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The Suggested Plan
For A National
Reserve Association

An Address

Before The Bankers’ Club
St. Louis, Oct. 31, 1911

By WILLIAM McCHESNEY MARTIN

Mississippi Valley Trust Co.
SAINT LOUIS



THE SUGGESTED PLAN FOR
NATIONAL RESERVE
ASSOCIATION

A

A n A d dress D elivered by
Willliam McChesney Martin
Mississippi Valley Trust Co.
St. L ou is
1 SSOUUI h a s a l w a y s
stood f or sound banki ng.
] n t he d a y s w h e n St. L o u i s w a s a s t a t i o n f o r
t r a p p e r s o n t he b o r d e r s o f a w i l d e r n e s s , tier
t r a d e n o t e s w e r e t h e c u r r e n c y in u s e a s f a r N o r t h as
C a n a d a , a s f a r S o u t h a s t he G u l f a n d a s f a r W e s t as
t here w a s a ci vi l i zed ma n to r e c ei v e them.
L a t e r t he
n o t e s o f t he B a n k o f t he St at e o f M i s s o u r i t o o k t h e i r
place and f o r thirty yea rs w e r e g l a d l y rec eived by
trapper, trader, ri verman, merchant, w o o d s m a n , p l a i n s ­
man and g o l d seeker.
W hen a general bank ing law
w a s p a s s e d in 3 857 it c o n t a i n e d a p r o v i s i o n c a l l i n g
f o r e x a m i n a t i o n s a n d r e p o r t s f r o m b a n k s a n d if
t hi s w a s no t t he first p r o v i s o n o f its ki nd, it w a s
a m o n g t he v e r y first.
O u r t r a d i t i o n s h o w s t ha t w e
a r e c o n s e r v a t i v e e n o u g h to be s o u n d a n d p r o g r e s s i v e
e n o u g h t o me e t c o n d i t i o n s .
So, o f c o u r s e , w e a r e i n ­
t e l l i g e n t l y i n t e r e s t e d in a n y p r o p o s e d p l a n t o m a k e
m o r e c f l ' ec t i ve o u r b a n k i n g s y s t e m.

M

Our Banking System Unsatisfactory
In an a u d i e n c e o f t hi s ki nd , it is u n n e c e s s a r y t o d o
m o r e t h a n s t a t e t hat o u r p r e s e n t o n e is u n s a t i s f a c t o r y .
W e a r e all s o c l o s e t o t he d a y s o f 11)07, t ha t w e h a v e
s e e n t hi s f a c t d e m o n s t r a t e d .
S o m e o f us d o u b t l e s s
h a v e had it b r o u g h t s o c l o s e h o m e t ha t w e w e r e u n d e r
t he n e c e s s i t y o f g i v i n g t he c o o k a c h e c k f o r h e r
w a g e s a n d w h e n t hat i m p o r t a n t p e r s o n a g e l o o k e d
d o u b t f u l , h a v e had t o e n t e r i n t o an e l a b o r a t e e x ­
p l a n a t i o n , t he p u r p o s e o f w h i c h w a s t o c o n v i n c e h e r
t ha t a w h i t e p i e c e y ^ ^ j w i r r ^ l f l / p n e d w i t h o u r n a m e
w a s b e t t e r t ha n th
r e e n bank-.^fujtes ' ° w h i c h s he
w a s a ccu st ome d,
l i o w e v e r , the e m ­
barrassment m ay /
v e S p B f U w sr
. f o r t he c o o k
may have postponed
aCftSs} f j oCJanot her m o n t h ,
w a i t i n g t o get w
f c h &' ^ OUl l t ^ a U real m o n e y .
We
l iav j heard o f a
called John
S m i t h a nd w e r e g r y f t ^ o take_-+fi'4'sfr'J^eks t h o u g h he
w a s un i d e n t ified.
f e w g r e y hairs




In this room caused by perplexity over the problem
"Shall we build up our reserves, by calling loans and
ruining our community, or be extremely lenient in
calculating the minimum necessary under the law ?”
W e read that there was a money stringency through­
out the world, but we found that neither England,
France, Germany, or even a country as newly modern
as Japan, suffered as we. In no other nation would
a period of six months show fluctuation in interest
on demand loans from 2% in August to 126% in
January.
Before 1907 there were prophets in the
land who delivered jeremiads against our system
but we practical men, not having had our Angers
burned, left the fire to what we were Inclined to call
“ the alarmists” . However, it is different now.
We
have practically been forced to give the situation at­
tention.
The result is that we have unanimously
concluded that our system is defective at least in
two respects.

Chief Defects
(1)
Our currency is not elastic.
It expands and
stays expanded, or contracts and stays contracted
with no regard to real business needs.
Instead of
acting like a rubber band and governing itself by
the size of the package, it expands and contracts ac­
cording to a standard outside of itself,— the price
o f government bonds.
Foreigners have said it was
the most unscientific system in the world.
(2)
Our reserves are really not reserves to be
relied upon in times of need.

A Banking System an Outgrowth
Having found the vital defects that we agree upon,
the next thing is to remedy them. But in considering
any remedy, we must bear clearly In mind that a
banking system id not a soil, but is an outgrowth.
The bank was never first established and then the
community taught its use. There was a need in the
community, and the bank was established to meet
that need, to meet the wishes and habits of that par­
ticular people. Human nature all the world over is
pretty much the same, but its habitat has an in­
fluence and its manifestation in government is d if­
ferent. Know ing this we can study the experiences
of other countries for our guidance, but we neces­
sarily cannot expect to use exactly the same means
to an end. W e have to put in practice the ancient
wisdom ‘'W h at’s meat to one man is poison to an-




2

4

|

other,” in preparing a banking system as well as in
other things.
The proper course to follow then is to see if some
at the remedies found effective in our own experience
cannot be amplified and systematized until Our banking
is at least the equal of any tn the world.

Proven Remedfe*
The panic of 18f>3, clearly indicated that banks as
isolated units each striving for its own preservation
regardless of others, resulted disastrously not only
for the country as a whole, but generally for the
individual bank. New York, profiting by this lesson,
in 1860 when threatened with trouble by the impend­
ing war, knowing that self-preservation of the in­
dividual bank meant the preservation of all, through
its Clearing House arranged for cooperation.
They
combined their reserves so that the reserve of the
strongest was available for the deserving weakest.
They also issued Clearing House Certificates, which
we may call a clearing house currency, against the
deposit of aproved securities with the clearing house
committee, this currency to be accepted by banks in
the settlement of obligations to other banks.
The
stringencies end panics follow ing 1853, Including 1907,
emphasized this fact, that a bank in order to save
itself must of necessity be altruistic and also em ­
phasized the remedy of concerted action, combined
reserves, and clearing house currency. The backbone
of any banking system is confidence and cooperation
helped to restore this.
St. Louis, New York, Chicago, Boston, Philadelphia
and other cities have proved the practicability of this
course, so it would seem natural to try to apply it
to the entire country.

Conditions to be Met
Let us now state our problem.
The territory of
the United States is of vast extent; part of it is fully
developed and part of it is still in the pioneer stage.
W e have a population of ninety million, served by
22,491 banking institutions, or an average of one
banking institution to every thirty five hundred of
our people, but these institutions differ greatly in
size and are unevenly distributed. Of the above num­
ber of banks 6,893 are operated under Charters re­
ceived from the Federal Government; 13,459 under
Charters from State Governments, and 1,497 have no
Charters, that is, are private banks. W e are a re­




3

public and our people believe neither in the divine
right of kings, politicians nor plutocrats. Our intelli­
gence is o f the highest, our civilization of the best,
our agriculture the most abundant, our manufactures
the most effective, our mines productive) our industry
and commerce the greatest in the world. Our financial
■jrstemi— and it is as important to the Nation as the
nervous system to the body— has. been found weak
In at least two ways.
First our currency is not
elastic, and second, our reserves are not real reserves.
Our experience has shown that in times of stress
cooperation, combined reserves and clearing house
currency were effective.
How then shall we apply
the remedies as shown by experience, to the proved
defects, and make such changes as w ill bring about
a real improvement in the banking conditions of the
United States, remembering alw ays that while we
may profit by the experience of England, Canada,
Prance, Germany and other countries, we are different
in many respects from all of them.

Investigation Necessary
The common sense method is first to investigate,
then to form ulate a plan. This is the order we have
followed. A National Monetary Commission was ap­
pointed by Congress and its work has been of great
value
I speak from personal experience, for in the
latter part of 1905, I began the attempt to investigate
this question on my own account. I found it prac­
tically impossible to find proper books on the subject
and even in such treatises as I found, the information
w as so out of date or so scattered, that a man who
spent his day in a financial Institution could make
practically no headway. The Commission has gathered
this information now in as compact shape as possible,
and it is accessible to every one. This Commission
as yet has not reported but Senator Aldrich, its
Chairman, has drawn up a plan which he has sub­
mitted to the committee and which it has published
throughout the country.
On October 19th Senator
Aldrich published a revision of his plan and it is
this revision I propose briefly to discuss, but at the
outsei we must bear clearly in mind that it is only a
proposal.
It is not a Bill before Congress, but as
a beginning has to be made, is a starting point.
Its purpose as I understand it, is to provoke study,
discussion and criticism. The Commission Is holding
public hearings on the plan traveling through the




4

cities from coast to coast. A ll interested will have
a chance to express themselves.

Membership in the Reserve Association
In the plan as o r i g i n a l l y proposed only National
Banks having a minimum capital of $25,000 shall own
stock in a federal corporation to be called the Reserve
Association of America. This was doubtless on the
theory that National Banks are subject to a more
rigid examination and supervision than State banks.
In some States this is true, but not in Missouri.
You who were at the last State Convention in Kansas
City heard your Bank Commissioner state that it
had been “ three and a half years in the State of
Missouri since there had been lost to any depositor
a single dollar in the banks of Missouri” . W hen you
think that these three and a half years immediately
follow a panic, I think that we can all be Justly
proud of the banking institutions and their regulation
in this State. And it was in Missouri that attention
was ttrat called to this injustice. To the honor of
the State be it said that the first public discussion
of this measure was by the Bankers’ Club of St. Louis,
and at that meeting Mr. Breckinridge .Jones protested
against barring State institutions from the privileges
of the measure.
He maintained that the Federal
Government did not have the power under the con­
stitution to charter National Trust Companies; and
that under proper regulation State banks, Trust Com­
panies and Savings Banks should be admitted on an
equality with National Banks. Later the Executive
Council of the American Bankers’ Association ap­
proved such an amendment to the plan.
Our State
Association has also made a similar recommendation,
and now the revision of the plan provides for the
membership of State Banks and Trust Companies
on an equality with National banks.
It is not the purpose to compel any bank to own
stock in this association. It may buy, or it may not,
as it sees fit, but will have to own stock or it
cannot receive the privileges of membership. If it
does become a member it will have to buy stock
in the Reserve Asosciation to an amount equal to
twenty per cent of the purchasing bank’s capital.
It cannot take more than this, nor less; it is twenty
per cent of its capital or nothing, and one-half must
be paid.
I f the member bank increases its capital,
it must increase its ownership in the Association,
and if it decreases its capital, it must decrease its




5

ownership. A member can never transfer its stock,
but in catfe of liquidation or suspension can surrender
its stock at book value.
These provisions are to keep any one bank from
gaining a dominating influence in the Association
through stock ownership, merger or otherwise.

Dividends
The dividends of the Reserve Association are limited
to five per cent per annum and provision is made
for a surplus equal to twenty per cent of the paid-in
capital. W hen the surplus reaches this amount, then
all earnings in excess of a five per cent dividend are
to go to the government. It is obviously the purpose
and correctly so that the Asociation shall not be
considered a money m aking institution, and a limited
dividend will serve to lessen the desire of any one
faction for control.

Organization
For purposes of organization and operation the
Reserve Association is composed of three divisions.
The Central Asociation is approachcd through the
District Association from the Local Association. The
Local Associations are composed of banks, the District
Associations are composed of Local Associations and
the Central Association is composed of District A s ­
sociations.
Kach Local Association is to be com­
posed o f not less than ten banks with an aggregate
capital and surplus of not less than five million dollars.
Subject to these limitations, there may be any number
of Local Associations, the District Associations are
limited to fifteen to begin with, but may be increased
if found neccssary, and each one is to have a branch
of the Reserve Association located in it, so the
Branches are limited at first to fifteen. Local A sso­
ciations, District Associations and Central Association
are to be governed by directors the m ajority of whom
are chosen by the banks having one vote each irre­
spective of capital and a minority by stock representa­
tion, the purpose being fully to safeguard the influ­
ence of the smaller members.

The Local Association
This machinery is necessarily complicated, but once
set in motion it seems that it should work smoothly.
Perhaps we can get a clearer idea of this matter if
tonight, as the banks of St. Louis, including in our
number not only the members o f the clearing house,




6

but those financial institutions located in the city
that clear through members of the clearing house,
but excluding those located in the county or in Illi­
nois, we proceed to organize a Local Organization.
In this city national banks must have a capital
of at least $200,000. and under the revised plan state
banks would also have to have a capital of at least
$200,000 to become members of the Association. There­
fore, there are in St. Louis seventeen banks, national
and state, that could become members of a Local
Association which we shall call the Local Association
of St. Louis. Under the revised plan trust companies
would have to have a capital of at least $500,000 and
a surplus of 20% of the capital. There are four such
trust companies in St. Louis.
This gives a total
of twenty-one financial institutions that could take
advantage of the revised plan in this city, with an
aggregate capital and surplus of $80,010,291.36.
Of
these, four financial institutions have each a capital
and surplus of over $5,000,000, sufficient to qualify
in this respect each for membership but it gives
these four financial institutions no advantage, for a
Local Association must have at least ten banks. The
consequence is that St. Louis though it has capital
and surplus enough to form sixteen Local Associa­
tions, could not possibly have more than two Local
Associations because the number of financial institu­
tions that could qualify is only twenty-one, and
doubtless the banks would find It much more con­
venient and practical to have only one, constituted as
the clearing house is at present.
Having formed ourselves into a Local Association,
the first meeting is for the purpose of electing directors
and is held right here in this room.
The plan
provides that only a president, vice-president or
cashier can represent his bank, and no proxies are
allowed, consequently we are pretty sure of having
assembled here twenty-one bank officers.
W e are
supposed to enact our own by-law s and by them
we make the number of directors of our Local Associa­
tion twenty-five.
Three-fifths of this number, or
fifteen, we proceed to elect by each bank casting one
vote, that is the majority of the twenty-one votes
elect them.
The remaining two-fifths, or ten, we
elect by each bank casting as many votes as It has
shares in the Reserve Association. As our total capital
(surplus is not considered in this) is $38,550,000 and
twenty per cent of this would be the par amount o f




sh ar es held by the L o c a l A s s o c i a t io n o f St. L ouis
or $7,710,000, the tot al n u m b e r o f sh ares v o te d f o r
this t w o - f i f t h s o f the n u m b e r o f d ir e c t o r s w o u ld be
77,100, and in this v o t i n g the b a n k s w ith the l a r g e r
c a p ita l w o u ld ha v e the a d v an tag e.
H o w e v e r , the
nu m b er o f b a n k s w o u ld c o n t r o l s i x t y per cen t o f
the boa rd , and the n u m b er o f sh ar es bu t 40%.
At
this m e e t i n g
we
w o u ld al so d o u b t l e s s elect ou r
p r o x y h o ld e r to r eprese n t the St. L o u is ba n k s a c c o r d ­
i n g to the ir s t o c k o w n e r s h i p in the R e s e r v e A s s o c i a ­
tion. T his r ep r e sen ta tiv e w o u ld c ast 77,100 v o te s f o r
d i r e c t o r s o f the D ist r ic t A sso c ia t io n , and the only
d u t y he has is to vote.
Our D istr ic t w o u ld p r o b a b ly c o n si st o f at least
three st ates — sa y M isouri, A r k a n s a s and O klah om a,
and the br an ch o f the A s s o c ia t i o n w o u ld d ou b t le ss
be at St. Louis. In this D ist r ic t there w o u ld p r o b a b l y
no t be o v e r 15 L o c a l A s s o c ia t io n s o f w h ic h the L oca l
A s s o c ia t io n o f St. L o u is w o u ld be one. A s the board
o f d i r e c t o r s o f St. Louis, w e w o u ld elect by b a llo t
one d ir e c t o r o f the D istr ic t or B ranch A ssoc iatio n,
and a c c o r d i n g to the plan as o r i g in a l ly p rop osed have
little else to d o un le ss w e are ask ed to g u a ra n t e e
p ap er f o r r ed isc ou n t w h ic h w o u ld p r o b a b ly be only
on rare ocas ions.
H o w e v e r , in the revised plan it is p ro v id ed that
the L o c a l A s s o c i a t io n ha v e a c o m p le t e or g a n i z a t i o n
w ith a pres ident, v i c e - p r e s id e n t and e x e c u t iv e c o m ­
mittee.
It is to ap p oint e x a m in er s w h o shall rep or t
to it and w h o s e rep or t s are to be fu rn ish ed the
Nat io na l R e s e r v e A s s o c ia t io n w h en desired.
By a
v ote o f t h r e e -fo u r t h s o f its m em b e r s wit h the a p p ro v a l
o f the N at iona l R e se r v e A s s o c ia t i o n it m ay ex er cise
such o f the p o w e r s and fu n c t io n s o f a c l e a r in g house
as are not in c on s iste n t w ith the p ur pos es o f the plan
and it can be c o m p e ll e d to f a cil it a t e d o m e s t i c e x ­
ch an g e.
It will also ha ve the p o w e r to su spend a
m e m b e r b a n k w h ic h r e fu s e s to c o m p ly w ith the
c o n d i t i o n s o f the L o c a l A sso c ia t io n .
A s the L oca l
(M|fociation is the p rim a r y unit o f the w h o le sy stem,
"Tn^Nrfy. ju d g m e n t , those p r o v i s i o n s fo r a c o m p lete
aHization are m ost e x c ell en t and w ill g r e a t ly help
i m ^ t o su ccess.
In b r i e f it so a r r a n g e s it that
A c3^ouis c l e a r i n g house, b y c a l li n g i t se lf a
.
/A ssoc iation ins tead o f h a v in g a restr ic ted inat pres ent , b e c o m e s part o f a n a t i o n -w i d e
f' efW ynd its d uties are p ra c t i c a l ly un chan ged .
In
L o c a l A s s o c i a t io n is m od eled a f te r the c l e a r ­




in g hou se as k n o w n in St. L ouis and C h ic a g o wh ic h
o r g a n iz a t io n s have alr ead y p rov en them se lv e s o f value
in tim e o f trou ble in this cou ntry.
E ac h o f the fifteen lo cal boa rd s o f d ire c t o rs in our
d is tr i c t w o u ld d o as we and elect one d ir e c t o r to
the D istr ic t A ssoc iation.
This w o u ld g iv e us fifteen
d i r e c t o r s el ec te d this way.
Then ou r p r o x y ho ld er
w ith his 77,100 votes, w h o m we had al read y elected
w o u ld meet the p ro x ie s f r o m the othe r L oca l A s ­
s oc ia t i o n s here in St. L o u is w h e re the br an ch is.

The District Association
T hese p ro x ie s w o u ld elect ten o f the D ist ric t d ir e c ­
t ors and then w o u ld g o hom e with no other duties
to p erform .
T hes e ten w ith the fifteen elected by
d ire c t o rs o f d ifferent L oca l A ss o c ia t i o n s g i v e s the
D ist r ic t t w e n t y -fiv e d irec tor s, and these tw e n t y -fiv e
w o u ld elect an ad ditiona l five d ire c t o rs w h o shall not
be officers o f ba nks, but w h o fa irly re present i n ­
dust rial, co m m erci a l, a g r ic u ltu r a l or othe r interests in
the com m u n ity .
The total nu mber o f d ire c t o rs then
o f our M i s o s u r l -A r k a n s a s - O k l a h o m a D ist ric t w ou ld be
thirty, o f w h ic h fif ty per ce nt w e r e elected by w h at we
m ay call Individual r epr es en ta tion, 33%% elec ted by
s t o c k r epr esen ta ti on and 16%% w er e elected by jo in t
ind iv idual and s t o ck re pr ese nta tio n. The d istrict will
have a m a n a g e r and d epu ty m a n a g e r appointe d by the
G o v e r n o r o f the A s s o c i a t io n w it h the ap p rov al o f
the E x e c u ti v e Comm ittee.
T hese D ist ric t B ran che s
will be the c h i e f m ean s by w h ic h the f u n c tio n s o f
the R eser v e A s s o c i a t i o n are car ri ed out.

The Central Association
Let us n o w ex am ine the o r g a n iz a t io n o f the Central
A so c iation .
Its boa rd o f d ire c t o rs will con sist o f
f o r t y -fi v e , o f w h ic h six are ex-off lcio, these b e in g the
g o v e r n o r o f the R e s e r v e A ss o ciation, t w o dep uty
g o v e rn o rs , the S ecre tary o f the T re asu ry, S ecretary
o f C om m er ce and Lab or, and the C o m p t roller o f the
C urrency.
E ac h D ist ric t Boa rd is a llo w e d to elect
one d irec tor , and this g i v e s fifteen.
An additiona l
twelve, are elected by v o t i n g re presen ta ti v es w h o
cast the nu m b er o f sh ares ow n e d b y the District s.
The n the t w e n t y - s e v e n elected d ir e c t o r s (the e x ­
officio d ire ctor s, un der the revis ed plan, are not a l ­
lo w e d to v ote f o r m em ber s o f the b o a rd ) elect
t w e l v e ad d iti ona l men to the board, w h o shall fa irl y
represe nt the industrial, c om m er cia l, ag r icu ltu r a l and
o ther in terest s in the c om m u n ity . This m a k e s a board
o f fo r t y - f i v e d ire ctors , o f w h ic h 13%% is ex-officio,




0

33V&% Is elected by individual votes, 2 6% % is chosen
by votes according to stock, and another 26%% is
chosen by the Joint individual and stock vote.
In order to prevent the possibility of centralization
of management the revised plan just presented to
the Commission al30 provides that of the tw enty-four
directors made up of the twelve elected by stock
representation and the twelve selected from the in­
dustrial, commercial and agricultural and other in­
terests, not more than three can be chosen from
any one district.
W ith this additional safeguard,
it seems the Central Association is fully protected
from the possibility of sectional control. Even New
York state in which it is said there is centered fully
three-fourths of the money power in our country
could not have more than four directors in the
Central Association, the one elected by the directors
of the District Association, and the three elected
by stock representation from the industrial and other
interests and the New York District could not by
itself elect these three, the other Districts would
have a voice in the matter. The same is true of our
proposed M issouri-Arkansas-Oklahom a District; we
could not have more than four directors.

The Smaller Bank is Protected
It is apparent that throughout the plan the purpose
is to give the control to number of banks rather than
to the capital of banks.
It would seem that the
interests of the smaller institution are thoroughly
safeguarded. The local association is the fundamental
unit and it seems to have been overlooked in discus­
sion that this unit is protected in two ways.
The
Local Association must have ten banks and must
have $5,000,000 capital.
As there are only tw entyone eligible banks in St. Louis, this means there
could not possibly be more than two Local Associa­
tions in this city, and probably only one, which in
spite of its capital of $38,550,000, would have no more
privileges than exercised by a rural Local Associa­
tion with capital one-third as large. This same thing
is true of New York and other big cities. The last
statistics available showed that the New York Clear­
ing House had flfty-one members. This would mean
that there would doubtless be not more than five
local associations in that city, and the chances are
there would be only one.

James J. Hill’s Criticism
Mr. James J. Hill in a recent address before the
Illinois Bankers’ Association as reported by the press,
10




lias s u g g e s t e d t h a t t hi s m e t h o d o f o r g a n i z a t i o n is
n o t e f f e c t i v e a n d s a y s t ha t s o m e l a r g e b a n k w i s h i n g
t o d o m i n a t e t he R e s e r v e A s s o c i a t i o n c o u l d t a k e a mi l l i o n
d o l l a r s a n d o r g a n i z e f o r t y b a n k s w i t h $25,000 c a p i t a l
e a c h a n d s o g e t f o r t y v o t e s in t he l o c a l a s s o c i a t i o n .
H o w f a r f e t c h e d a nd t h e o r e t i c a l t hi s o b j e c t i o n is,
is s h o w n b y t he f a c t w h i c h s e e m s to h a v e b e e n o v e r ­
l o o k e d b y Mr. Hi l l , t hat in o r d e r to h a v e a n y ef f ect
o n t he R e s e r v e A s s o c i a t i o n i t s el f , t he f i na nc i a l i n ­
t e r e s t s a t t e m p t i n g s u c h a t i l i n g w o u l d h a v e to f u r n i s h
a m i l l i o n d o l l a r s t o e v e r y L o c a l A s s o c i a t i o n , a nd g o
t h r o u g h t he p r o c e e d i n g s n e c e s s a r y t o e s t a b l i s h f o r t y
b a n k s in e a c h L o c a l A s s o c i a t i o n .
W h e n it is c o n ­
s i d e r e d t hat p r o b a b l y t h e r e wi l l be at l east f i f t een
L o c a l A s s o c i a t i o n s in e a c h d i s t r i c t a nd t hat t h e r e
a r e f i f t e e n d i s t r i c t s , w h i c h m e a n s t he e s t a b l i s h m e n t o f
J*,000 n e w b a n k s — m o r e t ha n t he t o t a l n u m b e r o f
n a t i o n a l b a n k s n o w o r g a n i z e d — a nd t he f u r n i s h i n g o f
$225,000,000 o f c a p i t a l w i t h t he p r o s p e c t o f a m o s t
d u b i o u s r e t u r n , it is c l e a r t h a t s u c h an u n d e r t a k i n g
is p r a c t i c a l l y i m p o s s i b l e .
It w o u l d t a k e t i m e t o d o
a t h i n g o f t hi s k i n d a nd it c o u l d not b o d o n e s u r r e p t i o u s l y , c o n s e q u e n t l y it s e e m s i n c r e d i b l e t ha t e v e n
i f t h e m e a n s c o u l d he f o u n d , t h a t t he p e o p l e w o u l d
a l l o w it.
I f s u c h a t h i n g is p o s s i b l e , w e a r e i nd eed
in a b a d s t at e.

Safeguarded Against Political Control
It s e e m s t o m e t ha t t hi s p l a n o f o r g a n i z a t i o n , e s ­
p e c i a l l y s i n c e t he r e v i s i o n , c a n h a r d l y be i m p r o v e d
u p o n a n d I d o n o t b e l i e v e t ha t u n d e r it a n y f i nanc i al
i nterest can get control.
1 a l s o d o no t s ee h o w
p o l i t i c s c a n d o m i n a t e it. It is t r u e t ha t t he g o v e r n o r
is t o b e a p o i n t e d b y t he p r e s i d e n t , b u t he c a n o n l y
s e l e c t f r o m n a m e s s u b m i t t e d b y t he B o a r d o f D i r e c ­
t o r s a n d s u r e l y a b o a r d o f f o r t y - f o u r me n, s e l e c t e d
i n t h e m a n n e r t h e y a r e s e l e c t e d wi l l n o t be s u b s e r v i e n t
to any p art y or power.
U n d e r t he r e v i s e d p l a n t w o
d e p u t y g o v e r n o r s , w h o are al so ex- of f i ci o di rect ors,
a r e t o b e e l e c t e d b y t he b o a r d , n o t a p p o i n t e d b y t he
g o v e r n o r a n d t he g o v e r n o r h i m s e l f c a n b e r e m o v e d
b y a t w o - t h i r d s v o t e o f t he b o a r d .
Three others
o f t h e b o a r d a r e g o v e r n m e n t off i ci al s, n a m e l y , t he
S e c r e t a r y o f t he T r e a s u r y , t he S e c r e t a r y o f C o m ­
m e r c e a n d L a b o r a n d t he C o m p t r o l l e r o f t he C u r r e n c y ,
b u t t h e s e w i t h t he g o v e r n o r m a k e o n l y f o u r o u t o f
a b o a r d o f f o r t y - f i v e a n d it is r a t h e r s t u l t i f y i n g to
A m e r i c a n c i t i z e n s h i p t o s a y t ha t t h e s e f o u r wi l l
dominate.




1
1

Executive Committee
It is al so ha rd to see h o w the e x e c u t iv e c o m m itt e e
c ould be m ore c o m p le t e l y sa f e g u a r d e d . It is to be
c o m p o s e d o f nine m em be rs, the g o v e r n o r , t w o d ep u ty
g o v e r n o r s and C o m p t r o l le r o f the C u r r en c y ex -offlcio,
and five ot h er s el ecte d b y the board, no t m or e than
one o f w h o m can c o m e f r o m an y one district.
In
o t h er w o r d s five sec tion s o f the c o u n t r y will a lw a y s
be represented.
The C om p t r o l le r o f the C ur r enc y is
the o n ly st r i c t l y g o v e r n m e n t official on this board,
f o r w h il e the g o v e r n o r is ap p ointed by the presiden t,
he is se lec te d f r o m na mes su bm itted by the board
and can be r em ov ed b y the board. The t w o depu ties
are elec te d b y the boa rd and w ith the five othe r
m e m b er s m a k e a m a jo r i t y o f seven.

Cooperation Possible Only Through an Association
H a v i n g e x am in ed the plan and finding the t w o
d a n g e r p oints o f p o litic a l c o n t r o l and fin ancial c o n t r o l
p ro tec te d, let us see w h a t a d v a n t a g e s w ill c o m e fr o m
this c o o p e r a t i o n o f the b a n k s t h r o u g h the R e s e r v e
A sso c ia t io n . The re are those w h o say that no i n s t r u ­
m ent like an a s s o c ia tio n is n ec es sa ry , and they point
to the b a n k i n g sy s t e m s o f C an ad a and Scotland, s a y ­
in g no Central Ins tit u t ion is needed in those countries.
T his is true, but the fa ct see m s to be o v e r lo o k e d
that there are on l y t w e n t y - n i n e b a n k s in Canada, and
these c o n t r o l all the b a n k i n g bu sine ss t h r o u g h 2,000
bran ches.
Of these head ba nk s, nin eteen
are in
T o r o n t o or M ontre a l and the entire t w e n t y - n i n e are
so situat ed that th ey can g e t t o g e t h e r w ith as m uch
ease as b a n k s can g o to a m e e tin g o f the C lea r in g
H ou se A s s o c ia t io n in a city.
In Scotla nd there are
on l y eig h t head b a n k s and these find it e asy to c o ­
op era te at an y time. W e ha ve 6,893 Nat io na l ba n k s
and 13,457 State in s tit u t ion s so w id e ly sc atte red they
c ould n ever g e t t o g e t h e r e x c e p t th r o u g h som e cen tra l
mediu m.
H i s t o r y al so s h o w s that C anada and S c o t ­
land are e x c e p t i o n s to a g en er a l rule, f o r the fo u rt een
la r g e r f o r e i g n cou ntr ies, even t h o u g h m ost o f them
have not near ou r e x pa n se o p era te un der a Cent ra!
bank.
Let us not g e t con fu sed , h ow eve r , the plan
un der d iscu ssion doe s not p ro p o se a ce ntral b a n k in
the sense o f the Ban k o f the United States d estr oy ed
by J a ck s on .
Its purpoiie Is not profit. P r im a r i ly it
is a m ediu m o f c o -o p e r a t io n .

Present Banks Not to be Done Away With
This R e s e r v e A s s o c i a t i o n does not enter into c o m p e ­
tition w it h an y bank.
It is not c on t em p la t ed that




12

an y c h a n g e be made in e x is t in g b a n k in g la w s ex cep t
a possible c h a n g e a l l o w i n g Nat iona l ba n k s to have
sa v i n g s d epa rt m en ts and un der g iv e n r estr ic ti on s to
lend limited am ou n ts o f their s a v in g s d epo si ts on
real estate. It is no t to be a llow ed to pay interest
on deposits. It is to r eceiv e d epo si ts fr o m the United
States G o v e r n m e n t and m em ber banks, and these
d ep o sit s o f m em ber s are to be cou nted as part o f
their reserves.
All banks, lar g e or small, are to be
tre ate d a l ik e and it shall be the duty o f the R eser v e
A s s o c ia t io n and its bran ch es upon request to t ra nsf er
an y part o f the depo si t balanc e o f any bank ha v in g
an ac c o u n t w it h it to the cre dit o f any othe r m em ber
bank. This, it seem s to me, w ill ev en t u a ll y do a w a y
w it h the c h a r g i n g o f e x c h a n g e on o u t - o f - t o w n c h e c k s
and m a k e ev er y to w n w h ic h has a m em ber o f the
a s s ocia tion a par point, c ert a in ly an ad v a n t a g e to
e v e r y one.

Bank Notes
It is als o p ro p osed that the r igh t o f issue be g r a d u ­
ally taken a w a y fr o m na tio nal ba n k s and vested in
the R e s e r v e A ssoc iation. Under the revised plan the
am ou n t o f notes that m ay be issued b y the R ese rv e
A s s o c i a t io n is unlimited but is sa feg u a r d ed in t w o
w ay s.
F irs t there m ust be a rese rve o f fifty per
ce nt in g o l d o r o t h er m on ey o f the United States,
w h ic h na tional ba n k s are n o w au th or iz ed to hold
as part o f the ir le g a l reserves, a g a in st all demand
liabilities,, i n c lu d in g d eposit s and c irc ulation, and when
this res er ve fa lls b e lo w fifty per ce nt the A ssoc iatio n
has to pa y a sp ecial ta x on the de ficie ncy o f reserve.
Second, all no te issues m ust be c ov ered to the ex tent
o f at least o n e - th ird by g o l d or o t h er l a w f u l m on ey
and the r em a i n in g p ortion b y ba n k a b le c om m er cia l
pap er o r o b l ig a t i o n s o f the Unit ed States. No fu rt her
notes can be issued w h e n e v e r the l a w f u l m on e y fa lls
b e l o w on e - th i r d o f the n ot es ou tst an d ing.
This is
a dead line b e y o n d w h ic h the r igh t o f issue cann ot
go, and w h en the r ese rve o f the A s s o c ia t i o n a g ain st
d eposits and o u t s t a n d in g n otes is less than fifty per
cent, it can on ly ap p ro a ch this limit by a sp ecial tax
on the d efic ienc y o f reserve.
Upon the n ot es th em selv e s there is no ta x until
the y a m oun t to o v e r $900,000,000, and this includes
an y na tio nal ba nk notes that m ay be o u t s t a n d i n g at
the time.
W h e n this am ou n t is ex ceed ed unless
the ex c e s s is c o v e re d b y an equal am oun t o f la w fu l




13

money it is subject to a tax of one and one-half
per cent per annum. W hen the notes exceed ?1,200,000,000 and the excess is not so covered then it is
taxed at the rate of five per cent per annum.
This is an Ingenious combination and adaptation of
several European methods for the regulation of note
issues and would seem to combine safety with a
proper elasticity.
It will give us in place of our
very faulty bond secured currency, a currency based
on a self-liquidating security, commercial paper, and
unquestionably will be a great improvement.

Rediscounting Commercial Papers
Probably the most important service to be performed
by the proposed Reserve Association is in rediscount­
ing paper.
None of us likes to do this under the
present conditions as it is a reflection on our credit,
but we must all realize that if a proper agency were
afforded, we would be able to keep in such a liquid
condition as to be safe at all times.
In fact, we
might call our commercial paper a secondary reserve
and it would be practically the same as cash. The
Reserve Asociation may rediscount commercial paper
having not more than tw enty-eight days to run and
made at least thirty days prior to the date of re­
discount having the indorsement of any bank having
a deposit with it. It may also rediscount for any
depositing bank commercial paper having more than
28 days to run, but not exceeding four months, but
in such cases the paper must be guaranteed by the
Local Association. There is in addition what may be
called
an emergency measure, whereby with the
approval of the governor and the Executive Com­
mittee of the Association and also of the Secretary
of the Treasury, the Association may discount the
direct obligation of a depositing bank indorsed by its
local association, provided the indorsement of the local
association is fully secured by pledge, with the local
association of satisfactory securities of one-third
greater value than the obligation discounted.

Creation of Discount Market
These provisions mean of course that instead of
sending our surplus money to New York to be lent
on the stock market we will lend it on commercial
paper at .a better interest return to ourselves than
the two per cent we receive now and with Just as
great certainty of turning it into cash when needed,
as that we can get it from our correspondent when




14

needed now. This will be especially true when on
account of banks accepting bills of exchange as the
bill contemplates, a great discount market is estab­
lished. Those of us who send our money to central
reserve cities now receive the customary rate of two
per cent, it makes no difference whether the money
is lent at 1 % or 100%. In European countries where
discount markets are established the discount rate is
usually fixed at from 1% to 1 % % higher than the
rate established— say by the Bank of England.
As
the Reserve Association will be authorized to flx a
uniform rate, we will have a standard by which banks
can flx their rate in a fairer way both to themselves
and to their correspondents.

The Plan Based on Proper Principles
It seems to me that the plan is founded on the
proper principles.
It takes co-operation as found
effective in our different financial stringencies and
offers it through the only medium suited to a country
so large with so many needed and well established
financial institutions, which it wishes to disturb as
little as possible. It guards against both the politician
and the plutocrat.

Results to be Achieved
The results attained would unquestionably seem
to be:
(1) Elimination of bonds as a basis for currency
and an issue of bank notes truly elastic and re­
sponsive to the needs of business.
(2) Bank reserves will be brought under control
of a body which can use them so they really are re­
serves, especially during panics, and an institution
which can go to the aid of a deserving subscribing
bank when it gets into a dangerous position.
(3) An institution which will rediscount paper at
a uniform rate throughout the United States and thus
put us on a commercial paper basis, which means a
self-liquidation basis.
(4) The creation of a general discount market so
that surplus funds will not have to be sent to New
York for investment in demand loans.
(5) The substitution of a well organized system of
credit banking in place of our dangerous and de­
fective system of Stock Exchange banking.
These are among the chief ends to be attained, and
if attained we will see no more scenes like those of
1907. On the contrary we will have one of the soundest
banking systems in the world. W e will have all the
advantages of co-operation so concentrated as to re­




15

suit in quick decision and quick action.
W hile re­
serves will be centralized and so mobile as to be
used to strengthen any danger point, control in
reality will be distributed between fifteen districts
of our country and thus decentralized.
It is a
generally known fact that New York holds nearly
all of our reserve now. It is also known that probably
four or five New York banks hold three-fourths of
the reserve in that City. In other words these four
or five banks are the present central instrument.
This situation is brought about by prevailing con­
ditions. New York has the only call money market,
and the surplus funds of all of us find their way
there.
W hen such facilities for rediscounting are
afforded as proposed by the Reserve Association and
when bank acceptances result in a great discount
market, instead of sending all our surplus money to
New Y ork through our correspondents, we will lend
a far greater amount to our home people for com­
mercial transactions, thus benefiting our community.
The Stock Exchange will cease to be the governing
factor on money rates.
New York will be less of
a central point. The Reserve Association will be an
Instrument to the end of separating legitimate busi­
ness from the speculative. It will be a medium of
co-operation and an instrument of decentralization.

Bankers Must be the Nation’s Leaders
Upon the bankers of the United States rests the
chieT responsibility for reform.
It is our business,
and the people look to us for guidance.
In these
days of quick transportation and communication by
telephone, telegraph and wireless, there are no iso­
lated places and the banker of the small town as
well as of the large city must keep his hand on the
pulse of country wide movements. If he is wise, he
does not say a currency reform does not affect him.
A ll banks, as I have said before, are now part of
the Nation’s nervous system, and a shock to any
one is felt by all. It is our duty to study this plan
carefully and. from every viewpoint. The subject is
too big and too vital to allow Its proper solution
to be affected by political considerations.
In con­
templating it we may have to give up some of our
pet theories and get over our personal prejudices, so
that we may act on that high plane of citizenship
which places above self the good of the country as
a whole.
The record of Missouri bankers, however,
speaks for itself.
They have always stood for the
best and their judgment can be relied upon now.




16


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102