Part 6

He said, you will remember that we were a State Bank until about a year ago, when we became a National Bank. Our capital of $100,000 is all invested in this bank building which we occupy. Our deposits were $500,000. We took $100,000 of our deposits and purchased $100,000 of Government Bonds, which we deposited with the United States Government, and received in return $100,000 bank notes which we have put out, or, as we say, put into circulation. Now, since we actually took $100,000 of our deposits to buy the bonds with, and then placed the bonds up as collateral, to guarantee the payment of $100,000 of notes, it is perfectly clear that the noteholders will get their money, in case of our failure whether anybody else gets anything or not.

I then asked him this question: Suppose, for the sake of the argument, that the $100,000 of the United States Government Bonds should not sell for $100,000? Say they sold for only $75,000, would the noteholders lose the other $25,000, and he replied as follows:

"No, if the bonds should sell for only $75,000, the remaining $25,000 due the noteholders would be taken out of our assets, before any depositor got a cent."

You see, therefore, gentlemen, that our National Bank Notes are a first lien upon the assets of the banks that issue them, and that they will always be paid in full, before the depositors get anything.

MR. MANUFACTURER: I am very glad this point came up, and has been explained so completely and satisfactorily, because during the week when I was studying up this question of a credit currency, that matter came up, but I found no explanation or reasons given for making the notes a first lien. It seems to me to be a fundamental principle that they should be, and the reasons are the soundest for making them a first lien. The bank note is a tool or instrument of trade for the benefit of the public, and is of general importance, while the bank deposit is a tool or instrument for the benefit of the individuals composing that general public, and primarily of individual importance. The distinction between the two must be very clear to all of you as it is to me.

MR. LABORINGMAN: That is just as it should be. The working people should always have a currency as good as gold, something that will not turn to ashes during the night; that cannot deteriorate to the extent of a single cent; for we are all practically compelled to take whatever is in circulation, or comes along, in the way of currency. It should certainly be as good as gold. I don't care how you fix it, but I do insist upon that. I say that it is one of the very first duties of the Government to the people; for, of all the ways of doing the laboring masses out of their earnings, and cheating them, a depreciated currency is positively the worst. Make your currency redeemable in gold, and so safe that no toiler can lose by holding it any length of time.

MR. MANUFACTURER: I am quite sure that we all agree that not only should the bank notes be currently redeemed in gold coin, but to make them doubly safe, safe beyond any peradventure, they ought also to be a first lien upon the assets of the bank issuing them.

During the week I read somewhere that the Scotch Banks had been in operation 217 years, and that they did not start the deposit and checking system until they had been in operation for 140 years. During all that time they simply exchanged their notes for the notes of the farmers, the shopkeepers, the manufacturers and anybody who was entitled to credit.

MR. BANKER: Now, if you will allow me, I will produce some further historical evidence.

The greatest financial genius that the United States has produced, and one of the greatest the world has produced, drew the charter of the first United States Bank upon which the second was modeled. Both of these banks were pure credit currency banks, and were founded upon the very soundest banking principles; but both of them were the victims of political strife and party feud. No man who has ever lived more clearly comprehended the principle of credit than did Alexander Hamilton.

The highest note issue of the first United States Bank was $5,900,000, and deposits were $5,000,000.

The highest note issue of the second United States Bank was $23,000,000, and the deposits were $2,600,000.

In 1800, under the inspiration of Napoleon Bonaparte, undoubtedly as great an economist as soldier, the Bank of France was organized, and is the most striking single example in all history of the bank credit currency principle. It has to all intents and purposes always had the right of unlimited note issue, as the limit is always fixed far beyond the requirements of trade. The amount of the notes outstanding are usually ten times as large as the deposits. The notes now exceed $1,000,000,000, while the deposits are only about $100,000,000. In a single week there has been a conversion of $75,000,000 of deposits into notes, and a reconversion of a corresponding amount of notes into deposits.

As a result of the destruction of the second United States Bank by a veto of President Jackson, there were established in various states of the Union banking institutions, largely modeled upon the work of Hamilton. These institutions showed remarkable strength and rendered most significant service to those sections of the country where located.

Probably the most noted of them all was the State Bank of Indiana, organized in 1834, which continued its almost matchless career until 1866. It was a pure credit currency bank, marvelously suited to serve the people of Indiana, under the conditions in which they lived. Its capital was $3,300,000; its maximum of note issue was $5,700,000, always currently redeemed in coin. In 1857, during the crisis when every bank in the State of Indiana, and all the banks in New York, except the Chemical, closed their doors, the State Bank of Indiana kept on redeeming its notes in coin. This Indiana State Bank had thirteen branches. The central office was at Indianapolis. Hugh McCullough, afterwards one of the wisest secretaries of the Treasury we have ever had, was President of the Fort Wayne Branch. He wrote this interesting paragraph:

"Fort Wayne was three good days' ride from Indianapolis, mostly through the woods. For fifteen years I made this journey on horseback, and alone, with thousands of dollars in my saddle bag, without the slightest fear of being robbed. I was well known upon the road, and it was well known that I had money with me, and a good deal of it; and yet, I rode unharmed through the woods, and stopped for the night at the taverns and cabins on the way in perfect safety."

Another most signal success of the same credit currency principle was the Bank Act of Louisiana, which was passed in 1842. It was a model, not only for those times, but for these as well. All the banks had to settle their balances every Saturday night in coin. In 1860 Louisiana, as a result of this law, held more specie than any other state in the Union except one. The very day that Gen. Butler took possession of New Orleans, the banks were redeeming their notes in coin.

I might, if it were profitable, describe in detail the Bank of the State of Ohio; the Banks of the State of Kentucky; the Banks of Virginia; the Bank of the State of Missouri; the Bank of the State of Iowa. Everyone of them were signal successes, and everyone of them models worthy of imitation, and all of them were established and operated successfully as credit currency banks.

But I want particularly to rivet your attention upon the Suffolk Bank System of New England, which was purely the product of experience, and I may say a perfect development of the law of evolution in banking.

MR. MERCHANT: My recollection is that the Suffolk System covered all the six New England States, and that there were then over 500 banks in the system, with capital varying all the way from $25,000 to $700,000 each. Two other facts must be kept constantly in mind in this connection; they are these: 1st, the combined authorized note issue of these 500 banks was $131,000,000, absolutely unlimited to all intents and purposes; 2d, there was then no means of communication or transportation except the stage lines and horseback mail carriers. There were no telephones in those days, nor telegraph lines, nor even railroads.

MR. BANKER: I am more than pleased, Mr. Merchant, that you have brought out these points, before I proceeded to explain what actually happened in the course of the development of what I regard as the most marvelous exhibition the world has yet furnished us with, what in principle was practically a perfect banking system, and what was in practice as nearly perfect as any human institution could be under the circumstances.

MR. MANUFACTURER: Well, Mr. Banker, that is unqualified, literally unmeasured praise. If we ever had so good a banking system actually in operation in this country, I don't see why we did not have sense enough to keep it. I hope you will be good enough to tell us why we lost it.

MR. BANKER: That is a very important and most pertinent question, and certainly most natural that you should ask it. I should have covered that point before, but it will do just as well now.

Uncle Sam, you will remember that when you passed the National Bank Act in order to get the advantage of all the bank note circulation and so increase the sale of United States Bonds, you put a tax of 10 per cent on all bank notes for the purpose of preventing any bank from issuing them, except National Banks. The result was that you killed the State Bank of Indiana and all the other banks to which I have referred, which were then issuing notes in the United States, including the 500 banks in the Suffolk System.

MR. MANUFACTURER: I ought to say right here, before you go on, that the 10 per cent tax on Bank Note issues, while doing a world of harm, precisely as you say, did some good, too, because it prevented a lot of banks that were not properly organized, and were not compelled to redeem their notes in coin, from issuing a good deal of worthless paper, or comparatively worthless paper. It is usually known as "red dog," or "blue pup," or some other kind of dog paper.

There are two things that resulted from the National Bank Act that I think should not be overlooked, though the act may have proved an economic failure. It gave us a uniform currency throughout the country, and it was of equal value everywhere, passing without charge, and at no time worth less than the credit of the Government, or the current value of the United States Note.

Therefore, if we are wise enough to take advantage of these two important results, our experience will not be wholly in vain. That is, we want a uniform currency throughout the country, in all the different states, passing in at every bank window, at face value, without charge, and unquestioned by anybody, because currently redeemed in gold coin everywhere.

MR. BANKER: These interruptions have been splendid and I thank you for them. You fellows have undoubtedly been studying up on this question, as we used to say at school, "You've been cramming up."

Now, returning to the Suffolk System, I want to assert there is not a question that can be asked by anyone, nor a point that can be made by anyone in favor of a banking system, that the Suffolk System does not answer and illustrate and exemplify.

Let me outline the situation:

1. It covered six different states.

2. It covered a large territory.

3. The facilities for communication were bad. Some parts of New England were as far from Boston then as San Francisco is now.

4. There were 500 individual, independent banks.

5. There was no branch banking.

6. The permissive note issue to all intents and purposes was unlimited. The possible amount of issue was $131,000,000, but the maximum amount of notes out at any time did not reach 50 per cent of this total, while the average amount did not exceed 33 per cent of it.

7. The Bank Notes of the Suffolk System were universally accepted at par throughout New England.

8. They were redeemed every day at Boston, in coin by the Suffolk Bank.

9. They were accepted in all commercial centers of the West, Buffalo, Cincinnati, Chicago, Milwaukee and St. Louis at a premium of from 1 to 5 per cent, because redeemed at Boston _in coin._

The Suffolk Bank was the clearing house for all the bank notes of New England, and they were accepted at par, and redeemed in coin if demanded.

Horace White says:

"It was the underlying principle of the Suffolk Bank system that any bank issuing circulation should keep itself at all times in a condition to be able to redeem it; that it should measure the amount by its ability so to do; and that the exercise at any time of the right to demand specie of a bank for its bills was something of which the issuing bank had no right to complain....

"Under the Suffolk System of Bank Note redemption specie was seldom asked for, but it was always paid when demanded; _the metallic reserve was the touchstone of the whole business_."

The following is Mr. White's description of the operation of the bank:

"In 1824 two clerks could do all the work. In 1855 seventy were required, and the redemptions reached $400,000,000 per year. As the circulation of the New England banks at that time was about $40,000,000, the whole amount was redeemed ten times each year, or about once in five weeks.

"Any person engaged in a legitimate trade in any part of New England could exchange his promissory note, running 60 or 90 days, for the notes of a bank with which he could pay the wages of his employees, or buy the materials for his industry in any part of the United States or Canada. The notes would remain in circulation about five weeks, and then find their way to the Suffolk Bank, where they were offset by the notes of other banks which took their rise in the same way. The man whose promissory note the bank had discounted, and by means of which it had put its own notes in circulation, had meanwhile sold his products. If he had sold them in Boston, his draft on the Boston merchant would pay his note at the local bank, and this would enable the latter to keep its balance good at the Suffolk. If he had sold them in New York or Chicago, he would get his pay in a draft on Boston, which would answer the same end. If he had sold them at home, and had received New England Bank Notes in exchange for them, the local bank could use these to keep its balance good at the Suffolk. New England trade was carried on by an endless chain of offsets and book balances at the Suffolk Bank. The security for the notes consisted of the bank's assets, and the banker's moral character and business sagacity. Both notes and deposits rested upon the same security that deposits rest upon now, and the volume of both was determined by the wants of trade."

The interplay of bank book credit and bank note credit under the Suffolk System in the panic of 1857 is nowhere equaled in the history of banking; and that demonstration of the perfect adaptability of bank credit to the most sensitive, and at the same time the most extreme situation that can possibly arise, leaves no question unanswered as to its fitness under all circumstances to meet the requirements of the people.

A year before the panic, the note issue stood at $50,000,000, and the deposits were $32,000,000. As a result of the panic, there was an exigent demand for currency, and the note issue rose from $50,000,000 to $56,000,000, and the deposits fell at the same time from $32,000,000 to $25,000,000, showing a conversion of about $6,000,000 of book credits into note credits, or of deposits into currency.

A year afterwards, when this exigent demand for currency had subsided, and the reaction had set in, the notes fell from $56,000,000 to $35,000,000, and the deposits increased from $35,000,000 to $46,000,000. In other words, $21,000,000 of notes were deposited and took the form of deposits, subject to check.

I do not need to state the fact, except for the purpose of calling your attention to it, that this currency did not cost the people of New England any more than deposits; for the two were constantly changing places with each other, strictly in accordance with the needs of trade.

MR. MERCHANT: Mr. Banker, I think we are all under the very greatest obligation to you for this elaborate explanation. This splendid illustration, yes, absolute demonstration of the perfect adaptation of bank credit to our currency needs. I want to compliment you upon another thing, and that is, your position that it is the bank's business to make provision for coin redemption. What do we have our banks for except to furnish us credit in just the form we need it to carry on our business, and to keep that credit, in whatever form it takes, just as good as gold. That is the natural business of a bank. I never caught on to that fact before, and therefore could not appreciate it.

MR. MANUFACTURER: Mr. Banker, I have been greatly interested. Now, if that plan worked so perfectly in New England, I cannot see for the life of me, why every other section of the country cannot work out the same system. If the New Englander could coin currency out of bank credit, based on codfish and cloth, why cannot the western man coin currency out of bank credit, based on cattle, cotton and corn?

The crux of the whole matter, the very heart of the thing, the vital part is, that the bank be ready to redeem its notes in gold. Why shouldn't it, that's the question?

MR. BANKER: Well, it should, that is the answer to your question, and the bankers around every natural financial center in the United States should get together, and form just what those 500 bankers had in New England before the war, a perfect banking system of their own.

MR. MERCHANT: Mr. Manufacturer, that's sound and looks mighty good to me. Do you see any objection to it, any flaw in it?

MR. MANUFACTURER: No, I do not, except to persuade the people, as Mr. Banker has persuaded and converted us. Of course we will be up against some legal difficulties, won't we, Mr. Lawyer?

MR. LAWYER: I imagine that we shall have no serious difficulties about the legal questions involved, if we can persuade Congress. You see we are up against Congress and for about every thought the average Congressman has concerning a question of this kind, he has several about how he is going to get back into Congress at the next election; that's the real difficulty.

UNCLE SAM: Well, we'll see about that when we get this worked out, and we'll put it up to them before election, and find out where they stand. They must study this question just as we have, and if they can't show us a better way, they will have to come over, or they won't get over, that is all there is about that.

MR. BANKER: Well, gentlemen, when it comes to putting up an argument to the Congressman, we will shove the Canadian currency system under his nose, and keep it there until he gives in.

MR. MERCHANT: Are the Canadians using this credit currency system?

MR. BANKER: That's what they are. They started by copying the Massachusetts Bank Act, as it existed before the war, and have gone on making some changes from time to time since. The banks are authorized to issue regularly an amount of currency equal to their capital. The amount of capital has not been increased in proportion to their business, because there are only a few banks there now, 27 in all, with about 2,000 branches.

Here is a chart I had prepared to show you, because it illustrates so perfectly how the currency expands and contracts every Fall. You see that in the month of October every year they have an increase of about $3.80 per capita over the minimum amount, and that just as soon as the crops are disposed of, the currency again takes the form of a deposit.

_Total circulation of the chartered banks of Canada for each month of 1912 to Nov. 30th._

January $88,065,521 February 88,920,598 March 95,918,404 April 95,145,371 May 93,819,333 June 102,011,848 July 95,827,534 August 101,501,270 September 104,334,287 October 110,696,877 November 115,473,098 Maximum issue 115,473,098 Minimum issue 88,065,521 ----------- Amount of Expansion $27,407,577 Population of Canada 7,204,838 Per Capita Expansion $3.80 Same expansion in the United States would amount to $380,000,000

Under present conditions we do not have any note expansion whatever. Not one single dollar. Every "Fall" we have a tragedy, because we are compelled to use our reserve money to meet the increased demands for currency.

The above figures correspond in their _expansion and contraction_ with the figures for many years previous, with one significant change in the date of maximum circulation, which has changed with the later farm demands due to the tremendous development in the great north-western territory. No stronger proof could be added to the marvelous way in which this bank credit currency automatically adjusts itself to any and every condition as it arises.

This currency goes to the Clearing House every day, precisely as the checks and drafts do, for redemption. And in those cities where there are no Clearing Houses, the banks present the notes they take in, to each other, and the notes are redeemed every day by the respective banks issuing them.

MR. MERCHANT: Gentlemen, isn't it marvelous how that currency adapts itself to the demands of the Canadian crop moving period? Why, if we had such a system working here, you would have an increase of currency every Fall exactly equal to our demands, probably $300,000,000. I have heard the amount variously estimated from $200,000,000 to $300,000,000. At all events, this principle would give us exactly the amount needed to meet the demands of trade.

MR. BANKER: That is precisely what would happen, and there would be no shipping currency to and fro, backward and forward from New York to Chicago and St. Louis, and then from these cities to a thousand other points; and then when the crops had been moved the currency must be shipped from the thousand points to St. Louis and Chicago and then on again to New York. The banks in every locality would create their own currency according to their respective needs, and at a cost of about one-fifth of what it costs them today.

As the matter now stands, gentlemen, if I want $10,000 currency I bundle up $12,000 or $15,000 of my commercial paper, and take it to my correspondent, and get the currency by giving my bank's note, and leaving the $12,000 or $15,000 of paper as collateral. Now, if you should ask my correspondent upon what he had loaned me $10,000 he would say, "my bank's credit and the commercial paper I left with him." But, gentlemen, why could I not issue $10,000 of my bank notes against my bank credit, and keep the $12,000 or $15,000 of commercial paper? Certainly if my bank's credit and the commercial paper were good enough for my correspondent bank to let me have $10,000 upon, they ought to be good enough to issue my own notes upon. The present situation is simply absurd and most troublesome, as well as most expensive.