Part 19

"If one of your local bankers were asked how much he allowed his bank to issue in cashier's checks, he would tell you that he issued whatever sums his customers wanted; either against their balances, or against new loans. He would tell you the same in respect of the amount of exchange he issued; his sole rule and guide being the amount of such credit which his customers require, and which he is in position to lend afresh, and to maintain against, or to redeem in cash, if demanded. If asked how long these obligations were allowed to remain outstanding, he would tell you that he had no control whatever over the period of their circulation; that these obligations stood out just as long as the holders wanted to use them in that form, and no longer; that his only concern was in being prepared to redeem the obligations on demand in cash.

"Thus it is that the volume of bank credits, whether in the form of deposits, checks or notes, responds in a rise or fall according as there is legitimate trade demand; and over this the bank has no control, except by ceasing to make loans. This is why deposits increase as loans increase, and these increase as the volume of business increases."

Now, if we understand the real nature of these so-called deposits, the reason for their diminution is plain. Deposits fall because loaning stops. When you stop loaning, you stop creating credit. You can readily see that it is not a diminution of deposits in cash, but it is a contraction of credit, a refusal to make loans.

This erroneous notion of the real meaning and nature of deposits in banking language may lead to very great mistakes in estimating the stability of a bank. That a bank's stability depends on a due proportion being kept between the deposits or the liabilities and the cash; and it may very well happen that while the deposits are apparently mounting high, and might lead many persons to believe that the actual quantity of cash was increased, it might be nothing, perhaps, but a dangerous extension of credit. And if this were carried too far, the bank might be in the most dangerous position just when it was apparently most flourishing.

Now, let us consider how a banker who has purchased either money or notes from his customers by creating deposits or debts, may be used by his depositors. That is how the depositors may use these credits. Of course, every banker does business exactly in the same way, or practically so, and when their customers begin to use checks these different results may follow:

_First_: The actual money may be drawn out.

_Second_: The credit may be transferred to the account of another depositor of the same bank.

_Third_: The check may be an order to pay another bank. But in this case, if the first bank is ordered to pay the second bank so much, the chances are that the second bank will be ordered to pay the first bank practically the same amount. If the claims of the two banks on each other were exactly equal, the respective checks or orders are interchanged, and the credits readjusted to the different customers' accounts accordingly, without any payment in money. If it should happen that the claims of all the banks against each other exactly balanced, any amount of business might be carried on, without requiring a single dollar of gold coin. If the mutual claims of the different banks against each other do not exactly balance, it is only necessary to pay the differences in coin.

Now, exactly to the degree that banks are brought into a closer relationship with each other by such means, the smaller is the quantity of coin required to carry on the business of the country; or the more gigantic is the superstructure of credit which can be reared upon a given reserve.

From what I have already said, you must all see that a merchant deals with credit; but a banker is a dealer in credit. A merchant brings his notes or debts, that are payable some time in the future, to the banker for sale, and the banker buys them for credits in the form of deposits, or debts payable instantly, which have precisely the same effect in commerce as so much gold. He reaps exactly the same profit by creating a credit in favor of his depositor as if he gave him the actual cash. The checks drawn against these credits so created by the banker circulate commodities in trade precisely in the same way that bank notes do which circulate commodities precisely in the same way that gold coin does. Consequently, these bank credits so created by the banker, whether upon his books subject to check, or in the form of bank notes, are exactly equal in their practical effects, so far as exchanging commodities is concerned, to the creation of so much gold coin.

This being true, you must realize how absolutely essential it is that every bank credit must be kept as good as gold by current redemption in gold everywhere, whenever demanded.

MR. BANKER: Mr. Lawyer, in all that you have said you have only affirmed what I said in the outset; the banker is a shopkeeper, a trader exchanging his credit for money and debts.

The development of the banking business in the United States is most interesting, and its growth has been simply marvelous.

On Feb. 25, 1863, almost fifty years ago, when the National Banking System was inaugurated, there were in the eastern states, including New York, New Jersey and Pennsylvania, what are known as Mutual Savings Banks. These institutions are run solely for the benefit of the depositors. This is upon the theory that those using savings banks are the wards of the state. These Mutual Savings Banks have no capital and the trustees, or directors, serve without pay. There are today in the United States 650 of these Mutual Savings Banks, with deposits amounting to $3,608,000,000. Practically all of these Mutual Savings Banks are located in the east, there being only thirty-one west of Buffalo. These few got a start before the present conditions of banking grew up. Today it is quite impossible to start a Mutual Savings Bank anywhere, because the State Banks and Trust Companies are able to pay such high rates of interest, owing to the fact that they can conduct the Savings Bank business as a part of their regular commercial business, or as a part of their Trust Company business. That is, the Savings Bank business is incidental to their regular business, and requires no separate and special organization. If there are any extra charges they would be nominal at most. The savings business being conducted over the same counter, this particular branch of banking may be regarded as done at no cost to them. Under the circumstances it is very easy to see how the State Banks, and those banking institutions more recently organized, known as Trust Companies, have absorbed all the savings business where the Mutual Banks had not already been permanently established.

Another reason that has enabled them to do this is the fact that in most states there are no prescribed rules for the investment of savings bank deposits, and the banks are using the savings deposits for commercial purposes, and also in speculative ventures, particularly in the way of underwritings where the profits are much larger than could be realized from such funds if they were limited to investments of the highest order where, as you know, the rates of interest are comparatively much lower.

MR. MERCHANT: How many such institutions are there?

MR. BANKER: There are today thirteen thousand three hundred and eighty-one State banks, with four hundred and fifty-nine million of capital and two billion nine hundred million of deposits.

Side by side with these state banks are 1,292 State Savings Banks, with seventy-seven millions of capital and eight hundred and forty-three millions of deposits. These State Savings banks differ only in name from the regular State banks. The only point to be noted in this connection is that the local statutes, or the laws of the State where the bank is located, always determine whether the name will be a State Savings bank, or a State bank. It may be assumed that whatever the name, the business carried on is practically the same all over the United States, with here and there some slight difference, but no substantial variance.

MR. MANUFACTURER: These institutions you have named do not include the Trust Companies, do they? There seems to be a perfect craze to start Trust Companies now. Why is that?

MR. BANKER: Within the past twenty-five years there has grown up, almost as if by magic, the class of banks you have just mentioned, differing from State banks and State Savings banks only in one single respect, but that is an all-comprehending one. Enterprising men in almost every state have secured the passage of laws for what they call a Trust Company business. Generally speaking, what you cannot do under a Trust Company Charter is some kind of a business that has not yet been thought of.

There are 1,410 of such Trust Companies, so called, with capital amounting to $419,000,000 owing individual deposits amounting to $3,674,000,000 with $450,000,000 additional liabilities, or something over four billion dollars, all told.

This vast business has grown up outside of the National banking system, simply because the National bank could not, but these other institutions could develop along natural lines of business progress.

Notwithstanding these obstacles, however, there is no kind of a banking business that the National banks of the country are not doing in some way or other. Of course, they are not all of them doing all kinds of business, but they have worked out methods by which they can, if they desire to do so. Of the 7,397 National Banks, nearly half of them, 3,039, are now doing a regular savings bank business, without any express authority of law, and 2,340,226 depositors have deposited with our National banks $659,500,000.

Who is there who does not know that either downstairs in the same building, or upstairs in the same building, or around the corner in some other building, with the back ends of the two buildings adjoining, many, if not all, the National Banks have attachments, where they are carrying on the Savings bank business and the Trust Company business under state charters. National banks are under National supervision, while the State banks and Trust Companies, owned and manipulated by them, are under State supervision, or possibly under no supervision at all.

There are many National banks holding the stock of other banks, either Savings banks, State banks, or Trust Companies in their treasury, and some of them are holding the stock of two or more banks. Only recently it was discovered that a National bank had invested ten million dollars, directly or indirectly, in other banks throughout the country; possibly an examination would show that this ten million was partly the stock of other National banks, and partly the stock of state bank institutions such as Savings banks, State banks and Trust Companies.

Now, if there is one holding company more to be criticised, and more to be abjured than any other, it is a bank holding company, controlling the stock of a great many other banks, particularly so under different supervision.

When we behold the malformation of banking as now carried on in this country, due to the struggle of the various institutions to adjust themselves to these new conditions and to take advantage of all the opportunities in modern business, it reminds one of the crooked, twisted, knotted, and sadly misshapen tree-trunk that has grown up amidst and between huge rocks, that stand in the way of an upright and symmetrical development. These huge bowlders and rocks are the obsolete laws on our statute books, our ignorance, our selfishness, our prejudice, our political cowardice and our demagoguery.

Like our mutual savings banks, the original idea was that a Trust Company could only do a Trust business in the strict sense of that word. They could hold a railroad mortgage, and pay interest to the bondholders, perform similar functions for other corporations, and could act as a trustee in case of estates. Today you may assume that no kind of business will escape the scope of the charter of the so-called trust company, from the care of estates and the execution of corporate trusts to banking in all of its forms, and agencies of every conceivable kind. In other words, the all-round charter of the American Trust Company, popularly so called, permits it to do anything that the varied affairs of the American citizen may by any chance require.

Just as there are in the east mutual savings banks, which are relics of former days, so the Trust Companies, with their limited powers, are only a landmark in the evolution of American banking, and must disappear as a separate institution in time.

The growth and development in fifty years has produced in the United States a banking unit, doing in a conglomerate way what it ought to be doing as a departmental business, with four distinct functions: viz., a commercial business, the manufacturing of credit; a savings bank business, accumulating the savings of the laboring masses, which is a sacred trust fund that should be placed in high grade investments; a trust company business, executing trusts, and carrying on agencies of every kind; a note-issuing business, which is only another form of the commercial business, as the bank note is in fact only another form, as we have learned, of a deposit--a circulating credit in place of a check credit for the convenience of the people.

From Feb. 1, 1863, the birth of the National Bank Act, down to the present time there has not been one single change in the National Bank law worth mentioning. It is true we have dotted an "i" here, and crossed a "t" there; but as for a substantial change there has not been a single one made. Now, this is truly a most marvelous fact, when you consider how great have been the changes, especially since 1890, or during the past twenty-two years. Our banking resources have increased fourfold. In 1890 they were about six billion, today they are more than twenty-five billion.

MR. LAWYER: This growth in our banking power is not so strange because it only reflects the growth of our business. The clearings of the United States in 1890 were only thirty-seven billion, while the clearings this year must pass the hundred and seventy billion dollar mark. The productions of the United States in 1890 were only seventeen billion. The productions of the United States in 1912 will exceed thirty-five billion dollars. The wealth of the United States in 1890 was only sixty-five billion dollars. The wealth of the United States in 1912 is estimated at about one hundred and twenty-five billion dollars. The imports in 1890 were seven hundred and eighty-nine million; the imports the present year will be one billion eight hundred million; the exports in 1890 were eight hundred and forty-five million; this year our exports will exceed two billion three hundred million dollars.

MR. FARMER: And do you mean to say with this vast, almost incalculable increase of production and wealth and consequent increase of banking resources, there has not been a single step taken by the National Government to facilitate it?

MR. BANKER: Mr. Farmer, there has not been a single change made to facilitate the handling of this vast business. On the other hand, there seems to have been such a profound ignorance on the part of Congress, or such an abject fear, lest they might aid business, that every progressive movement of a legislative character has been left to the states, which have given us laws as varied as Jacob's coat of many colors; indeed, rivaling the fifty-seven varieties of the famous pickle man.

Not only have they left the banking business to just "grow up" like Topsy in Uncle Tom's Cabin; but the Government itself has been one of the greatest obstructionists to the national growth of our banking business in its interference with the natural movement of the money of the country which by every economic law, and business right, belongs in the channels of trade, and not in the strong boxes of the Government.

MR. MANUFACTURER: That is absolutely true. I was greatly impressed only yesterday by a statement made by the Secretary of the Treasury right on that point of Government interference with current business by withdrawing money from circulation and piling it up in the vaults of the treasury. In the light of what we have learned during our talks, it is simply appalling; indeed, it does not seem possible in a civilized country.

Secretary MacVeagh says in the outset, "No reform of your banking and currency system can be adequate which does not take the United States Treasury out of the banking business," and then adds:

"When the independent Treasury system was established the idea was that all the funds of the Government should be stored in the Treasury vaults in the form of money, just as the mediæval war lords kept their treasures in strong boxes. The independent Treasury system was established in troublesome financial days, when the State banks were not the safest places for the deposit of money. The people decided that the public funds must be kept in Government vaults for safety.

"In this country, with our rigid laws fixing the minimum reserves the banks must hold, any loss of cash by the banks means an instant contraction of their loaning power. If the banks of New York and Chicago lose $100,000,000 cash, they must at once reduce their liabilities by $400,000,000. This means that they must reduce by that amount their loans to the business community.

"With the volume of bank credit moving in the reserve cities four times as fast as the volume of cash, and throughout the country ten times as fast as the volume of cash, it is plain that the machinery of credit is extremely sensitive to variations in the amount of cash held by the banks. For this reason, an institution like the United States Treasury, alternately accumulating and disbursing many millions of cash, is likely to create widespread disturbance in the money market.

"The funds held by the great European Governments vary from $25,000,000 to $50,000,000. The coin, bullion, and paper money held as assets in the United States Treasury during the present Administration has varied from $300,000,000 to $350,000,000. In other words, nearly one-tenth of all the money in the country is held idle in the Treasury vaults. If this money were all deposited in the banks it would increase their reserves 20 per cent.

"The receipts and disbursements of the Treasury are most irregular. The Treasury receipts in 1907 exceeded the disbursements by $91,000,000. Two years later the disbursements exceeded the receipts by $118,000,000. For the past two years receipts have again exceeded disbursements. The general fund in the Treasury was $272,000,000 in 1907; three years later it had fallen to $106,000,000. Under our present system of keeping a large surplus Government fund idle in the Treasury these wide variations in the yearly balance not only seriously disturb the money market and the business of the country, but force the Secretary of the Treasury to enter actively into the money market as a paternal overseer of the machinery of credit.

"It not infrequently happens that surplus revenues accumulate in the Treasury just at a time when the banks are straining their resources to grant all the credits needed to finance a business boom. The Treasury then takes money out of the banks and hoards it just at the time when the country most needs it. If the business boom goes so far as to strain credit to the breaking point, then the Treasury must come 'to the relief of the situation,' by depositing some of its hoarded cash in the banks. In recent years the Treasury has been carrying a large surplus, and it has been in a position to relieve financial tension by depositing funds in the banks. In December, 1907, following the money panic, the special deposits in the banks by the Treasury had reached $256,000,000. Three years later they were reduced to $4,000,000. In the fiscal year 1908-1909, the Treasury withdrew $100,000,000 from the banks.

"This state of affairs places in the hands of the Secretary of the Treasury a power greater than any American should have. The power of the Secretary to influence the money market by deposits or withdrawals of public funds is always dangerous. No Government officer should have this power. It has been a great burden, I believe, on the shoulders of every recent Secretary of the Treasury Department.

"If the people realized how dangerous is the power in the hands of the Secretary of the Treasury, they would insist that the Treasury be at once taken out of the banking business. Accustomed as we are to Government interference with the money market, few of us realize how the Treasury in the past few years has exercised the central-bank function of regulating the discount rate. The Treasury, by alternate deposits and withdrawals of the public money in the banks, as well as by other devices, has attempted to regulate the discount rate.

"The Treasury Department should be divorced from the money market and from the banking business, and the way to effect the reform is plain. We should have in this country a quasi-public institution not only to hold the ultimate cash reserves of the banks and to regulate the rate of discount, but to act as the fiscal agent of the Government. Such an institution would hold the Government balances as deposits, and the Government could check against them just as any large business concern checks against its balances in bank. With the Government balances deposited in such an institution the business of the country would never be disturbed by the Treasury hoarding up cash, and the Secretary of the Treasury would no longer be forced to meddle in the money market.

"As long as we have the present banking and currency system, we shall have panics--and no longer. Does not this alone create a state of emergency? What doubt should there be of the urgency of this legislation? Why should it take another wasteful and degrading panic to impress Congress? Why cannot 1907 suffice? There are many other things of prime importance to be secured through monetary reform, but if nothing were to be secured but emancipation from panics there would be abundant imperative reasons for immediate action by Congress."

MR. MERCHANT: This statement of Secretary MacVeagh proves absolutely just what you said a moment ago, that the situation was appalling, and when you realize that this practice has been kept up ever since 1846, when the sub-treasuries were established, it is unbelievable.

The Act of Aug. 5, 1846, declared it a felony to deposit public money in banks.

The United States Government has been committing an economic felony ever since. It has been committing an economic crime against commerce and the laboring interests of the country ever since that Act was passed, and is doing it this very hour.

The Act of Feb. 25, 1863, establishing National Banks, authorized their use as depositaries of the public money except "receipts from Customs." Forty-four years later the Act of March 4, 1907, struck out the words "except receipts from customs." By the Act of March 2, 1911, bank checks were made receivable for Customs dues, but no step has been taken by the Treasury of the United States to make them so at New York, Baltimore, Boston, Chicago, Cincinnati, New Orleans, Philadelphia, St. Louis, San Francisco and Washington, where the United States Government still has its morgues for our money. Every day the checks are presented which are sent in in accordance with the law, and the actual money is withdrawn from the channels of trade; that is, the United States Government withdraws reserve money to the full extent of every dollar that is due it.