Part 39

"Now, it is apparent that if this diagnosis is correct, the bankers did not cause the panic, as is so frequently charged. Indirectly, the bankers had a good deal to do with bringing it about, but not in the manner usually supposed. The way they helped it on was this:

"The great syndicates or underwriting bankers adopted the practice of simply notifying rich men and bankers all over the country that to them so much of some issue of bonds had been allotted. Those to whom they had been allotted, influenced, on the one hand by flattery and on the other by fear, lest if they refused to absorb what had been set apart for them they would be ignored in the future, took the allotment at all hazard.

"This forcing process went on until commerce broke down, because it had been robbed of its necessary capital and has not been able to replace it since, out of earnings."

MR. MERCHANT: Mr. Banker, do you believe that to be a correct statement?

MR. BANKER: Believe it! I know it. There is no doubt whatever that the banks generally are under a kind of duress. They know that if trouble comes, they must go to the powers that be. When these underwritings are put out, and we bankers are notified that we are expected to take a certain amount, we feel compelled, half compelled at least, to respond, precisely as Mr. Fowler stated, and, as a natural consequence, the commercial fund of the country is sapped and absorbed, and transferred to passive investments, which, when the break occurs, become to all intents and purposes fixed investments because you cannot dispose of them at all.

What we must do, and what I am sure we have accomplished in the bill we have prepared, is to set every individual bank free, absolutely free, from any domination or influence of any kind, direct or indirect. Take my bank as an illustration of what I mean. Today I am living in a kind of terror of the possibility of 1907 coming again, because I have no way of protecting myself, except through my correspondents, and, under present conditions, that is no guarantee, as the banks may all break down again as they did then. This, you will remember, is due to the fact that we have no real economic reserve in the United States today. All the reserves are loaned out all the time.

Let me call your attention to what my position will be, under the bill we have prepared.

_First_: I shall be able to furnish all the currency I need, by simply converting book debts or deposits into note debts or currency, up to twice the amount of my capital, if necessary. That is, I can regularly issue $100,000, the amount of my capital, and by going to my Board of Control, $100,000 additional. But, if I did this, I would not increase my liabilities a single dollar, but simply change the form of them from deposits to notes.

MR. MERCHANT: Have you any doubt about the people taking your bank notes, as you suggest?

MR. BANKER: None, whatever. You see, in the first place, they do not come to the bank because they fear the bank cannot pay them; but, because when one of these shocks to credit comes, there is a tremendous demand for cash of some kind. You will remember, that in 1893 and 1907, when currency was sold in New York, it did not make any difference what it was: gold or gold certificates, silver or silver certificates, United States notes or bank notes--anything that was cash brought the same premium. But, suppose the question should arise and a man should ask, are these notes good? He would not hesitate long after I gave him these facts:

_First_: That they were a first lien upon all my assets.

_Second_: That there was a gold guarantee fund amounting to $60,000,000 in the treasury of the American Reserve Bank, to redeem them if my bank failed.

_Third_: That the American Reserve Bank with $1,250,000,000 would redeem the notes in case my bank failed.

MR. LABORINGMAN: Well, Mr. Banker, do you know what I would do, if I had a deposit in your bank, under those circumstances, and got scared of you? I would give you a check for my deposit, take your notes, and hold them until the storm blew over. That's what I would do.

UNCLE SAM: There, can you beat that as a precaution against accidents? Mr. Laboringman never will get left, if you will give him half a chance.

MR. MANUFACTURER: Under those circumstances, of course, the question of goodness of the notes would never arise. The people would soon think only of the great central gold reserve, which would always be before their eyes.

MR. BANKER: In addition to my note issue, I would have the same recourse to my bank correspondent in New York that I have today, and he would then be in a far better position to assist me than he is now, because of his additional resources. Besides, I could fall in my required cash reserves, which would be about $100,000 down to $25,000, without any danger to my bank; because of my greatest, final, and practically inexhaustible resource, The Board of Control, which has examined my bank, knows my assets, and will give me any amount of gold to protect me in case of necessity.

MR. MERCHANT: I see, your exact condition is known to the Board of Control; and the Board of Control has access to the gold in the American Reserve Bank, and could get fifty or one hundred million dollars to protect itself, if necessary.

MR. BANKER: That is so. My last protection is the American Reserve Bank, which actually holds reserves, real reserves, not United States bonds, United States notes, silver certificates, chips, and whetstones, nor any old thing; but gold, in unlimited quantities, to all intents and purposes.

Now don't you see, gentlemen, that if you will place me in that position, I will be absolutely free and independent of any bank in the United States, and of all banking influences of whatever kind--simply because my final appeal is to a great coöperative fund, in which I have a common interest with all my fellow-bankers, and I know that my protection is absolute?

MR. MANUFACTURER: Yes, and I see another very important, all-important fact growing out of that situation; the complete liberation of every bank in that zone, as well as your bank; indeed, every bank in every zone would be absolutely liberated.

MR. MERCHANT: Yes, and I see more than the liberation of all the individual banks. I see the complete liberation of every commercial zone or section of the country from every other commercial zone or section of the country; as each zone will look for its protection to the American Reserve Bank, the holder of the great coöperative gold fund, that is more than ample for any emergency that can possibly arise.

MR. LAWYER: Mr. Banker, how would you fare under the Aldrich scheme, if you wanted $100,000 of currency to use to move the crops in the fall?

MR. BANKER: I am glad that you have asked for a comparison of our plan with the Aldrich scheme, under the same conditions.

I could not have any accommodation whatever, unless I first subscribed for an amount of stock in his scheme, equal to 20 per cent of my capital, and I had paid up 10 per cent, or one-half of it, or $10,000. Then, I must have a deposit or balance with his institution, possibly as much as $20,000, if I wanted to borrow as much as $100,000. Even then, I could not get any accommodation unless I had notes or paper that had less than twenty-eight days to run. But country bankers such as I am have no short time paper worth speaking of, and any of the paper or notes that might happen to be coming due within twenty-eight days would be the paper of people who do not want it sold and collected at some remote city. They usually want to pay a part and renew a part, so that, practically, I could not get any accommodation along that line.

Indeed, I do not believe that there is one bank in a hundred in the United States that could use the scheme at all directly. Now, if I should go into that scheme I would have to become a member of what they call a local association. If I had no twenty-eight day paper, I would then have to go to my local association with my hat in one hand, and my grip full of notes in the other, and ask them to guarantee my paper for me, by paying a commission for such guarantee. Of course, some of the officers of the local association would be from my particular neighborhood, and competing with me for business. I would not want to confess to my local fellow-bankers by asking their help in ordinary times, and I would not want to put into their hands the paper of my customers, and so expose their business to their neighbors. The result would probably be that I would resort to my correspondent banker, just as I am doing today. Of course, the large banks might have plenty of twenty-eight day paper, and could turn it over to the branch of Aldrich's Central Bank, and get some of the notes about which we have already heard something and supply me.

Now, let me suppose that I could use an average of $100,000 of currency throughout the year, and that I keep that amount of paper up all the time, for the purpose of supplying myself with currency of the Aldrich make; you can see that it would cost me 6 per cent upon $100,000, or $6,000 per annum.

Mark this, put it in your pipes and smoke it, that under our plan, allowing for the cost of my reserve of 15 per cent on $100,000 of notes, or 6 per cent on $15,000, or $900, and allowing my tax of 2 per cent on $100,000 of notes, or $2,000, it would make a total cost of only $2,900. My bank would, as you can see, be the loser of $3,100 by using the Aldrich scheme as against our plan. Do not fail to remember that the largest part of the 2 per cent tax on the notes under our plan will go to pay off the greenbacks.

Again, I want you to keep in mind the expense and trouble of shipping out the commercial paper, and looking after it throughout the year, and the interminable nuisance of buying just the right amount of currency every day, as compared with issuing your own notes, precisely as your customers want currency. You see, I will be getting back some of my notes every day through the Clearing House, as they will then be sent to the Clearing House with the checks and drafts, just as they are in Canada.

MR. MERCHANT: Of course, if you can save $3,100 on your currency every year, and a large amount of additional expense, as well as an endless amount of trouble, you can afford to share your gain with us fellows.

MR. BANKER: Most certainly, and you may depend upon it, that all the extra expense that we incur will come out of our borrowers.

MR. MANUFACTURER: As you say, there cannot be one bank in a hundred that would ever have what you call twenty-eight day paper. I know I would not want you, and I am sure that Mr. Merchant there would not want you, to take our paper to some local association and ask to have it guaranteed unless there was a panic and everybody was in the same boat. The whole scheme looks absurd and impractical.

MR. BANKER: Your opinion is confirmed by one of our most prominent country bankers, who said, "This proposition is impractical, unparalleled, and useless."

MR. MERCHANT: Mr. Banker, if you should ask your city banker correspondent from whom you purchased the Central Bank notes, upon what he relied, when he gave you the notes, what would he say?

MR. BANKER: He would undoubtedly say that he relied upon the credit of my bank, and upon the paper I turned over to him in exchange for the Central Bank notes.

MR. MERCHANT: Well, if your credit and the paper with your endorsement are good enough for that banker, why are they not good enough security for your own bank notes?

MR. BANKER: They certainly would be; especially since I would be under the supervision of the Board of Control, and my notes would be secured by being a first lien upon my whole assets; by a guarantee fund, and by the total amount of gold held by the American Reserve Bank.

MR. MERCHANT: Mr. Banker, you spoke of belonging to a local association if you should go into the Aldrich scheme. How many of those associations would there be in the United States?

MR. BANKER: No one could tell until they got through organizing them. The banks now have about two billion dollars of capital, and two billion dollars of surplus, or a total of four billion dollars. The scheme provides that any number of banks representing $5,000,000 of capital and surplus could form an association. If they succeeded in driving all the banks of the country into it, as was evidently their intention, you see there could be about 800 of these local associations engaged in guaranteeing their associates, if they wanted to, after prying into their private business.

MR. MERCHANT: That is the worst feature I have heard yet, because it would let all the cliques and cabals get together and run things by manipulation. Don't you think so?

MR. BANKER: I certainly do think so. Bankers above all things do not want to expose their business to their immediate neighbors in the banking business.

You will remember that in the plan that we have just submitted, we confined all knowledge to the boards of control, of which there is to be no more than forty-two, possibly only twenty-eight, and that we required all members of the Board of Control to disassociate themselves from all banking connections in their respective zones.

MR. LABORINGMAN: Yes, but you have seven districts in every one of your zones, don't you? That would make two hundred and ninety-four districts, if you should have as many as forty-two zones, would it not? Or one hundred and ninety-six if you have only twenty-eight zones. I am sure my arithmetic is right, for I am fairly good at figures.

MR. BANKER: Yes, your figures are right, but you must remember this--that the only purpose for the creation of the districts in our plan, as we have constituted them, is to prevent combinations and cabals, and guarantee a fair and evenly distributed representation of all parts of every zone.

These districts exist only for the single purpose of the organization of the commercial zones--the election of members to the Board of the Bankers' Council and to the Board of Control. When this is accomplished, their work is done.

MR. LABORINGMAN: Oh, I see, you would only have at most forty-two organizations in the United States that would have any actual business to do.

MR. BANKER: That is correct. Every zone would be so organized as to absolutely protect the confidences of the business world and the banking fraternity.

I think in the organization of the commercial zone, that we have taken such steps to emphasize and secure publicity of action, and so much pains to guarantee representation from every section of every zone, that the people as well as the bankers will be kept advised all the while of all that is being done. I think that the matter of the subsequent selection of members, both to the Board of Control and to the Board of the Bankers' Council, will always be a subject of general discussion and newspaper comment. This is true more particularly, because every bank has one vote, and because only one member will be elected to the Board of Control each year, and only two members will be elected to the Board of the Bankers' Council each year.

Publicity and direct representation are the two distinct ends sought, as we believe that in this way alone can a true and proper sense of responsibility be imposed upon the members of the two boards.

MR. MERCHANT: I agree with you absolutely. It is precisely as President-elect Wilson said: "Publicity, pitiless publicity, is the only sure protection to the people."

MR. MANUFACTURER: Just another word upon that point. Samuel J. Tilden I think it was who said: "Publicity is the only safeguard of republican institutions." How well we have guaranteed publicity in the organization of our commercial zone the public will have to judge. However, if our method for securing publicity can be improved upon, we will all welcome it.

MR. FARMER: Since we have been discussing this feature of publicity and independence, I have become so deeply impressed with the fact that every bank will be set free, will be able to act so independently, and that every commercial zone will be such a complete, such a perfect democratic republic in itself, that I have been wondering whether each zone could not create and carry its own reserve.

Listen! This is my idea. Some one has mentioned St. Louis as a financial centre. Now, why could not St. Louis carry the central reserve for that commercial zone, and so each of the forty-two financial centers of the zones carry their own central reserves, precisely as we have learned the Clearing Houses are carrying the reserves of their banks today. You have extended the approved Clearing House practices to the entire zone--you have complete, absolute, local self-government; you have your supervision and control of all the banks in the zone; you have your Central Reserve--you have a free check zone. Now, what more do you want? Why should not every zone stand upon its own bottom, just as the banks of Virginia, Louisiana, Kentucky, Missouri, and Ohio did; and as the Bank of the State of Indiana and the State Bank of Iowa did? That's what I want to know.

MR. BANKER: I must say that is a very pertinent, a very interesting, and very important question. There is one point upon which everybody now agrees, however much they may differ upon other points. That one point of common agreement is this--that the real source of weakness, from the standpoint of organization today, is the fact that whenever there is fear or apprehension in the country, every bank begins to fight for reserves, fight for some kind of cash; because there is no actual or real protection as matters now stand, unless a bank has practically as much cash as its deposits amount to. In other words, it is really a run of the banks upon the banks. It is "Everyone for himself, and the devil take the hind-most."

Now, it must be apparent to you that each of your forty-two zones would be fighting each other for reserves, just as all the individual banks fight each other today when the danger comes, and the whole situation proves no stronger than the weakest link; hence, our exchanges break down.

St. Louis, for instance, might have a Central Reserve of $50,000,000; but would St. Louis be satisfied that that was enough to protect her against any accident? She is confident that she has some strength, but is not sure of unlimited strength and absolute protection. Therefore, the struggle for reserves would begin between the zones, with the first appearance of danger, just as it does today between the banks.

On the other hand, if the banks in the St. Louis zone should send their $50,000,000 to Washington, and send along with it their representative of that zone, and in like manner every zone should send its Central Reserve and representative to Washington, it would make a total reserve of $1,250,000,000 of gold in one mass, and a board of forty-two members to manage it. The result would be precisely the same as that now attained by having a Federal army, a Federal navy, a National Government, for a "Common Defense." If each zone should be left to stand upon its own bottom, as you say, we would be repeating, economically, identically the same mistake that we made politically when we formed the Confederation of States in 1781. The confederation was too weak to be an efficient government, and so we formed a "Stronger Union," the present Federal Government in 1789.

It is no more important that the banks in a Clearing House should get together than that all the banks in any given commercial zone should get together; and it is no more important that the banks in any given commercial zone should get together, than that all the zones should get together for a _common defense_ of all the business interests of the country, and for the common defense of all the reserves of the country against all the demands of the rest of the commercial world. Unless this final union of reserves is made, no discount rate for gold can be fixed and enforced, and we would find ourselves in the same helpless, hopeless situation or position that we are in today. But if all the central reserves of all the zones are united in The American Reserve Bank, and every commercial zone has its representative upon the board of directors, you will have in the banking world of the United States identically the same form of Government we now have in our National Government. Then when we have converted our United States notes into gold certificates, and when all our silver certificates have been reduced to the form of token money, by cutting them up into pieces of two dollars and less, The American Reserve Bank will be in identically the same position that the Bank of England is in today, the most positive and powerful force in the world in controlling and directing the movement of gold. And yet, like the Bank of England, The American Reserve Bank would not be a bank of issue. It is not a question of note issue at all; but it is a question of centralizing our gold reserves to meet any emergency in the business world, coupled with the power of fixing and enforcing a price for the use of gold, a discount rate for gold throughout the United States.

The Financial and Banking system that we have proposed combines the Bank of England and the Canadian Bank note system--the two highest and best exemplifications of a central gold reserve and bank credit currency.

MR. FARMER: Well, Mr. Banker, you are undoubtedly right. I see now that we would be very little, if any, better off with the individual zone system than we are today, when you recall the fact that the whole world now uses one common reserve, gold, and have ways of obtaining it. I think your argument illustrated by the Army and Navy and the National Government is absolutely unanswerable. What do you think, Mr. Merchant?

MR. MERCHANT: I have never had any doubt about that question at all.

MR. LABORINGMAN: Abe Lincoln said, you know, "A house divided against itself cannot stand." I think this thing is just as plain as the nose on your face. It is Uncle Sam against the world just as much in banking as in anything else; and a good deal more so in these days of lightning intelligence and cheap transportation.

With a representative of every commercial zone, say forty-two in all, sitting at Washington and holding in trust for the protection of all the people of the United States such a Central Gold Reserve as you propose to make the banks create, you have a perfect duplicate of our present National Government, in political matters. These representatives of the zones are the servants of the zones, just as the senators are the servants of the states. Another thing, twenty-one of them will be business men, and twenty-one will be bankers; both sides of the bank counter, the inside and the outside, will be represented; and, since you have arranged to have one-seventh of them, or three business men and three bankers go out every year, your board of forty-two will always be old, and yet always will be becoming new. The more I think of it, the more I am for it, because I am for Uncle Sam against the world.

UNCLE SAM: If you ever want a "B" line on anything, go to Mr. Laboringman every time.

MR. BANKER: Well, we have considered the economic side of the Aldrich scheme pretty thoroughly. I think it is about time that we heard something from Mr. Lawyer about the administrative features of the scheme.

MR. LAWYER: From a professional point of view, I have been a student of motives all my life, and as you know, I have been a part of a powerful, political machine in this state for more than twenty years. The Aldrich scheme furnished me a rich mine of motives, and a detail of organization that staggered even an old political stager as I am.