Part 41

_Fourteenth: Each Board of Control should have access to this central gold reserve, and should have power to sell gold to any bank within its zone and under its supervision, in case it desired it for the purpose of moving crops or for any other legitimate reason. The practical result would be, that the gold would be held, to a large extent, at the financial centres, and under the command of the Board of Control, precisely as the Clearing House committees today hold the reserves of the banks constituting their respective Clearing Houses._

_Fifteenth: The use, distribution and control of the central gold reserve should be under the management of the representatives of all the commercial zones, who should be composed equally of business men and bankers._

_Sixteenth: For the purpose of establishing responsibility and securing efficiency, the representatives of the zones should act through corporate powers granted by the National Government._

_Seventeenth: The purpose of a national centralization of gold to so large an extent is two-fold:_

_(1) It brings all the banking power of the United States to the defense of the commercial interests in every part of the United States instantaneously._

_(2) It will give to the representatives of the zones the power to control and direct the movement of gold to and from the United States, by fixing and enforcing a price for the use of gold, or a discount rate for gold transactions throughout the United States._

_These reforms are based upon three distinct propositions:_

_First: They incorporate the principles of a central gold reserve, as illustrated by the Bank of England, where all the transactions are in gold, and gold alone, without the use or intervention of bank credit in the form of bank credit notes, which could be used for reserves by the banks throughout Great Britain._

_Second: They incorporate the principle of bank credit currency, as illustrated by the bank note system of Canada, which involves daily redemption in gold coin through the clearing houses._

_Third: They extend to every economic or natural commercial zone the established and approved practices of the American Clearing Houses, that is:_

_(1) Bank supervision and control over all members._

_(2) A reserve created by all the members of the Clearing House and held by the Clearing House Committee for the benefit of all the members._

_(3) Such a free check system over every commercial zone, precisely as New England has had since 1899, and as has just been established over a large territory around New York by the New York Clearing House._

_The result of these reforms would be:_

_(1) To make each individual bank absolutely independent, because it has an unlimited resource in the coöperative gold reserve._

_(2) To make every commercial zone as free and independent of every other commercial zone, as England is of France, or France is of Germany._

_(3) To completely decentralize all bank credit in the United States, while it centralizes the gold to a degree that would enable us by raising the discount rate to close the door of our markets against the demands for gold from abroad._

_(4) To insure all depositors in National banks against loss._

_(5) To liquefy and therefore develop a general market for commercial paper._

_(6) To save the business interests of this country more than $200,000,000 every year, to say nothing of the incalculable losses growing out of our ever-recurring panics._ #/

MR. LAWYER: Mr. Banker, you have stated with great clearness and precision just what our investigation has demonstrated should be done to give us a sound and economical financial and banking system.

After a careful consideration of the question, I am prepared to say that the Aldrich scheme would not accomplish or effect a single one of these reforms.

On the other hand, I am convinced that, while it would give us temporary relief, immediately there would follow undue expansion. In quick succession there would come wild inflation, a vast amount of gold would be expelled from the country and we would find ourselves in the end in far greater and more serious difficulties than those from which we are now suffering.

MR. BANKER: Your conclusion is in perfect keeping with my own. It seems to me very remarkable how many people were temporarily misled by its claims, but have since turned from it and are now opposed to it.

MR. LAWYER: I do not think that is either remarkable or strange, when you recall the mental condition of the whole country, due to the panic; the vast amount of money poured into its propaganda; the claims made for it and the fact that it incorporated some things that the public realized ought to be done.

For example, it proposed to divide the country into districts, an idea that Congressman Fowler had advocated ever since 1897 or for more than fifteen years, and had incorporated in his bill of 1908.

The Aldrich scheme provided for a Central Reserve, but composed almost entirely of United States bonds, United States notes and silver in some form, a fact that did not attract the attention of the public at the outset.

It proposed to make an unlimited market for the rediscount of paper, a most pleasing thought to contemplate until it was discovered that this was to be done by "replenishing" the reserves of our 25,000 banks "indefinitely," as Aldrich said, with bank debts in the form of bank notes issued by the so-called "Reserve Association." It incorporated the plan proposed by Congressman Fowler in his bill of 1908 for converting the "_Two per cent United States bonds_" into "_Three per cent United States bonds_," a fact that impressed the National banks favorably.

The so-called Association was given an attractive name--"National Reserve Association," also borrowed from the first draft of Congressman Fowler's Bill of 1908, with only a slight change. He called his central reserve, "United States Reserve Association." Finally, owing to the clever presentation of the scheme, the country took to it at the start, because they wanted something done and they hoped that the scheme was what Mr. Aldrich declared it to be, when he said, "The plan we propose is, essentially, an American system, scientific in its methods and democratic in its control."

Every intelligent man now knows that the system he proposed was the German system from top to bottom, which broke down completely under the first real test, which came in 1911.

Every man who calls himself an economist must admit, instead of its being scientific in character, it was constructed in absolute defiance of all economic law, and now the public is convinced that instead of being democratic in control, it was intended to be a gigantic "_Central Bank_" with fifteen branches over which a "_Governor_," a name wholly foreign to American banking institutions, and his seven associates were to rule, the "_Governor_" appointing his assistant managers over the fifteen branches as if it were a Manchu dynasty and not a democracy at all.

Thus one by one the economic blunders have been pointed out; one by one the sinister motives have been exposed; one by one the false pretenses have been unmasked, until there is left only a recollection of the impression made by the expenditure of hundreds of thousands of dollars in this futile attempt to enslave all American bank credit and the lesson of extreme caution and a most urgent need on the part of every citizen in every walk of life, of study, diligent study, if he desires to perform a truly patriotic duty and be of some real service to his country in this hour of peril, inspired only by unselfish motives and a sincere devotion to the welfare of the whole people.

MR. MERCHANT: Mr. Lawyer has certainly succeeded in pointing out very clearly the things that _must be excluded_ from our bill.

MR. MANUFACTURER: And Mr. Banker has certainly succeeded in pointing out very clearly the things that _must be included_ in our bill.

MR. LABORINGMAN: Well, then, if we are all sure that we are right, let us go ahead.

MR. FARMER: We will; and as our forefathers fought for the birth of this nation we will fight for its life.

UNCLE SAM: Boys, I shall live only through your intelligence, your courage, your justice, your honor, your patriotism, your service, your sacrifice; and I shall be immortal only if all those who come after you shall possess these same virtues.

FAREWELL.

APPENDIX A

UNITED STATES CIRCULATION STATEMENT--January 2, 1913.

=======================+================+=================+============= |General Stock |Held in Treasury,| Money in |of Money in the |as Assets of the |Circulation. |United States. | Government. | +----------------+-----------------+--------------- |January 2, 1913.|January 2, 1913. |January 2,1913. -----------------------+----------------+-----------------+--------------- Gold coin (including | | | bullion in Treasury) | $1,878,57,122| $170,983,732 | $623,159,221 Gold Certificates[2] | | 128,747,19 | 955,686,972 Standard Silver Dollars| 565,481,020| 165,022 | 74,528,998 Silver Certificates[2] | | 12,814,458 | 477,972,542 Subsidiary Silver | 174,538,163| 17,814,855 | 156,723,308 Treasury Notes of 1890 | 2,797,000| 10,115 | 2,786,885 United States Notes | 346,681,016| 6,995,837 | 339,685,179 National Bank Notes | 750,972,246| 30,787,771 | 720,184,475 +----------------+-----------------+-------------- Total | $3,719,046,567| $368,318,987 |$3,350,727,580 -----------------------+----------------+-----------------+--------------

Population of continental United States January 2, 1913, estimated at 96,496,000; circulation per capita, $34.72.

FOOTNOTES:

[Footnote 2: For redemption of outstanding certificates an exact equivalent in amount of the appropriate kinds of money is held in the Treasury, and is not included in the account of money held as assets of the Government.]

APPENDIX B

CLASSIFICATION OF CASH IN BANKS--June 14, 1912.

===========================+=================+============+============= Classification. |National Banks. |All Other |All Reporting | | Banks. | Banks. ---------------------------+-----------------+------------+-------------- Gold Coin | $149,294,417 | 88,210,552 | 237,504,970 Gold Certificates | 437,081,380 |204,494,410 | 641,575,790 Silver Dollars | 12,637,221 | 10,230,733 | 22,867,954 Silver Certificates | 138,569,628 | 55,248,220 | 193,817,848 Subsidiary and Minor Coins| 22,555,692 | 15,026,738 | 37,582,430 Legal-tender Notes | 188,440,207 | 63,576,675 | 252,016,882 National Bank Notes | { 47,564,277 }| 58,037,130 | 105,601,407 Cash not Classified | {of other banks}| 82,302,986 | 82,302,986 ---------------------------+-----------------+------------+-------------- Total | $996,142,823 |$577,127,445|$1,573,270,268 ---------------------------+-----------------+------------+--------------

Amount of money held by United States Treasury, $368,318,987. Amount of money held by all banks, $1,573,270,268. Amount of money held by the people, $1,777,457,312. Total amount of money in the United States, $3,719,046,567.

APPENDIX C

Assuming that the plan should be adopted within the year 1913, and taking round but approximate figures, the amount of reserves required to put the plan into operation would be as follows:

Individual deposits, commercial $11,000,000,000 Due to banks 1,000,000,000 Band credit currency, notes 1,250,000,000 --------------- _Total demand liabilities_ $13,250,000,000

Central reserves against this amount at 10% $1,325,000,000 Cash reserves on this amount at an average of 8% 1,060,000,000 Cash reserves against savings held amounting to $3,000,000,000 at 5% 150,000,000 -------------- _Total reserves required under our plan_ $2,535,000,000

_Amount of circulation in the United States that may be used as reserves_:

Gold coin in the United States $1,900,000,000 Standard silver dollars 565,000,000 Subsidiary coin 175,000,000 Treasury notes, 1890 2,797,000 United States notes 346,681,000 -------------- $2,989,478,000 Less gold held in the U.S. Treasury as a Reserve Fund 150,000,000 -------------- _Total possible reserves_ $2,839,478,000

Amount of reserves required by our plan $2,535,000,000 -------------- Leaving a net amount of lawful reserves for circulation among the people of $304,478,000 Amount of subsidiary coin $175,000,000 Amount of silver dollars out 75,000,000 Amount of $1 and $2 bills out 225,000,000 ------------ $475,000,000

This amount is probably about equally divided between the banks and the people.

Amount of circulation now outside of the U.S. Treasury and the banks and, therefore, in the hands of the people $1,780,000,000

If we deduct the amount of lawful reserves left for circulation among the people $304,478,000 --------------

_We have the total amount of bank note circulation_ $1,475,522,000

Amount of circulation provided for 1,250,000,000 --------------

Additional amount of bank credit currency to be provided $225,522,000

_But this increased amount of bank notes, amounting to $225,522,000, will not take any additional reserves because the deposits which will be converted into these notes are now covered by reserves. It is plain that, thereafter, book credits and note credits will be currently interchangeable._

_Thus every demand for currency will be met automatically and perfectly, every day, everywhere, throughout the United States, day in and day out; month in and month out; year in and year out._

INDEX

Appendix A, United States circulation, 501

Appendix B, amount of money held by banks, 502

Appendix C, reserves required under proposed plan, 503

Acceptance, what is an, 87 desirability of, 90 liability of, same as deposit, 93, 390 reserves against, should be same as against deposits, 96

Acceptance should be allowed only on goods in transit, 96 would develop a general market for commercial paper, 91

Acceptances, 428

Agriculture produced its money, 9

Aldrich, Nelson W, 60, 369

Aldrich, Wilbur, 30

American Reserve Bank, formation of, 389 duties of board of, 415 fund of, 433 how reserve is created, 422 government balance carried with, 434, 435 shall maintain parity of silver and gold, 439

Aldrich Plan and Plot, exposed, 459, 484 cost of currency of, 476 branches and foreign agencies, 487 economic objections to, 462 expansion and inflation of, 469 inconvenience and uselessness of, 475 loss of gold by, 469 800 associations possible, 478 was central bank, 484 possible capital and issue, 485 why public favored at first, 494, 499 would not effect reforms demanded, 498 reasons for its rejection, 500

Aristotle, 29

Bagehot, 202, 226

Bank, what is a, 225 credits of equivalent to gold, 234 failures of, 198 deposit, system of, 228 holding companies in, 237 at Hamburg, 226 number of, in United States, 235, 236 number and resources of, 374 independence of individual, 474 penalty for not carrying reserves, 431 repression in development of, 238

Bank, description of, by MacLeod, 226 by Bagehot, 226 United States, 71 at Venice, 226

Banks, no change in National, 239 increase in business of, 239 various kinds and business of, 375

Banker, is what, 224

Banking is Interstate Commerce, 216 is kind of insurance, 230 bank deposits and bank notes identical in, 231 necessary reforms in, 245 resources of, in 1860, 370 amount of, in 1890, 372 amount of, in 1912, 372 amount of, in world in 1890, 373

Bancroft, George, 165, 166

Bank credit currency, definition of, 67 first lien on assets, 69 additional amount permitted, 424 cost of transmission, how paid, 425 facility of supplying currency, 360 identical with check, 376 increase of, 400 how described and issued, 421 less profitable than deposits, 376 not understood, 378 tax on, how used, 427 strength of, 473

Bankers' Council, formation of, 412

Bank notes, bond-secured, 36 are a first lien, 69 are Government credit, in circulation, 58 bear no relation to business, 58 cost of, as currency, 50 not money, 36 origin of, 57 objections to, as currency, 59 penalty for carrying, as reserves, 428 promise of, to pay money, 36

Bayard, James A., 179

Bill, draft of, 407

Board of Control, compensation of, 413

Boston, country clearing at, 300, 310

Bullion report, 441

California, first use of gold, 14

Canada, bank system of, 79 chart showing movement of currency in, 80

Canada, circulation in 1912, 81 free from panics, 444

Cannon, James G., 291

Capital, what is, 108, 109 active, passive and fixed, 109, 110 active, essential to commerce, 110 conversion of commercial, into fixed, 131, 132 real estate mortgages tie up, 134

Central bank, tax on notes of, 486

Chase, Salmon P., 57, 176

Check, what is a, 86

City bank, National, bank stock holdings of, 488 Boss system established by, 493

Chicago Clearing House examinations, 316, 318

Clearing House, 289 approved practices of, 379, 383 clearings prior to establishment of, 295, 296 country Clearing, established in England, 299 centralizing reserves of, 308 definition of, 290, 291 established in London, 291 first clearing in New York, 298 free zones, 309 functions adopted, 339 for each commercial zone, 419

Clearing House Certificates, issues of, 329, 330

Coins, amount of subsidiary, 43 description of subsidiary, 38 parity of value of, 37 total amount of silver, 43 token, 37 value of, 37

Colonial credit money, 144 depreciation of issues of, 156 effect of issues of, 155 issues by Continental Congress, 157 issue of, in Connecticut, 149 in Massachusetts, 146 in New Hampshire, 151 in New Jersey, 151 in North Carolina, 153 in New York, 153 in Pennsylvania, 152 in Rhode Island, 151 in South Carolina, 153 in Virginia, 152 price of issues fixed, 158 succession of events following issue of, 173

Colwell, Stephen, 290

Congress, will legislate only after discussion, 369

Connecticut, bank commissioners report 1841, 357

Conklin, Roscoe, 180

Coöperative societies, conditions in Germany, 281 conditions in Belgium, 283 extent of business, 279 in United States, not a subject of banking legislation, 285 profits of, 279 main offices described, 281 started in Rochdale, 279 success assured in United States, 286 wholesale houses of, 280

Conant, Charles A. (Scotch currency), 68

Credit, definition of, 114, 124, 125 ample reserves essential to sound, 123 comparative value of, 124 contraction of, by an instrument of, 125 dangers of, 115 expansion as a result of, 121 Germany's abuse of, 124 importance of, 113 our banks should be ready to prove their, 124 per cent, of business done by, 112 production by use of, 119 proper functions of different forms of, 141, 142 use of, in Lancashire, 126 various forms of, 117 Webster on, 111

Crédit Foncier, amortization of mortgages, 266 capital of, 263 can take deposits, 265 formed when, 261 how governed, 262

Currency, definition of, 46, 441 cost of bank credit, 49 definition of bank credit, 67 deposits identical with bank credit, 64, 65 economy of bank credit, 51, 66 consists of, 47 proper system of, 48 right kind of, 55 what it is not, 47 redemption of, 67

Deposits, guarantee of, 393 no difference between currency and, 66 interchangeability of currency into, 64, 65

Depositors, insurance of, 395, 435, 437 cost of insurance of, 395

Depositors, insurance fund, how created, 435 losses of, how paid, 436

Deutsche Bank, 465

Diagrams, zone, subdivisions, 387 Canadian currency chart, 80 Clearing House, 295, 297 course of check, 311-313

Egypt, absorption of gold by, 20

Electricity, importance of, 113

Ellsworth, Oliver, 168

England, Bank of, 206 dissimilarity of, with banks of France and Germany, 443 failure of bank act, 441 resources, when established, 407 not bank of issue, 485

Exchange, what is, 84 Bill of, 87 broad definition of, 96 difference between draft and bill of, 87 is equal to gold in all transactions, 98 Origin, ancient, 94

Farmers, number of, 249

Fessenden, William Pitt, 181

Forgan, James B., 318, 319

Fowler, Charles N., 336, 340, 460

Fowler, W.J., Deputy Comptroller, 395

France, Bank of, founded by Napoleon, 71 land used as basis of money in, 137 Government credit of France used as basis of money, 138 resources of bank, when established, 407 note issue of, 484

Gallatin, Albert, 292

Garfield, James A., 58

Germany, resources of bank, when established, 407 financial situation of bank, weak, 467 failure of bank act, 443

Gold, adopted as standard by United States, 18 by England, 18 amount of, 19 amount in United States in 1860 and 1912, 370 certificate, 28 changing value of, 31 monetary use of, 22 outlook for supply of, 24 production of, 23 United States share of, 22 universal standard of value, 19

Gold, total amount used as reserves, 32 what influences the movement of, 440

Gold reserves, how created, 222

Government, demand liability of, 42

Government issues preceding greenbacks, 174

Hamilton, Alexander, 161, 171

Herrick, Myron T., 249

Hallock, James C., 293, 300

India, absorption of gold by, 20

Indiana, Bank of the State of, 346 State Bank of, 73, 345 statement of bank of, 361

Interest, rate in United States, 249 France, 254 Germany, 249

Iowa, State Bank of, 73, 348 statement of Bank of, 361

Japan, Tried Bond-secured Currency, 59

Jefferson, Thomas, 170

Jevons, Stanley, 203, 291

Kentucky, Bank of, 73, 347

Land Credit Bank, Directors of, 450 dividends of, 454 losses, how borne, 455 put into operation, how, 456 outline of provisions, 268, 269, 270

Landschaften, business of modern, 261 modern, 260 origin of, 252 old, 255 spread of, 258

Law, John, 137

Lee, Richard Henry, 162

Legal tender, what is, 41

Liverpool, Lord, coins of the realm, 39