Part 17

The report of the Comptroller also shows this fact, that while all other banks than the National Banks, excluding the Mutual Savings Bank, hold only 7 per cent cash reserves of their individual deposits, or demand liabilities, they have 24 per cent of their assets invested in bonds and other securities, which must of necessity be slower than current commercial paper, while the National Banks, which hold 17 per cent in cash of their individual deposits, have invested only 17 per cent of their assets in bonds, or other securities.

The inconvertibility of a great per cent of the assets of the State institutions is another burden then, thrown upon the total cash bank reserves of which the National Banks carry $996,000,000, with $5,825,000,000 individual deposits, while the other banks, excluding the Mutual Savings Banks, have only $577,000,000 cash reserves, with individual deposits amounting to $7,589,000,000.

The average cash reserves of the United States therefore are only a trifle over 11 per cent, when they should not be less than 16 per cent under any circumstances at the low level, reaching nearer 20 per cent at the high level. That is, reserves should be held for use, not ornament. There should be such an elasticity in the use of reserves, as to enable any community or section of the country to adjust itself to the ever-changing conditions of trade.

Let me make this point perfectly clear by giving you an illustration. Under the law of today, our bank carries 6 per cent cash, which amounts to about $120,000. There are times of the year when I could carry $180,000 or even $200,000 a good deal easier than I could carry $60,000, or even $50,000 at another time. Common sense would say that I ought to be able to adjust my business and my reserves somewhat to the varying conditions, but no, I am tied down by a cast-iron rule, so that I cannot bend without breaking the law. There is no doubt that my reserves ought to average for the year fully 6 per cent cash. In addition to this, I ought to carry at least 10 per cent more that I know absolutely is available at any time. Yes, and this should be so carried with the combined reserves of my fellow bankers all over the United States, as to make any amount available that could possibly be necessary at any time under any circumstances. _This is the principle of the elasticity of reserves._

The wide variation between the State reserves and the reserves of the National banks is not difficult to explain. There are eighteen states today which have no reserve requirements at all. In the remaining states, the reserve requirements range all the way from 5 per cent to 25 per cent. The reserve laws in some of the states are excellent, just as good as that of the National Bank Act, while in an adjacent state, there may be no provision whatever requiring reserves. The result is that half of the banks of the country which are compelled to carry adequate reserves are carrying the other half, a condition that is unfair, unjust and manifestly unsound.

MR. MERCHANT: It is not only manifestly unfair as between the bankers themselves, but such a condition imperils the banking situation as a whole, and more than any other single cause, brings on a general commercial disaster, as things now stand. The banking of the United States and all the productive and transportation interests are, comprehensively speaking, but one single business, so intimately associated and interwoven are their affairs. The banks put up their capital as an insurance fund, to protect their customers, and should handle their resources, and should keep such an amount of reserves on hand or at their command as to guarantee the payment of all depositors upon demand, or in accordance with their contracts. Since the banks, commerce and the people are all bound up together, the contracts of the banks with the people should take one common form, and each bank, from one end of the country to the other, should be compelled to assume its proper share of the burden, both as to paid-up capital and as to reserves.

It is interesting to note that the capital of the 7,312 National banks amounting to $1,033,000,000 is just about equal to the capital of the other 17,804 banks, outside the National System reporting, and the estimated capital of $70,000,000 of the non-reporting banks, $1,047,000,000.

The surplus of the National banks is 92 per cent of their capital, and strange and fortunate to say, excluding the Mutual Savings bank, the surplus of all other state banks is exactly 92 per cent of their capital.

That is, the National banks have $1,983,000,000 capital and surplus to insure $5,825,000,000 individual deposits and $2,178,000,000 due to the other banks, or a capital and surplus to all deposits of nearly 25 per cent, while all the other banks have $2,010,000,000 capital and surplus to insure individual deposits $5,089,000,000 and $454,000,000 due to banks, or a little over 24 per cent. Insurance expressed in capital and surplus, therefore, is about equal, but a great and serious divergence comes, as we have seen, in the average cash reserves of the two classes of banks.

MR. MANUFACTURER: This is the weakness of the present situation from the standpoint of reserves, and some of the states are beginning to realize the importance of protecting the well-conducted banks from the consequences of those recklessly or dishonestly managed; and they are passing laws compelling all persons or firms doing a banking business to submit to State supervision and control. They are compelling them to incorporate their business within a reasonable time. These States do not propose to have the innocent depositors swindled through a misuse of funds; nor do they propose to permit bankers to so conduct their banking business within their borders, that they can, if they so desire, commit gigantic frauds, or by the misuse of the people's deposits, bring on bank panics and a complete paralysis of business. I think that Ohio has just passed such a law and that Illinois is about to put the same kind of a statute into operation. The people of all the states are beginning to understand that banking is a quasi-public business, and that the banker, though not strictly speaking a trustee, is in fact a quasi-trustee, and must conduct his business upon that basis.

MR. BANKER: Mr. Manufacturer, you are quite right in what you have said, but you have not gone far enough; nor as far, I am sure, as you will be inclined to go when I have outlined the necessity of a police regulation of the banking business, from a National rather than from a State point of view. Just stop and think the matter over. To use your own observation with regard to the action of the state, no one will deny that a state has the right to supervise every person, firm or corporation that takes deposits under the name of bank, or banker, with a view of protecting the people against foolish or dishonest bankers. By the same course of reasoning, the United States, or National Government, has the right, and it is clearly its duty, to protect one state against the unwise and dangerous course of some other state and one section of the country against misconduct in the banking business in some other section of the country. Bad banking is not only a local mishap, but a national misfortune. Nine-tenths of the country might be under such supervision and control of its banking business as to insure practical immunity from such conditions and practices as breed panics and the remaining tenth be so conducted as to preclude the possibility of a day's freedom from the danger of a commercial cataclysm.

Will anyone say that such a condition should continue for a day, or a year, or for ten years, or for a hundred years, or for a thousand perchance, because the general Government has no right or power to act in the matter for want of constitutional authority? Let me ask you, Mr. Lawyer, whether there is anything that will so certainly conserve the peace, the prosperity and the "general welfare" of the United States as a sound and uniform financial banking system extending over the whole country.

MR. LAWYER: I certainly cannot conceive of anything of so much importance as a sound and uniform banking system for the whole country. If there is one single factor in our life that is distinctly national in its character and scope, it is this.

During the past week, I devoted much time to that phase of this question, because, as we have gone along during the last two or three months, and this problem has been under discussion, I have become more and more impressed with its vast importance, and above all with its distinctly national character. I have not butted in tonight, as you will observe, as I was anxious to see how you gentlemen would treat this subject of Reserves, whether from a standpoint of individual banks, or from the standpoint of the community, the commercial center, or our country as a whole, or upon the broad proposition that gold today constitutes the world's banking reserves and that we are a very great part of that commercial world. For my own part, I had come to the conclusion that there could not be a system of reserves established that would be efficient and of the highest use, and really protective unless it were national in its extent, and universal in its application. Therefore, realizing the absolute necessity of some common power to control all reserves, in order to compel each bank to perform its part by carrying its share of the burden that commerce imposes, I have been unable to find any solution, except in a uniform national system; and why not? Certainly the National Government could compel every bank to carry certain specified reserves, and failing to do so to pay a tax of 10 or 20 per cent per annum upon all deposits not so protected; that is, upon all deposits in excess of the required reserve. This could be done under the taxing power of the Government, precisely as a tax of 10 per cent was put upon all bank notes. Would any patriotic banker refuse to coöperate with his fellow bankers in such a reform, unless he wanted some unfair advantage by compelling the other bankers to carry his load for him?

You gentlemen will remember that the National Government was given jurisdiction of the Postal Savings Banks under these words which it was understood at the time were written by the President: "Sixty-five per cent of the deposits could remain with the banks as a working balance, and also a fund which may be withdrawn for investment in bonds or other securities of the United States, but only by direction of the President, and only when in his judgment 'the general welfare' and the interests of the United States so require." Similar words could be used with regard to a per cent of the surplus of the banks, and if the one was tenable, certainly the other would be especially so, since the latter involves seventeen billion of individual deposits, of which six billion four hundred and eighty million ($6,480,000,000) are savings deposits. Again Article I, Section 8 of the Constitution, empowers Congress "to regulate commerce with foreign nations and among the several states and with Indian tribes."

Upon this clause of the Constitution rests the Anti-Trust Law. What have we not done under this clause of the Constitution and the general welfare clause?

We have passed the Food and Drugs Act, giving the Government power to stop the use of poisonous substances in food products and drugs:

The Insecticide Act, giving the Government power to determine what kind of poison shall be used to annihilate bugs:

The Plant Quarantine Act, giving the Government power to regulate the importation of nursery stock and other plants and products and to enable the Secretary of Agriculture to establish and maintain Quarantine Districts for plant diseases and insect pests:

The Livestock Quarantine Act, to enable the Secretary of Agriculture to effectually suppress and extirpate contagious pleuro-pneumonia, foot and mouth diseases and other dangerous infectious and communicable diseases in cattle and other live stock:

The Meat Inspection Act that, for the purpose of preventing the use in Interstate, or Foreign Commerce, of meat and meat food products, which are unsound, unhealthy, unwholesome, or otherwise unfit for human food, the Secretary of Agriculture at his discretion may cause to be made, by inspectors appointed for that purpose, an examination and inspection of all cattle, sheep, swine, and goats before they shall be allowed to enter into any slaughtering, packing, meat-canning, rendering or similar establishments in which they are to be slaughtered, and the meat and meat food products thereof are to be used in interstate or foreign commerce.

The twenty-eight Hour Law by which the Government compels the humane treatment of cattle:

Employers' Liability Act:

The Safety Appliance Act:

The Hours of Service Act:

The Transportation of Explosives Act:

The Newspaper Publication Act:

The White Slave Act.

Can anybody doubt that we shall have a "National Health Act" by which the Government can stop the invasion of this country by yellow fever, cholera, bubonic plague, or any other scourge that may possibly visit our shores, and sweep over the land?

Can anybody doubt that we shall soon have a National Child Employment Act by which the childhood and youth of the land may be protected against those labor practices that imperil our chief national resource, the human resource?

Can anyone doubt that we shall soon have a National Woman's Employment Act that future generations may not be pauperized in health, strength and character?

Can anyone doubt that we shall soon have a National Workmen's Employment Act to the end that American citizens in all parts of the United States engaged in our productive industries shall have equal opportunities in matters of hours of labor?

The general welfare of this nation demands strength, power and greatness; but the strength, power and greatness of this nation reside and consist in the character, health, strength and power of the people, and therefore conservation of our greatest national resource is the conservation of our human resource. The citizen is a national asset.

Can anyone doubt that justice between the employers of labor in our various states, and the general welfare of this republic, demand uniform health and labor laws to the end that the citizenship of this republic may be the best product of the human race?

Gentlemen, if all these things are done, can be done and ought to be done by the National Government, can anyone doubt the soundness of this proposition: That it is interstate commerce to ship by mail, or freight, any kind of property?

What is property? "Property is a thing or things subject to ownership; anything that may be exclusively possessed and enjoyed; chattels, lands, possessions." Gold, gold certificates, silver, silver certificates, United States notes, checks, drafts, promissory notes are all certainly within this definition.

H.D. MacLeod, the highest authority I know of on banking economics, says: "Property, therefore, in its true sense, means solely a right, interest or ownership, and consequently to call goods or material things property is as great an absurdity as to call them right, interest or ownership.

"To call goods themselves property is, comparatively speaking, a modern corruption, and we cannot say when it began."

Therefore, property is primarily and essentially the very things with which banking is solely concerned.

Will anyone deny that gold is property? Remember that when gold is shipped in large quantities, it is by weight and not by count.

Will anyone deny that gold certificates are property?

Will anyone deny that silver is property?

Will anyone deny that silver certificates are property?

Will anyone deny that United States notes are property?

Will anyone deny that promissory notes are property?

Can anybody have the hardihood to say that if a note broker in New York ships a million dollars' worth of commercial paper to purchasers in the west upon a commission of a quarter or a half per cent, and receives his payment, for the sake of the argument, let us say, by a shipment of gold coin, that such broker is not engaged in Interstate Commerce? Does this transaction become a different transaction, forsooth, because it is carried out by a banker?

Will anybody deny that checks and drafts and bills of exchange are property?

Will anybody deny that a bank has property, although it may be the owner of one million dollars' worth of promissory notes?

Will anybody declare that a bank has no property when it has a million dollars' worth of gold coin in its vaults?

If a bank in Chicago should by any chance own one million dollars' worth of wheat, and should sell and ship the same to a New York bank, and the New York bank should ship the Chicago bank one million dollars' worth of gold, will anybody deny that they are engaged in interstate commerce? Now, suppose that the Chicago bank should sell the wheat in Chicago to Mr. Armour, instead of shipping it, for his promissory note for one million dollars, due in thirty days, and that the Chicago bank should then sell, and mail the note to the same New York bank, and the New York bank should ship the Chicago bank one million dollars in gold, in payment for the note, will anyone have the hardihood to assert that this transaction is not interstate commerce?

Will anyone deny that the sale and shipment by note brokers of billions upon billions of promissory notes from one state to another every year is not interstate commerce, but that to ship eggs, apples, potatoes, chickens, grain, cotton and live stock is interstate commerce?

I assert that it is just as proper and important that the National Government inspect this paper, and the banks that create it, or ship it, or buy it, as it is to inspect the sheep, hogs, cattle, slaughterhouses and the meat they turn out in order that it can protect the people of the United States. If the paper so shipped is infected by the hand of a rotten maker, commercially speaking, and the bank sending it out and responsible for it is not carrying an adequate reserve to meet the paper, should the maker fail to pay it, the harm done is vastly greater than that resulting from slightly infected meat. How much infected meat would it take to do the harm, the damage to the American people that resulted from the panic of 1907? And yet, if we had had a wise, national financial and banking system, we need never have passed through that harrowing, wasting panic that resulted in destroying property values into the billions; in the death of thousands of the people directly and indirectly; in the ruined health of tens of thousands more; in the non-employment of hundreds of thousands; and in the unknown and immeasurable suffering that ensued.

Such a national system must be supported by every banking unit; by every individual bank carrying its part of the commercial burden, and providing its proper share of the insurance of commercial safety by contributing its proper proportion of the necessary reserves, both local and national.

MR. MERCHANT: Mr. Banker, I heartily approve of every word that you have said, and there can be no possible doubt about the result of a discussion of this phase of this question by the American people.

There is one question, however, that I desire to ask you before we pass on, as we may overlook it. Is it not true that our National Banks are now carrying 20 per cent reserves of which 17 per cent are cash? Are not these reserves large enough to meet all emergencies?

MR. BANKER: I presume you gentlemen all know just how the National Banks carry their reserves; but fearing that you do not, I will explain the system to you. All so-called country banks are required to carry 15 per cent reserves; that is $15,000 cash against every $100,000 of deposits; that they may send 9 per cent or $9,000 for every $100,000 of deposits away to what we call reserve cities. Now, there are 320 banks in 48 of these reserve cities. These reserve cities are required by law to carry a reserve of 25 per cent, or $25,000, for every $100,000 deposits; but they may send away 12-1/2 per cent, or $12,500, for every $100,000 of deposits to a central reserve city, of which there are three: New York, Chicago and St. Louis.

These central reserve cities must carry 25 per cent cash reserves or $25,000 in cash for each $100,000 of deposits. Experience shows that these 320 banks in the 48 reserve cities and these 55 banks in the three central reserve cities keep all of their money loaned out all of the time; that is, right up to the reserve limit. Since they have no margin, when called upon for anything more than the usual daily current requirements, something extraordinary must be done to meet the demand. Loans must be called in and paid off. But since these same banks that are calling loans are supposed to be carrying the real, the final, the ultimate reserves, a deadlock follows, and the borrower is up against it; rates go almost anywhere that the banks want to put them; from 1 per cent to 10 per cent, to 20 per cent, to 100 per cent, or even 1,000 per cent; I believe that's the record rate. In other words, we have no true, final reserves in this country at all, for you cannot break the Government limit fixed by statute, and therefore we have a complete lockup all along the line, until through straining, something breaks somewhere.

There is absolutely no use of sending a part of your reserves away, if you cannot get them when you want them; for then it is no reserve at all, and that is the actual position or situation in the United States today. Our so-called central reserves are not reserves; it may be written down as a purely fictitious scheme, for there cannot be found a single year in which any substantial arrangement has ever been made by running the reserves up in the central reserve cities until they amounted to an average of 35 or 40 per cent, which would be the only practical way of providing for the crop-moving period.

If there is one thing more barbarous in our banking practices than a bond-secured currency, it is our system of superimposed bank reserves, especially in connection with the fixed limit, established by the Government. What would you think of a railroad company which ran out through the wheat country, having one-quarter of all its freight cars idle all the time as a reserve, and yet when thrashing time came, refused to use them, although the wheat was rotting on the ground, because the management of the road demanded that the railroads should always have at least one-quarter of the cars idle, as a reserve to meet the demands during the crop-moving period. Wouldn't you think that that was idiotic?

MR. LABORINGMAN: Well, I should say so.

MR. LAWYER: Mr. Banker, there is another point in that connection, and that's this. You started off to get a central reserve, a true reserve, as I supposed, as distinguished from the reserves of the National Banks that are all loaned out all the time. Then, your reserves were all broken up in the end, first into three hundred and twenty banks, and at the end into fifty-five banks, located in New York, Chicago and St. Louis. What we must have, it seems to me, is a real central reserve in the form of unloaned gold, and then permit the banks to use their cash reserves, if by any chance they needed them in part at least.

I notice that you carry about $100,000 in accordance with the legal requirement. Now, just as you said a while ago, there are times of the year when you could easily carry $200,000; but again there are times when you want to use a part of the $100,000, possibly as much as $75,000 of it. Why should you not do it, and then accumulate the necessary excess in the slack time to make up your average for the year.