Part 30
All of you seem to have possessed that high moral courage essential to the progress of the world, ready acknowledgment of error, even though the confession bore heavily upon the stability of your opinions. You seem to have utterly forgotten, if you ever possessed it, that false sense of courage that ever impels us to deny that we are wrong, however apparent our error may be. You have pursued the only course that leads on to progress. Your inquiries have always been: What are the facts? What are the principles involved? What does experience show? What is it wise to do under the circumstances? What principles, practices and methods will give us the very best financial and banking system in the world?
MR. MERCHANT: Uncle Sam, if our work under your tutelage has inspired you with the belief that our aims and purposes have been unselfish and patriotic, as you have just intimated, the measure of our achievement will be limited only by our capacity for the great task in hand. Certainly without unselfish devotion, and a sincere desire to do patriotic service, however great our abilities, our work should, and would in the long run, be a failure; even though it might upon the surface seem to be suited to the ends sought, because ulterior motives and selfish purposes, like murder would soon out.
MR. BANKER: It's a source of satisfaction to me to have had a part in this work so far and I shall be content if the public will only accord us their confidence in our good faith, and afterwards show their interest in the public welfare by the same persistent study of this question that we have given it.
Two things are perfectly clear to my mind. First, this question will never be settled upon right principles until the public takes it up in earnest, and discusses it to a finish, as they did the gold standard in 1896. Congress will never legislate upon this question broadly as they should, until they are convinced that the people are practically agreed and are behind some well established principles and at least approve the outline of some well considered plan for a financial and banking system for this country.
MR. MANUFACTURER: I believe that is literally true, with the exception that if all of us business men and farmers sit idly down until we have another panic, then the men who have been behind Nelson W. Aldrich will take advantage of the opportunity afforded by the conflagration of credit and like the looters, human ghouls, jackals and hyenas that robbed the dead and dying, after the San Francisco fire, will rush in, and, before the public are aware of it, will put something over, probably the same old scheme, concocted in behalf of the special interests of this country, fooling the people by changing its name, and having it introduced by some innocent member of Congress from an out of the way place, and under unsuspected auspices. Such a possibility makes it our duty to present in concrete form the result of our study.
MR. BANKER: That is a true prophecy; if the people of this country remain indifferent, and allow another panic to come, without having made a study of this question, these conspirators will undoubtedly carry out their plot yet. Therefore, I agree with Mr. Manufacturer that it is our duty to start such a discussion, if possible, as will save the people from such a dire calamity.
MR. FARMER: I suppose that I shall be largely responsible for the measure of interest the farmers take in this subject. I want to tell you now that this band of political pirates, and the secret forces of the special interests, are not going to board this ship, without ample warning, so far as I am personally concerned.
MR. BANKER: Before we get down to business and actually attempt to draw a bill, I think we should review the facts and situation from beginning to end, so that we may have a sort of sky line to guide us in that work.
The banking situation before 1860, the growth of the business of the country since and the development by the slow processes of evolution of that great mass of practices without the aid of law, and to some extent in absolute defiance of law, constitute the condition to which we must apply those great fundamental principles of economic law, if we would be wise, and hope to succeed in so great an undertaking by convincing the people, not only of our sincerity, but of our wisdom as well.
It is estimated that there was in the United States in 1860 approximately $300,000,000 of gold, and that our banking resources were approximately three billion dollars ($3,000,000,000); in other words, that the gold represented about 10 per cent of our banking resources. Today we have banking resources in excess of twenty-five billion dollars ($25,000,000,000) and our gold is only one billion eight hundred and fifty million dollars ($1,850,000,000), or our gold represents only about 7 per cent of our banking resources. In other words, our gold reserves today are not as strong as they were in 1860 by at least 33 per cent.
Another matter of importance about which I am sure we all agree is this: that there were in several of the states in 1860, banking systems which were vastly superior to anything we have today. This was particularly true of the banks of Virginia, Indiana, Iowa, Ohio, Kentucky, Missouri and the Suffolk System of New England. As a proof of this contention, which no man who knows anything about the subject will attempt to controvert, I have only to state that identically the same banking principles are in operation in Canada today that were in operation in those states. Canada, you will remember, took her system from the statutes of Massachusetts. Will any man in the United States deny that Canada has a vastly superior banking system to anything we have in the United States? Will any man assert that any country in the world has a better banking system than Canada has today? If so, let him name it. All the Canadian people, and all the Canadian bankers, so far as I have been able to learn, are completely satisfied, indeed, proud of their system. Is there one single business man, or one single banker, in the United States, who would have the audacity to expose his ignorance by stating upon a public platform that we have any banking system at all in the United States? And if he did, would he not be compelled to admit that it was one of the worst in the world, and as a panic breeder that it easily stands in first place?
MR. MERCHANT: I do not see how it could be otherwise, when you recall some of the facts brought to our attention during these talks.
The National Bank Act was passed Feb. 23, 1863, just fifty years ago, and we have literally refused to pass a single paragraph that would enable the bankers of the country to adjust themselves to the vastly changed conditions. Think of it, then we had only three billion of banking resources! Today we have more than twenty-five billion. Then our savings were comparatively a mere pittance, while they are today six billion five hundred million dollars ($6,500,000,000). The trust feature of the banking business, as followed today, had not even been heard of. Then by a tax of 10 per cent, we destroyed the natural note-issuing function of the banks simply because Secretary Chase wanted money to carry on the war. There were no laws to regulate banking in this country, except in a few of the states, where they had developed banking systems as perfect as any that have ever existed anywhere. The United States Government would have been just as much within its rights and power, and just as wise, economically speaking, if it had at the same time, and for the same purposes, imposed a tax upon the deposits that were not made in the national banks. For, as we have seen, there is absolutely no difference between bank book credits and bank note credits. A bank is just as fit to issue a bank note as it is to take a deposit. If a bank is not fit to issue a note, which is nothing but a cashier's check, it is unfit to take a deposit.
Again, however important it may have been to pass suitable banking laws in the past, there has never been a time when action was so necessary as now, because of the almost incomprehensible increase in our banking resources.
The Comptroller of the Currency, you will remember, has just made a report showing that the increase in our banking resources for the four years preceding June 14, 1912, reached the surprising and startling figures of five billion four hundred and three million dollars ($5,403,000,000). The significant meaning of these figures cannot be appreciated without recalling the fact that the Comptroller's office shows that the total banking resources of the United States in 1890 were estimated at only five billion four hundred and fifty million dollars ($5,450,000,000) or only $47,000,000 more. In other words, the increase in our banking resources in four years ending with June 14, 1912, were almost equal to the entire accumulation of our banking resources from the first settlement at Jamestown in 1607, two hundred and eighty-three years ago.
Mulhall, the English statistician, stated that the banking resources of the entire world in 1890, including the United States, were a little less than seventeen billion dollars ($17,000,000,000), and estimated that our banking resources at that time were a little less than seven billion dollars ($7,000,000,000), or about two-fifths of the total banking power of the world. Today our banking power exceeds twenty-five billion dollars ($25,000,000,000), while that of the entire world is estimated at about fifty-five billion dollars ($55,000,000,000). In other words, we now have more than 45 per cent of the total banking power of the world.
Commercially speaking, the last fifty years has been the most marvelous period in the history of the human race, and the most surprising and most surpassing period of this most marvelous period are the years from 1890 to 1912.
We now have more than twenty-five million toilers. Our productions in 1912 will exceed thirty-five billion dollars ($35,000,000,000). Our foreign trade will reach four billion dollars ($4,000,000,000). Our bank clearings will probably pass the one hundred and seventy billion dollar ($170,000,000,000) mark. Our total transactions (of all kinds) will approximate five hundred billion dollars ($500,000,000,000).
Any business expressed in these stupendous figures, and involving every dollar of our capital, both the commercial and our vast investment funds, and every day's labor from ocean to ocean, and from Canada to the Gulf, ought to be commanding most serious attention on the part of every intelligent and patriotic man. This is more especially so when we look into the present situation, and discover upon what dangerous ground we stand, and how imminent a commercial explosion is, and that our very prosperity at the present time is our greatest peril. Indeed, that as our prosperity comes on apace, with equal certainty are we moving onward toward a commercial cataclysm.
Since we have just passed a more or less critical stage, it may be well to call attention to the fact that any single, untoward incident of any great importance might have produced a business tragedy, even so soon after the commercial earthquake of 1907, which hardly left a single brick undisturbed in the edifice of the most prosperous time in the history of this or any other country.
The national banks have been confined from the outset to a single kind or phase of banking, properly known as commercial banking. This was practically all there was in the way of banking in the United States in 1863, except the mutual savings banks, of which there are today six hundred and thirty in the whole country. It's a most remarkable fact that only thirty-one of these are west of Buffalo.
There are today one thousand two hundred and ninety-two stock savings banks, with $76,000,000 of capital, owing individual deposits of $842,000,000. There are thirteen thousand three hundred and eighty-one state banks, with $459,000,000 of capital, owing individual deposits of $2,912,000,000, with $250,000,000 additional liabilities. There are one thousand four hundred and ten loan and trust companies, with $419,000,000 capital, owing individual deposits of $3,674,000,000, with $450,000,000 additional liabilities.
Here are sixteen thousand eighty-three stock savings banks, state banks and trust companies, with $904,000,000 capital, owing individual deposits of $7,428,000,000. These do not include one thousand ninety-one private banks reporting to the comptroller of the currency, nor the mutual savings banks, which bring the total number up to seventeen thousand, eight hundred and four and the individual deposits up to $11,198,000,000.
The capital of the national banks is $1,033,570,000; their individual deposits are $5,825,000,000 and the amount due to banks is $2,178,000,000.
These vast banking resources are without any general organization whatever and yet consists of four distinct economic functions, and our great danger lies in the fact that there is no harmonious development and unification that we can call a system under one influence and control. This is absolutely necessary for the safety of banking and commerce at home, and the protection of our reserves, especially against adverse influences in unfavorable times from abroad.
MR. MERCHANT: To simplify the matter, so that we can follow it through to the end, I suggest that we begin with the unit of a banking system: the bank as we know it today, the individual, independent bank, and note just what changes we should make in the organization of a bank, to make it the perfect and complete machine that the people demand, that they may be served as well today as they were in certain sections of the United States before the war.
MR. BANKER: That's a good idea; indeed, the only way to be thorough, and get results. As was pointed out last Wednesday evening, banking today consists of four distinct functions.
A COMMERCIAL BUSINESS A SAVINGS BUSINESS A TRUST BUSINESS A NOTE ISSUE BUSINESS
_First_: The commercial business: The use of capital in the production and distribution of consumable commodities--food and clothing and all the incidental tools and machinery.
_Second_: The savings bank business: The accumulation of the money saved by the working people of the country. This is distinctly a trust fund, and belongs to the investment fund of the country, and should be treated or handled as such.
_Third_: The trust company business: The execution of wills, and the care of estates; the execution of mortgage trusts, such as railroads or corporations create; the representation of others in the capacity of agent or attorney in the complicated business affairs of today; all such funds are of a distinctly trust character, and the investment of the money accumulating and growing out of such transactions in many of the states are specifically provided for by statutes. Such business cannot be included in the commercial affairs of the country, economically speaking, because they are essentially trust transactions, and the funds, generally, belong to the investment class.
_Fourth_: The note issue business: The provision of all the currency of the country, except the gold coin and gold certificates, which, while they constitute all of the money of our country, are also used for currency; and except the subsidiary coin and token coins of the country.
_True bank credit currency is economically identical with checks upon deposits held by a bank. The bank note is the check of the cashier against the credit of the bank, while the deposit check is the check of the depositor against the credit of the bank. The bank note, for the convenience of the people, is always in even amounts, and passes without indorsement, while the check of the depositor is for any amount, odd or even, that may be involved in a transaction, and almost universally passes only by indorsement._
The people have just as much right to demand that the banks provide them with a true bank currency, as to meet their checks in any other way, by cash payment or by draft on some distant city.
Some people have the very erroneous idea that a bank is creating money when it issues bank notes. It is doing nothing of the kind; on the other hand, it is only doing something for the convenience and accommodation of its customers, and serving the public in the matter of protecting its reserves and so strengthening its credit by increasing its reserves against its deposits.
_A bank makes less profit in issuing bank notes than it does in taking deposits and loaning them out._ Now, follow me, gentlemen, and I will demonstrate this to you beyond a doubt. You gentlemen all know that the capital of our bank is one hundred thousand dollars; suppose that I had the right to issue an amount of credit notes equal to my capital and that I had to pay the Government a tax of 2 per cent upon the one hundred thousand dollars of notes that I issue. Now, suppose that I exchange these bank notes for the notes of the farmers and merchants, who are customers of my bank, which bear 6 per cent interest; it is clear that outside of other expenses, my profits will be 4 per cent on one hundred thousand dollars, or four thousand dollars. But, you must remember this, that I will have to pay the Government for engraving a bank note plate, $85.00, and will then have to pay the Government in addition for the transmission of the notes about twenty cents per $1,000. Now if I should receive deposits amounting to one hundred thousand dollars and should pay interest on them at the rate of 2 per cent per annum, and should loan them out at the rate of 6 per cent to some of my customers, my profits would be 4 per cent, or four thousand dollars; identically the same profit that I made upon the one hundred thousand dollars of bank notes; but I do not have the extra expense of the engraved plate and the cost of the transmission of the notes. Of course, you understand that the reserves that I carry in both cases are identically the same--15 per cent; that is, I am carrying fifteen thousand dollars ($15,000) against the deposits and also fifteen thousand dollars ($15,000) against the one hundred thousand dollars of notes. You will see, therefore, that I will make less on the one hundred thousand dollars of bank credits in the form of bank notes than upon the one hundred thousand dollars bank credits in the form of deposits.
MR. MERCHANT: Mr. Banker, I want to thank you for this very clear explanation of what a bank note really is and why a bank should have the power to issue it, and more especially for your explanation of the fact that a bank makes less upon that form of bank credits than upon a corresponding amount of deposits. _I do not believe there is one person in a million who understands this question at all. I know we've all had the insane idea that the right of note issue was some kind of a special privilege to the bank out of which it would make some enormous profit; when, as a matter of fact, it is nothing of the kind; but on the contrary, only a great convenience and accommodation to the people themselves._ Furthermore, in as much as it will enable the bank to protect its reserves, by paying out its notes, instead of paying out its reserves, it will reduce the expense of the bank to that extent and so reduce the interest rates upon its loans. It will probably at some time or other of great stress save the bank from closing its doors, because it can create or obtain cash to meet the local demand, while otherwise it would have to suspend, although the bank might be absolutely sound. You see, don't you, that the bank in issuing credit currency is doing precisely the same thing that the banks did when they issued cashiers' checks, or Clearing House certificates, in 1893 and 1907.
MR. MANUFACTURER: Mr. Banker, your explanation has certainly been an eye-opener to me, too. How simple all truth is when you get to it. It is our ignorance and prejudices that are our curse. Just think what the application of this simple principle would mean to the United States as a whole. Every community could be supplied by the local banks with the necessary currency just as well as deposit facilities and at a cost not to exceed one-fifth of what it costs today, and not to exceed one-fifth of what it would cost if the banks had to buy their currency from some central institution.
MR. BANKER: Well, gentlemen, I was just going to state, when Mr. Merchant interrupted me, and I am glad that he did, that while a true bank note and a deposit are economically identical, yet it is a distinct feature or function of banking, nevertheless, and in working out our plan should be treated as such.
MR. MERCHANT: If I have followed you, Mr. Banker, and grasped the situation at our last Wednesday night meeting, banking in the United States should be carried on in the future like any other business of four distinct departments; that is, a departmental business. The accounts should all be kept separate and apart, so that a bank statement would show the amount of deposits in the commercial department; the amount of deposits in the savings department; the amount of deposits in the trust department; and the amount of notes outstanding at any time.
MR. BANKER: That is it precisely, and the only way that this can be accomplished is by granting the specific power to the national banks of the country:
_First_: To continue to do a commercial business.
_Second_: To do a savings business.
_Third_: To do a trust company business.
_Fourth_: To do a note issue business.
This step taken, no bank in the United States, with the rarest exception, can afford to remain out of the system, and the result will be to bring the banking business of the United States into one harmonious whole. The present conglomerate condition will be wiped out. Holding companies, which are probably the most prolific source of business iniquity and a curse to the country, generally will cease to mark American banking as a game of jugglery and sharp practice wherever the managers of double-headed or triple-headed banks are inclined that way. Furthermore, unless this is done, you will in the future as in the past, know little or nothing of the true condition of the banks of this country as a whole. For what can you know about the true inwardness of a bank, which is composed of three distinct institutions: a national bank on one block, with the stock of a trust company located on another block, and the stock of a savings bank located on still another block, and the stock of the two institutions lodged in the strong box of the national bank. The managers of the national bank may be of the very highest character, and of unquestionable and absolute integrity, and they might manage their business just as well as if there were no laws at all. But laws are made for the lawless, not for men of this class. Laws are made to compel the greedy, the over ambitious, the foolish and the unscrupulous to toe the line, and maintain certain standards, which have been established by the highest class of men of the banking world.
You can readily see that a national bank, under national supervision, with two other institutions under its control, which might be under state supervision, or under no supervision at all, could engage in practices that no upright man would stand for; and practices, too, that usually result in terrific losses, and consequently breed panics.
These powers having been granted to the national banks, the law should then compel the separation and complete segregation of all these various accounts, as they are all distinct in their nature or character, economically speaking. Part of them are active capital, and belong to the commercial fund of the country, while the others are passive capital, and belong to the investment fund of the country.