Part 32
Gentlemen, I have been a banker, as you know, for about forty years. I have never been favorably impressed with any of the methods yet proposed for the guarantee of bank deposits, however desirable the end sought is, because they have none of them involved the matter of such supervision as would insure sound banking, and compel every bank to carry its part of the commercial burden in the way of equal and adequate reserves. But I am absolutely convinced that there never need be a bank failure again in this country, if we will only organize ourselves throughout the length and breadth of the land, precisely as the Clearing Houses have to protect themselves against the unsound practices that are always creeping into the banking business particularly.
MR. LABORINGMAN: Well, Mr. Banker, if that is true, if a bank cannot fail under the supervision of your proposed organization it will not cost anything to insure your depositors. Why not relieve the millions of depositors from the anxiety they always feel about their money in the banks? For my part, I cannot see the slightest difference between a workman's compensation act, an employer's liability act and a bank insurance act. To me they are on all fours with each other. The business in each case should bear the burden. This is the settled social policy of the country, and is in perfect harmony with that social and economic philosophy that has been gaining ground so rapidly throughout the world in recent years. I cannot see how you can escape it. I appeal to you men; am I not right about this matter?
MR. MANUFACTURER: That point has never occurred to me in this connection, but I must say I cannot see any difference whatever between my carrying an insurance policy to protect my workmen and Mr. Banker carrying insurance to protect his depositors. Can you, Mr. Banker? Before you answer me, I want you to do two things: I want you to forget for the moment that you are a banker and I want you to think twice before you speak.
I have been so deeply impressed with the points that Mr. Laboringman has just made, that to me his arguments are unanswerable.
MR. BANKER: I am ready to answer right now and ready to admit that his arguments are unanswerable.
MR. FARMER: I am glad that you all practically agree upon this very important, all important, point. I want to tell you something that happened during the past week. I tackled Mr. Lawyer about a week ago upon this point and he declared that the guarantee of bank deposits was an absurdity and unthinkable because it would cost too much.
I went home and wrote to the Treasury department to give me the average annual deposits in the National banks since 1863 down to date and also the average annual loss due to bank failures. I have a letter from the Comptroller of the Currency, gentlemen, which shows this astounding fact, that an annual tax of 35/1000 of one per cent upon the average deposits would have paid all the losses due to the failure of National banks. Think of it! Only a little over 3/100 of one per cent.
MR. LABORINGMAN: 3/100 of one per cent. Jehoshophat! Think of the misfortune and suffering that might have been saved by the payment of that mere pittance. _It is an infinitesimal nothing. Think of it: It is only 3-1/2 cents on every $100; only one-third of one cent on $10, and one-third of one mill on $1. You would not believe it. But, as I told you, I am good at figures and you can bet your life that I am right._
MR. FARMER: I want to read the letter of the Comptroller to you men.
TREASURY DEPARTMENT, WASHINGTON, January 25, 1913.
Mr. Joshua Farmer,
Loraine, New York.
DEAR SIR: Your letter of January 22d is received and in compliance with your request I take pleasure in furnishing you the following information with respect to aggregate deposits of active National banks and the liability of insolvent National banks:
The annual deposits for forty-nine years in active National banks average $2,555,700,000. The losses sustained by creditors of failed National banks (actual for closed receivership and estimated for those not closed) will approximate $44,100,000, or an annual average loss of $900,000. The average annual loss is, therefore, 0.0352 per cent of the annual average deposits in active banks.
Of the 525 National banks placed in the charge of receivers, the affairs of 478 have been finally closed and the losses to creditors definitely determined.
The liabilities of 478 insolvent National banks the affairs of which have been finally closed amounted to $219,357,100 Creditors received in dividends, offsets, etc. 181,215,826 ------------ Loss to creditors $38,141,274
Creditors, therefore, received an average of 82.50 per cent, the loss averaging 17.41 per cent.
There are now (September 30, 1912) 47 insolvent banks in process of liquidation by receivers, with liabilities of $34,314,633 Creditors have received (September 30, 1912) 26,750,925 ----------- Balance due creditors $7,563,708
Creditors of these 47 insolvent banks have, therefore, received an average of 77.9 per cent. For these receiverships it can safely be estimated that the loss to creditors will be no greater than in those banks already closed, namely, 17.4 per cent.
During the past ten years 119 National banks have been placed in the charge of receivers. The affairs of 78 of these banks have been finally closed and 41 are yet in the charge of receivers. The liabilities of these 119 banks, as shown by the enclosed statement, aggregate $66,804,214. Creditors have received $56,252,544, or 84.20 per cent. If creditors were, therefore, paid no further dividends, the loss during the ten years mentioned would average only about 15.80 per cent. It cannot at this time be determined what the ultimate loss will be to creditors of the 41 insolvent banks which failed since 1902.
Yours very truly, W.J. Fowler, _Deputy Comptroller_.
MR. LAWYER: Well, here goes another complete knock-out for me, I am plumb out, over the ropes this time. I don't know that I can ever recover from that blow.
MR. BANKER: Just a moment, gentlemen, while I admit that you have won your fight for the depositors, you must remember that although you have an insurance that will cover net losses after you have cleaned up the failures and closed out the assets, you will still have quite a problem to solve to meet the demands of the depositors when the failure takes place.
MR. LABORINGMAN: If the depositors in the National banks had been insured in some way during the past forty-nine years, I do not believe that we would have had one failure in ten that we have had, and if you will now protect the banks, as Mr. Banker proposes, through his supervision by a board of control, I do not believe that we will ever have another; then why not give our 20,000,000 depositors the benefit of it, as it will cost nothing and will absolutely prevent runs on your banks.
MR. MERCHANT: Yes, and also stop the hoarding of money, which is a curse to any country where it takes place. I am not sure, gentlemen, but what the adoption of this principle of deposit insurance will do more to guarantee steady conditions than any other one thing.
MR. BANKER: Well, while the problem has its difficulties, I really think it is up to us to work it out in some way.
The folly, greedy purpose and unscrupulous methods of some of our fraternity have not only brought misfortune and overwhelming distress to their particular neighborhoods but a cataclysm to the whole commercial world because of the shock to banking credit generally.
MR. MERCHANT: Well, Mr. Banker, how are you going to protect yourself against those bankers who think that they can do better by remaining outside of the National Banking System, because they can do a scalping and scavenger business if left free. Of course, it will be advantageous for the upright banker to come into the National System.
MR. BANKER: You will remember that in 1865 Congress passed a law imposing a tax of 10 per cent upon all bank notes, except those based upon Government bonds. You also know from what has been said that the notes of all other banks immediately disappeared from circulation.
Congress has ample power, as was pointed out fully the other night, and should put a tax of 10 per cent, or even 20 per cent if necessary, upon all deposits a bank may have against which it does not hold the reserves prescribed by the National laws.
Congress has other methods it can adopt growing out of its constitutional powers by which every institution in the United States doing a banking business may be compelled to conduct its affairs upon sound principles.
MR. MERCHANT: From some statement we were looking at the other night we learned that the banks of the country were now carrying as a part of their reserves something more than $100,000,000 of National bank notes. The fact is that the amount is probably twice that, as the banks of the country, outside of the National banks, make no distinction in what they hold as reserves, between gold certificates, silver certificates, United States Notes and National bank notes. Of course this is nothing but a scheme of inflation, for there may be other credits based upon these bank notes which are themselves nothing but debts, aggregating all the way from $500,000,000 to $1,000,000,000, or more, according to the percentage of reserves the banks holding them may be carrying.
MR. BANKER: I would impose a tax of 10 per cent per day on every bank note that any bank in the United States holds as a part of its required reserves. It would not take long to force the substitution of gold coin, gold certificates, or other lawful reserves in place of these I.O. U.'s of the National banks.
MR. MANUFACTURER: During our discussions it has been demonstrated to me, at least, and I am sure to all, that there is in fact no more justification, economically speaking, for holding United States notes, or greenbacks, as a part of the reserve of a bank than National bank notes. Do you think it is wise to continue these United States notes indefinitely, as a part of our bank reserves?
MR. BANKER: I certainly do not. They are not only unfit for bank reserves, but are teaching economic lies every day that they remain out.
You are aware, I have no doubt, that the banks of this country, generally, are paying interest upon their deposits; probably as much as 2 per cent upon the average. I would impose a tax of 2 per cent upon our bank note issues, because banking is carried on upon about that basis. If a bank pays 2 per cent upon deposits, and 2 per cent upon its notes outstanding, the burden is precisely the same upon both forms of bank credits.
I would use a part of this 2 per cent tax upon the bank notes, which would amount to approximately $25,000,000, for these purposes:
_First_: To pay the expenses of the several commercial zones and the American Reserve Bank.
_Second: I would pay into the interest department of the United States Treasury an amount equal to 1 per cent per annum upon the $730,000,000 2 per cent United States bonds; so that the Government could convert these 2 per cent bonds into 3 per cent bonds, and return them to the banks to whom they belong._
_Third_: Whatever cash I had left I would use to convert the United States notes into gold certificates.
In the course of fifteen, at the outside twenty years, I figure, we would be able to convert all of the United States notes into gold certificates, and leave our banks with reserves of gold alone, with the exception of the subsidiary coin, which would, of course, be only nominal in amount.
No one will deny that this would be a most desirable thing to accomplish.
MR. FARMER: No, I don't think that anyone would make such a fool of himself as to argue or contend that that would be a bad thing any way, and you seem to have a very simple method of bringing it about.
MR. LAWYER: I noticed that you said that the tax of 2 per cent upon the bank notes would produce about $25,000,000 a year. How do you make that out, when we have only $750,000,000 of bank notes out? That would give us only $15,000,000.
MR. BANKER: I am glad you asked that question. You see that if the banks now outside the National system came into it as they certainly would, because of the very great advantages it would give them, they would have to increase their reserves at least 10 per cent upon their individual or commercial accounts, and 5 per cent upon their savings accounts. This they would do by simply exchanging their bank notes for gold coin and gold certificates, as they came in over the bank counter. The result would be an increase of our bank reserves to about $500,000,000, and of course a corresponding increase of our bank liabilities. No one would deny that this would be a sound banking proposition. For, our individual deposit liabilities, which are now $17,000,000,000, would be increased to only seventeen billion five hundred million dollars ($17,500,000,000), an increase of only 3 per cent, while our reserves, which now amount to about $1,600,000,000, would be increased by $500,000,000, or nearly 33 per cent.
MR. LAWYER: I see, then, that you propose to increase the note issue about $500,000,000. This would give us a note issue of $1,250,000,000, and 2 per cent of this would be $25,000,000.
We had a chart here the other night and some figures, which showed that the increase and decrease of the bank note currency in Canada amounted to $3.80/100 per capita every fall, and that every year, for a number of years, so far as we have the record at least, exactly on the 15th day of October, it was always at its maximum. Since we are now taking back from Canada what Canada originally took from Massachusetts, the principle of a true bank credit currency, we might expect just what they had in New England, before the war, and what Canada now has every year, and every month of the year, and every day of the month. That is, we would have an amount of bank note currency just equal to the demands of trade; no more, no less, but always just what the business of the country requires, dollar for dollar, day in and day out. Am I correct?
MR. BANKER: You are absolutely correct. Our variation in the demands of currency would not differ very much from that of Canada. We might expect a difference between the maximum and minimum issue of about $350,000,000 a year, that is, it ought to range from about one billion dollars to about one billion three hundred and fifty million dollars during each year, as matters now stand.
MR. LAWYER: Well, if that is true, we should never know one season of the year from another, so far as the demands of currency are concerned.
MR. BANKER: No, you never would; and the facilities gained by the banks for adjusting themselves to the changing conditions would enable them to be far more helpful to their customers than they now are, and yet be absolutely safe in doing so. You see, I would not limit a bank to an amount of currency equal to its capital; but subject to the approval of the Board of Control, where the bank was located, it could issue as much more, or a total of 200 per cent of its capital. That is twice as much as its capital; for, there are banks today situated a good deal as the New England banks were before the war, where the people would use more bank notes than deposits, if they were permitted to study their own convenience. This we would find to be true in the newer parts of the cotton growing country in cotton picking times. Can anyone tell why a bank, under such circumstances, should not meet the peculiar demands of its customers, and furnish bank notes at a cost of one-sixth of what it must be, if the bank is compelled, as it is today, to rediscount its promissory notes, and buy gold certificates or United States notes to be used as currency, when its own bank notes would answer every purpose of currency just as well?
MR. LAWYER: Then I understand also from what you said upon another occasion that you would allow a bank to use a part of its reserves during those seasons of the year when the demand for money was particularly strong, and make up its average reserves when the demand was slight.
MR. BANKER: Precisely so. Why should not a bank act just like any other merchant or trader, and adjust its stock of goods to the ever-changing conditions of its business? Of course I am fully aware that there is one element entering into a bank's business that is not common to other mercantile houses, and that is the question of its credit. It must keep itself in such a position at all times as to preclude the chance of suspicion arising about its ability to meet its demand obligations. This point brings me squarely up to the matter of a central reserve.
A bank that is known to be under the supervision of a Board of Control, which can and ought to know its actual condition, and which has the power to compel it to so conduct its business, as to be entitled to consideration and accommodation, whenever it asks for it, and actually needs it, will certainly have the confidence of the public to an unbounded degree. Of course, I am assuming that the public are aware of the fact that the Board of Control in turn has access to the great central reserve of one billion two hundred and fifty million dollars ($1,250,000,000).
You can imagine that the public under such circumstances would have absolute confidence in a bank. Indeed, I am of the opinion that as soon as this organization is effected, bank failures would be a thing of the past, because the public would soon come to appreciate this, and look upon every bank in the system as safe beyond the peradventure of a doubt.
MR. FARMER: There would be every reason for confidence in such an institution because of its great strength; and yet, if I understand your plan, as outlined, every one of these individual zones would be as independent of every other zone as if it were a foreign country. It would be like a great bank standing alone, of which every bank within the zone was an integral part, for the purpose of the defense of the credit of each. Then again, every individual bank would remain just as independent as it is today, while at the same time it enjoyed the full confidence which the larger institution would be naturally entitled to.
MR. BANKER: That is precisely the result this coöperative reserve fund of one billion two hundred and fifty million dollars ($1,250,000,000) would produce.
MR. LAWYER: _Then, as I understand it, beyond the individual independent bank, and beyond and behind the individual independent zone, would be "The American Reserve Bank," standing guard over the commercial interests of the whole United States, ready at any time to meet any possible contingency that might arise in any section of the country, with practically unlimited power to release, hold, or recall gold from the four quarters of the globe, because it can place a price upon the use of gold in the form of interest, and so conserve the general welfare of American commerce and American labor._
MR. BANKER: Now, gentlemen, let me call your attention to five important results we have achieved in the development of this outline of our proposed structure.
_First_: You will observe that every bank in the United States will be completely freed from every dominating influence, because in the last analysis it will have access to a practically inexhaustible hoard or reserve of gold, which belongs to itself as much as to any other bank.
_Second_: You will note that every commercial zone is a perfect and complete self-governing body. Not a single outside person has anything whatever to do with its affairs. Every person who is in any way connected with it, is selected by its members, even including the Deputy United States Comptroller, who will be, as you remember, the Chairman of the Board of Control, and President of the Bankers' Council. In principle and in function this organization is identical with that of the Bank of the State of Indiana, and of the State Bank of Iowa, in which you will remember the parent, or home institution, did no business whatever, except for the branches, which it examined and supervised.
_Third_: You will note that in the matter of issuing currency, it follows the principle of bank credit currency in operation today in Canada, with the added power, subject to the approval of the Board of Control, of doubling the issue to meet unusual demands of trade or in case of an emergency.
_Fourth_: You will observe that we have planned to reach ultimately a system of reserves consisting of gold, exclusively, and also to keep all bank credits, both deposits and note issues, in constant touch with gold by paying gold whenever called for.
_Fifth_: That in the matter of a strong central gold reserve, you will observe that the plan follows the principle in force at the Bank of England where all transactions are in gold, making England the only truly free market for gold in the world.
Gentlemen, I am convinced that it is the natural right and present opportunity of the United States to become the financial centre of the world; but no country can ever become the financial centre of the world, unless it is a free market for gold. No country can be a free market for gold, unless its entire credit system is based upon gold, and gold alone, thereby guaranteeing unquestioned bills of exchange. Such bills would draw a rate as low as the lowest because protected by a gold fund of such magnitude, when considered from the standpoint of its obligations to the commerce of the country, where held, all conditions being considered, as to insure beyond question its ability to take and give gold, as necessity requires in international trade, without endangering its stability, or affecting its credit.
This result can only be achieved by enforcing the discount rate throughout the country involved; and the discount rate can only be enforced throughout the country involved by buying and selling bills of exchange in straight gold transactions. We should not trade one bank credit for another bank credit, and put this bank credit into our bank reserves, as the Aldrich scheme proposed, thereby driving gold out of the banks, and out of the country, and also utterly destroying our power to control and protect the cash gold reserves of our banks, which outside of what may be called subsidiary money (from $2 pieces down), should ultimately and always be _gold and gold alone_.
In conclusion, I submit that the whole plan as we've worked it out does not introduce a single foreign element but creates out of our own practices, which have developed out of our own peculiar conditions, a financial and banking system, founded upon sound economic principles. It gradually eliminates those errors that have crept into our financial and banking practices, possibly through supposed necessity, but certainly through ignorance; and yet, the present incoherent conglomerate condition is brought to a simplicity and strength that may safely challenge any country in the world to institute a comparison for economy, efficiency, strength and safety.
MR. MERCHANT: Gentlemen, if you will achieve the results that you have outlined in the course of this evening's talk, you will accomplish all and precisely what Mr. MacVeagh, Secretary of the Treasury, recently described as the ends that must be attained if we are to bring about a complete financial and banking reform. These are his words: