right, but not
the duty, to issue such certificates, and it could, through this
power, hold a check on those institutions which it might regard as not sufficiently conservative. Moreover, the clearinghouse committee would pass on the question in general whether
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or not it would be well for the community to issue additional
currency.
The idea that the issuing of clearing-house certificates in
itself implies the existence of a crisis would soon disappear,
and before long the general public would be as little excited
by it as is the German public when the limit of the amount
of notes which may be issued without paying a tax has been
reached. The issue of clearing-house certificates would mean,
in general, that it is time to go slow, but it would not necessarily imply the imminence of a panic.
The scheme as proposed above would have the further advantage that clearing-house certificates, which now merely
allow the banks to draw on their reserves, without increasing
the currency, would serve in future as a means of providing
additional currency, and while clearing-house certificates now
materially increase the difficulty of settling the debits and
credits between the various cities, they would, if used in the
way proposed above, facilitate the intercourse between the
cities. The Government Bank would act as the clearing house
for the clearing houses.
It is not beyond the bounds of imagination that local boards
for branches of the Government Bank in the various cities
could be established, taking the clearing-house committee or
some members thereof as a nucleus around which some other
independent members might be added. It is also possible that
these agencies would receive moneys in one city in order to
pay them out in the other, as is done by the Reichsbank of
Germany. It is precisely in times of panic, when so much currency is absorbed by unnecessary shipments from one place to
another, that it would be a blessing to have a safe mechanism
to act as a daily clearing house between the cities.
There are, of course, many sides to this question which need
further discussion and elaboration in detail. I have tried,
however, to confine myself to the presentation of the rough
outlines only of a plan which seeks to avoid all those aspects
of a central bank which render it objectionable to many.
In the bank contemplated the composition of its board is a
guarantee that we shall not have " politics in business," and
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the limitation of its scope of business eliminates all danger of
selfish or speculative use of its moneys. At the same time we
should be laying a broad foundation on which it may be possible gradually to build a modern financial structure.
This scheme will perhaps meet with opposition from the
numerous small country banks which are not members of a
clearing house, and which, of course, would prefer that each
bank should have the right to issue emergency notes independently for its own account. It is to be hoped that selfish considerations will not prevail in the solution of the problem, which
is one of the most serious the country has faced for many
years. Moreover, it should not be difficult gradually to work
out some device, by means of which each clearing house would
be enabled to take care of the banks of the surrounding cities.
Above all, even if the scheme embrace for the present only the
clearing houses in larger cities, there can be no doubt that it
would prevent any recurrence of the present situation, which
practically means a temporary suspension of payment all over
the country.
We need some centralized power to protect us against others
and to protect us from ourselves, some power able to provide
for the legitimate needs of the country and able at the same
time to apply the brakes when the car is moving too fast
Whatever causes may have precipitated the present crisis, it
is certain that they never could have brought about the existing outrageous conditions, which fill us with horror and shame,
if we had had a modern banking and currency system.
With our present methods our " elasticity " depends principally on stock-exchange loans, while the most legitimate business, the purchase of commercial paper, causes a dangerous
locking up of capital in single-name promissory notes, which
under normal conditions cannot be resold.
My previous paper fully explained that this is exactly the
opposite of the European and of any modern system and that
by modernizing the form of our commercial paper and by
creating a central bank we should aim to transform our commercial paper from a non-liquid asset into the quickest asset
of our banks. This change, however, is so far-reaching that
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it would take years of educational work to carry it out, while
relief should come at once.
In creating a central bank with limited powers and in making clearing-house certificates the regular means of rediscounting and of taking out additional currency in times of scarcity
of money—not a means to be used only as a last resort in a
severe crisis—we should adequately meet the situation. To
the single-name paper we should add the guarantee of the
joint clearing-house institutions before making it the basis
of our current notes, which, with the additional weight of the
issuing Government Bank, would form a safe means of elastic
circulation, based on the legitimate demands of trade and industry.
Incidentally, we should gradually extend the influence of
the clearing houses and the Government Bank, not only over
the finances of the whole country in general, but also over individual concerns, against the reckless financial management of
which these bodies might feel called upon to discriminate.
Instead of giving vast and vaguely defined powers, properly
belonging to a central bank, to one or two political officers—
possibly without business training—and instead of putting the
burden and responsibility on them alone, we should define the
power and responsibility clearly and should associate with
our political officers in bearing it a large body of our besttrained business men. This would mean a democratic, a con-,
servative, and a modern way of self-government
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AMERICAN AND EUROPEAN BANKING METHODS
AND BANK LEGISLATION COMPARED
I
COMPARISON of European and American banking
methods and legislation is so broad a subject that it
cannot be fully dealt with in a single address. It
will, therefore, be necessary to limit ourselves to the broad
outlines of the subject. We shall endeavor to state the general
basis of the banking business in Europe and to compare it
with our own, and where European methods differ from each
other in detail, we shall single out for the purpose of comparison that system which is generally acknowledged to be the
most efficient. Furthermore, in speaking of Europe, we shall
understand the term to mean primarily the three prominent
financial powers,—England, France, and Germany.
Let us begin by establishing the line on which modern banking has developed. From the primitive method of bartering
goods for goods, exchange gradually develops to the acceptance of an acknowledged standard or measure, be it the accepted value of an ox, a slave, a woman, a measure of grain,
or a certain weight of metal. Those means of exchange which
prove the most durable and, at the same time, are the handiest
because, being the most precious, they absorb the least space,
are finally evolved as the best measures of value. Thus gold
and silver of officially certified weight and fineness have developed as the coin and currency of nations. The next evolution is that, instead of accepting and carrying about clumsy
masses of metal coins, the owner is satisfied to accept a certificate of ownership of metal—the note. Here we see the
first appearance of credit. Credit means, literally, faith; it
is faith in the bank or government issuing the paper representing the bullion. We reach a state of modern banking,

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however, only when to this credit, which still means payment
for each transaction in coin or coin certificate, are finally added
other bank credits, which become part and parcel of the banking system. This means that instead of paying by money
only, the vast majority of the payments are effected through
transfer of credits; it means payment by check. I need not
dwell at length on this question of deposits and checks, as it
has been fully dealt with in some of the preceding addresses.
The check, however, is only one, although a very important
one, of the factors that constitute a modern banking system; many other currency-saving devices which prevent the
use and absorption of cash have to be added to render the
system a perfect one. We must add a modern system of bills
of exchange (by which we mean two- or three-months paper
drawn on banks or bankers or indorsed by them) well regulated by clear and simple laws. As the check acts as a means
of transfer of cash credits from one owner to another, so the
transfer of the acceptance of a bank is the transfer of credits
on time; it is like the transfer of banks' interest-bearing certificates of deposit on time. We shall have to deal fully with
this important question a little later. As parts of a modern
banking system we must further add well-organized stock
and produce exchanges and clear and simple laws regulating
the administration of corporations, and the issue, the transfer,
and ownership of securities. All these refinements of our
business intercourse, if I may so call them, have the object
and effect of minimizing the physical transfers of property,
and of reducing to a minimum the dangers of such transfers
by establishing well defined and generally accepted laws and
regulations governing such transactions, by avoiding unnecessary payments (through clearings), by liquidating whatever
balances remain to be settled with the smallest possible use of
currency, and by concentrating into large centers all offers
for purchase or sale, so that on a common meeting ground of
buyers and sellers the exchange of properties can be effected
with the least expense, the least risk, and the least delay.
To transform the unsalable individual part ownership or
individual indebtedness into stocks and bonds having a wide
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market, and to standardize merchandise, is an important step
in the development of this time-, risk-, and currency-saving
device, without which modern banking is inconceivable.
We have to add one more factor and a most important one.
The partial replacement of money by instruments of credit
must needs bring about, as a logical consequence, the necessity of reserves of money to meet these credit tokens, to redeem which cash may of right be demanded. How large
thete reserves must be depends largely on the strength of the
confidence—the credit—upon which the general structure is
erected, and on the degree of perfection with which these reserves may be made available.
An ideal banking system is that which provides for the
legitimate needs of a country at moderate rates with the maximum use of credit and the minimum use of cash, which checks
illegitimate or dangerous expansion or speculation, and which
avoids or minimizes as far as possible all violent convulsions.
We need not emphasize the fact that the European system
comes very near accomplishing this ideal, while our system
has proved palpably inefficient. Recent events have again
brought it home to us that the richest and soundest country of
the world went into a disgraceful state of temporary insolvency, while European nations, poor by nature and loaded
down with much heavier burdens than we, have weathered
similar storms without any such panic and wholesale destruction of property values. Let us consider, then, wherein our
system differs from theirs, and let us see which component
parts are missing in our machinery.
II
If we may anticipate our conclusions, we may say that our
methods are completely opposed to those of European countries.
The European system aims at centralization, ours at decentralization. Europe believes in and has established a system
of central banks, issuing an elastic currency which follows the
requirements of commerce and trade and is based, more or
less, on bills of exchange; while the United States has so far
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refused to reestablish a central bank and persists in maintaining a system of inelastic currency issued by 6,500 banks. The
European system is built on modern bills of exchange, which
form the quickest assets; while in the United States, the rediscounting of paper by banks being practically unknown, the
chief quick assets relied upon by the banks are call loans on
stock-exchange collateral. Europe has a system of general
banks with large capitals and branch banks all over the country; we prohibit a similar branch-bank system, and prefer a
network of 20,000 small independent banks and trust companies. Europe believes in a system of monthly or halfmonthly liquidations for stock-exchange transactions, while
the United States maintains daily settlements. Europe has
succeeded in working out for each country clear, generally observed, and uniform laws, regulating all commercial and financial questions; while in the United States not only do the laws
differ in the various commonwealths, but the underlying principles are not so clearly and so definitely laid down as abroad,
and every now and then the basis of the business structure is
violently shaken by some new interpretation or legislation,
or temporarily upset and endangered by sweeping injunctions.
In order fully to understand the European system, it will
be necessary to explain at the outset the importance of the bill
of exchange in Europe in the financial intercourse among
individuals as well as among nations. In the United States
our commercial paper is the old promissory note, it is a bill;
in Europe commercial paper is a bill of exchange. I think
that I cannot more forcibly express the difference between the
two. In the United States this promissory note is an investment, in Europe it is a means of exchange. If, in the United
States, this promissory note has entered the bank, it usually
remains there until it falls due; if a New York bank, under
normal conditions, should try to rediscount such paper, it
would create suspicion and distrust. This means that every
dollar invested by a bank in American commercial paper, that
is, every dollar invested to satisfy the most legitimate requirements of business, leads, without fail, to a locking up of cash
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in unsalable assets. We have been shown bricks of the time
of Hammurabi, the Babylonian monarch, evidencing the sale
of a crop and similar transactions, and I am inclined to believe
that it was as easy to transfer the ownership of these bricks
from one person to another as it is to-day for an American
bank to realize upon its discounted paper, if indeed it was not
easier.
Let us now observe the absolutely reverse method of the
European countries. In Europe there are scores of banks and
private banking firms that give their two- or three-months' acceptances for the commercial requirements of trade, or that
make it their specific business to indorse'commercial bills. A
commercial borrower in those countries who does not get a
cash advance will do one of two things: he will either sell to
his bank or his broker his own three-months' bill, drawn on a
banking firm willing to give him this credit; or he will sell
the bill drawn by him on his customer in payment for goods
sold to him, which bill may be subsequently passed on with
the indorsement of the banker. Through the addition of the
established credit of the acceptor, or by the various indorsements on the bills, the quality of the bill becomes such as
practically to eliminate the question of credit and risk, and
the conditions of the sale will depend only on the rate of interest. From being a scarcely salable promissory note, the
ownership of which entails a more or less pronounced commercial risk, the paper has been transformed, if I may call it
so, into a standard investment, the equivalent of which in cash
can be easily secured at any time.
This prime constituent of the European banking machinery
is entirely missing with us. Its existence is, however, most
important. Without such paper, the government banks of
Europe could not accomplish their work; and vice versa, the
role which this paper generally plays in Europe's financial
household is dependent on the existence of central banks. The
two cannot be separated.
It is one of the main duties and privileges of the government banks to buy legitimate commercial paper, with bankers' acceptances or bankers' indorsements. As the govern(4«8)

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ment banks buy this paper, the circulation of the notes which
they issue in payment increases, and on the other hand, as
they collect this paper upon maturity and reduce their discounts, their outstanding circulation decreases. This means
that they expand or contract according to the requirements of
trade. However, this is not a merely automatic process. For
as those intrusted with the management of the government
bank see the necessity of exercising a restraining influence,
they raise the rate at which the bank discounts, and in this
they are generally followed by the other banks of the country.
In the same way, if the government bank finds it advisable
for any reason to discriminate against the paper or the securities of certain groups or individuals, general discrimination
by the other banks will usually follow. It might be well to
add that the European government banks are not limited to
the purchase of paper, but that they also have the privilege of
making advances within certain limits upon securities up to a
fixed percentage of the market value, according to stated published schedules. The rate, however, at which such advances
may be made, as well as the government bank's discount rate,
is uniform for everybody and is, as a rule, so much higher
than that of the general banks, and the restrictions as to the
character of the securities on which the government bank may
advance are so much more rigid, that in normal times the bulk
of the business is done by the general banks. Only when the
demand for money increases does the rate of the general
banks begin to approach that of the government bank; but in
that case the government bank will, as a rule, raise its rate, so
as again to increase the margin over that of the general banks.
The government banks consider themselves, more or less, as
constituting the national reserve, ready to take an active part
in the nation's business only in times of emergency. A distinction is, however, carefully to be drawn between the abnormal crisis and what we may call the normal emergency
which arises regularly in consequence of certain economic developments, like crop movements or particular requirements
for special industries at Axed periods, and which, as experience has shown, subside after a time as regularly as they
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occur. When these normal emergencies arise, the banks do
not unduly raise their rate, but for the time being meet all the
requirements at a given rate, and allow their circulation to
increase, while the reserves go down. When the government
banks anticipate, however, that more than a normal emergency
will have to be dealt with, they continue to raise the rates in
order to protect their reserves and to force liquidation, and
in order to deter all branches of industry and trade from entering upon far-reaching new engagements.
The notes which the government banks are allowed to issue
are limited by the amount of gold and bullion which must
be held to cover them in full, or, as in Germany, up to at
least 33%. It would, however, lead too far astray to go into
the details of these special regulations which govern the issue
of notes in the different countries. It will suffice here to outline the general rule. Each government bank has a very decided interest in keeping its gold holdings as large as possible,
and in preventing the gold from leaving the country. If an
augmented demand for money and credit accommodation increases the amount of notes outstanding, the government bank,
by raising its rate, purposes not only to encourage a general
contraction of business, and to force the general banks of -the
country to contract, but also to attract foreign money into the
country. If England has a private discount rate of, say, 6%,
that is, if first-class commercial paper accepted or indorsed
by banks can be bought on an interest basis of 6%, and if at
the same time, there is in France a discount rate of 4%, it
stands to reason that the big French banks and the French
public will invest in English bills, and that French money will
go to England. The same holds good, of course, as to German, Austrian, Russian, or Scandinavian bills. It is, for instance, well known that at present, while rates in Germany
are high and in France comparatively low, hundreds of millions of German paper are held by the French banks.
The French banks would not buy the individual note of an
English, German, Russian, or Scandinavian merchant whom
they do not know; but they do know, and must know, the
value of the acceptance or the indorsement of the foreign
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banks, which offer and indorse or accept this paper. They
would not buy this paper, unless they knew that it could be
rediscounted at any time through the existence of a central
bank in the home country. None the less, however, the bulk
of the business transacted by a central bank is only a fraction
of the total business of the country, and is, in normal times,
limited almost entirely to the purchase and collection of short
bills. The mere existence of the central bank, however, enables the general banks to discount freely; and as everybody
thus discounts freely, there is the widest possible market for
discounts even without any active purchases by the central
bank.
While we cannot attempt to give any full description of
the working of central banks, it may be well to add that some,
like the Banque de France and the Reichsbank, have hundreds
of branch offices, spread all over the country, which, in Germany in particular, have developed an admirable system of
collection and of transferring moneys from one place to another. It may also be interesting to note that, contrary to a
widespread idea, the central banks of Europe are, as a rule,
not owned by the governments. As a matter of fact, neither
the English, French, nor German government owns any stock
in the central bank of its country. The Bank of England is
run entirely as a private corporation, the stockholders electing the board of directors, who rotate in holding the presidency. In France the government appoints the governor and
some of the directors (regents). In Germany the government
appoints the president and a supervisory board of five members, while the stockholders elect the board of directors. The
German government receives three-quarters of the profits
after the stockholders have received a dividend of 3j*4%.
Thus the central banks are independent of direct government
interference, or there is a joint control by government and
stockholders. But the government is the largest depositor of
the bank, and is thus obviously, both for its own credit and
for the welfare of the nation, vitally interested in maintaining
its credit at the highest possible point.
The consequence of a broad bill market is that, whereas
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our banks keep against their deposits primarily call loans on
stock-exchange collateral, a European bank or banker will
keep against his demand obligations a large amount of banking paper, which he can sell at any time at the discount rate,
without causing any such commotion as is created with us
when call money is rapidly withdrawn from the stock exchange.
Call-money rates and their daily fluctuations do not directly
affect European stock exchanges. Europe has developed a
system of monthly or half-monthly settlements on its stock
exchanges, which means that from one settlement to another,
the amount of cash required by the stock exchange remains
stationary. If, at the settlement, it develops that commitments
on the stock exchange have increased, and that a larger
amount of money is needed for stock-exchange loans under
normal circumstances, so much more money will be withdrawn
from the bill market and go into the stock exchange. If less
money is wanted by the stock exchange, so much more will go
into the bill market. We cannot dilate fully on the interesting
question of the comparative merits of daily versus monthly
stock-exchange settlements. It may, however, be said that if
it is a saving not to settle each transaction by individually delivering and paying for each purchase and sale, but to pay
and deliver only the balance of the whole day's transactions
by one clearing (without which it would be impossible to deal
in a million shares a day), then the saving would be still
further increased if the clearings covered not only one day,
but a whole week or a whole month. It might, however, be
asked: Why not then clear only once a year? The answer is
that, until the transaction is actually paid for, there is a risk
that with wide fluctuations one of the contracting parties may
not be able to pay the difference between the price on the day
on which the business was concluded and on the day when it
would be finally settled. That is the reason why settlements
in England do not exceed two weeks, and why in New York
they should probably not exceed one week, for which period
some method of clearing the differences daily or of securing
them by collateral might easily be devised.
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The present American system of daily settlements, however, combined with the lack of a central bank and of modern
paper, brings about the shocking conditions from which we
are suffering. It is a fact that in Europe, where settlements
exist, such wild fluctuations as prevail with us are unknown,
except in our own securities.
Our much-maligned stock exchange is the scapegoat of the
nation; if trade contracts, the surplus money from the Atlantic
to the Pacific is thrown on the stock exchange, creating easy
money and encouraging speculation in securities just at a time
when speculation ought to be slow. If industry and trade
thrive, and are in need of money, call loans are withdrawn
from the stock exchange, and, the more money is required by
commerce and industry, the more the stock exchange will be
depleted. The usual consequence is our annual money panic,
and a resulting violent collapse of prices of securities.
This obnoxious system of cash dealings is forced upon us
as the result of our unreasonable usury law, which, although
making it unlawful to take more than 6% on time loans, is in
reality the direct cause of an almost confiscatory rate being
charged from day to day for weeks at a time. We shall dwell
upon this law later. The fact remains that with a legal limit
of 6% for time money, and with the desire of the banks not to
charge merchants a higher rate, and with the lack of any modern paper which we could offer to other nations, there remain
practically only two means of relieving the stringency and of
attracting foreign money. These are the utilization of foreign credit, through long bills drawn by our banks or bankers
on Europe (and these could hardly be used during the last
crisis in consequence of England's drastic measures) and incredibly high rates for call money, that bring about wholesale
realizations and attract foreign buyers at our bankruptcy
prices.
Banks have been blamed for the high rates and for having
had so much money on the stock exchange. They are absolutely helpless with regard to both. How could a bank withstand a run, if it had all its money in unsalable commercial
paper, and how is a bank to meet the demands made upon it
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otherwise than by drawing upon its quick assets, viz., its call
loans? It is our system that is wrong from top to bottom; it
is this and not the individual that is to be blamed in this
respect.
The aggregate amount invested in trade and commerce
must vary. Its grand total should be many times the amount
invested in stock-exchange loans, which represent the securities carried for speculative investors. Our way of doing business may be illustrated by two adjoining reservoirs, a small
one and a very large one. The small one represents the stock
exchange and contains the call loans; the large one represents
the general business of the country, as expressed by commerce
and industry. In Europe they regulate the small reservoir by
pumping water into it from the large one, or by withdrawing
water from the small reservoir into the large one. In this way,
the outflow and inflow in the large reservoir are scarcely perceptible, and there is no difficulty in regulating the small one.
With us, we do the reverse. If there is a shortage of water in
the large reservoir, we begin to draw on the small one and, in
order to increase the water in the large reservoir by an inch,
we empty the small one altogether or, in order to decrease the
amount of water in the large reservoir by an inch, we fill the
small one to the overflowing point. Moreover, Europe can
tap a third reservoir, the additional currency issued by a central bank, with which to regulate the large reservoir if it fluctuates more than a few inches, while with us no such final
reserve exists. As a consequence, fluctuations of several feet
appear to be inevitable and regular occurrences with us. It
may be added that not for many years has the European reservoir shown such variations as this year, and we must sadly
admit that Europe's abnormal rates were due largely to our
own unbalanced conditions. Unable to regulate our own
household and to use our own gold, we have accustomed ourselves to use and to abuse Europe, which suffers intensely from
our lack of a proper system.
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III
Let us now add a few words about European and American
banks in general.
We have in the United States national banks, state banks,
and trust companies, practically without any proper line of
demarcation; they are all, more or less, doing a similar business, except that the national banks have the privilege and
duty of providing currency against government bonds. In
Europe we find the privilege of note issue restricted to the
government banks, which are hemmed in by such regulations
as to keep them out of speculative business or general commercial transactions. Whenever a note-issuing bank desires
to enter upon general business, it has to abandon the privilege
of issuing notes.
Outside of the note-issuing banks the only European banks
that are regulated by law as to their investments and their
way of doing business are the savings banks. For all other
banks there is no government supervision, there are no laws
as to their reserves against deposits, and no restrictions as to
indorsing or establishing branch banks. On the contrary, accepting, discounting, and indorsing paper form the essence
of Europe's banking, which is built up on a system of old, established, very important general banks with large capital
and with a network of branch offices and agencies all over the
country, and in the centers with many branch offices in a
single town. On the whole, this system of making large responsible banks and their branches the custodians of the people's money is preferable to our system of allowing a few,
often irresponsible, men to get together, hire some groundfloor corner, fit it up in marble and bronze, and call it a bank,
with a capital of $1 oo.ooo, and often less, and a corresponding
surplus paid in, not earned. Small banks constitute a danger,
particularly so if they accumulate deposits which are out of
proportion to their own resources. There is an old French
and Italian banking rule that deposits ought not to exceed
four or five times the amount of capital and surplus. This
rule is certainly a wise one for a country with so imperfect a
banking organization as the United States.
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While Germany and France may claim the best government
bank organizations, there has been too much concentration in
the business of the general banks of these two countries. The
German and French banks have accomplished a wonderful
piece of work, but their system of " taking it all," being banks
of deposit, discounters, acceptors, indorsers, brokers, and underwriters at the same time, is not free from danger. Not
that there is risk of their getting involved, but there is too
much elimination of independent firms, which constitute a valuable backbone, especially in times of need. In Germany,
where this process has been most marked, there is a strong
movement on foot to undo the harm that has been done.
The English system has, in this respect, so far proved the
best, for the reason that, while they have large deposit banks
with branch offices all over the country, they have kept these
deposit and check banks comparatively free from commission,
investment, underwriting, and kindred operations. In England the investment and the commission business remain
mainly with the broker, while the contracting of large loans
and the formation of syndicates is generally left to private
firms, or if it is a question of South American, Oriental or
colonial loans, to the banks which confine themselves to business with these countries. Again, there are foreign exchange
houses and firms conducting exclusively an accepting and indorsing business; and finally, there are the big discount companies. One might say that every branch of these various
enterprises is taken care of in an able and efficient manner in
England; business is done at fair rates and at the same time
substantial profits are earned.
In Europe the general banks are not required to hold gold
reserves. Gold reserves are kept exclusively by the note-issuing central banks, which have outstanding demand obligations payable in gold.
We ought carefully to draw the line between a working reserve and a gold reserve. A general bank has no need of a
gold reserve. But every general bank or financial institution
ought to have a large working reserve against its demand obligations. Such working reserve, however, need not consist
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of legal-tender notes, but of such assets as can be quickly
turned into cash credits; be it call loans, bank paper, British
consols, or whatever can readily be made available in times
of stress. In addition, the European banks generally have
very large on-demand deposits, especially with the central
bank of the country, and, of course, a substantial amount of
actual cash, as it is required for the daily needs of the business.
But why should state banks or trust companies or national
banks, if they happen not to issue notes, carry gold reserves?
For their own protection they need strong working reserves,
but, if it were not for our lack of a central bank and for the
shortcomings of our treasury system, why must they lock up
legal-tender notes to such an extent?
In Europe the gold reserve and the emergency reserve of
the country are kept and managed by the central bank. We
have already shown how the government bank acts in protecting the country and in providing for its needs. Let us
clearly understand that without the bank rate, that is, without
the ability to regulate the rate of interest in times when the
government bank's cooperation is needed its efficiency would
be nil. A system of modern banking paper is absolutely necessary to establish this power of the bank, and furthermore, a
credit so firmly established that the higher rate of interest will
act as an inducement to invest and not as a breeder of distrust
and an incentive to realize. A further requirement is a system of large and conservative banks that will cooperate, and
that, as a matter of fact, cannot afford to abstain from falling
in line with the general tendency initiated by the central bank.
With such a system, a panic like the one from which we are
just emerging should be impossible. For no matter whence
money is withdrawn, it would turn up in another bank. It is
inconceivable that conditions would nowadays arise in either
England, Germany, or France where people would lose entire
confidence in all banks, government banks and savings banks,
so that actual hoarding and locking away of money would
occur. Our worst hoarders, the banks and trust companies,
would, under a European system, have no reason to lock up
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lating a balance with the central bank. The unheard-of fact
that during a scarcity of currency the banks, instead of disbursing their cash, begin to accumulate and actually to hoard
currency, would be an impossibility.
There are two different kinds of panics or crises with which
a nation may have to deal. One is a domestic drain, created
by strong domestic demands, degenerating into a panic by
some catastrophe engendering the fear that the supply of
money will reach an end. Such panics must be met by paying
out freely and boldly. Bagehot says:
A panic, in a word, is a species of neuralgia; and according to the
rules of science, you must not starve it. The holders of the cash
reserve must be ready, not only to keep it for their own liabilities,
but to advance it most freely for the liabilities of others. In wild
periods of alarm one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which
causes them.
And further on he says:
It is not unreasonable that our ultimate treasure in particular cases
should be lent; on the contrary, we keep that treasure for the very
reason that in particular cases it should be lent.
Another kind of panic may arise through a drain from without. Such drain must be met in modern countries by increasing the rate of interest until the tide has turned, until the
creditor finds it more profitable to leave the money where it
brings attractive interest than to withdraw it. Both kinds of
panics have been successfully met, or have been entirely
averted, in Europe by central banks and by a firmly established credit. Germany, for instance, without such a system,
would now be in the midst of a panic; but she has safely
avoided it, in spite of her being by nature a poor country,
while we, nature's spoilt children, need only be wise to be rich
and safe.
As it is, neither can we protect ourselves by a discount rate,
there being no discount system, no central bank, and no legal
rate beyond 6 % ; nor can we meet an internal panic because,
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irrespective of other shortcomings of our system, it forces each
bank to look out for itself and to try to draw away the cash
from the others, in order to increase the amount in its own
vaults, thus aggravating the panic. While the only way to
meet a panic should be to pay freely, any bold action is paralyzed by the frightful thought that there is no way of creating
additional currency, and by the knowledge that, if the drain
continues, there are no means of preventing wholesale individual failures unless general suspension of cash payments is
adopted. While one thousand millions of dollars were lying
idle in our banks and trust companies as so-called reserves,
that is, as the final resort in case of need, this money, by virtue of the law, could scarcely be touched! What, then, is the
use of such reserves, if they are not available in such times,
and if, even in contravention of the law, they could not be
used by one bank without fear of being ruined unless all
banks agreed to use them freely? And as it is impossible,
even without such a law, to make all banks act in the same
bold way, it follows that reserves should be concentrated, as
they are in Europe, and that while the banks may be asked to
cooperate, they must be governed in this respect by one central organ.
The question of treasury and government-bond secured
bank notes has been so fully and so ably dealt with by Mr.
Hepburn in a preceding address, that I can limit myself to the
hearty indorsement of what he said in this respect.
The net result of our system is that immense amounts of
gold and currency are wastefully locked up, and that, in spite
of our immense gold treasure, which is four times as large as
that of England, and notwithstanding our enormous per capita
circulation of thirty-five dollars, we suffer almost annually
from acute scarcity of money.
If we only had the means energetically to contract our currency, and to use our gold in a scientific and a practical way,
we should have gold and currency enough to meet any panic.
As it is, the amount of notes outstanding is about stationary in
times of activity or stagnation alike, while as a consequence
the rates for money vary between zero and 200%. In Europe
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it is the reverse; rates are fairly stationary and the amount of
notes outstanding contracts and expands. With a cash balance of $260,000,000 during the recent crisis, our government had to incur new indebtedness to enable and to induce
the banks to issue additional currency. Within three months
the circulation increased through this artificial process by
eighty million dollars, but the government had to lose about
$1,000,000 of the people's money to reach this result. On the
other hand, the German Reichsbank issued in one week, at
the end of last December, M. 320,000,000 and the government
received a 5% tax on this issue, which is borne by those who
received the money. These notes returned to the Reichsbank
within less than three weeks.
Our present system of maintaining and selling government
bonds on a basis so high that only national banks can buy
them results in constant inflation of our currency by about
75% of the amount of new government securities issued from
time to time. Inflation with practically no contraction! It
would be cheaper and more straightforward if the government, instead of issuing interest-bearing government bonds,
would issue new greenbacks. It amounts to the same thing,
and the government would in addition not lose the interest.
Furthermore, our one-man-power system of the treasury is
contrary to European ideas; it is harmful to the country and
unfair toward the incumbent of the office. While our generation has been particularly fortunate in seeing this office occupied by honest and able men only, the danger remains, nevertheless, that this vast power may one day be vested in less desirable men. Besides, the laws governing the functions and
powers of the Secretary of the Treasury are old-fashioned,
in parts too loose and in parts too extreme, and not clearly defined, so that even under the same President we find a radical change from one method to another, according to the individual interpretation by the incumbent of the office.
This lack of continuity is injurious. Europe does not give
such vast and arbitrary powers to one single political official,
holding office for a comparatively short time only, and often
without proper business training. On the contrary, the powers,
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clearly defined and properly restricted, are vested in a permanent non-partisan body of business men of the highest
standard, thus constituting a system which insures clear legal
conditions, safety and continuity.
IV
A similar difference exists between the United States and
Europe as to general legislation governing banking transactions and corporations. In dealing with these questions it is
not my intention to accuse anybody or to excuse anybody; the
only object of this investigation is to explain certain fundamental shortcomings of our system.
Modern banking is built upon gold—and confidence. The
question of how to estimate working reserves, business risks
and profits, as well as the general valuation of securities, all
these are indissolubly interwoven with the other question of
how firmly established is the confidence on which the whole
structure rests and how far this confidence is liable to be shaken
in normal and in troublous times.
The basis of confidence is an immutable belief in the continuity of political and social conditions, which are held to be
safe and sacred. There must be faith in the continuity of the
form of government, in the continuity of the legal status, and
in the fair observance of law by government and governed
alike. There cannot, however, be confidence in the continuity
of the laws until they rest on a broad, equitable basis, and are
fairly uniform over the entire country. There is nothing so
harmful and so dangerous as the existence of two laws, the
one a written law, unenforced and often impossible of enforcement, the other a customary law, which stands unchallenged
for generations and which the written law cannot override,
often because the latter, enacted in haste or hate, is incompatible with reasonable business usages and necessity.
Just and uniform laws, universally observed and equably
enforced, imply wholesome government regulation. Loose
or extreme laws that cannot be observed and that, therefore,
are not generally enforced, but that may be suddenly and
spasmodically enforced according to the whim of the people
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or of the party in power (yesterday a dead letter and to-morrow a firebrand), imply anarchy or autocracy. In financial
matters Europe has advanced far in attaining the former condition; we have made little progress in emerging from the
latter state.
To cite only a few instances:
If the full taxes on capital, at present about 1.68%, were
exacted and paid, no capitalist could remain in New York.
If banks did not over-certify, our financial centers would
have to stop business.
If it had not been possible to pay rates far exceeding 6%
for time loans, it would not have been possible a few weeks
ago to draw so much gold from Europe, where money rates
were above 6%, and the catastrophe would have been still
worse than it was.
But, *e venture to ask, why is it necessary to force people
to evade the laws in order to carry on business?
Among the important laws that have a distinct bearing on
the banking situation, and that are in great need of revision, I
should specify the following:
In the first place is to be put the usury legislation of our
separate states and especially of New York. The usury laws
in Europe, where they exist at all, apply only where the borrower is in dire distress when seeking and accepting a loan,
and where the individual or corporate lender knowingly profits
from his helpless situation when exacting usurious rates.
Usury can be judged only in the light of the surrounding circumstances; and usury laws in Europe generally apply only
to individuals. Our law, which prevents solvent firms of
bankers, merchants, manufacturers, or brokers from contracting for money on time at more than 6%, implies not only undignified tutelage, but unsound business judgment. The recent crisis has shown that it was not taking advantage of people in need to give them money on time at over 6%; on the
contrary, it would have been a blessing, and in many cases
their salvation, if they had been able to receive the money at
even a much higher rate. This unsound and completely indefensible usury law is, however, the reason why we must have
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daily settlements, and in this and other ways it indirectly leads
to frequent convulsions of our money rates.
Secondly, the lack of a modern system for discounting commercial paper in the United States is due to the want of uniformity and precision in the laws governing bills of exchange
and bankruptcy. This uncertainty as to procedure forces us
to prefer the well-defined promissory note—however unsalable—to the business of accepting and indorsing commercial
paper at the low commissions customary in Europe. Furthermore, since our commercial business is chiefly financed by the
national banks, it is a foolish regulation that prevents their
indorsing or accepting such paper to any extent, in order that
they may carry out the purely secondary object of issuing
bank notes.
Another difference between Europe and America that affects the banking business is the regulation of the issue of securities.
Stock watering, that is, capitalization of earning power and
of goodwill, is permitted in England and France, while it is
not allowed in Germany. While, personally, I prefer the
German system, it is a mistaken idea to think that the capitalization of earning power necessarily means taking advantage
of somebody. If the German sells at 200% an industrial stock
paying 10% dividends, it amounts to the same as if the Englishman had sold at par twice the amount of shares, on which
a 5% dividend is paid. But whether we adopt the one system
or the other, it is of the first importance that the public should
be fully informed as to the real value of the stock which it acquires, and that the law should be clear and definite in its
terms, and equal rather than erratic in its enforcement.
In Germany the law makes all public offerings of securities
and applications for listing on the stock exchange dependent
on the publication of a full prospectus. This document must
contain all facts of importance concerning the security offered
and must be submitted to, and approved by, a state commissioner. Anybody withholding information, or furnishing
wrong and misleading information, is criminally liable. At
the same time, the law requires that balance sheets be pub(433)

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lished regularly, and where the issue deals with a new flotation the prospectus must state clearly the value and the price
of the properties transferred to the corporation at the time of
its incorporation, and in certain cases also the names of those
from whom they were bought.
We come finally to one of the most important of the subsidiary points affecting our banking system, namely, the relation of the directors to the corporation. In most of the European countries, particularly in Germany and France and, to a
certain extent, in England, this relation departs radically from
our custom. The French and German corporation is managed by a board of directors and salaried managers. The
latter are not members of the board, as is the managing president with us. The board of directors in Europe supervise the
managers, who have to report to the board about their acts
and proposed acts, in order to secure their sanction. The rule
is that both the managing officers, whose fixed salaries are
comparatively small, and the board of directors share in the
profits of the company. The stockholders ordinarily receive
the first 4%, while of the surplus over 4%, a certain proportion goes to the managing officers and their staff and to the
board of directors. As the corporation grows, the percentage
going to the directors and the managers is frequently modified
to whatever the shareholders consider a fair compensation.
The net profit of the forty-five important German banks for
1906 was M. 231,000,000. The aggregate capital of these
banks was M. 2,198,000,000 with a surplus of M. 542,000,000,
making their total resources M. 2,740,000,000. Of this net
profit about M. 200,000,000 were paid out; about one-seventh,
viz., M. 28,000,000, was paid to the managers and staff
and to the directors, while the remaining six-sevenths, being
M. 171,000,000, were paid to the stockholders, being an average dividend of 8.07%.
The underlying idea is a very different one from our own.
The European maintains that, in order to hold any one liable
in case he does not perform his duty, one ought to pay him if
he does. In Germany, for instance, if a director does not act
with what would be deemed ordinary business prudence, and
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if he neglects his duties, so that the company suffers loss, he is
made personally liable. In the very rare cases of bad bank
failures which Germany has witnessed, like that of the Leipziger Bank,—which, however, owing to Germany's admirable
system, passed by without any panic—the directors, among
whom were men of many millions, lost all they possessed.
While the law is thus very rigid, it does, on the other hand,
not require the director to be anything more than honest, or
to do anything more than use the utmost possible care. But
the board members in a bank, who receive quite a large income through their share of the profits, realize that they must
in turn devote a good part of their time and energies to the
interests of the bank. All corporations, like the big shipping
lines, the industrial concerns, and the insurance companies,
are run on exactly the same system. As a result, the so-called
dummy director, so familiar to us, does not exist, because
every director is materially concerned in seeing to it that the
interests of the company are fully safeguarded at all times,
and that no one director or manager receives any profits that
might be determined to the corporation; while at the same
time this system makes the directors disinclined to consent to
over-capitalization.
With us, on the other hand, the laws and usages regulating
the relations of director to stockholder need much modernizing. We do not pay our directors, for ten dollars or so per
meeting cannot be considered a remuneration. Under the old
system is was considered good style to be on the board of a
bank, as it was to be on philanthropic, religious, or educational boards; membership was, in fact, largely a social function. Or, on the other hand, some individuals were willing
to join a board without any compensation, because it was their
own business that they were managing; e. g., their own railroad, for which they had to supply the wherewithal themselves, and the territory of which they had to open by taking
up farming or mining or by starting other industries. In
such cases they sometimes made money and sometimes suffered
heavy losses; but on the whole, it was this system of directors
as chief stockholders and ever active prospectors, assuming
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large risks themselves, that developed the country and made
it what it is to-day.
In the course of time, however, as the corporations grew in
size and number, directorship ceased to be a social function,
and the corporations ceased to be the property of a few. They
became the property of a large community of stockholders,
and the directors, from being majority stockholders, slowly became trustees.
With the evolution of the modern conception of trusteeship
has come the present tendency to endeavor to tie the director
hand and foot and to hold him liable if anything goes wrong
with the corporation. But let me ask, what right has one
shareholder substantially to say to the other: " Go on the
board, work for me, worry for me, give your time and spend
your energy; I shall not pay you for it, but I shall hold you
strictly accountable if anything happens to my company. If
you chance to have a business of your own, and if you find
any time left for it, be very careful not to do any business with
my company. Leave that privilege to me. Because you work
for me, you lose that privilege; and because I do not work for
you—I retain it." That is virtually the present attitude of the
American stockholder and to a certain degree the legal status
of the director. Let us do as the Europeans do, let us remunerate our directors in proportion to the dividends they earn
for us, and then we shall not only have the full right to hold
them liable and to ask them to give up certain privileges, but
we shall at the same time have greater certainty that every director will be careful to do his best.
Banking, like almost all other commercial transactions, is
in reality an insurance business. For each risk, we ask and
receive a premium commensurate with the hazard of the transaction. In a city built on volcanic ground the insurance
premium is high. Bankers' profits in America are higher
than in Europe; but they must be high so long as, for lack of
modern banking methods and of uniform and well-established
laws, we live financially on volcanic ground. We have just
passed through a pretty lively earthquake, and the losses which
wiped out the profits of years show conclusively that the
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premiums earned were not too large in proportion to the risk.
Do not let us blame the insurance company, but let us be
doubly careful to build only in steel and stone and let us build
on solid ground. For, luckily, in this instance it is within
our power to transform that volcanic ground into a solid foundation.
We are apt to think that our problems are peculiar to us
and that we must find our own way of solving them. If we
had only realized that American and European history is
being written with the same ink, that man is man, with similar
virtues and similar vices, on both sides of the Atlantic, we
might have learned much from experience, and might have
been able to avoid much amateurish and harmful legislation.
Germany also had many sovereign states which ultimately
formed a union. In each of these states there was a different
legal system,-—German law, Roman law, Code Napoleon and
all kinds of local laws. Yet Germany organized a commission,
which worked for twenty-five years and which finally completed a code of laws to govern the entire country. A uniform
commercial code had, in fact, been created far earlier, and
Germany has now for many years been enjoying the advantages of uniformity. With us, also, there are surely many
questions, social as well as commercial, on which the East and
the West, the North and the South, can agree, and on which
uniformity of state legislation can be secured—if for no other
reason than to avoid the much-disliked federal regulation.
In Germany, Sweden, and Switzerland—the last of the
countries to adopt a central bank—we find that obstinate opposition was long directed against the creation of such a central
institution, chiefly by the then existing numerous banks of
issue, which feared lest their business might suffer. In each
country in turn the very banks that were forced to abandon
the right of issue in order to become banks of discount and deposit acknowledge to-day that they have derived nothing but
profit from the change, and that the central bank has conferred unalloyed benefit on the entire country.
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V
While our investigation has disclosed the nature of the
ideal, it has, at the same time, also made it evident that we are
still far removed from this ideal; so far, in fact, that any attempt to reach it immediately would be futile. We can, indeed, advance only step by step, but I am convinced that we
shall never attain the summit of our ambitions or reach a completely satisfactory condition until we have worked our way to
a central bank and to the adoption of clear and equitable statutes. We cannot secure uniform laws promptly, but we can
begm by modifying some of the laws mentioned above, which
are incompatible with common sense, and by creating truly responsible boards of directors like those in Europe.
We cannot have an effective modern central bank, because
there are no modern American bills of exchange, and we cannot create a sufficient amount of modern paper without a central bank. We cannot have stock-exchange settlements without the abolition of the usury law; but even after its abolition
we must have a bill market before we can do away with daily
settlements and call loans, based on these daily transactions.
Nevertheless, every one of these changes will have to be effected some day, and it is all-important that each successive
step in currency and banking reform be made with this end in
view.
From this standpoint it is evident why neither the Aldrich
bill nor the Fowler bill can be deemed to be a step in the right
direction. Every measure is bad ( i ) which accentuates
decentralization of note issue and of reserve; (2) which
uses exclusively bonds as a basis for additional circulation;
(3) which gives to commercial banks power to issue additional
notes against their general assets without restricting them in
turn in the scope of their general business, and without creating some additional independent control, indorsement, or
guaranty; (4) which gives arbitrary powers exclusively to
political officers, often untrained in business, and usually holding office only for a short period.
A central clearing house, with power to issue against clear(438)

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ing-house certificates notes to be guaranteed by the United
States, would, in my judgment, form the best solution for the
time being. The creation of a central clearing house with a
capital of its own and with a limited dividend, the surplus
revenue going to the United States, would leave present conditions undisturbed, and, while offering immediate relief,
would at the same time form a sound basis for future developments. The plan would possess the following advantages:—
1. The clearing house would have its own gold reserve.
2. It would centralize the additional note issue and would
therefore do better service in permitting legitimate expansion
as well as in forcing effective contraction, which, with sixtyfive hundred independent note issuers, is well-nigh impossible.
While additional notes issued by a bank mean an increase
of deposits, which may perhaps be called any day or which, on
the other hand, may remain forever, an advance by the central clearing house would be made to the banks for a given
period, after which the money must be returned. It would,
therefore, be safer for the banks, and would at the same time
insure contraction after a certain time, as in Europe.
3. The central clearing house would be able to accommodate commerce and industry in times of need by accepting
commercial assets, provided that they are recognized as legitimate and safe by the indorsement of the local clearing houses.
4. It would leave our national banks without any further
independent note-issuing power, and would in this respect be
beneficial; for additional note-issuing power should logically
carry with it further restrictions as to their privilege of doing
a commercial business, whereas their privileges in this respect
should rather be increased.
5. Through the share in the profits reserved for the government, the latter would receive some return on the funds
which it would deposit with the banks through the central
clearing house, whereas at present the government does not
receive any such return.
6. It would form a medium through which gold loans
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might be contracted with European government banks in a
way similar to that by which transactions have been concluded
between the Bank of England and the Banque de France.
7. If there were formed to supervise the management of the
central clearing house a central board administered by salaried managers, as in Europe, and comprising business men,
largely selected from the clearing-house committees, as well
as political officials, it would eliminate the arbitrary powers
which the Secretary of the Treasury is now called upon to exercise, and it would create a continuity of policy, which is
most essential for the development of the country.
8. Finally, it would show that this country is able to produce a body of men as honest, as trustworthy, and as efficient
as those into whose hands Europe has confided the care of its
central banks. As the confidence in this body grows, as the
banks come to feel its beneficent influence, the powers of this
clearing house may gradually be increased, and thus from
the joint indorsement by the clearing houses we may gradually gain our way to the indorsement and acceptance by individual banks, so that we may finally be able to develop a central organ which, safeguarded from political and from financial domination and rigidly restricted as to its scope of business, will place us financially in a sound and healthy condition
and will cause us in this domain, as in others, to be respected
as a modern and completely civilized nation.
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A CENTRAL BANK SYSTEM AND THE UNITED
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N dealing with the problem of a " Central Bank of the
United States," one should properly discuss first the advantages and disadvantages of the central bank system
in general, and then the particular problem of a central bank
of the United States.
For the purpose of this discussion, however, I may take it as
a matter of common agreement, that in the present state of our
civilization, wherever circumstances permit of its establishment, the central bank system is the most suitable and efficient.
When the millennium comes, when the reign of eternal peace
is ushered in, and when competing armies and navies no longer
exist, we may see a system which will centralize all the gold
of all countries into one big international reserve, or a system
which can be operated without the use of any gold at all, as
some theorists, like Prof. Knapp, of Strassburg, foresee. I, for
one, do not believe that either we or our great-grandchildren
shall have to discuss these possibilities as more than theoretical questions.
While we all hope that the arbitration movement will continue to grow and that wars may in the future become less and
less frequent, the possibility of struggles among nations always remains. Hence nations will never consent entirely to
abolish their armies and navies, and just as little as they will
give up their reserves of powder and guns, will they agree to
give up their reserve of gold. This is important; for while,
within the confines of our own political boundaries, our present money system acts as a national clearing house—crediting to each of us the net result of his work, and accomplishing
this practically without the actual use of gold, by means of
bank accounts or of checks to bearer, viz., bank notes,—still
ulterior payments between nations, whenever all other means
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of settling a debit balance with a creditor nation have been
exhausted, must be made in gold.
To meet the immense volume of demand obligations, which
are, by their terms, payable in gold, there exists in actual
gold under a modern banking system an amount equal to but
a small fraction of the total amount of gold debts. This system is therefore safe only if the credit of the banks is so strong
as to inspire a confident reliance that even if actual gold in
large quantity is at one and the same time demanded from one
or from several banks, the metal will not be needlessly and
wastefully hoarded, the public and the banks themselves being
confident that money so withdrawn will be redeposited, so
long as there remain some institutions the credit of which cannot be shaken. Furthermore, the system must be so constituted that in case of a demand for gold each solvent bank will
pay out the metal freely and boldly, recognizing this as the
sole method of stopping an internal drain, and of preventing
it from degenerating into a panic. In addition, the system
must provide for a means of successfully combating the export
of gold, and of encouraging its import, when necessary,
through the medium of the discount rate. This again presupposes the existence of a large volume of safe commercial
paper endorsed by, or bearing the acceptance of, well-established banks or bankers, paper which is salable at any time
and which, by the customs of the country, is freely purchased
or resold by financial firms and institutions, as their daily
needs develop. Finally, the laws governing and safeguarding the creation and collection of such paper must be so clear
and uniform and the collection of such paper in every part of
the country must be so easy, as to make an investment in such
paper not only the safest, but also the quickest asset of a bank.
These conditions actually prevail in countries enjoying a powerful and well-organized central bank.
There is a very old English phrase saying, " John Bull can
stand anything, but he cannot stand 2%." Since this phrase
originated, centuries ago, John Bull has seen lower rates, but
none the less it remains true to-day. It means that money
seeks to draw a fair return of interest, and it illustrates, fur(442)

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thermore, why a period of too easy money invariably brings
in its train a period of expansion and overspeculation. With
both phases the central bank is intimately connected. As the
meteorologist draws his chart showing the points of high and
low pressure, and from these deduces the probabilities of wind
and weather, so a map could be drawn showing how money,
among financially well-organized nations, flows with absolute
certainty from the point of low interest rates to the point where
a higher return can safely be secured. And just as low pressure is not the only factor determining atmospheric transformations, but as temperature and humidity are important elements as well, so in the movement of money also there are important local questions to be taken into account. Such .are the
rates of exchange which, as the case may be, either add to the
interest rate to be earned in another country, or else decrease
the return to be received. There is furthermore the question
of the degree of confidence enjoyed by each country.
As the insurance premium is commensurate with the risk of
each transaction, so money exacts a larger return from investment in countries which are considered financially less secure
or in which, owing to a smaller or more irregular market, the
investment cannot be so quickly resold. The total amount
which the investor is willing to place in each particular country will depend upon these considerations.
An investigation of European conditions will show that
money moves freely, according to this principle, between the
larger and well-regulated European financial centres. In the
face of political antagonisms money will flow to that centre
where the highest interest return can be received, provided
that confidence in that particular country is so strong that the
higher rate does not act as a deterrent but as an inducement.
Thus French gold began to flow into England when the English bank rate went up to 7% at the end of last year. French
capital at the attractive interest rate was invested in English
bills to such a degree that the balance between the two nations
turned in favor of England, and had to be settled by shipments of gold. In a similar way hundreds of millions of foreign capital move into Germany when rates become remnner(443)

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ative there, and leave that country again when the difference
in rates, the margin, as the banker calls it, disappears.
We cannot too strongly grasp this idea of the power of the
bank rate to protect and to attract gold. Without such power
the central bank system is useless; for it would collapse when
the first drain occurs.
How is it possible, it is often asked, for England to do this
enormous business which comes to it as the world's clearing
house, with so small an amount of gold ? The answer generally given is that it is possible only through England's power
to command the gold—thus implying the idea of immense balances due to England, which are called in when needed.
While this at certain times may be correct, it does not state the
most important cause, namely, England's credit, the great
confidence commanded by the English banks and by their
paper and the knowledge that that paper can always be resold
without any difficulty whatsoever, and that, if required, it can
be collected in actual gold. England's credit and her ability
to adjust her rates of interest render her system possible and
effective. Between the indebtedness of one nation to another
and the actual settlement of that debt in gold there lies as a
buffer the borrowing power of the banking communities of
the respective countries. Nations financially well-organized
will find that for a moderate inducement money will flow to
them freely for the purchase of securities, or for the purpose
of short-time investment. This buffer is strong in England,
as it is weak in the United States. We have no modern and
readily salable paper which in critical times we can offer to
foreign markets, and while the European banks work, with
fluctuations within fractions of i%, our primitive methods
often mean that before the tide can be turned we must suffer
fluctuations of interest rates of 100% and a fall in the value
of securities to bankruptcy prices.
Just as important as the protective power of the central
bank is its preventive power. When money becomes too
abundant there is always danger that it may leave the country,
and also that speculation may be unduly stimulated. It is
during such a period of general exuberance and expansion
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that the central bank, if wisely managed, will draw in its
funds and prepare for the coming storm; to accomplish this it
will seek to stiffen money rates, and, by sounding its note of
warning, it will often avert the coming crisis or modify it into
that normal form of natural reaction which inevitably follows
any period of great prosperity and expansion.
On the other hand, a perfect central bank system will protect the country not only from too easy money, but also from
too high rates during those periods when money is in active
demand, as for instance, in our country, during the crop season. During such times a perfect central bank system will,
without unduly increasing the rate, provide freely for legitimate demands. It will be prepared to let its reserve decrease
materially, knowing by experience that the notes issued in excess of its normal circulation will quickly return after the particular business of a given season has been done. Thus we see
that the end of December annually brings with it a large increase in the note circulation of the German Reichsbank,
which notes, however, quickly return for redemption during
the first two weeks in January.
From the banker's point of view, the chief features and advantages of a central bank system are the following:
(1) The protection and replenishment of the country's gold
holdings.
(2) The creation of an elastic currency which tends to prevent too low money rates in times of abundance, as well as
too high rates in times of money scarcity.
(3) The establishment of a broad market for commercial
bills. This market at bottom owes its existence and its importance to the central bank's readiness to discount such bills
at any time, thus making the commercial bill the best quick
asset of a bank.
(4) The fact that it acts as a bed-rock foundation for confidence in times of stress, because it centralizes the reserves of
the country, thus rendering possible their free and effective
use.
(5) The fact that it creates a central institution able to deal
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with other nations, in case exceptional measures become advisable, and with which other nations, even in times of the
worst panic, can negotiate to furnish or obtain large loans of
gold, as has frequently been the case as between France and
England.
The shortest and most striking way to illustrate the shortcomings of our system will probably be to review our experience of last year. We had, like Europe, gone through a
period of rapid expansion, probably over-expansion, and a
natural reaction was bound to come to us, as to Europe, and it
did come to both. Expansion was probably more acute in
Germany than with us. Why then did Germany, much weaker
than we, weather the storm without a panic, while we went
into a most disgraceful state of utter helplessness and temporary bankruptcy?
We may leave aside the ephemeral question as to which
" straw " is was that " broke the camel's back." After a long
period of prosperity, there will almost always develop some
point of weakness where the break will first occur, and, as a
rule, that break and the ensuing strain will bring down other
parts of the structure affected by dry rot. Some " bubbles "
were pricked in Germany also, and some ugly failures occurred there, but they did not create any panic. Distrust did
not spread in Germany, because the general system, being
what it is, keeps unshaken the belief that against good assets
good money will always be available, and so " hoarding " remains an unthinkable phenomenon. Furthermore, there was
unimpaired confidence that so long as the Reichsbank was in
general touch with the situation, though some things might be
rotten, they would remain the exceptions, and that it would
be impossible for all or even any large proportion of the financial institutions to be unsound.
We shall not deal with the question whether with us bad
judgment and mismanagement had been so extreme that the
resultant outbreak of distrust was, as a natural consequence,
bound to be as violent as it proved to be, or whether artificial
fanning of the flame by agitation, sensation, and exaggeration
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played any part in the unfortunate development, or whether
such a complete collapse of credit would under any circumstances have been possible had the legal foundation on which
the whole industrial and financial structure rested been firmly
and equitably constructed and had it been less subject to violent upheavals.
Whatever causes may have combined in the United States
to bring about the crisis of 1907, it cannot be doubted that it
would never have reached such appalling dimensions had it
not been for the lack of elasticity in our currency, the utter
uselessness of our reserve, our inability to apply the brakes
Avhile we were going too fast, the absence of any means to
negotiate for measures of relief with other countries through a
channel recognized by them as official, and finally the lack of
modern American bills of exchange, which, while serving as
the means of settling the daily balances of the nation, would
have been assets on which the banks might have realized in
Europe and in the United States, by rediscounting among
themselves or at a central bank.
When the panic came, no outflow of gold had taken place,
and no natural shortage of currency prevailed. Our existing
per capita currency was very large, much in excess of that of
most other nations, and there were hundreds of millions of
currency in the banks and trust companies. But when, owing
to an epidemic of distrust, people began to withdraw cash, it
became strikingly apparent that our system was only a fair
weather system, liable to absolute collapse in adverse times.
Where, as with us, there are no means of issuing additional
currency against the best commercial' assets, where the enormous reserves of cash, accumulated in the banks, cannot be
used because each manager fears a run on his own bank if his
reserves go below the 25% limit, it is inevitable that each bank
must attempt to draw upon the reserves of every other bank,
and that each will hesitate to pay out cash at a time when the
panic-stricken public should be fortified in its confidence that
its money is safe and that cash is coming out freely everywhere. Under such conditions the drain by the public must
increase instead of being stayed, and it is inevitable that the
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worst and most aggressive hoarder will come to be the bank or
trust company, which, realizing that its 2 5 % cash reserve is
quite useless, will, as an act of self-protection, and because no
other way exists, use every means of " building up " a reserve,
by preying on its neighbors, at the very moment when reserves
should by all means be decreased.
From such a system there can result only one consequence:
a tremendous rise in interest rates and a tremendous fall in
the price of securities; and if even these brutal effects do not
attract foreign capital and do not convert the home depositor
and hoarder into investors, a general suspension—politely
called clearing-house certificates—must follow in order to prevent wholesale individual suspensions. Our system, in fact,
did not permit us even to suspend scientifically. When New
York began to issue clearing-house certificates and all the rest
of the country had, as a natural consequence, to follow, the
struggle for gold and currency became even more acute among
the various cities, and a shameful gold premium which lasted
for several months drained Europe's gold chests and brought
needless harm and anxiety to our friends on the other side of
the Atlantic.
Some years ago a stranger arrived late at night in a German town, and when he was about to leave the station, he saw
that there was only one cab left. He hailed the driver, who,
however, refused to move, and the policeman explained that
as the law prescribed that one cab should always be in waiting
at the station the cab could really not be allowed to leave!
Ridiculous as this story may appear, it is quite applicable to
our law which prescribes that the 25% reserve must always be
kept intact.
It cannot be too strongly emphasized that our most urgent
needs in addition to the creation of an elastic currency are
concentration of reserves and the possibility of concerted
action in lieu of our present system of decentralization.
Let us now consider what circumstances there are to prevent
us from establishing a central bank similar to those found in
the European systems. The chief difficulties are the existence
of our bond-secured currency, the decentralization of our note(448)

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issuing power and of our reserves, the lack of modern commercial paper on which to base an elastic currency, the existence of our obsolete usury laws, and finally the deep-rooted
prejudice against anything bearing the name of a central bank,
the fear alike of politics in business and of business in politics.
It is unnecessary to make a long argument against bondsecured currency. Only weak nations or a people in times of
stress, generally during a war, have issued bond-secured currency, and every healthy nation as soon as it was again strong
enough, has always abolished this obnoxious system of inflation. As long as we have this bond-secured currency, we cannot succeed in getting an elastic one. Bond-secured currency
always expands, it hardly ever contracts. Our recent legislation, enacted last summer, was wisely created as a temporary
measure only, since a far-reaching reform could not be successfully achieved in a hurry and without thorough research.
The new law is an important step in advance, inasmuch as for
the first time commercial paper is admitted as a basis for the
issue of notes. But unfortunately the issue of notes against
commercial paper is made dependent upon the previous issue
of bond-secured currency to the extent of no less than 40%
of the note-issuing power of a bank. This, and other conditions imposed upon such note issue, make the new currency an
emergency currency, but not a healthy and normally elastic
currency.
With elasticity we generally connect the idea of the rubber
band. If we take an old and frayed rubber band, which has
been stretched to its utmost capacity by holding together a
large bundle of papers, we cannot make the old rubber elastic
by tying to it a new piece of elastic band. Where this has
been done we have indeed made room for more papers and
when this new room is filled, some little elasticity will develop,
but if the papers should then decrease below their previous
maximum size, the rubber band will stay as it is—it will not
contract. In order to have effective elasticity, the band must
still fit tight when the bundle has been reduced to its smallest
size. This means that in order to make the old band elastic
we must shorten it considerably before we affix the new elastic
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addition. In other words, we must first of all redeem our
bond-secured currency so that our note issue may hereafter be
able to contract in times of abundance and so that roughly
from the lowest point upwards the note issue shall remain in
healthy touch with the demand for currency.
In redeeming the bond-secured currency, two points will
have to be borne in mind: the one is that it must be done without injuring the banks that now own these bonds, or it will
never be done—and besides, to do it otherwise would be unfair;
and the other is that we must be able to provide new currency
when we withdraw the old, so that no scarcity will be artificially created.
If I were asked to suggest how this could be done, I should
propose an inverse conversion of the bonds, *. e., I should advocate the conversion of the present government bonds into
bonds bearing a rate of interest higher by so much that after
the privilege of issuing notes against them shall have been
withdrawn, the bonds will sell just as high as, and possibly a
little higher than they now sell with this privilege. This can
be done gradually and in various ways; it would indeed mean
an increase in the yearly interest charge to be borne by the
United States, but it would put our bonds on a natural basis,
like the English consols or French rentes, so that the American people could afford to own their own government bonds.
In fact, this money, by securing a healthy financial system,
and by protecting us from a repetition of past convulsions,
would come back to us a thousandfold, and would constitute
the best expenditure that our government could make.
In creating the new currency, we could probably follow the
lines of the recent legislation, and provide for the organization of currency associations throughout the country. These
associations, which should be open also for state banks and
possibly also for trust companies, and which should be modified in many other respects, would discount the legitimate commercial paper handed in by their members and pass it on
with their indorsement to the central issue department at
Washington, which in turn would issue its notes against such
guaranteed paper. Of course, such paper with such guarantee
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should be taken at par, and not at 75%, as at present provided,
and it should be taken at a uniform rate, to be published from
time to time by the central issue department. The currency
associations would receive from the institution handing in the
paper a certain remuneration for every endorsement or guarantee executed by them. (Whether the profit, after paying
for the running expenses and after having accumulated a
large reserve fund, should in years to come be paid out to the
members of the associations, in proportion to their pro rata of
the guaranty, is a detail to be worked out later.) A most important consequence of such a development would be that we
should break with our present dangerous system by which the
banks are filled with single-name paper which they cannot resell, and which, under our present conception of banking, they
could not attempt to sell without ruining their credit. The
laws would, of course, have to be so amended that banks could
indorse and accept freely as in Europe, and it will in time follow as a natural development that discount companies will be
created, as in England, and that when money is in active demand in the South and offered freely in the East, the southern
banks, instead of rediscounting with their association, will be
able to rediscount frankly and openly in New York or in Boston or in Europe. If, as it is to be hoped, the currency associations and the discount companies will, at the proper moment, begin to establish two different rates for guaranteeing
paper, a higher one for single-name paper, and a lower one
for paper bearing in addition to the commercial signature the
acceptance of a bank or banking firm, we shall give an added
stimulus to the modernization of our paper. When our banks
once feel that they can rely on being able to rediscount their
legitimate paper, they will be able to purchase the same freely
without, as now, running the risk of dangerously locking up
their capital through such investment.
I have repeatedly dealt with this question and with the disastrous effects of our usury laws, and have tried to show that
our system is in this respect directly opposed to the European
system, and that our almost annual convulsions will perforce
continue unless we make our commercial paper the quickest
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asset and the basis of our banking, instead of using the stockexchange call loan for this purpose.
As for the organization of such a Central Issue Department,
I have also dealt with this question on previous occasions,1 and
I must not go fully into the details of that problem here. Suffice it to say that the board of trustees br directors should be
composed of delegates from the various currency associations,
of the Secretary of the Treasury, the comptroller of the currency, some members of the Senate and of the House, to whom
some members of the commercial classes might be added by
election of the stockholders. This body of men should elect
two governors, salaried officers of highest standing and training, who would be retained in office as long as they are effective and honest, irrespective of the political party that may
for the time being be at the helm.
The powers of the Central Department of Issue should be
strictly limited, and should be as follows:
To discount paper, running not to exceed three months, for
the various currency associations; to make advances against
certain bonds (government bonds, savings-bank bonds, etc.)
at uniform, published rates and up to certain percentages of
their market value to be designated from time to time.
(Whether such advances are to be made only through the
currency association or also direct, is a detail which can be
left open for the time being).
To buy and sell foreign bills running not to exceed three
months and bearing at least three bona fide signatures.
To deal in bullion and to contract for loans of bullion.
To act as the depository of the treasury's money without
giving collateral.
And finally, to receive deposits from the currency associations.
The Central Issue Department may issue notes which must
be covered by gold or commercial paper; no less than onethird of the notes issued to be at all times covered by gold or
legal tender.
1
Cf. Defects and Needs of Our Banking System, and American and European Banking Methods and Bank Legislation Compared, supra, pp. 7 and 30.
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A Central Department of Issue so constituted would be beyond any possibility of abuse for political or other purposes.
The constitution of the board and the limitations of its power
preclude any such possibility, however remote.
As the Central Department of Issue must command the
highest possible confidence and as it is necessary to provide a
strong gold purchasing power from the start, it is suggested
that the department be endowed with a large stock capital of,
let us say, $100,000,000. In order, however, to prevent any
possibility of having the department administered with a view
of earning large dividends for the stockholders, it is proposed
to limit the dividends to a certain percentage, and after having accumulated certain reserves, to turn over the balance to
the United States government. Whether or not, in consideration of such profit to be received, the United States should
guarantee the notes, may be left for future consideration.
The bugbear that somebody might buy the control of such
an institution may safely be dismissed. A man or a group of
men purchasing all the stock would not derive the slightest
profit from it, except the limited return on the investment.
They could not appoint the board, and even if they could do
so, they would not profit by it, as the department is restricted
to a limited number of safe transactions.
The Central Department of Issue should have the right to
ask from time to time that the banks, through the associations,
deposit with it a certain proportion of their cash reserves, and
the law would have to be amended so as to allow the banks
to count as cash their deposits with the Central Department of
Issue. The object of such an amendment is obvious, as the
gold in the hands of the Central Issue Department can do
thrice the amount of good that it can do with the individual
bank, which, after the organization of a Central Issue Department, need not fear the withdrawal of cash so long as by rediscounting its sound and legitimate paper it can secure currency.
As for greenbacks and silver certificates, I believe that we
could well afford to leave them untouched for the time being
and possibly use the surplus to be derived from the profits of
the Central Issue Department for the purpose of gradually re(453)

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tiring the greenbacks. With the bond-secured currency redeemed and replaced by an elastic currency, it is conservative
to hope that with the large exporting power of this country,
we shall be sufficiently equipped to protect our gold, and that
the greenbacks and silver certificates will represent no more
than the pocket money of our large population. However,
this scheme with all its details, as far as they can be outlined
in this brief address, does not pretend to be the only solution
of the problem; it is a suggestion, subject to many modifications. I have great hesitation in outlining it at all, for while
the Monetary Commission is so seriously at work, accumulating material for thought and study, I should have preferred
not to express any views at this time. However, as this most
important question cannot be solved by the politician alone,
nor by men of science alone, nor by the business man alone, 1
feel that we, each of us, must do our little share, when called
upon, and I therefore accepted your invitation, though fully
realizing my own shortcomings for such an undertaking.
The advantage of the scheme as outlined is, that instead of
trying new experiments, it proceeds on lines which have been
successfully followed in the most important financial centers.
Conditions are too different with us to permit of an exact copy
of any of the European systems; but the proposed plan would
tend toward the gradual evolution here of conditions that, as
we develop, would render the Central Issue Department more
and more efficient and simple in operation.
Some schemes which have heretofore been advanced propose to leave the note-issuing power with the national banks,
and to regulate their reserves and rates by a central board or
similar institutions. I for one, do not believe in such plans.
Their shortcoming is, that in order to be efficient they must
interfere too much with the liberty of conducting business.
For such a central board would eventually have to dictate
the rates at which the banks would be allowed to take money
or to lend money, and a general guarantee of deposits is only
one of the logical consequences of such a scheme. As a matter
of fact, under that scheme there would be one central board
managing all the banks—an entirely new departure and much
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more drastic than any central bank. If under that scheme
such central interference were made less effective than above
outlined, our present defects, viz., the weakness of scattered
reserves, and the danger of the decentralization of the noteissuing power into more than 6,500 banks, would remain as
obnoxious as before.
Other schemes have been suggested, which propose to regulate the whole question automatically by a t a x ; but automatic
measures cannot possibly meet in the most efficient way alt
the different eventualities that may arise. A drain from within
must be met in a very different way from a drain from without, and a drain from both within and without will again have
to be treated in a different way. How, then, can we hope to
attempt to create one measure which by a tax will automatically meet all these varying requirements? Besides, these
measures provide for inflation without creating new reserves
or effective means to attract and retain the gold. Most of
these measures will remain passive measures; they have
scarcely any preventive or protective power at all.
Some people believe that we should imitate the Canadian
system. Without going into the question whether a system
that has proved a success for six million people would also be
well adapted for a population of eighty-five or ninety millions,
(and without discussing the point whether this system, like
many others, could survive in the absence of the close relationship with the well-organized English banking community), we shall follow out only this one thought: The Canadian
system is based on the small number of some 30 banks with
branches in every hamlet. The minimum capital of a bank
admissible by law is $500,000, but the majority of the banks
have a much larger capital, some up to $14,000,000. Of our
6,650 national banks, 5,367 have a capital of less than $100,000. Are all of these to go into liquidation? And would
not a concentration of the whole banking power into the hands
of a few gigantic institutions with branch banks bring about
the very conditions which popular sentiment abhors, and which
the government is striving to avoid?
The central bank system—and also the modified system of
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a Central Issue Department—stands for sounder principles in
this respect: it centralizes reserves and brings about the possibility of concerted action in the face of danger. By creating
safe conditions, it makes the small bank independent and the
danger of an overpowering individual control, instead of being
aggravated, is for this reason immensely lessened by a Central Issue Department. Thus the Central Issue Department
would protect the small bank and not menace it as is generally believed.
The Central Issue Department is sound also in this, that
each transaction which it brings about, directly or indirectly,
is a plain business transaction. If a bank desires its paper
guaranteed by the currency association the bank pays the commensurate commission for such indorsement, and the guarantors earn the commission. If the currency association finds
the security insufficient, it will refuse the business. Each
transaction is an individual one, carefully scrutinized, and
there is no unbusinesslike wholesale guaranty.
Nor is there any real interference; each bank deals with
the currency association of its own free volition, and through
it with the Central Issue Department The Central Issue Department can post the rates at which it is willing to do business
with others, but it cannot force anybody to do business at these
rates, nor directly interfere with anybody's conduct of business. It is its indirect influence which is strong, and which
is of the most beneficial effect.
Furthermore, it is a sound principle that the financial affairs
of a nation should be guided not by an automaton but by willpower and brains behind the machinery, though strong restrictions must give the assurance that this will-power cannot
go beyond certain safe lines. Such a system will be a vast improvement upon our present treasury organization, which is
constructed on the one hand in order not to do what a central
bank of issue ought to do and which, on the other hand, as a
consequence of our defective system, has gradually vested in
the Secretary of the Treasury more autocratic and dictatorial
powers than any central bank manager could ever exercise.
Finally, banks are money-making concerns. Money mak(456)

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ing and money issuing are two entirely distinct functions. It
is precisely in order to abate eagerness in making money that
the issuing of money at times must be rendered more difficult.
Moreover, the note-issuing bank must be put beyond the danger of material losses and beyond the possibility of being
drawn into individual transactions, for otherwise its credit
will not be unassailable as it absolutely must be, even in times
of the worst panic. The ordinary bank, on the other hand,
has the duty of taking commercial risks and of carrying on individual transactions. That is why with us, as in every modern country, general banking and the issuing of notes must be
kept separate.
I have avoided calling the institution of the future a central bank, because, as proposed here, it is not a central bank.
If, instead of the independent currency association, this Central Issue Department were endowed with active branch offices
dependent upon the head office, such a name would be correct. No doubt a central bank with active branch offices would
be the more efficient, so far as concerns the controlling of the
country's gold, its money rates and its financial safety. But
with our present political and financial conditions, it would
probably be impossible, and in many respect unsafe, to vest
such vast powers and duties in one body. Though the system suggested by me may be a little less effective and more
cumbersome, we must, for the beginning, at least, interpolate
the currency association, or some similar institution, to stand
as guarantor and examiner between the Central Issue Department on the one side and the local bank and its customer on
the other. As our banking paper becomes modern, and as safe
standards for the same develop, as we outgrow those financial
and political dangers which are stronger in a country in its
period of rapid growth than under conditions of more advanced and slower development, we may gradually—and it is
to be hoped, soon—simplify the system. But it is safe to leave
this further development to the future, provided that we now
find the right principle for the establishment of a sound basis.
In constructing such a basis, it is better to err on the conservative side than to attempt too big a stride at the beginning.
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While we may disagree as to the extent to which a central
bank system may be applied in the beginning, there cannot be
the slightest doubt that the principle of that system must be
adopted.
It is most surprising that so ineffective and obsolete a currency system as that of the United States should have been so
long maintained by so eminently practical a nation. The explanation is that the wonderful resources of the country, its
marvelous prosperity and natural everlasting credit balance
against other nations appeared to legitimize and justify our
system. The currency reformer has always been met with the
argument that while theories might be good for poor little
Europe, practise proved that the American system was sound
enough for the United States. We had to live through last
year's horrible crisis to learn that we had been prospering in
spite of our system, not in consequence of it, and that, unless
we effect a thorough reform, the future is bound to bring us
similar disasters and similar disgrace as the past.
It is our duty to keep the memory of the crisis of 1907 fresh
in our minds, for unless we grasp not only the danger but the
certainty of its reappearance, we shall not realize the blessings
and the absolute necessity of a central bank system in the
United States.
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A U N I T E D R E S E R V E BANK O F T H E U N I T E D
STATES
H E summary of a recent investigation undertaken by
the Banking Law Journal discloses the fact that out
of 5,613 answers given by national and state bankers
to the question: " Do you favor a central bank if not controlled
by ' Wall Street' or any monopolistic interest? " Sgj/3% were
affirmative, 7% were undecided, and 33^5% were negative.
Almost all the negative answers, as far as published, are based
upon the argument that a central bank, if established, could
not permanently be kept out of political or " Wall S t r e e t "
control. Between the opponents and the champions of a central bank plan there is complete unanimity of opinion that
such a system should be tried in our country only if the dangers of " Wall S t r e e t " or political control can be absolutely
averted.
The main question at issue is this: Is it possible to evolve
a plan which, while containing these elements of safety, will
at the same time be completely practicable?
It is our belief that no progress can be made by meeting
the sweeping assertions of those opposed to a central bank plan
by equally sweeping replies, but that advance is possible only
by outlining a tangible plan for such a bank. This, on the one
hand, will give to those not yet familiar with the actual working of such an institution an opportunity for study, and on the
other hand it will force the critics of such a plan, it is hoped,
to offer specific and well-defined objections which may lead to
some definite results.
It should be stated at the outset that the plan here submitted
does not suggest a central bank such as exists in various European countries. It is a scheme based upon conditions peculiar
to our country and our form of government. It recognizes
the vast territorial area of the United States, the diversity and
dissimilarity of interests, and even the traditional, sectional

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and partizan prejudices of the people. In consequence of
this, many features which are contained in European plans
and which figured, to some extent, in the operations of the
First and Second Banks of the United States have been omitted,
while certain features foreign to European organizations have
been incorporated. All the underlying principles of safe and
intelligent modern banking, however,—principles which must
be adopted if we are to obtain a banking system adequate to
our present and prospective needs—have been observed and
are embraced in the plan. This essay, while advocating the
central bank idea, submits a much modified system, which we
should like to designate the " United Reserve Bank of the
United States." The plan does not pretend to be final or complete in all its details; its purpose is to indicate the fundamental principles upon which the solution of the problem depends and to point out one method of solution.
The strongest arguments made against the plan of a central
bank in the United States are those advocated by Mr. Victor
Morawetz and by Professor O. M. W. Sprague. We have
made free to answer these two critics in the second and third
parts of this essay, and in endeavoring to refute their arguments have attempted at the same time to meet the principal
objections of other critics whose writings have come to our
notice.
I
Let us assume that a United Reserve Bank of the United
States be established in Washington with a capital of $100,000,000 fully paid. Let us assume the United States divided
into twenty zones of operation, similar to the currency-association districts now proposed by the Aldrich-Vreeland measure, each zone of operation to contain a voluntary association
of banks grouped around a financial and commercial center,
in accordance with a plan to be worked out in detail. To form
the operating associations, which we shall call banking associations, the banks within each zone should have the privilege
of appointing from their own number a board of directors,
who in turn may appoint a president or managing director of
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the association. Certain mistakes which crept into the AldrichVreeland bill must be avoided. The measure should be
drafted so as to permit a bank to withdraw from the association at will; to restrict the obligations of each bank to certain
transactions, in each case carefully examined and approved by
the associations; and also to enable the associations, with the
approval of the Secretary of the Treasury, to group themselves
into subdivisions. One might simplify the formation of these
associations by making them stock companies, each bank within
a zone of operations having the privilege of subscribing its
pro rata share, according to its capital and surplus.
In order that the board of directors of the United Reserve
Bank in Washington may be thoroughly representative of the
various interests and districts of the country, that it may be
non-political, non-partisan, and non-sectional, a certain number of the directors, say three-fifths, should be appointed by
the banking associations; a further number, perhaps one-fifth,
should be elected by the stockholders; while the Secretary of
the Treasury, the comptroller of the currency, the treasurer
of the United States and others to be nominated by them,
should fill out the remainder of the board. It might be advisable to provide that no director, excepting the ex officio
members, should serve more than a certain number of years in
succession.
In order that commercial interests be adequately represented, provision might be made that the members appointed
by the stockholders should not be bank or trust-company
presidents, and that these members should be elected preferably from the class of merchants and manufacturers. One
would then have a mixed board, of whom three-fifths would
be bankers, appointed by the banking associations, while onefifth would be chosen from the commercial classes by vote of
the stockholders, and one-fifth would be ex officio government
members and the additional members appointed by them.
This board should have the right to elect one or two governors of the United Reserve Bank, who would be salaried
officers appointed, like other bank presidents, for an indefinite
time, irrespective of political considerations, and remaining in
office as long as they render satisfactory service.
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The share capital of the United Reserve Bank could be divided among the banks of the country under a fair plan of
apportionment, or the stock could be sold to the public. The
dividends on the stock should be limited to, let us say, 4%.
Any profit in excess of this should go to the government. A
provision that no one stockholder be allowed to have more
than a certain number of votes should be inserted.
The United Reserve Bank should be authorized to perform
the following functions:
(1) To accept deposits from the government of the United
States and from members of the banking associations only.
No interest should be paid on such deposits, but they might
be counted as cash by the banks and trust companies making
them.
(2) To buy from members of the banking associations, at a
discount rate to be published from time to time, commercial
paper having not more than twenty-eight days to run, and
issued at least thirty days before the date of rediscounting.
The aggregate amount which it might buy from each member
should be restricted to a certain proportion of the unimpaired
capital and surplus of such member, and the aggregate amount
issued by one issuer of commercial paper to a member of the
banking association and rediscounted with the United Reserve
Bank, should also be limited to a certain proportion of such
unimpaired capital and surplus.
(3) To buy from member banks, at a discount rate to be
published from time to time, commercial paper having more
than twenty-eight days to run, but in any case less than ninety
days. The aggregate amount to be rediscounted by the United
Reserve Bank from each member and the aggregate amount
admissible from individual makers of notes should be restricted as under (2). Such paper, however, could be discounted by the United Reserve Bank only with the indorsement or guaranty of the banking association to which the member belonged.1
1
In consideration of such guaranty or indorsement, the banking association
would receive from the member handing in paper for rediscount a certain remuneration, let us say % or */2 of i % in the interest rate. The banking asso(46a)

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(4) To buy, at a discount rate to be published from time to
time, paper having no more than ninety days to run, drawn
by a commercial firm on, and accepted by, a bank, trust company or banker, and indorsed by a bank, trust company or
banker. One of these signatures should be that of a member
of the banking association. Limits as to amounts of acceptances admissible from time to time for discount with the
United Reserve Bank should be fixed by the central board.1
(5) To buy bills on England, France, Germany (and such
other countries as may be decided upon), such bills to have a
maximum maturity of ninety days, to bear one commercial
signature, to be drawn on and accepted by a well-known foreign banking house and indorsed by a member of a banking
association or a banker in good standing. The United Reserve Bank should have power to resell all bills that it might
buy and to do all things necessary for their collection.
(6) To deal in bullion, and to contract for advances of bullion, giving security therefor and paying interest on such advances.
(7) To buy and sell bonds and treasury notes of the United
States.
(8) To issue circulating notes, payable on demand in gold;
such notes to be secured by bills, bought by the bank under
provisions (2) to (5), and by gold to the amount of at least
33V3% of the aggregate amount of outstanding notes.
(9) To establish branches in places where there are head
offices of banking associations. Such branches under the direction of the central board of the United Reserve Bank,
might do the same business as the head office. Each branch
would have a local board, chosen by the board of managers of
the local banking association, to which board might be added
some members of the commercial classes appointed by the head
ciations would, of course, like the clearing houses when clearing-house certificates are issued, have the right to reject any paper which they did not deem it
safe or proper to guarantee or indorse.
1
It might be advisable to provide that in case of emergency the central
board, with the approval of the Secretary of the Treasury and the President of
the United States, might increase the limits fixed under (2), (3) and (4).
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office in Washington. This local board would supervise the
business of the branch bank, and elect its salaried president,
subject to the approval of the central board in Washington.
(10) To request banks or trust companies desirous of making use of the services of the United Reserve Bank, to keep
with its branches a cash balance commensurate with the amount
of business done by them. The United Reserve Bank should
have the right to transfer sums of money from the account of
one member to that of another upon request.
(11) To join the clearing-house association of the various
cities where the bank and its branches are located.
Let us now consider the plan, as above outlined, from the
following points of view: First, would it be safe? Second,
would it be effective ? Third, would the vested interests of the
banks have reason to oppose or favor it, and can the general
prejudice existing against any such plan be overcome?
The chief criticism that has been raised against a central
bank is that it is subject to the danger of control either by
politics or by Wall Street finance. Would this danger exist
under our plan? Could anybody acquire control? Nobody
could do so if a provision were made that the stock should be
divided among the 18,000 banks of the United States.1 But
even without such provision there would be no danger on this
score. A man or a group of men acquiring the whole capital
stock of the United Reserve Bank would, after all, acquire the
right to appoint only a few members of the board, who would
be in a hopeless minority against the combined members of the
banking associations of the whole country and those representing the government.
But furthermore it is evident, with the restrictions placed
upon the United Reserve Bank as to the transactions in which
it might engage, and with the restrictions as to the earning
power of the stock, that the control of the United Reserve Bank
by one individual or a group would not offer any attraction.
1
The author is fully aware that there are only about 6.500 national banks
now, but it is to be expected that under any new plan all national banks would
become state banks or all state banks national banks. It would, however, lead
too far to go into this question here.
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As an investment it would not pay, because any earnings in
excess of 4% would go to the government, and as for securing help for speculative ventures or aggrandizement of power,
this aim could not be achieved by the control of a bank restricted in its dealings to the purchase of short paper from
member banks, and of three-months paper which could be acquired only from the banking associations. Taking into consideration all these safeguards, namely, the method of appointing the board, the restriction of income on the stock, and the
limitation of transactions permitted, it is absolutely safe to
say that under such a system any fear of undue financial or
political control may be dismissed once for all.
Secondly, would the plan be effective? It is easy to devise
a plan that would be ultra-safe, and not very hard to create
one that would be effective, but to combine safety and effectiveness is difficult. Let us first determine what is the main object
of a central bank, and then investigate whether the plan above
outlined would fulfill this purpose.
A central bank acts as a central reserve of a nation. Its
first duty is to see that a proper proportion is maintained between actual cash reserve and all demand obligations of the
nation which are payable in cash at the option of the payee,
but of which the majority are habitually paid by exchange of
credits. Its duty in this respect is two-fold: on the one hand,
to protect and to strengthen the country's holdings of gold,
and on the other hand to establish and maintain a perfect
system of credit, enabling the general banks to transform cash
credits into actual cash with such absolute ease and certainty
that the use of the cash credit, instead of the actual cash, will
not cease, no matter what may happen. In other words, there
must not remain the faintest possibility of hoarding during a
crisis, or the system will fail. In order to assure this, cash
credit must not only be as good as cash, it must be better than
cash! The carrying of cash entails a risk of actual loss as well
as a loss of interest; a cash credit is free from this first-named
evil and, in addition, investments which can be quickly turned
into cash credits bear interest. The general tendency of civilized people in a well-organized country must therefore be to
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free themselves as rapidly as possible from cash and to transform it into the safer and more economical cash credit or into
assets which can be quickly transformed into cash credits.
Every idle token of money must, therefore, under a modern
system return without delay into the central reservoir, where
it must be unreservedly available for every legitimate demand
for cash. There must never arise any doubt that a legitimate
demand for cash will be met promptly and that legitimate
quick assets can be turned into cash credits.
If quick assets can be promptly and reliably turned into cash
credits, and if cash credits can be turned into cash at will, then
it is certain that all such credits never will be turned into cash
at the same time, because nobody has any use for so much
cash and therefore he will not ask for it, as long as he is sure
that he can get it.1 This is the only basis on which our modern system of immense demand gold obligations, built up on a
comparatively small amount of cash, is safe.
Let us use an illustration for this fundamental point: *
If after a prolonged drought a thunderstorm threatens, what
would be the consequence if the wise mayor of an Oriental
town should attempt to meet the danger of fire by distributing
the available water, one pailful to each house owner? When
the lightning strikes, the unfortunate householder will in vain
fight the fire with his one pailful of water, while the other
citizens will all frantically hold on to their own little supply,
their only defense in the face of danger. The fire will spread
and resistance will be impossible. If, however, instead of uselessly dividing the water, it had remained concentrated in one
reservoir with an adequate system of pipes to direct it where
it was wanted for effective use, the town would have been safe.
Ridiculous as these conditions may appear, the parallel with
our own financial organization is evident. Our reserves of
1
This applies only to the internal drain. We shall deal later with the
demand for gold that might arise from without.
2
This illustration is taken from the writer's pamphlet, The Discount System
in Europe, published by the National Monetary Commission, which appears at
p. 129, infra.

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cash are entirely disconnected; they are insufficient for even a
single institution in times of serious stress, and instead of being
a protection they are a dangerous weakness, because the consciousness of insufficient protection causes one bank to try to
draw on the reserves of others, and the very moment these
mutual attacks begin, panic inevitably follows.
Our true conditions are, as a matter of fact, even more preposterous than those in the Oriental town, by reason of our
law prescribing that a certain proportion of the deposits must
be kept in cash,—a law which must be observed if a bank
wants to preserve its credit. Not only is the water uselessly
distributed into 18,000 pails, but we are permitted to use the
water only in small quantities in proportion as the house burns
down. If the structure consists of four floors, we are practically forced to keep one-fourth of the contents of our pail for
each floor. We must not try to extinguish the fire by using the
water freely in the beginning; that would not be fair to the
other floors. Let the fire spread and give each part of the
house, as it burns, its equal and insufficient proportion of water.
As long as the owners of houses threatened with fire know
that the central water supply is well in hand, with one central
power, available wherever danger may arise, everybody feels
safe and is not frightened by the thought that if all the houses
should burn at the same time there would not be enough water
to go around. Though there may not be enough water for the
last house that might burn down, even the owner of that last
house would not ask that some water be kept back for him,
because he realizes that unless the fire be stopped before it
reaches him, his own little supply of water will not help him.
If, however, a central system does not exist, everybody will
hoard water, trying to steal it from his neighbor or from the
community by tapping some source in order to create a supply
of his own. He will lessen thereby the full supply that ought
to be led into the central reservoir, without protecting himself
adequately in time of danger.
The main function and object of a central bank is to make
every dollar which lies idle return to the central money reservoir to make it available to the fullest extent, wherever and
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whenever it can do good legitimately, and to provide a system
of mains, by which it can be conveyed quickly to any point of
danger.
Note issue is not a fundamental, but only a side question,
and it is very important to grasp this fully. If the British government should issue a government loan and use the proceeds
to pay into the Bank of England in gold £18,400,000, thereby
paying off its present indebtedness to the bank and providing a
gold cover for the uncovered portion of the note issue of the
bank, the latter could pay off every one of its sterling notes in
gold. If this were done, the only change would be a change
in pocketbooks, to enable people to carry gold instead of notes.
The central bank system of England would go on absolutely
undisturbed. With or without the note-issuing power, the
Bank of England would remain the central reservoir of gold.
It would continue to protect England's gold holdings and to
maintain the proper proportion between the country's demand
obligations and actual cash. It would continue to guarantee
the prompt transformation of cash credit into cash and of
quick assets into cash credits.
This is possible only through the discount system. The
banks know that they can, in case of need, rediscount their
legitimate bills with the central bank. The central bank, on
the other hand, having a large investment in bills of short maturity, can, by increasing its discount rate, withdraw from
new investments and thereby strengthen its reserve. Incidentally, by increasing the interest rate of the country, it attracts
foreign money, wards off gold exports, and by throwing part
of the burden on the general banks brings about a general contraction of business.
Money flows where it can draw good interest in safety.
Where credit is firmly established and financial organization
sound, money flows easily from one city or country to another,
for a difference in interest of a fraction of one per cent. It is
humiliating to realize how large a margin in interest rates we
must offer to attract money, as compared with our European
competitors. This question and the working of the discount
system, of which the central bank system is a part, have been
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dealt with fully in my previous paper, so that I need not dwell
on them here.
Elastic note issue, that is, the power of a central bank to
issue notes not fully covered by bullion, is an auxiliary measure. The central bank system becomes more pliable and safer
by this addition because, the lines being less rigid, the fear of
reaching the end of the tether is not so great; and, furthermore, since the result to be reached is not exclusively dependent upon the discount rate, the latter need not be changed so
often and so drastically as with an inelastic system.
To return to our metaphor: note issue represents an auxiliary reservoir. Where it does not exist, the men in charge of
the central reservoir have to advance the price for water so as
to discourage extravagant use whenever the available supply
falls below a safe margin. Unsecured note issues enable the
managers to use this auxiliary supply, which renders it possible often to provide for the needs without increasing the
price for the water, where the increased demand is normal and
only temporary.
To decide when to supply water freely, when to warn the
consumer to save, and when to limit the supply without ever
refusing to comply with legitimate demands, is the duty of the
central bank. No automaton—no tax or fixed regulation—
can perform it, but the best judgment of the best experts must
indicate the policy to be pursued from time to time. In addition, it must be the exclusive care and responsibility of one institution, chartered and constructed for the single purpose of
maintaining the proper proportion between demand and
supply.
With us the general banks, which are the consumers and
represent the consumers, are at the same time the regulators.
Where everybody regulates himself, there is anarchy and
chaos in times of stress. Money making and the maintenance
of a safe proportion between cash and cash obligations are at
times distinctly opposed functions, and the performance of
these functions should lie in entirely separated bodies. The
general banks must remain money-making concerns, administered with the full responsibility of being able to meet all pos(469)

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sible cash demands by available cash credit. To guarantee
that every cash credit can be met, if desired, by actual cash
payment, and to avoid the possibility of such general demand
for cash—this is the function of the central bank.
Let us consider whether these aims of a central bank can be
safely and effectively reached under the system above outlined.
The great difficulty in the United States is the complete lack
of modern bills of exchange, freely indorsed by the banks and
passed on from hand to hand, as in Europe. With us there
still prevails the old single-name promissory note, which,
under our present system, is practically unsalable once it has
entered the bank, and which therefore immobilizes our bank
holdings.
To permit the banks to rediscount these promissory notes
with a central bank would be the easiest way, but the criticism
may be justly raised, that in doing so we should open the door
to abuse. Hence the inclusion, in a scheme previously outlined by me, of the banking associations, which, having to
guarantee the paper before it enters the United Reserve Bank,
would carefully examine and sift it. The interjection of the
banking association would make the paper safe beyond peradventure and, if nothing else could be found or agreed upon,
this system might well be adopted for the present.
The criticism, however, has been raised against this method,
that it would be fairly clumsy and that in normal times the
banks would try to do without it. Therefore it would remain
only an emergency system, out of touch with the market in
normal times. To meet this difficulty, it is proposed in this
plan to empower the United Reserve Bank to take directly
from members, without the guaranty of the banking associations, bills with not more than twenty-eight days to run.
This thought developed from the following observation:
Upon examining the report of the Reichsbank one finds that
on December 31, 1908, it held in German bills M. 1,032,000,000; of which 44% were payable within 15 days, 17.4% within
16 to 30 days, 24.870 within 31 to 60 days, and 13.9% within
61 to 90 days. This brings out the surprising fact that the
maturity of 61.4% of all the bills held by the German Reichs(470)

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bank was of 1 to 30 days. The average duration of all bills
held by the Reichsbank is thirty-four days. A similar proportion could be shown by the Banque de France, where the average duration of all bills held is even less, namely, twenty-four
days.
How is this to be explained? It means that if, when making
up its daily balance sheet, a German or French bank finds that
on balance it needs money, it will send to the Reichsbank or
Banque de France for discount its bills falling due the next
following days. These central banks have a complete schedule
for each city where they have an office, stating the minimum
number of days that will be deducted at the bank rate, without
any further charge for collecting the bill. To illustrate this
procedure: the Reichsbank in Berlin will charge on a bill beyond M. 5,000 a minimum of four days for bills on Berlin, a
minimum of five days on Hamburg, Bremen, Frankfort, and
similar cities, a minimum of ten days for smaller bills on small
and remote towns. This means that when the rate for call
money and the bank rate are about even, a Berlin banker will
send his bills on Hamburg to the Reichsbank for collection five
days before the bills mature; if he collected them through his
own correspondent in Hamburg, he would lose one day's interest at least, which would be consumed by the return trip
of the money after the bill had been collected; and the longer
the distance, the larger the loss of interest. When money is
very easy, it pays the banks to lose that day's interest, and collect the bill themselves, since, instead of submitting to a discount of five days at 4%, they might pay on call six days at
2% or 3 % and still fare better. This illustrates how, by keeping its rate higher than the ruling interest rates, the central
bank withdraws its funds from general business and accumulates reserves for times when stronger demands arise. The
stronger this demand grows, the longer will be the bills which
are being sent for discount to the bank, until they reach the
permissible maximum of ninety days.
A consideration of these facts brought up the question as to
whether it would not be feasible and conservative to allow such
institutions as may be admitted to dealings with the United
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Reserve Bank to rediscount with it directly, and without the
intervention of the banking association, legitimate paper having no more than twenty-eight days to run. It would appear
that this could safely be permitted. A bill which has only a
few weeks to run embodies a much smaller risk than one having three months to run. General conditions and the standing
of the bank offering the paper for discount, and of the maker
of the note, can be judged with a fair degree of safety for a
few weeks ahead. The United Reserve Bank would make it a
rule not to buy thirty-day notes issued for the obvious purpose
of being immediately rediscounted and renewed at maturity,
but to acquire only paper originally issued as 2, 3 or 4 months'
paper, in accordance with the usages of the trades in question.
The bank examiners would be trained to ascertain infractions
of the rule and, besides, the United Reserve Bank would notice
them immediately when the new bill was offered for discount
so promptly after the expiration of the old note. The shorter
the maturities of bills, the stronger would be the United Reserve Bank's position.
While this plan would be of immense advantage to the
banks inasmuch as it would enable them without difficulty to
turn into cash at once about one-third of the bills which they
have discounted, at the same time it would not encourage reckless banking or speculation. No customer and no bank will
dare to enter into extended commitments on the strength of
an advance of twenty-eight days. What will happen after this
lapse of time one does not know, and he must be prepared for
possible retrenchment by the United Reserve Bank.
Moreover, some rule would have to be established that the
aggregate amount of such short bills sent in for discount by
any bank should not exceed a certain percentage of its capital
and surplus, and that the aggregate amount of paper sent in
for discount issued by one individual or concern should not
exceed a certain part of such surplus and capital. This
method would appear to be entirely safe; if deemed necessary,
the twenty-eight-day limit might be reduced to twenty-one
days. In the writer's opinion a twenty-eight-day limit is conservative.
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We should then have one rate at which the branches of the
United Reserve Bank in the banking association cities would
take short bills directly from members, and one rate, possibly
the same, at which they would take longer bills from members
with the guaranty of the banking association.
There remains to be established one more rate, the private
discount rate, at which the United Reserve Bank would take
sixty- or ninety-day bills, drawn by commercial firms on, and
accepted by, a bank, trust company or private banker [as under
(4)]. The private discount rate of the United Reserve Bank
would be kept very low in the beginning, for the purpose of
encouraging shippers at home and abroad to use the credit of
American banks, where now they use foreign credit. Shipments of coffee from Brazil to New York and of cotton from
Galveston to Boston are now usually financed by long drafts
on Europe. Under this plan such banking transactions will be
turned over to the United States. Bills will be drawn on
Amercan banks and bankers, instead of on London, Paris or
Berlin, and instead of being financed by others we may gradually become the financers of others. Not only will this increase
our trade, but most important of all, once we establish the
modern banking bill in the United States, its use will grow
and our banks will reap the tremendous advantage of being
able to invest their deposit money in assets upon which they
can quickly realize at home and abroad. As the use of this
modern paper increases, so will the financial safety of the
banks and the business community.
These bills will be strictly commercial in character and it
will be an easy matter to scrutinize the legitimacy of their
origin. At least two well-known banks, trust companies, discount companies or bankers must accept or indorse them, and
one of these names should be that of a member of a banking
association. This is much more than any European central
bank requires, and it should be entirely sufficient to provide
against any political or financial danger in this respect. On
the other hand, the powers given are far-reaching enough to
bring about the most important change, viz., the creation of
modern American bills of exchange.
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There remains to be considered one more field of activity
for the United Reserve Bank; that is, its privilege of buying
foreign bills having not more than ninety days to run. This
power is necessary for obvious reasons. It would afford the
United Reserve Bank an opportunity to employ its idle funds
in times when the management should decide upon a policy of
withdrawing funds from use in the United States, and it would
enable the bank to accumulate an interest-bearing gold reserve ; for foreign bills are available for the purpose of drawing gold from foreign countries, and they also serve as a
means for warding off withdrawals of gold.
We now have a fair outline of the normal functions of the
United Reserve Bank. Though restricted in its dealings to
the utmost limit of safety with respect to its scope of transactions and to its circle of clients, its effect will be most farreaching.
The cash reserves now scattered and useless will be concentrated into an effective central reserve. The general banks
will hold a sufficient amount of till money for their requirements, but as a reserve they must hold a cash balance with the
United Reserve Bank, commensurate as at present with the
aggregate amount of their deposits. If cash is withdrawn
from the general banks, they in turn will draw on the United
Reserve Bank for their needs and will replenish their balance
by sending to it for discount short or long bills. As a result
the dreaded cash withdrawal will lose its terrors for the banks.
If a Chicago bank withdraws its balance from a New York
bank, all the latter has to do is to notify the United Reserve
Bank's branch in New York, by a transfer check, to transfer
the amount in question from the account of the New York
bank to that of the Chicago bank. Wherever branches of the
United Reserve Bank are established, the wasteful remittances
of cash between members will cease. The bank will act like a
huge clearing house for the settlement of balances between
various sections. Millions are now constantly in transit, moving to and fro, crossing and recrossing one another in opposite
directions. Hundreds of millions are kept in scattered balances, which can be centralized under the new system.
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While banks now immobilize their assets by buying commercial paper which is legitimately issued, but which is practically non-negotiable, and while they use for quick assets call
loans on the stock exchange, that cannot be called in a panic
or a time of stringency which falls short of panic, the new system makes commercial paper a quick asset which can be converted into a cash credit or into actual cash. Our present
scandalous system, of attempting to regulate the money market
of the entire country by first pouring money into the stock
market, and then withdrawing it, creating inflation and exorbitant security prices, followed in due course by stringency
and unnecessary price depression, will give place to more orderly movements, as our discount markets develop.
This plan would be incomplete if it did not touch upon, without discussing in detail, the question of the government bonds
and the notes issued against them by the national banks. It is
certain that this question must be dealt with in a way entirely
fair to the national banks. Otherwise they will oppose the
plan. Having bought these bonds under the note-issuing
privilege, they are entitled to due consideration if this privilege is to be withdrawn. It is most opportune that, whether
we want a central bank or not, our miserable system of bondsecured note issue has at last come to a fatal impasse. One of
the most beneficent influences of the construction of the Panama
Canal is that it is opening our eyes to the impossibility of
linking together the aggregate amount of the funded debts
of a great nation and the aggregate amount of currency in the
pockets of the people. There is no doubt that this foolish inflation of our currency and of the price of our government
securities must now stop. There is furthermore no doubt that
elasticity means expansion and contraction and not expansion
alone, as results from our present currency system.
In order to secure an elastic currency and a safe basis for a
United Reserve Bank, we must reduce our outstanding currency somewhere, so as to substitute the new elastic note issue
—an issue that will contract, so that it can expand with safety.
One way would be an inverse conversion; that is, a gradual
withdrawal of the existing note-issuing power with a simul(475)

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taneous conversion of our government bonds into obligations
bearing a somewhat higher rate of interest, thereby safeguarding the banks against a loss in the price of their bonds.
This would bring the price of our bonds to a normal level, like
those of England, France and Germany, whose people can
afford to hold government securities. The higher interest
rate to be paid by the government to the people would be the
most wisely spent money in our entire budget. There are
several other ways of dealing with this problem. Suffice it to
say here, that to solve this part of the problem does not offer
insurmountable difficulties. It will be necessary only to investigate which method is the best, and offers the least resistance.
II
Let us now turn our attention to the criticisms of those opposed to a central bank system in the United States.
Mr. Morawetz says x that the territorial expanse of the
United States is too large for such a system, that the bank
would be one of too " colossal magnitude " and that it would
be necessary to place the central bank in a position to regulate
and control financial conditions throughout the country. He
furthermore claims that the central bank would either " have
the power to discriminate," and therefore " the managers
would be placed in the attitude of beneficent dispensers of bank
credit and of prosperity " or, if properly restricted, the bank
would be " a penny-in-the-slot machine for obtaining credit,"
the resources of which might be drawn upon too heavily by
" banks engaged in speculative business or located in sections
of the country where interest rates are high."
The size of the country is an argument not against, but for,
a central bank system. A small and unimportant country
could live with a less perfect system, and could lean upon the
other central bank countries in times of need. The immensity
of our country, our resources and our transactions renders it
1
Victor Morawetz, The Banking and Currency Problem in the United States,
The North American Review Publishing Co., N. Y., 1909; and Address on the
Banking and Currency Problem and the Central Bank Plan, delivered at the
Finance Forum of the West Side Y. M. C. A., Nov. 24, 1909.
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absolutely necessary for us to adopt the most efficient system
in existence.1 The greater the area, the more perfect the system must be in order to reach every remote point. The plan
here outlined covers the whole country. Each section of the
United States, as a matter of fact, will have a central reserve
bank of its own, where directly—or indirectly through its
correspondents—each bank in the United States will enjoy the
advantages offered by the United Reserve Bank. While the
general policy will be settled at the head office, in consultation
with the presidents of the branch offices and the members of
the central board, the actual business will be done by the
branch offices, which will act as separate units for each section.2 There will be this most important difference, however,
that, as far as reserves are concerned, they will be united and
act as one. The surplus of one section will be available for
other sections and the interests of all together will bring
about the general policy of the United Reserve Bank. The
effectiveness of this plan would not be interfered with by a
provision that the discount rates of all the branches need not
necessarily be the same. Thus it might be possible to meet
undue expansion in one section of the country by increasing
the rate of that branch without increasing the rate for other
sections.
As outlined here, the United Reserve Bank will not be a
" penny-in-the-slot machine," any more than the European
central banks, which discount and advance upon uniform conditions published from time to time. The United Reserve
Bank would certainly have the right to refuse any paper that
did not appear safe or legitimate. Furthermore, the power to
increase or decrease its rate and its circulation would place it
in a position amply to protect itself and the country. At the
same time, the restrictions placed upon it absolutely preclude
1

Our weight has become too heavy and threatens at times to break the European machinery which we use to make up for the lack of elasticity in our own
system.
1

Even the banks at Washington, D. C, would deal with the United Reserve
Bank only through a local branch office, like all the other banks in the country.
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any danger of its becoming " a beneficent dispenser of bank
credit and prosperity." The fear that some section, where interest rates are high, might absorb all the available means of
the United Reserve Bank, may be dismissed from consideration. The proportion to be fixed between capital-and-surplus
and amount admissible for rediscount with the United Reserve
Bank would prevent such abuse. Besides, as this facility of
rediscount is a most valuable element in the strength of a bank
and its real reserve, no conservatively managed institution
would go to its full limit in normal times. An institution
known to abuse its rediscounting privilege would quickly lose
standing in the community.
Mr. Morawetz's next criticsm is directed against the " control of the bank." It is contended that there would be too
much one-man control, or control by a group; that the bank
might become involved in political strife or become the issue
between contending political parties. The first two points we
have already answered at length, and little remains to be
added in this respect. The central office would merely indicate the policy; the branches, which practically are under the
supervision of the local banking associations, would undertake certain well-defined, safe transactions, into which no element of politics could enter, any more than it enters into our
clearing houses. No political patronage whatsoever would be
connected with the United Reserve Bank. A conscientious and
honest man, not even brilliant, would be required to fill the
presidency, at the pleasure of a board which, as we have seen,
would be made up of the best men the various banking communities could secure as delegates. There is no reason, despite
our critics, why such a board should not work harmoniously
and effectively, and whoever examines the plan from an unbiased point of view will see no danger of excessive power
being vested in one man.
Mr. Morawetz claims that great disaster would follow if the
central reserve bank, once established, should be abolished
again. Quite true; but should we hesitate to build a water
reservoir, because we feel that it would be a calamity if one
day it were to be removed ? It is safe to say that if a system
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were established as safe as the one here outlined, it would develop as our country develops. Its requirements might change;
but just as little as we can go back to the old mail coach after
the railroad, just so little can we return to our present impossible system, once we have modernized it. If frauds or patronage fill the post office or the custom house or the army and
navy or the treasury, we should clean up but not abolish those
departments. Though it is difficult to perceive how under our
plan abuse could develop, in such a case we should clean the
house, but we should not destroy it. Mr. Morawetz concludes
his argument by saying that a central bank should not be tried
because if it should fail, the cause of true reform would be
postponed for a generation. In so doing, he reminds me of a
man who should refuse to be born, for fear that he might die!
Now let us analyze Mr. Morawetz's plan.1 Under it, Mr.
1
[At the request of the editor, Mr. Warburg left this section as written in
the spring of 1910, though Mr. Morawetz later modified his plan in some
particulars.—Ed.] Mr.. Morawetz's plan provides for so-called " note-issue
associations," embracing practically all the national banks of the country. The
banks will appoint a board of managers, who in conjunction with the Secretary of the Treasury will have authority to establish branches wherever they
deem it advisable, the main office of the association being at Washington.
The main function of the central office and the branches will be to regulate
the issue and redemption of notes. Each national bank will be entitled to
issue against its general assets an amount of notes equal to its capital stock.
The board of managers, however, has the right to increase the amount of note
issues of the banks to some fixed percentage of the capital stock of the banks,
and this board also has the power to reduce such increase as it may have authorized. Each bank having taken out notes will be required to keep on deposit with the association, as redemption fund for their payment, a sum oi
lawful money equal to such percentage of the notes as may be prescribed from
time to time by the board of managers and the Secretary of the Treasury. The
required percentage of the redemption fund will be fixed from time to time
by general order applying equally to all the banks, but the required percentage
will never be less than 20% of the outstanding notes. It is left open for
further discussion in the plan whether each bank shall receive a special note
issue and shall keep a separate redemption account, or whether it will be
practicable to have one joint issue and one joint redemption account.
The general idea of the plan is that when notes are issued, they shall be
covered by a substantial amount of cash to be set aside in the redemption fund,
let us say 40 to 70%. The board of managers will have the power, in times
of stress, to allow a reduction of this reserve in the redemption fund, which,
however, may not be lower than 20% and in times of easy money, the central
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Morawetz provides for a board of managers, to be elected by
the banks. This board, in conjunction with the Secretary of
the Treasury, will have the right and duty of dictating to every
bank in the United States what percentage of cash it must hold
against its outstanding notes.
We grant that such a board could be so constituted as to be
safe; but every argument raised by Mr. Morawetz against the
dangers of political or one-man control of the central bank
board, can be applied with equal force to his board of managers. However, the power of this board of managers is more
far-reaching and of broader scope and therefore more dangerous than that of the board of the United Reserve Bank.
While the central bank is a passive institution, Mr. Morawetz's
board of managers is an active institution. The central bank
establishes rates at which it is willing to do business, but it
does not force anybody to do business with it. If the bank
rate should be 5%, banks in the South may find it to their advantage during the cotton crop movement to rediscount with
the United Reserve Bank, while banks in New England may
for the time being dispense entirely with its services, and therefore not be affected. If, however, the board of managers,
under the Morawetz plan, issues its command that all banks
must increase their reserve against notes from 30% to 40%,
it is a direct interference with the business of every individual
bank in the country, no matter if money is easy in Boston and
tight in New Orleans. Expansion and contraction is ordered,
whether it is needed or not, for every one at the same time.
How about " expanse of territory " in this case? Is it possible
to regulate all the varying demands of the varying sections of
our immense country at the same time by one " You must!"?
It is Mr. Morawetz's " You must!" against the United Reserve
Bank's " You may!" This difference is most important.
Furthermore, while the United Reserve Bank is enabled to
board may decree that this redemption fund be increased up to 100%, so as to
withdraw the notes, finally, from circulation.
The plan provides for the withdrawal of all national bank notes secured by
government bonds. Some provision has been made to protect the bonds owned
by the banks.
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perform its functions by the freest return, of idle money into
the central reservoir, thus avoiding its being needlessly held in
separate reservoirs, Mr. Morawetz would force every one at
the same time to withdraw more cash and to lock it up as special collateral for new notes. This power to influence money
rates, vested in a few men, would, from Mr. Morawetz's own
point of view, form ti grave danger.
Leaving aside this phase of the question, the system is unsound for these further reasons:
( i ) Our examination of modern systems has shown that
note issue is only a side question. It is a poor plan, therefore,
to try to solve the main problem by attacking an auxiliary part
of it. It is just as unsatisfactory as the attempt to repair a
broken-down dynamo by readjusting the storage battery attached to it only as an auxiliary emergency device.
(2) Notes issued by banks must be considered as demand
deposits, since for both, payment in cash may be demanded.
It is an unfair and unscientific plan to secure one depositor by
50% or 60% of cash, while the other must be satisfied with
20%.

(3) It is a faulty system that will change practically the
whole outstanding currency carried in the pockets of the people into money which the banks may not hold when it is paid
in to them.
(4) It is an anomalous and unsound system that allows a
bank to pay its creditors in notes which it may not carry as reserve, or that forbids it to carry as reserve against a deposit,
notes the very receipt of which may have created such deposit.
(5) The Morawetz plan tries to solve the problem exclusively by issuing more or less currency. But it is cash credit,
not currency, which is required most frequently. The two are
not identical.
(6) A bank is safe in granting time loans against time
money which it may have taken; the excessive granting of
time loans (loans and discounts) against call loans (deposits)
is dangerous and often the cause of financial disturbances. A
bank already overextended, makes its condition more dangerous by granting further accommodation through note issue.
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For increased note issue means an increase of demand obligations, while rediscounting of paper with a United Reserve
Bank means an outright sale of assets. That is, cash credit
or cash becomes available without the creation of a new and
dangerous demand obligation.
(7) The vicious system of separated, disconnected and competing reserves remains the same.
This is only an outline of the main arguments against Mr.
Morawetz's plan. It would lead too far to follow up in detail
every single point
What would the effect of this system be ? There were in the
United States in 1908, according to the report of the comptroller of the currency:
Number
Cap. Stock
Surplus
Cash
Deposits.

Nat'I Banks
6,853
£921,000,000
566,000,000
889,000,000
4,374/x»,ooo

State Banks
11,220
$502,000,000
217,000,000
308,000,000
2,937,000,000

Trust Co's
852
$278,000,000
370,000^00
118,000^00
1,866,000,000

Sav. B'ks
1453
$3fifiaofiOo
244,000,000
44,000,000
3479,000,000

Under the Morawetz plan, the 6,853 national banks, which
are money-making concerns, competing against one another,
with deposits of $4,374,000,000, would have to bear the burden of regulating not only their own conditions, but also those
of the other institutions, having deposits of $8,282,000,000.
But let us suppose the state banks all turned into national
banks. We should then have 18,073 banks, with a capital of
$1,423,000,000; surplus $783,000,000; cash $1,197,000,000;
deposits $7,311,000,000. In order to bring the state banks up
to the standard of the national banks, figuring only a 25% reserve, a cash reserve of $1,462,000,000 would be required,
being an addition to bank cash that must be withdrawn from
circulation of $265,000,000. Every bank will have the right
to take out these notes to at least the amount of its unimpaired
capital, and the board of managers may authorize larger issues.
Let us take the minimum, $1,423,000,000, and a reserve of
only 40%. This would mean an additional withdrawal of
cash of $568,000,000, or a total of $833,000,000. This means
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that two and three-fourths times the amount of cash held at
present by all state banks, or about the total aggregate amount
of cash now held by all the national banks, would have to be
withdrawn from circulation and be replaced by bad notes—
bad because they cannot be used by the banks as reserve
money. Taking the above figures as a basis, it means that there
would be in the hands of the public about $1,400,000,000 of
national bank notes, while the circulation of such notes under
our present system amounts to about $700,000,000.
When there is a demand for more currency, and not for
more credit, the plan may work for a while, though weakening the currency; but when there is currency enough in the
pockets of the people, while demand for additional credit continues, every note issued will return at once through the redemption fund and must be paid in cash. Every bank will
then try to accumulate legal-tender notes, to strengthen its
power of granting credits, and will therefore at once present
for redemption the national bank notes that it receives.
Crises have frequently arisen because people believed that
the top wave of demand for accommodation had passed, and
all means had been spent in this expectation, when the main
pressure had not yet begun. If during such critical times gold
withdrawals from abroad should begin, it is difficult to see how
under this plan reserves could be strengthened, for it is to be
expected that in such case the reserves would already be at the
lowest point. Then we should again witness the critical times
when one bank, by refusing to renew its call loans and thus
throwing the burden on the others, creates a credit balance for
itself in the clearing house, thus strengthening its cash balance
at the expense of the others. Retaliation would follow, and
panic would be in sight in the future just as it has been in the
past. The weakness of our present system in this respect
would remain unchanged.
This plan would leave the treasury money either wastefully
piled up and withdrawn from circulation, or it would leave to the
Secretary of the Treasury arbitrary power to dispense favors
by depositing the funds wherever he may prefer. It would
leave promissory notes as immovable in the future as in the
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past, with no hope of ever developing a modern system of bills
of exchange. I have no hesitation in saying that it would be a
most reckless experiment, on entirely new and untried lines,
and it would in my opinion lead to certain disaster.
Mr. Morawetz's plan contains two suggestions: one, as we
have seen, being the regu