CHAPTER XXX

THE WEAKNESSES OF OUR BANKING SYSTEM PRIOR TO THE ESTABLISHMENT OF THE FEDERAL RESERVE SYSTEM

CONFLICTING OPINIONS

[249]For fifty years the United States has lived rather happily under the National Bank Act, born in the strife of the Civil War and developed in the period of the nation's greatest expansion and growth. This act has, by its record, earned for itself a place as a great piece of constructive legislation; and the recognition of this fact is responsible for the preservation of our national banking system almost intact under the Federal Reserve Act. The National Bank Act removed the ills of wild-cat banking, which so afflicted the country prior to the Civil War; gave us an absolutely safe form of money which, although not legal tender, is taken without question by everyone; and has made possible an enormous expansion in the banking resources and facilities of the country. In spite of the denunciation and abuse which have been heaped upon it, the act has been reasonably satisfactory in operation. Anyone who reviews the figures of the material growth and prosperity of the nation and the rise of its financial power will be forced to the conclusion that no act that was fundamentally unsound could have been an integral part of the achievement of such a notable record.

Designed for the purpose of encouraging a system of independent banks, the act has been responsible, directly and indirectly, for the creation of some twenty-five thousand banking institutions in this country, practically all of which are independent of each other. Instead of a small banking class and an equally small group of banks, all under the domination of one or a very few interests, we have developed a system of banking which has sprung from the people, and which is closer to the people than that of any other country.

[250]We have grown and prospered in spite of an imperfect, repressing, and perilous banking and currency system. We have grown as a vine sometimes forces its way through a crevice in a wall, our very growth inviting disaster and death, our wonderful vitality hastening catastrophe.... Over fifty years of growth under the old banking act has been forced by the generosity of the soil of a new land, by the unconquerable energy and resiliency of a virile and courageous people; yet it has been interrupted by periods of business depression and stagnation; our progress punctuated by panics, discreditable, appalling--to many ruinous.... The immediate results ... have been crashing of banks and commercial houses, the wholesale stoppage of industries, the wiping away or cruel draining of the results of honest thrift, denial to willing and hungry labor of the opportunity to earn bread and shelter.

[251]A physician would probably say that what primarily ails our currency system and causes panics and desperate stringencies is something akin to _arteriosclerosis_. The veins and arteries of credit, which in order to function properly ought to be elastic and contractile like rubber, are hard and brittle as glass. When subjected to unusual strain they can yield but little and are very liable to rupture, and when once stretched they are apt to remain over-enlarged....

The temporary act of May 30, 1908, which relaxed the rigor of the law in moments of critical emergency [as to note issues] by permitting additions to the currency to be based upon other security by payment of a heavy and increasing tax, was no real solution of the situation. It contained no provision to render the currency responsive to ordinary fluctuations in currency demand, and resort to its provisions in times of great stress might easily precipitate a panic if one did not already exist. It was only enacted for six years, and was only regarded by its sponsors as a temporary palliative pending the preparation of a permanent cure. _One universally recognized essential ... of a proper banking and currency plan is provision for a more flexible and responsive note issue_.

INFLEXIBILITY OF LEDGER BALANCES

When we turn to credit in the form of ledger balances or "deposits" and enquire as to the causes of their inflexibility, the explanation also rests in quite familiar facts. There are two peculiar features of our banking system which are practically without counterpart in other important countries, and which render ledger balances or deposit credits in this country less flexible and responsive than such balances or credits are elsewhere. The _first_ is the rigidity of our reserve laws, and the _second_ is the lack of any bankers' bank or similar institution, with ample resources and lending power, from which the banks can replenish their own reserves when necessary.

RIGID RESERVE REQUIREMENTS

Outside of the United States I know of only one other country in which the law requires a cash reserve to be held against deposits. That country is Holland, and the law applies to only one institution, the Bank of the Netherlands, and that institution does not hold enough deposits to make it worth mentioning in this connection (less than $3,000,000). Our national banking law, however, and the banking laws of most of the states are unreasonably and unsoundly rigorous in this regard. Not only must stated proportions of all deposits be held by the banks in reserve, but these reserves, according to the law, can never under any circumstances be used. It is very much as if the Government, having established naval and military reserve forces in times of peace, were to insist that these forces should not be used in time of war, in order to maintain them intact as reserves. Whenever the cash held by a bank has fallen to the required minimum, the bank cannot legally continue to extend accommodation. It cannot issue more notes unless it has additional government bonds to deposit for their security, and it cannot enlarge its ledger balances unless it has additional reserves. No matter what may be the stress of an emergency, or whether it is due to war, catastrophe, or unreasoning fear, there are no legal means for relaxing this requirement. And so, in moments of great sensitiveness and anxiety, legal spokes are apt to be suddenly thrust into the wheels of credit, and the whole machinery of business brought crunching to a standstill. _A second essential then of any adequate currency plan is some provision which will render the reserve requirements pliable and the reserves of possible use._

NEED OF BANKERS' BANK

Our banks also have less flexibility in their power to lend ledger balances than the banks of practically all other countries for another reason, because of the lack of any permanent institution or institutions which can perform for them services similar to those which they perform for their customers. An individual bank makes the money of each and all of its customers flexible in amount, by rendering it of mutual service, and available to those who most need it, when they most need it, and, in order that the money of individual banks may be similarly flexible in amount, of mutual service to each other and available to those institutions which most need it, when they most need it, they require in their turn some agency which will do for them severally and jointly what they do for the general public....

It does not matter what such an agency may be called. It may be a discount bureau, or a rediscount bureau, a national clearing house, or a national or regional reserve association. Out of deference to those great financial experts who write the banking clauses of political platforms and whose bans and edicts are blessed with sacerdotal infallibility, when such an institution is proposed for this country, it must not be called a central bank. Such an institution is perhaps most plainly designated if it is called a "bankers' bank," but by whatever name it is referred to, the need of such an institution is the fact of primary importance in the American banking situation.

Just as an individual bank economizes and mobilizes and makes flexible in amount the funds of individual members of a community, so a bankers' bank mobilizes and economizes and makes flexible in amount the money of the banks. It collects money from institutions and localities when and where they do not need it, and lends it to others when and where they do. In like manner the active deposits of the various banks, as they are not all wanted simultaneously, furnish the bankers' banks with a large surplus reserve of lending power, which in turn is an invaluable source of flexibility to the individual banks. By its means they can, if need be, rediscount their commercial paper, exchange their unmatured assets for actual cash, and secure its still better known credit in place of their own. By its means their reserves can be replenished and their lending power made responsive to the needs of their communities. A bankers' bank makes it possible for the money of the individual banks to do many times the work it would do if left in the separate institutions, and to do it far more effectively. It is the only ultimate safeguard, the only scientific deposit guarantee, the only sound basis of flexibility in any banking system. As some philosopher once said of God--if such an institution did not already exist, people would certainly have to invent one, and, as we have no such institution permanently and legally established in America to-day, _the prime essential of any sufficient banking plan is the equipment of our system in some way or other with the facilities of a bankers' bank_.

THE PARCELLATION OF RESERVES

[252]If the absolute certainty of ability to pay all depositors in money on demand be taken as the _summum bonum_ of banking, an idea which quite generally prevails among the unthinking, it is interesting to reckon the cost. A bank has no fairy wand with a wave of which it can transmute into gold the amounts due it, whether represented by borrowers' notes or balances due from other banks. Such repayments have an element of uncertainty which pervades all human affairs. All uncertainty could be eliminated only by having in money on hand an amount equal to the total of liabilities to depositors. A deposit with a bank would then be simply a warehousing transaction.

If a readjustment to such a condition were accomplished, and if we consider only the ultimate result, and not the cataclysm of the process, it would clearly prove such an extinguishing restriction of commerce as would cost fabulously more than the value of the advantage gained. It would be like preferring the constitution of a jelly-fish to that of a human being in order to avoid the hazard of fracturing a bone.

Only by having banks which employ in loans a part of depositors' capital lodged with them, can the best interests of the whole people be served, even if this entails something less than an absolute certainty of power to liquidate deposits on demand. That banking system must then be best which combines equally the largest measure of each of two elements: the use in commerce of funds deposited, and the certainty of paying depositors in money on demand.

Turning now to the vast system of banks throughout the country, if the separate reserves of all the banks were gathered into one mass, available to meet the demands of depositors for payment in money, whether made in Maine or Texas, New York or California, the banks of the whole system would be able to operate with the highest degree of safety by having a total sum of money equal to only a small percentage of the aggregate amount owing to depositors, and consequently would be able to lend for use in the commerce of the country the greater proportion of the funds deposited. The total of deposits and withdrawals made throughout the country would very nearly offset one another. Very little of the reserve money would actually be used. A special requirement of one section would represent only a small percentage of the total massed reserves. The country has such vast area, and the requirements in different parts so vary in season that a deficiency of money in some sections would find a measurably offsetting surplus in others.

While theoretically an institution so constituted would be strongest and most efficient, none such exists, and no one would advocate such a system. Omniscience and omnipotence would be required for its wise administration.

But the conclusion seems clear that only in proportion to the massing of reserves can efficiency in lending for commerce be combined with strength to pay depositors. The greater the proportion of the entire reserves gathered into one mass, the greater the efficiency and strength rendered possible. This principle is fundamental.

The fundamental defect of our banking system, then, is the parcellation of the entire reserves among the separate self-independent banks, necessitating either a wastefully large proportion of reserve for assured ability to pay, with correspondingly inefficient service to commerce, or efficient service with the hazard of unexpected exhaustion of reserves and consequent inability to make good the contracts to pay depositors in money on demand.

[253]If after a prolonged drought a thunderstorm threatens, what would be the consequence if the wise mayor of a town should attempt to meet the danger of fire by distributing the available water, giving each house owner one pailful? 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 defence 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 effective system of pipes to direct it where it was wanted for short, energetic, and efficient use, the town would have been safe.

We have parallel conditions in our currency system, but, ridiculous as these may appear, our true condition is even more preposterous. For not only is the water uselessly distributed into 21,000 pails, but we are permitted to use the water only in small portions at a time, in proportion as the house burns down. If the structure consists of four floors, we must keep one-fourth of the contents of our pail for each floor. We must not try to extinguish the fire by freely using the water 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 inefficient proportion of water. _Pereat mundus, fiat justitia!_

REDEPOSITED OR OVERLAPPING RESERVES

[254]If we are to understand the radical change which will be worked by the Federal Reserve Act in the reserve situation in this country it is necessary to examine at some length the system heretofore prevailing. Under the National Bank Act these banks were divided into three groups or classes, referred to as the country banks, the reserve city banks and the central reserve city banks.

There are three central reserve cities: New York, Chicago, and St. Louis. Every national bank in these cities is a central reserve city bank. The reserve cities are forty-seven in number and include the larger cities of the country. Every bank not situated in any one of the three central reserve cities or the forty-seven reserve cities is a country bank. This last term includes all the national banks of the smaller cities in the country, of the manufacturing towns and communities of New England and the Middle States and thousands of national institutions doing business in the agricultural sections.

~The Country Banks.~--The country banks, by the terms of the National Bank Act, are required to keep a cash reserve at all times equal to 15 per cent. of their deposits. Under the old law the country bank must keep only 40 per cent. of this required reserve in its own vaults, while it is allowed to deposit 60 per cent. of the required reserve on call in such national banks in any of the reserve cities or central reserve cities as may be approved as "reserve agents" for it by the Comptroller of the Currency....

~The Reserve and Central Reserve Cities.~--The second class of national banks, known as reserve city banks, includes all national banks located in forty-seven cities of the country, which from time to time have been designated as reserve cities. Every national bank in them is required to keep a reserve at all times equal to at least 25 per cent. of its deposits. It must be borne in mind that the deposits of a reserve city bank include not only what the banker refers to as individual deposits--the deposits of individuals, firms, partnerships, and corporations--but also deposits which have been made with the reserve city bank by country banks, for which it is the reserve agent.

A reserve city bank is permitted by the National Bank Act to keep one-half of its required reserve on deposit, subject to withdrawal on demand, in a national bank or banks in a central reserve city, approved by the Comptroller of the Currency, as its reserve agent....

Every national bank within the central reserve cities must keep a reserve equal in amount to at least 25 per cent. of its deposits, including not only individual deposits but deposits by bankers for whom it acts as reserve agent or correspondent.

~The Reasons for the System.~--This rather complicated system of reserves was authorized by Congress because it was necessary to allow the banks of the country districts or smaller cities to keep reserves in other banks in the larger centres of trade in order to facilitate the commercial exchanges of the country; and also because it was necessary to have some means by which banks of the larger cities could finance payments for their customers in the great centres of the country, especially in New York, Chicago, and St. Louis....

~Its Weaknesses.~--Our system of deposited reserves has failed miserably in times of stress, although it has worked reasonably well in ordinary times. It is contended that it has, to a large degree, built up the great centres, and more especially New York City, at the expense of country districts. It has been responsible for the seasonal withdrawal of money which was at one time a most serious embarrassment to business, especially in New York, Chicago, and other large cities in the fall months, but which has practically disappeared in New York City since the panic of 1907.... It was not until the system of deposited reserves brought about the panic of 1907 that the country at large became convinced that this feature of the national banking system was vicious, dangerous, and likely to produce trouble at any time. With this conviction began the movement which finally ended in the enactment of the Federal Reserve Act.

~Much of Our Reserve Fictitious.~--As a matter of fact, the actual available reserves of the three classes of national banks in the country are much less than is indicated by the percentage specified in the act quoted above.... This condition is referred to frequently as the pyramiding of reserves, which means, in substance, that the national banks of this country, omitting from consideration the state banks where the same conditions exist in an even more aggravated form, are doing business largely upon a paper reserve, which experience has shown is utterly useless in times of panic. The seven thousand five hundred and nine national banks held cash and paper reserves on October 21, 1913, as follows:

_Cash in vaults._ _Due from banks._

Country banks $294,000,000 $534,000,000 Reserve city banks. 251,000,000 258,000,000 Central reserve city banks 381,000,000 ------------ ------------ $926,000,000 $792,000,000

As a matter of fact the national banks of the country held $926,000,000 in cash as against total deposits subject to reserve requirements of $7,172,000,000, or about 12.8 per cent. of the liabilities subject to the requirements.

~Dangers of the System.~--So conclusive are the lessons to be learned from the experience of the last half century with the system of redeposited reserves, that there is a practical unanimity among bankers and financial experts that the reserves of our banks, with the exception of the money actually held in the vaults, are, in the words of William Ingle, vice-president of the Merchants and Mechanics National Bank of Baltimore, "A great deal of a delusion and a snare." In every panic, the country banks and the reserve city banks have found that it has been impossible for them to secure the return of the portion of these reserves which has been redeposited in New York, Chicago, and St. Louis. At a time of great stress, when the banks have been subjected to a drain, they have been suddenly bereft of the support which, in theory, should have been forthcoming from their reserve agents, and have been forced to depend upon the 6 per cent. or 12-1/2 per cent. reserve, which was contained in their own vaults. What is even worse, the outbreak of a panic in New York City, where every panic of the last half century has started, was the signal for the suspension of cash payments by every bank in the country, within a few hours.... Thus a local panic, in many cases occurring when business conditions were exceedingly prosperous and healthy, has completely disorganized the exchanges of the country and brought business to a standstill.

THE PERVERSE ELASTICITY OF NATIONAL BANK NOTES

[255]... It is not quite correct to call our national bank notes inelastic. They are decidedly elastic. The trouble is that their elasticity is of a wrong sort; they expand when there is need of contraction, and contract when the need is for more currency. By calling the notes inelastic we mean that their volume does not correspond automatically to the need for currency. This is true, and is one of the most serious defects of the bond-secured notes....

The demand for currency depends upon the volume of business to be transacted, and is continually in a state of fluctuation. Various causes have only to be mentioned to explain the unequal demand at different times. We have thus the payments of salaries, bills, etc., coming usually, on the first of each month. Then there are the quarterly payments of dividends, interest, etc., falling generally on the first of January and at intervals of three months thereafter during the year. Above all, we have in this country a regularly recurring seasonal change in the volume of business, due to the harvesting and moving of the crops every fall and early winter. Besides these normal fluctuations in the demand for currency there are of course such abnormal circumstances as business emergencies, panics, depressions, etc., which at irregular intervals call for expansion or contraction of the currency. To meet all these varied demands an elastic currency is a necessity.

The most serious evils of inelasticity in this country are seen in connection with the annual handling of the crops. It may be safely said that for this purpose the United States needs every fall at least one hundred and fifty million dollars of extra currency. Since our monetary system contains no really elastic element, this extra business of the fall has to be done with little or no increase of the country's currency. The crops must be handled by means of a shifting of currency from one part of the country to another. In the spring and early summer the agricultural districts are apt to have more money than they need. Accordingly, the country banks are in the habit of depositing part of their reserves in banks situated in the reserve cities. A large part of these sums eventually finds its way into the money markets of New York and other Eastern cities, where a low rate of interest is paid to outside banks for such deposits. Now comes the harvest season, and a demand goes up from the country banks for the return of their deposits. Every fall the clearing-house banks of New York City alone give up about fifty millions of "lawful money" to meet this demand.[256] Of course this means a tight money market. In the spring and summer the funds obtained from the country banks were loaned out or used as reserves for deposits. Money was in excess, interest rates were low, and speculation was encouraged. Now loans must be called in and deposits reduced. This sudden contraction is a hard blow to all business interests. It is especially hard on the speculators, and their desperate demands cause the enormous rates on call loans which are witnessed every fall on the New York money market....

It has ... been suggested that the inelasticity of the national bank notes does not mean that their volume never changes. As a matter of fact, the circulation has been marked by enormous fluctuations, and these fluctuations, having no relation to the demands of business, have simply aggravated the evils of inelasticity which have been described. Thus, between June 1, 1880, and June 1, 1891, the total volume of bank notes outstanding declined from $345,000,000 to $169,000,000, a decrease of $176,000,000, or 51 per cent. This retirement of half the circulation came during a decade marked by large growth in population and wealth, and by remarkable industrial expansion and business activity. The reason for this decline lies in the fact that the Government was using part of its large surplus revenue to pay off the debt. In eleven years the Treasury paid $1,105,000,000, reducing the debt by more than half, something without parallel in the history of public finance. The retirement of half the debt caused a scarcity of United States bonds, and their prices went soaring. Four per cents of 1907 rose from 103-113 in 1880 to 125-130 in 1888. The inevitable result was the decline of circulation. The opposite course of events has been seen in recent years....

[The subjoined diagram (suggested by a similar one for 1902-1906, accompanying the article a part of which is here reproduced) illustrates the comparative seasonal elasticity of the notes of our national banks and the circulation of the chartered banks of Canada for the period 1910-1914. The marked expansion of national bank notes in 1914 was due to the crisis brought on by the outbreak of the European war. The Aldrich-Vreeland notes which were issued in that emergency were retired in a few months and the volume of national bank notes assumed normal proportions.

For the Canadian statistics involved the editor is indebted to Mr. G. W. Morley, Secretary of the Canadian Bankers' Association.]

NATIONAL BANK NOTES UNSOUND AND UNSAFE

[257]... Any correct system of credit currency must be based on a foundation of gold. Bank credit is issued in the two forms of deposits and notes. The former are based on a reserve of gold, the latter are not. We have here a fundamental weakness of our bank-note system. Under proper banking methods, deposits cannot expand without a proportional increase of the gold reserves of the banks. This furnishes the natural and necessary check to inflation. Our bank notes, however, have no such connecting link with the business and the monetary stock of the world. The basis of the American bank-note currency is the government debt, a very inferior kind of foundation. Such a system carries with it the possibility of paper money inflation of a peculiarly dangerous kind, because its real meaning is apt to be concealed. For example, between January 1, 1900, and January 1, 1908, the volume of national bank notes outstanding increased from $246,000,000 to $690,000,000, an expansion of $444,000,000. In other words, the circulation nearly trebled in eight years. The cause of this great increase was not the need of more currency but the changes in the National Bank Act made in 1900, changes which made the establishment of national banks easier and the issue of notes more profitable.... The future is likely to witness further expansion, unless some change is made in our system.... It is undoubtedly the present intention to give ... to future [bond] issues [the privilege of being used as security for notes]. Indeed, unless this privilege is given, there will be no market for the 2 per cent. bonds. We may expect, therefore, to see each issue made the basis of a further increase in the volume of bank notes.

All this means inflation, and inflation by means of a circulating medium having no connection with the gold stock of the world. To make room for the additional currency, gold must be forced to leave the country, and our whole monetary system, by no means too strong to-day, will be weakened at its foundation. This is the fundamental difference between expansion of credit by means of deposits and expansion by means of national bank notes. The one is based on gold; the other is based on the government debt. When deposits expand, the reserves of the banks must increase proportionately and, if carried far enough, the result must be to bring in gold rather than to force it out. In like manner, deposits cannot for any considerable time be in excess of business needs. But bank notes may be increased indefinitely, if the Government only borrows enough, and the result will be the expulsion of gold whenever the currency becomes redundant. That this is an actually present danger is sufficiently demonstrated by the recent action of the Secretary of the Treasury, who has seen fit to add to the national debt at a time when the Treasury had a surplus of over 250 millions, for the sole purpose of increasing the circulation of the national banks. Our currency system can never be sound until the bank circulation is entirely divorced from the government debt.

The danger of inflating our monetary system with bank notes having no gold reserve back of them is all the more serious from the fact that the notes of the national banks are used as reserves by state banks, private banks, trust companies, etc. They are part of the "cash reserves" on which these banks base their deposits. Thus we have a system of credit based on credit, and any weakness in the national bank note is carried over and multiplied in the deposits of other banks.

The complete _reductio ad absurdum_ of this multiple credit system came when at a recent convention of the American Bankers' Association it was seriously proposed that it be made lawful for national banks to count their notes as "lawful money" in their own reserves. There is good reason to believe that this is actually practised to some extent by national banks to-day, though the practice is, of course, illegal.

The safety of the national bank notes is seldom questioned. Whenever the evils of our currency system are pointed out and plans for asset currency or other reforms are proposed, the reformer is apt to be met by the reply that, at any rate, our bank notes are perfectly safe, and we had better put up with their other shortcomings rather than launch out on new schemes which may possibly sacrifice that safety which we now enjoy. The foregoing discussion should already have cast some suspicion on this complacent attitude. It will be further weakened by a closer analysis of the basis of the national bank circulation.

National banks may issue their notes up to the amount of their paid-up capital, and up to 100 per cent. of the par value of United States bonds deposited with the Treasury, but never in excess of the market value of the bonds. The notes are engraved by the Government and issued to the banks. When signed by the proper officers of the bank, they become the bank's promise to pay upon demand and may be issued for circulation. The United States Treasury is also required by law to redeem on demand all notes of national banks presented to it. For this purpose each bank must keep with the Treasury a reserve fund equal to 5 per cent. of its circulation. The duty of the Treasury to pay notes on demand, however, is not limited to the amount of this reserve, but applies to all notes properly presented. In case of the failure of a national bank, the Treasury is required by law to immediately redeem all its notes. The Treasury is secured against loss by the bonds deposited, by the 5 per cent. cash reserve, by its prior lien on the assets of the banks, and by the personal liability of the stockholders for an amount equal to their stock investments.

It is thus seen that the popular idea that the holder of a national bank note is secured against loss by the government bonds deposited in Washington is not strictly correct. What protects the holder of a note is the absolute responsibility of the Treasury to redeem all notes on demand. The bonds are to secure the Treasury, not the individual noteholder, against loss. The noteholder is secured so long as the Treasury is able to meet its legal obligations.

Let us examine the character of our government bonds as security to enable the Treasury to meet its obligations. To understand the situation, it should be remembered that the leading purpose in the establishment of the national banking system was not the creation of a scientific currency system. The National Bank Act was a war measure enacted largely for the purpose of improving the market for government bonds during the Civil War. It was for this purpose that the circulation of state banks was forced out of existence by a 10 per cent. tax and the right of issue restricted to national banks on condition of the deposit of government bonds as security. In the accomplishment of this purpose the act has been eminently successful. United States bonds have been given a new utility over and above their utility as an investment. From the very beginning, this has given them an added value and enabled the Government to borrow at lower rates of interest than it would otherwise have had to pay. The act of March 14, 1900, made provision for the ultimate refunding of all the United States debt into 2 per cent. bonds, and gave an added inducement to the use of these bonds as note security by lowering the annual tax on circulation from 1 per cent. to one-half of 1 per cent., provided the notes were secured by the new 2 per cent. bonds. All bonds issued since 1900 have borne 2 per cent. interest. Yet the market value of these bonds has always stood above par.... Obviously, this value is not based on earnings. British consols paying 2-1/2 per cent. are to-day quoted in the neighborhood of 85, which makes them yield about 3 per cent. on the investment. The French and German 3 per cent. loans are both considerably below par. United States bonds have been given an artificial value through their use as security for bank circulation. The national banks to-day hold for this purpose about two-thirds of the total funded debt of the United States. Remove this privilege from the national debt, and we should see the 2 per cent. bonds (which compose two-thirds of the interest-bearing debt of the United States) fall to perhaps seventy cents on the dollar, very likely even lower.

Here we have a remarkable situation. Our national bank notes are safe because they are secured by government bonds, and our government bonds are valuable because they are security for national bank notes. This looks very much like lifting oneself by one's bootstraps.

If we are to cling to the bond-secured note system, this matter of the artificial value of government bonds will become an important practical problem whenever it becomes necessary for the United States to make any addition to its debt. Either the rate of interest will have to be raised to 3 per cent. or higher, or, if that alternative is rejected, means will have to be found to induce the banks to use the greater part of the new loans as security for additional note issues.[258] In practical effect, this is only a thinly disguised resort to the time-honored but now thoroughly discredited practice of compelling the people to use the government debt as a circulating medium.

The bearing of this matter on the safety of the national bank note is simple. The burden of the ultimate redemption of the bank notes has been placed on the shoulders of the Treasury, to add to its other burdens of maintaining the value of the greenbacks and of the silver dollars. If loss of confidence in the bank notes should ever lead people to demand their wholesale redemption, the Treasury would have to meet the demand in gold. But the moment it tried to sell the bonds, it would find there was no market for them except at a discount of perhaps 30 or 40 per cent. It is true that the Treasury would still be able to recoup itself for this loss in the value of the bonds by exercising its prior lien on the assets of the banks. But this leads us to the important conclusion that the final security for our bond-secured notes rests on the assets of the banks after all. A more striking argument for asset currency could hardly be discovered.

It must be remembered, however, that the foreclosure by the Government of its claim on the assets of the national banks would cut into the wealth on which deposits are based and so have a most disastrous effect on the deposit system. The pressure upon the Government to refrain from such a crushing blow to credit would be overwhelming. It is almost inconceivable that in time of panic or a national crisis the Government would resort to such a procedure. Almost any alternative would be preferred. It would not be too difficult a matter for the Government to persuade itself that the wiser and safer course would be to suspend specie payments, perhaps even declaring the bank notes a legal tender. A more plausible case could be made out in favor of such action than was found sufficient to justify the issue of the greenbacks of the Civil War. Yet such action would mean the breakdown of our financial system.

This is, of course, looking into the future and anticipating a state of disaster which may never come. But a system which bids fair to break down in time of disaster should be remodelled before disaster comes. And we should not rest too confidently in the notion that disaster can never reach us. It is only thirteen years ago [1895] that the burden of supporting its paper and silver currency brought the United States within twenty-four hours of suspension....

SPECULATION INVOLVED IN THE ISSUE OF NOTES

[259]When a banker takes out currency he engages in two distinct transactions and enters upon two different hazards. In one transaction he assumes the risk and holds the expectation of greater profit for taking out circulation. Since buying bonds and taking out circulation most of the time shows some theoretical profit over loaning direct, presumably if there were no other consideration, most of the time our bankers would keep outstanding all the notes they could. In the other transaction, however, the banker engages in a speculation in government securities. As a matter of fact, if the price of government bonds advances, the profit from taking out circulation declines; but our banker is pretty likely to view with equanimity the declining circulation profit when he considers the profit he is making in his speculation in bonds. On the other hand, as the price of government bonds declines, circulation grows more profitable. The banker is likely to view this with sour satisfaction when he looks on his loss in his bond speculation. Profit or loss in the bond speculation is likely to outbalance loss or profit in the circulation transaction.[260]

Let us examine the situation more closely. Just what is the profit or loss from taking out circulation? In the first place the bank gets the regular current money rates on the loans it makes through issuing notes. Also it gets the interest on the government bonds it buys. This, of course, means the real interest, or income on the investment, called basis, taking into consideration coupon interest, price paid, and date of maturity. Excepting for the tax of 1/2 per cent. on the circulation taken out (1 per cent. if taken out on the 3's or 4's) and for the expenses attendant on taking out circulation, which the government actuaries compute to average $63 on the $100,000, this interest on the government bonds looks like clear "velvet." It would be, too, if the banker did not have to pay more for the bonds than the amount of circulation he can take out against them. To figure his net profit he must deduct from the gain items just stated what he would have made if he had loaned his funds direct instead of investing in bonds.

Expressed as an algebraic equation the situation becomes much clearer. Let

x = current money rate; y = basis rate at which government bonds are bought; z = price of government bonds; b = circulation received ($100,000 used as basis of calculation); c = taxes, redemption, and other circulation expenses.

(As already stated, government actuaries have calculated that circulation expenses average to cost the banks $63 on the $100,000 of circulation taken out. Taxes depend on whether the 2's, in which case the tax is 1/2 per cent., or the 3's or 4's, in which case the tax is 1 per cent., are bought. Taxes, then, amount to either b(.01) or b(.005). We can take b as a constant in our calculations and base all our computations on taking out $100,000 of circulation.)

The equation of profit or loss on taking out circulation then reads:

yz + bx - xz - c = profit or loss.

But circulation taken out (b) can never be greater than the amount of money paid for the bonds (z).

If government bonds should be at par or at a discount, the nominal profit would always be just the basis interest on the bonds, less the tax and the cost of taking out circulation, or a constant advantage in the case of the 2's of 1.437 per cent. For the purpose of this discussion we will consider only the 2's of 1930.

In the regular case, then, the money paid for the bonds (z) is greater than the amount of circulation received (b). With that statement in mind we can draw certain very definite conclusions about our circulation direct from the equation we have formed; z is greater than b.

Repeating the equation in order to have it directly before us:

yz + bx - xz - c = profit or loss.

Then as the current interest rate (x) increases, if all the other quantities remain constant, the negative influence in the equation grows greater, or profit from circulation decreases. We can, then, make definitely:

STATEMENT I

_If all other circumstances remain the same, circulation grows less profitable as the current money rate advances._

As business increases and the demand for both credit and money increases, as reflected in the rising interest rates, taking out circulation _caeteris paribus_, with the inexorability of a mathematical law, becomes _less_ profitable.

Further, there is an intimate relationship between y and z. If the price of bonds (z) declines, the basis rate (y) must advance. As a matter of fact as z declines yz grows greater. If, then, x remains constant and z declines the influence of the negative quantities of the equation is growing less. Then follows:

STATEMENT II

_As the price of bonds declines, if the current interest rate remains constant, the profit from taking out circulation increases._

That gives the absolute mathematical basis for such general statements as that "the price of bonds is too high to make circulation profitable."

These two facts set out in Statement I and Statement II place the banker who has taken out circulation between the devil and the deep, blue sea. If the price of bonds remains the same and the current interest rate rises, his circulation grows steadily less profitable. A decline in the price of bonds affords the only offset to an increasing interest rate. But if the price of bonds declines enough to offset the advance in the current interest rate, the banks must mark off enough profits to cover the loss on the capital value of the bonds.

Speculating in securities properly forms no part of a bank's business. It is an anomalous situation that in order to fulfil a proper function of note issue a bank should have to undertake such an improper speculation.

THE LACK OF ADJUSTMENT BETWEEN BANK NOTES AND DEPOSITS

[261]Under our present currency system the volume of money in circulation is perfectly flexible. It constantly expands and contracts in automatic adjustment to the requirements of trade and the convenience of the people. An increase in the volume of cash transactions brings promptly an increase in the volume of currency in circulation through the current withdrawals of money exceeding the current deposits of money. A lessening in the volume of cash transactions promptly drives unneeded currency out of circulation through the deposits of money exceeding the withdrawals. No other system could provide a currency which would adjust its volume in circulation more exactly to the needs of trade and the preferences of the people. There is a ceaseless flow of the money in circulation into bank reserves, and of money in bank reserves into circulation--ceaseless except in an occasional crisis when the natural flow of money from bank reserves into circulation is arbitrarily stopped by banks refusing, for self-protection, to continue paying out to the point of exhausting reserves.

While the volume of money in circulation is thus perfectly and automatically adjusted to trade requirements, it is to be noted that this flexibility arises from the flow back and forth, between the mass of money in circulation and the mass in bank reserves. In this lies the main economic defect of our present currency system. An expansion in the volume of money in circulation entails a corresponding contraction in the volume of bank reserves, and necessarily a corresponding contraction in loans. A period of expanding business would naturally be attended by both an increased volume of loans and an increased volume of cash transactions, such as increased pay-rolls, increased retail sales. Increased cash transactions cause a larger volume of money to flow into circulation. But this flow is out of bank reserves, thus contracting them and necessitating a contraction of loans depending upon them, at the very time when loans would naturally expand. Obviously, if business becomes very active, the effect upon bank reserves is so adverse, and the contraction of loans depending upon reserves so important, that embarrassment is widespread and panic ensues.

The main defect, then, of our present currency system is that the volume of currency in circulation has its adjustment in the flow from bank reserves into money in circulation and from money in circulation into bank reserves, causing a contraction of bank reserves and the loans depending on them as business expands.

A remedy would be the use of bank notes through which the volume of currency in circulation would have its adjustment in the flow from bank deposits into bank notes in circulation, and from bank notes in circulation into bank deposits, thus protecting from disturbance both bank reserves and the loans based on them.

THE COMMERCIAL PAPER SITUATION IN THE UNITED STATES

[262]... At the present time the commercial paper situation in the United States is peculiar. "Commercial paper" in the old and strict sense is little used in this country. "Trade paper," as it is now called, arises in less than 3 per cent. of the credit transactions in the United States.[263] In some lines of trade, especially where a local wholesaler does a large business with small tradesmen, the wholesaler will extend credit by taking the retailers' notes; but in obtaining credit for himself the wholesaler will not surrender control of the bundle of retailers' notes, preferring instead to give simply his own note on a general understanding with his banker that the personal note rests on, and is fully covered by, the retailers' notes.[264] The wholesaler hesitates to surrender to the banker the notes that he receives because he fears that his competitors might get some inkling of his trade connections, etc. In general, "trade paper" is used to settle accounts only when the credit terms are still long, that is, four months or more.[265]

What generally passes as "commercial paper" in the United States is single-name paper. As in the case of the wholesaler referred to above, the borrower of bank credit in these days offers for discount simply his own promissory note. Some of this paper, particularly corporation notes, carries indorsements, but these are largely "accommodation" indorsements, which may buttress the security of the paper but which indicate nothing as to its purpose.

The wide use of single-name paper in this country is largely explained by the fact that the prevailing terms of payment in business transactions are net in 30 or 60 days, with a discount for payment in cash within variously from 10 days to one month. The cash discount allowed is usually so large that a purchaser can ill afford not to take advantage of it. Two per cent. discount for cash within 10 days, for example, with "60 days net" is equivalent to a return of 12 per cent. per annum on one's capital. In actual practice the allowance is often even more liberal. Hence where competition is at all keen the business man is practically forced to adopt the system of cash payments, depending upon his bank to advance to him, on his own notes, the necessary funds. Moreover, so broadly has the custom of taking cash discounts spread that a failure to take advantage of them is generally regarded as an indication of weakness, and tends to undermine general confidence in the business man's credit standing. Hence the necessity for maintaining his credit rating, as well as competition, virtually forces the business man into making anticipatory cash payments and thus, more or less as a consequence, into the general practice of discounting his personal paper.[266]

Furthermore, as business operations have grown to a larger and larger scale, especially in the case of large corporate enterprises, the credit needs of business have in many cases expanded beyond the capacity of the local banks to supply them. The necessity arose, therefore, to go elsewhere for accommodation. This was met in some cases by the opening of bank accounts in other centers, but obvious difficulties and restrictions attend this method of procedure. More elastic possibilities and fewer difficulties grew out of the employment of middlemen to market the paper over the country as a whole on the best available terms. Hence the note-broker is to-day an important factor in the discount market. As a result of the note-broker's activities there has come to be established an extensive open market for commercial (single-name) paper in this country, and the rates at which such paper is discounted are regularly reported in the daily newspapers.

This development of a commercial-paper market reflects, of course, a considerable development of the demand of the banks for this form of investment.[267] "Country banks" especially have in the last few years heavily increased their purchases in the open market, because the necessity of writing off heavy losses due to the shrinkage of bond values has tended to make them more timid about investing in securities, and because they have also learned by experience that paper purchased through a broker does not have to be renewed, as does most of the purely local paper.[268]

This development has, of course, tended to put an increasingly heavy responsibility on the note-broker and has brought about, at least to some extent, a readjustment of his business methods. At first note-brokers simply solicited paper from merchants and charged a brokerage fee. Latterly, the custom has grown up for the broker to buy up the paper outright.[269] This forces the broker "to stand between the maker and the bank," and to the extent that any given piece of paper may be left on his hands, even though he does not indorse the paper that he sells, it compels him to be very circumspect about the paper that he purchases. Moreover, some banks now purchase paper with an option of return within a specified period, making it a point carefully to inquire about the maker of the paper before the option expires. In the last few years banks as well as brokers have established carefully organized credit departments, the purpose of which is, through careful inquiry into the character and standing of sellers of paper, to enable both brokers and bankers to select paper with sounder discrimination.

This characteristically American discount system differs greatly from that which prevails in Europe. Abroad, single-name paper is very little used.[270] The European banker demands more than one signature, not only as a guaranty of security, but also as an assurance of the validity of the transaction out of which the paper offered for discount grew. When the prospective borrower, for some sufficient reason, does not wish to divulge the names of his clients, as would be necessary if he drew bills on them, he may arrange with his bank for an overdraft (known as a cash advance),[271] or by paying a small commission he may get the bank to "accept" a bill drawn directly on it. With a bank's acceptance a bill, even though drawn by the humblest shopkeeper, becomes a prime investment and may be sold openly on the market at the lowest terms that prevail.[272] On the Continent bank acceptances thus open the market widely to all who can arrange for them, while the open market for single-name paper in this country is restricted to large firms of established reputations.

In view of the prevailing practice in Europe it is interesting to inquire why in America there should have been this peculiar development in the discount field. It has been pointed out that before the Civil War trade paper, as it is now called, was pretty generally used, but the exigencies growing out of the war completely changed the situation. The excessive issue of the greenbacks and the uncertain value of credit instruments covering any appreciable period of time led sellers to endeavor to bring business to a cash basis. Credits were shortened to 30 or even to 10 days, and strong emphasis was placed on immediate payment. With cash discounts alluringly liberal, merchants could ill afford to forego them, and cash payments tended to become more and more common. Big houses offered single-name paper to raise the needed funds, and little by little the older system of settling by the promissory note of the debtor was supplanted by the system of selling on open account, with the choice given to the debtor of a liberal discount for cash or the payment of the due amount "net" at the expiration of a relatively short credit period.

The transition was hastened by the development of the practice of selling goods by sample instead of by personal selection from an accumulated stock. Under the old practice the buyer bought under the rule of _caveat emptor_, but when purchasing by sample he had a right to demand that the delivered goods attain the standard of the sample, and there grew up in consequence the doctrine of "implied warranties." These warranties have in some lines been pushed very far,[273] but in any case the buyer would hesitate to pay for goods until he had had a chance to inspect them, and hence he would as a rule demand that they be consigned to him on open account. The seller, however, cannot afford to wait for payment until his accounts become due. Too much of his capital would be tied up. He is forced, therefore, to go to his banker and, on the basis of his accounts receivable, to offer his own note and thus to obtain release of the capital otherwise temporarily beyond reach.... Single-name paper virtually monopolizes the field....

NO SYSTEM OF BANK ACCEPTANCES AND THE ABSENCE OF AN OPEN DISCOUNT MARKET

[274]The weakness of our banking system as compared with the systems of Europe may very certainly be attributed in part to the omission of the bank act to permit bank acceptances. It is a weakness, furthermore, which involves the country in serious economic loss. Without a national discount market, the great majority of our merchants and manufacturers are compelled to confine their borrowings to American capital, either through the discounting of their paper with their local banks or through its sale to note brokers. All but the strongest and largest are practically excluded from the benefits of foreign competition for their paper. Aside from the great concerns with international ramifications, which are able to arrange their own credits abroad, our merchants and manufacturers are not benefited by low foreign discount rates, except in so far as note brokers, who make it a practice to borrow in Europe with commercial paper as collateral, are better able to finance their purchases. What is more, they receive relatively little advantage from an accumulation of funds in New York banks. Low call loan rates have an indirect rather than a direct effect on the rate which the mercantile community has to pay for money. Low call rates, in other words, are an indication more especially of stagnation in the stock market than of a lack of demand for accommodation from merchants and manufacturers. Such rates do not act as a stimulus to trade in general any more than high call rates act as an immediate check to over-expansion.

It is not only in our domestic trade that the country suffers through the want of a discount market. Without bank acceptances we are at a distinct disadvantage in connection with our foreign trade. Our importers, unable to open credits with their banks, as is done abroad, are not in a position to finance their purchases upon as favorable a basis as the importers in other countries, as English cotton spinners, for example. The English spinner about to purchase cotton in America arranges for his bank to accept sixty or ninety days' sight bills drawn on it by the American shipper. The latter draws his bills on the English bank and attaches the documents covering the shipment, such as the bills of lading, insurance certificates, invoices, etc. He then sells them to a New York bank, thereby receiving immediate payment for his cotton. The New York bank forwards the bills to its London correspondent, which presents them for acceptance to the bank upon which they are drawn. Upon the acceptance of the bills the documents are delivered to the accepting bank, which then turns them over to the spinner upon whatever arrangement has previously been made. The accepted bills are discounted by the New York bank in London and the proceeds placed to its credit there. The New York bank can afford to pay a high rate for such bills, as they are drawn on prime bankers, rendering certain their ultimate payment. The purchase of the bills does not, moreover, necessitate any outlay of money, as against the credit to be received through the discount of the bills the New York bank can immediately sell its checks on London.

Without such banking facilities--that is, the ability to arrange with his bank to accept time bills drawn on it by a foreign shipper, the American importer is compelled to finance his purchases in either one of two ways. He may pay for the goods at once by remitting funds direct to the shipper. This, however, ordinarily necessitates the negotiation by the importer of a loan on his promissory note. If he is not in a position to secure such an advance he must shift the burden of providing funds to finance the shipment, from the time it is forwarded until it is to be paid for, upon the foreign shipper, who is then in a position to exact terms more favorable to himself through an adjustment of prices. The practice in connection with this method of making payment for foreign purchases is for the shipper to draw his draft on the American importer and turn it over to his banker to forward for collection. Such drafts, drawn as they are on individual importers and not on banks whose standing is well known abroad, must be sent for collection since there is no general market for them. Practically the only way in which a foreign shipper can realize immediately on bills of this character is to dispose of them to his own banker or get him to make an advance on them.

Either of these two methods of financing our imports is expensive even when the time between the shipment and the receipt of the goods is short. When the time is much longer, as in the case of imports from South America and the Far East, the cost is almost prohibitive--that is, so great that we can not compete on an even basis with foreign buyers. In fact, we might be practically excluded from these markets if a makeshift were not possible. Our importer gets around our lack of banking facilities by having his bank arrange a credit with its London correspondent. He receives an undertaking, called a commercial letter of credit, giving the terms of the credit--that is, the name of the London bank upon which the bills are to be drawn, the amount which may be drawn, the character of the goods which are to be purchased, the tenor of the bills, and the documents which must accompany them. On the strength of such a letter of credit, the shipper in South America, for example, is able to dispose of his bills on London and thus receive immediate payment for his goods. The local bank which buys the bills sends them with the documents to its London correspondent, which presents the bills to the bank on which they are drawn--that is, the bank with which the credit was opened. Upon the acceptance of the bills the documents are delivered. They are then sent by the London accepting bank to the New York bank which opened the credit and the latter delivers them to the importer against his trust receipt. Twelve days prior to the maturity of the bills in London the New York bank presents a statement to the importer indicating the amount of pounds sterling which must be remitted to London to provide for their payment at maturity or rather a bill stated in dollars for the amount of pounds sterling drawn under the credit. In this purchase of exchange the importer makes payment for his goods. This method while workable is obviously cumbersome, yet it is practically the only one which the American importer can follow in connection with such imports. It is expensive for the importer, for not only must he pay his bank a commission for arranging the credit, but there is included in this commission a charge made by the London bank for its acceptance. Further than that the importer must take a material risk in exchange. At the time a credit is opened the cost of remitting, say L10,000 to take up the bills in London, might be only $48,600, or at the rate of $4.86, whereas by the time the bills actually mature exchange may have risen and cost him $4.87, or $48,700.

As a result of the inability of our banks to finance imports through the acceptance of time bills, American importers are, then, made dependent to a large extent upon London, and are required to pay London a considerable annual tribute in the way of acceptance commissions. This practice not only adds to the importance of London and militates against the development of New York as a financial center, but it at the same time works serious injury to our export trade. Since time bills can not be drawn on our banks from foreign points against shipments of goods to the United States, there are consequently in such foreign countries very few bills which can be purchased for remittance to the United States in payment for goods which have been bought here. In other words, under our present banking system our imports do not create a supply of exchange on New York, for example, which can be sold in foreign countries to those who have payments to make in New York. This means that our exporters are also, to their great disadvantage, made dependent upon London. It means that when they are shipping goods to South America and to the Orient they can not, when they are subject to competition, advantageously bill them in United States dollars. They naturally do not care to value their goods in local currency--that is, in the money of the country to which the goods are going--so their only alternative is to value them in francs or marks or sterling, preferably the latter, owing to the distribution and extent of British trade, creating throughout the world, as it does under the English banking system, a fairly constant supply of and demand for exchange on London. When we come to bill our goods in sterling, however, it is at once seen that our exporters are obliged to take a risk of exchange, which is a serious handicap when competing with British exporters. Our exporters who are to receive payment for their goods in sterling must previously decide on what rate of exchange will make the transaction profitable. If, in an effort to safeguard themselves against a loss in exchange, they calculate on too low a rate for the ultimate conversion of their sterling into dollars, their prices become unfavorable compared to those made by British exporters and they lose the business. If they do not calculate on a sufficiently low rate they get the business but lose money on the transaction through a loss in exchange.

The prohibition of bank acceptances not only acts as a hamper upon our domestic and foreign trade, but is detrimental to our banks as well. It is the small country bank which is chiefly affected. The business of the country bank, so far as the employment of its funds is concerned, may be divided into two classes--that which relates to advances to local customers and that connected with the investment of its surplus. It is in respect to the latter that the matter of acceptances is important. Under the present limitations of the National Bank Act there are three principal ways in which a country bank may render its surplus funds productive. It may deposit them with its reserve agent. This means a low interest return, too low in fact to permit of only a relatively small amount being thus employed. It may invest in bonds. In this way an increased interest return can be secured, providing a wise selection of securities is made, but it partakes of the nature of speculation. The third way is to buy commercial paper. Such purchases give an ample interest return and there is no savor of speculation. Even this method of employing a bank's funds, however, is far from satisfactory. It means the investment in a security for the strength of which the bank must depend on the word of note brokers, the rating of the mercantile agencies, or the opinion of some correspondent bank. It means, furthermore, the tying up of the bank's funds for a fixed period. If national banks were permitted to accept time bills the country bank could then invest its funds in paper bearing the guaranty of some great bank with whose standing it is perfectly familiar. Risk such as now has to be taken would be eliminated. What is vital, however, is that with a national discount market an investment in a bank-accepted bill is one which could be realized upon immediately. Commercial paper and bank acceptances are both discountable. The prime difference between them, as affecting a country bank, is that they are not both readily rediscountable. Herein probably lies the reason for the strong prejudice against rediscounts which exists among bankers in the United States. In this country when a bank discounts a piece of commercial paper it is discounting something which for its security depends solely on its maker. Should the bank desire to realize on this paper it could do so by rediscounting it, but such a rediscount would be practically equivalent to a loan to the bank on the strength of its own name. In other words, to rediscount its commercial paper would affect a bank's credit. To ask for a rediscount is to ask for accommodation. This would not be the case with bank-accepted bills. If such bills were discounted by a country bank as a means of investing its surplus and it was desired to realize on them such a rediscount would be made not on the name of the country bank, but on the name of the accepting bank. A rediscount in this instance would not constitute a loan to the country bank and would have absolutely no effect on its credit. It would merely indicate that some more profitable business had arisen in which to employ its funds or that it was desirous of increasing its reserve.

Since the reserves of interior banks are so largely concentrated with them and it is essential that they keep their assets in an especially liquid condition, the prohibition of bank acceptances works injury to the banks at the country's financial center, New York, in a different way. It deprives them of what London banks, for example, have--that is, a mass of the soundest securities against which to loan their money on call or in which they may invest their funds for very brief periods--bills of exchange, covering genuine commercial transactions, bearing the acceptance of prime bankers. Unquestionably such securities as a basis for loans are preferable to stock and bonds, but without them New York banks must have recourse to day-to-day loans on the Stock Exchange. Moreover, when the demand for such loans is limited. New York banks are forced into the keenest kind of competition, a competition which, as has been pointed out, is not only of little benefit to trade but which, through the lowering of the money rate, actually stimulates speculation. Furthermore, without a steady money rate such as exists in countries possessing discount markets, New York banks are left with no reasonable or satisfactory basis upon which to fix a rate of interest to pay for the deposits of country banks. In London interest on bank deposits is fixed at a certain percentage below the Bank of England discount rate, usually 1-1/2 per cent.--that is, a rate which fluctuates with the value of money and normally leaves a certain margin of profit to the London bank. The same practice is followed in all the great financial centers of Europe. With us, country banks receive a fixed rate of interest for their deposits, usually 2 per cent., the year around, regardless of fluctuations in the value of money. The unscientific nature of such a rate is obvious. When the call loan rate is high country banks do not receive interest in proportion to the value of their deposits. When it is low the New York banks pay more interest than the deposits are worth. In the latter instance the New York banks are forced into injurious competition with one another. They are in much the same position as competing railroads were earlier in our history, with results similarly baneful. With the railroads it was worth while to secure traffic even at a losing rate, as no matter what the return it helped, if only a little, toward meeting fixed charges. Oftentimes with the New York banks to-day any rate which they can secure for their money whether losing or not is acceptable as helping to meet this fixed interest charge on bank deposits. To pay 2 per cent. for deposits and to keep a 25 per cent. reserve a bank must loan its money at 2-3/4 per cent., to come out even, taking into consideration the actual expense of making and recording the transaction. It is better to loan at 1-3/4 per cent., however, than to let the money lie idle. It is better to lose 1 per cent. than to lose the entire 2-3/4 per cent., as would be done in case no loans at all were made, clerk-hire being just as much a fixed charge as interest. With the amendment of the National Bank Act, to permit the acceptance of time bills, such ruinous competition would cease. The funds of the banks would come to be principally invested in trade paper and stock-exchange loans would be relegated to a position of secondary importance, as in London and on the Continent. The field for the investment of their deposits would be greatly broadened, to the benefit both of the banks and trade in general.

To remedy this primary defect in our banking system, to make possible the financing of our domestic and foreign trade along the lines which have proved so advantageous in other countries, to provide negotiable paper of a character suitable to the investment of foreign funds, paper which can not only be discounted but rediscounted, to give trade the advantage of bank surpluses accumulated both in the country at large and in New York, to lessen the evils of speculation, to afford a reasonable basis for the calculation of interest rates on bank deposits in central reserve cities, to bring New York into the circle of those financial centers between which funds move naturally as discount rates rise or decline, to secure the advantage of the competition of foreign capital for our trade paper, can be put in the way of accomplishment by the insertion of a paragraph or two in the National Bank Act.

* * * * *

[275]The European financial system is constructed upon discounts as its foundation; the American system is constructed upon bonds and stocks as its foundation. Bank notes in Europe are issued mainly against bullion and discounts; in the United States mainly against bullion and bonds.

The quick assets held by European banks against their deposits consist of discounts or call loans, largely secured by discounts. The quick assets of American banks ... are primarily call loans on stock and bond collateral.

In Europe the daily plus and minus of money requirements are adjusted by the use of the discount market--that is to say, in a final analysis, by purchase or sale of bills. (Calling in or putting out money on call where the loans are secured by bills amounts, in effect, to a sale or a purchase of bills.) In a last analysis this means that in Europe attempts to liquidate are primarily appeals to the whole nation to liquidate its temporary commercial investments, the brunt of such liquidation being borne by the entire community, and the pressure being constantly subdivided, every member of the community thus contributing his share.

As a majority of discounts represent goods in process of production or on the way to consumption, liquidation with them primarily expresses itself by a falling off in new production, while the consumer, on the other hand, can not stop consuming and must therefore continue to pay. The brunt is thus borne by the whole nation and adjustment follows without violent convulsions.

In sharp contrast with such a system the attempts to liquidate in the United States are directed primarily at the contractors of stock exchange loans. This means that a comparatively limited number of debtors are called upon to sell their securities. This they can do only by finding new investors, who, as a rule, are at such times comparatively rare, because when acute pressure arises it generally originates in the inability of the investor to purchase because of lack of funds or in his unwillingness by reason of his distrust of the financial situation. The concomitant of this is that those forced to sell securities at such times must offer them at sufficiently reduced prices to bring about an entire change in the attitude of the investor. The difficulty here is that violent reductions of prices in themselves cause distrust, and low prices caused by distrust not only frighten away purchasers but, in addition, unsettle the owners of securities and thus cause them to join the ranks of the sellers. An acute convulsion, therefore, must inevitably follow before the tide can be turned....

Of course, general liquidation in Europe includes a liquidation of securities, just as liquidation in the United States also includes liquidation of commercial paper as it matures. But the difference is that in Europe bills will be the main factor and securities will play a much more subordinate part, while with us just the reverse is true.

THE ESSENTIAL CONDITIONS FOR THE ESTABLISHMENT OF AN INTERNATIONAL DISCOUNT MARKET

[276]The essential conditions for the establishment of an international discount market are:

1. Every bill offered for discount should be based on a commercial transaction where value passes. Finance or accommodation bills should be extremely rare and capable of satisfactory explanation.

2. It follows that almost invariably the bill will arise out of a sale of goods and will be in the form of a draft by the seller upon the buyer, and accepted by the buyer.

3. It will thus be a two-name bill, and not an individual promissory note. How far you can change your system in this respect and how far the powers of your new Federal banks can be used to induce such a change, is a question which I cannot pretend to answer, but which you will no doubt be able to answer.

4. The bill should be drawn for a period neither too long nor too short. The period should be sufficient to allow of a resale of the goods on which the bill is based, thus making the bill in a sense self-liquidating. The usual period is three months.

5. While there should be a large proportion of trade bills, there should be a still larger proportion of acceptances by banks and finance houses, based, of course, on collateral, which usually takes the form of imported produce. In Germany, however, I understand that banks accept a good many drafts arising out of internal transactions.

6. If the market is not to be merely a home market, but international: that is, attractive to foreign bill buyers, an important and desirable step would be the opening of American banks or branches of American banks in foreign exchange centres, such as London, Paris, Berlin, Amsterdam, Buenos Aires, Shanghai, and so on, and these banks should always be prepared to encourage American bills by buying, at reasonable rates of exchange, bills on New York, Chicago, and other American centres, payable in dollars.

7. Your usury laws would have to be modified so as to allow discount rates to move freely upwards if required.

8. Your Federal reserve banks which are intended to be the equivalent of the Central banks of other countries, such as the Bank of England, Bank of France, and the Reichsbank, should be prepared to rediscount approved bills at all times and to any extent.

The advantages to you of such a market would be the same advantages that we possess, namely, liquid employment for short money; power to meet demands for money without disorganizing stock exchange prices; power to check overtrading at home, and finally, power to check a foreign drain of gold.

CASH STOCK EXCHANGE DEALINGS

[277]In England, France, and Germany there exist monthly or half-monthly settlements of stock exchange transactions, and as stock exchange loans run from one settlement to the next the amount of money employed on the stock exchange between settlements 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 there, so much additional money will under normal circumstances be withdrawn from the bill market and go into the stock exchange. If less money is wanted on the stock exchange, so much more will go into the bill market.

Without entering upon a discussion of the question of cash stock exchange dealings versus stock exchange dealings per settlement (for which, be it said in passing, a suitable method of weekly stock exchange settlements can probably be devised for this country, combined with provisions for proper margining in order to prevent over-stimulation to gambling), we are, for the purposes of this article, interested only in the effect of this method of cash dealings on the whole financial system. An exclusive system of cash dealings brings about the pre-ponderance of the call loan on stock exchange collateral. But for the existence of the seducing call loan, which is one of the gravest dangers and curses of our system, we should have been forced to develop our bill market as a regulator of our daily money requirements. In that case, instead of seeing the idle money of the whole nation poured into stock exchange loans when trade is inactive--thus unduly stimulating speculation when it should be discouraged--and again withdrawing money from the stock exchanges in order to provide for the business of the whole nation when trade becomes active--thus bringing about anxiety and convulsions on the stock exchange in the face of prosperity--we should have a system based on bills; that is to say, based on the broad foundations consisting of the commerce and trade of the whole nation, and we should then enjoy an almost uniform rate of interest all over the country, gently rising and falling within moderate bounds, instead of the violent fluctuations and unbearable conditions to which we are now subjected.

The aggregate amount invested by a nation in trade and commerce should be and is many times the amount invested in stock exchange loans, which latter represent undigested securities and securities carried for speculative investors. Our way of doing business may be illustrated by two adjoining reservoirs, one small and one very large. 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 the small reservoir is regulated by pumping water into it from the large one or by withdrawing water from it into the large one. In this way the outflow and inflow of the large reservoir are scarcely perceptible, and yet there is no difficulty in regulating the small one. With us, the reverse is done. If there is a shortage of water in the large reservoir we draw on the small one and, in order to increase the water in the large reservoir by perhaps an inch, we empty the small one altogether, or else in order to decrease the amount of water in the large reservoir by an inch, we fill the small one to overflowing.

NO POWER TO LEND ON REAL ESTATE[278]

Most of the restrictions in the national banking law have to do with loans, reserves, or the issue of notes. Of these the restrictions upon loans are by far the most serious impediment in competing for business with state banks and trust companies. For the banks outside the large cities this is particularly true of the provision which forbids loans upon real estate as security.

This restriction is based upon a sound banking principle, learned after much bitter experience. But the experience which led to a complete prohibition of real estate loans was gained amid the economic conditions of the first half of the last century, and the principle itself is one which is applicable only to a particular form of banking organization. While the country was in process of settlement, with an abundance of unoccupied fertile land, real estate was a security of most uncertain value. Moreover, the wildest of the speculative movements which preceded all our early crises were invariably in land. At present, land values are far more stable, and real estate is everywhere included among the most conservative of investments, proper for all with the one exception of commercial banks.

For banks, all of whose obligations are payable upon demand, the real estate loan, quite regardless of its safety, is wisely considered unsuitable. Such loans are commonly wanted by borrowers for a considerable period of time and, therefore, they can not readily be reduced in amount even by an individual bank. In other words, they are not liquid. But the importance of this quality in all its assets disappears when a bank begins to acquire time or savings deposits, as well as those payable on demand.... The example of the trust companies shows that a great variety of financial business can be carried on safely and profitably under a single management. Failures among them have been comparatively few in number, and it would be difficult to find a single instance of disaster which could be attributed to the variety of business carried on.

Some of the advantages which the banks would derive if they were able to lend on real estate are so evident that they require little more than mere mention. It would give them more of the most profitable kind of business, that which has its origin in the neighborhood of the bank. The immediate return is generally greater than can be secured from the employment of funds in the money centers or in the purchase of paper from note brokers. Moreover, in fostering the growth of wealth and population in its locality a bank is laying a solid foundation for the future expansion of its own business. Finally, the ability to lend on real estate will often enable a bank to secure valuable customers who would otherwise go elsewhere. It has been the unpleasant experience of many a national banker to be obliged to refuse a loan to a would-be borrower who has nothing but real estate to offer as security and to see him enter a neighboring state bank or trust company where there was no legal obstacle to the transaction. Relations once established are pretty certain to continue even after the borrower has security which falls within the provisions of the national law.

There are then at least three distinct advantages which may be expected to follow if the national banks are permitted to lend on real estate. It would be profitable for the banks; it would be of advantage to the localities served by the banks; and, finally, it would enable the banks to compete with state institutions upon a more equal footing,[279] thus checking to some extent the relative decline of banking under the national law.

THE INDEPENDENT TREASURY AS A SOURCE OF WEAKNESS IN OUR BANKING SYSTEM[280]

For many years the banks of this country have conducted a persistent agitation for the abolition of the Independent Treasury system. It has been their contention that the Independent Treasury was an archaic and inefficient system of administering the finances of the nation; that it worked serious hardship upon the banks and the business of the country, and that any system of reform should include its abolition.

The treasury is, in reality, a central bank of deposit with branches, run by the Government, in which the Government is the only depositor, and from which there are no borrowers. The central office of the Treasury is situated in Washington, while there are ten subtreasuries or branches scattered among the various large cities of the country. The most important subtreasury, from the standpoint of the volume of business handled, is located in New York City....

The United States is the only large nation in the world which has a treasury system of this sort, and this fact has been made much of in the agitation for its abolition.

DIFFICULTIES ARISING FROM THE TREASURY SYSTEM

There is no room for dispute that many features of the Independent Treasury have, in the past, been the source of serious difficulties. However, we must recognize that within the last decade, and particularly within the last two or three years, most of the glaring defects have been eliminated through a liberalization in methods, involving, in brief, a deposit of a very considerable amount of the Government's money in national banks rather than carrying it locked up in the vaults of the Treasury, through more liberal administrative regulations by which payments to the Treasury could be made with certified checks, and through facilitating in other ways the transactions of business men with the Treasury Department.

CORRESPONDENCE OF TREASURY RECEIPTS AND DISBURSEMENTS

... The real criticism against the Treasury is that it causes the tying up of money, not over a series of years, but during the months in which the banking system of the country most needs it. This condition is the result of the lack of correspondence between government receipts and disbursements.

During the first four months of the year the receipts are less than in any other period. During the month of May, the receipts sharply increase, reaching their maximum about the first of June, and continuing at a very high rate over that month. In July the income falls off, reaching by the end of the month a point a little above that which prevailed in April, after which it gradually increases during August and September. About October first the tide turns and the receipts fall off sharply during that month, while during December the revenue again increases. As contrasted with this the government expenditures change only in a general way....

EXAGGERATION OF TREASURY EVILS

It should be stated that whatever embarrassment exists because of this condition, and which as a matter of fact has been grossly exaggerated, is found almost entirely in New York City.

However, in order to reduce as much as possible the objections raised by the bankers and to prevent money being taken out of circulation and buried in the Treasury, where it would be of no service to the country, the Secretary of the Treasury, on January 9, 1913, issued the following order, which inaugurated a radical change in the manner of handling and disbursing the public funds. The objects to be accomplished were announced in the order as follows:

"For the purpose of bringing the ordinary fiscal transactions of the Federal Government more nearly into harmony with present business practices, it has been determined that the daily receipts of the Government shall be placed with the national bank depositaries to the credit of the Treasurer of the United States. Disbursements will be made by warrant or check drawn on the Treasurer, but payable by national bank depositaries, as well as by the Treasury and subtreasuries."

Secretary McAdoo, in his report for the fiscal year ending June 30, 1913, in speaking of this, stated that while it had caused some embarrassment "the difficulties at first encountered are disappearing, and the system appears to respond to the public requirements, and to be accomplishing the purposes for which it was devised."

LACK OF CENTRAL CONTROL

[281]There is no country in the world where the volume of currency in circulation and the demand for bank credits fluctuate more widely than in the United States. This is due to the great expanse of our territory, to the annual harvest requirements of the agricultural sections, to the prevailing business activity and enterprise, and to the rapid and unequal increase of population and wealth in different sections. Furthermore, there is no country in the world where intelligent control over bank credits and bank reserves is needed more than in the United States. There are in the United States nearly seven thousand national banks, besides twice as many state banks and trust companies. Each of these institutions acts for its individual interest alone, independently of the others, and the prevailing tendency of each at all times is to expand its credits to the limit permitted by law. The country banks lend their surplus resources in the form of deposits at interest to the banks in the larger cities, and the banks in the principal money centres commonly expand their credits as much as practicable by lending on call such sums as they deem it unsafe to lend on time or by discount of commercial paper. Each bank with a deposit in another bank assumes that, in case of need, it can strengthen its reserve by drawing upon this deposit; but it fails to consider that, when thus it strengthens its own reserve, it must to the same extent weaken the reserve of the other bank, and that the deposits of banks with other banks add no strength to the general credit situation. Each bank that has loaned money on call assumes that, in case of need, it can strengthen its reserve by calling such loans; but it fails to consider that, generally, when a loan is called the borrower is obliged to borrow the same sum from some other bank, although a high rate of interest may be exacted, and, therefore, that call loans affect the security of the entire bank situation practically to the same extent as time loans.

In the United States there is no way of regulating the supply of bank credits and of holding part of the potential supply in reserve for periods of financial stringency. Consequently, nearly always there is either an over-abundance of money (meaning credit which the banks are ready to lend) or a money famine. It has been argued that the volume of credits granted by the banks depends upon business activity and upon the consequent demand for credit and not upon the power of the banks to grant credits, and, therefore, that low interest rates have little effect in causing an expansion of bank credits. Experience, however, shows that the contrary is the case, at least in the United States. It is true that, when there is loss of confidence and when business is depressed, interest rates are low, because there is less currency in circulation and more in the bank reserves, while at the same time the demand for bank credits is diminished. It is true, also, that low interest rates will not stimulate speculation and enterprise unless people have confidence and are ready to speculate and to embark in new enterprises. But we know by experience that when people are in a mood for speculation and for business expansion low interest rates operate as a powerful stimulus to speculation and business expansion. A leading banker has said: "In the long run commerce suffers more from the periods of over-abundance (of money) than from those of scarcity. The origin of each recurring period of tight money can be traced to preceding periods of easy money. Whenever money becomes so over-abundant that bankers, in order to keep it earning something, have to force it out at abnormally low rates of interest, the foundations are laid for a period of stringency in the not far distant future, for then speculation is encouraged, prices are inflated, and all sorts of securities are floated until the money market is glutted with them."[282] [The need of intelligent control over discount rates and bank credits is (was) imperative.]

ABSENCE OF REGULATION OF RATIO OF DEPOSITS TO CAPITAL AND SURPLUS

[283]The reports of condition of the national banks, according to the statements of September 12, 1914, to the Comptroller of the Currency, show that, on an average, the total deposits of all national banks amount to about four and six-tenths times their total capital and surplus. This means that the average capital and surplus of these banks is equal to approximately 21 per cent. of the total amount of deposits. There are, however, national banks whose deposits amount to ten or more times their capital and surplus, and in these cases the margin of protection to depositors is only 10 per cent. or less of the sum total of deposits. Usually the amount of money which a bank has invested in loans approximates the amount of its deposits. In the case of a bank whose loans equal its deposits, and whose deposits are approximately ten times its capital and surplus, it is obvious that the loss of over 10 per cent. in loans would wipe out both capital and surplus and destroy the solvency of the bank, rendering it unable to pay its depositors.

The view is held by many practical bankers and experienced economists that it is not sound banking for an active commercial bank to be allowed to receive deposits in excess of ten times its capital and surplus. I am firmly impressed with the correctness of this view, and respectfully recommend to the Congress that the national-bank act be amended so as to provide that no national bank shall be permitted to hold deposits in excess of ten times its unimpaired capital and surplus. Perhaps it might be wiser to make this limitation eight times the capital and surplus.

Such a limitation need not interfere with the growth and development of the bank. When its deposits approach an amount equal to ten times its capital and surplus, or whatever other limitation may be fixed, arrangements may be made to increase its capital. A bank whose deposits amount to ten times the capital and surplus, if efficiently managed, should be so profitable that there would be no difficulty in providing for an increase of capital by the sale of additional stock, and when the proposed increase shall have been authorized by two-thirds of its stockholders and approved by the Comptroller of the Currency, it can be made promptly effective. A commercial bank whose capital and surplus amount to less than one-tenth of its deposits is, except possibly under very exceptional conditions, doing business on too small a capital and upon too narrow a margin for safety, and does not furnish its creditors the protection to which they are entitled against unexpected losses and contingencies which are liable to, and do, so frequently arise....

BANKING ABUSES

[284]... Among the many abuses and violations of law and regulations with which the department has to contend are excessive loans; overdrafts; loose and unbusinesslike methods of accounting; excessive borrowings by the banks; investment of the bank's funds in securities not authorized by law; charging of usurious rates of interest; unlawful loans on real estate; excessive loans to officers, clerks, and employes of the bank employing them; loans to a bank's officers or employes and others through "dummies"; loaning money, directly or indirectly, upon the bank's own stock; transaction of a brokerage or commission business by the bank's executive officers, the commissions thus collected being sometimes appropriated personally by the officers and sometimes going directly or indirectly to the bank; false statements of directors as to ownership of stock; false statements made by bank officers, such as including as cash or cash items memoranda of moneys due from one source or another which do not represent actual cash and can not be immediately converted into cash; and failure or refusal when so directed to charge off bad debts and other ascertained losses; delay on the part of directors in taking the oath of office.

For many of the offences indicated the only penalty which can be enforced by the Comptroller's office is the forfeiture of the bank's charter by suit in the United States Court. This in many cases would prove a great hardship to innocent stockholders and depositors, and can only be resorted to with much reluctance by this office....

USURIOUS INTEREST RATES

[285]All the national banks of the country have been required in each report of condition made to the Comptroller's office since January 1 last to state under oath the highest rate of interest they have charged since the preceding report and the average rate of interest charged by them on all loans since the preceding report.

The reports received at the Comptroller's office show indisputably that in some States and sections borrowers, especially small borrowers, have been and are being subjected to extortions and exactions which the average man would consider impossible in this enlightened age.

One thousand and twenty banks in different sections of the country, out of the total of 7,615 banks, admitted that they were receiving an average of 10 per cent. or more--some an average of 18 per cent.--on all their loans.

Those receiving an average of 10 per cent. and upwards included 2 banks in Illinois, 6 in Minnesota, 2 in Missouri, 23 in Georgia, 6 in Florida, 21 in Alabama, 2 in Louisiana, 315 in Texas, 17 in Arkansas, 3 in Tennessee, 90 in North Dakota, 25 in South Dakota, 18 in Nebraska, 5 in Kansas, 38 in Montana, 14 in Wyoming, 37 in Colorado, 25 in New Mexico, 300 in Oklahoma, 12 in Washington, 10 in Oregon, 13 in California, 2 in Utah, 1 in Nevada, and 33 banks in Idaho.

Let me illustrate the methods of some of these bankers by giving you the facts and figures as taken from the sworn statements submitted to the Comptroller's office by the national banks in two particular States in the Southwest.

In one of these States there were 131 banks which reported that they charged a maximum rate of interest ranging from 15 per cent. to 24 per cent. per annum, 67 banks whose maximum rate ranged between 25 per cent. and 60 per cent. per annum, 22 banks which charged between 60 per cent. per annum and 100 per cent. per annum, 18 banks whose maximum rate was from 100 per cent. to 200 per cent. per annum, and 8 banks which owned up to having charged maximum rates ranging between 200 per cent. and 2,000 per cent. Most of these disgraceful and unprecedented rates were for comparatively small loans....

These figures are not results of the rule, applied by many banks, not to pass a loan on their books for less than a dollar.... When we find loans made by national banks for $25, $50, $100, $200, $500, and $2,000 or more, at 40, 50, 100, or 1,000 per cent., it is merely a hideous gamble on how long the borrower can keep starvation from his door and live and work. Yet I am told on good authority that in one State, largely agricultural, reports from nearly 200 banks--lending chiefly or largely to farmers--show losses of only a fraction of 1 per cent. on farmers' loans, while the average interest rate in these particular banks is 12 per cent. to 15 per cent.--and the maximum rate 30 per cent. or 40 per cent., the banks paying large dividends.

We read much of the infernos of the slums of the great cities, of degradation and misery and squalor, of the grinding callousness of tenement landlords and sweatshop operators. Here in the country we find bankers, men in business that should be the most respectable, as it is the most responsible, of all secular avocations, literally crushing the faces of their neighbors, deliberately fastening their fangs in the very heart of poverty....

A well thought out, carefully constructed, conservative system of rural credits for the development of agriculture and the increase of our wealth and resources by offering encouragement and opportunity to the ambitious farmer will come presently. When it comes all of us will share the splendid results....

BANKERS' VIEW OF USURIOUS INTEREST RATES

[286]On February 25 the following statement was "given out" from the office of the Comptroller of the Currency:

The Comptroller of the Currency received to-day from the Farmers' Grain Dealers' Association of Iowa notification of the adoption at the convention of that association in Des Moines, Iowa, on the 17th instant, of the following resolution:

_Be It Resolved_, By the Farmers' Grain Dealers' Association of Iowa, representing 40,000 members, as follows:

That we are as much opposed to bank discrimination in interest rates as to railroad discrimination in freight rates.

We oppose private control of the public currency.

That we strongly commend the Comptroller of the Currency for his courageous exposure of bank usury; and we unalterably oppose the efforts of the guilty parties to abolish his office.

There has been no better statement of the Comptroller's position than is here given--credit standing and variations of it must have no influence on interest rates and anyone who wishes his office abolished is guilty of usury; or, conversely, only those guilty of usury wish the office abolished.

The statement is inadequate only in the failure to define what is meant by "private control of the public currency."

FOOTNOTES:

[249] Conway and Patterson, _The Operation of the New Bank Act_, pp. 1, 2. J. B. Lippincott Company, Philadelphia, 1914.

[250] John Skelton Williams, Comptroller of the Currency, _Democracy in Banking_, Address delivered before the annual convention of the North Carolina Bankers' Association, Raleigh, May 13, 1914. Printed in _Congressional Record_, 63d Congress, 2d Session, Vol. 51, pp. 10150-53.

[251] A. Piatt Andrew, _The Essential and the Unessential in Currency Legislation_, in Questions of Public Policy, Addresses delivered in the Page Lecture Series, 1913, before the Senior Class of the Sheffield Scientific School, Yale University, pp. 62-70. Yale University Press, New Haven, Connecticut, 1913.

[252] Adapted from John Perrin, _What is Wrong with Our Banking and Currency System?, The Journal of Political Economy_, Vol. 19, No. 10, December, 1911, pp. 856-865.

[253] Paul M. Warburg. _The Discount System in Europe_, Publications of the National Monetary Commission, Senate Document, No. 402, 61st Congress, 2nd Session, pp. 33, 34.

[254] Conway and Patterson, _The Operation of the New Bank Act_, pp. 203-207. J. B. Lippincott Company. Philadelphia. 1914.

[255] Fred Rogers Fairchild, _Bond-Secured Bank Notes and Elasticity_, _The Outlook_, Vol. 88, No. 11, March 14, 1908, pp. 590-93.

[256] [As was pointed out in an earlier chapter, the autumnal demand for currency in the agricultural sections of the country has fallen off appreciably since 1907.]

[257] Fred Rogers Fairchild. _Fundamental Defects of the Bond-Secured Bank Notes_, _Bankers Magazine_, Vol. LXXVI, No. 4, April, 1908, pp. 487-90.

[258] We are not considering the third alternative of issuing bonds at a heavy discount.

[259] Adapted from W. H. Lyon, _A Gamble in Governments_, _Moody's Magazine_, Vol. XI, No. 1, January, 1911, pp. 181-186.

[260] [In this extract the explanation of the so-called perverse elasticity of our national bank notes is given incidentally but very clearly.]

[261] Adapted from John Perrin, _What is Wrong with Our Banking and Currency System?_, _The Journal of Political Economy_, Vol. 19, No. 10 December, 1911, pp. 856-865.

[262] Eugene E. Agger. _The Commercial Paper Debate. The Journal of Political Economy_, Vol. 22, No. 7, July, 1914, pp. 663-667.

[263] _Annalist_, March 9, 1914, p. 293.

[264] _Annalist_, March 9, 1914, p. 294.

[265] J. J. Klein, _Annalist_, March 23, 1914, p. 361.

[266] _Ibid._

[267] During 1912 over $1,700,000,000 in notes were sold by reputable brokers, and they represented in these transactions from 2,500 to 3,000 concerns. In one large eastern state over two-thirds of the state banks and trust companies regularly invest a portion of their funds in this class of paper (J. A. Broderick, _Finance_, October 4, 1913, p. 328). On August 9, 1913, according to the report of the Comptroller of the Currency, the national banks held over six billions of dollars of commercial paper, most of which was single-name.

[268] _Financier_, June 22, 1912.

[269] J. G. Cannon, _Financial Age_, October 19, 1908.

[270] P. M. Warburg, _The Discount System in Europe_, in Report of the National Monetary Commission.

[271] _Ibid._: see also William Jacobs, _Bank Acceptances_, in Report of the National Monetary Commission.

[272] Warburg, _loc. cit._

[273] E. D. Page, _Annalist_, March 16, 1914, p. 324.

[274] Lawrence Merton Jacobs, _Bank Acceptances_, Publications of the National Monetary Commission, Senate Document No. 569, 61st Congress, 2d Session, pp. 9-19.

[275] Paul M. Warburg, _The Discount System in Europe_, Publications of the National Monetary Commission, Senate Document, No. 402, 61st Congress, 2nd Session, pp. 23-25.

[276] Adapted from James H. Simpson, General Manager, Bank of Liverpool, Ltd., _Some Leading Features of the London Money and Discount Markets_, an address delivered at the annual banquet of the bankers of the city of New York, January 19, 1914.

[277] Paul M. Warburg, op. cit., pp. 28-30.

[278] O. W. M. Sprague, _Banking Reform in the United States_, pp. 72-75, Harvard University, 1911.

[279] The importance of real estate to the state banking institutions is shown in the Special Report from the Banks of the United States on April 28, 1909, recently published by the National Monetary Commission. For state banks real estate loans and mortgages amounted to $414,000,000 or 12-1/2 per cent. of total resources and for the trust companies to $377,000,000, more than 9 per cent. of their resources.

[280] Conway and Patterson, _The Operation of the New Bank Act_, pp. 184-192. J. B. Lippincott Company. Philadelphia, 1914.

[281] Victor Morawetz, _The Banking and Currency Problem in the United States_, pp. 47-50. North American Review Publishing Company. 1909.

[282] From an address by Mr. James B. Forgan to the Texas Bankers' Association.

[283] Report of the Comptroller of the Currency, 1914, pp. 20, 21.

[284] _Ibid._, pp. 16, 17.

[285] John Skelton Williams, Address before the Kentucky Bankers' Association, October 6, 1915. _The Commercial and Financial Chronicle_, Vol. 101, No. 2624, October 9, 1915, pp. 1137, 1138.

[286] _Journal of the American Bankers' Association_, Vol. VIII, No. 9, March, 1916, pp. 755-6.