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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..d7b82bc --- /dev/null +++ b/.gitattributes @@ -0,0 +1,4 @@ +*.txt text eol=lf +*.htm text eol=lf +*.html text eol=lf +*.md text eol=lf diff --git a/LICENSE.txt b/LICENSE.txt new file mode 100644 index 0000000..6312041 --- /dev/null +++ b/LICENSE.txt @@ -0,0 +1,11 @@ +This eBook, including all associated images, markup, improvements, +metadata, and any other content or labor, has been confirmed to be +in the PUBLIC DOMAIN IN THE UNITED STATES. + +Procedures for determining public domain status are described in +the "Copyright How-To" at https://www.gutenberg.org. + +No investigation has been made concerning possible copyrights in +jurisdictions other than the United States. Anyone seeking to utilize +this eBook outside of the United States should confirm copyright +status under the laws that apply to them. diff --git a/README.md b/README.md new file mode 100644 index 0000000..aa541d2 --- /dev/null +++ b/README.md @@ -0,0 +1,2 @@ +Project Gutenberg (https://www.gutenberg.org) public repository for +eBook #60029 (https://www.gutenberg.org/ebooks/60029) diff --git a/old/60029-8.txt b/old/60029-8.txt deleted file mode 100644 index 8eda000..0000000 --- a/old/60029-8.txt +++ /dev/null @@ -1,18818 +0,0 @@ -The Project Gutenberg EBook of Seventeen Talks on the Banking Question, by -Charles Newell Fowler - -This eBook is for the use of anyone anywhere in the United States and -most other parts of the world at no cost and with almost no restrictions -whatsoever. You may copy it, give it away or re-use it under the terms -of the Project Gutenberg License included with this eBook or online at -www.gutenberg.org. If you are not located in the United States, you'll -have to check the laws of the country where you are located before using -this ebook. - - - -Title: Seventeen Talks on the Banking Question - -Author: Charles Newell Fowler - -Release Date: August 1, 2019 [EBook #60029] - -Language: English - -Character set encoding: ISO-8859-1 - -*** START OF THIS PROJECT GUTENBERG EBOOK SEVENTEEN TALKS *** - - - - -Produced by MFR, Graeme Mackreth and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - - - - - - - -[Illustration: _Very truly Yours Charles N. Fowler_] - - - - - SEVENTEEN TALKS - - ON THE - - BANKING QUESTION - - BETWEEN - - UNCLE SAM - - AND - - MR. FARMER, MR. BANKER, - MR. LAWYER, MR. LABORINGMAN, - MR. MERCHANT, MR. MANUFACTURER - - BY - - Hon. Charles N. Fowler - - WHO WAS A MEMBER OF THE HOUSE OF REPRESENTATIVES - FOR SIXTEEN YEARS, A MEMBER OF THE - BANKING AND CURRENCY COMMITTEE FOR - FOURTEEN YEARS AND CHAIRMAN - OF THE COMMITTEE FOR - EIGHT YEARS - - PUBLISHED BY THE - FINANCIAL REFORM PUBLISHING CO. - ELIZABETH, NEW JERSEY - - - - - Copyright, 1913, by - FINANCIAL REFORM PUBLISHING CO. - - [Illustration] - - THE TROW PRESS - NEW YORK - - - - -FOREWORD - - -This book is written in the form of a conversation between Uncle Sam -and six men of various occupations. It begins with the A, B, C of the -subject and by question and answer goes over all the different phases -of the subject precisely as you would expect them to arise under such -circumstances. After weeks of study and investigation they finally -reach an agreement, based upon their talks, and formulate a Financial -and Banking system for the United States. - - The Author. - - - - -TABLE OF CONTENTS - - - PAGE - - FIRST NIGHT. The Standard of Value 7 - - SECOND NIGHT. What Is Money? 26 - - THIRD NIGHT. What Is Currency? 46 - - FOURTH NIGHT. Bank Credit Currency 62 - - FIFTH NIGHT. What Is Exchange? 84 - - SIXTH NIGHT. Value, Price, Wealth, Property, Credit 101 - - SEVENTH NIGHT. Commercial Credit, Land Credit, - Government Credit 118 - - EIGHTH NIGHT. Colonial Credit Money 144 - - NINTH NIGHT. United States Notes or Greenbacks 173 - - TENTH NIGHT. Reserves 195 - - ELEVENTH NIGHT. The Bank 224 - - TWELFTH NIGHT. Land Credit Bank 248 - - THIRTEENTH NIGHT. The Clearing House 289 - - FOURTEENTH NIGHT. Banking in 1860 340 - - FIFTEENTH NIGHT. Outline of Bill 368 - - SIXTEENTH NIGHT. Draft of Bill 405 - - SEVENTEENTH NIGHT. Aldrich Plan and Plot Exposed 459 - -[Illustration] - - - - -FIRST NIGHT - -THE STANDARD OF VALUE - - -UNCLE SAM: Gentlemen, I have invited you to take part in one -conversation a week upon the much-vexed and all-important question -of a financial and banking system for my country. We shall continue -these conversations until we arrive at some conclusion which will be -satisfactory to all of us, although this may seem difficult at the -outset. - -To begin with, I want to assure you that our talks shall be absolutely -confidential, and nothing that is said at these meetings shall ever -go any farther, unless we agree to announce our conclusion. With this -understanding we can be brutally frank with each other, and I can -expose my hand to you. - -The present situation is one demanding immediate attention, and only -our ignorance, greed or political cowardice can prevent us from -arriving at a satisfactory solution of this problem. We must be sincere -and patriotic in our purpose, for we represent practically every -phase of our citizenship, and I assume you are typical of the average -intelligence of the people. - -Here is Mr. Lawyer to steer us clear of legal obstacles, Mr. -Laboringman to speak for our millions of daily toilers, Mr. Farmer -to point out the disadvantage of agricultural loans, Mr. Merchant -to illustrate the defects of our present commercial credits, Mr. -Manufacturer to caution us against the conversion of our liquid capital -into fixed investments and Mr. Banker to tell us of his woes and -enlighten us upon the remedies for all his ills. - -What we don't know now, we will each attempt to find out before -our talks come to an end. Certainly there is some solution to this -question. In short and in fact it must be solved. - -I am the laughing stock of the entire civilized world today. For -our persistent folly we suffer losses in the aggregate amounting to -hundreds of millions of dollars every year. We ought to have, and can -have the best and the most efficient banking system in the world. -Indeed, we ought to give the laugh to all the other countries in -banking, as we do practically in everything else. It is up to us. - -MR. BANKER: Uncle Sam, I agree absolutely with what you have just -said. I believe it is our duty to sit every week, as you suggest, -continuously until we arrive at some conclusion upon which we can all -agree. If we do this I believe, since we represent so many callings and -are so representative of the various lines of business, we shall find -the public approving of our conclusion. - -I suggest that we begin with the very A, B, C of this question, and -settle one point after another as we go along. If we do this, our -differences will disappear as we progress, and the X, Y, Z of this -question, or the formation of a financial and banking system, will be -comparatively easy in the end. - -For example, we must first fix clearly in our minds what a standard -of value is, and what our standard of value is, what money is, what -currency is, what capital is, what a bank is, and so continue step by -step to the end, leaving absolutely nothing for guesswork, if that is -at all possible. - -The experience of the world has been so broad and complete that our -solution of this question is entirely possible, although we have some -problems that are peculiar to ourselves. - -MR. LAWYER: That plan suits me exactly, for only recently I made -a thorough study of the question of our standard of value. My -investigation took me back more than 6,000 years, and I found the -subject amusing often as well as intensely interesting, while the -result of my research was most satisfactory. - -I discovered that everything from baked clay to the credit of -practically every government that has ever existed had been used at -some time or other, as a standard of value, or a measure of value. - -MR. FARMER: Mr. Lawyer, just what do you mean by a "standard of value"? - -MR. LAWYER: A "standard of value" is anything that may be selected -by which all other things in some particular locality or country are -measured. - -The Indians of British Columbia used haiquai shells; one string being -equal to one beaver skin. In Australia tough green stone and red ochre -were used. In Central Africa slaves were used. In Iceland the law made -cattle the standard of value. In the Fiji Islands whales' teeth. In the -South Sea Islands red feathers were used. In Mexico and Abyssinia salt -was used. - -Agriculture has produced its standard of value; corn, maize, olive oil, -cocoanuts, cocoa-nut oil, tea, tobacco, cacao, beans, wheat, rice. - -The pastoral life produced its standard of value; sheep, cattle, goats, -horses and practically every other domestic animal, according to the -time and place. - -The following history of American experience in the development of -a standard of value cannot be better restated, and is practically a -repetition of the experience of mankind in all the ages, therefore I -want to read what Horace White says upon the subject: - -"It may be said that Virginia grew her own money for nearly two -centuries, and Maryland for a century and a half. - -"The first settlers of New England found wampumpeage, sometimes called -wampum and sometimes peage, in use among the aborigines as an article -of adornment and a medium of exchange. It consisted of beads made from -the inner whorls of certain shells found in sea water. The beads were -polished and strung together in belts or sashes. - -"They were two colors, black and white, the black being double the -value of the white. The early settlers of New England, finding that -the fur trade with the Indians could be carried on with wampum, easily -fell into the habit of using it as money. It was practically redeemable -in beaver skins, which were in constant demand in Europe. The unit of -wampum money was the fathom, consisting of 360 white beads worth sixty -pence the fathom. In 1648 Connecticut decreed that wampum should be -'strung suitably and not small and great uncomely and disorderly mixt -as formerly it hath been.' Four white beads passed as the equivalent -of a penny in Connecticut, although six were usually required in -Massachusetts and sometimes eight. In the latter colony wampum was at -first made legally receivable for debts to the amount of 12d. only. In -1641 the limit was raised to fifty pounds sterling, but only for two -years. It was then reduced to forty shillings. It was not receivable -for taxes in Massachusetts. The use of wampum money extended southward -as far as Virginia. - -"The decline of the beaver trade brought wampum money into disrepute. -When it ceased to be exchangeable in large sums for an article of -international trade the basis of its value was gone. Moreover it was -extensively counterfeited, and the white beads were turned into the -more valuable black ones by dyeing. Nevertheless it lingered in the -currency of the colonies as small change till the early years of the -eighteenth century. While it was in use it fluctuated greatly in value. - -"The first General Assembly of Virginia met at Jamestown July 31, 1619, -and the first law passed was one fixing the price of tobacco 'at three -shillings the beste, and the second sorte at 18d. the pounde.' Tobacco -was already the local currency. In 1642 an act was passed forbidding -the making of contracts payable in money, thus virtually making tobacco -the sole currency. - -"The Act of 1642 was repealed in 1656, but nearly all the trading -in the Province continued to be done with tobacco as the medium of -exchange. - -"In 1628 the price of tobacco in silver had been 3s. 6d. per pound -in Virginia. The cultivation increased so rapidly that in 1631 the -price had fallen to 6d. In order to raise the price, steps were taken -to restrict the amount grown and to improve the quality. The right to -cultivate tobacco was restricted to 1,500 polls. Carpenters and other -mechanics were not allowed to plant tobacco 'or do any other work in -the ground.' These measures were ineffective. The price continued to -fall. In 1639 it was only 3d. It was now enacted that half of the -good and all of the bad should be destroyed, and that thereafter all -creditors should accept 40 lbs. for 100; that the crop of 1640 should -not be sold for less than 12d., nor that in 1641 for less than 2s. -per lb., under penalty of forfeiture of the whole crop. This law -was ineffectual, as the previous ones had been, but it caused much -injustice between debtors and creditors by impairing the obligation of -existing contracts. In 1645 tobacco was worth only 1-1/2d. and in 1665 -only 1d. per lb. - -"These events teach us that a commodity which is liable to great and -sudden changes of supply is not a desirable one to be used as money. - -"In the year 1666 a treaty was negotiated between the colonies of -Maryland, Virginia, and Carolina, to stop planting tobacco for one year -in order to raise the price. This temporary suspension of planting made -necessary some other mode of paying debts. It was accordingly enacted -that both public dues and private debts falling due 'in the vacant year -from planting' might be paid in country produce at specified rates. - -"In 1683 an extraordinary series of occurrences grew out of the low -price of tobacco. Many people signed petitions for a cessation of -planting for one year for the purpose of increasing the price. As the -request was not granted, they banded themselves together and went -through the country destroying tobacco plants wherever found. The evil -reached such proportions that in April, 1684, the Assembly passed a -law declaring that these malefactors had passed beyond the bounds of -right, and that their aim was the subversion of the Government. It was -enacted that if any persons, to the number of eight or more, should go -about destroying tobacco plants, they should be adjudged traitors and -suffer death. - -"In 1727 tobacco notes were legalized. These were in the nature of -certificates of deposit in Government warehouses issued by official -inspectors. They were declared by law current and payable for all -tobacco debts within the warehouse district where they were issued. -They supply an early example of the distinction between money on the -one hand, and Government notes, or Bank notes, on the other. The -tobacco in the warehouses was a real medium of exchange. The tobacco -notes were always payable to bearer for the delivery of this money. -They were redeemable in tobacco of a particular grade, but not in any -specified lots. Counterfeiting the notes was made a felony. In 1734 -another variety of currency, called 'crop notes,' was introduced. These -were issued for particular casks of tobacco, each cask being branded -and the marks specified on the notes. - -"The circulating medium of the New England colonies was quite as -fantastic as that of Virginia. Merchantable beaver was legally -receivable for debts at 10s. per pound. In 1631 the General Court of -Massachusetts ordered that corn should pass for payment of all debts -at the price it was usually sold for, unless money or beaver skins -were expressly stipulated. In other words, a debt payable in pounds, -shillings, and pence might be paid at the debtor's option in any one of -three ways; in corn at the market price, in beaver at 10s. per pound, -or in the metallic money of England. For more than half a century this -order continued in force and operation, other things being added to the -list from time to time. - -"In 1635 musket balls were made receivable to the extent of 12d. in one -payment. - -"In 1640 Indian corn was made current at 4s. per bushel, wheat at 6s., -rye and barley at 5s., and peas at 6s. Dried fish was added to the -list. Taxes might be paid in these articles and also in cattle, the -latter to be appraised. - -"The need of metallic currency was severely felt. In 1654 it was -ordered that no coin should be exported, except 20s. to pay each one's -traveling expenses, on penalty of forfeiture of the offender's whole -estate. - -"The cost of carrying the country produce taken for taxes amounted to -10 per cent of the collections. A constable once collected 130 bushels -of peas as taxes in Springfield. He found that he could transport this -portion of the public revenue most cheaply by boat. Launching it on the -Connecticut River, he shipped so much water on board at the falls that -the peas were spoiled. Thus we learn that money ought to be easy of -carriage and not liable to injury by exposure to the elements. - -"In 1670 it was ordered for the first time that contracts made in -silver should be paid in silver. - -"In 1675, during King Philip's war, the need of metallic money for -public use was so great that a deduction of 50 per cent was offered on -all taxes so paid. - -"The first local currency of New Netherlands was wampum, but it was -subordinate to the silver coinage of the mother country; that is, -it was reckoned in terms of that coinage as fixed by the Dutch West -India Company from time to time. It was fixed at six white beads for -a stiver. Wampum was not made in the province, but was imported from -the east end of Long Island, the principal seat of production. It is -mentioned in a letter from the Patroons of New Netherlands to the -States General in June, 1634, as 'being in a manner the currency of the -country with which the produce of the country is paid for,' the produce -of the country being furs. - -"Beaver soon became current here, as in New England, and for the same -reason, its currency value being fixed by the company at 8 florins -per skin. As 5 wampum beads were equal to 1 stiver and 20 stivers to -1 florin, and 8 florins to 1 skin, the ratio of wampum to beaver was -960 to 1. The market ratio did not coincide with the legal ratio very -long. Nor was the legal ratio of either wampum or beaver to silver -maintained; for, in 1656, Director Stuyvesant wrote to the company -urging that beaver be rated at 6 florins instead of 8, and wampum at 8 -for a stiver instead of 6, as these rates were nearer the commercial -values. - -"In 1719 the Assembly of South Carolina made rice receivable for taxes, -'to be delivered in good barrels upon the bay in Charlestown.' In -the following year a tax of 1,200,000 pounds of rice was levied, and -commissioners were appointed to issue rice orders to public creditors, -in anticipation of collection, at the rate of 30s. per 100 lb., in the -following form: - -"'This order entitles the bearer to one hundred weight of well-cleaned -merchantable rice to be paid to the commissioners that receive the tax -on the second Tuesday in March, 1723.' - -"Rice orders were made receivable for all purposes, and counterfeiting -was made felony without benefit of clergy. - -"In eastern Tennessee and Kentucky, early in the nineteenth century, -deer skins and raccoon skins were receivable for taxes and served the -purposes of currency. - -"When California was first invaded by gold seekers there were a few -Mexican coins in circulation there, not nearly sufficient to answer -the needs of the growing community. The immigrants brought more or -less metallic money with them. The smaller coins were those of many -different countries, chiefly Spanish. For want of sufficient coins, the -first trading was done largely with gold dust, sometimes by weighing -it in scales, sometimes by guesswork. A 'pinch' of gold dust about as -large as a pinch of snuff had a current value and was a common measure -in places where there was no means of weighing. At a public meeting -in San Francisco, September 9, 1848, it was resolved by unanimous -vote that $16 per ounce was a fair price for placer gold. This rate -was at once adopted in all business transactions. By and by private -coiners of gold came into the field. The Legislature was at first -alarmed by the appearance of these unaccustomed pieces, and passed a -law to prohibit circulation and to close the shops where they were -made. It was soon found, however, that they were a great convenience. -Then the law was repealed. Several establishments immediately went -to work assaying and coining gold. One of these was at Salt Lake -City, whose productions were known as Mormon coins. Only one of these -establishments, that of Moffat & Co., of San Francisco, conformed -exactly to the government standard of weight and fineness. All the -others, however, including the Mormon ones, circulated freely, and were -received on deposit by the banking houses until the government set up -an assay office and began to stamp octagonal pieces of $50, called -'slugs,' and afterwards those of $20 each. This was done in 1851; the -San Francisco mint was not ready till 1854. The Moffat coins continued -to circulate after the mint had gone into operation, since everybody -had confidence in their goodness. It is estimated that $50,000,000 of -private coins were struck. They were received in the Atlantic cities at -their assay value only." - -The foregoing illustrations drawn from our own history serve to explain -the nature of money and the processes by which mankind learns to -distinguish between good money and bad. - -MR. FARMER: In all that has been said there is nothing stranger nor -more interesting than what is going on today. - -Uap is one of the most interesting of the South Sea Islands. It is the -Western outpost of the Carolines, which were purchased by Germany from -Spain for $3,300,000 at the close of the Spanish-American War. The -form of money used by the people and the perfection of the system of -currency is as interesting as anything in the history of the human race. - -The small change consists of pieces of pearl shell and small round -stones. Large sums are represented by fei. These are big circular -stones in the form of wheels ranging in diameter from one to twelve -feet. In the centre of each is a hole through which a pole is thrust to -facilitate carriage from one spot to another. - -These coins are not minted on the island, nor has any addition been -made to the supply of them for a number of years. They were originally -fashioned in the Pelao Islands, and brought thence to Uap in canoes -over a stretch of four hundred miles of ocean. A very large fei could -not be changed into smaller coin without seriously disturbing the -currency of the island. The owner of one of these twelve-foot masses of -wealth is a sort of J.P. Morgan. Like the man with the million dollar -bill in Mark Twain's story, he does not need to break his money in -order to pay for anything he may buy, but readily secures all that he -desires on credit. - -It speaks volumes for the honesty of the islanders that all this stone -money is left out of doors standing against the sides of the huts. The -annals of Uap do not contain a single record of the theft of a fei, -but perhaps the difficulty of disposing of such unwieldy cash may be -a potent factor in the matter. Not only is the ownership of a large -fei equivalent to the command of an unlimited amount of currency, but -abstract possession seems to entail the same advantage. - -Many years ago a canoe carrying one of these large stones was sunk a -few miles off the island. Although the fei went to the bottom of the -ocean and has lain there ever since, the man to whom it was consigned -enjoyed all the advantages that would have accrued from its delivery to -him. During his lifetime he was accredited one of the wealthiest men of -Uap. Not only that, but he bequeathed his interest in the submerged fei -to his son, and it has been passed on in like manner through four or -five generations, securing all the advantages of substantial wealth to -each. - -MR. LAWYER: Metal of some kind has been used as far back as the records -of time go, and strange as it may seem, gold was the first metal to be -used as well as the first to be discovered, as a standard of value, or -measure of value. Iron was used in Sparta, spikes in Central Africa, -nails in Scotland, lead in Burmah, copper, tin and silver in Rome. -Silver and gold were used in China a thousand years ago. In her palmy -days gold bracelets and rings were weighed out in Egypt, measuring -value. - -For the past two hundred years there has been a distinct evolution of -the world's present standard of value going on, sometimes it has been -gold, sometimes it has been silver, sometimes nations have tried to -have both. During the last hundred years the struggle to use both has -gone on persistently until within the last twenty-five or thirty years. - -William A. Shaw states that in France during a period of one hundred -years, the ratio between gold and silver had been changed one hundred -and fifty times. The controversy of this period has well been called -the "Battle of the Standards." - -A constantly increasing trade between the nations of the earth has -made a common standard of value more and more important, while the -ever-increasing refinement in the exchange of commodities among the -peoples of the earth has made a single standard absolutely essential. - -Experience has wrought the change, and now the entire commercial world -has gold as its standard of value. - -It is interesting to observe how gold because of its peculiar fitness, -as compared with any other commodity, was finally selected and adopted -as the world's standard of value. - -If we were to study for months for the purpose of ascertaining what the -characteristics of the world's standard of value should be, we would -define the characteristics of gold as particularly distinguished from -any other metal or thing. - -_First_: Gold has by far a greater stability of value than any other -substance. It is very doubtful whether there is a perceptible change, -at least any such change of value, as could be agreed upon. It is so -small. - -_Second_: Gold has portability, or the facility of transportation from -one part of the country to the other, or from one nation to the other, -that makes it desirable as compared with any other metal, that is to -be thought of for a standard of value. For example, the same value in -silver weighs thirty times as much. - -_Third_: The divisibility of gold at the mint into convenient pieces -for trade and commerce is all that can be desired. - -_Fourth_: It has, practically speaking, perfect durability. It will -not corrode, or waste away, except by wear, and waste by wear is now -largely obviated by the use of some representative, such as our gold -certificate. - -_Fifth_: Gold possesses homogeneity or perfect uniformity of structure -and material. - -_Sixth_: Gold possesses cognizability, or can be readily known or -recognized. - -It was undoubtedly all these inherent qualities, these prerequisites -that led to those legislative enactments which have during the last -hundred years singled out this yellow metal as the most fit arbiter of -the world's trade. - -The first legislative act that seemed to lead to this ultimate decision -of the world was passed by the House of Commons in 1774, but not until -1816 was the law passed that definitely settled the question of the -standard of value for Great Britain. The very same law passed in that -year, now nearly one hundred years ago, remains in force to this day. - -In 1853, the United States followed Great Britain in an attempt to -establish the gold standard. We reduced the weight of our silver -coins, smaller than one dollar, and made them legal tender for only -five dollars in amount. The silver dollar was not considered in -this legislation of 1853, and not until February 12, 1873, did the -gold dollar become the unit of value, when the gold standard was -unequivocally established. The silver dollar was at that time worth -about two cents more than a gold dollar, and therefore it was omitted -from the coinage. This was the famous crime of '73, about which the -men now wearing gray hair, or no hair, heard so much in the '80's and -early '90's. Yes, we were hearing this as late as 1896, when it was the -Battle Cry of the Presidential Campaign. - -It may be stated that practically the whole civilized world, with -the single exception of Great Britain, has come to the single gold -standard, since 1873. - -The only country now remaining upon the silver basis, or that has not -taken steps to place itself upon a gold basis, is, according to the -report of the Director of the Mint, the Central American States, which -are of comparatively no commercial importance whatever. - -MR. MERCHANT: How much gold is there in the world today? - -MR. LAWYER: It was estimated in 1890 that the amount of gold -accumulated was approximately $4,000,000,000 (four thousand million -dollars). - -The amount of gold produced during the last twenty-two years, or since -1890, by all the countries of the world approximates $6,500,000,000 -(six thousand five hundred million dollars). Of course a deduction, -or allowance, must be made for what has been used outside of monetary -purposes, or in industrial consumption, approximately $1,500,000,000 -(one thousand five hundred million dollars). A deduction should also -be made for what has been absorbed by India, about $700,000,000 (seven -hundred million dollars), and also by Egypt, about $200,000,000 (two -hundred million dollars), or nearly $1,000,000,000 (one thousand -million dollars), by these two countries. - -The Director of the Mint in his report, Page 53, says: - -"In statistics of the precious metals India is the most important -country of Asia, and has long been one of the most important in the -world. The Government of India has advised this bureau that the -uncoined gold imported into that country might be considered to be -used for ornaments and in manufactures. This amounted in 1910 to -$47,026,698. - -"The movement to India deserves to be treated in a class by itself. A -large part of the gold and silver that goes there sinks out of sight, -and whether it is made into ornaments or buried in the ground, is -withdrawn at least in large part from the monetary stock of the world. -Some of it may be brought out in periods of emergency, such as times of -famine, and reconverted into money, but in the past a steady stream of -the precious metals has moved into India and disappeared as a factor -in the commercial world. Sir James Wilson, K.C.S.I., for many years in -the Government service in India, in a comprehensive address delivered -before the East India Association of London, on June 14, 1911, reported -the net imports of gold by India since 1840 at about $1,200,000,000, or -one-tenth of the world's production in that time. - -"It may be questioned whether the economists who are expressing fears -as to the effects that may result from the production of gold at the -present rate are aware of the amount of that metal taken by India since -the gold standard was definitely established, and the Government began -to pay out sovereigns freely. That occurred in 1900. For the ten-year -period, 1890-1899, the net imports plus the country's own production -were $135,800,000; for the eleven years, 1900-1910, they aggregated -$433,800,000. For the British fiscal years ended March 31, 1911, they -amounted to $90,487,000, or about one-quarter of the world's production -after the industrial consumption was provided for. - -"_If this ability on the part of India to take and pay for gold proves -to be permanent, it is apparent that there will be no over supply to -trouble the rest of the world._" - -The finance department of the Government of India, in its report for -the fiscal year ended March 31, 1911, commenting upon these figures, -says: - -"'The gold figures are striking, but it is equally remarkable that the -increase in gold has not been at the expense of silver; the country, in -other words, continues to take practically the same amount of silver, -but it prefers that the addition to the imports of treasure which it -has been able to claim should be in the form of gold.'" - -Sir James Wilson, in the address alluded to, sums up his explanation by -saying: - -"'As for India, her prosperity is steadily advancing. Great numbers of -her people prefer to spend their savings on gold rather than on other -commodities. The probability is that altogether apart from questions -of currency India will continue to absorb gold in ever increasing -quantities.' - -"The Egyptian situation is somewhat like that of India. The country is -on a gold basis, and for thirty years has been steadily taking gold -in the settlement of its trade balances. The high price of cotton in -recent years, and the increasing production of the country explains -the trade balances, but there is some mystery about the way the gold -disappears from view. It does not enter into bank stocks, and it is -difficult to understand how a country of its size and population, and -in which the masses of the people are so poor, can absorb so much gold -coin. In the first period under review the customs records show net -imports by $58,670,000, and in the second period, $146,660,000. For the -year 1910 they were $30,000,000. - -"Some light is shed upon the situation by the following statement in an -address by Lord Cromer, made in London, in 1907: - -"'A little while ago I heard of an Egyptian gentleman who died leaving -a fortune of £80,000 [$400,000], the whole of which was in gold coin in -his cellars. Then, again, I heard of a substantial yeoman who bought -property for £25,000 ($125,000). Half an hour after the contract was -signed he appeared with a train of donkeys bearing on their backs the -money, which had been buried in his garden. I hear that on the occasion -of a fire in a provincial town no less than £5,000 ($25,000) was found -hidden in earthen pots. I could multiply instances of this sort. There -can be no doubt that the practice of hoarding is carried on to an -excessive degree.'" - -In round figures the approximate amount of gold remaining for -commercial or banking purposes is approximately $4,000,000,000 (four -thousand million dollars), in addition to what we had in 1890, making a -total of $8,000,000,000 (eight thousand million dollars). - -Of this total amount the United States has $1,800,000,000 (one thousand -eight hundred million dollars), or nearly one-quarter of the monetary -gold supply of the world. - -However, if we had our proper proportion of the world's monetary gold, -considered from the standpoint of our bank resources, we should have -upwards of $3,000,000,000 (three thousand million dollars). - -MR. BANKER: How do you make that out? - -MR. LAWYER: The banking resources of the entire world are now -about $55,000,000,000, while those of the United States are about -$25,000,000,000, or two-fifths of the bank resources of the world, -and therefore we are entitled to two-fifths of the eight billion of -monetary gold of the world. This would give us $3,200,000,000. - -While, as I have just said, it is true that there have been no -discoveries of new fields since 1890, with the exception of the -Klondike, a most important event occurred in the discovery of the -Cyanide process, which was, with the circumstances attending it, well -described by the Mining World and Engineering Record of London, which -said: - -"The discovery of the Cyanide process must be regarded as one of the -greatest achievements of modern time. And there can be no doubt that -Cyaniding will be held by the coming generation for its importance, not -so much to the mineral industries directly, as for its bearing upon -world economies in rendering possibly a greatly increased output of -gold and silver year after year. In a comparatively brief twenty-year -interval since 1890, when Messrs. McArthur and Forrest brought the -modern perfected Cyanide process prominently before the mining world, -the output of gold has amounted to 284,081,289 fine ounces. This is a -most astonishing showing, especially when compared with a total output -of 401,311,148 fine ounces for the entire 397 years previous from 1493 -to 1890, a period lacking just three years of being four centuries. - -"For the great expansion in the world's output, particularly noticeable -in the past fifteen years, the spread of the Cyanide process is -directly responsible. Nor, if we except the Klondike, has this record -production been boomed by the development of new fields. The cream of -the world's gold fields had already been skimmed in previous years in -California, Australia, South Africa, Siberia, India, and elsewhere. It -is mainly on the cast-off leavings of the old field that the Cyanide -process has achieved a record production of the yellow metal. And among -those leavings, we must not forget the innumerable low-grade properties -whose exploitation has been rendered fundamentally possible only by -the Cyanide process. It is these latter which now furnish the bulk of -the world's supply of gold, and upon which the world must depend very -largely for its future requirements." - -MR. BANKER: Those figures are startling. We must be getting more gold -than we need for banking purposes. - -MR. LAWYER: On the contrary, our banking resources are increasing -faster than our gold supply. In 1890 the banking resources of the world -were estimated at $16,000,000,000, less than one-third of what they are -today. That is, the banking resources have trebled since 1890, and the -gold supply for reserve or monetary purposes has only doubled. - -MR. BANKER: What about the gold supply for the future? - -MR. LAWYER: The production during the past four years has been about -stationary, averaging $450,000,000 each year. You must remember there -have been no gold discoveries of any consequence during the past ten -years, and it is very probable that the production will remain almost -stationary for a few years to come. At present it looks as though the -gold supply, and the demand for gold for monetary purposes, would run -along about equal. Of course the more intimate the business relations -of the nations of the earth become, the more efficient will the reserve -of gold become, because the reserves of the world will become more and -more mobilized, and therefore more efficient in the conduct of the -world's business. - -MR. MERCHANT: From what you have said, and as a result of my own study, -I am convinced that the adoption of the Gold Standard was a natural -selection. It was the survival of the fittest. - -Thousands of books have been written upon this subject, and libraries -literally filled with them. - -In 1896, when the Presidential campaign was fought out on this -question, my investigation led me into an extended historical review -of the use of metals as money. I found that it had been in use by -the Babylonians, the Egyptians, the Greeks, the Romans, the Chinese, -the Europeans during the middle ages, and that the struggle between -gold and silver during the last two hundred years had resulted to the -advantage of the people, to the commerce of every nation and to the -whole world. This last struggle was not whether gold or silver should -be the standard of value, but whether both should or could be used as -the standard of value. That is, could we have a double standard. The -decision has been unequivocal and universally in favor of a single -standard of value, and that standard gold. - -But the double or bi-metallic standard had been a troublesome question -long before that. Professor Ridgeway says that from the first to the -last the Greek communities were engaged in an endless quest after -bi-metallism * * *, but while the gold unit never varies in any part -of Hellas, until a late epoch, the silver coins exhibit differences -not merely between one district and another, but even between one -period and another in the same city or state. There is incontrovertible -evidence to prove that the same trouble was caused by the fluctuation -in the relative value of gold and silver, as arises in modern times. -DelMar also states that gold Greek coins remained constant while the -silver ones varied, and had to be adjusted. - -At present, it may be stated as a general truth, that all other -things throughout the commercial world are now measured by gold, or -very soon will be, as all the commercial nations of the earth, with a -single exception, have taken steps looking to the adoption of the Gold -Standard. - -The Gold Standard is the evolution of the ages. - - - - -SECOND NIGHT - -WHAT IS MONEY? - - -UNCLE SAM: At our talk last Wednesday evening we all agreed upon two -facts, and these were fundamental to the consideration of a financial -and banking system for me. - -The first fact was this: that Gold is the Standard of Value all the -world over, as well as our standard. - -The second fact: that a Standard of Value was something by which the -value of all other things is measured. - -It must necessarily follow then, and be perfectly clear to all of us -that everything we produce, and everything that we buy and sell is -measured by Gold. In other words _that Gold is our money and that our -money is Gold_. - -MR. LAWYER: Uncle Sam, you say "Gold is our Money." Now, it seems to me -as though there must be something done to gold to make it money, even -though all our money is gold. - -MR. BANKER: Yes, something is done to gold to make it money, and to -circulate it as money. Just three things are done to gold to make it -possible to circulate it as money. - -_First_, we have established a degree of fineness. The gold coin we -circulate as money is nine-tenths pure gold, or nine-tenths fine, and -one-tenth of cheaper metal. This is added to give it an increased -hardness so that the loss by rubbing the gold against other things will -not be so great. This loss is called the abrasion of gold. - -_Second_, we have established a unit of value in gold which is one -dollar, composed of twenty-five and eight-tenths grains of gold, -nine-tenths pure, or fine. - -_Third_, Uncle Sam here cuts up the gold into pieces as follows: he -makes a two dollar and a half piece, which contains two and a half -times as much gold as our unit of value and stamps each piece two and -a half dollars. It is known as a quarter eagle, being one-quarter of -the ten dollar piece which is called the eagle. He makes a five dollar -piece which contains five times as much gold as our unit of value and -stamps each piece five dollars. It is also known as a half eagle. He -makes a piece which contains ten times as much gold as our unit of -value and he stamps it ten dollars. It is also known as the eagle. He -makes a piece which contains twenty times as much gold as our unit of -value and stamps it twenty dollars. It is also known as the double -eagle. This is called making coins, or coining money. - -These four gold coins constitute all the money there is in the United -States, for Uncle Sam does not make pieces containing twenty-five and -eight-tenths grains of gold, nine-tenths pure, or fine any more, and -stamp them one dollar because this piece of gold was so small as to be -inconvenient, indeed an actual nuisance. Uncle Sam stopped making these -coins in 1890. - -UNCLE SAM: That is right, and I don't make any more gold pieces now -containing fifty times as much gold as my unit of value for the same -reason that I don't make any of the dollar pieces. A fifty dollar piece -was found to be inconvenient and in a way an actual nuisance. - -MR. LABORINGMAN: Well, Uncle Sam, I would like to have a few of such -nuisances, and if any of you fellows have any of these two nuisances, -even the one dollar pieces about your persons, I wish you would allow -me to relieve you of all you have of either kind. When it comes to -getting rid of that kind of a nuisance, you don't seem to be in a hurry -about it. However, just remember that I stand ready at all times to -remove a nuisance of that kind, if it happens to be bothering any of -you. - -MR. MERCHANT: We will remember that and give you the first chance. - -MR. LABORINGMAN: Well, you might as well forget it, for I'll never get -the chance. - -MR. MANUFACTURER: Mr. Banker, did I understand you to say that the -four gold coins you have mentioned, the two and a half, the five -dollar, ten dollar and twenty dollar gold pieces constitute all the -money that there is in the United States? - -MR. BANKER: That is precisely what I said, and I stand ready to prove -it. Yes, to demonstrate it absolutely, and if I don't convince everyone -of you that I am right, I'll eat all the other stuff you call money -that you can bring me. - -MR. LAWYER: Here is a gold certificate, isn't that money? - -MR. BANKER: Mr. Lawyer, please hand me that certificate. Here is what -it says on its face: "_This certifies that there have been deposited in -the Treasury of the United States of America Ten Dollars in Gold Coin -payable to the bearer on demand_." It is perfectly evident, Mr. Lawyer, -that this is nothing but a warehouse receipt for ten dollars, stored -in Washington subject to the demand of the holder. There is just the -same difference between that and the gold coin as there is between a -trunk and a trunk check. You would not hold up a trunk check, and tell -me that it was a trunk. This certificate is no more money than a trunk -check is a trunk. - -MR. LAWYER: You are right, Mr. Banker. There is nothing so absolutely -essential in our talk, as illustrated by this incident, as the use of -correct, exact language. And I am very glad that you have impressed -this fact so indelibly upon our minds at the outset. - -MR. FARMER: Did you say, Mr. Banker, that all the money there was in -the United States were the gold coins? Then you said that if you didn't -convince the rest of us that that was the fact, you would eat all the -other stuff that we call money that we would bring you. Now, it seems -to me as though that was just one of your smooth, slick tricks of -getting what we have got in our pockets, as usual. How does that strike -the rest of you boys? Now, I have a few silver slugs here, Mr. Banker, -that will keep you busy chewing until you pass over, if you try that -game on us. - -MR. BANKER: That is all right, Mr. Farmer, but you wait until you hear -me out. - -Now, let us agree upon one fact, and that is this, that Uncle Sam over -there is not making or coining any other pieces of gold than the four -pieces I have just described, and that none of the one dollar or fifty -dollar pieces are now in circulation. Do you all agree that that is a -fair assumption under the circumstances? - -UNCLE SAM: Yes, that is a perfectly fair assumption that all of the gold now -in circulation consists of the four pieces I am now making, the two and a -half, five, ten and twenty dollar pieces. But, if they constitute all -the money I have in circulation, I am mightily fooled, and it is high -time I was put right. - -MR. BANKER: Well, that is what I am going to do. I am going to put you -right, for you have not only been fooled yourself, but you've been -fooling the people long enough as well. - -Three hundred and fifty years B.C., one of the greatest philosophers, -and one of the wisest men that ever lived, described the development -and evolution of money, and defined what money was better than any man -ever has since, I think. That man was Aristotle. Aristotle's account of -the origin and definition of money was as follows: - -"It is plain that in the first Society (that is in the household) there -was no such thing as barter, but that it took place when the community -became enlarged: for the former had all things in common, while the -latter, being separated, must exchange with each other according to -their needs, just as many barbarous tribes now subsist by barter; for -these merely exchange one useful thing for another, as, for example, -giving and receiving wine for grain and other things in like manner. -This kind of trading is not contrary to nature, nor does it resemble -a gainful occupation, being merely the complement of one's natural -independence. From this, nevertheless, it came about logically that as -the machinery for bringing in what was wanted, and of sending out a -surplus was inconvenient, the use of money was devised as a matter of -necessity. For not all the necessaries of life are easy of carriage; -wherefore, to effect their exchanges, men contrived something to give -and take among themselves, which being valuable in itself, had the -advantage of being easily passed from hand to hand for the needs of -life--such as iron, or silver, or something else of that kind, of which -they first determined merely the size and weight, but eventually put a -stamp on it in order to save the trouble of weighing, for the stamp was -placed there as _the sign of its value_." - -Wilbur Aldrich says: "Gold, and no other thing, sustains all the -functions of money. Gold is money as soon as it is taken from the -earth, without smelting, without refining, without minting and without -limitation." - -Horace White says: "Nobody would give that which has cost him labor in -exchange for something which he could obtain without labor." - -MR. MERCHANT: Mr. Banker, you quoted a man there, Mr. Aldrich, I think -it was, who said that gold alone possessed all the functions of money. -Just what do you mean by the "functions of money"? - -MR. BANKER: I am glad that you asked that very question, because those -functions have determined the place of gold in the world's business, -and made it the standard of value of the world, and consequently the -money of the world. - -Those functions are these: - -_First_: Gold is a measure of value; that is, all other things are -measured in gold. - -_Second_: Gold is divided into units, such as our dollar, the English -sovereign, the French franc, the German mark, and so determines prices. - -_Third_: Gold is a medium of exchange. - -_Fourth_: Gold is a storehouse of value; that is, the people of the -world hold it as an absolutely safe form of property, varying less in -value than anything else they can possess. - -_Fifth_: It is such a permanent form of value that it is made the basis -or standard of future or deferred payments: not only at the end of a -year, but at the end of twenty-five or fifty years. - -MR. MERCHANT: I would like to ask you whether you think there is -anything in this claim that gold is cheaper today than twenty years -ago? Whether it is falling in value, and as a consequence prices of -everything else, which must be compared with gold, are rising? - -MR. BANKER: No, sir, I do not think that the increased output of gold -is the cause of higher prices. The increased prices can be more than -accounted for in other ways. Think of it. There are: - - 1. The Trusts, - 2. The Middleman, - 3. Advertising, - 4. Unscientific Management, - 5. Overcapitalization, - 6. Monopoly! Monopoly! - 7. Extravagance, - 8. Militarism, - 9. Exhaustion of Soil, - 10. High Rates of Interest on Agricultural Loans, - 11. Unnecessary Disease, - 12. Concentration of Population in Cities, - 13. Shorter Hours by one-quarter, - 14. Increased Wages by one-quarter at least; in some instances, 150%, - 15. Shorter Hours for Women, - 16. Child Labor Laws, - 17. Minimum Wage Laws, - 18. Workmen's Compensation Acts, - 19. Insurance Against Unemployment, - 20. Old Age Pensions. - -MR. LABORINGMAN: Well, I don't know what you fellows think, but I -am for everyone of these forward movements that make for a better -humanity, morally, intellectually and physically; and I'm utterly -opposed to the unfair advantages that any man, or corporation, has over -any other man, or any other corporation. A just government rules its -people through just laws, and guarantees equal opportunities under the -operation of those laws. - -MR. BANKER: So I think we all are, or will be, very soon. Every lover -of his country, everyone who recognizes that the government exists for -man--manhood and womanhood--must be for these purposes, but all these -things will require a readjustment, and will take time. I am only -saying that these things more than account for all your high prices, -but let me finish. - -21. During the past ten years, 10,000,000 of our people have shifted, -or gone, from the country to the cities. Food producers have decreased, -and food consumers have increased by 10,000,000. Our population has -increased 47% and our food products only 30% since 1890. - -22. The hundreds of millions that have gone into automobiles, not one -dollar in a thousand of which produces anything but a good time, or a -joy ride, is a burden on production, and has been affecting prices, -because they are nothing but luxuries. - -23. Then there are all the other conveniences of life, such as -telephones, electric light, etc. - -Again, gentlemen, let us note where the gold has gone to during -the last ten years, the period of increase in price. Germany got -only $40,000,000, although her business has expanded enormously. -England took only $30,000,000, while France took $300,000,000, Russia -$200,000,000, and we absorbed $1,100,000,000. During the same time -India took $433,000,000. Will anyone say that the prices in these -various countries have in any way shown or reflected the amount of gold -taken or absorbed? - -Let some one come forward and prove that gold has become cheaper by -pointing out that prices in the various countries indicate its effects -upon commodities. Lastly, let them explain the fact that while the -banking resources of the world have increased from $16,000,000,000 -to over $55,000,000,000, or increased three and one-half times, -the gold for monetary purposes has only doubled, or increased from -$4,000,000,000 to $8,000,000,000. - -MR. MERCHANT: I am more than satisfied and pleased that I asked you -that question, for I knew it would be constantly bobbing up and -bothering us, as we went along. When I interrupted you, you were -speaking of gold and its functions as money. - -MR. BANKER: Yes, and I assert that no other substance or thing -possesses these functions, qualifications or characteristics, at least -in no such degree as gold. Does anyone here deny that? - -MR. LAWYER: I think we must all agree to that, and further I would say -that anything that did not possess all these functions, qualifications -or characteristics in combination cannot very well be called money. To -illustrate, if anything was used as a medium of exchange but depended -upon its relation to gold for its acceptance it could not be called -money. - -I am fully aware that we speak of "cash" and "money," as anything we -get in exchange for property, but this language does not mean anything -definite, except as to the transaction. - -I want to lay this down as an absolute rule, and something that no one -of us should forget or overlook during our conversations. - -"_We should be careful to avoid calling any kind of credit instrument -money, no matter how much used as a medium of exchange._" - -Let me read that again. - -UNCLE SAM: Now, let me see just what you mean by that. If I understand -you, I think that is an attack upon me, upon my credit. For if my -recollection serves me right, the United States Notes, or Greenbacks, -have been called money, and treated as money ever since I issued them -during the war, way back in 1862, I think it was. - -MR. BANKER: Well, Uncle Sam, do you think calling a thing something -which it is not makes it that thing? To say that the moon is made of -green cheese does not make it so. Now, here's one of your United States -Notes, or Greenbacks. Do you recollect what you printed on that at the -time you issued it, and have been printing on it ever since? This is -what it says: - -"_The United States will pay the bearer $5.00._" - -That promise, or agreement, can mean but one thing, and that is -that you will pay the bearer five times one dollar, or five times -twenty-five and eight-tenths grains of gold, nine-tenths fine. - -Now, it must be perfectly clear to you, indeed, the conclusion is -incontrovertible, that that $5.00 United States Note, by which you -agree to pay me $5.00 cash, can't be the $5.00 itself. - -MR. FARMER: No, by jocks, I know that is true. Tom Jones gave me a -written agreement to deliver me a horse last Monday morning. I sent -my boy over with his written promise for the horse, and he refused to -deliver the horse. Certainly, his promise was not the horse; that's -perfectly clear to me, for I did not get the horse, and that's the same -kind of a deal that this United States Note is. - -MR. LABORINGMAN: Yes, but Uncle Sam is no such flunker as that. - -MR. BANKER: Well, he flunked from 1862 until 1879, for about seventeen -years, and he came within an ace of flunking again in 1894. He is -liable to flunk any time it suits him, if he should get into a tight -place. - -UNCLE SAM: That's so, and the misfortune and the shame of it is, that I -am left in a position where I am compelled to flunk. - -MR. BANKER: I agree with you, but that only adds additional proof that -this $5.00 bill, which is your promissory note, your I.O.U., or old due -bill, given for boots, mules and ammunition during the war, is not -money at all, but a mere promise to pay money. - -As you have just said, it is most unfortunate that you have been left -in this position by your boys who have been going to Congress for the -past fifty years, apparently without the intelligence, or courage, to -relieve you of this disgraceful situation. - -UNCLE SAM: Well, if these United States Notes are nothing but -my promissory notes, or due bills, agreeing to pay money, it is -self-evident that they are not money. You have completely satisfied me -on that point. Mr. Banker, how much of that kind of stuff have I got -out? - -MR. BANKER: $346,000,000. - -UNCLE SAM: Great Scott, I presume if I should get into trouble with -some first-class nation, and have to go to war for a few years, and -the people began to wonder whether I was going to pull through and pay -my debts, that is to doubt my ability to stand the bill, and all that -$346,000,000, then that $5.00 United States Note would not pass for -$5.00. - -MR. BANKER: Precisely so; that very note passed for only $1.75 at one -time in 1864, or only 35 cents on the dollar. - -UNCLE SAM: Well, I wish Congress would get busy and pay these things -off, so that I would be prepared for business, if anything should turn -up compelling me to fight. - -MR. MANUFACTURER: From what you have said, Mr. Banker, and what Uncle -Sam admits, I guess we all agree that the United States Notes, or -Greenbacks, are not money at all, but just ordinary debts, or demands -for money, and therefore cannot themselves be money, of course. But -what have you to say about this National Bank Note here? How does this -differ from the United States Notes or Greenbacks? Don't you admit that -this is some sort or kind of money? - -MR. BANKER: I do not. It is no more money than the United States Note. -Just read what it says: - -MR. MANUFACTURER: I will. This is what it says: - -"_The First National Bank of New York will pay the bearer $5.00._" - -Mr. Banker: Don't you see that that bill is a mere I.O.U. of the Bank, -nothing but a promise to pay five times twenty-five and eight-tenths -grains of gold, nine-tenths fine, to the bearer? It does not differ in -the slightest degree from the United States Note except that one is -the promise of the First National Bank of New York, and the other the -promise of Uncle Sam to pay $5.00. You can no more say that a promise -of a bank to pay money is money than you can say that a promise of -Uncle Sam to pay money is money. Both are debts, and both are demands -for money, and therefore neither can be money. - -MR. FARMER: Gentlemen, while I must admit that Mr. Banker has -completely, yes, absolutely, gotten away with the United States Notes -and National Bank Notes and convinced us that they are not money at -all, just watch me choke him with this silver slug, weighing 412-1/2 -grains, and bearing two invincible superscriptions. - -_First_: "In God we trust." - -_Second_: "United States of America, One Dollar." Mr. Banker, what -have you to say about our Silver Dollar? Do you mean to tell me it is -not money? That's what I want to know. Think of it, this dollar of our -daddies not money. - -MR. BANKER: Well, Mr. Farmer, if you'll follow me for half a minute, I -will only have to ask you whether you yourself think it is money; and I -will abide by your own decision. But, what I would rather do is to put -it to a vote of the crowd, and if it is not unanimous I'll give it up. - -Here is a 1 cent piece, bearing one of your invincible superscriptions, -"United States of America, One cent." We have more to trust God for in -one of these cents than we have in your Silver Dollar, and therefore -it was a grave oversight when Uncle Sam left off the other invincible -superscription, "In God we trust," since this piece of bronze is worth -only about one-thousandth part of a one-hundredth part of our Gold -Dollar, or .0011890. Here is one of our nickels, bearing the same -invincible superscription, "United States of America, V cents," which -is worth about two-thousandths of one-hundredth part of a Gold Dollar, -or .0026743. Here is a 10 cent piece, worth about 4 cents, or .04456, -and here is a 25 cent piece, worth about 11 cents, or .11141. Here is -a 50 cent piece, worth about 22 cents, or .22283. Here is the sacred -dollar of our daddies, worth about 47 cents, or .47651. - -Now, all these pieces of metal belong to the same class of coin from -the cent to the dollar included, and are merely token coins. - -MR. MERCHANT: Well, what is a token coin? - -MR. BANKER: A token coin is a piece of metal bearing the stamp of the -Government, and passing at its face value, though the metal it contains -is worth less than its face value. - -This definition covers every piece of metal coin Uncle Sam makes except -our gold coins, which are worth just as much and no more in the form of -coin than they are in the form of metal, or gold bars. Now, Mr. Farmer, -I want you to understand that the silver dollar is included in these -token coins. - -MR. MANUFACTURER: Well, please tell me why do people take these pieces -of money at their face value, when they are worth so much less than -they pretend to be? - -MR. BANKER: For the very simple reason that Uncle Sam over there -redeems all the coins, smaller than one dollar, when presented to him -in sums of five dollars or more, and because it is made the duty of -his Secretary of the Treasury to maintain the face value of our silver -dollar with our gold dollar by exchanging gold dollars for silver -dollars, if anyone asks him to do so. - -If the Government should pass a law refusing to redeem our silver -dollars with gold dollars, our silver dollar would then pass for just -what the silver it contains would be worth from day to day. It is now -worth 47 cents. In 1902 it was worth 40 cents. In other words, our -silver dollar is not its own redeemer at 100 cents any more than the -United States Notes or the National Bank Notes are their own redeemers. -A silver dollar is a demand or a check calling for a gold dollar. The -silver dollar, the United States Note, the National Bank Note all -pass at their face value because they are convertible into gold, and -are temporarily redeemed by Uncle Sam in gold, while gold is its own -redeemer, and a ten dollar gold piece, or any other gold coin, is worth -just as much, if hammered into a spike, or melted into a slug, as -when it bears the stamp of Uncle Sam, certifying its quality and its -quantity. - -MR. LAWYER: Mr. Banker, what are subsidiary coins? - -MR. BANKER: All these token coins are properly called subsidiary coins. -Let me read to you what Horace White says on that point: - -"The word 'subsidiary' is usually applied to coins which constitute the -small change of a country, and which are legal tender only for limited -amounts. In the United States the silver dollar must be classed as -subsidiary also; for, although it is full legal tender, the Government -does not coin it for private individuals as it coins gold. It is -subsidiary or subordinate to gold coin." - -MR. LABORINGMAN: Uncle Sam, why do you make these token or subsidiary -coins? - -UNCLE SAM: I make token or subsidiary coins out of silver, nickel, and -copper just as a matter of convenience to the people, and as a result -of custom also. - -MR. LAWYER: I think what Horace White says upon that point is -particularly good, and answers your question, Mr. Laboringman, -completely. White says: - -"If subsidiary silver coins circulate at a value which is largely -imaginary, the question may be asked, why not make them of some other -metal, or even of paper? There are no reasons except custom and -convenience. A coin, not heavier than a half dollar, is more convenient -than a piece of paper; it is cleaner, and in the long run is probably -cheaper, as it does not require frequent renewal. A cheaper coin might -be made out of some other metal, but it is generally best to conform -to the habits of the people. Having been always accustomed to a silver -subsidiary coinage no good reason is apparent why we should depart from -it." - -MR. MERCHANT: Of course, you must use something besides gold to make -the 50, 25, 10 and 1 cent pieces out of, because even a gold dollar -would be found to be impracticable on account of its size. It would -take a microscope to find a piece of gold worth only 5 cents. - -MR. LABORINGMAN: And it would take a telescope to find a piece of gold -worth only 1 cent. - -MR. BANKER: Mr. White has this to say also about the silver dollar: -"The silver dollar is a larger kind of subsidiary coin, and should be -treated by the Government exactly as the smaller ones are treated. The -Government has received the value of a gold dollar for every silver -one emitted, and is therefore bound in equity to redeem the dollars -as it redeems the halves, quarters and dimes.... There are additional -reasons, however, for direct redemption of the silver dollar. One is -that such coins are unlimited legal tender between individuals. Another -is that there is a certain amount of public apprehension and lack of -confidence touching any coin which passes for more than its metallic -value." - -"McLeod says that in 1691 in a posthumous work Sir William Petty -pointed out that one metal only should be adopted as the standard unit, -and other metals should be issued as subsidiary to the standard unit. -The same doctrine was advocated with great force and at great length by -Locke in 1693, and also by Harris in the middle of the last century, -and was finally embodied in the great masterpiece of the subject 'Lord -Liverpool's Coins of the Realm,' published in 1805." - -Now, gentlemen, it must be apparent to everyone that a silver dollar is -only another form of a debt of Uncle Sam over there, and that unless he -continues to stand ready to exchange gold dollars for silver dollars, -and so keep the silver dollars in circulation at 100 cents, they would -circulate at their metal or bullion value, or at about 47 cents. - -Mr. Farmer, do you think that stamping One Dollar upon that silver -coin, added one-hundredth part of a cent to it, or affected its value -in the slightest degree? Are you not convinced that it is not money at -all, but a mere debt of Uncle Sam and that it is a mere demand for One -Dollar in gold, and nothing more? - -MR. FARMER: I am bound to admit that you have surprised me, indeed -paralyzed me, for I thought the Silver Dollar was money, but it is -certainly exactly the same sort of thing that the Greenback and the -National Bank Note is, and if they are not money, neither is the Silver -Dollar money. - -MR. MERCHANT: I am sure we all agree on that point now, but what about -this silver certificate? Do you pretend, Mr. Banker, that all our -Silver Certificates are not money either? - -MR. BANKER: That is just what I assert, but I claim still more than -that with regard to the Silver Certificate; for, if you will read it, -you will find that it is only a warehouse receipt for silver dollars, -which have been deposited in the United States Treasury; and therefore -is not a promise to pay anything, but simply to deliver so many silver -dollars, which, as I have just demonstrated, must be redeemed in gold -to keep them going for 100 cents on the dollar. - -MR. LAWYER: I am going to ask one question in this connection, and that -is this. The United States Notes are a legal tender for everything -except to pay taxes on goods coming into the country and interest on -the debt and silver dollars are a legal tender, unless the contract -is made payable in something else. Does not the fact that the United -States Note and the Silver Dollar are legal tender, make them money? - -MR. LABORINGMAN: What's legal tender? - -MR. LAWYER: Anything which can be lawfully used in payment of a debt, -or which creditors are compelled to accept, is called legal tender -currency. - -MR. BANKER: The fact that the United States Note and Silver Dollar are -legal tender does not change the real character of either of them. -Don't you know that the very fact that you are compelled, or think -you are compelled, to make anything legal tender, to make it go for -something it is not, lowers its value and depreciates that very thing? - -The price of the United States Notes or Greenbacks from the day they -were issued, until January 1, 1879, the date Uncle Sam redeemed his -promise to pay gold for them, was simply a quotation of the government -credit. This credit ranged from $1.00 to 35 cents. White says: "The -difference between these extreme quotations may be taken to represent -changes in the public credit, or various vicissitudes and states of -mind, dependent upon the war." - -Again he says: "In 1864 Congress attempted to check the depreciation -of the currency by closing the gold exchange, and prohibiting sales -of gold or foreign exchange for future delivery. The premium on gold -advanced more rapidly after the passage of this Act than before, and -Congress repealed it two weeks later." - -MR. LABORINGMAN: Now, men, let me see if I understand what this is all -about. If I have caught on to just what you have been saying about -gold, which is all the money we have, and all these promises to pay -money, these United States Notes, Bank Notes and Silver Dollars, the -difference between gold coins and these promises is the same as the -difference between a meal and a meal ticket. And when you come to the -Silver Certificate that is only an order for a meal ticket. - -UNCLE SAM: By Jove, he's hit the thing plump and square on the head, -hasn't he, boys? But what I want to know now is how many of these meal -tickets I've got out in one form or another? And, Mr. Banker, I want to -know another thing. I want to know how many cans of pork and beans I -have on hand to meet the meal tickets with? - -MR. BANKER: Well, Uncle Sam, as I look at it you have 1,659,000,000 -meal tickets out, and only 150,000,000 cans of pork and beans to meet -the demand for meals. - -UNCLE SAM: Great Scott, what unbounded confidence the people must have -in me not to shove those meal tickets in, before I get ready to supply -the meals. What is worrying me is this, if anything should happen to -cause any suspicion on that score, the jig would be up with me, and I -can see the end of my credit; but of course that wouldn't be my finish. -Now, what I want done is this: I want to shift these meal tickets over -to the banks where they belong, or make full provision for them myself, -so that I can stop worrying, and shall be ready for business, if called -upon to meet a first-class nation in a protracted war. - -By the way, Mr. Banker, just how did you make those meal tickets amount -to 1,659,000,000 and that I had on hand only 150,000,000 cans of pork -and beans to meet the meal tickets with? You must remember it takes one -can of pork and beans to redeem one meal ticket. - -MR. BANKER: Uncle Sam, you will remember that you have $346,000,000 of -United States Notes to pay. You have also $563,000,000 Silver Dollars -to redeem, and there are $750,000,000 National Bank Notes, making a -total of $1,659,000,000, all resting on your $150,000,000 of gold in -the reserve of your Treasury. - -UNCLE SAM: Yes, but I don't have to pay those National Bank Notes, do I? - -MR. BANKER: Well, Uncle Sam, it's this way, you know, you have to pay -them out of a 5% fund created by the bankers, but the bankers can turn -right around and ask you to redeem the United States Notes which you -pay them for the National Bank Notes, in gold. - -UNCLE SAM: Mr. Banker, tell me another thing. If these silver -certificates are nothing but warehouse receipts calling for silver -dollars, and the silver dollars are nothing but token coins, then all -these silver certificates are nothing but token or subsidiary coins in -another form. - -MR. BANKER: That is literally true. - -UNCLE SAM: And you say I have $563,000,000 of silver dollars out good -for nothing but token or subsidiary coin? - -MR. BANKER: Precisely so. - -UNCLE SAM: Now, what I want to know is this. How much of this silver is -needed today to supply the people with the token or subsidiary coin, up -to and including the $2.00 bills; that is, the $2.00 bill, the $1.00 -bill, 50, 25, 10 and 5 cent pieces? - -MR. BANKER: There are in circulation today about $400,000,000 of these -various forms of subsidiary or token coins, or about $4.00 for every -man, woman and child in this country. - -UNCLE SAM: What is the total amount of silver in the country then, of -all kinds, silver dollars and pieces of silver less than one dollar? -Tell me that. - -MR. BANKER: There are, as I just said a moment ago, $563,000,000 of -silver dollars and $147,000,000 of silver pieces less than one dollar, -or a total of $710,000,000. - -UNCLE SAM: Well, well, you frighten me, for at the rate of four dollars -each, the amount necessary for the convenience of the people, I am -stacked up ahead for at least fifty years, or until we have about -200,000,000 of people; for you say we have all told $710,000,000 of -silver coins in the country now. I want to tell you gentlemen, right -now, that I want to get out of this hole, and I want to keep your mind -steadily on that point as we go along. - -The whole situation is a most embarrassing one. Tell me how much gold -coin we have scattered about everywhere over the country? - -MR. BANKER: There is about $1,850,000,000 of gold available in the -country. - -UNCLE SAM: Then I am confident there is great plenty for the present, -if we can devise some plan, or scheme, to avail ourselves of it. - -MR. LAWYER: I am convinced of that also, but the trouble is going to be -to bring it together, centralize it and so mobilize it that we can make -the most of it. We have learned one great and most important lesson -tonight, and that is that the only money we have is gold, and that -we cannot substitute an agreement to pay gold, a debt, a mere demand -for gold itself, for it. Such a proposal when you think of it is an -absurdity, a contradiction of terms. - -To state the result of our conversation, or our conclusion, as I -understand it, it is this: Money must be coined out of a commodity that -is just as valuable in the form of a commodity as it is in the form of -coin. A piece of gold weighing just the same as a $20 gold coin, if as -pure, is worth just as much as a $20 gold piece. - -Last Wednesday evening we all agreed that, as the result of our -conversation, gold was the standard of value of the entire world, and -was our standard of value as well. - -Tonight, as I understand the result of our talk, we all agree that the -only money we have in this country is gold coin; that our money is gold -coin, and that our gold coin is our money. - -Next Wednesday night let us investigate our currency and ask ourselves -"What is currency?" - -Before we separate, I want to read to you what Webster says currency -is, because I want you to be thinking over the matter in the mean time. -Webster says: - -"Currency is the state or quality of being current; a continual course -or passing from person to person or hand to hand; general acceptance; -circulation." - -MR. LABORINGMAN: You mean something that everyone takes and is glad to -get. - -MR. LAWYER: Precisely so; it is that which is in circulation, or is -given and taken as having value, or is representing value, as the -currency of the country. - -If we all keep this definition in mind, we shall have very little -trouble next Wednesday evening in agreeing upon what currency is, and -what it ought to be. - -UNCLE SAM: I want you men to remember one thing, and that is this, that -we want no currency in this country that isn't as good as gold, and -currently redeemed in gold coin to prove it. Nothing will satisfy Uncle -Sam but the best, and don't you forget it. On top of that I want to -plant another proposition, and that is this: It's not my business to be -exchanging gold for that currency either. Compel the banks to do that, -for that is their business. - -But first, we will settle what our currency is, and what it ought to be. - - Good Night. - - - - -THIRD NIGHT - -WHAT IS CURRENCY? - - -UNCLE SAM: Well, boys, when we parted last Wednesday night, it was -agreed that we should take up for consideration and discussion tonight -the question, "What is Currency?" And just before we left Mr. Lawyer -read Webster's definition of Currency. - -MR. MERCHANT: I am very glad that he did so because it gave me a start, -and set me to thinking, and as a result I became very much interested -in the subject. - -MR. BANKER: I have made the question of currency a study now for -several years, and regard it of prime importance in any financial and -banking system; but especially so considering the peculiar conditions -existing in this country with our vast extent of territory, and the -many distinct commercial centers there are here, each specializing in -some one kind of production or industry. But more particularly is a -right form of currency essential in this country because of the great -number of our individual, independent banks now exceeding 25,000. - -MR. MANUFACTURER: Well, Mr. Banker, it strikes me that you are getting -a trifle on to a side line. Let us get right down to business, and see -if we can make any progress in determining just what Currency is, what -kind we have and what kind we ought to have, if any change is to be -made. - -To my mind, and I have put all the spare time I had upon the question, -that definition when fully understood described currency perfectly, -and will help us amazingly in arriving at a clear idea of just what -currency is as well as what it is not. Let me restate a part of -it, which I think covers all of it. "Currency is that which is in -circulation, or is given and taken as having value, or as representing -value." That is, currency may have value in itself, as illustrated by -our gold coin, or may only represent value, as illustrated by our gold -certificate. - -Again, the definition described another quality, when it said that -"currency passes from person to person, or from hand to hand; general -acceptance; circulation." To be a piece of currency then, a thing may -or may not have actual value, as a gold coin, or as a gold certificate, -which can be exchanged for the coin. But the thing must have general -acceptance, that is, it must be received by the people generally, as a -matter of course, and without hesitation, and without taking anything -from it, or adding anything to it, such as a stamp, or a signature. - -That is, a piece of currency having passed through a thousand hands, -remains identically the same thing, except the ordinary wear to which -it has been subjected. - -MR. MERCHANT: Mr. Banker, taking that explanation as correct, what -would you say that our currency consists of? - -MR. BANKER: Our currency consists of the following things: - -_First_: Gold coin, which is generally accepted, and has actual full -value. - -_Second_: Gold certificates, which are generally accepted, but have no -actual value. - -_Third_: All token, or subsidiary coin, including the silver dollar. - -_Fourth_: Silver certificates. - -_Fifth_: United States Notes. - -_Sixth_: Bond-secured National Bank Notes. - -MR. MERCHANT: I read an article recently in which checks and drafts -were spoken of as currency. Can it be possible that they can properly -be called "currency"? - -MR. BANKER: Certainly not. They come under an entirely different head, -and I hope we shall spend an evening considering them very soon. Checks -and drafts never pass from person to person and from hand to hand and -are not of general acceptance. Herein lies the mark of distinction. -Checks and drafts do not pass from person to person and from hand to -hand and are always of special acceptance, that is, they are considered -before they pass. They are taken according to the strength of the -makers, acceptors and endorsers and usually pass only by endorsement. -We must make no such mistake because it will lead to a confusion of -ideas. - -MR. MERCHANT: Mr. Banker, you have just told us of what our currency -consisted. Gold coin, gold certificates, token coins, silver -certificates, United States Notes and our bond-secured Bank Notes. -Taken altogether I presume you would call that our currency system. Do -you call it a good system? - -MR. BANKER: It is our currency system, but it is without doubt the -worst currency system in the world, if you include only respectable -commercial nations. - -MR. MERCHANT: Well, Mr. Banker, what is wrong with it? - -MR. BANKER: To tell you what is wrong with our currency system, I would -first have to tell you what a right kind of currency system is. And -I will proceed to do so in a word. A right kind of currency system -consists of three forms of currency only. - -_First_: Gold coin, or the gold certificate. - -_Second_: Token, or subsidiary coin. - -_Third_: A credit bank note or bank credit currency. - -All these forms of currency are absolutely essential to a right -currency system, as I shall proceed to demonstrate. - -_First_: Gold coin, or its substitute, the gold certificate, is the -very foundation of a right currency system, because there must always -be present, or immediately available, a sufficient amount of gold to -prove, protect and redeem, if necessary, all other forms of currency. - -_Second_: Subsidiary coins are absolutely essential as a matter of -convenience to carry on the small trade of the country. - -_Third_: A credit bank note which will always spring into being, -precisely as a check does, to perform some special transaction, is the -most efficient and most economic form of currency in the world, because -it always just equals the demand for currency, and costs no more than a -deposit account, subject to check. - -MR. MANUFACTURER: Just what do you mean when you say that a credit bank -note currency will cost no more than a deposit account subject to check? - -MR. BANKER: I mean just this, that if you had a deposit at a bank of -$1,000, and the bank upon receiving your check for $1,000 could convert -that book account, or book debt, into a note account, or note debt, by -giving you its bank notes for $1,000, in exchange for your check, the -bank note currency would cost only the interest on the reserve carried -against the notes, which would be identical in amount with the reserve -carried against the deposit. - -To illustrate, if the bank were in the country it would carry 15 per -cent reserve, if a National Bank, or $150 in cash against that deposit -of $1,000. The interest on that $150 for one year at 6 per cent would -be $9. Now, if that deposit were convertible into notes, and you kept -the same reserve of 15 per cent against them, the thousand dollars -in notes would cost only $9 per year, and could and would in turn be -reconverted into a deposit, subject to check. - -Not only does this form of currency cost only about one-sixth as -much as our present currency in the form of United States Notes and -bond-secured Bank Notes, but it is the only form of currency that will -always be precisely equal to all the demands of trade. It will never -be too great in amount. It will never be too small in amount. It will -always just exactly equal the ever varying requirements of business and -will always be as good as gold, because currently redeemed in gold. - -The principle of converting bank book credits into bank note credits, -in accordance with the requirements of the customers of a bank, is the -bank credit currency principle and there is not a single instance in -the history of banking where it has ever been tried and failed. - -Let this be laid down as one of the eternal laws of banking. _Current -coin redemption is the very soul and breath of life to bank credit._ - -MR. MERCHANT: That is certainly most interesting and I must say a most -impressive fact, if we can secure a currency, equal at all times to -the requirements of trade, and always as good as gold coin, and at -an expense of one-sixth of what our present currency costs us in the -form of United States Notes and bond-secured Bank Notes. There are -today outstanding $346,000,000 United States Notes and $750,000,000 of -bond-secured Bank Notes, or about $1,100,000,000 in all. Now, since any -bank must pay par, or 100 cents on the dollar, to get possession of -either of these forms of currency, the cost of carrying either of them -will be 6 per cent on the total of $1,100,000,000, or $66,000,000 per -annum. Of course if the banks are compelled to use such an expensive -form of currency, they will have to charge their customers accordingly, -and in the end it comes out of me, Mr. Manufacturer and so on down the -line, until, finally, the cost or burden reaches Mr. Farmer over there, -or Mr. Laboringman over here. - -Now, you assert that a credit currency would only cost the country -one-sixth as much, or only eleven million per year, whereas the same -amount of currency in United States Notes and bond-secured Bank Notes -now cost us $66,000,000 a year, or $55,000,000 more than it should. Of -course every cent of that must in the end come out of labor. - -MR. BANKER: I said one-sixth for the country bank. The average reserve -held by all the National Banks is 20 per cent, not 15 per cent. So that -the unnecessary cost to the people of our present United States Notes -and bond-secured Bank Notes is five times as much as it should be, or -we are losing every year $53,000,000, every dollar of which must come -out of labor. - -MR. MERCHANT: Now, let me see whether I understand this matter -correctly; to illustrate, let us suppose that your bank needed today -$1,000 more currency than it has on hand to accommodate a customer. You -would have to go out and buy it, and pay $1,000 for it, or obligate -your bank to do so. With interest at 6 per cent it would average $60 -per year to carry it, but if you could exchange your bank's notes, -amounting to $1,000, for your customer's note of $1,000, and carry a -reserve against your bank notes outstanding of say 20 per cent or $200, -and interest is at 6 per cent, it would cost you only 6 per cent on -$200, instead of 6 per cent on $1,000; or you would make a saving of -$48 on the $1,000 of currency. Am I correct in my understanding of the -difference of cost upon these two forms of currency? - -MR. BANKER: Yes, you are absolutely right. No one could state the -principle better than you have. - -MR. MERCHANT: Well, then, it is clear, that if there is a saving of $48 -a thousand on $1,100,000,000, we are wasting annually on that one item -alone $52,800,000. - -MR. MANUFACTURER: But, gentlemen, let me call your attention to another -fact. This country is losing several times as much as that every year -on the average, because of our present rigid form of currency. Just as -soon as there is any fear anywhere in this great country about a bank -of any consequence, or about the business generally in the country, -every banker from Dan to Beersheba begins to grab currency in whatever -form he can get it, because he knows the amount is fixed and limited. -It is not nearly so much a run on the banks by the depositors, as it is -a run by the bankers on each other, just to accumulate cash. Everything -comes to a dead stop, just as it did in 1907, and it always will under -present conditions. Now, it seems to be perfectly plain that if the -banks could convert their book credits into note credits, they could -immediately meet the demand for cash, and so avert these commercial -catastrophes, which set us back years. You know we are just now -beginning to realize that we are getting over the panic of 1907. - -Gentlemen, instead of the panic of 1907 costing us $53,000,000 a year, -it costs the people of the United States more than ten times as much as -that every year. God only knows what these commercial tragedies mean in -the life of a nation like ours, and it is up to us to prevent them, if -possible, and it must be possible. It looks to me as though Mr. Banker -was on the right track. - -UNCLE SAM: Well, you fellows have got to show me a thing or two, before -we make the proposed changes, because I am from Missouri, as well -as from forty-seven other unsuspecting states, and don't you forget -it. In the first place, I want you to show me why my I.O.U.'s or the -United States Note, so-called Greenbacks, are not a good currency. In -the second place, I want you to show me why the present National Bank -Notes, which are secured by my bonds, dollar for dollar, are not the -best currency in the world. I have been told this for the last fifty -years, and if it is not true, it is about time I waked up. - -MR. BANKER: Well, Uncle Sam, they've been fooling you, for both the -United States Notes and these bond-secured Bank Notes are the worst -form of currency in the world, and I can prove it. - -UNCLE SAM: Well, you will have to prove it, that's all. - -MR. BANKER: In the outset, I will tackle the United States Note, and -incidentally, I will state all the other objections to them, as well as -the objections to them as currency. - -_First_: They are demand obligations against you amounting to -$346,000,000, and you must stand ready at all times to redeem them in -gold. This fact always has and always will imperil your credit. It -was the same greenbacks that sent your credit down to 35 cents on the -dollar during the war, and again they came within an ace of wrecking -your credit in 1894 when the gold in the treasury went down, down and -down, until there was only $41,000,000 left, between you and national -dishonor. Don't you remember that you then sold $262,000,000 of your -bonds to protect your credit which was being sapped by these very same -United States Notes? Pretty expensive business that, when you could -have had a currency that the banks of the country, and not you, would -have been compelled to redeem in gold whenever necessary. - -You will no doubt remember that in 1879 when you began to keep your -promise, and redeem these greenbacks in coin, and make your old -due bills as good as gold, you issued $100,000,000 of bonds for a -corresponding amount of gold to establish your reserve or guarantee -fund, in order that you might keep your promise good in the future. If -you add this $100,000,000 to the other $262,000,000 you have issued -since to protect your credit against these United States Notes, -you will find that you have issued altogether $362,000,000 of your -bonds, or $16,000,000 more than the total amount of the greenbacks, -$346,000,000, and that you have also obligated yourself to pay interest -on these bonds from first to last amounting to $362,000,000 more. Now, -the astounding fact is that these old due bills, these I.O.U.'s, these -United States Notes, or so-called greenbacks, are still out and you -still owe them, just as you did in 1879, when you began keeping your -promise to redeem them in gold. - -One of your expert clerks in the Treasury Department at Washington, the -Chief of the Loan and Currency Division, published a calculation in the -Congressional Record of April 29, 1908, Page 5638, that showed that, if -the greenbacks had been funded on the 1st day of January, 1879, into -4 per cent 30 year bonds, and canceled and destroyed, the total cost -to the Government for principal and interest to July 1, 1907, would -have been $741,897,340, whereas the total cost and liability actually -incurred on account of them has been $1,081,881,562; the difference in -favor of converting into bonds being $339,984,222. - -Now, don't you think, Uncle Sam, that as a matter of business you'd -better get rid of these demand debts, these United States Notes? - -_Second_: Don't let this most important fact escape your attention -either; that if you should be called upon to use your credit -extensively, as would be necessary in case of a great war, these demand -notes would be a very black cloud upon your credit, and your loans -would cost you vastly more, on account of the interest you would have -to pay, because they were still outstanding. I hope that you are not -hugging that sweet delusion that war is impossible. - -_Third_: These United States Notes, as you are aware, are made legal -reserves for the national banks, who hold them against their deposits. -Now, if your credit goes to pieces, the credit of the banks will go -with it of course; because precisely to the extent that the banks hold -these debts of yours as reserves, they are driving gold out of the -country, and therefore instead of being better able to help you, they -will attack your credit by demanding gold from you for these old demand -debts. - -You are also, of course, familiar with Gresham's law, so-called, under -the operation of which, the poorer money always drives out the better. -I assert without any fear whatever of successful contradiction, that if -you had paid off these United States Notes in 1879, you would not only -have saved $340,000,000 by so doing, but that today there would be in -the United States in our banks, and in circulation among the people, -$346,000,000 more gold than we now have. In other words, instead of our -gold amounting to $1,850,000,000, it would now amount to $2,196,000,000. - -UNCLE SAM: Well, you have certainly demonstrated that I have made -some very expensive mistakes. Let's see just what the net result of -this blundering has been. I have lost $340,000,000 on account of the -greenbacks and I have lost the great advantage of having $346,000,000 -more gold to further strengthen the commercial credit of the country; -and yet, I still owe every cent of these due bills and what seems to me -equally certain is this: that if I should get into a great war, these -very greenbacks will make me more trouble by injuring my credit in the -future to a much greater extent than they ever have done at any time -in the past. There is no doubt whatever about that. By the eternal, -something must be done to get me out of this apparently bottomless pit. - -But you have not told us yet why these I.O.U.'s of mine, or United -States Notes, are not fit for currency, as you declare. You know that -you sort of hurt my feelings, and for half a minute I was fighting -mad, but as I said I am from forty-seven states, besides Missouri, and -therefore I am ready to be shown. - -MR. BANKER: I am coming to their use as currency right now. There are -three distinct reasons why the United States Notes are a bad form of -currency. - -_First_: Any Government issue of bills, or of I.O.U.'s such as these -are, must be very limited, if they are kept as good as gold. - -_Second_: The United States Notes do not spring into existence in -connection with business transactions, as the right kind of a currency -always does. - -_Third_: It costs those who use it, as currency, five times as much as -currency should. - -It is precisely as Mr. Manufacturer over there asserted a moment ago. -Any system of currency that is of necessity limited in amount, and -fixed as these United States Notes must be from the very nature of -the case, breeds panics, because everybody realizing that the amount -is limited, begins to scramble for cash upon the first intimation -that there is any business trouble brewing. For this reason, they are -utterly unfit as a system of currency. - -Again, a right currency system is the natural product of business, and -the amount of the currency will always rise and fall with the demands -of trade. This can never be the case with the United States Notes, and -they are on that account utterly unfit for currency. - -And finally, certainly, if they cost the users of currency five times -as much as the right kind of currency would, then we should replace -them at once with the right kind of currency. Now, let me illustrate -and demonstrate this. - -If, over at my bank, we are compelled to furnish an average of $10,000 -in currency a week, our average expense for the year will undoubtedly -be $10,000 invested for that purpose. And if money is worth 6 per cent -interest, it will cost us $600 to supply that amount of currency. If -we can buy United States Notes as cheap as any other kind of currency, -and we should carry them in stock, they will cost us $600 per annum. -Now, our bank, being a country bank, we carry 15 per cent of all our -deposits to meet current demands. Is it not a perfectly simple and -self-evident fact that if instead of being compelled to buy this -$10,000 of United States Notes every week, and so keep $10,000 invested -all the year around at a cost to us of $600, the interest on $10,000, -we could convert $10,000 of our deposit debts into $10,000 note debts -of the bank it would only cost us 6 per cent on $1,500, the amount -we are carrying as reserve against our deposits of $10,000, or only -$90. In other words, we would save $510 on the transaction. Of course, -if we have to pay out $510 more in the one way than in the other, we -will have to get it back from Mr. Merchant here, Mr. Manufacturer, Mr. -Lawyer, Mr. Farmer and Mr. Laboringman; and if we should collect it -from Mr. Merchant and Mr. Lawyer, they will in turn take it out of Mr. -Farmer and Mr. Laboringman. - -MR. FARMER: You bet they will. We always get the gaff in the end. - -MR. LABORINGMAN: Where do I come in? I don't come in anywhere except to -carry the load, as usual. I come out at the little end of the horn, as -always heretofore. - -UNCLE SAM: Well, fellows, you see, don't you, that everything gets -back, sooner or later, to the producer? He carries the load. - -MR. MERCHANT: But we carry the worry. - -MR. BANKER: I wish you did. You would have an easy time then, but-- - -MR. LABORINGMAN: You needn't say "but" to me. You have it on all of us. -There is no doubt about that. However, Mr. Banker, I'm not going back -on you, for you have helped me out of several tight pinches. - -UNCLE SAM: Well, it does really look to me as if I had been living in a -fool's paradise. Those dear old greenbacks they have been about as much -of a fraud as the dollar of our daddies. I do declare this whole thing -makes me half sick. But if you are actually finding out what really -ails me, I'll get over that pretty soon, and, boys, if we stick to this -job, and play fair and honest, we'll have the best banking system in -the world yet, and don't you forget it. - -But you forgot to tell me about the safest and best banking system in -the world because every bank note was secured by one of my Government -bonds. That's what they've been telling me, you know. Now, what about -that? - -MR. BANKER: Well, I could not interfere with your confession that you -had been living in a fool's paradise, and dreaming dreams about making -something out of nothing, while your credit was in peril, and you were -losing hundreds of millions and furnishing the country a currency that -was costing the people five or six times as much as the right kind of -currency would. - -Now, a word about your bond-secured bank note illusion, and I will -be through. Uncle Sam, you remember that during the war, you were -looking around in every direction to find some new method for obtaining -means to carry on the war. You had busted your credit wide open with -your United States Note issue, and the question was how to find some -new resource. Your Secretary of the Treasury, Mr. Chase, concocted -this scheme of giving the banks the right of issuing notes if they -purchased Government bonds, and deposited them to secure the payment -of the notes. It is very strange, but he did not get much from this -source, as there were only $98,896,488 of notes out when the war -closed. However, the scheme was started, and has been going ever since, -precisely as it was inaugurated, a bond investment scheme. The amount -of notes in circulation has never borne any direct relation to the -demands of trade, as you can see by the following facts: In 1880 the -notes outstanding amounted to $352,000,000, and in 1891, eleven years -afterwards, they amounted to only $162,000,000, or about $100,000,000 -less, although the country was growing and business expanding all -the while. We ought always to expand our currency during the fall -months about $300,000,000, and we ought to contract it during the -succeeding months, or during the springtime just as much. But a careful -investigation shows that these bond-secured notes have decreased as -often in the fall months as they have increased, and have increased -in the spring months as often as they have decreased. This proves -conclusively that the amount of notes outstanding has never borne any -relation whatever to the requirements of trade. The scheme is today -precisely what it was when first concocted, purely a bond investment -affair. - -UNCLE SAM: Well, well, now that is mighty strange, but my greatest -Chief Justice, John Marshall, pointed out the necessity of having -a currency directly related to the business of the country, when -upholding the constitutionality of the Act incorporating the second -United States Bank. He said: "The currency which it circulates by -means of its trade with individuals is believed to make it a more -fit instrument of government than it could otherwise be." One of my -presidents, James A. Garfield, used this language: "_No currency can -meet the wants of this country that is not founded on business._" Boys, -both of these great men must have referred to credit currency, and -declared that it was essential to our business. - -MR. BANKER: Furthermore, Uncle Sam, these bond-secured Bank Notes -are indirectly just that much more of a burden resting upon the -United States Treasury, upon you, if you want to know the truth, as I -explained to you last Wednesday night. - -The fact is, these bond-secured Bank Notes are only another form -of Government credit put into circulation through the disguise of -Government bonds. - -Every single criticism and objection that I have made tonight to the -United States Notes are applicable equally to these bond-secured Bank -Notes. - -_First_: For all banking purposes, economically speaking, they are -practically rigid and inflexible, at least so far as current needs go. - -_Second_: These bond-secured notes do not spring into existence, or -into being, as checks and drafts do in connection with some business -transaction, but are tied up with a bond speculation. - -_Third_: They cost those who use them as currency from five to six -times as much as the right kind of currency would. - -_Fourth_: If we adopt the right kind of a currency system, it will set -free $750,000,000 of capital which is now tied up in these Government -bonds, and this vast sum which would be realized from the sale of the -bonds will assist to an amazing degree in supplying much needed capital -to the commerce of the country. - -MR. MERCHANT: How is that? - -MR. BANKER: The banks could then sell all the bonds now deposited to -secure these bond-secured Bank Notes. They amount to $750,000,000. - -That these bond-secured Bank Notes are a monument of our stupendous -folly, and have been a curse to the business interests of the country, -I am sure no one here will attempt to deny. - -MR. LAWYER: The Japanese, thinking that we were a smart people, copied -this bond-secured bank scheme from us, but immediately discovered that -it was worse than worthless and repudiated it. No one else has been -foolish enough to adopt it. - -MR. BANKER: I challenge anyone here to urge a single reason in favor -of either the United States Notes, or the bond-secured Bank Notes, -which are only another form of United States Notes. No one can meet -the objections raised to them. In fact, there are two objections to -the bond-secured notes, in addition to those urged against the United -States Notes. First, as stated, they have tied up $750,000,000 in -the bonds. Second, they have proved such a successful delusion as to -prevent any sane legislation until sad experience has driven us to take -the matter up seriously and compelled us to act. - -UNCLE SAM: Well, boys, so far as I am concerned, I am thoroughly -convinced that you don't want any of my I.O.U.'s for currency. Nor do -we want any bond-secured Bank Notes, which are really only another form -of my I.O.U.'s. But I am still from Missouri, as I have not yet been -convinced what we ought to do by way of a substitute. Mr. Banker has -told us something about credit currency, and he declares that it is the -only real thing in the way of currency. - -Now, I suggest that we take that matter up next Wednesday night, -and decide definitely whether we want to adopt that principle, and -substitute that system, or some other. What do you all say to that? - -MR. MERCHANT: I think that should be the programme. In the meantime, -let us all dig into the question and go to the very bottom of it, and -if possible stump Mr. Banker. - -MR. BANKER: All right, gentlemen, I am ready for you, and if I don't -convince you that the only thing for us to do is to adopt a credit -currency system, I will retire in favor of anybody you name. Possibly -you'll select Nelson W. Aldrich. - -UNCLE SAM: No, you won't do anything of the kind. We'll look around a -long time before we'll take him on. It is my candid opinion that he -don't know a thing on earth about the question. I have known Nelse -about thirty years. He came to my house after he had been engaged in -the grocery jobbing business, and he has been a jobber ever since. A -man who could stay in Congress for thirty years, declaring that we had -the best banking system in the world, would not recognize an economic -principle, on a cloudless day, walking down the middle of Pennsylvania -avenue at noon time. Now, as I said, Nelse has always been a jobber, -and he would detect a crooked political deal crawling down a gutter, -lizard-like, in the densest fog at midnight. He was prominent in a way -in my home town, but it was only as a broker in senatorial favors. He -kept books with the rest of his associates, his fellow senators. He was -the clearing house of the United States Senate. That's all. He would -be the very last man in the United States, the very last to join in -clear, intelligent, unselfish, patriotic thinking. He just couldn't do -it. Why, boys, he had rather go down a ram's horn than a gun barrel. -He likes the twisting sensation. We don't want him at any price. Mark -my word. What we want is honesty, intelligence, patriotism, unselfish -devotion to duty and some good hard work. - -Let us hope that we shall find a way out. - - Good Night. - - - - -FOURTH NIGHT - -BANK CREDIT CURRENCY - - -UNCLE SAM: When we parted last Wednesday night, we had an understanding -that everybody would give all the time he could to looking up Credit -Currency. Now, I think before we take up that subject, it might be -well to recall and review what we've settled among ourselves up to the -present time. - -_First_: We learned that gold is our standard of value. - -_Second_: We all agreed that our money consisted of our gold coin alone. - -_Third_: We agreed that our money, which consists of gold coin, is -identical in amount with our gold currency; that they are one and the -same thing. - -_Fourth_: We found that we had at present a large amount of other -currency, consisting of subsidiary coins (including the silver dollar), -the United States Notes and our bond-secured Bank Notes. - -_Fifth_: We came to the conclusion, however, after our last talk, that -neither the United States Notes nor the bond-secured Bank Notes were -fit for currency; and, in our quest for the best substitute possible, -Mr. Banker proposed a Credit Currency currently redeemed in gold -coin as the form of currency best suited to our condition. Indeed he -asserted that it was the only form of currency we should think of. - -I have gone over the road we have traveled so far and called attention -to all the mile posts so that we should become perfectly familiar with -them; for unless there is a complete harmony between our conclusions -reached from time to time, our talks will in the end lead us to no -practical results. - -At our last talk it was decided, you will remember, that both on -account of the peril to my credit, and because the United States Notes -and the bond-secured Bank Notes were unfit for currency, we should -tonight consider Credit Currency as a substitute. - -MR. MERCHANT: Uncle Sam, I am more than gratified that you have called -our attention tonight to just those things we have agreed upon, because -unless we keep all these points constantly in mind, we will have -trouble in the end in reconciling our views. On the other hand, it has -began to dawn on me that possibly what we have always considered beyond -our comprehension may after all prove a comparatively simple matter, -because I have discovered, since our talks began, that truth here as -in all other subjects is simple when we arrive at and comprehend it. -Our great problem in this connection is to disentangle the great or -fundamental truths and make each one stand out in bold relief. So far, -I think we have succeeded to a remarkable degree. - -MR. MANUFACTURER: We must have done so, for we have not yet struck a -single point upon which we have not unanimously agreed. Let us hope -that we shall be as successful in the future. At present, I must say -I am a little dubious about the results of tonight's discussion, for -I have run up against a snag or two, which I half fear will stump -Mr. Banker, when he tries to pull them. However, he has been pretty -successful so far in holding his own, and he may surprise us tonight. - -MR. BANKER: I have no desire, or hope, of surprising you, but I have -perfect confidence in convincing all of you, that there is only one -system of currency for us to adopt, or even think of adopting, and that -is a pure Credit Currency. - -Let us assume that two men, A and B, who are of equal and unquestioned -standing in some country town, start in the banking business at the -same time. - -A begins by taking the deposits of his neighbors, and continues until -he has received $100,000, and has loaned the same out to the people -of the community. He now owes $100,000 subject to check, and he has -$100,000 owing to him, as he has loaned out all his deposits. - -B starts a banking business, but upon an entirely different plan, or -basis. He takes no deposits in the ordinary way, but if anyone comes to -him desiring to borrow, or sell him promissory notes, he will lend his -credit, and take all good notes and checks offered him, and in exchange -give his own notes in such denominations and form as are suitable for -circulation as currency, until he has exchanged $100,000 of his notes -for $100,000 of the notes of the same people who have borrowed the -$100,000 from the other banker. - -Now, this is not a strange thing for B to do, because the bankers of -Scotland did this for one hundred and forty years before they took -deposits subject to check. - -Now, let us return to A and B. As a matter of course, some of these -notes of B will be deposited in A's bank, and B will have taken in some -of the checks on A's bank. At 10 o'clock each morning A and B meet; -A presents B's notes for redemption and B presents checks upon A for -redemption, and the one pays the other the difference. Sometimes the -balance is due to A and sometimes it is due to B. At the end of six -months or a year, it will be at a stand off. A has paid B as much as B -has paid A. - -Now, can anyone of you men here tell me what difference there is in the -transactions of A and B, except this, that the notes of B amounting -to $100,000 payable to bearer on demand are outstanding, while the -deposits at A's bank amounting to $100,000 and payable to order are -outstanding. Those notes of B's amounting to $100,000 are a bank Credit -Currency. They are issued against, or upon B's credit. They pass from -person to person, from hand to hand and are currently redeemed every -day. While the deposits at A's bank amounting to $100,000 are against -A's credit, and the checks against them are redeemed every day. It is -perfectly evident that if the capital of A and B combined is ample -to meet the business requirements of that town, the form of credit -offered by them will also adapt itself to the peculiar needs of each -citizen. In other words, on a limited scale, you have a perfect banking -system in that country town; bank credit being given to each person in -precisely the form he wants it. - -Now, let us go a step further. Let A and B unite and incorporate the -A-B Bank with a paid-up capital of $100,000, each man paying in $50,000 -and the bank, so organized, taking over the liabilities. - -The one bank could then furnish the people of that community their -deposit, or order credit, and their current credit, or currency at -exactly the same cost to the bank; for the amount of the reserve will -determine the cost of the note credit as well as the book credit. The -bank being a country bank will carry a 15 per cent reserve, or $15,000 -cash, to protect the deposit of $100,000 subject to check, and also a -15 per cent reserve, or $15,000 cash, to protect the $100,000 of demand -notes outstanding. The actual cost to the bank in each case is 6 per -cent on the reserve of $15,000 or $900 per annum. - -If this bank should be located in the cotton-growing section of the -country, and from August until January, the people needed more currency -than at any other time of the year to pay for picking and handling the -crop, and the customers of the bank came in and drew their checks for -$50,000 and asked the bank for currency for that amount, and the bank -should, as it ought to be able to do, under such circumstances change -its deposit debt of $50,000 to a note debt of $50,000, so that instead -of owing $100,000 in deposits, it owed only $50,000 in deposits, and -instead of owing only $100,000 in notes, it owed $150,000, would it -make any difference whatever to the bank except the trouble of making a -few book entries? - -In the springtime, probably, the situation would be just the reverse. -The notes having served the convenience of the cotton-planters would be -returned to the bank by various people, and deposited to the credit of -the depositors, so that now the deposits are $150,000, and the notes -outstanding, or note debts, are only $50,000; the total debt of the -bank being precisely the same all the time, $200,000. It has made no -difference whatever to the bank, but the customers of the bank, and all -the people of that community, have been perfectly accommodated at the -smallest possible expense to them. Now, if that bank had been compelled -to go to some financial centre and buy that $150,000 of currency in the -form of United States Notes, bond-secured bank notes, or the notes of a -central bank, it would have cost the bank at the rate of 6 per cent per -annum on $150,000, or $9,000; whereas, it has only cost the bank 6 per -cent on the reserves carried to protect the $150,000, at the rate of -$15,000 for each $100,000, or six per cent on $22,500. The cost to the -bank you will see would be only $1,550, as against $9,000, if compelled -to buy the currency, or would result in an actual saving to the bank of -$7,450, an item, gentlemen, well worth saving. - -MR. MERCHANT: Mr. Banker, as I understand your contention from the -illustration you have just completed, it is this, that there is -absolutely no difference whatever, either in principle or in practice, -between a bank book credit and a bank note credit, except as a mere -matter of bookkeeping. That it is wholly immaterial whether there are -1,000 men walking about the streets of a town, each having a $10 bank -note of the local bank in their pockets, or a thousand men walking -about with check books from which they can issue 1,000 checks for $10 -each. It is wholly a question of having a banking system that will -adjust itself every hour of the day, and every day in the year, to the -requirements of trade in that town, at the least possible expense to -the people. - -MR. BANKER: You comprehend my contention perfectly. - -MR. LAWYER: I will agree that your plan is structurally perfect to -accomplish this purpose; but, before I can concede that the plan is all -that can be desired, and all that we must insist upon having, I must -know that your plan contemplates the current redemption of these bank -notes in gold coin. For, as we have already agreed, our currency must -be as good as gold coin, and this can only be demonstrated by daily -gold coin redemption. - -MR. BANKER: These bank notes or this Credit Currency will always be -interchangeable with the deposits of the bank of issue, and, like the -checks against the bank, will be daily redeemed over the counter of the -bank, and also at some clearing house centre. The life of the notes -will probably not exceed on the average thirty days. I hold that it is -the duty of the bank to supply its customers with exactly that form of -credit, either current credit in the form of notes, or book credits -subject to check, which their business demands, and that both forms of -credit must be kept as good as gold by giving gold if gold is demanded. - -MR. LAWYER: With this point of current gold redemption covered and -settled, I am willing to agree that theoretically you have completely -convinced me. Now, what have you to offer in support of your theory by -the way of any practical illustrations? - -MR. BANKER: I am glad that you have demanded illustration and proof -by way of banking experience; but, before taking up the historical -evidence in support of my condition, I want to define a Credit -Currency, so that you will have a concrete idea, if I may express -myself that way, in your mind. - -I define a Credit Currency as follows: _a note issued by a bank against -its credit, without depositing United States Bonds, or any other kind -of security, to guarantee its payment, is bank Credit Currency_. - -In speaking of the marvelous prosperity of Scotland, MacLeod used this -language in 1860 about the effect of Credit Currency in Scotland, where -it has now been in use 217 years. - -"All these marvelous results which have raised Scotland from the lowest -state of barbarism up to her proud position in the space of 170 years -are the children of pure credit." - -The great achievement of the Scotch system of credit notes is -exceedingly well stated by Mr. Charles A. Conant in these words: - -1. It has provided Scotland with an elastic currency adapted to the -condition of her industries and adequate in volume to their changing -needs. - -2. It has enabled the people to carry on numerous commercial and -agricultural transactions for which they could not have found the -necessary quantity of coin, and has economized the locking up of -capital in the precious metal. - -3. It has made the use of notes of small denomination familiar and -popular, and has taught the people the distinction between bank notes -as the representatives of credit, and the precious metals as the -measures of value. - -4. It has brought into active use the available savings and capital of -the country. - -5. It has afforded an opportunity for entering upon business to -thousands of poor, but honest men, and enabled them to lay the -foundation of a comfortable home, and in many cases of a fortune. - -6. It has convinced the people so conclusively of the value and safety -of the banking currency system that no serious panic has ever lasted -beyond a few days, or has ever affected any of the banks, except those -which were justly the subject of distrust. - -Horace White, describing the Scotch system, says: - -"Notes are issued in denominations of five dollars, or one pound, and -upwards. They are exchanged daily at the Edinburgh Clearing House, -and settlements are made between banks by drafts on London. The notes -remain in circulation on the average eighteen days after issue, the -whole circulation being redeemed twenty times each year. Noteholders -have a prior lien on the assets." - -That is, if a bank should fail, the noteholders are paid first, and -before anyone else gets anything. - -MR. MERCHANT: What is that? Did you say that the noteholder had a first -lien on the assets of the Scotch Bank: that is, that the noteholders -are paid in full before anyone else gets anything? - -MR. BANKER: Yes, sir, and for the very best reasons in the world. - -MR. LAWYER: Certainly, the noteholders should have a first lien upon -the assets of the bank issuing them, because bank notes are a public -convenience. Bank deposits, on the other hand, primarily are a private -convenience. It is a matter of public importance that bank notes -should flow through the channels of trade, pass from person to person -and hand to hand unquestioned by any member of the public, and have -ready as well as general acceptance. The man who selects his bank for -the purpose of making deposits has time to investigate and decide -deliberately which one he will choose. While a man in a transaction -must accept the currency of the country offhand. At all events, it is a -matter of the greatest public importance that he should do so without -hesitation, and yet be protected, be absolutely safe in doing so. - -MR. MERCHANT: Come to think it over, I believe you are absolutely -right. Our present bank notes are made a first lien upon the assets of -the bank issuing them. We were talking about that the other day over -at the bank, and while I had never thought of it before, the cashier -of the bank explained the matter fully to me, and gave the same reason -for making bank notes a first lien that Mr. Lawyer has. When I told him -that I did not quite understand the thing as he did, he satisfied me -completely by using his own bank as an illustration. - -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. - -[Illustration: This diagram demonstrates that the Canadian bank notes -adapt themselves every year, every month, every day, with unvarying -precision, to the ever changing demands of trade.] - -_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. - -MR. MANUFACTURER: I agree with you, it certainly is. I was talking the -other day with a Congressman about the Canadian Currency system, and -he said, "yes, it works fine up there, but they have a branch banking -system up there, and only 27 banks." Well, I said, it works just as -well in France with one bank. It has been working in Scotland just as -well with 12 banks for 217 years. It worked in Indiana with one bank -and 17 branches. It was just as efficient and successful in Louisiana -under a General Bank Act, where several banks were incorporated. And -it worked in New England under the Suffolk system with 500 individual -independent banks--why won't it work here? All he could say was, "Well, -I don't know." - -UNCLE SAM: Pinhead. Didn't know the difference between a principle and -a fact, and he didn't even know the fact. - -Now, boys, I am completely satisfied and if any one here is not, let -him speak up, or forever hold his peace. I believe you must all be -satisfied. - -You must all be on time next Wednesday night so that we will not have -to wait as we did tonight. - - Good Night. - - - - -FIFTH NIGHT - -WHAT IS EXCHANGE? - - -UNCLE SAM: Now, boys, let us see just what we have settled during the -four nights we have been talking this matter over. - -The first night we learned that gold was the standard of value, the -whole world around. - -The second night we agreed that gold coin was the only money we had. - -The third night we agreed that the only currency that we had and -ought to have was gold coin, the foundation and redeemer of all other -currency and our token or subsidiary coins. We came to the conclusion -and unanimously agreed that neither the United States Notes nor -bond-secured bank notes were fit for currency, because not related to -business transactions in their origin, that they were unresponsive to -the demands of trade, and were five times as expensive as the right -kind of currency. - -The fourth night we agreed that the only true or correct currency was a -credit bank note, currently redeemed in gold coin. - -_In other words, we agreed that gold was our standard of value, gold -coin our money, and that our currency should consist of gold coin, the -subsidiary coins and bank credit currency._ - -Tonight we want to find out, if we can, what Exchange is. This is a -mighty important question for probably 90 per cent or nine-tenths of -all our business is transacted in some form of Exchange. Mr. Lawyer, I -want to put it up to you first. What is Exchange? - -MR. LAWYER: Well, Uncle Sam, the best definition I can give, is to take -one thing for or in the place of another. It is illustrated in a way -by the old saw, "a fair exchange is no robbery." That describes the -act of exchange, but I imagine that what you have in mind is the system -or practice of exchange, as carried on today. That practice or system -is only a multiplication of transactions where one man takes one thing -in place of another. In this connection it means to take one credit in -place of another credit; to take one debt in place of another debt. As -now developed and applied to the commerce of the world, I would say -that _the science of exchange is to substitute one credit for another -credit, or to make one debt pay another debt_. - -A debt is what is due from one person to another person. I have a -deposit with Mr. Banker there, and I owe Mr. Farmer $20 for a load of -potatoes; if I draw a check upon Mr. Banker for $20 in favor of Mr. -Farmer, and hand it to him, I have paid my debt to Mr. Farmer with Mr. -Banker's debt to me. - -MR. MERCHANT: Now, Mr. Lawyer, just hold on a minute until I find out -a thing or two before we go any further. In fact, I am sure everyone -here would like in the outset to find out the same things, except -possibly Uncle Sam, who ought to know everything, and is probably -omniscient, Mr. Banker, who deals in these things, and you, Mr. Lawyer, -who are presumed to know about them, and must know them, as a matter of -necessity in your practice. What I want to know is: - -1. What is a promissory note? - -2. What is a check? - -3. What is a draft? - -4. What is an acceptance? - -5. What is a bill of exchange? - -Until we know precisely what these various terms signify, or mean in -banking, when put into use, we shall soon be so far out at sea that we -will not know what we are saying, because we do not know the meaning of -the words we are using. This will be true of some of us at least. We -must familiarize ourselves with these words, or terms. - -MR. BANKER: If you will allow me, I will try and explain and tell you -what these various terms mean, and what use we make of these several -instruments in writing. - -_First_: A Promissory Note is a written promise to pay some one a sum -of money. It may be either to pay it immediately, or on demand, or at -some future day; to pay it either with or without interest; or to pay -it at some particular place. - -MR. MERCHANT: It is just a written acknowledgment of a debt, isn't it? - -MR. BANKER: It is a written acknowledgment of a debt, coupled with a -promise to pay it. If A owes B $1,000, and gives his note for that -amount, and B sells the note to C, the note has become exchange. It is -not the usual form of what is called exchange, but is nevertheless just -as truly exchange; for suppose that C owes A $1,000, he can then cancel -the debt by delivering him the note for $1,000. C has paid his debt to -A with A's debt to B. - -_Second_: A check is a written order on a bank to pay money on demand. -It may be drawn to cash, or it may be drawn to bearer, or it may be -drawn to the order of some one. If A owes B $1,000 and A has a deposit -at a bank for that amount, A can cancel his debt to B by giving him a -check on the bank for $1,000. The check is exchange, though not in the -usual form of what is known as exchange, for A has canceled his debt to -B by giving B the bank's debt to him. - -_Third_: A draft is a written order from one person to another to pay a -third person a sum of money. - -An acceptance is to write across the face of a draft, payable at a -future time, the word "accepted," and the signature of the person -accepting it. - -If A is owing B $1,000 and C is owing A $1,000, the debt to B can be -paid by A's draft upon C. The draft is identical in every respect with -the check, the difference is in form only, and the use of them. A check -is only used when the order to pay money is upon a bank. A draft may -be, and often is used when the order to pay money is upon a bank. A -check, properly or correctly speaking, is never used in an order to pay -money upon an individual or corporation, but a draft is invariably used -in such cases. - -The transactions are identical in effect, though the conditions, or -circumstances, are different. Both the check and the draft are exchange. - -_Fourth_: When a draft has been accepted, it becomes the promissory -note of the one accepting it, as he promises to pay it on the day named -in the draft. An accepted draft is only another form of a promissory -note, for if A owes B $1,000, and B draws upon A for that amount, and A -accepts the draft, A is in precisely the same position as he would have -been if he had sent B his promissory note for $1,000. - -In the banking world a draft, after it has been accepted, is often -called and known as an "Acceptance." - -_Fifth_: A Bill of Exchange in its ordinary or usual sense, is an order -of one person upon another to pay a third person a sum of money. - -MR. MANUFACTURER: That is precisely what you said a draft was. - -MR. BANKER: Just wait a moment, please, until I finish, and you will -note the difference. The Bill of Exchange is the medium of settling -accounts or debts between parties residing at a distance from each -other, without the intervention of money by exchanging checks or drafts. - -MR. MANUFACTURER: Then they are identically the same thing except a -bill of exchange acquires its name from the fact that it settles debts -at a distance. - -MR. BANKER: That is the exact distinction, if one is to be made at -all, and I think it will be well for us to make this distinction to -save confusion in our conversation, although in the ordinary and usual -language of the street, or the business world, the terms, or words, -"draft," "acceptance" and "Bill of Exchange" are used indiscriminately -the one for the other. - -If the definition of Mr. Lawyer stands, and I think it is a very good -one, when he said "the science of exchange is to make one debt pay -another debt," the science of Bills of Exchange is to make one debt -pay another debt at a distant point. This is not a distinction fully -without a difference, because it helps us to classify the transactions -and distinguish them in a way as we go along. - -A simple illustration is this: A, who lives in Boston, owes B, who -lives in San Francisco, $1,000, and C, who lives in San Francisco, owes -D, who lives in Boston, $1,000. B and D could exchange drafts with each -other; then B and D could collect each other's drafts. But B could sell -his draft on A to C for $1,000 and C could pay his debt of $1,000 to -D by forwarding him the draft on A. D would then collect the draft on -A. It will be seen at once that this transaction has saved the expense -of sending $1,000 in money from Boston to San Francisco, and also of -sending $1,000 in money from San Francisco to Boston at great expense -by express. This transaction between Boston and San Francisco is known -and called a transaction in Domestic Exchange. - -If A, who lives in New York, owes B, who lives in London, $1,000, and -if C, who lives in London, owes D, who lives in New York, $1,000, B, -the resident of London, can draw on A in New York, and sell the draft -to C, who resides in London, and C could pay his debt to D, who resides -in New York, by forwarding B's draft to D, who resides in New York. -D could then collect the draft from A. It is perfectly clear that by -means of this transaction, the expense of sending $1,000 in gold from -New York to London, and also the expense of sending $1,000 in gold from -London to New York, has been saved. - -This draft would be Foreign Exchange, because the cities are in two -different countries. - -MR. MERCHANT: According to your illustration, Mr. Banker, if our -sales of cotton, grain and meat to Great Britain should amount to -$1,000,000,000 a year, and the sales of Great Britain to us of woolens, -silks, cotton and cloth and other manufacturies should amount to -$1,000,000,000, we would not have to transmit a single dollar of gold -either way, because the debts would just cancel each other. If the -debtors in the United States could find out who the debtors in Great -Britain were, then they could exchange debts with each other. The debts -of the two countries would just offset each other. - -MR. BANKER: That is absolutely true, and it is entirely possible that -the $2,000,000,000 worth of goods in the two countries could be bought -and sold without moving a single dollar's worth of gold either way -across the Atlantic. - -MR. MANUFACTURER: Well, that is just what we want to do and save the -expense and trouble of transmitting the money, and it is up to you, Mr. -Banker, to explain just how we are to accomplish this trick or feat, -because it will save a tremendous expense, if this can be done. - -MR. BANKER: Yes, and will bring other advantages to the business -interests of the country of almost incalculable importance, as we shall -soon see. Now, the question is how to gain these ends. Two things -must be accomplished in this connection, if we are to profit by every -advantage that can possibly be taken in our trade with each other, as -well as in our trade with other countries. - -_First_: The Bills of Exchange must be of such a high character -as to invite those, who need them to pay debts with, to take them -unhesitatingly. - -_Second_: The Bills of Exchange must become known to those who may want -to use them to pay debts with, instead of shipping the actual money. - -MR. MERCHANT: Of course, you gentlemen are aware that our debts abroad -are being settled in just this way today to a very large extent, -and I do not think that you need worry very much about the Bills of -Exchange not becoming known to those who need them to pay debts with, -if they are made of such a high character as to command a market, for -the market will at once develop and make itself felt. That is, I mean -a general market for Bills of Exchange of unquestioned character. -The only thing for us to do is to give our Bills of Exchange such a -standing as to command ready and general acceptance in the commercial -world. How can we do that? - -MR. BANKER: That can be accomplished in a very simple, easy and natural -way, if we will only adopt it. Let me illustrate what I mean. - -Today, A, living in this country, sells a bill of goods, say for -$50,000, to some one in Great Britain; the purchaser in Great Britain -arranges with his bank to accept a 60 or 90 day bill drawn on it by the -American shipper. Such drafts are drawn on well-known bankers, and when -accepted become virtually a time-deposit at the bank, and therefore -can always be disposed of at the lowest current rate of interest. This -arrangement is a very great advantage to the English business man, as -it enables him to use the high credit of the bank in carrying on his -business. - -At the present time our National Banks are not authorized to accept -drafts made in this way, but if they were authorized to do so, the -credit of our banks would be given to the drafts made by one business -man upon another whether the drafts were domestic or foreign. Such an -obligation is the most desirable one for a bank or an investor to hold, -as a temporary investment for the following reasons: - -_First_: The draft arises out of a transaction where goods passing from -buyer to seller are equal in value to the face of the draft. The goods -are actually in transit, and the draft is economically a title to the -goods. - -_Second_: The seller is invariably good, or at least thought to be. - -_Third_: The buyer is invariably good, or thought to be. - -_Fourth_: The bank accepting the draft is invariably good, or believed -to be. But above and beyond that no bank will engage in such a -transaction, without making itself absolutely safe in some way. - -MR. MERCHANT: Mr. Banker, if we should adopt that principle in this -country, we would at once make every dollar's worth of goods in -transit, or ready for shipment, a liquid asset, practically a cash -asset, as we shall see, for the American merchant and manufacturer; -because a large amount of capital would at once be attracted to this -field for steady employment, or temporary investment. - -MR. MANUFACTURER: There is nothing so essential to relieve the constant -strain upon individual credit and mobilize the really liquid wealth -of the country, as the creation of the kind of paper you have just -described. Think of it for a moment; there are the goods in transit, -the shipper, the buyer and the banker back of the paper that will be -coming due within the next sixty or ninety days. You can hardly imagine -anything safer, and more quickly convertible into cash. - -Money available for the purchase of such paper would come from many -sources, among them the following: - -_First_: Corporations would immediately be organized to deal in such -paper. - -_Second_: All strong business houses, merchants and manufacturers would -prefer to hold such paper instead of stocks or bonds, for their surplus -funds during their slack seasons. - -_Third_: Bankers of all classes, both in the country and city, would -find such paper preferable to any other form of investment for a -secondary reserve, and for their surplus funds during slack periods in -their respective sections. - -_Fourth_: If acceptances are limited as they should be to goods in -transit, or on the road to consumption, the adoption of this principle -will mark, indeed will accentuate, the strong, the fundamental -difference between liquid assets and the more fixed forms of -investment, such as bonds and stocks. Banking capital employed in -this way can far more readily adjust itself to the exigent demands of -liquidation in the case of a panic, or a commercial crisis. - -_Fifth_: Undoubtedly, to a very large degree, foreign capital would be -attracted to our market for this kind of paper, because its strength -and liquidity has already been proved to the bankers and capitalists on -the other side of the Atlantic. And whenever capital was required, the -rate of interest would be such as to be inviting. In other words, the -rates of interest would rise, correspondingly with our needs, and the -entire commercial world would be our possible market for the commercial -paper representing the economic title to the five or six billions -of finished goods that are always passing from the producer to the -consumers in this country, and to the consumers abroad. - -MR. BANKER: Undoubtedly, we should soon have right here a general -market to take care of all this kind of paper; and it ought to become -soon the strongest and broadest market in the world for this kind of an -investment, considering our vast commercial resources. All of our Bills -of Exchange would be drawn in dollars, not francs, marks or pounds -sterling, and we would put upon them the stamp of the eagle, and not -the lion and the unicorn. - -UNCLE SAM: I like that. It stirs my blood, warms the cockles of my -American heart. That's business. - -MR. MANUFACTURER: I understand that for such Bills of Exchange, those -accepted by banks, there has grown up in London, Paris, Berlin, -Amsterdam and many other European centers, a large market, known as a -discount market. Indeed, that this form of paper constitutes a very -essential feature of the commercial transactions of all European -financial centers. - -MR. BANKER: That is true, and unless we follow them and adopt the -same principle, and facilitate in the same way the protection, -transportation and distribution of our commodities, needed for current -consumption, we will continue to work under a very great handicap, as -compared with our foreign competitors. Moreover, we will again find -it difficult, if not impossible, to adjust ourselves to those periods -of contraction which must come from time to time, without almost -immeasurable losses, and the consequent stagnation in business that is -sure to follow. - -MR. MERCHANT: I appreciate what Mr. Banker has just said. I am -confident from my observation during the panics of 1893 and 1907 that -our greatest injury came from the shock to business due to the fact -that there seemed to be no real relief from the strain until there was -an actual breakdown all along the line. Now it is evident that if a -large amount of capital were employed in the economic titles, as it -were, to our consumable commodities in the form of Bills of Exchange -and the market for them extended to the financial centers of Europe, as -seems probable, indeed certain, whenever the rate of interest was high -enough, we should pass through any future strain, without the usual -tragic results. Of course this added facility to the investment of our -Bills of Exchange will not be a cure-all, but it will certainly correct -an obvious and a very great defect in our present method of doing -business. - -MR. BANKER: Certainly it will not be a cure-all, because it is only an -added facility in our credit system, and therefore must be provided -for precisely as a corresponding amount of loans should be. You see, -don't you, that an acceptance by a bank is practically the same thing -as a loan to the buyer and seller of the goods jointly, or to one of -them with the other as an endorser. The only difference is this: that -if a loan is made the money would be placed at once to the credit of -one of them, subject to his check, while the acceptance is an agreement -to pay the amount on a future day. The bank must take precisely the -same precaution in securing or protecting itself, and should carry -identically the same reserve against acceptances that it does against -its deposits subject to check. - -MR. LAWYER: That is true, for if the buyer and seller fail to make -good, and meet the draft, the bank must pay it precisely as a bank must -pay the checks of its depositors, even though the borrowers of those -deposits do not pay their promissory notes when due. In reality and -in fact the results are identically the same, therefore I agree with -you, Mr. Banker, that a bank should carry the same reserve against its -acceptance liability as against its deposit liability. - -MR. MANUFACTURER: Mr. Banker, have Bills of Exchange and bank -acceptances been used very long, or are they something quite new and -modern? - -MR. BANKER: The Lord only knows how ancient they are. However, it is -undoubtedly true that the use of them, especially acceptances, has -grown enormously in recent years. For it is now a universal practice at -all financial centers throughout Europe. - -The bank liabilities of the whole world were only $16,000,000,000 in -1890, while today they are upwards of $50,000,000,000, possibly as much -as $55,000,000,000. This almost appalling increase is due not only -to the growth of international trade and the expansion of the credit -system in foreign trade, but to domestic production as well. Of course -an acceptance is the natural counterpart of a Bill of Exchange. - -Bills of Exchange, or something accomplishing the same purpose, were -in use among the Greeks. The history of the subject is buried in much -obscurity. - -It is stated upon high authority that among the bankers of the Roman -world there existed a certain method or means of effecting payments -abroad. - -MR. LAWYER: Here is what one author, Wilbur Aldrich, says: - -"From the beginning of the Christian era the Jews became dispersed -and, shut out from other trades and occupations, became usurers, or -money-lenders at interest, a business which by the Canon law was -forbidden to Christians. The Jews were united by such strong ties that -their business assumed almost a corporate aspect. They bought, sold and -transferred for collection part of the many debts constantly owed to -them, and became practically an international exchange community. Their -practice gradually evolved the Bill of Exchange. - -"Rivals of the Jews, and more given to money changing, Lombard and -other Italians naturally also became exchangers. Many large Italian -houses included whole families, and had branches in many cities widely -separated. The financiers from each city in Italy and from associated -leagues of such cities, frequently united for exchange purposes. -Italian finance thus grew into a great system of international -exchange. Among the great fairs of the Middle Ages, under the influence -of the Italians, some became connected chiefly with the business of -exchange; Piazenca, the most noted of the fairs of exchange, was -practically a clearing house for foreign exchanges. - -"The Bill of Exchange was already in frequent use in the middle of the -thirteenth century, but at this time its form was that of a document -certified before a notary. At the end of the fourteenth century, it had -approached the form now in use. It should be added that the Bill of -Exchange was drawn only by the money changers and the bankers that had -branches or agents. - -"The business of bill broking grew up in England towards the end of -the fourteenth century. The issuance of Bills of Exchange, based upon -genuine business sales of goods, was recognized as a legitimate source -of gain by the Canonists; or the ecclesiastic lawyers." - -MR. BANKER: You _see_, Mr. Manufacturer, from what Mr. Lawyer has just -read, Bills of Exchange, in practically the same form that we now have -them, have been in use about 500 years. However, we are not now so -much interested in a post mortem of the Bill of Exchange as we are in -its place in our commerce. What we are most interested in is, just -what part the Bill of Exchange is playing in the trade and commerce of -today. What we want to get clearly fixed in our minds is what it is, -and what it does, as distinguished from other instruments of trade. - -_First_: For the purpose of a definite idea of just what exchange is, -let us remember that exchange includes every written promise or order -to pay money that is used to substitute one credit for another credit, -or to make one debt pay another debt. - -_Second_: That Bills of Exchange (sometimes called drafts, or -acceptances, indiscriminately) are promises or orders to pay money -which are used to substitute one credit for another credit, or to make -one debt pay another debt, at some distant city. If the cities are in -the same country, the Bills of Exchange are called Domestic Exchange. -If the cities are in different countries, the Bills of Exchange are -called Foreign Exchange. - -_Third_: Let us agree, gentlemen, that so far as we are concerned we -should not, and shall not, consider the acceptance of any draft by a -bank as legitimate, unless the draft has grown out of an actual sale -and shipment of goods. In other words, what I want to impress upon you -is that if the draft is the economic title to goods, which are moving -from the producer to the consumer, the liability of a bank upon an -acceptance is reduced to a minimum. Acceptances of drafts growing out -of sales and shipments of goods will never be a source of dangerous -expansion, because they will liquidate, or pay themselves out, as the -goods will be wanted to eat, to wear, to use, or to go into other -manufactures, almost immediately. - -_Fourth_: I want to nail one fact down right here so that no one of -you will ever overlook it, or forget it; and that fact is this: An -acceptance is just as much a bank liability as a deposit subject to -check, for if the seller and buyer, or the drawer and the drawee, don't -pay the debt on the day named, the bank will have to pay it, just as -much as it will have to pay the checks against its deposits, although -the people who borrowed the deposits have not paid their notes. It is -clear, therefore, that the same reserve should be carried to protect -acceptances as deposits. - -MR. LAWYER: I am convinced of that, and I think we cannot insist -upon this conclusion too strongly for two reasons. First, the credit -facilities for trading, or carrying on business, are increasing at -a tremendous rate, and this particular form of credit is probably -increasing at a greater pace just now than any other. Second, there -is no form of credit more indirect, subtle and liable to mislead than -this; therefore, it will require double diligence to keep it as good as -gold. We must remember that since gold is our standard of value, gold -alone is the touchstone of all credit, acceptances as well as deposits -and bank notes. - -MR. BANKER: There is no question whatever about that. If we want an -absolutely sound and impregnable financial and banking system, we must -meet checks and acceptances with gold just as well as bank notes, -for they are all identical and the same thing--only in different -forms--bank credit. Gentlemen, if you place our banks in a position -where they can pay gold no one will ever ask for gold, except for some -special purpose like that of export. - -MR. MERCHANT: Is it not a fact that credit transactions in business are -increasing every year? - -MR. MANUFACTURER: Mr. Merchant, I presume you mean, relatively. -That is, that the proportion of business transactions in credit as -distinguished from cash is greater now than formerly. - -MR. MERCHANT: That is precisely what I mean, of course. I am aware that -there is on the average a great increase of business every year. - -MR. BANKER: In some localities credit transactions are increasing, but -in others they are practically at a standstill. For example, I suppose -if you should take some country town in a cotton-growing district, the -amount of cash used from August to January might be 75 per cent of all -the transactions; for the planter pays the pickers and all the laborers -cash, and they in turn pay the storekeeper; during other periods of -the year, when accounts are running, the cash used is much smaller. -The average amount of cash used gradually falls as the people come to -use banks more and more, the bank checks taking the place of currency. -Generally speaking, however, the average country community does about -60 per cent of its business with currency, while the medium sized -cities, or towns, do possibly as much as 60 per cent of the business -with checks. In the largest cities as much as 90 per cent of the -business is done with checks, while the clearing houses settle their -differences or balances with about 5 per cent of actual money, where -money is used. Sometimes the differences or balances at the clearing -houses are settled by checks or drafts on a financial center. - -While we have no definite figures that justify a positive statement, -it is generally estimated that about 90 per cent of all the business -of the country is done with some form of credit instrument, checks, -drafts, or bills of exchange. - -MR. MERCHANT: Then all forms of exchange, promissory notes, checks, -drafts and bills of exchange are really mediums of exchange in -precisely the same sense that gold coin and currency are mediums of -exchange. - -MR. BANKER: Certainly they are all just as efficient as mediums of -exchange, as gold coin and other forms of currency, although not as -facile for small trade. But, in large transactions they are far more -expeditious, more convenient, cost much less, and involve less risk. -These are the reasons they are used instead of cash to so large an -extent. - -UNCLE SAM: Boys, from the attention that you have given this subject it -is evident that you are mightily interested, for you have had to work a -good deal harder to understand what you were talking about than usual. -But we have arrived, we have really gotten somewhere, difficult as -Exchange is generally thought to be. - -Now, in order to fix in your minds just what progress we have made -during these five talks, I want to review what we have accomplished, or -agreed to. - -The first night we found out that our standard of value was gold. The -second night we decided that our money was gold coin and that nothing -else would do. The third night we found out that our currency was -gold coin, token money, United States Notes and bond-secured notes; -we also found out that the United States Notes and bond-secured bank -notes were not fit for currency. The fourth night we determined that -the only currency in addition to our gold coins and token coins -worth considering for our purpose was a credit bank note, or bank -credit currency. Tonight we have found out what Exchange is and that -nine-tenths of our business is done in some form of it; but that we -must keep it as good as gold by holding adequate reserves to protect -this form of credit as well as any other. - -Now, I call that going some. - -MR. MANUFACTURER: Uncle Sam, last Wednesday evening, during our -discussion, Mr. Banker frequently used the word "reserve" in connection -with our currency, and insisted that the reserves should be such as to -protect the currency, and tonight he has again used the word "reserve" -in the same way in connection with exchange. While I know in a general -way what he means, I am not at all sure that I comprehend fully what a -reserve is in its true and broader sense. - -MR. FARMER: Nor do I, and to confess the truth I am a little dazed on -that very point, and I want to suggest that we spend the next night -finding out what a bank reserve is. If all that Mr. Banker has been -saying is true the reserve is certainly the hub of this wheel, and -I want to tell you now that unless the hubs of your wheels are all -right, you won't have much of a wagon when you get through. - -MR. BANKER: That's right. Your reserves are the very heart of the whole -question, the hub of the wheel. - -UNCLE SAM: Well, then, we'll have reserves up next Wednesday, and let -us hope that our reserves will never get down, at least to a dangerous -point. - - Good Night. - - - - -SIXTH NIGHT - -VALUE, PRICE, WEALTH, PROPERTY, CREDIT - - -UNCLE SAM: Well, boys, what about reserves? - -MR. LAWYER: Uncle Sam, soon after we departed the other night, I -began to think over the subject of reserves; but soon found myself -considering several other points, which, it seemed to me, we should -take up before reserves. Therefore, without consulting you, I -telephoned Mr. Merchant, Mr. Banker, Mr. Manufacturer, and I saw Mr. -Laboringman and talked the matter over with him. We all agreed that -there were several other points that we should discuss tonight instead -of reserves. I knew that Mr. Farmer lived on a Rural Free Delivery -route, and that I could reach him by noon the next day or Thursday -morning; so here we are ready to talk about something else. And we came -to this conclusion without even consulting you, for which possibly we -ought all of us now to beg your pardon. - -UNCLE SAM: Well, there you go again. Really, I feel as though I were -in about the same position that one of my wisest Presidents, Abraham -Lincoln, said he was in, with regard to his influence over his Cabinet. -You will remember he once said, "I don't believe I have any influence -with the present administration, anyway." Of course, we all know that -was one of Honest Abe's sly drives, because he knew deep down in his -soul that in the end he was always the master of ceremonies. However, -what is it that you want to talk about? Of course, you understand, that -under the circumstances, having made the arrangement to talk about -reserve, "I am completely upsot." - -MR. FARMER: Well, I'm the fellow that suggested that we talk about -reserves tonight; but I am sure that the change made was most -advisable. To use an ugly illustration, possibly ugly to this august -assembly, we now have our horses representing the standard of value -hitched up to our wagon which represents our currency and exchange, the -things that carry the value, wealth, property, and all commodities that -go by price, the trades having been made on credit, but calling for -capital. I think with Mr. Lawyer that we had better find out just what -these various words or terms mean before going any further. Otherwise -we will certainly be using words whose meaning we do not know, or, at -least, do not properly appreciate. - -MR. MERCHANT: Now just what did you say; value, wealth, property, -capital and credit? That all sounds very well, but I suggest that you -include one more word that has always been a source of annoyance to me -when I want to buy anything, and most unsatisfactory when I want to -sell anything, and that is "price." - -MR. FARMER: Oh, I had that in all right, but I will admit, in a sort of -backhanded way. - -MR. BANKER: All right, then, let us include price in the list; then the -programme for tonight is, value, price, wealth, property, capital and -credit. - -MR. LABORINGMAN: Just what do you mean by the value of anything? That -is, what is value anyway? - -MR. MANUFACTURER: I have been studying over that very thing, and I -believe I can give you a definition that will wash. The value of -anything is measured by the use to which it is put, and is expressed in -anything for which it is exchanged. - -MR. FARMER: I have been mulling over this question of value a little -myself, and I think that Mr. Manufacturer has that about right. I -worked it out this way: I have an old horse down on the farm that I -traded for, giving Hiram Johnson, my neighbor, a mule. That mule was -a mighty handy animal. I could do anything with him on the farm, but -he was a little too handy with his hind legs occasionally, so I traded -him off to let him practice on my neighbor Johnson. Now the value of -that mule was that horse that I got in exchange for it; and the value -of that horse was the mule. So, too, if I traded a hog for a sheep the -value of the hog is the sheep, and the value of the sheep is the hog. - -MR. MERCHANT: Hold on just a minute before you go any further, as I -want to know whether anyone here can tell me what intrinsic value is. -We heard so much about that during the campaign of 1896; and I want to -know whether there is anything in it or not. I ran up against the same -expression in one of the books that I thumbed away back in 1896. And -today you sometimes hear men say that gold has intrinsic value. Now, -according to your definition, if no one could use gold, or rather did -not use it and you could not exchange it for anything else, it would -not have value. - -MR. BANKER: Precisely so. Nothing is more absolutely true than that. -Gold, like everything else, gets its value from the demand for it, -which comes from its use and its consequent exchangeability. - -MR. LAWYER: That is undoubtedly true, all the value that gold has -arises from its use and exchangeability, and its exchangeability arises -from its universal use. - -It may be said, possibly, that the value of anything is measured by the -use to which it can be put; but I believe that it is all covered by the -latter part of the definition given by Mr. Manufacturer: _The value of -anything is any other thing for which it can be exchanged._ Anything -has value when it is exchangeable; when it is not exchangeable it has -no value. What is really more in keeping with our common everyday -language, is the definition of the Roman Law, "The value of anything is -what it can be sold for." - -MR. BANKER: Yes, that is true in one sense, but I think we had better -make a distinction between receiving money and something else. If you -exchange anything for money, the amount of money received is more -properly called its price. - -MR. LAWYER: You are right; I think we should make just that -distinction: "The value of anything is the thing you receive in -exchange for it." _The price of anything is the money you receive in -exchange for it._ Of course in everyday conversation, we are constantly -using value and price indiscriminately. We ask, what is the value of -something, when we want to know the price of it. - -UNCLE SAM: Well, you have made short work of two topics or points -raised already. - -MR. FARMER: Yes, and if we keep our noses to the grindstone, our eyes -on the sickle we are grinding, and our feet on the ground, we'll make -headway right along. - -MR. LABORINGMAN: I think anybody can understand this subject, at least -so far anyway. We may get over our heads before we get through, but I -know I'm all right yet. - -UNCLE SAM: The great thing to do in a discussion of this kind is just -what you do in any other matter. Talk common sense. Just talk horse -sense. Do you know I flatter myself that the common sense of the -American people is the wealth of the country? - -MR. LAWYER: Wealth, did you say, Uncle Sam? Why that is just what we -are going to talk about. It may be that common sense is the source -of most of the wealth of the American people, but really, Uncle Sam, -with all due deference to you, I do not think you can call it wealth. -Aristotle said: "We call wealth everything whose value is measured by -money." - -MR. BANKER: That definition of Aristotle has never been improved upon, -and today all students, scholars and economists have accepted it as -correct. And, while others have talked without limit and written books -without number about wealth, no one has improved upon what Aristotle -said wealth was. Just keep this simple inquiry in your minds: "Can it -be sold for money," and, remember that "whatever can be exchanged for -money is wealth." - -Let me illustrate just what I mean. If I have land, houses, cattle, -horses, cotton, corn, or any other material thing that I can convert -into money, they all constitute wealth. Again, if I were a lawyer, a -doctor, farmer, bricklayer, engineer, musician, or painter, my services -would be wealth because I can sell them or exchange them for money. -Again, there is still another kind of wealth that may be described by -the single word "rights," such as mortgages, bonds, stocks, bank notes, -checks, drafts, bills of exchange, copyrights, patents, good will of a -business, etc., all these various things are also wealth because they -can be exchanged for money. They can all be bought and sold. - -Let us remember this then, that all wealth is one of these three things: - -_First_: Wealth is material, land, etc. - -_Second_: Wealth is labor, work, etc. - -_Third_: Wealth consists of rights, checks, notes, bonds, etc. - -MR. LAWYER: Then, if I understand you correctly, you say a man is -wealthy because he has a good deal that he can turn into money. -Of course I am aware that a man may be considered wealthy in one -community, and in another community the same man with the same amount -of wealth may be considered a comparatively poor man--in other words, -everything is relative. A man worth $50,000 in some small country town -may be considered, and properly so, a very rich man; but on Fifth -Avenue, New York, he would be considered a comparatively poor man, -because it might take $50,000 to pay a year's rent for a house. - -MR. LABORINGMAN: You bet I can see that point all right. - -MR. FARMER: It seems to me as though you have made that perfectly -clear, but I want to tell you boys that when I tried to study up -on this question during the week, I got all balled up on the words -property and wealth, for I cannot see the slightest difference between -these two words. - -MR. LAWYER: Well, I think there is a very great difference; and I -think I can demonstrate to you by an illustration right in your own -neighborhood just what the distinction is between these two words. -You will remember, Mr. Farmer, when that mill located over on Carroll -River, and that big dam was put in, Mr. Adams, a man whom you and I -both know very well, owned all the land in that neighborhood. You will -remember that he proceeded to borrow money and build houses for the -employees who wanted to come and work in the mill. I think he built as -many as 150 houses for that purpose. You will remember the dam washed -out and that they did not rebuild it; and as a consequence the mill -closed down. The result was the employees all left, and Mr. Adams was -involved to a very large extent, I think something over $200,000 all -told. Now he still has the property, but the insurance company has -the mortgages--in fact, Mr. Adams has a great deal more property now -than he had before the mill located there, because he has the land and -the 150 houses, but he has a good deal less wealth. For when the mill -located there, Mr. Adams' wealth exceeded $100,000, but after the mill -closed he could not rent or sell the houses to anyone. Now the evident -result was that he had increased the amount of his property, for he had -150 houses, but he actually had no wealth left. His property was what -we lawyers call corporeal property, that is, material property, land, -and buildings. The insurance companies which held the mortgages had -a very different kind of property, called by the lawyers incorporeal -property, that is, not material property but an interest in the real or -material property. - -I think you will all agree that while Mr. Adams still has all his -property, all the wealth there is left belongs to the insurance company -which holds the mortgages. - -MR. MERCHANT: Mr. Lawyer, is it not true that you could and would say -that a man had a lot of property if he owns say 100,000 acres of land -worth only 25 cents an acre, even if it was not salable at all? - -MR. LAWYER: Yes, I think that is true, and illustrates in another way -that there is or may be a real difference between property and wealth; -however, it may be said that in conversation we often use the words -wealth and property without much, if any, distinction. It seems to me -that we should note this particular difference. _Wealth consists of -property convertible into money, and therefore implies exchangeability, -while property may not mean wealth at all, because the property has no -exchangeable value._ - -MR. BANKER: Mr. Lawyer, I think that that last statement of yours will -assist Mr. Farmer very greatly in understanding the real difference -between wealth and property. The difference is certainly very evident. - -MR. FARMER: Yes, I have caught on. There may be a very great -difference between wealth and property, although we are in the -habit of using these two words without any reference to the special -meaning that really attaches to them. In our conversation we use them -indiscriminately, and I don't know as that makes any difference; but -for our purposes, that is, for the purposes of these discussions, -I think it is very important that we should know the difference; -because something may arise that will compel a recognition of the real -difference between these two words. - -MR. BANKER: I was just going to remark that the very difference between -these two words suggests one of the other words we have agreed to -consider tonight, and that is the word "capital"; for capital is a form -of wealth, although all wealth is not capital. - -Wealth, as we have seen, consists: - -(1) Of material things, such as houses, land, etc.; - -(2) Of productive power, called labor, etc.; - -(3) Of rights, such as checks, notes, bonds, etc. - -The owner of these things may use some of them for his convenience. He -may so use some of them as to produce a profit. Now, when anything is -traded with, or so used as to produce a profit, or as we often say -used productively, it is called capital. - -Stephens defines capital thus: "Capital, the source whence any profit -or revenue flows." - -So Senior says: "Economists are agreed that _whatever_ gives a profit -is properly called _capital_." - -Again M.D. Fontenay says: "Wherever there is a _revenue_, you perceive -_capital_." - -MacLeod says: "Capital is an economic quantity used for the purpose of -profit." I would suggest that we say _Capital is anything used for the -purpose of profit_. - -MacLeod uses this language also: "If a person has a sum of money, he -may expend it on his household requirements; or in gratifying his -personal taste by buying books, or statues, or pictures, etc. Money -spent in this way is not _capital_. - -"But if he buys goods of any sort for the purpose of selling them again -with a _profit_: Then the money so employed is '_capital_,' and the -goods so purchased are also _capital_, because they are intended to be -sold with a '_profit_.' - -"So money let out at interest is _capital_. - -"In a similar way any material thing may be used as capital. If a -landlord lets out his land for the purpose of profit, it is capital. - -"All modern economists class personal skill, ability, energy and -character, as wealth, because persons can make a profit by their use. -Hence they may be used as capital, as well as material objects. - -"If a man digs in his garden for his own amusement such labor is not -capital; or if he sings or acts or gives gratuitous lectures on any -subject to his friends, such labor is not capital. - -"But if he sells his labor in any capacity for money: then such labor -is capital for him. Thus Huskisson says: 'that he had always maintained -that labor is the poor man's capital.' So Mr. Cardwell addressing his -constituents said 'labor is the poor man's capital.' And a writer in a -daily paper, speaking of agricultural laborers, said: 'The only capital -they possess is their labor, which they bring into the market to supply -their daily wants.' - -"So if a man expends money in learning a profession such as that of an -advocate, physician, engineer, or a profession of any sort which he -practices for profit, the money laid out in acquiring such knowledge -is capital: and his skill, ability and knowledge are also capital. He -makes an income which is measurable and taxable, just in the same way -as if he had made profits by selling goods. - -"Now, there are two fundamentally distinct ways in which capital may -increase: - -"1. By direct and actual increase of quantity; thus flocks, and herds, -and all the fruits of the earth increase by adding to their number and -quantity. - -"2. By exchange. - -"That is by exchanging something which has a low value in a place, for -something which has a higher value. - -"Now, it is clear that money produces a profit, and becomes capital, by -the second of these methods. Money is used as capital by exchanging it -for some goods or labor, the produce of which may be sold or exchanged -again, for a greater sum than they cost." - -MR. LAWYER: Mr. Banker, that is very simple and very clear, but it -strikes me that a distinction which is of greater importance to us -is the form that capital takes, and I would say, as preliminary to a -distinction in the different forms of capital, that we should have a -broad definition of what capital is, concretely expressed. _Capital is -that part of the accumulated wealth of the country that is used for the -purpose of profit. It is either Active, Passive, or Fixed._ - -The Active Capital is that portion of the wealth of the country -which is employed in the production, transportation and distribution -of consumable commodities, and is more accurately described as the -commercial fund of the country. - -The Passive Capital is that portion of the wealth of the country which -is derived from the commercial fund in the form of earnings, profits, -savings and income from investments, and is more accurately described -as the investment fund of the country. It is represented by bonds, -mortgages, and other investment securities. - -The Fixed Capital is that portion of the wealth of the country which is -represented by real estate, buildings and all permanent improvements, -such as railroads, mill property, irrigation enterprises, etc. - -_If we transfer the Active Capital, or commercial fund of the country, -to the Passive Capital, or investment fund, or what is still more -serious, convert it into Fixed Capital, we can no more keep the people -working and producing new wealth than you can keep a steam engine -producing power without coal and water._ - -What invariably happens in the so-called good times but almost -invariably what, by experience, proves "boom" times, is that business -men and in fact everybody, not only take all of their spare money, and -go into speculations, but they exhaust their credit as well; and what -they have to pay so far exceeds what they have to pay with, that when -the chain of credit breaks at any one point, the whole fabric falls. - -It then takes years, usually, to catch up and reconstruct and reach -a normal condition in which, after "paying for the dead horses," so -to speak, the profits on business, savings from labor and the income -from rents and investments again begin to supply investment funds. -For example, it took at least four years to get the American people -to thinking naturally and normally, after the panic of 1907--and the -fact is some "dead horses" have not been paid for yet; but generally -speaking, we are now ready to turn a considerable sum from various -sources into the investment fund of the country, or into bonds, -construction of new work, and into fixed investments, lands, buildings, -railroads and other permanent improvements. - -MR. BANKER: I think that you will all perceive from what Mr. Lawyer has -just said with regard to the various directions into which capital may -be turned and the fatal mistake that is ever and ever recurring--the -transfer of active or productive capital, or the commercial fund, into -the investment fund, or fixed forms, is what invariably, as he said a -moment ago, breaks the chain of credit at some point. - -You can readily see, indeed it takes no argument to show, that nothing -in the business world should be guarded so jealously as the commercial -fund of the country, in order that credit may be maintained and labor -steadily employed. - -MR. LAWYER: Our discussion has brought us most naturally to the last -word suggested for our consideration, and that is the word "credit." -I remember what Daniel Webster once said in a speech when speaking on -the continuance of the charter of the United States Bank in 1837. It -was this: "Credit is the vital air of the system of modern commerce. -It has done more, a thousand times, to enrich the nations than all -the mines of all the world." And again in another place he says: "We -owe more to credit and to commercial confidence than any nation which -ever existed; and ten times more than any nation, except England. -Credit and confidence have been the life of our system, and powerfully -productive causes of all our prosperity. They have covered the seas -with our commerce, replenished the treasury, paid off the national -debt, excited and stimulated the manufacturing industry, encouraged -labor to put forth the whole strength of its sinews, felled the forests -and multiplied our numbers, and augmented the nation, so far beyond all -example, as to leave us a phenomenon for other nations to look at with -wonder." - -MR. BANKER: That might have been true in 1837, but today other -commercial nations could truthfully reverse that comment, for -they have in some respects and in some places passed us in credit -facilities--they have beaten us as it were at our own game, that is, -in having worked out a more highly developed use of credit. - -MR. MANUFACTURER: When you recall the fact that between 90 and 95 per -cent of our business is carried on in some form of credit, you realize -that we have become so accustomed to this marvelous device that we have -lost appreciation of its power for human achievement and advancement. - -MR. BANKER: You are right. Do you know that I regard credit as one of -the three greatest instrumentalities of modern civilization? - -MR. LAWYER: Well, no, I never thought of credit in that connection. -That suggestion is so unusual that I am quite interested to know what -you regard as the three and in what order of importance you would place -them. - -MR. BANKER: I regard the invention of printing as the greatest -influence in the world's advancement, because it opened up the paths -of knowledge to the poorest as well as the richest, and completely -destroyed the supremacy of wealth in the acquisition of knowledge. We -have observed what gigantic strides have been made during the past -twenty years, and with what increasing and amazing facility information -is now being disseminated, the progress of the last ten years -outstripping the imagination itself. Everybody can now know everything, -if they have the time and ability to acquire it. - -MR. FARMER: How absolutely true that is. There are no less than ten -magazines on my table at home. They cover every conceivable subject -from electrical science, in which my son is deeply interested, to the -fashion plates of the latest style of women's dresses, current events, -current literature, fruit growing, intense farming, stock breeding, -eugenics and euthenics. - -MR. LAWYER: Hold on there, Mr. Farmer, or you'll prove conclusively -that you fellows out in the country know more than we do in town. - -MR. FARMER: Well, between you and me, I think that's so. - -MR. BANKER: The second most powerful agent in the advancement of the -human race is that instrumentality by which all the resources of the -human mind have been developed and brought into requisition in meeting -the ever-increasing demands of mankind throughout the world. It has -destroyed the supremacy of money, and provided the means by which the -most humble of the race can place his foot upon the ladder of opulence. -That instrumentality is credit. - -MR. LAWYER: I doubt whether such a proposition was ever thought of, -certainly it has never been advanced to my knowledge before; but when -you stop to think of it, I do not believe that anyone can successfully -controvert that statement. Look about you, and imagine, if you -can, what the condition of the people would have been without the -advantage of credit. Who of all your acquaintances has not made his -way to success by means of credit. Credit is certainly the gateway to -opportunity, and opportunity is the everlasting hope of the world. - -MR. BANKER: Mr. Lawyer, unless you stop your flow of eloquence upon -this newly discovered means of human happiness, I will not get a chance -to state the third greatest contributing cause to the uniform and -universal development and advancement of mankind. It is steam and its -modern companion electricity. Through the application of steam to ocean -craft and railroads, transportation has brought the people of the whole -world practically into one market zone, and we are now all eating the -same food and wearing the same clothes, and to the last degree, every -people, and broadly speaking, every man, is doing that which he can do -most efficiently and profitably. - -MR. MANUFACTURER: Mr. Banker, you have certainly opened up an entirely -new strain of thought to me; and yet when you grasp the full force -of the idea, and comprehend fully these three elements or forces: -printing, the general transmission or diffusion of thought or -knowledge; credit, the fullest use of all our talents by opening up a -world of opportunity; and transportation, the fullest exchange of all -the products of the mind and hand of man, you have actually covered -the realm of human life up to date. And yet, who ever thought of -placing this relative importance upon credit. We have been discussing -the comparative importance of gun powder that brought the knight and -soldier to a common level, the cotton gin, electricity, the telegraph, -the telephone, chemistry, surgery, wireless, printing and steam, but -whoever heard of credit in this connection? - -MR. MERCHANT: What you say is distinctly true, but all these other -things I can readily see are only additional facilities in making the -three great fundamental instrumentalities for the advancement of the -human race more efficient; and the more one thinks it over, the more -impressive Mr. Banker's statement becomes. - -_First_: Printing, the means of spreading knowledge; - -_Second_: Credit, the fullest opportunity of developing and using the -powers of mind and body; - -_Third_: Steam and electricity, the means of distributing on land and -sea the products of all mankind. - -These three, printing, credit and power are certainly the three -greatest forces of modern civilization. - -MR. BANKER: Now, gentlemen, having convinced you as I assume I must -have done, of the tremendous part that credit is playing in the world -of today, let us try to find out and comprehend just what credit really -is, and how it happens to be so essential to our present life. - -The word "credit" means, "I believe," "I trust." That is, I believe -in a man, in a man's character, and in his ability, and therefore I -trust him to do something tomorrow, three months from now, six months -from now, nine months from now, one year, or possibly a longer time, -which he cannot do today. That is credit. What a limitless field of -opportunity and then of speculation this confidence of man in man opens -up. Credit is to money what steam is to water, and credit like steam -must always be kept within control, and within safe bounds, as in the -case of steam, or there will be an explosion of credit, a most direful -thing. Now, there never will be an explosion or crisis in the world of -credit, so long as credit is subjected constantly to the test of coin -redemption, that is, the conversion of credit into money, gold. So long -as credit can be extinguished by payment in gold, it is under control. -But, gentlemen, when gold redemption becomes impossible, look out! Let -me read what MacLeod says about that: - -"It is unextinguished credit which produces those terrible monetary -cataclysms which scatter ruin and desolation among nations. It is by -the excessive creation of credit that overproduction is brought about, -which causes those terrible catastrophes, called 'commercial crises,' -and the inability of credit-shops to extinguish the credit they have -created, commonly called the failures of banks, is the cause of the -most terrible social calamities of modern times." - -MR. LAWYER: Now, we have the other side of the picture. On the one -hand, we have Daniel Webster painting the possibilities of human -achievements through credit--its tremendous power for good, when under -control, and, on the other hand, the words of MacLeod pointing out the -awful danger, the tragical consequences of credit beyond control. The -years of 1873, 1893 and 1907 are illustrations of what happens when -credit has passed the boundaries of control. - -MR. BANKER: Precisely so, and what we want to do is to prevent the -recurrence of those commercial tragedies which interrupt the currents -of prosperity, spreading desolation and death throughout the length and -breadth of the land. - -MR. LABORINGMAN: It is to be hoped that we can do it, for no class -suffers so much as the working masses during these periods of disaster, -depression and distress. Don't you see that if any one of us has -succeeded in laying aside by painful saving a little nest egg, in some -savings bank, that it is wiped out, and he has to begin all over again? -And if one of us fellows has accumulated enough to start some little -business of his own, ninety-nine times out of one hundred he is cleaned -out, and through no fault whatever of his own. - -MR. FARMER: In this very connection I want to call your attention to -another thing, and that's this. These men who have the intelligence, -ambition, perseverance and moral courage to pinch and save, even if -they have to starve to get a start for themselves, constitute the true -and the greatest ultimate source of wealth of this nation. They are the -chaps that make two blades of grass grow where only one grew before. -You don't want to forget that. They are not only the hope of every -community in which they live, but they are a constant inspiration to -the young. - -MR. MANUFACTURER: Now, gentlemen, you are talking sense. If we can -devise some scheme to keep business from running away with us, and -running off the track, and down the embankment every few years, and -plumb over the precipice, we'll be doing something worth while. In a -word, what we want, it seems to me, is to keep business on a more even -keel, if possible; and if we could only get control of credit, and keep -it within reasonable limits, always subject to a current gold test, we -will be in a fair way to accomplish it. - -MR. BANKER: That is just what we are after; to find some way to keep -credit within reasonable limits. You have struck the keynote of this -whole question. - -In the first place, I want to call your attention to the fact that -there are several kinds of credit, and that we must familiarize -ourselves with all of them, in order that we may know how to deal with -them. A doctor, you know, is a mighty poor stick, if he cannot diagnose -your case, and tell you just what ails you, and yet proceeds to give -you some kind of medicine, any kind of medicine for the right or the -wrong disease. Indeed, he's about the most dangerous individual to -have in a community. Now, unless we can become convinced that we are -proceeding along right lines, because we have actually discovered the -evils from which we are suffering, we had better let things alone. But -our case is not hopeless, for the disease from which we are suffering -has a well-known specific antidote, and it is up to us to first find -out what ails us, and then to administer it. - -The treatment of the credit phase of the situation, or what may be in a -way termed the mental aspect of the case, is probably as important as -any other, and I will now try to analyze and describe credit, so that -we can understand it, at least from my point of view. - -There are five well defined forms of credit. - -_First_: Credit granted to aid production. - -_Second_: Credit to distribute production. - -_Third_: Credit granted upon accommodation paper. - -_Fourth_: Credit granted upon real estate. - -_Fifth_: Credit granted to the Government, or forced by the Government. - -UNCLE SAM: Say, Mr. Banker, do you know what time it is? Don't you -see it's half past ten o'clock? It will take you till morning to tell -all about credit, and I don't know but what it would take you until -"Kingdom Come." - -MR. LABORINGMAN: Well, I've got to be up at six o'clock in the morning, -and be at my job by seven, and I want to go home. I move, we adjourn. - -MR. FARMER: So do I, for I've four miles to go yet tonight. - -MR. LAWYER: What difference does that make? The trolley goes right by -your door, and you'll be there in twenty minutes. - -MR. FARMER: That's all right, Mr. Lawyer, I don't get my breakfast at -nine o'clock as you do, but I've got to be up in the morning at five -o'clock to feed my stock. I'm a-going, so good night. - -UNCLE SAM: This is a rather informal break-up, but I guess it will be -of no use to call in the police, so good night. - - - - -SEVENTH NIGHT - -COMMERCIAL CREDIT, LAND CREDIT, GOVERNMENT CREDIT - - -UNCLE SAM: Mr. Farmer isn't here yet. He left in such a huff the other -night, possibly he is sore--no, he is not, here he comes. - -MR. LAWYER: When our meeting broke up last Wednesday night, Mr. Banker -had just outlined the different forms of credit, and I was very glad -that he did, because it gave me an opportunity to read up on the -subject and be prepared to listen intelligently, at least, to what any -of you may say tonight. - -MR. MERCHANT: I did some investigating, too, and found the subject -far more interesting than I supposed it could possibly be. Indeed, -that is true of any subject. Your interest is always measured by your -knowledge, and many matters that seem to us difficult to understand, -become exceedingly simple as you get into them, and comprehend them. -How often the apparently impossible task completely dissolves under -persistent attacks. - -MR. BANKER: I am more than pleased that you gentlemen have given -your spare time to this subject. Simple in function it is, but it is -immeasurably great in its possibilities, extent and responsibilities -from the standpoint of the banker. - -Just as we parted last Wednesday I had described or defined the -different forms of credit, so far as they enter into banking directly -or indirectly. As I then stated, the first and simplest use of credit -is that granted for the production of something to eat, wear or -use--what we call consumable commodities, that is, credit granted to -aid in production. - -If Mr. Farmer over there should come into my bank now as he used to -before he got rich, and ask for a thousand dollars to pay his expenses -while he was planting, cultivating and harvesting his crop, and then -in the fall should come again and ask me for three thousand dollars -more to buy some steers and hogs with, because he thought he could make -more money feeding than by selling his corn outright, and I had let -him have the total amount of $4,000 from time to time as he wanted it, -because I believed in his honesty and intelligence, and also because I -regarded the venture as a good one, that would be granting credit for -the production of beef and pork, food products--the very necessities of -life. - -Just as soon as his steers and hogs had become fit for market, and -had ceased to gain anything to speak of, by holding them and further -feeding, he must sell or lose the cost of holding on the chance of a -rise in the market. But even this delay must be temporary. Virtually -he is compelled to sell from the very nature of the case. When he -sells his steers and hogs, suppose he should receive $5,000. First, -he pays me the $4,000 and interest, and has about $1,000 profit on -the transaction. You will all perceive and understand, that as I gave -Mr. Farmer this credit of $4,000 from time to time, he gave me his -promissory note for an equal amount, so that as fast as I granted -credit he created a debt. I acquired the right to demand payment of -$4,000 and he incurred the duty or obligation to pay $4,000. - -So for every credit granted a corresponding debt is created; and if -every debt is paid every credit will be canceled. Though the credit -granted to Mr. Farmer was for the production of the necessities of -life, it was not the safest kind of a loan to make as we shall soon -see--his personal responsibility aside of course; because after I had -given the $1,000 he might have to replant his corn. The summer might be -dry and the frost might come early and cut off his crop; but passing -over these possible dangers to his crops, if we assume that his crop is -the biggest he ever raised, and that that very fact makes it desirable -to borrow the additional $3,000, pleuro-pneumonia might strike his -cattle, and cholera might seize his hogs and the transaction might -result in a loss of $1,000 instead of a profit of $1,000; or even a -greater loss than $1,000. - -It is these risks that the banker takes in making loans to farmers -that justifies higher interest rates than are charged under some other -circumstances. Again it is these risks that lead a banker out of -caution to take real estate loans in addition, to cover the accidents -of crop raising, although the National Bank Act forbids making loans -upon real estate. - -MR. FARMER: Under such circumstances, I think it ought to be possible -for a bank to take real estate loans. I believe it would help the -farmer to get his money at a trifle lower rate of interest. - -MR. BANKER: I agree with you, and provision should be made for just -such cases; but the rule of the National Bank should still prevail -with regard to loans upon real estate so far as a regular business is -concerned, unless the bank is doing a savings bank business or a trust -company business, in which event it would be entirely proper to use -such funds for that purpose. - -MR. MERCHANT: Mr. Banker, a moment ago you said that the loan to Mr. -Farmer, apart from his personal standing, was not the safest kind of a -loan to make. Just what did you mean by that? - -MR. BANKER: I am glad that you asked that question, for it should be -explained right here. Suppose that you, Mr. Merchant, should purchase -$4,000 worth of pork and beef in the barrel, at some distant point, and -should come to me for the money to pay for it. In all probability I -should ask you for the bill of lading covering the shipment, and also -insist upon your getting an insurance policy on the goods before giving -you the money. In this case, I am loaning money upon the necessities of -life, consumable commodities, and unless the insurance company fails, -and the goods are destroyed, I cannot possibly lose a cent. I have, -humanly speaking, eliminated all chances of loss. You will observe -that if I should hold the bill of lading and the insurance policy, I -have the title or ownership of the pork and beef, in any event. In such -cases, comparatively speaking, the rate of interest ought to be the -lowest possible, as far as the risk goes. - -MR. MANUFACTURER: But this kind of a transaction constitutes a -comparatively small part of the commerce of the country. - -MR. BANKER: Yes, that is true, and if credit was limited to such -transactions, credit crises would be very few, indeed, probably never -would arise as a result of over trading under such circumstances; trade -would be greatly hampered, and business curtailed to a destructive -degree. - -MR. MANUFACTURER: That is certainly true. You men all know that I am a -manufacturer of high class clothing. I want to give you an illustration -of how business is being carried on today in the way of multiplying -credit. - -A manufacturer of woolen goods at Lancashire, England, sold to a -wholesale merchant on the other side, $10,000 worth of goods on three -months' time. The wholesale merchant sold the goods for $12,000 to an -English exporter on three months' time. The English exporter sold the -goods to an American importer for $20,000, duty paid; the importer -sold them to an American jobber for $22,000; the jobber sold them to -me for $24,000. All these sales occurred within thirty days, and not -a single man paid a cent of money on account of his purchases. By way -of payment, this is what happened. I gave my note due in ninety days -to the jobber, and he discounted it at his bank. The jobber gave his -note due in ninety days to the importer, and the importer discounted it -at his bank; the English exporter sent over a draft upon the American -importer at ninety days sight, and he accepted it and it was returned -to England, where the exporter discounted it at his bank. In the -meantime, the wholesaler drew a draft on the exporter at ninety days -sight, and he accepted the draft, whereupon the wholesaler discounted -the draft at his bank. At the same time the manufacturer drew on the -wholesaler at ninety days sight, and the draft was accepted by the -wholesaler, and was discounted by the manufacturer at his bank. Thus we -see that goods which sold originally for only $10,000 went through five -different hands and became the basis upon which credits were granted -for $88,000, and debts were created for $88,000. Every single debt was -sold just as though it was so much woolen goods. Every man had his -money and not one of them had paid his debt, and yet every transaction -was legitimate and in the ordinary course of business. - -Within sixty days I shall have turned these goods into clothes and sold -and delivered them, giving my customers in turn credit upon my books, -or will have accepted their promissory notes, which I may discount at -my bank if I should need the money in my own business. Now mark and -note this. If I should deliver to the American jobber my check today, -and he should send his check to the American importer and the American -importer should send a draft to the English exporter, and the English -exporter should deliver his check to the wholesaler, and the wholesaler -should send his check to the manufacturer, debts amounting to $88,000 -would have been paid and credit amounting to $88,000 would have been -canceled; and yet not a single cent of cash in the form of coin or -currency has been used. - -Every one of the checks, notes or drafts taken in the transaction is -property, just as much as the note taken for a single sale of the goods -would have been property. Indeed, every one of the five notes or drafts -was just as much property as the goods themselves were, and could be -bought and sold just as well as the goods themselves could be bought -and sold. Now it must be evident to all of you that in the production, -transportation and distribution of commodities, credit performs exactly -the same function as money. So far, therefore, credit is in all -respects equivalent to money. So long, therefore, as the operations -through credit are successful, everything goes well. - -MR. BANKER: Precisely so, Mr. Manufacturer, so long as the operations -are successful, everything goes well; but it is the sudden breaking of -the chain of credit that brings or precipitates a disturbance. - -MacLeod uses this language in referring to the destruction of -confidence: "It is the sudden failure of confidence and extension -of credit which produces what is called in commercial language, 'a -pressure on the money market' and which causes money to be 'tight.' -When money is said to be scarce, it does not mean that there is a -smaller quantity of money actually in existence than before; there may -be more, or there may be less in the country; no one can tell what the -amount of money in existence is, but a great amount of credit which -serves as a substitute, and was an equivalent of money, is either -destroyed altogether, or is suddenly struck with paralysis, as it -were, and deprived of its negotiable power, and therefore, practically -useless. A vast amount of property is expelled from circulation, and -money is suddenly called upon to fill the void." - -It must be observed and noted right here, therefore, that streams of -gold, of gold, I say, must be constantly and swiftly running through -the channels of trade, and so intimately connected with a practically -unlimited supply or an inexhaustible reserve of gold, in the form of a -central reserve for the whole country, to immediately extinguish any -conflagration of credit as soon as it breaks out, precisely as a flood -of water extinguishes a fire when it first makes its appearance. - -For the past ten or fifteen years, the banks of England have realized -the necessity of pursuing this principle, by carrying their own -individual reserves, and accordingly have been gradually accumulating -cash reserves of their own, instead of depending upon the Bank of -England, except as a last resort. - -Germany, too, within the past year, has suffered severely because -adequate reserves have not been present in her channels of trade; and -having discovered this weakness in her banking practices, appointed -a commission to pass upon that and other questions. The commission -reported that the individual banks should carry their own reserves; -and Herr Havenstein, President of the Imperial Bank, a short time ago -demanded that the banks of Germany should carry their own cash reserves -up to 15 per cent of their liabilities. - -How much more important, then, gentlemen, must it be that we, when -you consider the extent of our country, our vast and varied banking -interests which are being carried on by 25,000 or 30,000 individual or -independent banks, should require everyone of these banks to be in a -position to test its credits with the touchstone of gold, and at the -same time take the precaution of protecting itself by a central reserve -of gold far beyond any possible demand that may be made upon it. - -MR. MERCHANT: Mr. Banker, from what you have been telling us it is -perfectly clear that every promissory note, check, draft, or bill of -exchange, which are acknowledgments of debt, are just as much property -as land, houses, cattle, corn, iron, or anything else material that can -be bought and sold. Credit itself is merchandise and the subject of a -gigantic commerce of its own. - -"A well-managed credit amounts to tenfold the funds of a merchant; and -he gains as much by his credit as if he had ten times as much money." -This maxim is generally received among all merchants. Credit is, -therefore, the greatest wealth to every man who carries on commerce. - -Demosthenes says: "There being two kinds of property, money and general -credit, our greatest property is credit." - -Again he says: "If you were ignorant of this, that credit is the -greatest capital of all toward the acquisition of wealth, you would be -utterly ignorant." - -So Melon says: "To the calculation of values in money, there must be -added, the current credit of the merchant, and his possible credit." - -So also Dutot says: "Since there has been regular commerce among men, -those who have need of money have made bills, or promises to pay in -money. The first use of credit, therefore, is to represent money by -paper. This usage is very old; the first want of it gave rise to it. It -multiplies specie considerably. It supplies it when it is wanted, and -which would never be sufficient without this credit; because there is -not sufficient gold and silver to circulate all the products of nature -and art. So there is in commerce a much larger amount in bills than -there is specie in the possession of the merchants." - -MR. BANKER: While it is true, as a general principle, that by the sale -and transfer of the same property, as we have seen in the case of the -woolen goods, many credits are granted and a corresponding amount of -debts are created, it is also true that a single debt in the form of a -promissory note, check, draft or bill of exchange, may be the medium of -exchanging or transferring many different pieces of property. This is -just the reverse of the transaction that Mr. Manufacturer has explained -to us. - -MR. FARMER: That is right. I want to tell you fellows something. One -day about six months ago I was thinking of taking an automobile trip, -but hesitated on account of the weather signs. I hung around town here -for an hour or two and happened to drop into the office of a certain -lawyer (I never go there any more now). We talked politics. While -there, I asked him what he thought of the weather, and the political -situation, and then went out. At the end of the month I got a bill -from that lawyer for $50. I called upon the gentleman (I suppose I -have got to call him a gentleman on account of his neighbor here) to -find out what his bill meant, and he claimed that while we talked -about politics, the Presidential election prospects and the weather, -that I had pumped him about some very important legal matters upon -which he had given me valuable advice. Upon my soul I never knew it, -but what could I do. My only possible escape was to pay some other -lawyer, possibly Mr. Lawyer over there, $100 to defend the case. As -is the practice nowadays, I took the short cut and paid it by sending -him my check. That lawyer indorsed and gave that check to a neighbor -of mine for a Jersey cow. My neighbor indorsed and gave the check to a -country grocery store out there and paid his bill with it. The country -storekeeper indorsed and gave the check to Mr. Merchant over there -for $50 worth of boots and shoes. Mr. Merchant indorsed and gave the -check to Mr. Manufacturer for $50 worth of clothing. Mr. Manufacturer -indorsed and deposited that check with Mr. Banker, right here, who -charged it up to my account. Now, by Jove, you wouldn't think that was -possible, but here is the check with those five indorsements. - -Mr. Manufacturer has just given us an instance where the same identical -property worth only $10,000 in Lancashire, England, was sold five -times, and that credits amounting to $88,000 were being granted, and a -corresponding amount of debts were created. Now here is a case where -my debt to that blasted lawyer acknowledged by my check, paid him -$50; paid my neighbor for a Jersey cow $50; paid the country grocery -store for groceries $50; paid Mr. Merchant for boots and shoes $50; -paid Mr. Manufacturer for clothing $50; paid the bank on account of -Mr. Manufacturer's debt $50; or six separate debts in all, amounting -to $300. And the joke is, I never ought to have given the check at -all. This is the reverse side of the use of credit. The instance given -by Mr. Manufacturer was one illustrating the tremendous expansion of -credit. The instance I have given is one of the contraction of credit. - -MR. BANKER: Right on that point Mr. MacLeod says that sixty years ago -almost the entire circulating medium of Lancashire, England, consisted -of bills of exchange in no way different from Mr. Farmer's debt, and -that they sometimes had as many as 115 indorsements upon them before -they came to maturity. So that the useful effect of a bill of exchange -is indicated by the number of indorsements upon it, supposing that -every transfer is accompanied by an indorsement, which is not always -the case. We see here the fundamental difference between bills of -lading and bills of exchange, because the indorsements on the former -denote the number of transfers of the same identical property; the -indorsements on the latter denote the number of transfers of distinctly -different property. - -MR. MERCHANT: Mr. Banker, in every form of credit granted so far and -debts created, we have certainly been dealing only in a legitimate way -with consumable commodities, the necessities of life, and ordinarily, -if not always, this kind of credit will take care of itself. And yet -the marvelous facility and power of credit has been illustrated so -vividly, that I am sure all of us appreciate it and can readily see how -it might be abused and lead to disaster if not confined to the actual -production of articles of food, clothing and daily use, or, in a word, -to the production of the necessities of life. - -MR. FARMER: I object to your including that lawyer's bill as one of the -necessities of life. - -MR. LAWYER: I beg your pardon, but we lawyers are a necessity. Possibly -necessary evils, but nevertheless, I insist that we are necessary. - -MR. BANKER: Passing over this little quarrel between Mr. Farmer and Mr. -Lawyer, Mr. Merchant has hit upon the vital distinction that should -always be maintained in commercial banking as distinguished from -investment banking as we shall soon see. - -MR. LAWYER: There is not one man in a thousand that comprehends the -distinction that you have just called our attention to, and I include -the bankers when I say that, too. I did not appreciate it myself a -week ago, but it is fundamental and must not be overlooked. I want to -call your attention to one form of credit that does not grow out of -actual transactions in the production and distribution of consumable -commodity, and that is accommodation paper. - -MR. LABORINGMAN: Accommodation paper? It strikes me as though that -was just the kind of paper I wanted. I certainly will take any -accommodation that Mr. Banker over there will give me. - -MR. LAWYER: Speaking of accommodation paper, Mr. MacLeod says: "We now -come to a species of credit which will demand great attention, because -it is the curse and plague spot of commerce, and it has been the -great cause of those frightful commercial crises which seem to occur -periodically; and yet, though there can be no doubt that it is in many -cases essentially fraudulent, yet it is of so subtle a nature as to -defy all powers of legislation to cope with it." - -The obvious distinction between accommodation paper and promissory -notes or bills of exchange here referred to, and all legitimate -commercial paper, is this: the accommodation paper represents a future -transaction, something to be done, while the true commercial paper -represents a past transaction, or something that has been done; for -example, goods that had been manufactured and are ready for sale or -have been sold and shipped. - -MR. BANKER: Mr. Lawyer, will you allow me to illustrate that -distinction? - -MR. LAWYER: Certainly. - -MR. BANKER: If Mr. Manufacturer there should make ten different sales -of clothing of $5,000 each, and then send out ten drafts to his ten -customers, who accepted them and returned them, these ten drafts would -be called real bills of exchange, or let us call them true commercial -bills, because the ten men have purchased and agreed to pay for the -goods received by them. Should the ten men have sent their promissory -notes to Mr. Manufacturer, they would be identically the same thing as -the drafts which they had accepted, and answer identically the same -purpose. - -The real beneficiaries in these ten transactions are the ten purchasers -of the goods which they have received; and if Mr. Manufacturer should -sell me these ten bills of exchange or promissory notes as the case -might be, with his indorsement, the ten men would all individually -regard themselves as primarily liable; and they will, therefore, each -of them, prepare to pay his note when it comes due, although Mr. -Manufacturer is the guarantor. But if Mr. Manufacturer should go to -these same ten men and ask each of them as a favor or _accommodation_ -to him to accept the draft or indorse his note for the same amount of -$5,000, each due in 90 days, no goods having been purchased by any one -of them, all these drafts would be accommodation paper, and no one of -these men would look upon his note as his debt, and therefore would -expect that Mr. Manufacturer would take care of the paper when it came -due. - -In the latter case, Mr. Manufacturer, having gotten the money -and the ten men having no interest in the transaction, except as -an accommodation to Mr. Manufacturer in the form of a favor, Mr. -Manufacturer becomes the real maker of the ten notes, and the ten men -who are indorsers are, as I have said, without any interest in the -transaction, except that of accommodation acceptors. - -Mr. MacLeod has described this whole transaction so fully and forcibly -I want to read it to you: "There is in fact only one real principal -debtor and ten sureties. Now these ten accommodation acceptors are -probably ignorant of each other's proceeding. They only give their -names on the express understanding that they are not to be called upon -to meet the bill: and accordingly they make no provision to do so. If -anyone of them is called upon to meet his bill, he immediately has -a legal remedy against the drawer (or the note maker). In the case -of real bills, then, the bank would have ten persons who would each -take care to be in a position to meet his own engagement; in the -case of accommodation paper there is only one person to meet the ten -engagements. Furthermore, if one of the ten real acceptors fails in his -engagement, the bank can safely press the drawer: but if the drawer of -the accommodation bill fails to meet one of the ten acceptances, and -the bank suddenly discovers that it is an accommodation bill, and they -are under large advances to the drawer, they dare not for their own -safety press the acceptor, because he will, of course, have immediate -recourse against his debtor, and the whole fabric will probably tumble -down like a house of cards. Hence the chances of disaster are much -greater when there is only one person to meet so many engagements, than -when there are so many each bound to meet his own. - -"We see, then, that the real danger to a bank in being led into -discounting accommodation paper is that the position of principal and -surety is reversed. They are deceived as to who the real debtor is, and -who the real surety is, being precisely the reverse to what they appear -to be, which makes a great difference in the security to the holder of -the bills...." In carrying on a legitimate extension of credit, the -bank never permits the advance to exceed a certain definite limit; but -it never can tell to what length it may be inveigled to discounting -accommodation paper until some commercial reverse happens, when it -may discover its customer has been carrying on some great speculative -operation with capital borrowed from it alone.... - -"This is the rationale of accommodation paper; and here we see how -entirely it differs from real commercial paper. Because with real -commercial paper, and bona fide customers, though losses may come, -still directly the loss occurs, there is an end of it. But with -accommodation paper the prospect of a loss is the very cause of a -greater one being made, and so perpetually in an ever-widening circle -till at last the canker may eat into a banker's assets to any amount -almost." - -"The insurmountable objection, therefore, to this species of paper, is -the dangerous and boundless facility it affords for raising money for -speculative purposes." - -MR. MERCHANT: That is absolutely true. Accommodation paper and -speculation go hand in hand. They are twin sisters. Siamese twin -sisters. Pardon me, if I take a moment to demonstrate its terrors -by relating the experience of a friend of mine who was led into an -irrigation scheme: - -"My friend was in the grocery business in a western town and had a -stock of groceries worth $75,000, and he had $25,000 cash in the bank. -The dam and water ditch was to cost $100,000. My friend sold off a -part of his goods, realizing $25,000 of additional cash. He moved the -balance of his goods out to the point where the dam was to be located, -forty miles away, and began operations. He succeeded in finishing -the dam after paying out for work all that he had, and in securing -indorsers up to $100,000 upon accommodation paper in the city where -he had carried on the grocery business. Two hundred thousand dollars -had been paid for groceries and clothing. The laborers had gone to -his store and obtained food and clothing during the two years he was -engaged in constructing the work, and they had consumed all their wages -in living, and more, too. He put an issue of bonds on the dam but could -not sell them; therefore he could not pay the banks. His indorsers -could not pay the banks, and most of them were ruined because of their -indorsements for accommodation purposes. He was wiped out. He turned -over everything to the bank, bonds and all. The banks had to carry -those bonds ten years before they could sell them." - -MR. BANKER: Mr. Merchant, you have given a splendid illustration of -the result of accommodation paper, but you have proved far more than -you set out to demonstrate. You have not only shown the ruin wrought -by the $100,000 of accommodation paper, but also the extreme danger -accompanying accommodation paper, when the proceeds go into a real -estate investment or improvement; especially an irrigation enterprise -that usually requires a long time to reach results. The same is true -with regard to railroad investments, town lots, or any kind of real -estate investments. Your friend put into that grocery store from first -to last $200,000 worth of groceries and clothing, and the laborers who -did the work ate up the groceries and wore out the clothing. - -MR. MERCHANT: That is just what they did, for he simply gave them -credit at the store for their wages, and they were charged for what -they bought, and at the end of two years, the $200,000 worth of -groceries and clothing were consumed and converted into that dam and -ditch. He used to say he was ruined by the dam ditch. - -MR. BANKER: Now you have proved another thing by your illustration and -that is this. When the $200,000 worth of food and clothing represented -by two years' work of 100 men were converted into a real estate -improvement, instead of into consumable commodities, the necessities of -life, you have, so to speak, destroyed that much commercial capital, by -converting or changing it into fixed capital. This is true because your -friend could not begin and build another dam, for he had no money with -which to do it. - -MR. MERCHANT: But, Mr. Banker, he could sell his bonds. - -MR. BANKER: If he could, yes, but you just said he could not, and that -he turned everything over to the bankers and that they carried the -bonds for ten years. Now suppose that a flood should have come and -taken out his dam and destroyed his irrigation ditch, it would then -be perfectly clear to all of us, would it not, that $200,000 worth of -food and clothing had gone down the stream and had been forever lost; -completely wiped out, just as completely as if the goods had been -consumed by fire. - -MR. MERCHANT: That is perfectly plain, but suppose that he could have -sold the bonds, he would have gotten his money back, would he not? - -MR. BANKER: Yes, we would say in that case, that he had gotten his -money back, but he could not get the $200,000 of food and clothing -back, for they are in the dam and ditch. The $200,000 he gets for -his bonds, if he sold them for that price, is an entirely different -$200,000, as you must admit after a moment's thought. Your friend had -groceries and clothing which he could sell for $200,000 in money. Now, -suppose that you had had at the same time, $200,000 in your business. -Your $200,000 with the $200,000 your friend had put into the dam, -when finished would amount to $400,000. Now, if he had come to you to -dispose of his bonds, and you had thought well enough of them to sell -out your business and buy them, your $200,000 bonds would represent the -food and clothing in the dam and ditch, and are no longer cash capital -any more than a farm is cash capital, and it might take you longer to -sell your irrigation bonds than to sell a farm. You said it took the -bank ten years to get rid of them. - -MR. MERCHANT: Oh, I see that now. We have simply converted $200,000 of -cash capital into $200,000 of passive or fixed capital. Before he built -the ditch he had $200,000 and before I sold out my grocery business I -had $200,000, making $400,000 of cash capital. Now he has $200,000 of -cash capital and I have $200,000 of fixed capital, possibly an eternal -investment in the bonds. That is what you would call a permanent -investment, I suppose, for it might take me twenty years to demonstrate -the value of the enterprise as it did the bankers. - -MR. BANKER: Now, Mr. Merchant, I want you to mark and remember this; in -fact, I want all of you gentlemen to set this down in your memories so -that it can never be dislodged. These irrigation bonds would continue -as passive or fixed capital until the earnings or sale of the property, -covered by the ditch, should not only pay the interest upon them, but -should pay off the principal as well, even if it took a thousand years -to accomplish this result. - -MR. LABORINGMAN: That is nothing but a straight real estate loan as far -as I can see, and not a very good one at that. - -MR. BANKER: That is just what it is, and for the very same reason a -banker should no more buy such bonds or loan on such securities, his -commercial deposits than he should loan money on real estate. The -principle is the same. If we bankers loan on cotton, cattle, hogs, -wheat, corn, or manufactured goods of any kind, we know there is a -constant and ready market at some price for these things, for they are -all in current demand at some price, somewhere, while a real estate -loan, however good it may be, is not what we call a quick asset, or -liquid asset; that is, something that you can turn into money at once. -A commercial bank should never take a real estate loan, except as -additional security for money advanced for some legitimate commercial -purpose as distinguished from an investment. The commercial funds -should be used for the production of crops, or goods of some kind, -and if a real estate mortgage is taken in addition, it should be only -within reasonable limits, for it is the easiest thing in the world to -tie up all a bank's capital and deposits in real estate loans; that -is, to turn the capital and deposits into passive or fixed capital, -mortgages or real estate, which might be selling readily in boom times, -but which are utterly unsalable when the break comes. - -MR. LABORINGMAN: What do you mean by tying up the capital and deposits -of a bank in mortgages and real estate? - -MR. BANKER: I will explain that to you in such a way that I am sure -you cannot fail to understand and appreciate it. Suppose that I had -$100,000 in cash in my bank to meet the demands of my depositors; but -should give it to farmers in exchange for mortgages upon their farms. I -could not pay my depositors the mortgages; they want money. I might not -be able, and probably would not be able, to sell the mortgages in time -to pay the depositors their money; and if money happened to be scarce, -possibly not for a long time would I be able to pay them their money. -I would have that $100,000 tied up in mortgages. This is granting -credit on land. Now, these mortgages will continue in existence until -the farmers can make enough out of their crops to pay the interest -upon them from year to year, and finally to pay them off; it may take -ten or twenty years. If I had loaned $100,000 on cotton or cattle, the -products of the farm, they could have been converted immediately into -money at some price to meet the demands of my depositors. - -MR. LABORINGMAN: I see now that you bankers must keep the money you -receive from us depositors, either in cash or in something you can -instantly convert into money, and when you don't do that, you have tied -it up, as you say; and if we happen to find it out we are apt to want -our money; and if we all want it at the same time, you call it a run -on your bank. Now when you say a banker is ready for a run, you mean, -as I now understand it, that he has all his deposits on hand in cash, -or has all his deposits invested in something that he can turn into -cash: good notes that have been taken in the course of business, that -is, in the production and transportation of consumable commodities, -the necessaries of life. Of course, anybody must understand that if a -bank bought a lot of farms or a lot of farm mortgages (and it might be -worse off if it bought city mortgages with our deposits), he could not -convert them or turn them into money on demand. I am on to this thing -now; neither mortgages nor land can be considered what you described -a minute ago as quick assets, or as liquid assets, because you cannot -convert them into money practically on demand. - -MR. FARMER: I grasp that idea now myself. Do you know I have always -thought, until within an hour, that we farmers ought to be able to -get something to pay out in the shape of currency that represented -our land, or in exchange for a mortgage, just because I knew a -mortgage was good or worth its face; but I see now that a bank must -not only have something that is good and worth its face, but it must -be exchangeable for, and convertible into, real money or gold, at any -time, or the bank must shut up. And you can't turn all our farms into -some form of currency, and expect the banks to redeem it any more than -you can sell a farm every hour. I have been trying to sell one farm -for ten years. Now I see that would not make very good currency. Since -I cannot sell it, the only way for me to convert that farm into cash -capital is to take the net earnings, and lay them aside until they -equal its value or what it cost me; that might not be within twenty -years, as I might not be able to save for that purpose more than 3 per -cent or 4 per cent a year which, at compound interest, would about make -it. It is perfectly clear to me, now, that real estate is not a proper -basis for a currency, which must be currently redeemed in gold. It -cannot be done; that is a sure thing. - -MR. LAWYER: Mr. Farmer, you have reasoned out for yourself a thing that -has fooled many a man, and the world has had many bitter experiences -trying to do the very thing you now so clearly see cannot be done; that -is, make currency out of real estate, or, rather, as you would say, -make money out of real estate, when, as we have already seen, gold is -the only money we have or can have, so long as gold is our standard of -value. - -Jevons, a great English writer, has well said: "Land is doubtless one -of the best kind of security for the ultimate repayment of a debt; and -it is therefore very suitable when money is lent for a long time. But -representative bank notes purport to be equivalent to gold, payable -on demand, and nothing is less readily convertible into gold in an -emergency than land." - -MR. FARMER: And we cannot have any more currency than we can redeem -daily in gold. Therefore we can't make currency out of all of our real -estate, even our agricultural land, which is according to our last -census worth sixteen billions or $160 for every man, woman and child -in the United States. The average value per acre is $15.57. Now, at -first thought, anyone would say that it would be safe to issue money -for this value, or sixteen billion dollars; but who would redeem it? -That is the question. One hundred and sixty dollars for every man, -woman and child. That would certainly be absurd; and yet I have always -thought that we could do that very thing until tonight. I see how it -is, currency must be currently redeemed in our standard of value, or it -will become first worth less than 100 cents on the dollar, and if the -thing goes far enough, it would actually become practically worthless, -although it might be based upon valuable real estate. How perfectly -simple and plain this all is now. - -MR. LAWYER: Indeed, it is simple and plain, but do you know that that -scheme of making currency or money out of real estate, or converting -real estate into currency or money, was tried twice in France upon a -most gigantic scale? First, John Law, in 1717, worked out a scheme -whereby he tied the government of France to a land enterprise in the -United States, the "Mississippi Scheme," covering a large French grant, -and through his plan issued money, Government money, that represented -about one-quarter cash and the balance real estate. But everybody has -heard of John Law and the "Mississippi Bubble," so I won't say any more -about that. Nearly a century afterward the same scheme was tried again, -and strange as it may seem, in France, too. - -From 1789 to 1796, during the French Revolution, the credit of the -French Government was added to vast real estate holdings, so that the -security was doubled, such as it was. I have just looked this matter -up with a good deal of care, and the best description I found was -substantially as follows: - -Assignats were a form of paper money issued in France from 1789 to -1796. Assignats were so termed because land was assigned to the holders -of them. The financial strait of the French Government in 1789 was -extreme; coin was scarce, loans were not taken up, taxes had ceased to -be paid, production and the country were threatened with bankruptcy. -In this emergency Assignats were issued to provide a substitute for -metallic currency. These Assignats were originally of the nature -of mortgage bonds on the National lands. These lands consisted of -the church property confiscated on the motion of Mirabeau by the -Constitutional assembly on Nov. 2, 1789, and the Crown lands which had -been taken over by the nation on Oct. 7th. Subsequently the lands of -the Emigres, the princes and royal followers, 30,000 of the nobility -who were exiled from the soil of France, were added to the list of -lands against which the Assignats were issued. - -These Assignats were first to be paid to creditors of the State; -with them the creditors could purchase National land, the Assignats -having for this purpose a preference over other forms of money. If the -creditor did not care to purchase land, it was supposed that he could -obtain the face value for them from those who desired land. Those -Assignats which were returned to the State as purchase money were to -be canceled, and the whole issue, it was argued, would consequently -disappear, as the National lands were distributed. - -A first issue was 400,000,000 francs or ($80,000,000) worth of -Assignats, each note being 100 francs or $20 value and bearing interest -daily, at 5 per cent. They were to be redeemed by the product of the -sales, and from certain other sources, at the rate of 120,000,000 -francs ($24,000,000) in 1791; 100,000,000 francs ($20,000,000) in 1792; -80,000,000 francs ($16,000,000) in 1793 and 1794, and the balance in -1795. The success of this first issue was undoubted, as all such first -issues are. - -Mirabeau was a strenuous advocate of the Assignats. "They represent," -he said, "real property, the most secure of all possessions, the soil -on which we tread. There cannot be a greater error than the fear so -generally prevalent as to the overissue of Assignats, reabsorbed -progressively in the purchase of the national domain; this paper money -can never become redundant." - -In 1790 the interest was reduced to 3 per cent, and as the Treasury had -again become exhausted, a further issue was decided upon; it was also -decreed that the Assignats were to be accepted as legal tender, all -public departments being instructed to receive them as the equivalent -of metal money. The second issue amounted to 800,000,000 francs -($160,000,000) and carried no interest. It was solemnly declared in -the decree authorizing the issue that the maximum issue was never -to exceed one billion two hundred million francs (1,200,000,000) -($240,000,000). This pledge, however, was soon broken, and further -issues brought the total up to three billion seven hundred and fifty -million francs (3,750,000,000) ($750,000,000). The consequence of these -further issues was instant depreciation, and the note of 100 francs -($20) sank to less than 20 francs ($4) in coin. Recourse was then had -to protective legislation. The first step was to decree the penalty -of six years' imprisonment against any person who should sell specie -for a more considerable quantity of Assignats, or should stipulate a -different price for commodities, according as payment was to be made -in specie or Assignats. For the second offense, the penalty was to be -twenty years' imprisonment (August 1, 1793). For this the death penalty -was ultimately substituted (May 10, 1794). This severe provision was, -however, repealed after the fall of Robespierre. Notwithstanding these -precautions, the value of the Assignats still declined, till the -proportion of specie had become that of sixty to one. Then came the -passing, by the convention, on May 3, 1793, of the absurd maximum. The -decree required all farmers and corn dealers to declare the quantity -of corn in their possession and to sell it only in recognized markets. -No person was to be allowed to lay in more than one month's supply, a -maximum price was fixed above which no one was to buy or sell under -severe penalties. These measures were soon stultified by further issues -and by June, 1794, the total number of issued Assignats aggregated -nearly eight billion francs ($1,600,000,000), of which only two billion -four hundred and sixty-four million francs had returned to the Treasury -to be destroyed. The extension of the maximum price to all commodities -only increased the confusion. Trade was completely paralyzed and -all manufacturing establishments were closed down. Attempts by the -convention (legislature) to increase the value of the Assignats were of -no avail. Too many causes operated in favor of the depreciation; the -enormous issue, the uncertainty as to their value, if the revolution -should fail; the relation they bore both to specie and commodities -which retained their value and refused to be exchanged for money of -constantly diminishing power. Even between the Assignats themselves -there were differences. The Royal Assignats themselves, which had been -issued under Louis XVI had depreciated less than the Republican ones. -They were worth from 8 per cent to 15 per cent more, a fact due to the -hope that in case of a counter-revolution they would be less likely to -be discredited. - -The Directory was guilty of even greater abuses in dealing with the -Assignats. - -By 1796 the issue had reached the enormous figure of forty-five billion -francs ($9,000,000,000), and even this gigantic total was swollen -still more by the numerous counterfeits introduced into France by the -neighboring countries. The Assignats had now become totally valueless, -the abolition of the maximum the previous year, 1795, had produced -no effect; and, though by various payments into the Treasury, the -total number had been reduced to about twenty-four billion francs -($4,800,000,000), their face value was about thirty to one of coin. -At this value they were converted into eight hundred million francs -($160,000,000) of land warrants or Mandats Territoriaux, which were to -constitute a mortgage on all the lands of the republic. These Mandats -were no more successful than the Assignats; and even on the very day of -their issues were at a discount of 82 per cent. They had an existence -of six months, and were finally received back by the State at about -the 70th part of their face value in coin. That is, the State gave one -dollar in coin for seventy dollars in the paper. - -This experience of France has been the experience of practically the -entire world, Italy, Russia, Germany, Great Britain. The South American -countries are now going through it. Even the very best of them, Brazil -and Argentina, although their notes are not backed up by the land as -those of France were, have suffered the same consequences of their -folly. They are the notes issued by the Government against their own -credit. They were issued as fiat money, but are gradually being retired -just as the Assignats were as depreciated currency. - -MR. BANKER: Well, we haven't anything on the South American countries -to speak of ourselves from Colonial times down to the present day. - -UNCLE SAM: Now, Mr. Banker, just hold up; you can't get into that tale -of woe tonight, for I always have a bad dream when I think of it; a -veritable nightmare. We must quit for tonight. Mr. Farmer over there -has gone to sleep on my hands already. - -MR. FARMER: No, he hasn't; not on your life, and I hope it's a very -long life, Uncle Sam. - -MR. LABORINGMAN: Mr. Farmer, you are the first man I ever saw who -snores when he is awake. You snored loud enough to wake the dead. Your -snoring actually kept me from going to sleep. - -UNCLE SAM: Well, boys, let me see whether I can recollect just what -points we have made tonight. - -_First_: There is credit, which is the result of confidence and trust. -It is the right to demand payment. - -_Second_: For every credit granted, a debt is created. - -_Third_: If every debt is paid every credit will be canceled. - -_Fourth_: Credit is never excessive no matter what its absolute -quantity is, so long as it always returns into itself; that is, cancels -itself. - -_Fifth_: Credit from a commercial point of view, when granted to create -consumable commodities, the necessaries of life, is filling its proper -function. - -_Sixth_: Credit granted to facilitate the sale, transfer and -distribution of consumable commodities, the necessaries of life, is -filling its proper function from a commercial point of view. - -_Seventh_: Credit extended in the form of acceptances of checks, -drafts or bills of exchange, growing out of the actual production and -distribution of the necessaries of life, is filling its proper function -from a commercial point of view. - -_Eighth_: Credit obtained through accommodation acceptances or -indorsements is a bane to and peril of commerce, especially if such -credit is used in real estate investments, and more particularly in -speculation. - -_Ninth_: Credit granted upon real estate securities should depend -entirely upon the investment fund of the country for its cancelation. -So far as such credit is canceled by appropriating the commercial fund -of the country, labor will be thrown out of employment, production and -consumption will cease to a corresponding degree, and this will measure -the amount of human suffering that is sure to follow. - -_Tenth_: Real estate is not a proper basis for currency, because it -is not a consumable commodity with a ready market where it can be -converted into gold and because the value of real estate from the -standpoint of our currency needs is unlimited and therefore necessarily -not convertible into gold coin which is always essential to a sound -currency. - -The history of credit granted to our Government or forced by our -Government from the people will furnish plenty of food for our -appetites, humble our pride, and recall most sickening experiences one -week from tonight. Don't you think so, Mr. Banker? - -MR. BANKER: I certainly do. - -MR. LAWYER: So do I. And even then we cannot do the subject half -justice; but I suppose that we must get through some time. - -UNCLE SAM: I see that Mr. Farmer is now wide awake, but that Mr. -Laboringman over there is starting for the land of nod, because Mr. -Farmer is not keeping him awake by his snoring, so I think I'd better -say good night. - - - - -EIGHTH NIGHT - -COLONIAL CREDIT MONEY - - -UNCLE SAM: When we parted last Wednesday night, we all agreed to make -our experiences in Government issues of money the subject of inquiry -tonight, and I presume you have all been spending your days and nights -in studying American history, that is, in studying me. - -MR. MERCHANT: I have put more work into the question of our Government -issues of money than into any subject in my life in the same length of -time, principally because I knew Mr. Farmer used to be what we called -a Green-backer some years ago and I wanted to be ready if he happened -to still entertain those ideas and was still subject to those fits of -madness that came over him before he paid off the mortgage on his farm. -But that's ancient history now, and he's holding the mortgage on the -other fellow's farm. Now, Mr. Farmer, don't get hot, for I don't mean -any disrespect to you, but only to recall that craze for fiat money -when you and I were much younger than we are now. Then again, you seem -to have had a real revelation during our last talk, and to have been -converted to the principle that there could be too much paper money. - -MR. FARMER: That's all right, Mr. Merchant, but I well remember that -I was not alone when I used to advocate greenbacks without limit. Mr. -Banker over there was in the same boat with me. - -MR. BANKER: Right you are, Mr. Farmer, and there was not a man in this -immediate neighborhood then except old Judge Jones who did not agree -with us, but we've traveled some since then. - -MR. LAWYER: Well, gentlemen, I am a little surprised to find you all -so completely convinced that Government issues of money are to be -condemned before a fair trial. I half imagine that Mr. Manufacturer -over there will sympathize with me in my contention for the -constitutional power, and the wisdom of issuing United States Notes. - -MR. MANUFACTURER: You are very sadly mistaken about me; I am ready to -prove that you are mistaken, both as to the wisdom and constitutional -right of the Government to issue money even if you are a lawyer, -and ought to know all about the constitution. I don't claim to know -very much about the money question, generally speaking, but like Mr. -Merchant I have made a special study of this particular feature of it. -I am convinced there is only one side to this question, however many -sides there may be to some other phases of it, and we do not have to -leave the history of our own country for overwhelming proof of the -folly of it. I for one do not believe that the Government has any -constitutional right to issue money. - -MR. LAWYER: Well, Well! - -MR. MERCHANT: We'll make you say "well, well" before we get through -with you, if it takes till morning. - -MR. MANUFACTURER: It won't take until morning and when we get through -with him, he will be finished for fair, I think. - -MR. LABORINGMAN: We are evidently going to have some fun tonight. You -seem to think that you have Mr. Lawyer in chancery. Now, blaze away. I -want you to nail Mr. Lawyer on the greenback question, if you can; for -he has been getting the best of you on several occasions; personally, -I hope I will never get any less of the greenbacks as they are good -enough for me. - -MR. MERCHANT: But they are not good enough for you, Mr. Laboringman, -nor for anyone else, if they are not worth one hundred cents on the -dollar; or if they are ever liable to be worth less than one hundred -cents on the dollar; or if they are teaching an economic falsehood, -so long as they remain in existence; or if they are positively doing -the business interests of the country actual harm by excluding a -corresponding amount of gold, and finally, if they have no legal right -for existence today, even though one may admit for the sake of the -argument that it was necessary to issue them to save the nation, an -admission which I will not make. - -MR. MANUFACTURER: Good for you, Mr. Merchant, that statement has the -right ring to it. The greenback is guilty of every one of the charges -that you make from my point of view, and so it must always be with -every Government issue of money. - -You may go back to the very first Government issue of paper money in -this country, and follow the practice down to this very hour, and it -has left a trail of dishonesty, disaster, ruin and misery unmatched by -any other single cause. In my contention for this statement I am going -to rely for my historical facts upon George Bancroft, the greatest -American historian of our earlier period. - -In the fall of 1690, upon the return of an unsuccessful expedition -which Massachusetts had sent out to capture Quebec, the general court, -the then legislative power, ordered an issue of "£7,000 ($35,000) of -printed bills of equal value with money." And the balance of the cost -which was £40,000 or $200,000 was issued the following day. - -In July, 1692, within nineteen months of the earliest emission, -the first legislature under the new charter which transformed the -self-governing colony of Massachusetts Bay into a direct dependency -of Great Britain, made "all these bills of public credit current -within this province in all payments equivalent to money, excepting -specialties and contracts made before the publication" of this new law. -Their credit was supported by receiving them in all public payments at -a premium of 5 per cent. - -_Immediately all the coins then in Massachusetts were exported to -England and the new stock followed as fast as it came in from abroad._ -The vain sorrow of the province expressed itself in 1697 by the -prohibition of "the export of coin, silver money or bullion." In June, -a joint committee of the Council and representatives, to be aided by -the advice of merchants and others, was appointed to consider how to -revive trade, and find out some suitable medium to supply the scarcity -of "money"; and it is to be noted that the word "money" in all colonial -legislation was used exclusively for gold and silver coin. - -The first issue of Bills of Credit of Massachusetts, after it became a -Royal Province, was in November, 1702, for £10,000 in value "equal to -money," but to be accepted in all public payments at the advance of 5 -per cent. - -The passion for borrowing spread like flame on the dry prairie. In -November, 1714, Massachusetts ordered £50,000 to be let out by trustees -to the inhabitants of the province for five years on real security, -at 5 per cent per annum, to be paid back in five annual installments. -The Act was a sacrifice of the public interests to borrowers, who -were to return their loan only after a lapse of time, sufficient to -insure the very great depreciation of the paper in which it was to -be paid. Moreover, the borrowers needed an enforcement by law of the -circulation of the paper which they borrowed: swiftly, therefore, in -December, 1715, under a pretext "to prevent the oppression of debtors" -a stringent statute made the bills legal tender for all debts that had -been, or should be contracted, between the 30th of October, 1705, and -the 30th of October, 1722. - -The loan of Bills of Credit by Massachusetts in 1714 was managed at -the seat of Government. But why should Boston be favored? "That the -husbandry, fishery and other trades of the province might be encouraged -and promoted," Bills of Credit on the province to the amount of -£100,000 were in 1716 ordered to be distributed to a loan office in -each county. But why should borrowers in the smaller townships be -forced to travel to their shire towns? Let a public money lender be -near every man's door. By the statute of March, 1721, £50,000 were -distributed among borrowers in each of the several towns according -to its proportion in the last province tax. Again in 1728, £60,000 in -Bills of Credit were proportionately loaned among the several towns, -even on personal security, at the rate of 6 per cent for six years, -after which repayment was to be made in five yearly installments. Of -course, "money" disappeared; not even a single penny was to be had; the -small change became of paper. - -The next development of the colonial system of paper money was a -partial repudiation, so far as Massachusetts was concerned. In -February, 1737, less than forty-seven years after the first emission -of Bills of Credit by Massachusetts, that colony issued £9,000 of a -new tenor of which one dollar was to be equal to three of the old, -and which, after five years, was to be redeemed at par in silver and -gold. When the time of redemption came around they were not paid off, -but by a further repudiation four pounds for one was made the rate in -exchanging the old tenor for the new. - -On the 9th of January, 1739, the general court in Massachusetts made -this confession: "The emissions of great quantities of bills of public -credit, without certain provision for their redemption by lawful money -in convenient time, have already stripped us of all our money and -brought them into contempt to the great scandal of the government; for -the remedy thereof this province hath fixed the value of their bills in -lawful money, and the time of their redemption in 1742 new style." - -But that year went by and relief had not been found. In 1744, James -Allen, the preacher of the annual election sermon, from the pulpit, -addressed the Governor in this wise: "Be the means of delivering us -from the perplexing difficulties we are involved in by an unhappy -medium, uncertain as the wind and fluctuating like the waves of the -sea, through the unrighteousness thereof the land mourneth, and the -cries of many are going up into the ears of the Lord of Sabaoth." - -In 1745, people of Massachusetts took the largest part in the brilliant -enterprise which ended in the Louisburg campaign, and were to receive -from the British Parliament some payment for their extraordinary -expenses in the expedition. - -In February, 1748, Massachusetts, while awaiting its share of this -remuneration, invited the governments of Connecticut, New Hampshire and -Rhode Island to join in abolishing the use of Bills of Credit; but as -no one of the three gave effectual heed to the summons, the people of -Massachusetts proceeded alone. It was estimated that about £2,200,000 -of their Bills of Credit would be outstanding in the year 1749, that -is, $11,000,000. In January of that year an act was passed redeeming -the bills of the old issue or tenor at the rate of 45 shillings, those -of the new issue or tenor at the rate of 11s. and 3d. for one Spanish -dollar; a rate which somewhat exceeded their market value at the time. - -The Bills of Credit of New Hampshire, Rhode Island and Connecticut were -excluded by most stringent laws, and Massachusetts, with its quickened -industry and established credit, "sat as a Queen among the Provinces." - -MR. MERCHANT: Mr. Manufacturer, you must have gotten your information -from the same source that I obtained mine; all that you've said sounds -very much like George Bancroft, whose history of this question I've -just read. Since my ancestors came from Connecticut, I am going to tell -her tale of woe. - -In June, 1709, Connecticut put forth £8,000 of bills, or $40,000; then -soon followed that by £11,000 more, which were "to be in value equal to -money, and to be accordingly accepted in all public payments." - -In October, 1718, Connecticut, to prevent oppression by the rigorous -exaction of money, declared its Bills of Credit legal tender for -debt contracted between the 12th day of July, 1709, and the 12th day -of July, 1727. The time for the operation of the law was afterwards -extended to 1735. - -In the year 1733 Connecticut loaned interest-bearing bills for nearly -£50,000. In May, 1740, it issued £30,000 of a new issue of which -£22,000 were to be loaned to freeholders of the colony on mortgage, -or personal security, to be repaid one half in four years, the other -half in eight years in current bills, or hemp, or duck, or canvas at -their current market price. These bills were made legal tender in all -payments. But this provision was censured by the lords of trade in -England, and in the following November it was repealed. - -Roger Sherman, the greatest statesman of Connecticut, gave his mind -to the questions about money and mediums, commerce and exchanges, -and having mastered them in 1752, under the name of Philoeuonomos, -"the lover of just laws," he addressed to the men of Connecticut "a -caveat" against injustice or an inquiry into the evil consequences of -a fluctuating medium of exchange. These are some of his words: "The -Legislature of Connecticut have at length taken effectual care to -prevent a further depreciation of the Bills of this colony; the other -Governments (meaning New Hampshire and Rhode Island) not having taken -the like prudent care, their Bills of Credit are still sinking in their -value...." "_Money ought to be something of certain value it being that -whereby other things are to be valued_ ..." and this I would lay down -as a principle that can't be denied that a debtor ought not to pay -any debts with less value that what was contracted for, without the -consent of, or against the will of the creditor.... "If what is used as -a medium of exchange is fluctuating in its value, it is no better than -unjust weights and measures, both of which are condemned by the law -of God and man; and, therefore, the longest and most universal custom -could never make the use of such a medium either lawful or reasonable. - -"We in this Colony are seated on a very fruitful soil, the product -whereof with our labor and industry and the divine blessing thereon, -would sufficiently furnish us with and procure us all the necessaries -of life and as good a medium of exchange as any people in the world -have or can desire. But so long as we part with our most valuable -commodities for such Bills of Credit, as are no profit, we shall spend -a great part of our labor and substance for that which will not profit -us; whereas, if these things were reformed we might be as independent, -flourishing and happy a colony as any in the British Dominion." - -In May of the same year, the famous traveler, John Ledyard, and -twenty-five other merchants of Connecticut caught up the theme, and in -a petition to their legislature said: "The medium of trade whereby our -dealings are valued and weighed, ought to be esteemed as sacred as any -weights and measures whatever, and, to maintain justice, must be kept -as stable, for as a false weight and a false dollar is an abomination -to the Lord, a false and unstable medium is equally so, as it occasions -as much iniquity, and is at least as injurious." - -The Connecticut Assembly supported these memorialists, excluded -the bills of paper money of Rhode Island, and overcoming every -embarrassment, at last, like Massachusetts, redeemed every nine -shillings of its paper money with one shilling in specie. After the -first day of November, 1756, all accounts in Connecticut were kept in -lawful money. - -MR. MANUFACTURER: The experience of the other New England States is -practically the same as that you have just recited in Connecticut. In -1717 the Council of New Hampshire was zealous to follow the fashion of -issuing paper money by loan and issued £15,000. - -Rhode Island, also, in July, 1710, on its first emission of Bills -of Credit, declared them equal in value to "money," and made them -receivable in all public payments. In November, 1711, Rhode Island -discharged a claim by a loan of its Bills of Credit to the amount of -£300 for four years free of interest. - -New Jersey, too, tried its hand at the same scheme, following the lead -of Pennsylvania. In December, 1783, it issued £31,250, and in 1786, it -struggled hard to issue a larger amount, but William Patterson, who -was afterwards a member of the Supreme Court, resisted the proposal -with inflexible courage, and here are some of the words which he -employed: "An increase of paper money, especially if it be a tender, -will destroy what little credit is left, will bewilder conscience in -the mazes of dishonest speculations, will allure some and constrain -others into the perpetration of knavish acts, will turn vice into a -legal virtue, and sanctify iniquity by law. Men have, in the ordinary -transactions of life, temptations enough to lead them from the path -of rectitude; why then pass laws for the purpose, or give legislative -sanction to positive acts of iniquity? Lead us not into temptation -is a part of our Lord's prayer worthy of attention at all times, and -especially at the present." - -In March, 1723, when there was universal peace, borrowers undermined -the scruples of Pennsylvania, and that colony issued bills of credit -for loans to individuals, and not only compelled creditors to receive -the bills at par, or "lose their debts," but ordered sellers to -receive them at their nominal value in the sale of goods, or lands, or -tenements or "forfeit a sum from 30 shillings to £50." - -Again, on March 21, 1783, Pennsylvania, which hardly knew what it was -doing and had not yet gathered up the strength of its will, was the -first to renew in peace the evil usage of the times of war, and issued -$300,000 in what was called Treasury Notes, the lowest of one-quarter -of a dollar, the highest at twenty dollars. Two years later, but after -great resistance, its legislature issued £150,000, the lowest note -of 3 pence. But in the decisive hour Pennsylvania, too, proved the -implacable foe of paper money. - -In 1733, £90,000 in its bills of credit were brought into circulation -by loans of 4 per cent by the legislature of Maryland. - -Virginia was involved from May, 1755, in measures of war, and immediate -and increasing issues of paper bills were made which from the -beginning were a lawful tender for private debts. For the new "notes" -of April, 1757, it was further ordered that any seller who should -demand more for his goods in notes than in gold or silver coin, should -"forfeit 20 per cent of their value." ... In 1781, in the month of -March, Virginia directed the emission of £10,000,000 and authorized -£5,000,000 more; and the Continental paper currency and its own were -made a legal tender in discharge of all debts and contracts, except -contracts which expressly promised the contrary. - -In 1780 North Carolina directed the emission of more than £1,000,000, -and such further sums as the exigencies of the state might require; in -the next year gave authority at one dash to issue $26,250,000 of paper -dollars bearing 6 per cent interest. Again in 1783, North Carolina -emitted £100,000, declaring each pound of the emission equal to two and -one-half Spanish milled dollars, and a tender in all payments whatever. -In 1785, the state emitted £100,000 more. - -South Carolina, too, as late as 1785, permitted itself to be persuaded -to lend among the constituents of its legislature £100,000 in paper -bills of the state, which were to pass in payments to the treasury of -the state but were not otherwise made legal tender. The state soon -perceived that the paper banished more gold and silver than the amount -of the bills which were to take their place.... This was done, although -its legislature on the pretext of creating a fund to sink former Bills -of Credit, and to encourage trade and commerce in July, 1712, had -ordered £52,000 in new bills of credit to be stamped and put out at -interest in loans. In December, 1717, they passed this statute: "It is -found by experience that the multiplicity of the Bills of Credit hath -been the cause of the ruin of our trade and commerce, and hath been the -great evil of this province, and that it ought with all expedition to -be remedied." - -Finally, the great Empire State, with all the rest, entered eagerly -into the defense of its northern frontier, and in November, 1709, -for the first time involved itself in the use of Bills of Credit. In -1770, the legislature of New York passed an Act for emitting £120,000 -in Bills of Credit to be put out on loan. Again in April, 1786, the -opening year of the final great movement for a closer union of the -state, it placed an emission of £200,000 in Bills of Credit with loan -officers, to be loaned on mortgage security; and they were made a legal -tender in any suit for debt or damages, and the costs of suit. The -bills were further to be received for duties to be collected at the -Port of New York by the state. Gen. MacDougal, the brave soldier and -patriot, though sick unto death, insisted upon being carried to the -Senate, that, as the last act of his public life, he might give his -voice against the proposal to emit paper money. - -In 1780, the United States began repudiation by issuing a new paper -dollar equal to forty of their previous issues. After their new -constitution was established, all that remained of the bills of the -Continental Congress were called in at the rate of one dollar in silver -for one hundred dollars impressed on paper. - -MR. FARMER: While you gentlemen were studying Bancroft, I have been -reading Horace White upon this question of Government issues of money, -and thought I would not give myself away until after you exposed -your hands. You've piled up facts, but you've given us a very slight -impression of the effect that these money issues had, and therefore I -am going to give you the benefit of my explanation which I think throws -another and very important light upon the subject. - -Mr. White refers to a pamphlet circulated in 1743, which speaks of the -Bills of Credit in New England issued on loan "to themselves, members -of the legislature and to other borrowers, their friends, at easy -and fallaceous Lays, to be repaid at very long Periods; and by their -provincial laws made a tender in all contracts, trade and business, -whereby currencies, various and illegal, have been introduced which -from their continued and depreciated nature in the course of many -years, have much oppressed widows and orphans and all other creditors." - -The same writer gives special attention to the colony of Rhode Island, -which had "defrauded more in a few years than any of the most wicked -administrations in the several nations of Europe have done in several -centuries. A contract made thirty years ago for £100,000 sterling in -value is at present reduced to a nominal 32 shillings." - -White says that in addition to legal tender acts there was a great -variety of laws to compel people to sell their property at the same -price for bills of credit as for silver. The debtor class was not -satisfied with forcing depreciated paper upon creditors for past -obligations, but insisted that they ought to be able to buy as much -property with the paper as with specie. Those who had been forced to -take the paper for past debts naturally joined in this demand, and the -legislatures agreed with them. Hence we find in nearly all the colonies -severe penalties on those who charged more for their goods, lands or -services in Bills of Credit than in money. In some cases the penalty -was a fine, in others imprisonment, in others confiscation of property -offered. - -The usual course of events where Bills of Credit were issued was as -follows: (1) emission; (2) disappearance of specie; (3) counterfeiting; -(4) wearing out of bills; (5) calling in and replacing worn and -counterfeited issues with new ones; (6) extending the time for old -ones to run, especially those which had been placed on loan; (7) -depreciation; (8) repudiation of early issues in part and the emissions -of others called "New Tenor." - -Dr. Douglas says that Massachusetts had at one time "old tenor, -middle tenor, new tenor first, new tenor second." Rhode Island had an -indefinite number of tenors. - -All sorts of opprobrious epithets were heaped upon them. They were -called invidious statutes, old, worn, torn, tattered, shattered, -ragged, mutilated, defaced, obliterated, illegible and "unfit to pass." - -The depreciation of the Colonial bills varied in the different -colonies. In Massachusetts the maximum depreciation was 11 for 1 (the -standard being "proclamation money"). In Connecticut it was 8 for 1. In -1763, the value of the New Hampshire shilling was a little less than a -half penny; in 1771, it vanished altogether. Rhode Island owed tenor -bills in 1770 that were worth 26 to 1. Those of North Carolina were 10 -for 1; of South Carolina 7 for 1. - -Here is Mr. White's graphic description of the times: "The pamphlets -and records of the colonial period are filled with accounts of the -distress and demoralization caused by depreciated paper made legal -tender. As all loans were so payable, the accumulations of age, and -the inheritance of orphans dwindled. So, too, did the earnings of the -wageworker. In order to avoid the losses from a depreciating standard -of value, resort was had by working men to 'store pay,' and here they -were generally cheated. Trustees and executors, who had money in their -hands which belonged to other people, and who saw how things were -going, often postponed the payment on frivolous pretext, since each -delay enabled them to settle their accounts with less value, thus -devouring widows' houses. Not only was bad blood stirred up by the -resistance of the Royal Governors, but a spirit of lawlessness was -engendered against the local assemblies, if they showed a disposition -to resist the demands of the _green-backers_ of that day. Even after -the revolution the legislature of New Hampshire was mobbed because it -refused to legal tender bills. One of the demands of Shays' rebellion -in Massachusetts was for more paper money. In Rhode Island, after -the revolution, a general system of repudiation of debts, public and -private, was undertaken, and carried through by means of legal tender -paper in spite of the decisions of her courts." - -However bad these colonial bills of credit proved to be, if it were -possible those of the revolutionary period were still worse. - -Even before the Continental Congress assembled the separate colonies -began to issue Bills of Credit. When the Continental Congress met in -June, 1775, Franklin urged that the bills should bear interest, in -order to prevent depreciation. He even urged that the interests should -be payable in "hard dollars," but this was voted impracticable. - -All seemed to be in confusion, and in this unsettled state it was voted -in July, 1775, to issue due bills for 2,000,000 Spanish milled dollars, -to be sunk by taxes in four successive years, beginning November 30, -1779, the taxes to be levied and collected by the states in proportion -to their population. These bills were not legal tender at the time of -their issue. The Congress had no power to make them so, but in January, -1777, it was recommended that the States should do so, and this they -did, one after another, in one way or another. Before the two millions -were issued, another million was wanted, and was authorized with three -million more, before the end of the year; and still they came nine -millions more, or until fifteen in all were out, before independence -was declared. This was called Continental Currency to distinguish it -from the issues of the separate states. Mr. White says from this time -the demon of "fiat money" had possession of the country, and worked -its will on the inhabitants. The issues ran on in an increasing volume -till they amounted to $240,000,000 in the year 1779. In 1781 the whole -mass became worthless. On this subject the essays of Pelatiah Webster -have become classic. Mr. Webster, it is thought by some, was the author -of the Constitution. He was a merchant of Philadelphia and an ardent -patriot. He wrote "we have suffered more from this than from every -cause of calamity; it has killed more men, pervaded and corrupted the -choicest interests of our country more and done more injustice than -even the arms and artifices of our enemies." - -Professor Sumner says that when the depreciation was going on rapidly a -man might lose his whole wages while earning them. - -Naturally, the next thing in order was the establishment of prices, for -which purpose conventions were called. The first one held at Providence -was composed of delegates from the four New England states. It fixed -the prices at which imported goods might be sold, but an exception was -made of arms and ammunition in order to encourage their importation. - -Of course the proceedings in Connecticut were substantially the same. -This state, however, had a law to prohibit persons from buying any more -goods than the select men, or county commissioners, should judge to -be necessary for the use of their respective families. Anything like -prudence in laying in supplies was thus forbidden. - -A Price Convention of the six Middle States was held at York, Pa., in -March, 1777, but was unable to agree upon a single point. - -When the Price Conventions failed of their object, new ones were held -fixing new limits, for example fourfold the prices of 1774, then -eightfold, then tenfold, then twentyfold--terrorism being applied in -each case to enforce the decrees. Country folks accused town folks -of extortion, and threatened to come in and take what they wanted by -force. Town folks accused country folks of withholding their produce, -and so laws were enacted against withholders. Anonymous hand bills and -broad-sides were circulated threatening vengeance on merchants. - -As a result of such irrational business disturbances, Boston was, in -October, 1779, on the verge of starvation; money transactions had -nearly ceased and business was done by barter. - -A soldier's pay had dropped by depreciation from $7.00 per month to 33 -cents, although it had been twice raised by Congress. Washington could -not move his soldiers to Yorktown till Robert Morris had borrowed hard -money from Rochambeau for their back pay. - -In March, 1780, Congress tried the colonial experiment of "new tenor" -in a very awkward and roundabout way, and declared that "old tenor" -to be worth 40 to 1; the actual depreciation being 60 for 1. As it -was supposed that $200,000,000 of Continental money was out, this -was a repudiation of all but $5,000,000 of it. The depreciation then -went on more rapidly than before. The "new tenor" bills started at -a depreciation of 2 for 1, which became 3 for 1, even before they -reached the army, and dropped to 6 to 1 in a few months. Old tenor -went at a galloping pace at 500 for 1 in Philadelphia, when it ceased -to circulate. In the remoter districts of the South, it continued -in circulation nearly a year longer, and until the depreciation had -reached 1,000 to 1. The southern people, when they learned that -they had been using the stuff long after it had become worthless in -the North, thought that they had been cheated by the Yankees, thus -intensifying the sectional distrust which was already so dangerous. - -Continental money was now an object of execration and afterwards of -derision. "Not worth a continental" became a synonym for absolute -worthlessness, and remains an axiom to this day. In the Act of Congress -approved August 4, 1790, authority was granted for funding the bills -in 6 per cent bonds "at the rate of $100 in the said bill for $1.00 in -specie." Only $7,000,000 turned up to take advantage of this provision. - -MR. BANKER: I want to be perfectly frank with the rest of you men. Last -Thursday I was over at Mr. Lawyer's office and we got into a discussion -about this matter. I was literally astounded to find him in favor of -Government issues of money, and that he actually thought such issues -were constitutional. I knew how Mr. Merchant and Mr. Manufacturer -stood, for we had talked the matter over some time ago. So we got -together and divided up the work we should each of us do in order to -convince Mr. Lawyer that he was wrong on both points. - -From what has been shown with respect to the facts I am sure that Mr. -Lawyer must be convinced that the principle at least of Government -issues of legal tender paper money is unsound; for all the evidence, -as we have seen for 100 years, from 1690 to 1790, is all on one side. -Indeed not a single exception can be found anywhere. You will remember -that everyone of the thirteen original states tried fiat legal tender -paper money, and then when they all united under the Continental -Congress, they tried it altogether; but the result was precisely the -same. - -_First_: You will remember, came the issuance of the Bills of Credit, -as they called them, or Greenbacks, as we call them, paper money. - -_Second_: And immediately all the gold and silver disappeared because -driven from the channels of trade, with something cheaper with which -the debtor could cancel his obligations. - -_Third_: Dishonesty, dishonor, fraud, disaster, ruin and repudiation -followed each other in quick succession. - -_Fourth_: Then came the return to sound conditions when paper issues -were discarded and the effort to make something out of nothing was -abandoned. - -Mr. Lawyer, I want to ask you now whether you do not think we have made -a case against you so far as the unwisdom and utter folly of Government -issues of paper money is concerned. - -MR. LAWYER: I must admit that the facts are overwhelming. I had never -taken the time nor trouble to investigate the subject, but had assumed -that one of the functions of our Government was the issuance of money, -even paper money, if you like. It seems from what has been shown here -and last Wednesday night as well that this scheme of issuing paper -money has been tried, not only by everyone of our thirteen Colonies -and the Continental Congress, but by practically every country of the -world at some time or other. It was tried in Austria, England, France, -Germany, Italy, Russia and is now going on in nearly every one of the -South American countries with the same experience, I am informed, that -other countries have suffered. Now, so far as the facts have been -disclosed, there is not a single instance in which the scheme has been -tried that has not resulted in precisely the same way--complete failure -and ultimate dishonor and repudiation if persisted in as a principle. - -Under the circumstances I must say, as every fair-minded man must, -that the practice has been an absolute failure, and therefore it must -be admitted that the principle must be unsound, for it seems to have -worked nowhere, although tried under every conceivable condition. Of -course I am compelled to give in on the unsoundness of the scheme. Now, -you understand, that my admission as to the unsoundness and unwisdom of -the practice does not carry with it my admission that the United States -Government has no constitutional right or authority to issue paper -money if it chooses to do so. - -MR. BANKER: I understand perfectly well that your admission of the one -point has nothing whatever to do with the constitutional question, but -I wanted to know your conclusion after a consideration of the facts as -presented first. - -I think everyone here will agree that the disastrous experiences of -the colonies and of the Continental Congress in issuing paper money -must have forced this question upon the minds of the framers of the -Constitution, as one of the very greatest importance to be settled by -them. Certainly what they thought about it would indicate what they -intended to do. I will first show this by what they said, and then I -will demonstrate what they intended to do by what they actually did do -in the Constitutional Convention. - -Alexander Hamilton, in June, 1783, set forth explicitly in a resolution -for a new Constitution of the United States of America his deliberate -opinion in these words: "To emit an unfunded paper as the sign of value -ought not to continue a formal part in the Constitution, nor ever -hereafter to be employed; being in its nature pregnant with abuses -and liable to be made the engine of imposition and fraud; holding out -temptations equally pernicious to the integrity of Government and to -the morals of the people." - -In 1786, Thomas Paine, the author of "Common Sense," in an opinion on -Paper Money used this language: "The laws of the country ought to be -the standard of equity and calculated to impress on the minds of the -people the moral as well as the legal obligation of political justice. -But tender laws of any kind operate to destroy morality and to dissolve -by the pretence of law what ought to be the principle of _law_ to -_support_, reciprocal justice between man and man; and the punishment -of a member who should move for such a law ought to be _death_." - -In the summer of 1785 Richard Henry Lee, then president of Congress, -warned Washington of a plan formed for issuing a large sum of paper -money in the next assembly of their state, adding as his opinion: "The -greatest foes in the world could not devise a more effectual plan for -ruining Virginia. I should suppose every friend to his country, every -honest and sober man, would join heartily to reprobate so nefarious a -plan of speculation." - -Washington replied to Lee in these words: "I never have heard, and I -hope I never shall hear, any serious mention of a paper emission in -this state. Yet ignorance is the tool of design and is often set to -work suddenly and unexpectedly." - -In 1787, on the 9th day of January, Washington wrote to Jabes Bowen as -follows: "Paper money has had the effect in your state that it will -ever have, to ruin commerce, oppress the honest, and open the door to -every species of fraud and injustice." - -To Mr. Stone, a member of the Senate of Maryland, who appealed to -Washington to allow his opinion on this subject to be made publicly -known, Washington wrote just three months before the opening of the -Constitutional convention, as follows: "As my sentiments thereon have -been fully and decidedly expressed long before the assembly either of -Maryland or of this state was convened, I do not scruple to declare, -that if I had had a voice in your legislature, it would have been given -decidedly against a paper emission upon the general principles of its -utility, as a representative and the necessity of it as a medium. - -"To assign reasons for this opinion would be as unnecessary as -tedious. The ground has been so often trod that a place hardly -remains untouched. In a word the necessity arising from the want of -specie is represented as greater than it really is. I contend that -it is by the substance, not with the shadow of a thing, we are to be -benefited. The wisdom of man, in my humble opinion, cannot at this -time devise a plan, by which the credit of paper money would be long -supported; consequently, depreciation keeps pace with the quantity of -the emission, and articles for which it is exchanged rise in a greater -ratio than the sinking value of the money. Wherein then is the farmer, -the planter, the artisan benefited? An evil equally great is the door -it immediately opens for speculation, by which the least designing, and -perhaps most valuable part of the community are preyed upon by the more -knowing and crafty speculators." - -In 1785, George Mason wrote "they may pass a law to issue paper money, -but twenty laws will not make the people receive it. Paper money is -founded upon fraud and knavery." - -On the first day of August, 1786, Washington wrote to Jefferson: "Other -states are falling into the very foolish and wicked plans of emitting -paper money." - -In May, 1788, Charles Pinckney, in a speech in the Convention of South -Carolina, said: "I apprehend these general reasons will be found true -with respect to paper money; that experience has shown that in every -state where it has been practiced since the Revolution, it always -carries the gold and silver out of the country, and impoverishes it." - -John Marshall, the greatest of all our Chief Justices, the man who -breathed into the dry bones of a constitutional contract, the soul of -nationality, expressed himself at various times in these words: "He -had 'an unabated zeal for the exact observance of public and private -engagements.' He rightly insisted that the only ways of relief for -pecuniary 'distresses' were 'industry and frugality'; he condemned -'all the wild projects of the moment; he rejected as a delusion every -attempt at relief from pecuniary distresses' by the emission of 'paper -money' or by 'a depreciated medium of commerce.'" George Bancroft said: -"These were his opinions through life. He gave them to the public in -1807, and twenty-four years later in a revised edition of his 'Life of -Washington,' he confirmed his early convictions by the authority of his -maturest life." - -James Madison, who was probably more responsible for the Constitution -than any other single individual, used these words in addressing the -delegates of Virginia in the year 1786: "Paper money is unjust; to -creditors, if a legal tender; to debtors, if not legal tender, by -increasing the difficulty of getting specie. It is unconstitutional, -for it affects the rights of property, as much as taking away equal -value in land. It is pernicious, destroying confidence between -individuals; discouraging commerce; enriching sharpers; vitiating -morals; reversing the end of government, and conspiring with the -examples of other states to disgrace Republican Government in the eyes -of mankind." As the result of his words and the well-known opinions -of Washington, Lee and Mason, the House of Delegates of Virginia on -the first day of November resolved by a vote of 85 against 17 that an -emission of paper money would be "unjust, impolitic and destructive of -public and private confidence, and of that virtue which is the basis -of Republican Government." - -Disquieting symptoms having appeared in Virginia, Madison, in April, -enjoined Monroe, a member of its assembly, to battle paper money. - -Madison enumerated among the evils for which the new Constitution -should provide a remedy, the "familiar violation of contracts in the -form of depreciated paper, made a legal tender." In his notes for his -own guidance in the Federal Convention, he laid down the principle -that "Paper money may be deemed an aggression on the rights of other -states," and just five weeks before the time for the meeting of the -convention, he wrote from Congress, then sitting in New York, to Edmund -Randolph, as follows: "There has never been a moment since the peace, -at which the federal assent would have been given to paper money." - -In conclusion, Mr. Lawyer, I want you, because you are a particularly -good reader, and ought to be more interested in this subject than -anybody else, if you are wrong, to read the story of the Constitutional -Convention as related by George Bancroft. - -MR. LAWYER: I will very gladly do so. - -"The convention of the states for the reform of the confederacy -organized itself by electing as its president George Washington, who of -all the public men in his day was the most decided in his convictions -and the most outspoken in his words on the inherent dishonesty of -irredeemable paper bills. - -"Virginia took the lead, and Randolph, its governor, in his opening -speech drew attention to paper money by reminding its hearers that the -patriotic authors of the confederation did their work 'in the infancy -of the science of constitutions and of confederacies, when the havoc of -paper money had not been foreseen.' - -"Among the delegates from Connecticut were Oliver Ellsworth, who in -the Federal Congress had repeatedly served on committees for the -reform of the federal constitution, and Roger Sherman, who, in -1752, had published his conviction that good laws and poor money are -irreconcilable. They agreed to insist in the convention 'that the -legislatures of the individual states ought not to possess a right to -emit bills of credit for a currency, or in any manner to obstruct the -recovery of debts, whereby the interests of foreigners or the citizens -of any other state may be affected.' - -"The refusal of the convention to confer on the legislature of the -United States the power to emit bills of credit or irredeemable paper -money in any form is so complete that, according to all rules by -which public documents are interpreted, it should not be treated as -questionable; but as the truth in this case is of infinite importance, -and has been questioned by those in authority, the wrong done to the -Constitution may justify a simple narrative of the facts, which ample -and indisputable records establish, and which no power can alter. - -"The journal of the convention for framing the Constitution was kept -under the supervision of its members, and its authority is vouched for -by Washington, not only as the presiding officer of the convention, but -as President of the United States in a special message to Congress. - -"By a clause in the ninth article of confederation of the United States -of America, and only by that clause, the confederated states had -authority 'to emit bills on the credit of the United States.' - -"Of the legislature of the United States, under our present -constitution, the court insists that 'Congress is clearly authorized to -emit Bills of Credit.' But is it so? - -"The eighth clause of the seventh article, in the first draft of the -Constitution, was as follows: 'The legislature of the United States -shall have the power to borrow money and emit bills on the credit of -the United States.' The journal of the convention for August 16th -makes this record: 'It was moved and seconded to strike out the words -"and emit bills," and the motion to strike out these words "passed in -the affirmative. Yeas: New Hampshire, Massachusetts, Connecticut, -Pennsylvania, Delaware, Virginia, North Carolina, South Carolina, -Georgia--9. Nays: New Jersey, Maryland--2." So the convention by a -vote of more than four to one, refused to grant to the legislature of -the United States the power "to emit bills on the credit of the United -States."' - -"For the interpretation of this record, Madison, the best possible -witness, has left this note: 'Striking out the words cut off the -pretext for a paper currency, and particularly for making the bills a -tender either for public or private debts.' - -"Madison was the chief author of the new Constitution. Its opponent, -Luther Martin, the attorney-general of Maryland, a delegate to the -Federal Convention and present at the debate, read to the Maryland -House of Delegates a paper, in which he gave his account of the purpose -of the Convention; his evidence agrees exactly with that of Madison, -and for nearly a hundred years his fidelity as a witness was as little -questioned as that of Madison. Here are two witnesses: Madison, who -approved the prohibition, and Martin, who condemned it; the court -pushes the testimony of Madison aside as if he had 'not explained -himself,' though on the point in question his words are as clear as -sunlight. The address of Martin the court rejects as a 'philippic,' -though it contains not a word of invective against any individual, and -does contain the clearly expressed wish of its author 'not to wound the -feelings of any person.' - -"We have a record of what was spoken and of what was done in the -Federal Convention kept by Madison, who took upon himself the most -solemn engagement to preserve the truth for the instruction of coming -generations, and whose opportunity, capacity, and integrity no one -questions. His report of what was said and done on the 16th of August -in the Federal Convention preserves the testimony of many witnesses, -taken down as it were by the most capable notary. - -"The question before the Convention was: Shall power be granted to the -legislature of the United States 'to emit bills of credit'? The first -witness is Gouverneur Morris, a man free from illusions; a delegate -from the state which contained Philadelphia, then the most opulent city -in the thirteen states; and as by its interests he was nearly connected -with the city and state of New York, he thoroughly represented the -interests of commerce. He moved to strike out the grant of power to -'emit bills on the credit of the United States,' saying: 'If the United -States have credit, such bills will be unnecessary; if they have -not, will be unjust and useless.' The seconder of Gouverneur Morris -was Pierce Butler, a delegate from South Carolina, then the richest -commercial state in the South. He remarked in the course of debate that -'paper is a legal tender in no country in Europe,' and he was urgent to -withhold from the Government of the United States the power to make it -so. - -"Madison interposed: 'Will it not be sufficient to prohibit the making' -the bills 'a tender'? Gorham, in reply to Madison, held that no -accompanying prohibition was sufficient to make it safe to grant to the -legislature of the United States the power to emit bills of credit. He -spoke absolutely 'for striking the words out,' saying: 'If the words -stand, they may suggest and lead to the measure.' - -"The words of Oliver Ellsworth, our third chief justice, were: 'This is -a favorable moment to shut and bar the door against paper money. The -mischiefs of the various experiments which have been made are now fresh -in the public mind, and have excited the disgust of all the respectable -part of America.' - -"Randolph expresses 'his antipathy to paper money'; but, 'could -not agree to strike out the words, as he could not foresee all the -occasions that might arise.' - -"James Wilson, in concurrence with Ellsworth, said: 'It will have a -most salutary influence on the credit of the United States to remove -the possibility of paper money. This expedition can never succeed -whilst its mischiefs are remembered; and, as long as it can be -resorted to, it will be a bar to other resources.' - -"George Reed spoke for Delaware: 'The words, if not struck out, would -be as alarming as the mark of the beast in Revelation.' - -"John Langdon, of New Hampshire, conforming to the wise instructions of -the towns of his state, said: 'I had rather reject the whole plan than -retain the three words "and emit bills."' - -"Madison, agreeing with the journal of the convention, records that -the grant of power to emit bills of credit was refused by a majority -of more than four to one. Eleven men took part in the discussion; and -every one of the eleven whether he spoke for or against the grant of -the power, Gouverneur Morris, Pierce Butler, James Madison, Nathaniel -Gorham, George Mason, John F. Mercer, Oliver Ellsworth, Edmund -Randolph, James Wilson, George Reed and John Langdon, each and all, -understood the vote to be a denial to the legislature of the United -States of the power to emit paper money. Take the men, one by one, and -see how weighty is the witness of each individual; take them together -and add the consideration that they, every one of them, unanimously -support each other and are contradicted by no one, and who shall dare -question their testimony? The evidence is perfect; no power to emit -paper money was granted to the legislature of the United States. - -"By refusing to the United States the power of issuing bills of credit, -the victory over paper money was but half complete. The same James -Wilson, who twelve days before, with Oliver Ellsworth, had taken a -chief part in refusing to the United States the power to emit paper -money, and the same Roger Sherman, who in 1752 had put forth all his -energy to break up paper money in Connecticut, jointly took the lead. -The first draft of the Constitution had forbidden the states to emit -bills of credit without the consent of the legislature of the United -States; on the 28th of August they jointly offered this motion: 'No -state shall coin money, nor emit bills of credit, nor make anything -but gold and silver coin a tender in payment of debts,' making the -prohibition absolute. Roger Sherman, animated by zeal for the welfare -of the coming republic of countless millions, exclaims in the debate: -'This is the favorable crisis for crushing paper money.' His word was -the will of the convention, and the states, by a majority of eight -and a half against one and a half--that is, by more than five to -one--forbade the states, under any circumstances, to emit bills of -credit. This is the way in which our Constitution 'shut and barred the -door against paper money' and 'crushed' it. - -"Nothing is wanted to the perfect strength of the truth, that the -constitution put an end to paper money in all the United States and -in all the several states.... 'No suggestion of the existence of a -power to make paper a legal tender can be found in the legislative -history of the country. Had such a power lurked in the Constitution, -as constructed by those who ordained and administered it, we should -find it so recorded. The occasion for referring to it has repeatedly -arisen; and had such a power existed, it would have been recognized and -acted on. It is hardly too much to say, therefore, that the uniform and -universal judgment of statesmen, jurists, and lawyers has denied the -constitutional right of Congress to make paper a legal tender for debts -to any extent whatever.'" - -Thomas Jefferson's opinion: "The Federal Government--I deny their power -to make paper a legal tender." - -MR. BANKER: Now, Mr. Lawyer, you undoubtedly with all your profession -will recognize Daniel Webster as the greatest expounder of the -Constitution. I want you to read what he says and then my case will be -closed on the constitutional right and authority of the Government to -issue paper money. - -MR. LAWYER: I will gladly do so. "Most unquestionably there is no legal -tender, and there can be no legal tender, in this country, under the -authority of this Government or any other, but gold and silver, either -the coinage of our own mints, or foreign coins, at rates regulated by -Congress. This is a constitutional principle, perfectly plain, and -of the very highest importance. The states are expressly prohibited -from making anything but gold and silver a tender in payment of debts; -and although no such express prohibition is applied to Congress, yet -as Congress has no power granted to it, in this respect, but to coin -money and to regulate the value of foreign coins, it clearly has no -power to substitute paper, or anything else, for coin, as a tender in -payment of debts and in discharge of contracts. Congress has exercised -this power, fully, in both its branches. It has coined money, and -still coins it; it has regulated the value of foreign coins, and still -regulates their value. The legal tender, therefore, the constitutional -standard of value is established and cannot be overthrown. To overthrow -it would shake the whole system. The constitutional tender is the thing -to be preserved, and it ought to be preserved sacredly, under all -circumstances." - -MR. MERCHANT: Well, Mr. Lawyer, what do you really think about the -constitutional question now? - -MR. LAWYER: In the light of the facts preceding the Constitutional -Convention, the personal opinions of those who framed it, and what -they actually did in the convention, I will admit I have not a leg to -stand on. The story of our experience so well told by you gentlemen -demonstrating the utter unwisdom of government issues of money, and the -overwhelming evidence on the constitutional question has completely -converted me to your contention. But I was relying in a sort of a -blind way upon the fact that our Supreme Court has held that the -United States notes were lawfully issued. How about that? Have you -investigated it? - -MR. BANKER: I have, but the story of the Greenback will take the best -part of another night. Therefore, I move we adjourn. It is enough -glory for one night to have a layman knock out a lawyer upon a -constitutional question. - -MR. LAWYER: There is no humiliation in being shown that you are wrong -upon so great a question; I regard it as a piece of disgraceful -cowardice for a man to persist in holding to a position when he is -clearly wrong. - -UNCLE SAM: That is the way I like to hear my boys talk. This is really -the longest siege we have had, and you all look as though you had been -undermined, and so we had better say good night. - - - - -NINTH NIGHT - -UNITED STATES NOTES - - -UNCLE SAM: Here we are again and all present. Not a single man has -been sick or even reported as indisposed or indifferent since we began -these discussions. You must all be thinking that we are engaged in a -religious duty, a patriotic service, or you are mightily interested in -the subject. - -Before we begin, let me recall what was so fully presented last -Wednesday night so that we can keep the mile posts constantly before us. - -We then learned that during a hundred years, from 1690 to 1790, every -one of the thirteen colonies experimented with "Bills of Credit," -"Legal tender" "paper money," or "Greenbacks," as we call them, -and that they issued fiat or "legal tender money" in almost every -conceivable shape, form and way. They issued money against their own -credit; they issued it against real estate mortgages, that is, in -the form of loans secured by mortgages; they issued it against the -personal credit of men in the form of ordinary loans; they issued it -under the authority of the Continental Congress when the Colonies -were all united. But in no case did any one of them, or all of them -combined, escape the certain and universal fate of all such efforts. -The order of events was always the same: (1) Emission of paper money; -(2) depreciation of the issue; (3) disappearance of coin; (4) emission -of more paper money to make up for the depreciation of that already -issued; (5) defrauding of creditors; (6) repudiation; (7) cancelation; -(8) reappearance of gold and silver; (9) resumption of species or coin -payment; (10) a return of that degree of prosperity that the times and -the conditions of the country justified. - -Then came that review of the opinions of the framers of the -Constitution and the vote in the Constitutional Convention to strike -out the power to issue "bills of credit" by the general Government by -the decisive vote of 9 to 4, backed up subsequently by the opinions of -Thomas Jefferson and Daniel Webster. - -As a result of the night's discussion, Mr. Lawyer was forced to admit -the unwisdom of any such issue of legal tender money, and that in the -light of the evidence, such an issue was without authority of law and -unconstitutional. - -MR. BANKER: Uncle Sam, I think it should be stated right here that -every President of the United States and every successive Congress of -the United States down to 1862 recognized the fact that it was the -intention of the members of the Constitutional Convention "to shut and -bar the door against any such issue." Here is what Horace White says: -"During the war of 1812, the Government of the United States issued -Treasury notes to the amount of $36,680,794. All except $3,392,994 -were payable to order and payable at a definite time and bore interest -at the rate of five and two-fifths per cent. About two-thirds of them -were of denominations of $100 or more. They did not become a part of -the circulating medium and were not intended to. They were paid to -such creditors of the Government as were willing to receive them, and -they were generally at par until specie payments were suspended in -September, 1814. On November 12, 1814, Mr. Hall, a member of Congress -from Georgia, introduced a bill into the House for an issue of Treasury -notes to be legal tender. The House, by vote of 42 to 95, and without -debate, refused to consider this bill. No other attempt was made to -pass a legal tender bill until 1862. - -"In the panic and crisis of 1837-43, during a portion of which time -specie payments were suspended, the Government issued Treasury notes -to the amount of $47,000,000 to meet deficiencies of revenue. All of -these notes bore interest, and were payable at a fixed time. They -did not become a part of the circulating medium. A few were issued by -the Secretary of the Treasury in 1842, bearing only a nominal rate -of interest (one mill per $100 per annum). Such notes had not been -contemplated by Congress. The Committee of Ways and Means of the -House, to whom the subject was referred, reported that the Secretary -had exceeded his authority, but Congress took no action on the report. -It was the opinion of the Committee that these notes were 'Bills of -Credit' within the meaning of the Constitution, and that Congress had -no power to issue 'Bills of Credit.' In 1847, during the war with -Mexico, Treasury notes to the amount of $26,122,100 were issued. They -bore interest at the rate of five and two-fifths and six per cent. -They did not enter into the circulation, and were not intended to. -The foregoing issues of interest bearing Treasury notes were merely -Government loans, of which the securities were in small denominations -and had only short periods to run. - -"When specie payments were suspended in 1814, and again in 1837, silver -and small change disappeared because it was worth more per dollar than -the bank notes in circulation. On both occasions private notes and -tickets or less denomination that $1.00, and copper coins were issued -and put in circulation by bridge, ferry, and turnpike companies and -by tradesmen and manufacturers. One hundred and sixty-four varieties -of private copper coin of the period of 1837 have been preserved in -numismatic collections. Most of them bore the names of the issuers who -promised to redeem them. - -"Prior to the Civil War, the fiscal operations of the Government were -transacted exclusively with coin, by its own officers, without the -intervention of banks." - -MR. MERCHANT: Now it seems to me an interesting question why after -maintaining this policy for more than seventy years from 1789 to 1862, -a fundamentally different view was taken in 1862. - -MR. LAWYER: I think I can answer that question, if you will allow me. -You see, I have been looking this matter up since our last discussion, -when you fellows knocked me out, and I am now loaded for bear myself. - -Salmon P. Chase, Secretary of the Treasury, probably knew as little -about finance as any man of his great ability could. He did not seem to -be able to think in the terms of economics at all. When the war broke -out he happened to do the natural thing by first going to the bankers -of New York, Philadelphia and Boston, and making loans amounting to -one hundred and fifty million dollars. Though prior to that time -the Secretary of the Treasury had had no authority to deposit the -Government money in the banks, Congress then authorized him to do so, -and he was enabled to leave it in the banks until he wanted it; but he -did not know enough to do that even. He required the banks to pay the -gold into the Treasury at New York at the rate of $5,000,000 per week. -Fortunately, the public creditors knew more about this question than -he did, or had more confidence in the country than he seemed to have; -and so when they received the gold they immediately returned it to the -banks. Chase's utter incapacity to deal with the question in his report -as Secretary of the Treasury in the fall of 1861, and a threatened -war with Great Britain, growing out of the Trent affair, so shocked -public confidence that by January 1, 1862, our national finances were -in a state of complete and utter collapse, and the consequence was -that specie payments were suspended. I do not see how anyone can fail -to conclude, after a careful study of the situation, that had Chase -allowed the bankers to finance the war, we should have fared very -much better than we did. We should probably have saved thirty-three -per cent of the cost of the war, or approximately one billion dollars -($1,000,000,000), the total cost of the war being three billion two -hundred million ($3,200,000,000). - -MR. BANKER: I agree with you absolutely, Mr. Lawyer, Chase seemed to be -as unfit to run the Treasury Department, as a fish is to run a foot -race. If he had allowed James Gallatin, Moses Taylor and George S. Coe, -three great New York bankers, who arranged the first loan to formulate -a financial policy for him, the war could undoubtedly have been carried -on without issuing greenbacks, or any "legal tender money." But after -specie payments had been suspended, the situation was certainly -critical, and became more difficult to manage. However, there were -those who thought, and I agree with them, that it was never necessary -at any time, even then to resort to "legal tender money," or greenbacks. - -MR. FARMER: How do you think it could have been avoided? How do you -think James Gallatin, Moses Taylor and George S. Coe would have -provided the money for carrying on the war? - -MR. BANKER: By selling the bonds of the Government upon the best terms -possible, as to rates and interest and time, and by such a system of -taxation, as would help produce the necessary means for prosecuting the -war. These bankers had already furnished one hundred and fifty million -dollars ($150,000,000), and stood ready to go on and finance the war as -they certainly could have done, if they had been permitted to do so. - -When they, in August, 1861, arranged to furnish the first $150,000,000, -the banks of New York, Philadelphia and Boston held gold amounting -to $63,200,000, and on December 7th, they held practically the -same amount, or $58,100,000, although they had already furnished -$100,000,000 of the $150,000,000 they had loaned. However, Chase was -both ignorant and obstinate and the result was a crisis in our national -affairs. - -MR. LAWYER: That is the fact, and as you said a moment ago even then -there were those, and they were among the greatest of our public men, -who were convinced that it was unwise, dangerous, unconstitutional and -unnecessary to issue "legal tender money," or greenbacks, as they are -called. Just hear what some of them said. Justin S. Morrell used this -language in the House of Representatives: "If this paper money is a war -measure, it is not waged against the enemy, but one that may well make -him grin with delight. I would as soon provide Chinese wooden guns for -the army, as paper money alone for the Treasury. - -"What is it that we most need? Clearly we lack money, and wish to -inspire our own people with that confidence that will induce them to -lend the requisite amount. But the very first step we propose is one -to destroy whatever of confidence yet remains among those who have a -dollar to lend. We proclaim by an engraved advertisement--to be forced -into the pockets of every man by the fiat of the Government--that we -will hereafter liquidate all of our debts with paper only.... - -"I object to this bill on the ground of its utter impolicy. I admit -that from the contracts entered into--many of which are now due--I -regret have not been paid as promptly as they deserve to be, and from -the heavy monthly disbursements to our armies, that the Government can -flood the country with even $150,000,000 of paper dollars. But from -that amount, you would vastly increase the cost of carrying on the war; -prices would go up and the addition we should pile upon our national -debt would prove that it might have been even wiser to have burned our -paper dollars before they were issued; the inflation of the currency -would be inevitable.... - -"It will be conceded that the power is no where contained in the letter -of the Constitution, and that, in all our history since the adoption -of the Constitution, it has never been exercised.... By making paper -a legal tender, no more specie will be seen, except through offers -of rewards to draw it from its hiding places, until we emerge from -our present difficulties, and not for an indefinite period perhaps, -thereafter. The $300,000,000 of specie said to be in the country, -though I think there is not quite so much, will be hoarded and remain -useless and idle for the rest of the war. I am for keeping this, the -vital fluid of commerce, in healthy, active circulation." - -Charles Sumner used this language in the United States Senate: "Is -there not bad faith toward creditors who are compelled to receive what -is due to them in a depreciated currency? Is there not bad faith toward -all abroad who, putting trust in our integrity, national and personal, -have sent their money to this country, in gold or its equivalent? -And, surely, just in proportion as this is so, you cannot doubt that -we shall suffer alike in character and resources; for what resource -is greater to a nation, or to an individual, than a character for -integrity?... Is it necessary to incur all the unquestionable evils of -inconvertible paper, forced into circulation by an Act of Congress--to -suffer the stain upon our national faith--to bear the stigma of a -seeming repudiation--to lose for the present that credit which in -itself is a treasury--and to teach debtors everywhere that contracts -may be varied at the will of the stronger? Surely there is much in -these inquiries which may make us pause. If our country were poor or -feeble, without population, and without resources, if it were already -drained by a long war, if the enemy had succeeded in depriving us of -the means of livelihood, then we should not even pause. But our country -is rich and powerful, with a numerous population, busy, honest and -determined, and with unparalleled resources of all kinds, agricultural, -mineral, industrial and commercial; it is yet undrained by the war -in which we are engaged; nor has the enemy succeeded in depriving us -of any of the means of livelihood. It is hard--very hard--to think -that such a country, so powerful, so rich and so beloved, should be -compelled to adopt the policy of even questionable propriety." - -James A. Bayard, of Delaware, used this language: "The thing is to my -mind so palpable a violation of the Federal Constitution, that I doubt -whether in any Court of Justice in this country, having a decent regard -for its respectability, you can possibly except that this bill, which -you now pass, will not, whenever the question is presented judicially, -receive its condemnation as unconstitutional, and void in this clause." - -Roscoe Conklin used this language in the House: "I propose to assign -my reasons briefly for voting against the attempt by legislation to -make paper a legal tender. The proposition is a new one, no precedent -can be found in its favor; no suggestion of the existence of such a -power can be found in the legislative history of the country; and I -submit to my colleague as a lawyer, the proposition that this amounts -to affirmative authority of the highest kind against it. Had such a -power lurked in the Constitution as construed by those who ordained -and administered it, we should find it so recorded. The occasion for -resorting to it, or at least referring to it, has, we know, repeatedly -arisen, and had such a power existed, it would have been recognized and -acted on. It is hardly too much to say, therefore, that the uniform and -universal judgment of statesmen, jurists and lawyers has denied the -constitutional right of Congress to make paper a legal tender for debts -to any extent whatever.... - -"It will, of course, proclaim throughout the country a saturnalia -of fraud, a carnival for rogues. Every agent, attorney, treasurer, -trustee, guardian, executor, administrator, consignee, commission -merchant, and every debtor of a fiduciary character, who has received -for others money, hard money, worth 100 cents on the dollar, will -forever release himself from liability by buying up for that knavish -purpose, at its depreciated value, the spurious which we shall have put -afloat. Everybody will do it, except those who are more honest than the -American Congress advises them to be. Think of Savings Banks, entrusted -with enormous aggregates of the pittances of the poor, the hungry and -the homeless, the stranger, the needle woman, the widow and the orphan; -and we are arranging for a robbery of 10 per cent, if not of 50 per -cent, of the entire amount, and that by a contrivance so new, as never -to have been discovered under the administrations of Monroe, Adams or -James Buchanan.... - -"Such a step, if it should ever be taken by a Government, should be -taken when everything else has failed, and the last extremity has -been reached. It is the last expedient to which kings and nations can -resort." - -William Pitt Fessenden, of Maine, used this language: - -"With regard to the particular bill now before the Senate, we all know -that it was resorted to as a temporary measure, not in the beginning, -but in consequence of the necessities of the treasury, arising from -a greater expenditure than the Secretary could have imagined, and -arising from the necessary delay with reference to other measures. Can -it be said that a measure like the one now pending before the Senate -and the country is a measure of a day or an hour? Why, what does it -propose? It proposes something utterly unknown in this government from -its foundation; a resort to a measure of doubtful constitutionality, -to say the least of it, which has always been denounced as ruinous to -the credit of any government, which has recourse to it; a measure, -too, about which opinions in the community, as perhaps they never have -been divided upon any other subject; a measure which, when it has been -tried by other countries, as it often has been, has always proved a -disastrous failure.... - -"Everybody who has spoken on this question, I believe without an -exception--there may have been one or two--but all the opinions I have -heard expressed, agree in this: that only with extreme reluctance, only -with fear and trembling as to the consequences, can we have recourse to -a measure like this of making our paper a legal tender in the payment -of debt.... - -"A measure of this kind certainly cannot increase confidence in the -ability, or the integrity of the country. It can make us no better -than we are today, so far as the foundation of all public credit is -concerned. - -"Next, in my judgment it is a confession of bankruptcy. We begin and go -out to the country with the declaration that we are unable to pay or -borrow, at the present time, and such a confession is not calculated to -increase our credit. - -"Again, say what you will, nobody can deny that it is bad faith. If it -be necessary for the salvation of the Government, all considerations -of this kind must yield; but to make the best of it it is bad faith, -and encourages bad morality both in public and in private. Going to the -extent that it does to say that notes thus issued shall be receivable -in payment of all private obligations, however contracted, is in its -very essence a wrong, for it compels one man to take from his neighbor -in payment of a debt that which he would not otherwise receive, or be -obliged to receive, and what is probably not full payment.... - -"Again, in my judgment it must inflict a stain upon national honor. We -owe debts abroad. Money has been loaned to this country, and to the -people of this country, in good faith.... - -"Again, it necessarily changes the values of all property. It is very -well known that all over the world gold and silver are recognized as -money, as currency; they are the measure of value. We change it here, -what is the result? Inflation, subsequent depression, all the evils -which follow from an inflated currency.... - -"Again, a stronger objection than all that I have said to this -proposition--I am stating the objections which everybody must -entertain, because I suppose these facts are palpable--is that the -loss is to fall most heavily upon the poor. I believe it never was -disputed, it cannot be in the light of experience, that those who are -injured most by an inflated currency are the laboringmen, the poor.... -The poor laborer suffers in the first place more than all; then small -capitalists, if I may so call them; and the rich capitalist, last -of all. Such is the necessary result and consequence always of this -system." - -Thaddeus Stevens used this language in the House: - -"This bill is a measure of necessity, not of choice. No one would -willingly issue paper currency, not redeemable on demand and make it -a legal tender. It is never desirable to part from that circulating -medium which by the common consent of civilized nations forms the -standard of value. But it is not a fearful measure, and when rendered -necessary by exigencies, it ought to produce no alarm." - -John Sherman used this language: - -"I agree that this measure can only be justified on the ground of -necessity. I do believe there is a pressing necessity that these demand -notes should be made a legal tender, if we want to avoid the evils of a -depreciated, dishonored paper currency." - -E.G. Spalding, the reputed father of the legal tender act, used these -words: - -"These are extraordinary times, and extraordinary measures must -be resorted to, in order to save our Government, and preserve our -nationality.... - -"This being accomplished I will be among the first to agitate a speedy -return to specie payment, and all measures that are calculated to -preserve the honor and dignity of the government in time of peace." - -MR. MERCHANT: From what transpired there was undoubtedly an -overwhelming opinion that there was a necessity, and therefore the -issue of United States Notes was justified. No one will deny this -power, if placed upon that ground, that the issuance of the Notes was -essential to the preservation of the life of the Nation. But certainly -that reason no longer exists, and therefore we should now act as we -would then have acted, if we had not believed that it was a national -necessity. - -The measure for the first issue of $150,000,000 of United States Notes -was passed and signed by the President February 25, 1862. The second -issue of $150,000,000 came very soon, on July 11, 1862. The third -issue of $150,000,000 followed on March 3, 1863, making a total issue -in about a year of $450,000,000. If the result of the war had been -doubtful and long continued, God only knows what the results would -have been, as these United States Notes came very near reaching the -zero point, as it was. The astounding fact, as the result of having -practiced the law of making something out of nothing, followed in 1868 -when one of the great political parties in the hot pursuit of political -success declared in its platform that it was in favor of paying off -the national debt with the I.O.U.'s of the Government or United States -Notes. Of course, this action would have been the natural and necessary -prelude to national repudiation. - -MR. FARMER: What I want to know is how much those greenbacks actually -depreciated. - -MR. BANKER: I have a sheet here furnished by the Government showing -precisely what they were worth from February, 1862, to January 1, 1879, -when we resumed specie payment, and began their current redemption in -gold coin. It shows that they were worth 97 cents on the dollar in -February, 1862, when the President signed the bill; in one year, or -February 15, 1863, they were worth 60 cents on the dollar; and in a -little more than a year afterwards, in July, 1864, they were worth only -35 cents on the dollar. That is, if you had bought a horse for $100 in -January, 1862, and given a note due in July, 1864, you could have paid -for the horse with $35. - -You will perceive that every creditor was defrauded going down hill -until you struck the bottom on that July day in 1864, when it took -$2.85 of United States Notes to buy $1.00 of gold coin, and you -defrauded every debtor climbing up that long hill from that July day in -1864, when the United States Notes were worth 35 cents, until January -1, 1879, when they became worth 100 cents. It took us just two years to -go down the hill, and fifteen years to reach the top of the same hill, -only to find the crater of a sleeping financial volcano beneath our -feet; for if war clouds should now encompass us, or we should take one -single step in the wrong direction, our National Credit would again be -shattered, and must fall into utter ruin. - -MR. FARMER: Well, it then came out just as those men said it would, -didn't it? - -MR. BANKER: Certainly, and I want to call your attention to another -thing, and that is that the additional cost of the war, because of -issuing United States Notes, was greatly increased precisely as they -predicted it would be. - -MR. FARMER: Oh, yes, we must find out about that. You remember we -investigated the cost of the greenbacks since the war, and that Mr. -Banker then demonstrated to our entire satisfaction that the United -States Government would have been better off by $339,984,222, if at the -close of the war we had issued bonds, bearing 4 per cent, and taken up -these United States Notes and paid them off. Now, it would be mighty -interesting to know just how much the war cost because we issued these -United States Notes, and went off the Gold Standard. - -MR. LAWYER: I have something here right on that point. Let me read it: -In his work on Public Debts, Prof. H.C. Adams computes the extra cost -of the war to the tax payers in consequence of the depreciated currency -at $850,000,000. And Mr. Wesley Hill, in the "Journal of Political -Economy," March, 1897, computes the net cost of the war, due to this -cause at $528,000,000. Now to be fair and take the average of these -two estimates or $689,000,000, and add the cost of meeting greenback -redemption since the war, or $339,984,222, we have $1,028,984,222, or -about one-third of the cost of the war which, as I told you a while -ago, was three billion two hundred million dollars, proving everything -that was said by those who were opposed to issuing the greenbacks. - -MR. MANUFACTURER: I beg your pardon, sir, except one thing, Mr. Lawyer. -According to the decisions of the Supreme Court, up-to-date, and that -is, that they are constitutional. You remember, of course, that the -question of the constitutionality of the Legal Tender quality of the -United States Notes has been before the United States Supreme Court -three different times. - -This question came up in the case of Hepburn vs. Griswold, December, -1869, and was held by five judges against three, the Court then -consisting of eight judges, the opinion of the Court being delivered -by Salmon P. Chase, himself, who was then Chief Justice, "that the -making of the Notes, or Bills of Credit, a legal tender in payment of -pre-existing debts, is not a means appropriate, plainly adapted, or -really calculated to carry into effect any power vested in Congress; is -inconsistent with the spirit of the Constitution, and is prohibited by -the Constitution." - -MR. FARMER: Well, this man Chase, who was then Chief Justice, was -Secretary of the Treasury, and favored the issuance of these same -United States Notes, didn't he? - -MR. LAWYER: Yes, he is the same person. But you must remember that he -was a politician in the one case, and a Chief Justice in the other. -Possibly, I should have said a statesman in the first place, but Thomas -B. Reed said that a statesman was a dead politician, and probably, you -might say, according to his theory, that Chase is a statesman now. - -Chase also held that the clause in the Acts of 1862 and 1863, which -makes United States Notes legal tender in payment of all debts, public -and private, so far as it applies to debts contracted before the -passage of these Acts, is unwarranted by the Constitution: "The legal -tender quality," Chase said, "was valuable only for the purpose of -dishonesty, every honest purpose was answered as well without it." - -Just one year afterward, in December, 1870, the question of the legal -tender of the United States Notes was again before the United States -Supreme Court, which now consisted of nine members. In a decision of -five against four, the above decision was reversed; one judge had -died, and a new judge had been created, and these two joined the three -formerly in favor of the Act. - -MR. MANUFACTURER: That looks a little as though General Grant wanted -that kind of a decision, and had picked out the right kind of men to -get it. Possibly it was more this decision than pressure of business -that called for the creation of an additional member of the Court--was -it not? - -MR. LAWYER: A great many have thought so, and that makes it look as -though the Supreme Court does some legislating occasionally on its -own account. However, the same question came up again in the case of -Juillard vs. Greenman, and was decided the same way in March, 1884. -It was then held that Congress has the constitutional power to make -Treasury Notes of the United States a legal tender in payment of -private debts in time of peace, as well as in time of war. - -Justice Gray uses this language: "The power is incident to the power of -borrowing money, and issuing Bills or Notes of the Government for money -borrowed, of impressing upon those bills or notes, the quality of being -a legal tender for the payment of private debts was a power universally -understood to belong to sovereignty in Europe and America at the time -of the framing and adoption of the Constitution of the United States." -It appears that he based his decision upon this fact, but George -Bancroft, the historian, reviewed this opinion in both its legal and -historical aspects. And referring to the statement quoted above, this -great historian declared it to be a stupendous error, and further -affirmed that no such power was understood to belong to sovereignty in -Europe at the time of the adoption of the Constitution, that is, in -1788. - -MR. MANUFACTURER: Well, I assume that we have another guess coming yet, -haven't we? You know this same Court has guessed four times already -on the Sherman Anti-Trust Law. In the Knight case, they declared that -manufacturing was not and could not be considered as United States -Commerce. Then came the Trans-Missouri case, then the Northern Security -Co. case, and last the Tobacco and Standard Oil cases, wherein this -august body ran amuck the word "reasonable," although that very word -was not in the Act at all, and although it had been impossible to get -Congress to put it into the Act. But after all, is it not the very soul -of the whole question? And is it not a fact that the Supreme Court of -the United States ought to be constantly interpreting the Constitution -of the United States in the light of changed conditions, and ever -advancing public opinion? - -MR. LAWYER: It looks as though it might be well to give the Supreme -Court one more chance to guess; they might possibly guess right next -time. It is certainly "reasonable" to hope so, both in accordance -with the Constitution, and in accordance with economic law, and in -accordance with the experience of the whole world. - -MR. MERCHANT: Well, what would happen if, when the Supreme Court -guesses again, it should guess right? Would the fact that the Court -declared that Congress had no power to make paper money a legal tender -render the greenbacks unfit for reserves, or illegal, as reserves? - -MR. BANKER: Congress cannot, by law, make anything fit for reserves, -which by economic law is unfit for reserves; but Congress may make -anything, however unfit for reserves from an economic point of view, a -legal reserve; they might make potatoes, wheat, corn, a bale of cotton, -or a bundle of hay reserves. Therefore, although the Supreme Court -should declare the Legal Tender Act unconstitutional, as it ought to, -the United States Notes might still be held as reserves. The silver -certificates and the gold certificates are both legal reserves, but -neither of them are made legal tender by law, nor should they be, as -nothing but gold, which is our standard of value, should be made legal -tender. However, all of these barbarous forms of currency, United -States Notes, Silver Certificates, bond-secured National Bank Notes -should, and must be maintained upon a parity with gold, if possible, -as they now are; because the faith and honor of the Government is at -stake. It is this very fact that is the source of our weakness from a -national point of view, for the United States has no assets with which -to meet these enormous liabilities. The United States has no resources, -such as a bank has. It has nothing to sell in the way of grain, meat, -cotton, or manufactured goods, or personal property of any kind. It has -no capital, and no deposits, as our banks have, whose resources today -exceed twenty-five billion dollars ($25,000,000,000). The individual -deposits of the United States today exceed seventeen billion dollars -($17,000,000,000). Every month about three billion dollars' worth of -notes come due. Compare this situation with the condition of the United -States Treasury, and its ability to meet obligations. The Treasury does -not control a single dollar's worth of assets, except the incoming -taxes, which are more than pledged every year to meet the current -demands arising from the expenses of the Government. - -MR. LAWYER: That is correct, as we learned upon a former evening. -The United States is bound for more than one billion seven hundred -million of demand liabilities, directly and indirectly, and has only -one hundred and fifty million of gold with which to meet them. All -the Government has is the power to tax the property of the people. Of -course it can anticipate this taxing power by selling bonds to meet an -emergency; but let us imagine for a moment what may happen. This very -night we may be looking out upon a perfectly clear and peaceful sky, -and even so soon as tomorrow morning war clouds may curtain the rising -sun, and before nightfall blacken the zenith of the heavens, and hang -low and lowering the whole horizon round, presaging the most titanic -and wicked struggle in blood that has ever stained the history of the -human race. What do you think the effect would be upon our credit, with -all these demand obligations outstanding? Would not that fact, coupled -with a great war on our hands, impair our credit to a very great -degree, compelling us to sell our bonds at much lower prices, and at -rates of interest far higher than could be possibly necessary, if there -was no question whatever about our remaining steadfastly upon the Gold -Standard instead of resorting to fiat paper money, as we did the very -last time we had to meet a similar difficulty, or crisis? - -MR. BANKER: There is no doubt whatever about the imperative necessity -of our relieving the United States Treasury from the load it is now -carrying, and placing the United States Government in the same position -precisely that every state and municipality is in, so far as its credit -is concerned; for the treasury of the Government, when filling its -normal and proper functions, is no more fit to carry on the banking -business than a man who may be wealthy in land, but has no cash assets; -or a township, city, county or state is. And until the United States -Government divests itself of these unnatural burdens, which it is -unfitted to carry, we shall continue to suffer immeasurably whenever -called upon to use our national credit to any great extent. - -Let me explain this principle a little more fully so that we will all -get it so thoroughly fixed in our minds that we shall not forget, -or overlook it, as we go on. A farmer, however wealthy in lands and -prosperous he may be, even though he may be worth half a million, or -a million dollars, should not have demand obligations outstanding for -any considerable amount because his resources are in lands or fixed -investments. If he borrows to enable him to produce his crops, he -should make his notes come due when he can meet them with the money he -receives from the sale of his crops, and the balance, or his profits, -will go to pay the interest on the mortgage, and possibly reduce it. -So a township, a city, county, or state has no personal property worth -considering to meet demand obligations. It has no liquid property of -any kind, in fact, nor any resources whatever, except its power to -tax the property within its jurisdiction; and therefore, if it needs -money, it may borrow to meet expenses; but it will make its notes come -due when the taxes come in, precisely as the farmer times his notes' -maturity with the sale of his crops. If a municipality has no demand -obligations, and its bonded debt is low, it can borrow on its bonds -at a low rate of interest. But if its demand obligations are enormous -in proportion to its ready cash, high rates of interest, and possibly -even bankruptcy, will always be staring it in the face. Granting or -assuming that the United States Government has no power to issue legal -tender, or fiat money, which is the greatest peril and most unmitigated -curse that ever hung over any country, the United States Treasury is in -precisely the same position, or situation, that the farmer is, whose -property is in land; that the township, the city, the county and the -state is in, and should always keep itself in a position where, in case -of war, or any other great emergency, it could use its credit to the -best possible advantage to itself; that is, to us, the people who must -pay the taxes to liquidate whatever debt it may incur. - -MR. FARMER: I for one want to thank you for this explanation, for I -have always had a sneaking idea that the United States Government -owned everything, and was, as we say, the richest Government on earth, -when it could not possibly mean anything except that the people who -constitute the nation are the richest people on earth. Of course the -Government doesn't own anything worth speaking of, and cannot take -any property, without due process of law, that is, either through the -process of taxation or through condemnation proceedings, for public -uses. It is perfectly plain to me now that the United States Government -is no more fitted to carry on the banking business than Lorrain -township, where I live, nor this city, this county, nor this state, -except that it operates on a bigger scale, that's all. Do you know -that's as clear as a pike staff to me now. - -MR. MANUFACTURER: Now, gentlemen, I want you to correct me if I don't -state this credit question right, from beginning to end; for I'm -not sure that I have followed all that has been said with sufficient -care to understand it perfectly. I appreciate the fact that we must -grasp this question of credit, and comprehend it very clearly, if we -are going to prepare a banking bill in which credit must play a most -important part. - -_First_: We have credit, which is the result of confidence and trust -and gives us the right to demand payment. - -_Second_: If credit is granted for the purpose of producing and -distributing consumable commodities, it should be for a short period, -proportioned to the time involved to complete the transaction. - -_Third_: If credit is granted upon real estate, it should be for a long -period, because the security is not readily convertible into cash. - -_Fourth_: Credit granted to a Government, by purchasing its bonds, -should be for a long period, unless for some temporary purpose. - -_Fifth_: Neither real estate nor Government credit are a fit basis for -currency, because neither is a fit security for a demand debt, nor cash -credit, such as consumable commodities are. - -_Sixth_: Government credit should never be used in the form of legal -tender money, because it must itself be redeemed in coin. It never -has been, and never can be its own redeemer, and is always subject -to unlimited abuse which must necessarily result sooner or later in -repudiation. - -MR. BANKER: Mr. Manufacturer, you have summarized the discussion upon -credit remarkably well, I think. - -MR. MERCHANT: So do I, and I am sure that we all understand what -constitutes the difference between the right and wrong basis of demand -obligation--convertibility or non-convertibility--quick assets or -slow assets--the commercial fund and the investment fund. If we keep -this thought steadily in view it will help us amazingly when we come -to draw a banking bill demanding the recognition of this fundamental -distinction. - -MR. LAWYER: Gentlemen, don't you see that the very nature of things -forces the recognition of this fundamental distinction, because you can -keep your currency, if of the right kind, and all your credit used in -the production and distribution of consumable commodities convertible -into gold coin. But you cannot keep all the railroad bonds, all the -municipal bonds and all the real estate of the country convertible into -coin, practically on demand. That is impossible, and has been proved -times without number, as we have already seen. - -MR. LABORINGMAN: Mr. Lawyer, I have been sitting here with a very -hazy kind of an idea about this credit matter, until this moment, but -that last point you made seems to me to clinch things, for I saw in -the "Evening Journal" last night that there was about one hundred and -twenty-five billion dollars' worth of property in the United States. -Of course you can't cash that all in tomorrow, nor next week, nor next -month, nor next year even, and the fortunate thing about it is that the -owners don't want to. When you come to think of it, there is a mighty -small part of it that the people want to turn into cash each day. - -MR. BANKER: Mr. Laboringman, that is the point exactly, and our problem -is to make it absolutely sure that those who have a right, and want to -demand cash, can always get it. This can only be accomplished by two -things, adequate gold reserves to protect all current demands, and such -assets or commercial credits as can be converted into gold, at once to -meet any extraordinary demands--yes, even satisfy the panic-stricken -mob, and carry the country through such crises as 1893 and 1907 -without unnecessary loss, indeed, prevent the recurrence of any such -experiences again. - -MR. LABORINGMAN: Do you really think that that can be done? What a -blessing that would be to labor. - -MR. BANKER: I certainly do believe it can be done; indeed, I know it. -But every banker must be compelled to do his part; that is, be ready at -all times to carry his proper share of reserves against his deposits. -One half of the bankers of this country cannot ride the other half, -that is certain. - -MR. MERCHANT: Mr. Banker, what amount, or percentage of reserves do you -think a banker should carry? - -MR. FARMER: Now, hold on, just a minute. You can't get into that -subject, because I want to hear it, and I've got to go home right now. - -MR. BANKER: Very well, gentlemen, we will put it off, if you say so, -until next Wednesday night. - -UNCLE SAM: This is the second time you men have said that you would -take up reserves. Indeed, it has been so long since you talked about -taking it up before, that I was afraid that it would be overlooked -entirely, and yet nothing but the standard of value itself is more -important. Now, mark this, we want the right kind of reserves, and -plenty of them. - - Good Night. - - - - -TENTH NIGHT - -RESERVES - - -UNCLE SAM: Here we all are, every man in his accustomed place for the -tenth night. Not a man has been late on a single occasion, although Mr. -Farmer just got in under the wire one night by the skin of his teeth. -It is most agreeable and satisfying to note that there has been no -lagging in interest since we began. Indeed, there seems to me to have -been a most pronounced gain in your enthusiasm, at times amounting -almost to religious fervor. - -MR. LABORINGMAN: That's the way it always is; the more you know about -anything, the more interesting it becomes. - -MR. MERCHANT: Certainly the man who has a fad or who is even a crank -upon any subject, enjoys life a good deal more than a dead level -commonplace fellow, who never takes any particular interest in -anything--just passes the time. Every man for his own pleasure, if for -no other reason, ought to have something in which he is interested -outside of his regular employment. It may be a good horse, a good cow, -a good dog, or some fine chickens--a good garden, a fine front yard, -or just some flowers, or some subject affecting the welfare of his -fellows. Every man ought to have something; it doesn't matter so much -what it is, so long as he is devoted to it intensely. Of course, if he -can profit by it, or help his fellows at the same time, so much the -better. However, we have our hands full just now with a subject which -has become mighty interesting, I think, to all of us, and I hope that -our work will prove not only interesting to us, but profitable to our -fellows. At all events, it can do no one any harm, and will better fit -everyone of us for our duties as citizens. There is too little work -of this kind done all over the country; men can accomplish so much -more, if they only get together in small groups like this, instead of -plugging along alone. It's a good deal like the football game, where -team work counts for so much. It may be that what we are now doing -will inspire thousands of other little groups to get together and -discuss this, the greatest, the most important business question that -can possibly come before the American people, and then when this is -finished, they will, as a matter of habit, take up others, in precisely -the same way. - -UNCLE SAM: Hold on there, Mr. Merchant, you've lectured us long enough -this evening, now let us get down to business. You know if there is -anything that your Uncle Samuel is noted for all the world over, it is -business, and business is business, you know. But, before we tackle the -tenth topic, tonight, I am going to retrace the road we have traveled, -and see if you can all recall and recognize the mileposts we've passed. - -_First_: There was the Standard of Value, gold. - -_Second_: Money, our only money is gold. - -_Third_: Currency, the wrong kind. - -_Fourth_: Currency, the right kind. - -_Fifth_: Exchange by which one debt is made to pay another. - -_Sixth_: Value, the value of anything is measured by the thing for -which it is exchanged. - -Price, the amount of money received for anything. - -Wealth, what can be exchanged for money. - -Property, the right of ownership. - -Capital, anything that may be so used as to result in a profit. - -Credit, result of confidence and trust; creates a debt, and is the -right to demand payment. - -_Seventh_: Land or Government credit is unfit as a basis for money or -currency. - -_Eighth_: Our Colonial experience proved that land and Government -credit were unfit as a basis for money or currency. - -_Ninth_: Our United States Notes again demonstrated the fact that -Government credit should never be used as a basis of legal tender -money. Tonight we are to discuss Reserves, which are the protection or -guarantee of credits granted or debts created. - -Is that a correct definition of reserves? - -MR. BANKER: Uncle Sam, I don't think anyone could give a better one. - -UNCLE SAM: By way of encouragement to you men, before you begin to -discuss the subject of reserves, I want to gamble the prophecy that if -you will work out some method or plan that will make it possible for -the banker to pay all his deposits on demand, and at the same time will -enable him to continue to use practically all of them in profitable -employment, I will guarantee you now the support of every banker for -your plan, when you've completed it. - -MR. MERCHANT: I don't think you assume any risk in that guarantee, -Uncle Sam. - -MR. LABORINGMAN: Uncle Sam, you say that you will guarantee that every -banker will support it. That insurance policy won't be any risk at all. -Won't cost you a cent. I tell you now that if you can work out a plan -that will amount to an absolute guarantee of deposits, as a matter of -administration, I will guarantee the support of every depositor in the -country, and if I could prove it to their satisfaction, every depositor -would gladly pay me from one-quarter to one-half per cent on his -deposit. Do you know what I would get at that rate, say at one-quarter -per cent, only $42,000,000 every year; for our deposits you say are now -seventeen billion ($17,000,000,000). - -Have you men ever looked up bank failures in the United States? Here is -something I stumbled upon yesterday. - -Our country is so extensive and our banks are so numerous that -nothing whatever is thought in one part of a bank failure in another -part. Especially is this so since they occur so frequently. Like the -operation of the guillotine during the French Revolution and the -automobile manslaughter of today, bank failures in the United States -have become mere passing occurrences. Is this putting it too strongly? -Let us see. - -Since the establishment of the national system in 1864, 518 national -banks have failed, with liabilities reaching $244,000,000. The direct -losses of the failed banks amount to $38,000,000. - -Two thousand and fourteen state and private banks have failed since -1864, with liabilities amounting to $825,000,000, and probable losses -of $200,000,000. - -The total liability of all banks, national, state and private, failing -since 1864 is $1,069,000,000. Their aggregate is 2,532 banks. In other -words, fifty-six banks have failed every year on an average, or nearly -five banks every month, and more than one bank every week. - -Three hundred and fifty-one national banks have failed since 1890, with -liabilities aggregating $174,000,000. - -One thousand four hundred and six state and private banks have failed -since 1890, with liabilities aggregating $694,000,000. - -The total liabilities of all banks failing since 1890 aggregate -$898,000,000. - -The total number of all banks failing since 1890 is 1,757. In other -words, eighty-eight banks have failed every year on an average, or -more than seven banks every month, and one bank about every four days, -during the last twenty years. - -But who can estimate the indirect losses or depict the consequences of -these bank failures? - -If this tragic condition can be obviated, it is a crime against the -people of the United States, it is a crime against civilization itself, -to permit its continuance. - -MR. BANKER: No, indeed, neither Uncle Sam nor Mr. Laboringman assume -any risk in their guarantees. They certainly do not, and I will go -still further, and under those circumstances will guarantee the support -of every merchant, manufacturer, farmer, laboringman, and every man, -woman and child, whether depositors or not, as we would be the greatest -benefactors of the human race, if we could devise a plan that would -remove all risk from every deposit. And yet, humanly speaking, I am -not sure that this very result, the absolute guarantee of all deposits -may not be accomplished, and the chief factor in the accomplishment -of so great a blessing to the people is locked up in the principle of -reserves, assuming, of course, that the administration of the banking -business is such as to keep it sound. - -If all the deposits made with the bank were in gold, or were -convertible into gold, and held to meet the deposits when called for, -the problem would be simple indeed, and would be solved already. But -such a plan would be impracticable and archaic. Indeed, it would -preclude all profit, unless a charge were made for such service, and -would reduce a bank to a safe deposit company. It would exclude the -use of all credit, and therefore destroy the possibility of doing -approximately more than nine-tenths of the business carried on today, -unless we should go back to actual barter. Our problem is to make the -business of banking absolutely safe and yet preserve the great credit -structure by which the business of the country and the world is carried -on. - -MR. MERCHANT: For the purpose of this discussion we must assume that -the business is honestly managed, and is, therefore, ordinarily -sound, and confine ourselves to just the single subject of reserves, -which my study leaves me to think, may be considered; 1st, from the -standpoint of the single bank; 2d, from a standpoint of the community -or a single city; 3d, from a standpoint of the whole country; 4th, from -the standpoint of the whole world or our relation to the rest of the -commercial world. - -Now, generally speaking, we mean by reserves in banking that part of -the capital which is retained in order to meet the average demands upon -deposits. But this, of course, varies with every bank to some extent; -and, while 5 per cent cash would be ample reserve for a high-class -mutual savings bank, a commercial bank, in equally good standing, may -require from 10 per cent reserve up to 50 per cent, according to the -character of the business carried on. A country bank dealing with -the farmers might require the smaller amount, while a bank dealing -entirely with bankers would require the largest possible reserve, to -meet any emergency at any time. Each individual bank must be judged by -itself and its reserves adjusted accordingly. In the second instance, -as suggested, the locality or environment must be taken into account; -in many instances the character of the neighboring banks and their -peculiar business are all factors of great importance, and no one of -them can be overlooked. So also when the bank credit is considered as a -unit of the structure of the nation, the general situation from one end -of the country to the other has a bearing upon it, and from some cause -terror may sweep over the entire land in a single day, and every nerve -of trade be paralysed. - -Then, finally, if our nation is an integral part of the commercial -world, we must devise some method that will conserve our reserves when -possibly for a hundred of various reasons, they may be steadily leaving -us or be drawn away by foreign influences. - -MR. BANKER: Your statement of the condition and forces that are always -playing upon every center of credit from the single bank in the country -town to the largest and strongest in our financial centers makes it -necessary for the welfare of the whole people, that we should develop -in the United States an atmosphere of absolute confidence that nothing -can shake. Unless we can do this we shall continue to have commercial -earthquakes of ever increasing violence and destructiveness. - -How to develop, establish and retain a defense of impregnable -confidence should be then our purpose, and if we succeed, this must be -our great achievement. - -Speaking of the matter in a more definite way, we must assume that from -the primary form of reserve, which is what we started out with, such a -part of our capital in gold as will always prove equal to the average -demands upon deposits must be kept constantly available. - -We must have what are aptly called secondary reserves, which will -meet all ordinary, yes extraordinary, or unusual calls; but, finally -we must have such access to an almost incomprehensible store of gold, -as to impress and overwhelm the imagination, and place its possible -exhaustion beyond human conception. - -Mark this, your cash on hand of the reserve order, that is in gold -coin, ought under all circumstances, to be ample to care for current -requirements, while your credits, subject to call, with other banks, -or arrangements for credit, ought to be ample to meet all ordinary, or -seasonal, or periodic demands--and your general assets, which most of -necessity be your ultimate reserve, must be of such a liquid character -that if a panic comes, and the necessity arises, they can be converted -into cash, of the reserve order; that is gold coin. - -You perceive, of course, that such a condition assumes two things; -first, that gold should always be running through the channels of trade -in sufficient quantities to touch and characterize the quality of all -credits; book credits, as well as note credits; both must always be -equal to gold, and commerce must be kept conscious of that fact by the -persistent presence of gold. - -There must be kept before the business eye, the people's eye, the -national eye, such a vast horde of gold concentrated for the purpose as -to compel even the most timorous to feel safe, beyond a peradventure. -There must be a conviction everywhere that the system cannot break down -or fail. - -MR. MANUFACTURER: Mr. Banker, your position, or statement, is in -perfect accord with Bagehot, the great banking economist of England. -Here's what he said: "I have tediously insisted that the natural system -of banking is that of many banks keeping their own cash reserves, with -the penalty of failure before them if they neglect it." In another -place he says: "Of course, in such a matter the cardinal rule to be -observed is that errors of excess are innocuous, but errors of defect -are destructive. Too much reserves only means a small loss of profit, -but too small a reserve may mean ruin. Credit may be at once shaken, -and if some terrifying accident happens to supervene, there may be a -run on the banking department, that may be too much for it, as in 1857 -and 1866, and may make it unable to pay its way without assistance, as -it was in those years." And again he writes: "Why should a bank keep -any reserve? Because it may be called upon to pay certain liabilities -at once and in a moment." - -Upon the same point I want to support your position by another great -English economist, Stanley Jevons. He says: "There is a tendency -to frequent severe scarcities of loanable capital, causing sudden -variations of the rate of interest, almost unknown thirty years ago. -I will therefore in the next chapter offer a few remarks intended -to show that this is an evil naturally resulting from the excessive -economy of the precious metal which the increasing perfection of our -banking system allows to be practiced, but which may be carried too -far, and lead to extreme disaster." Again he says: "The vast trade of -the country cannot be placed upon a sound basis, until the force of -public opinion among bankers imposes upon each member the necessity of -holding a cash reserve, bearing a fair proportion to the liabilities -incurred. It matters little who holds the reserve, provided it actually -does exist in the form of metal, and is not evaporated away, _by being -placed at par_, or deposited with other banks which make free use of -it. In the absence of some common action among bankers, it is certain -that the sensitiveness of the money market will increase, and it is -probable that commercial crises will from time to time recur, even -exceeding in their violence and disastrous consequences those whose -history we know too well." - -The want of the conservation of proper gold reserves is what has led -to the weakness of the German situation today and compels them to take -steps to strengthen the reserves of the individual banks in accordance -with the finding of the commission appointed to revise the banking laws -of Germany. The individual banks of England have also been increasing -their cash reserves for several years past, recognizing the force of -what Jevons wrote several years ago. - -MR. FARMER: That's all right, Mr. Banker, as a statement of principles, -and I think it is perfectly clear to me just what you mean; but there -is one point that I would like to have settled, and that's this: -what is a reserve in the United States? That is, what can you call -a reserve? You know I am a director of our little bank down in the -village below. The other day I asked them what they held for reserves -and the cashier brought out this list; $3,000 silver certificates; -$3,500 of United States notes, or greenbacks; $4,500 National bank -notes; $2,500 gold certificates; $1,500 gold coin; and some silver -change. As quick as I saw that bunch of stuff, I said to myself, just -what you pounded into me some nights ago, that those bank notes ought -never to be held as reserves, because they were nothing but another -bank's debts, nothing but another bank's I.O.U.'s. Do you know that -idea never penetrated my cranium until that very minute. Now, that is -an absolute absurdity, that one bank's debts should be used as another -bank's reserves. Just imagine what a high old time we would have, if -the banks went around the country exchanging their debts with each -other for the purpose of creating reserves. The sky would be the limit. -Just think of it; where would it stop? - -MR. BANKER: Well, Mr. Farmer, that is precisely what the bankers -of this country are doing. I know of one National banker who took -$3,000,000 of his own bank notes, and put them into the reserves of a -Trust Co., and all the stock of the Trust Co. was owned by his bank, -and was locked up in the safe of the bank. I know another National bank -that got a large Trust Co. to bury $3,500,000 of its notes down at the -bottom of its reserves, so that they could not get out; and this is -a fair sample of just what is going on all over this country today. -This is done just to keep their notes out, so that they can make the -extra 1 per cent or 1-1/4 on the notes in circulation, as we call it. -Some one of you may say, well! these notes are secured by Government -bonds. Yes, suppose they are, what of it? Congress has just passed a -law providing for $500,000,000 more just like these present National -Bank Notes, which are to be secured by State Bonds, Municipal Bonds, -Railroad Bonds and Promissory Notes and what not, and the boast of that -wonderful economist Aldrich was that you could not tell them apart. Any -fraud, apparently, would suit him, so long as no one found it out. Now, -I assert, and challenge any man to deny it, that if any good debt is -fit to be used for reserve money, then every good debt is equally fit. -If a Government debt is good reserve money, then New York State debts, -Pennsylvania, Illinois, and all state debts; and if all state debts, -then New York city, Philadelphia, Chicago and all city debts; and if -New York, Chicago and Philadelphia debts are good reserve money, then -the United States Steel, Standard Oil and all corporation debts; and if -all corporation debts are good reserves, then the debts of J.P. Morgan, -John D. Rockefeller, Andrew Carnegie and all private debts are good -reserves. When you stop to think of it, what a preposterous proposition -it is to make any debt a reserve for another debt. The State of -California has just waked up, and will not permit her state banks to -hold a National Bank Note as reserve; but the great State of New York -specifically provides that her banks may hold National Bank Notes as -reserves. - -MR. MERCHANT: I must confess that I never knew that before; such a -scheme as that is perfectly rotten, and it seems to me as though -something ought to be done to correct so obvious an evil. Why, -gentlemen, these men who are using bank notes as reserves, must have -known that they were driving just that much gold out of the country, -and weakening the basis of credit to just that extent. - -MR. BANKER: I don't know whether they know enough to know that or not, -and I don't know whether it would have made any difference with them -if they did. When a man's cupidity and greed make a slave of him, they -drive all patriotism out of his soul, just as debts, promises to pay, -or wind money drives the gold out of the country. - -MR. MANUFACTURER: This scheme of banks exchanging their promissory -notes or their debts for the purpose of making reserves is a new one to -me, too. But, if any one thing can be much worse than another, it must -be this scheme. - -Gentlemen, a true reserve must be the measure and touchstone of credit, -therefore a reserve cannot be a credit itself nor a debt created by -granting credit. Now, what is the thing by which we are measuring the -value of all credit? Indeed, the thing by which we are measuring the -value of everything? It is gold, is it not? Then certainly gold is the -only thing that ought to be considered as a reserve. - -MR. BANKER: Right you are, Mr. Manufacturer, no greater economic truth -was ever uttered, or better said, than you have just put this one. In -support of that, I want to read something just written by Joseph T. -Talbert, Vice-President of one of our greatest banks. It is this: "What -is a Bank Note? It is the available gold behind a Bank Note that gives -it value. Substitution of any form of credit paper, the greenback, for -instance, is a substitution of a deferred promise of a thing, for the -thing itself. A statute which forces such notes upon the people as a -legal tender, works a fraud and vitiates all reason in regard to money -and banking. It perverts the moral sense of right and justice." - -MR. FARMER: There is no doubt whatever that all the true reserves -that that little country bank really had, was only the gold and gold -certificates amounting to $4,000 out of the total of $14,250, the rest -being only a substitution of some form of credit which must itself -be redeemed by gold which is certainly the only redeemer. We settled -that a long time ago, but it never came home to me until right now. -This thing is growing on me so rapidly that I shall soon be a real, -unregenerate Gold Bug. I guess I am that now. But, how plain and -self-evident that truth is when we get close to it. We are living and -teaching a gigantic economic fraud, an economic lie. - -MR. BANKER: Some reference may have already been made to this fact; -however, it will do no harm to repeat it right here because of its -force and great importance. Under the English Bank Act of 1844, -permission was given to count silver as one-quarter or 25 per cent of -the reserves of the Bank of England; but it has never done so, since -it is regarded as an economic falsehood. The reason is obvious. If the -bank today held $50,000,000 of silver and $150,000,000 of gold, the -gold would not only have to carry the $50,000,000 of silver, which -is nothing but another form of credit money, because actually worth -only 50 cents on the dollar in bullion, but the gold would also have -to carry $150,000,000 additional; that is, all the credit based upon -this $50,000,000 of silver, a condition that is wholly misleading; for -the silver instead of being a reserve at all, as it seems, or pretends -to be, would actually be, so to speak, a bundle of dynamite under the -whole structure of English credit. - -So, in the United States our $346,000,000 of United States Notes, or -greenbacks, instead of being an actual reserve to that extent, are not -only a burden resting upon our gold, to the amount of their face value; -but the burden our gold is carrying is multiplied to the extent of all -the credit that is resting, or is based upon these United States Notes, -which may be anywhere from one billion to three billion according to -the per cent of the reserves the banks using them carry. They may be -used as a 5 per cent reserve, and carry twenty times the amount of -the reserves, or more than six billion; it is possible that they may -be carried as a 17 per cent reserve, the average of all the National -Banks, or only 7 per cent, the average reserves of all the other State -Banks, excluding the Mutual Savings Bank. - -MR. MERCHANT: What's that? Do you mean to say that the State Banks do -not carry more than an average of 7 per cent reserve, and that the -National Banks carry an average of two and a half times as much or 17 -per cent cash? - -MR. BANKER: I have the statement of the Comptroller right here, which -shows that the average cash reserves of all the State Banks is 5 per -cent, including the Mutual Savings Banks, but excluding them, only -an average of 7 per cent, and that the average reserves of all the -National Banks is 17 per cent. - -The report of the Comptroller also shows this fact, that while all -other banks than the National Banks, excluding the Mutual Savings Bank, -hold only 7 per cent cash reserves of their individual deposits, or -demand liabilities, they have 24 per cent of their assets invested in -bonds and other securities, which must of necessity be slower than -current commercial paper, while the National Banks, which hold 17 per -cent in cash of their individual deposits, have invested only 17 per -cent of their assets in bonds, or other securities. - -The inconvertibility of a great per cent of the assets of the State -institutions is another burden then, thrown upon the total cash -bank reserves of which the National Banks carry $996,000,000, with -$5,825,000,000 individual deposits, while the other banks, excluding -the Mutual Savings Banks, have only $577,000,000 cash reserves, with -individual deposits amounting to $7,589,000,000. - -The average cash reserves of the United States therefore are only a -trifle over 11 per cent, when they should not be less than 16 per -cent under any circumstances at the low level, reaching nearer 20 per -cent at the high level. That is, reserves should be held for use, not -ornament. There should be such an elasticity in the use of reserves, as -to enable any community or section of the country to adjust itself to -the ever-changing conditions of trade. - -Let me make this point perfectly clear by giving you an illustration. -Under the law of today, our bank carries 6 per cent cash, which -amounts to about $120,000. There are times of the year when I could -carry $180,000 or even $200,000 a good deal easier than I could carry -$60,000, or even $50,000 at another time. Common sense would say that -I ought to be able to adjust my business and my reserves somewhat to -the varying conditions, but no, I am tied down by a cast-iron rule, so -that I cannot bend without breaking the law. There is no doubt that -my reserves ought to average for the year fully 6 per cent cash. In -addition to this, I ought to carry at least 10 per cent more that I -know absolutely is available at any time. Yes, and this should be so -carried with the combined reserves of my fellow bankers all over the -United States, as to make any amount available that could possibly be -necessary at any time under any circumstances. _This is the principle -of the elasticity of reserves._ - -The wide variation between the State reserves and the reserves of the -National banks is not difficult to explain. There are eighteen states -today which have no reserve requirements at all. In the remaining -states, the reserve requirements range all the way from 5 per cent to -25 per cent. The reserve laws in some of the states are excellent, just -as good as that of the National Bank Act, while in an adjacent state, -there may be no provision whatever requiring reserves. The result is -that half of the banks of the country which are compelled to carry -adequate reserves are carrying the other half, a condition that is -unfair, unjust and manifestly unsound. - -MR. MERCHANT: It is not only manifestly unfair as between the bankers -themselves, but such a condition imperils the banking situation as -a whole, and more than any other single cause, brings on a general -commercial disaster, as things now stand. The banking of the United -States and all the productive and transportation interests are, -comprehensively speaking, but one single business, so intimately -associated and interwoven are their affairs. The banks put up their -capital as an insurance fund, to protect their customers, and should -handle their resources, and should keep such an amount of reserves on -hand or at their command as to guarantee the payment of all depositors -upon demand, or in accordance with their contracts. Since the banks, -commerce and the people are all bound up together, the contracts of -the banks with the people should take one common form, and each bank, -from one end of the country to the other, should be compelled to assume -its proper share of the burden, both as to paid-up capital and as to -reserves. - -It is interesting to note that the capital of the 7,312 National -banks amounting to $1,033,000,000 is just about equal to the capital -of the other 17,804 banks, outside the National System reporting, -and the estimated capital of $70,000,000 of the non-reporting banks, -$1,047,000,000. - -The surplus of the National banks is 92 per cent of their capital, -and strange and fortunate to say, excluding the Mutual Savings bank, -the surplus of all other state banks is exactly 92 per cent of their -capital. - -That is, the National banks have $1,983,000,000 capital and surplus to -insure $5,825,000,000 individual deposits and $2,178,000,000 due to -the other banks, or a capital and surplus to all deposits of nearly 25 -per cent, while all the other banks have $2,010,000,000 capital and -surplus to insure individual deposits $5,089,000,000 and $454,000,000 -due to banks, or a little over 24 per cent. Insurance expressed in -capital and surplus, therefore, is about equal, but a great and serious -divergence comes, as we have seen, in the average cash reserves of the -two classes of banks. - -MR. MANUFACTURER: This is the weakness of the present situation from -the standpoint of reserves, and some of the states are beginning to -realize the importance of protecting the well-conducted banks from the -consequences of those recklessly or dishonestly managed; and they are -passing laws compelling all persons or firms doing a banking business -to submit to State supervision and control. They are compelling them -to incorporate their business within a reasonable time. These States -do not propose to have the innocent depositors swindled through a -misuse of funds; nor do they propose to permit bankers to so conduct -their banking business within their borders, that they can, if they -so desire, commit gigantic frauds, or by the misuse of the people's -deposits, bring on bank panics and a complete paralysis of business. I -think that Ohio has just passed such a law and that Illinois is about -to put the same kind of a statute into operation. The people of all -the states are beginning to understand that banking is a quasi-public -business, and that the banker, though not strictly speaking a trustee, -is in fact a quasi-trustee, and must conduct his business upon that -basis. - -MR. BANKER: Mr. Manufacturer, you are quite right in what you have -said, but you have not gone far enough; nor as far, I am sure, as -you will be inclined to go when I have outlined the necessity of a -police regulation of the banking business, from a National rather than -from a State point of view. Just stop and think the matter over. To -use your own observation with regard to the action of the state, no -one will deny that a state has the right to supervise every person, -firm or corporation that takes deposits under the name of bank, or -banker, with a view of protecting the people against foolish or -dishonest bankers. By the same course of reasoning, the United States, -or National Government, has the right, and it is clearly its duty, to -protect one state against the unwise and dangerous course of some other -state and one section of the country against misconduct in the banking -business in some other section of the country. Bad banking is not only -a local mishap, but a national misfortune. Nine-tenths of the country -might be under such supervision and control of its banking business -as to insure practical immunity from such conditions and practices as -breed panics and the remaining tenth be so conducted as to preclude -the possibility of a day's freedom from the danger of a commercial -cataclysm. - -Will anyone say that such a condition should continue for a day, or -a year, or for ten years, or for a hundred years, or for a thousand -perchance, because the general Government has no right or power to act -in the matter for want of constitutional authority? Let me ask you, Mr. -Lawyer, whether there is anything that will so certainly conserve the -peace, the prosperity and the "general welfare" of the United States as -a sound and uniform financial banking system extending over the whole -country. - -MR. LAWYER: I certainly cannot conceive of anything of so much -importance as a sound and uniform banking system for the whole country. -If there is one single factor in our life that is distinctly national -in its character and scope, it is this. - -During the past week, I devoted much time to that phase of this -question, because, as we have gone along during the last two or three -months, and this problem has been under discussion, I have become more -and more impressed with its vast importance, and above all with its -distinctly national character. I have not butted in tonight, as you -will observe, as I was anxious to see how you gentlemen would treat -this subject of Reserves, whether from a standpoint of individual -banks, or from the standpoint of the community, the commercial center, -or our country as a whole, or upon the broad proposition that gold -today constitutes the world's banking reserves and that we are a -very great part of that commercial world. For my own part, I had -come to the conclusion that there could not be a system of reserves -established that would be efficient and of the highest use, and really -protective unless it were national in its extent, and universal in -its application. Therefore, realizing the absolute necessity of some -common power to control all reserves, in order to compel each bank to -perform its part by carrying its share of the burden that commerce -imposes, I have been unable to find any solution, except in a uniform -national system; and why not? Certainly the National Government could -compel every bank to carry certain specified reserves, and failing to -do so to pay a tax of 10 or 20 per cent per annum upon all deposits -not so protected; that is, upon all deposits in excess of the required -reserve. This could be done under the taxing power of the Government, -precisely as a tax of 10 per cent was put upon all bank notes. Would -any patriotic banker refuse to coöperate with his fellow bankers in -such a reform, unless he wanted some unfair advantage by compelling the -other bankers to carry his load for him? - -You gentlemen will remember that the National Government was given -jurisdiction of the Postal Savings Banks under these words which it was -understood at the time were written by the President: "Sixty-five per -cent of the deposits could remain with the banks as a working balance, -and also a fund which may be withdrawn for investment in bonds or -other securities of the United States, but only by direction of the -President, and only when in his judgment 'the general welfare' and the -interests of the United States so require." Similar words could be -used with regard to a per cent of the surplus of the banks, and if the -one was tenable, certainly the other would be especially so, since the -latter involves seventeen billion of individual deposits, of which six -billion four hundred and eighty million ($6,480,000,000) are savings -deposits. Again Article I, Section 8 of the Constitution, empowers -Congress "to regulate commerce with foreign nations and among the -several states and with Indian tribes." - -Upon this clause of the Constitution rests the Anti-Trust Law. What -have we not done under this clause of the Constitution and the general -welfare clause? - -We have passed the Food and Drugs Act, giving the Government power to -stop the use of poisonous substances in food products and drugs: - -The Insecticide Act, giving the Government power to determine what kind -of poison shall be used to annihilate bugs: - -The Plant Quarantine Act, giving the Government power to regulate -the importation of nursery stock and other plants and products and -to enable the Secretary of Agriculture to establish and maintain -Quarantine Districts for plant diseases and insect pests: - -The Livestock Quarantine Act, to enable the Secretary of Agriculture to -effectually suppress and extirpate contagious pleuro-pneumonia, foot -and mouth diseases and other dangerous infectious and communicable -diseases in cattle and other live stock: - -The Meat Inspection Act that, for the purpose of preventing the use in -Interstate, or Foreign Commerce, of meat and meat food products, which -are unsound, unhealthy, unwholesome, or otherwise unfit for human food, -the Secretary of Agriculture at his discretion may cause to be made, by -inspectors appointed for that purpose, an examination and inspection -of all cattle, sheep, swine, and goats before they shall be allowed -to enter into any slaughtering, packing, meat-canning, rendering or -similar establishments in which they are to be slaughtered, and the -meat and meat food products thereof are to be used in interstate or -foreign commerce. - -The twenty-eight Hour Law by which the Government compels the humane -treatment of cattle: - -Employers' Liability Act: - -The Safety Appliance Act: - -The Hours of Service Act: - -The Transportation of Explosives Act: - -The Newspaper Publication Act: - -The White Slave Act. - -Can anybody doubt that we shall have a "National Health Act" by which -the Government can stop the invasion of this country by yellow fever, -cholera, bubonic plague, or any other scourge that may possibly visit -our shores, and sweep over the land? - -Can anybody doubt that we shall soon have a National Child Employment -Act by which the childhood and youth of the land may be protected -against those labor practices that imperil our chief national resource, -the human resource? - -Can anyone doubt that we shall soon have a National Woman's Employment -Act that future generations may not be pauperized in health, strength -and character? - -Can anyone doubt that we shall soon have a National Workmen's -Employment Act to the end that American citizens in all parts of the -United States engaged in our productive industries shall have equal -opportunities in matters of hours of labor? - -The general welfare of this nation demands strength, power and -greatness; but the strength, power and greatness of this nation reside -and consist in the character, health, strength and power of the people, -and therefore conservation of our greatest national resource is the -conservation of our human resource. The citizen is a national asset. - -Can anyone doubt that justice between the employers of labor in our -various states, and the general welfare of this republic, demand -uniform health and labor laws to the end that the citizenship of this -republic may be the best product of the human race? - -Gentlemen, if all these things are done, can be done and ought to be -done by the National Government, can anyone doubt the soundness of -this proposition: That it is interstate commerce to ship by mail, or -freight, any kind of property? - -What is property? "Property is a thing or things subject to ownership; -anything that may be exclusively possessed and enjoyed; chattels, -lands, possessions." Gold, gold certificates, silver, silver -certificates, United States notes, checks, drafts, promissory notes are -all certainly within this definition. - -H.D. MacLeod, the highest authority I know of on banking economics, -says: "Property, therefore, in its true sense, means solely a right, -interest or ownership, and consequently to call goods or material -things property is as great an absurdity as to call them right, -interest or ownership. - -"To call goods themselves property is, comparatively speaking, a modern -corruption, and we cannot say when it began." - -Therefore, property is primarily and essentially the very things with -which banking is solely concerned. - -Will anyone deny that gold is property? Remember that when gold is -shipped in large quantities, it is by weight and not by count. - -Will anyone deny that gold certificates are property? - -Will anyone deny that silver is property? - -Will anyone deny that silver certificates are property? - -Will anyone deny that United States notes are property? - -Will anyone deny that promissory notes are property? - -Can anybody have the hardihood to say that if a note broker in New York -ships a million dollars' worth of commercial paper to purchasers in the -west upon a commission of a quarter or a half per cent, and receives -his payment, for the sake of the argument, let us say, by a shipment of -gold coin, that such broker is not engaged in Interstate Commerce? Does -this transaction become a different transaction, forsooth, because it -is carried out by a banker? - -Will anybody deny that checks and drafts and bills of exchange are -property? - -Will anybody deny that a bank has property, although it may be the -owner of one million dollars' worth of promissory notes? - -Will anybody declare that a bank has no property when it has a million -dollars' worth of gold coin in its vaults? - -If a bank in Chicago should by any chance own one million dollars' -worth of wheat, and should sell and ship the same to a New York bank, -and the New York bank should ship the Chicago bank one million dollars' -worth of gold, will anybody deny that they are engaged in interstate -commerce? Now, suppose that the Chicago bank should sell the wheat in -Chicago to Mr. Armour, instead of shipping it, for his promissory note -for one million dollars, due in thirty days, and that the Chicago bank -should then sell, and mail the note to the same New York bank, and the -New York bank should ship the Chicago bank one million dollars in gold, -in payment for the note, will anyone have the hardihood to assert that -this transaction is not interstate commerce? - -Will anyone deny that the sale and shipment by note brokers of billions -upon billions of promissory notes from one state to another every year -is not interstate commerce, but that to ship eggs, apples, potatoes, -chickens, grain, cotton and live stock is interstate commerce? - -I assert that it is just as proper and important that the National -Government inspect this paper, and the banks that create it, or -ship it, or buy it, as it is to inspect the sheep, hogs, cattle, -slaughterhouses and the meat they turn out in order that it can protect -the people of the United States. If the paper so shipped is infected -by the hand of a rotten maker, commercially speaking, and the bank -sending it out and responsible for it is not carrying an adequate -reserve to meet the paper, should the maker fail to pay it, the harm -done is vastly greater than that resulting from slightly infected meat. -How much infected meat would it take to do the harm, the damage to the -American people that resulted from the panic of 1907? And yet, if we -had had a wise, national financial and banking system, we need never -have passed through that harrowing, wasting panic that resulted in -destroying property values into the billions; in the death of thousands -of the people directly and indirectly; in the ruined health of tens of -thousands more; in the non-employment of hundreds of thousands; and in -the unknown and immeasurable suffering that ensued. - -Such a national system must be supported by every banking unit; by -every individual bank carrying its part of the commercial burden, and -providing its proper share of the insurance of commercial safety by -contributing its proper proportion of the necessary reserves, both -local and national. - -MR. MERCHANT: Mr. Banker, I heartily approve of every word that you -have said, and there can be no possible doubt about the result of a -discussion of this phase of this question by the American people. - -There is one question, however, that I desire to ask you before we pass -on, as we may overlook it. Is it not true that our National Banks are -now carrying 20 per cent reserves of which 17 per cent are cash? Are -not these reserves large enough to meet all emergencies? - -MR. BANKER: I presume you gentlemen all know just how the National -Banks carry their reserves; but fearing that you do not, I will explain -the system to you. All so-called country banks are required to carry -15 per cent reserves; that is $15,000 cash against every $100,000 of -deposits; that they may send 9 per cent or $9,000 for every $100,000 of -deposits away to what we call reserve cities. Now, there are 320 banks -in 48 of these reserve cities. These reserve cities are required by -law to carry a reserve of 25 per cent, or $25,000, for every $100,000 -deposits; but they may send away 12-1/2 per cent, or $12,500, for every -$100,000 of deposits to a central reserve city, of which there are -three: New York, Chicago and St. Louis. - -These central reserve cities must carry 25 per cent cash reserves or -$25,000 in cash for each $100,000 of deposits. Experience shows that -these 320 banks in the 48 reserve cities and these 55 banks in the -three central reserve cities keep all of their money loaned out all of -the time; that is, right up to the reserve limit. Since they have no -margin, when called upon for anything more than the usual daily current -requirements, something extraordinary must be done to meet the demand. -Loans must be called in and paid off. But since these same banks that -are calling loans are supposed to be carrying the real, the final, the -ultimate reserves, a deadlock follows, and the borrower is up against -it; rates go almost anywhere that the banks want to put them; from 1 -per cent to 10 per cent, to 20 per cent, to 100 per cent, or even 1,000 -per cent; I believe that's the record rate. In other words, we have no -true, final reserves in this country at all, for you cannot break the -Government limit fixed by statute, and therefore we have a complete -lockup all along the line, until through straining, something breaks -somewhere. - -There is absolutely no use of sending a part of your reserves away, if -you cannot get them when you want them; for then it is no reserve at -all, and that is the actual position or situation in the United States -today. Our so-called central reserves are not reserves; it may be -written down as a purely fictitious scheme, for there cannot be found -a single year in which any substantial arrangement has ever been made -by running the reserves up in the central reserve cities until they -amounted to an average of 35 or 40 per cent, which would be the only -practical way of providing for the crop-moving period. - -If there is one thing more barbarous in our banking practices than a -bond-secured currency, it is our system of superimposed bank reserves, -especially in connection with the fixed limit, established by the -Government. What would you think of a railroad company which ran out -through the wheat country, having one-quarter of all its freight cars -idle all the time as a reserve, and yet when thrashing time came, -refused to use them, although the wheat was rotting on the ground, -because the management of the road demanded that the railroads should -always have at least one-quarter of the cars idle, as a reserve to meet -the demands during the crop-moving period. Wouldn't you think that that -was idiotic? - -MR. LABORINGMAN: Well, I should say so. - -MR. LAWYER: Mr. Banker, there is another point in that connection, and -that's this. You started off to get a central reserve, a true reserve, -as I supposed, as distinguished from the reserves of the National Banks -that are all loaned out all the time. Then, your reserves were all -broken up in the end, first into three hundred and twenty banks, and -at the end into fifty-five banks, located in New York, Chicago and St. -Louis. What we must have, it seems to me, is a real central reserve in -the form of unloaned gold, and then permit the banks to use their cash -reserves, if by any chance they needed them in part at least. - -I notice that you carry about $100,000 in accordance with the legal -requirement. Now, just as you said a while ago, there are times of -the year when you could easily carry $200,000; but again there are -times when you want to use a part of the $100,000, possibly as much -as $75,000 of it. Why should you not do it, and then accumulate the -necessary excess in the slack time to make up your average for the year. - -MR. BANKER: That is precisely what we ought to be permitted to do. - -MR. LAWYER: Then, Mr. Banker, instead of sending as you now do, 9 per -cent of your deposits, or $175,000, to a reserve city, and that city in -turn sending a part of it to some central reserve city, your balance -with your reserve city should be sufficient to carry your exchange -account, and the balance go to a great central gold reserve, upon -which you and your fellow bankers throughout the country could rely -absolutely when the emergency came. - -MR. MANUFACTURER: I have been listening to you gentlemen with intense -interest, and must say that you have worked this plan out completely -and practically. - -I see what an enormous advantage it would be to a bank to use its -reserve as a reserve should be used, and what an absolute guarantee -of protection it would be to have all the reserves of all the banks -centralized, and ready to help anyone of them in need of gold, because -the gold was actually on hand, and had not been loaned out as the banks -now do; but I have been wondering where the State Banks and Trust -Companies were going to get 10 per cent more reserves of their demand -deposits to put up in this central gold reserve. You must remember that -they have five billion of deposits. - -MR. BANKER: I can tell you how to do that; that is very easy. - -When the State Banks come into the National system as they certainly -will, if you have the right kind of a system, they will exchange their -notes for the gold or gold certificates that are now in circulation, -as they come in over their counters. You see that all the gold and -gold certificates that are now held by the banks only amount to -$879,000,000, although there is in the country $1,850,000,000 of gold, -practically one billion of gold, or $10 of gold for every man, woman -and child out in the corn, cotton and wheat fields; in the mining -camps, when as a matter of fact, this gold should be in the reserves -of our banks, protecting our bank credits; and bank notes should be in -the corn, cotton and wheat fields, in the mining camps filling the true -function of currency, and where gold, or gold certificates are not at -all needed. - -MR. LAWYER: Now, wait a moment, Mr. Banker, and let me see if I grasp -that. It is very important that we should all understand this. I am -exceedingly anxious to, and it strikes me that we are at a mighty -interesting juncture of this subject. If a State Bank with a reserve -of $70,000 came into your National system and had to increase its -present reserve, which is only 7 per cent, by as much as 10 per cent, -it could do so by simply retaining the gold and gold certificates as -they were deposited from day to day, and pay out its bank notes to the -extent of one hundred thousand dollars. The result would be that the -bank would increase its liabilities by $100,000, but it would also -increase its reserves by $100,000. That is certainly a perfectly sound -proposition. Before the bank came into the system, its reserves were -only 7 per cent, or $70,000, since its deposits were $1,000,000. After -it goes into the National system, it has changed $100,000 of its notes -for $100,000 of gold, or gold certificates, as they came in over the -counter; it now owes $1,100,000, of which $100,000 is of notes, but it -now has $187,000 of reserves of all of its demand liabilities, or 17 -per cent, instead of $70,000, or 7 per cent, as before. - -MR. MERCHANT: Isn't that a simple and very easy thing to do? And what -tremendous strength it would give to the whole banking situation -immediately. - -MR. MANUFACTURER: Then when you think of it, what a stupendous piece of -folly it is, to have all this gold floating around the country, doing -no possible good, when a piece of credit paper, or bank note, would do -the work just as well. - -MR. LABORINGMAN: Anybody can see that. A man that can't ought to be -arrested for want of brains. He'd have to plead guilty. Putting that -gold that you need in your bank reserves at the rate of one dollar of -gold for five or six dollars of credit into the streets, cotton fields, -corn fields and in the mines, is no greater piece of folly than it -would be to send a six-horse team to haul Mr. Farmer home, when one -horse would do just as well. - -UNCLE SAM: Mr. Laboringman has got this thing dead right. In fact, in -my judgment, he has the horse sense of this crowd. Give him a show, -I'll bet on him every time, he always takes a short cut, and hits the -nail square on the head. - -MR. MERCHANT: Suppose, Mr. Banker, that all the banks of the country -should come into the National system, and put up, say 10 per cent, as -you suggested a while ago, of their demand or individual deposits, and -5 per cent of their savings deposits, what would your central gold -reserve amount to? - -MR. BANKER: On June 14, 1912, the Comptroller of the Currency reported -that the individual deposits amounted to ten billion five hundred -million ($10,500,000,000), and that the savings deposits, outside of -the mutual savings bank, amounted to two billion eight hundred and -seventy-two million ($2,872,000,000). - -If the State Banks and Trust Companies should become National Banks, -and bring their reserves up to the National standard, by exchanging -their notes for gold; that is, exchanging $468,000,000 of their notes -for that much gold, the result would be as follows: - - Individual - Deposits $10,500,000,000 @10% $1,050,000,000 - Savings - Deposits 2,872,000,000 @ 5% 143,600,000 - Bank Notes 1,219,000,000 @10% 121,900,000 - -------------- - Making a total central gold reserve of $1,315,500,000 - -This is just double what the gold reserve of France is, the largest -gold reserve in the world today, but when you consider the fact that -our banking resources are 45 per cent of the total banking resources of -the world, it should be even more than that. It is interesting to note -that in making this readjustment for a central gold reserve it would be -just $100,000,000 larger than our bank note circulation. - -With this central reserve of gold created, the United States could then -control the inflow and outflow of gold to and from the United States, -precisely as England controls the movements of gold today by fixing the -rate of discount or a price for the use of gold. - -UNCLE SAM: Well, boys, if there is one phase of this question that you -have treated with a greater thoroughness and more satisfactory results -than any other, to my mind, it is your plan for protecting our bank -credits with ample gold reserves. They are so disposed of as to keep at -all times all bank credits in touch with gold, and therefore as good as -gold; at the same time have developed a great central gold reserve in -harmony with the practice of the great commercial nations of the world, -and commensurate with my importance as a banking power in the world. -You have made this subject so clear and conclusive that I need not -restate the points you have made. - -I hope our next night will be as satisfactory as this has been. - - Good Night. - - - - -ELEVENTH NIGHT - -THE BANK - - -UNCLE SAM: At our last meeting you considered the very important -element in banking, of reserves, and seemingly the final factor that -enters into the structure of a bank. You have run the whole schedule -off, I think. Standard of value, money, currency, exchange, capital, -credit, government credit as money and as currency, land credit as -money and as currency and reserves. What else can there be? - -MR. BANKER: I do not think there is any particular topic for us -to tackle now, but the bank itself, and I want to be permitted in -the outset to describe just what a bank is, and what it does. I do -not think there is any single thing in business life that is so -misunderstood. People think of a bank as a kind of mystery. - -The banker is a merchant in money and credit, and precisely as you can -say that a man is a hardware merchant, cotton goods merchant, grain and -flour merchant, so you can say that the banker is a money and credit -merchant. He deals in these two things. - -Let me illustrate this in a simple way. If Mr. Farmer should come to -me to borrow a thousand dollars for three months, and I should make -him the loan, as we say, I, as a banker, would buy his note, due in -three months. That is just what happens every time a bank makes a loan; -it simply buys the note. Now, in all probability I would not give Mr. -Farmer any actual money, but would simply give him credit for one -thousand dollars on the books of the bank, so that he could draw his -check against it. In other words, I would owe him one thousand dollars. -I have created a debt to him of one thousand dollars; in short, I have -traded debts with him. He has given me his note, which is a debt for -one thousand dollars due in three months, and I have given him credit -on the books of the bank, a debt due to him on demand. The transaction -does not differ in the slightest degree from the trade of horses for -cattle. Let me demonstrate this. Suppose that Mr. Farmer came to me and -offered me two of his Jersey cows for my horse and buggy, because he -does not want the cows, but does want the horse and buggy to do a lot -of running around. I want the cows to milk, and so make the exchange -with him. He gets something that meets his pressing needs in the horse -and buggy, and I get something from which I receive an income, the cows -from which I get milk. This corresponds to the interest on his note, -and by the way, the cream would be my profit. - -MR. LABORINGMAN: That's it; you bankers are always milking the public, -and the interest you get is all cream; all profit. - -MR. BANKER: Oh, no! it is not as bad as that. Don't make such a -mistake. The average cost to the bankers of the country, outside of any -losses, is about 4 per cent upon their deposits for interest paid on -deposits, rent for building, clerk hire and other general expenses. So -you see that it is not all profit by any means. - -But let me get right back to what I was saying. The banker is nothing -but a trader who keeps an open shop for the purpose of trading his -debts for the debts of his depositors; or to put it in another way, -for the purpose of exchanging his credit for actual money which is -deposited with him, or for checks and drafts that are deposited with -him, or for promissory notes which he buys when he loans money to his -customers, and gives them credit on his books for the amount of the -loans. All these different things, money, checks, drafts and promissory -notes are bought by the banker with his credit, and the greater the -amount he buys with his credit the greater will be his debt. But, you -will probably say these are his deposits. Very true, but his deposits -are his debts. Don't forget that. - -MR. LAWYER: Mr. Banker, you have accurately described the situation, -just as it exists today, and that, of course, is what we are interested -in; but it seems to me as though it would be a great help to us to -follow the development of banking, as we have it now. - -MacLeod, the highest authority upon banking credit, and the theory of -banking, used this language: "The first business of a banker is not to -lend money to others, but to collect money from others." - -Bagehot used this language, in describing the business of the bank: -"Thus, a banker's business--his proper business--does not begin while -he is using his own money; it commences when he begins to use the -capital of others." - -Many writers have maintained that a bank should only be allowed to -create exactly as much credit as the specie paid in, and that its -sole function should be to exchange its credit for coin, and coin for -credit; and that the quantity of the bank's credit should always be -exactly the same as the coin it displaces. This principle is called the -currency principle. - -Many banks in the world's history have been constructed on this -principle, especially those famous banks at Venice, Hamburg, Amsterdam -and several others. - -These cities, small in themselves, were the centers of great foreign -commerce; and as a natural consequence, an immense quantity of coin -and denominations of all sorts of different countries was brought -by the foreigner who resorted to them. These coins were, moreover, -greatly clipped, worn and diminished. The degraded state of the current -coin produced intolerable inconvenience, disorder and confusion among -merchants, who, when they had to make or receive payment of their -bills, had to offer or receive a bag full of all sorts of different -coins. The settlement of these bills, therefore, involved perpetual -dispute--which coins were to be received, and which were not, and -how much each was to count for. In order to remedy this, it finally -became absolutely necessary that some fixed uniform standard of payment -should be devised, to insure regularity and a just discharge of debts. -In order to do this, the magistrates of those cities instituted a -Bank of Deposit, in which every merchant placed all his coins of -different kinds and nations. These were all weighed, and the bank gave -him credit, either in the form of notes, or a credit on their books, -exactly corresponding to the real amount of the bullion deposited. The -owner of this credit was entitled to have it paid in full weighted coin -on demand. These capital credits, therefore, always insured a uniform -standard of payment; and it was enacted that all bills upon these -respective cities, above a certain amount, should be paid in these Bank -Credits, which were called _Bank Money_. The consequence was evident, -as this Bank Credit, or Bank Money, was always exchangeable for money -of full weight on demand; it was always at a premium. - -These banks professed to keep all the coin and bullion deposited with -them in their vaults. They made no use of it in the way of business, -as by discounting bills. Thus the credit created was exactly equal to -the specie deposited and their sole function was to exchange specie for -credit and credit for specie. - -These banks were examples of the currency principle; they were of no -further use to commerce than this, that they served as a safe place -to keep money in--and they insured a uniform standard of payment for -debts. They made no profit by their business, but those who kept their -accounts with them paid certain fees to defray the expenses of the -establishment. - -Later and during the civil war in Great Britain the goldsmiths of -London began to receive the cash of the merchants on deposit. They not -only agreed to repay it on demand, but to pay 6 per cent per annum -for the use of it. Consequently, in order to enable them to do that, -the deposits necessarily became their property to trade with as they -thought best. - -When, therefore, these goldsmiths received this money on deposit, -they gave in exchange for it, or issued to their customers a credit, -or right to demand back an equal amount of money at will. And it must -be noted that it is this banker's credit which in banking language is -termed a deposit. The money itself is called an asset, or resource. - -MacLeod says that in practice it will be found that in ordinary -times a banker's balance in cash will seldom differ by more than one -thirty-sixth part from day to day. So that if he retains one-tenth part -of his cash to meet any demands for payment that may be made, that is -ample and sufficient in ordinary times. - -The banker, therefore, can see that if an amount of cash was sufficient -to support ten times the amount of his liabilities, he might safely buy -debts to several times the amount of cash in his hands. - -From this you see clearly by evolution a banker is a trader, just as -Mr. Banker said a few moments ago, whose business consists in buying -money and debts by creating other debts. If he has taken actual money -on deposit, he has bought it, and if he has received checks and drafts -on deposit, he has bought them likewise with his credit. - -Thus, it is seen that the essential and distinctive feature of a bank -and a banker is to issue credit payable on demand, and that this credit -may be put into circulation and serve as money. - -_First_: They might demand payment in cash; if they did so, the banker -canceled his debt. - -_Second_: The banker, if his customer wished it, gave him his -promissory note to pay him or the bearer on demand such sum as he -might wish; this neither created nor extinguished a deposit, it merely -recorded it on paper for the convenience of transferring it to someone -else. This promise to pay was at first called a "Goldsmith's Note," and -is now called "A Bank Note." - -_Third_: If the customer wished to make a payment he might write a note -to his banker desiring him to pay the money to some particular person, -or to his order, or to bearer. These notes were then called "Cash -Notes," but are now called "Checks." - -Now, it is perfectly clear that neither a bank note, nor a check -creates any new right; it merely records on paper a right to have money -which already exists, and it is used for the purpose of transferring -that right to have money to someone else. - -It will be noted now, and I want you to keep this observation clearly -in mind, that all banks are banks of issue, that is issues of credit. -MacLeod says that the very meaning of the words "To Bank" is to issue a -right of action or a credit, in exchange for money or other debts; and -when once the banker has issued this right of action, or right to have -money, to his customer by writing it down to his credit, it makes not -the slightest difference as to his liability whether he delivers his -own promissory note, that is a bank note, to his customer, or whether -he merely creates the credit, and gives him the right to transfer it to -someone else by means of a check. - -When a person deposits money at the bank, it is not his intention to -deprive himself of the use of it; on the contrary, he means to have -as free use of it as if it were in his own purse. The depositor, -therefore, lends his money to his banker, but yet at the same time has -the free use of it, as the bank employs that same money in promoting -trade; upon the strength of the money being deposited with the bank, -it buys debts with its promises to pay, either in the form of "Bank -Notes," or of credit on its books, several times exceeding the amount -of the cash placed with it; and the depositors who sell the bank their -debts, have the free use of the very same coin which the depositor has -the right to demand; thus the lender that is, the depositor, and the -borrower that is, the banker, have the same right at the same time to -the free use of the same money. All banking depends on the calculation -that only a certain small portion of each set of depositors will demand -the actual cash, but that the majority will be satisfied with the mere -promise, the "Bank Notes" or the credit on the books of the bank. - -Banking is a species of insurance; it is theoretically possible that -a banker may be called upon to pay all his deposits at once, just as -it is theoretically possible that all the lives insured in an office -may end at the same instant; or it is theoretically possible that all -the houses insured may be burned at the same hour. The depositors and -noteholders of the Bank of England could demand payment the same day. -All the depositors and noteholders of the Bank of France could demand -payment the same day. All the depositors of any bank could demand -payment the same day. But all banking, as well as all insurance, is -based upon the expectation that these contingencies will not happen, -and the average experience of life proves that they do not happen. A -banker multiplies his debts to be paid on demand and keeps buying a -sufficient amount of cash to insure the immediate payment of all claims -which are _likely_ to be demanded at one time. If a pressure comes upon -him he must sell some of the securities he has bought, or borrow money -on them. - -When the customer discounts a note at his bank he parts with the -property in it, just as when he sells any other article. The note -becomes the absolute property of the banker and he may sell it again, -or pledge it, or deal with it in any way that suits his own interests -best. - -The notes in the safe of a banker are exactly similar to the goods in -the shop of a retail dealer. The retail dealer buys the goods from the -wholesale dealer and sells them at a higher price to his customers; -and, as he makes a profit by doing so, the goods are _capital_ to him. -Notes likewise are goods, or merchandise, which the bank buys from its -own depositors at a discount, or bearing interest for a time, and as -the bank makes a profit by so doing, the notes are _capital_ to the -bank precisely in the same way that the goods in the shop of the retail -dealer are _capital_. - -Now, lest we shall be misled, I want to call your attention to an -error which is very common. Many persons not being aware that the word -"_Deposit_" in banking language means the credit created in exchange -for money, checks, drafts or notes bought, when they hear or read that -a bank has such an amount of deposits conceive or suppose that the bank -has that amount of cash on hand to trade with. - -When it is said that a bank has $10,000,000, $50,000,000 or -$100,000,000 or $200,000,000 of deposits, they are not deposits in -cash at all; they are almost entirely pure credit, and are exactly -equivalent to just as many "Bank Notes." They are nothing but an -enormous superstructure of _Credit_ built up on a comparatively small -basis of reserves exactly like the note circulation. These figures do -not show the quantity of cash at the command of the bank that can be -traded with; but they show the quantity of business the bank has done, -and the debts or liabilities it has created. These deposits, then, -which so many think are cash, are in fact nothing but the credits the -banks have created in exchange for the cash and notes which figure on -the other side of the balance sheet as assets or resources. - -This play of bank credit has been graphically described by Joseph -T. Talbot, the Vice-President of one of our largest National Banks; -he says: "A customer holding a bank note may present it for deposit -and credit, instead of demanding redemption in cash. In this case, -there is a conversion from the circulating form of credit, payable to -bearer, back to a 'Book Credit,' payable to order, as was ordinarily -the case. Thus it will be seen that all these forms of 'Bank Credits' -are interchangeable, one for another, at the pleasure of the holder -of the credit. The difference between these several forms of credit -involves no changes whatever in the bank's liabilities. They amount to -about the same difference which exists, let us say, between a coupon -bond and a registered bond. The one is payable to bearer, the other -is not. At one time a bank note may best serve a customer's needs; at -another time he might prefer a deposit in the bank; or again he might -prefer 'exchange.' All these interchangeable uses of credit actually -and continuously take place. It will now be clear that a circulating -'Bank Note' in the hands of the public does not differ essentially from -a 'Deposit Credit' on the bank's books. - -"If one of your local bankers were asked how much he allowed his bank -to issue in cashier's checks, he would tell you that he issued whatever -sums his customers wanted; either against their balances, or against -new loans. He would tell you the same in respect of the amount of -exchange he issued; his sole rule and guide being the amount of such -credit which his customers require, and which he is in position to lend -afresh, and to maintain against, or to redeem in cash, if demanded. If -asked how long these obligations were allowed to remain outstanding, -he would tell you that he had no control whatever over the period of -their circulation; that these obligations stood out just as long as the -holders wanted to use them in that form, and no longer; that his only -concern was in being prepared to redeem the obligations on demand in -cash. - -"Thus it is that the volume of bank credits, whether in the form -of deposits, checks or notes, responds in a rise or fall according -as there is legitimate trade demand; and over this the bank has no -control, except by ceasing to make loans. This is why deposits increase -as loans increase, and these increase as the volume of business -increases." - -Now, if we understand the real nature of these so-called deposits, the -reason for their diminution is plain. Deposits fall because loaning -stops. When you stop loaning, you stop creating credit. You can -readily see that it is not a diminution of deposits in cash, but it is -a contraction of credit, a refusal to make loans. - -This erroneous notion of the real meaning and nature of deposits -in banking language may lead to very great mistakes in estimating -the stability of a bank. That a bank's stability depends on a due -proportion being kept between the deposits or the liabilities and -the cash; and it may very well happen that while the deposits are -apparently mounting high, and might lead many persons to believe -that the actual quantity of cash was increased, it might be nothing, -perhaps, but a dangerous extension of credit. And if this were carried -too far, the bank might be in the most dangerous position just when it -was apparently most flourishing. - -Now, let us consider how a banker who has purchased either money or -notes from his customers by creating deposits or debts, may be used -by his depositors. That is how the depositors may use these credits. -Of course, every banker does business exactly in the same way, or -practically so, and when their customers begin to use checks these -different results may follow: - -_First_: The actual money may be drawn out. - -_Second_: The credit may be transferred to the account of another -depositor of the same bank. - -_Third_: The check may be an order to pay another bank. But in this -case, if the first bank is ordered to pay the second bank so much, -the chances are that the second bank will be ordered to pay the first -bank practically the same amount. If the claims of the two banks on -each other were exactly equal, the respective checks or orders are -interchanged, and the credits readjusted to the different customers' -accounts accordingly, without any payment in money. If it should happen -that the claims of all the banks against each other exactly balanced, -any amount of business might be carried on, without requiring a single -dollar of gold coin. If the mutual claims of the different banks -against each other do not exactly balance, it is only necessary to pay -the differences in coin. - -Now, exactly to the degree that banks are brought into a closer -relationship with each other by such means, the smaller is the quantity -of coin required to carry on the business of the country; or the more -gigantic is the superstructure of credit which can be reared upon a -given reserve. - -From what I have already said, you must all see that a merchant deals -with credit; but a banker is a dealer in credit. A merchant brings -his notes or debts, that are payable some time in the future, to the -banker for sale, and the banker buys them for credits in the form of -deposits, or debts payable instantly, which have precisely the same -effect in commerce as so much gold. He reaps exactly the same profit -by creating a credit in favor of his depositor as if he gave him the -actual cash. The checks drawn against these credits so created by the -banker circulate commodities in trade precisely in the same way that -bank notes do which circulate commodities precisely in the same way -that gold coin does. Consequently, these bank credits so created by -the banker, whether upon his books subject to check, or in the form of -bank notes, are exactly equal in their practical effects, so far as -exchanging commodities is concerned, to the creation of so much gold -coin. - -This being true, you must realize how absolutely essential it is that -every bank credit must be kept as good as gold by current redemption in -gold everywhere, whenever demanded. - -MR. BANKER: Mr. Lawyer, in all that you have said you have only -affirmed what I said in the outset; the banker is a shopkeeper, a -trader exchanging his credit for money and debts. - -The development of the banking business in the United States is most -interesting, and its growth has been simply marvelous. - -On Feb. 25, 1863, almost fifty years ago, when the National Banking -System was inaugurated, there were in the eastern states, including -New York, New Jersey and Pennsylvania, what are known as Mutual -Savings Banks. These institutions are run solely for the benefit of -the depositors. This is upon the theory that those using savings -banks are the wards of the state. These Mutual Savings Banks have no -capital and the trustees, or directors, serve without pay. There are -today in the United States 650 of these Mutual Savings Banks, with -deposits amounting to $3,608,000,000. Practically all of these Mutual -Savings Banks are located in the east, there being only thirty-one -west of Buffalo. These few got a start before the present conditions -of banking grew up. Today it is quite impossible to start a Mutual -Savings Bank anywhere, because the State Banks and Trust Companies -are able to pay such high rates of interest, owing to the fact that -they can conduct the Savings Bank business as a part of their regular -commercial business, or as a part of their Trust Company business. That -is, the Savings Bank business is incidental to their regular business, -and requires no separate and special organization. If there are any -extra charges they would be nominal at most. The savings business being -conducted over the same counter, this particular branch of banking may -be regarded as done at no cost to them. Under the circumstances it is -very easy to see how the State Banks, and those banking institutions -more recently organized, known as Trust Companies, have absorbed all -the savings business where the Mutual Banks had not already been -permanently established. - -Another reason that has enabled them to do this is the fact that -in most states there are no prescribed rules for the investment of -savings bank deposits, and the banks are using the savings deposits for -commercial purposes, and also in speculative ventures, particularly -in the way of underwritings where the profits are much larger than -could be realized from such funds if they were limited to investments -of the highest order where, as you know, the rates of interest are -comparatively much lower. - -MR. MERCHANT: How many such institutions are there? - -MR. BANKER: There are today thirteen thousand three hundred and -eighty-one State banks, with four hundred and fifty-nine million of -capital and two billion nine hundred million of deposits. - -Side by side with these state banks are 1,292 State Savings Banks, with -seventy-seven millions of capital and eight hundred and forty-three -millions of deposits. These State Savings banks differ only in name -from the regular State banks. The only point to be noted in this -connection is that the local statutes, or the laws of the State where -the bank is located, always determine whether the name will be a State -Savings bank, or a State bank. It may be assumed that whatever the -name, the business carried on is practically the same all over the -United States, with here and there some slight difference, but no -substantial variance. - -MR. MANUFACTURER: These institutions you have named do not include the -Trust Companies, do they? There seems to be a perfect craze to start -Trust Companies now. Why is that? - -MR. BANKER: Within the past twenty-five years there has grown up, -almost as if by magic, the class of banks you have just mentioned, -differing from State banks and State Savings banks only in one single -respect, but that is an all-comprehending one. Enterprising men in -almost every state have secured the passage of laws for what they call -a Trust Company business. Generally speaking, what you cannot do under -a Trust Company Charter is some kind of a business that has not yet -been thought of. - -There are 1,410 of such Trust Companies, so called, with capital -amounting to $419,000,000 owing individual deposits amounting to -$3,674,000,000 with $450,000,000 additional liabilities, or something -over four billion dollars, all told. - -This vast business has grown up outside of the National banking -system, simply because the National bank could not, but these other -institutions could develop along natural lines of business progress. - -Notwithstanding these obstacles, however, there is no kind of a banking -business that the National banks of the country are not doing in some -way or other. Of course, they are not all of them doing all kinds of -business, but they have worked out methods by which they can, if they -desire to do so. Of the 7,397 National Banks, nearly half of them, -3,039, are now doing a regular savings bank business, without any -express authority of law, and 2,340,226 depositors have deposited with -our National banks $659,500,000. - -Who is there who does not know that either downstairs in the same -building, or upstairs in the same building, or around the corner in -some other building, with the back ends of the two buildings adjoining, -many, if not all, the National Banks have attachments, where they are -carrying on the Savings bank business and the Trust Company business -under state charters. National banks are under National supervision, -while the State banks and Trust Companies, owned and manipulated by -them, are under State supervision, or possibly under no supervision at -all. - -There are many National banks holding the stock of other banks, either -Savings banks, State banks, or Trust Companies in their treasury, and -some of them are holding the stock of two or more banks. Only recently -it was discovered that a National bank had invested ten million -dollars, directly or indirectly, in other banks throughout the country; -possibly an examination would show that this ten million was partly -the stock of other National banks, and partly the stock of state bank -institutions such as Savings banks, State banks and Trust Companies. - -Now, if there is one holding company more to be criticised, and more to -be abjured than any other, it is a bank holding company, controlling -the stock of a great many other banks, particularly so under different -supervision. - -When we behold the malformation of banking as now carried on in this -country, due to the struggle of the various institutions to adjust -themselves to these new conditions and to take advantage of all the -opportunities in modern business, it reminds one of the crooked, -twisted, knotted, and sadly misshapen tree-trunk that has grown up -amidst and between huge rocks, that stand in the way of an upright -and symmetrical development. These huge bowlders and rocks are the -obsolete laws on our statute books, our ignorance, our selfishness, our -prejudice, our political cowardice and our demagoguery. - -Like our mutual savings banks, the original idea was that a Trust -Company could only do a Trust business in the strict sense of that -word. They could hold a railroad mortgage, and pay interest to the -bondholders, perform similar functions for other corporations, and -could act as a trustee in case of estates. Today you may assume that -no kind of business will escape the scope of the charter of the -so-called trust company, from the care of estates and the execution of -corporate trusts to banking in all of its forms, and agencies of every -conceivable kind. In other words, the all-round charter of the American -Trust Company, popularly so called, permits it to do anything that the -varied affairs of the American citizen may by any chance require. - -Just as there are in the east mutual savings banks, which are relics -of former days, so the Trust Companies, with their limited powers, -are only a landmark in the evolution of American banking, and must -disappear as a separate institution in time. - -The growth and development in fifty years has produced in the United -States a banking unit, doing in a conglomerate way what it ought to be -doing as a departmental business, with four distinct functions: viz., -a commercial business, the manufacturing of credit; a savings bank -business, accumulating the savings of the laboring masses, which is a -sacred trust fund that should be placed in high grade investments; a -trust company business, executing trusts, and carrying on agencies of -every kind; a note-issuing business, which is only another form of the -commercial business, as the bank note is in fact only another form, as -we have learned, of a deposit--a circulating credit in place of a check -credit for the convenience of the people. - -From Feb. 1, 1863, the birth of the National Bank Act, down to the -present time there has not been one single change in the National -Bank law worth mentioning. It is true we have dotted an "i" here, and -crossed a "t" there; but as for a substantial change there has not been -a single one made. Now, this is truly a most marvelous fact, when you -consider how great have been the changes, especially since 1890, or -during the past twenty-two years. Our banking resources have increased -fourfold. In 1890 they were about six billion, today they are more than -twenty-five billion. - -MR. LAWYER: This growth in our banking power is not so strange because -it only reflects the growth of our business. The clearings of the -United States in 1890 were only thirty-seven billion, while the -clearings this year must pass the hundred and seventy billion dollar -mark. The productions of the United States in 1890 were only seventeen -billion. The productions of the United States in 1912 will exceed -thirty-five billion dollars. The wealth of the United States in 1890 -was only sixty-five billion dollars. The wealth of the United States in -1912 is estimated at about one hundred and twenty-five billion dollars. -The imports in 1890 were seven hundred and eighty-nine million; the -imports the present year will be one billion eight hundred million; the -exports in 1890 were eight hundred and forty-five million; this year -our exports will exceed two billion three hundred million dollars. - -MR. FARMER: And do you mean to say with this vast, almost incalculable -increase of production and wealth and consequent increase of banking -resources, there has not been a single step taken by the National -Government to facilitate it? - -MR. BANKER: Mr. Farmer, there has not been a single change made to -facilitate the handling of this vast business. On the other hand, -there seems to have been such a profound ignorance on the part of -Congress, or such an abject fear, lest they might aid business, that -every progressive movement of a legislative character has been left to -the states, which have given us laws as varied as Jacob's coat of many -colors; indeed, rivaling the fifty-seven varieties of the famous pickle -man. - -Not only have they left the banking business to just "grow up" like -Topsy in Uncle Tom's Cabin; but the Government itself has been one of -the greatest obstructionists to the national growth of our banking -business in its interference with the natural movement of the money of -the country which by every economic law, and business right, belongs in -the channels of trade, and not in the strong boxes of the Government. - -MR. MANUFACTURER: That is absolutely true. I was greatly impressed -only yesterday by a statement made by the Secretary of the Treasury -right on that point of Government interference with current business by -withdrawing money from circulation and piling it up in the vaults of -the treasury. In the light of what we have learned during our talks, it -is simply appalling; indeed, it does not seem possible in a civilized -country. - -Secretary MacVeagh says in the outset, "No reform of your banking and -currency system can be adequate which does not take the United States -Treasury out of the banking business," and then adds: - -"When the independent Treasury system was established the idea was -that all the funds of the Government should be stored in the Treasury -vaults in the form of money, just as the mediæval war lords kept -their treasures in strong boxes. The independent Treasury system was -established in troublesome financial days, when the State banks were -not the safest places for the deposit of money. The people decided -that the public funds must be kept in Government vaults for safety. - -"In this country, with our rigid laws fixing the minimum reserves -the banks must hold, any loss of cash by the banks means an instant -contraction of their loaning power. If the banks of New York and -Chicago lose $100,000,000 cash, they must at once reduce their -liabilities by $400,000,000. This means that they must reduce by that -amount their loans to the business community. - -"With the volume of bank credit moving in the reserve cities four times -as fast as the volume of cash, and throughout the country ten times as -fast as the volume of cash, it is plain that the machinery of credit -is extremely sensitive to variations in the amount of cash held by the -banks. For this reason, an institution like the United States Treasury, -alternately accumulating and disbursing many millions of cash, is -likely to create widespread disturbance in the money market. - -"The funds held by the great European Governments vary from $25,000,000 -to $50,000,000. The coin, bullion, and paper money held as assets in -the United States Treasury during the present Administration has varied -from $300,000,000 to $350,000,000. In other words, nearly one-tenth -of all the money in the country is held idle in the Treasury vaults. -If this money were all deposited in the banks it would increase their -reserves 20 per cent. - -"The receipts and disbursements of the Treasury are most irregular. -The Treasury receipts in 1907 exceeded the disbursements by -$91,000,000. Two years later the disbursements exceeded the receipts -by $118,000,000. For the past two years receipts have again exceeded -disbursements. The general fund in the Treasury was $272,000,000 in -1907; three years later it had fallen to $106,000,000. Under our -present system of keeping a large surplus Government fund idle in the -Treasury these wide variations in the yearly balance not only seriously -disturb the money market and the business of the country, but force the -Secretary of the Treasury to enter actively into the money market as a -paternal overseer of the machinery of credit. - -"It not infrequently happens that surplus revenues accumulate in the -Treasury just at a time when the banks are straining their resources to -grant all the credits needed to finance a business boom. The Treasury -then takes money out of the banks and hoards it just at the time when -the country most needs it. If the business boom goes so far as to -strain credit to the breaking point, then the Treasury must come 'to -the relief of the situation,' by depositing some of its hoarded cash -in the banks. In recent years the Treasury has been carrying a large -surplus, and it has been in a position to relieve financial tension by -depositing funds in the banks. In December, 1907, following the money -panic, the special deposits in the banks by the Treasury had reached -$256,000,000. Three years later they were reduced to $4,000,000. In -the fiscal year 1908-1909, the Treasury withdrew $100,000,000 from the -banks. - -"This state of affairs places in the hands of the Secretary of the -Treasury a power greater than any American should have. The power of -the Secretary to influence the money market by deposits or withdrawals -of public funds is always dangerous. No Government officer should have -this power. It has been a great burden, I believe, on the shoulders of -every recent Secretary of the Treasury Department. - -"If the people realized how dangerous is the power in the hands of -the Secretary of the Treasury, they would insist that the Treasury -be at once taken out of the banking business. Accustomed as we are -to Government interference with the money market, few of us realize -how the Treasury in the past few years has exercised the central-bank -function of regulating the discount rate. The Treasury, by alternate -deposits and withdrawals of the public money in the banks, as well as -by other devices, has attempted to regulate the discount rate. - -"The Treasury Department should be divorced from the money market and -from the banking business, and the way to effect the reform is plain. -We should have in this country a quasi-public institution not only to -hold the ultimate cash reserves of the banks and to regulate the rate -of discount, but to act as the fiscal agent of the Government. Such an -institution would hold the Government balances as deposits, and the -Government could check against them just as any large business concern -checks against its balances in bank. With the Government balances -deposited in such an institution the business of the country would -never be disturbed by the Treasury hoarding up cash, and the Secretary -of the Treasury would no longer be forced to meddle in the money market. - -"As long as we have the present banking and currency system, we -shall have panics--and no longer. Does not this alone create a state -of emergency? What doubt should there be of the urgency of this -legislation? Why should it take another wasteful and degrading panic to -impress Congress? Why cannot 1907 suffice? There are many other things -of prime importance to be secured through monetary reform, but if -nothing were to be secured but emancipation from panics there would be -abundant imperative reasons for immediate action by Congress." - -MR. MERCHANT: This statement of Secretary MacVeagh proves absolutely -just what you said a moment ago, that the situation was appalling, and -when you realize that this practice has been kept up ever since 1846, -when the sub-treasuries were established, it is unbelievable. - -The Act of Aug. 5, 1846, declared it a felony to deposit public money -in banks. - -The United States Government has been committing an economic felony -ever since. It has been committing an economic crime against commerce -and the laboring interests of the country ever since that Act was -passed, and is doing it this very hour. - -The Act of Feb. 25, 1863, establishing National Banks, authorized -their use as depositaries of the public money except "receipts from -Customs." Forty-four years later the Act of March 4, 1907, struck out -the words "except receipts from customs." By the Act of March 2, 1911, -bank checks were made receivable for Customs dues, but no step has been -taken by the Treasury of the United States to make them so at New York, -Baltimore, Boston, Chicago, Cincinnati, New Orleans, Philadelphia, St. -Louis, San Francisco and Washington, where the United States Government -still has its morgues for our money. Every day the checks are presented -which are sent in in accordance with the law, and the actual money -is withdrawn from the channels of trade; that is, the United States -Government withdraws reserve money to the full extent of every dollar -that is due it. - -MR. LAWYER: While Mr. Manufacturer was reading what Secretary MacVeagh -said, I have been wondering what the people would do if the United -States Steel Corporation, the Standard Oil Co., J.P. Morgan or John -D. Rockefeller, or any of the railroad companies, or any other great -interest, should collect and hold in safe-deposit boxes hundreds of -millions of money, just as the United States Treasury does. - -MR. FARMER: I'll tell you what we would do. We would blow them up -mighty quick, and hang them to boot, that's what we'd do. - -MR. MERCHANT: Gentlemen, just think what it means to withdraw these -hundreds of millions of reserve money from the channels of trade, say -in the fall, keeping in mind that every dollar that the Government -grabs and withdraws, will support from five to ten times that amount -of credit. The withdrawal, as Mr. MacVeagh said, of one hundred -million dollars, means the contraction of from five hundred million to -a billion dollars; this is not only a fool's practice, but it is an -actual crime against the commerce of the country; a crime against the -producers, a crime against the laboring men of the country. - -MR. LAWYER: How long, O Lord, how long, shall we remain the laughing -stock of the rest of the world? But, let us see, can any man here give -me a single reason why the United States Government should not deposit -its money with the banks, precisely as all the other governments of -the world do? It seems to me perfectly clear that the United States -Government should treat its income precisely as this town does, this -county does, this state does. Is there any conceivable reason why it -should not act in this matter precisely as New York City, Chicago, New -York State and Illinois, and every city and every state does? - -MR. BANKER: Not one in the world. - -MR. MANUFACTURER: This discussion upon the development of banking in -the United States and the present treasury situation brings out the -necessary reforms most vividly to my mind from these two points of -view, the banks, and the treasury. - -_First_: Assuming that we are all agreed as to the result of our talk -last Wednesday night upon reserves, that they must be national to be -equal and adequate, our conclusions now are inevitable, (1) we must -give to the National banks the power to do a Savings bank business, as -well as a Commercial business; (2) we must give our National banks the -power to do a Trust Company business; (3) we must give our National -banks the power to issue a pure credit Bank Note precisely like that -issued by the Scotch Banks and the Canadian Banks, and was issued by -the five hundred banks in New England before the war. These notes will -go to the Clearing Houses every day with the checks and drafts to be -cleared at precisely the same time, and precisely in the same way. - -_Second_: We must take the United States Government out of the banking -business, so that its transactions will cease to be a disturbing factor -in the everyday affairs of the commercial world. - -MR. BANKER: You have outlined these necessary reforms splendidly, but -there are just two more points in this connection that must not escape -our attention. They are these: - -_First_: All these various forms of banking are distinct in character -and economically the funds of each perform a peculiar function that -must be recognized and observed or we shall make a great fundamental -error in constructing what we hope will prove a sound financial and -banking system. We must provide that the commercial function, the -savings function, the trust function shall be kept apart by separating -the funds arising from each, and keeping them completely segregated, in -order that the country may always know just what its commercial fund -is, as distinguished from its investment fund. - -_Second_: There is such a great demand for Farm Mortgage Loans by those -who are pursuing agriculture that I am convinced that some provision -should be made whereby the farmers of this country could obtain -money upon their lands, as cheaply as our great railroads and other -corporations are able to do. I have given this matter much study, and -as you gentlemen are aware, I am a member of the Committee appointed by -the American Bankers' Association to investigate and report the best -method possible to accomplish this purpose. Therefore I think that we -had better consider it here. - -MR. LAWYER: I am in perfect accord with what you are aiming at, but it -is almost eleven o'clock. - -MR. LABORINGMAN: I have been waiting patiently to see whether you -gentlemen were going to provide in some way for coöperative credit, but -up to date, you've not peeped a word. - -MR. MANUFACTURER: Both of these subjects are really outside of a -financial and banking system, the particular thing we set about -creating. However, I am perfectly willing to take a night to discuss -them, and if we should find that either or both of them should -constitute a part of our plan I am ready to adopt them. - -MR. BANKER: All right, I am agreed, and I think we all are agreed that -it is not only fair, but advisable, that we take up the whole subject -next Wednesday night. - -UNCLE SAM: Do you know, boys, I am really proud of the work you are -doing; you've gotten on swimmingly. You have shown such fine moral -courage in caving in when you found out that you were wrong instead of -playing the part of the jackass that has not intelligence enough to -discern when he is in error, and too obstinate to change, if he happens -to find out by accident that he is wrong. - -MR. MANUFACTURER: Uncle Sam, I am a Democrat, and I look upon that as a -personal stab. - -UNCLE SAM: Just wait a minute, or playing the part of the elephant, -that is so turgid, or possibly designedly stupid, or so calm and by -self-satisfaction lulled into a conservatism that amounts to reaction, -and therefore refuses to move. - -MR. MERCHANT: Well, I'm a Republican, and that looks like a slap at me. -However, I guess Uncle Sam is just in for a housecleaning tonight. - -UNCLE SAM: You're both all right, personally, but your organizations -have been in wrong until just now there seems to be a patriotic -soul-awakening, and it's up to you to redeem them, or there will be -a housecleaning, and don't you forget it. I want men; men who have -intelligence and conscience; men who are capable and have convictions; -men who have moral courage; men who will fight if necessary to have -peace; I mean that peace that rules only when right prevails and -justice reigns. - - Good Night. - - - - -TWELFTH NIGHT - -LAND CREDIT BANK - - -UNCLE SAM: Boys, by unanimous vote we agreed at our last meeting to -devote tonight to the subjects that seem to lie close to the hearts -of Mr. Farmer and Mr. Laboringman. You will remember that Mr. Farmer -insisted that our work would not be complete unless we included in our -plan a Land Credit Bank, while Mr. Laboringman declared that he had -waited patiently to hear what we had to say about coöperative credit, -but in vain. - -Since Mr. Farmer is a member of the committee appointed by the -agricultural society of his State to investigate the subject of Land -Credit Banks, I presume he is loaded to the guards and can tell us all -about it, and convince us, too, that he is right in his contention. I -suggest that we let him lead off tonight. - -MR. FARMER: Well, gentlemen, I can assure you of my confidence of my -ability to convince you of the importance of recognizing my contention; -but I shall have to ask you all to be patient and agree to assist me in -working out the plan that is best adapted to our needs and conditions. -In studying this aspect of the banking problem, I think it will be -well to follow the steps of development up to date, just as we have in -considering other phases of this question, because experience is our -surest guide to tell us what not to do as well as what we ought to do. - -In the outset, however, I want to call your attention to the fact, -that there is no subject of broader interest and more world-wide -discussion than the productivity of the soil. You are all aware, no -doubt, that there has been established at Rome the International -Institute of Agriculture, and that last summer fifty different -governments were represented there. Hon. David Lubin, of California, -represented this government. The President of the United States became -intensely interested and with the help of our foreign representatives, -particularly Hon. Myron T. Herrick, Ambassador to France, a vast amount -of most valuable information has been gathered, studied, digested and -classified. I think that we are now ready to take the matter up and -legislate upon it. Our interest ought to be greater and more intense -than that of any other nation on account of the number of our people -engaged in agriculture and the staggering interest rates they are -paying. Think of it. - -The 12,000,000 farmers of the United States are adding over -$8,400,000,000 to the national wealth each year. They are doing this -on a borrowed capital of $6,040,000,000, on which $510,000,000 of -interest is annually paid. Counting commissions and renewal charges, -the rate averages at 8-1/2 per cent for this country as against 3-1/2 -or 4-1/2 per cent for Germany. If the American farmers had a thoroughly -organized system of coöperative associations they would not only -save this difference of $200,000,000 or $250,000,000 to themselves -individually, but in the course of time the entire debt would be -transferred to the societies, the interest paid to them, an economic -waste stopped, and this stupendous sum restored to agriculture. The -assertion is neither fanciful nor extravagant. It is below the actual -ratio obtained by a comparison with the German figures. - -There is practically no limit to the amount of capital that could be -advantageously employed for rehabilitating worn-out and abandoned -farms, opening up new areas, and introducing modern methods of -cultivation; and it is of vital importance that this capital be -obtainable at once in sufficient volume and on easy terms. The -world-wide problem caused by the pressure of population upon the -means of subsistence now confronts the United States in the very face -of its matchless natural resources and vast acreage of arable lands -still remaining untouched by the plow. The $385,000,000 of foodstuffs -exported last year barely equaled 76 per cent of the annual interest -charges on the debts the farmers owe. - -The cause of the trouble is the lack of capital, and the remedy lies -in financing the farmer and the landowner. This is the indisputable -conclusion logically reached from examination into the actual -conditions and from comparisons furnished by recent European history. -The solution of the problem concerns the general welfare as much -as does the currency and monetary reform, and it is gratifying to -note that it seems destined to go side by side along with this -undertaking. For as soon as the alarm was sounded the best talent of -the nation became enlisted, and now bankers, merchants, professional -men, legislators, and private individuals in town and country, many -impelled purely by patriotic and disinterested motives, have combined -their efforts to better the situation before it pass to the acute and -critical stage. - -The only instrument by which land-mortgage banks can finance -themselves, draw money from the public for investment in loans, are the -debenture bonds, but these bonds will not circulate freely nor far from -the place of issue unless they are known to have the same underlying -values and give the same rights to the holder, regardless of whether -they be secured by mortgages in Texas, Massachusetts, or in any other -State. But possessed of these characteristics as guaranties of law, -there is no reason why debentures of large mortgage banks should not be -listed in stock markets and sold, negotiated, and exchanged as readily -as railway and municipal securities, and thus equalize and reduce -interest rates for farmers throughout the country. - -For our guidance that we may escape all cost of experience that has -been paid for by others, I am going to give you the benefit of my study -of the Government report upon this important subject and quote it -extensively as the best authority we have. - -You must all realize that this almost complete organization of land -and rural credit in advanced European nations was not a haphazard -and spontaneous growth. It was brought about by the insistence of -public and private individuals, philanthropists, scholars, bankers, -legislators, agricultural societies, government commissions, and -national assemblies, all studying and working in a common cause. The -history of their efforts in the middle of the past century reads much -like an account of the agitation which has been started in the United -States by the American Bankers' Association, the Southern Commercial -Congress, the Federal authorities at Washington, and other bodies -and individuals, for financing the farmer, improving agricultural -conditions, and encouraging the movement back to the soil. In Europe -the agricultural banks and credit facilities were created before -agricultural or even general education was attempted. The United -States began at the opposite end. The American colleges and systems -for teaching agriculture are among the oldest and best in the world, -and millions of dollars have been appropriated by the Federal and -State Legislatures since the passage of the Morrill Act in Lincoln's -administration to aid this science in one way or another. Incalculable -good has come therefrom, but the results would have been far greater -if financial education had gone hand in hand with this work. It would -have led to the study and introduction of the rural banking methods of -Europe generations ago, and so familiarized the American farmers with -the uses of credit that the lack of capital and excessive interest -rates would not now be interfering with the agricultural development of -the country. - -The development and history of Land Credit banks in Germany is most -interesting and is as follows: - -The land-mortgage banks are either joint-stock corporations or -societies of borrowers. These latter are typified by the well-known -German Landschaften, and are the originals of all land banks. Before -them the private money lender reigned supreme. The organization of land -credit, in fact, began with them. They undoubtedly also suggested the -coöperative idea to Herr Schulze, because five, with nearly $60,000,000 -of mortgage loans, were in existence in 1848, when he was trying -to start his personal-credit society at Delitzsche. These peculiar -institutions are associations of landowners, and have no shares and -pay no dividends, the profits, if any, going to reduce the loans; and -since they and their borrowers are identical, and managerial services -gratuitous, they have been able to lend money at lower rates than any -other kind of companies. - -The establishment of the old Landschaften was the outcome of the -indebtedness and distress of the nobility, and their membership in -Germany is still composed mainly of that class and large landed -proprietors. After the Seven Years' War the nobles, who owned nearly -all the land, lacked the working capital necessary to repair and -cultivate their damaged estates, and so were unable to pay their -creditors. Frederick the Great ordered the suspension of interest on -all estate debts for three years. The period was subsequently extended. -The result was the withdrawal of the money lenders from agriculture, -the rise of interest to ruinous rates, and a financial stringency that -involved the public welfare. In order to relieve the situation this -autocratic King decided to adopt plans that had been submitted by -Herr Bühring, a Berlin business man. Accordingly, in 1769, by a royal -fiat, he forced the nobles of Silesia to join an association whether -they wished to borrow or not, and their lands were made jointly liable -without limit for all loans granted by the association. Loans were -granted only upon the consent of the directorate elected by the members -themselves. Great care was naturally exercised, so no losses occurred, -while immense credit came to the association. - -This was the first Landschaft. Others were formed in the same fashion. -Nine more were formed by the Provinces and one voluntarily. Then two -companies were organized on the coöperative principle, so that there -are now twenty-five Landschaften. The mortgages held by them, all on -farm lands, exceed $500,000,000, and the interest rate runs as low as -4 per cent and 3.5 per cent per annum. The bonds by which the money -for these loans were obtained are secured by the mass of underlying -mortgages and general assets of the issuing association, and ultimately -by the unlimited liability of all its members. The collective guaranty -and the fact that loans are made only to members constitute the -characterizing features of a true Landschaft; but there is a growing -tendency to limit this liability and substitute reserves in place of it. - -Originally a Landschaft did not give cash to a member in exchange for -his mortgage. It gave him a bond which simply contained a promise to -pay in the event the interest and principal could not be collected from -the debtor. The bond was of the exact size of the mortgage, primarily -secured by it, and made payable to bearer on a few months' notice. In -case of default the holder had to resort to foreclosure proceedings, -so the bonds had only a limited circulation, and were often sold below -par. This was but a slight advance on private money lending. Later the -associations undertook to collect the interest and principal. Finally -they assumed direct responsibility, and began to give cash to members -for their mortgages, raising funds for this purpose by issuing and -selling bonds of even denominations for large and small amounts. The -practice of requiring mortgages to be paid in lump was abolished, and -in place thereof the loans were made repayable by annual installments -running through a long period of years, and the installments were -set aside for redeeming the bonds. These steps brought about a -complete revolution in land credit and marked the beginning of the -land-mortgage business as it is known today. The whole theory of the -organization of land credit is based upon this debenture bond and -system of amortization and sinking funds devised and introduced by the -Landschaften. One without the other two is useless. The three must be -combined, and also coupled with strong management under wise laws -in order to attract a steady flow of cheap money to agriculture. It -is remarkable that this truth has never been realized nor applied in -the United States to farm-mortgage loans. In spite of the example of -practically every nation in Europe for generations, the lending of -money on mortgage in America still remains largely a mere brokerage -business unrestricted by proper governing laws, either by individuals -or corporations, while mortgages continue to be drawn up for three or -five years, when experience shows that the average life of a loan is -far in excess of that period and needs to be renewed time and again, -with added expense to the debtor and trouble for the creditor. Had -the European amortization system been employed the companies dealing -in western farm mortgages between 1890 and 1894 probably would have -escaped the misfortunes that brought them down to ruin. - -Amortization is simply a method of paying off a loan by returning a -little of the capital each year. These payments are called annuities -and are composed of the interest and contributions to the sinking -fund and the cost of conducting business. They are calculated for -periods of ten to seventy-five years, and at the end of the period the -mortgaged debt becomes extinguished and the property returns to the -owner free and clear of all encumbrances. The prevailing interest rate -on amortizable mortgages in France at present is 4.3 per cent. But by -adding a little over 3.2 per cent to this, and paying 7.5 per cent a -year, a French farmer can extinguish his debt within twenty years and -obtain a satisfaction piece in full from his creditor. Thus, suppose he -borrowed $10,000. He pays $750 annually twenty times for the interest, -sinking fund and expenses. This makes a total of $15,000, interest -included, and his debt is paid off. A farmer in the Southwestern States -would pay this much for interest alone, and his debt would still be -unsatisfied. Amortization has a two-fold value. It lessens the debtor's -burden year by year and increases in an equal ratio the security -of the lender, provided, of course, the sinking fund created by the -accumulated annuities be properly and honestly kept for the redemption -of the debentures. The Landschaften were very particular in this -respect. Hence, their debentures obtained the confidence of the public, -and through their means they were able to draw capital from all parts -of the country for distribution among their members at the lowest rates -on record. If a holder of a bond wished his money back he had merely -to sell his bond in the open market. In this way fluidity was given -to real estate securities for the first time in history and the dream -of "mobilizing the soil" accomplished at last. For these reasons the -Landschaften hold the most prominent place in the literature on land -credit, and everybody who studies that subject must begin with them. - -The old Landschaften, however, have many characteristics peculiar -to their own localities and dates of their foundation. They are in -fact governmental institutions, and their head officers are public -functionaries clothed with summary executive and judiciary powers over -the property, and, to some extent, over the actions of their associate -members. These powers were simply an enlargement of the feudal and -manorial rights possessed by princes in early times, and so, in many -respects, are contrary to modern ideas. But the new Landschaften, which -have adopted the best principles, present points worthy of careful -study. A description of these latter institutions is taken from the -excellent report of Sir F.A. Nicholson to the Madras Presidency in -India. - -These new institutions are of different patterns. Several are annexes -to the older societies, but most are independent and resemble ordinary -mortgage banks, except in the essential point that they have no share -capital, earning dividends. They are, as the old societies, simply -syndicates of borrowers formed to supply proprietors with capital on -the lowest possible terms and repayable in the easiest manner. They -are gratuitous intermediaries between the outside capitalists and the -borrowers, and while performing services of the highest importance -in testing the security offered by the borrowers and in guaranteeing -to the public the safety of the capital lent by them, they charge -absolutely nothing for their services beyond a small commission, -perhaps one-fourth of 1 per cent, or even one-tenth of 1 per cent, -to cover actual expenses. It is usual for each association to be -restricted to a particular area of operations within which every -proprietor, whether noble or peasant, may obtain a loan if he can offer -sufficient security. There is always a minimum limit either to loans -or to the value of property on which loans will be given. This is -usually low. In the new Brandenburg Landschaft, affiliated to the old -Kur-und-Neumark Landschaft, loans may be granted on property having a -net income of only $25. The minimum limit is seldom even approached. - -Members are those who borrow from the bank. They are generally -responsible in all their property, not merely for their own borrowings, -but for the debts of the society to the outside public. But in some -cases only the property pledged to the society is responsible; in -others they are bound, in case of need, to pay a sum proportionate to -the amount of their own borrowing. There are no shares to be paid up -except in two societies. These two resemble coöperative societies, for -the shares are personal and nontransferable, are of unlimited number, -varying with the number of members, and their value is claimable by a -withdrawing member. The share seems to be demanded simply to provide -a first working capital and the nucleus of a reserve. The amount of -the share is frequently a certain percentage of the amount of the loan -required. Some societies demand an entrance fee of a few cents, which -goes to the reserve. This reserve will be dealt with below. - -The societies in general, having no share capital, do not lend their -own funds. The candidate for a loan asks that debentures may be issued -against a mortgage of his property. This is then examined. If the -security is approved the candidate executes a mortgage deed to the -society, which thereupon issues debentures which are placed on the -market and, being sold, provide the funds for the loan. In the old -banks the debentures are simply handed to the borrower, who sells them -for himself. In the new land banks either this is done or the bank -sells them and pays the borrower the value if below par, or if they -sell above par then the face value, the surplus going to the reserve; -or they simply issue debentures on the market and pay the borrower the -amount of the loan as settled. It will be seen, then, that the banks -have no capital and no need for it. - -The debentures are for the usual class, secured not by the particular -mortgage on which they are issued, but by the whole mass of mortgages -held by the bank and by all its proper forms of security, viz., the -property of the members, the reserve or guaranty fund, and even the -sinking funds. In some banks a debenture holder has the right (never -needed, however) of requiring a court to assign a particular mortgage -against his debenture as a specific security in case the bank should -fail to pay him his interest or capital due. A debenture holder cannot -demand payment of his debenture, except when it is drawn for payment. -But the bank can call in any at six months' notice, besides withdrawing -them by lot in the usual way. These debentures enjoy an excellent -position, the 4 per cents selling usually at or above par. Since -cheapness of loans is the sole object of the bank, it is customary to -call in debentures selling at a premium and issue a fresh series at a -lower rate. - -Loans are usually applied for to the district committee which each -bank has, with a statement of the property, the amount required, and -all documents necessary to prove title and freedom from encumbrance. -Properties may be valued by a special valuation, or a multiple of the -net income as assessed to the land tax may be taken. In both cases, -however, an inspection of the property is necessary unless under a -special rule. Half to two-thirds of the estimated value is allowable -as a loan. The interest paid by the borrower on the loans is that paid -by the bank on the debentures, the bank being merely an intermediary -between the borrower and the actual lending public. But where the -bank pays the loan in cash it charges such interest as it thinks -proper, in order to make up any loss should the debentures sell below -par. Loans are repayable almost entirely by amortization, usually -in about fifty-three years. Some short-term loans are granted, with -corresponding debentures. The bank cannot demand repayment of a loan -except in case of waste, deterioration, or the like. On the other hand, -the borrower is at liberty to repay in whole or in part whenever he -pleases, but must pay the entire interest for the half year in which he -repays. The loan is repaid by an annuity consisting of the interest, -sinking fund (usually beginning at one-half of 1 per cent), with a -contribution to the reserve or guaranty fund, and another for the -expenses of administration. The annuities have totaled 6 per cent, but -they now average around 4 per cent or lower; e.g., interest being 3 per -cent, sinking fund one-half of 1 per cent, guaranty fund one-fourth of -1 per cent, and expenses one-fourth of 1 per cent. Some of the banks -also require a lump payment on the grant of the loan of 1 or 2 per -cent, to be credited either to the working or to the guaranty fund. The -working fund is formed by the contribution made for the expenses of -management and any special sources. - -Hungary is the only nation outside of Germany that has a true -Landschaft of the original type. But modified forms exist in Russia, -Austria, Switzerland, Denmark and Roumania, where they have been -useful in supplying agriculture with cheap capital. There is no older -principle in land credit than the Landschaften idea. It has been tested -and proved by over one hundred and thirty years of success, and could -undoubtedly be employed to advantage by water users' associations in -the irrigated regions of the West and in other parts of the United -States where landowners might unite to raise funds for drainage -or other improvements for their common good. Some of the banks of -Switzerland and the credit associations of Denmark, with the laws -governing them, perhaps furnish the best models, as appears from the -reports of the American ministers to those countries that have been -forwarded to the Secretary of State. - -The most noticeable fact revealed by the investigation of the European -land-credit institution is the all-pervading presence of the state -in every nation. Most of the older joint-stock corporations have a -public character equal to that of the German Landschaften. Every one -that dates back to 1850 or 1860 was directly organized by the state or -brought into existence by a Government fiat or favoring legislation, -subsidized in some way or other and granted special privileges. The -supervision now exercised over them all is most stringent, going into -the minutest details and varying from direct control to surveillance by -state officials, usually by special laws that impose heavy penalties -for malfeasance or even neglect of regulations. Continental Europe -is accustomed to state intervention. Commercial credit was organized -by means of central banks connected with the Government, and so this -régime was naturally followed in organizing the land credit. For this -reason the results obtained, at least in some instances, cannot be used -by way of comparison to illustrate the possibilities of organization -along the lines of private and independent endeavor. - -But whatever may be the opinion entertained for the State intervention -in the land-credit system of the Continent, there can be no doubt -that the working principles and business methods of the European -land-mortgage banks are the best ever devised, and that they will -have to be introduced into the United States if it be hoped to make -the farm mortgage a fluid and popular form of investment and direct a -flow of capital in sufficient volume to agriculture to enable it to -keep pace with the progress of the Nation. The main features of this -system are the limitation of the interest rate that can be charged, -the amortization of the debt, and wise and equitable regulations and -restrictions relative to loans and the issuance of debentures which -protect the farmer from extortion and thriftless borrowing, and at the -same time bring safety and a feeling of confidence to the investing -public. These features, with modifications and additions, appear in -all European land banks, whether they be semipublic, as they are in -France, Spain and Russia, or of a private character, as with some cases -in Germany, or of the mixed type of Switzerland and Italy, but are best -exemplified in the great Crédit Foncier of France--the largest and most -successful land bank in the world. - -But Germany has progressed very decidedly beyond the so-called -Landschaften as exemplified by her great mortgage banks which, -though of comparatively recent operation, largely exceed in business -that of the Landschaften type, and it is here that we find many -vital suggestions for our guidance. Germany has general laws under -which these mortgage banks operate, but the rules of operation -and supervision are of the strictest kind. The mortgage banks of -Europe may be classified generally as public or semipublic, and as -strictly private institutions. The first have just been described. -The latter are all those which, whether they consist of lenders or -only of borrowers, operate under general laws and have absolutely -no privileges. The State, however, does not leave these companies -entirely to their own devices. They are limited in the conduct of -their business by strict rules and regulations, and are subject to the -most scrutinous supervision. The best law of this kind is that enacted -in Germany in 1899. It is the last word in legislation for private -joint-stock mortgage banks, and with slight modifications could be -easily adapted to the United States, as it was framed to overcome the -troubles occasioned by the conflict of authority between the sovereign -Provinces of which the Empire is composed. Remarkable as it may seem, -these companies in Germany have outstripped the old established and -specially privileged public banks. They now have $2,618,000,000 loaned -out on mortgage, or over five times more than the Landschaften. The -capital is $170,563,000, the smallest being $238,000 and the largest -$14,000,000. The bonds in circulation amount to $2,548,009,000, with -interest at 3-1/2 or 4 per cent per annum, while the average returns -on mortgage loans are 4.22 to 4.33 per cent per annum. As 6 per cent -and even 14 per cent dividends are yearly declared, the figures again -furnish a favorable comparison with the Landschaften and Crédit -Foncier. The provincial head, however, selects the president of one -of these newer German banks, while the Imperial Government watches -over them all. The supervision is carried out by royal commissioners -and extends to the minutest detail. These inspecting officials have -the right to verify the securities and cash on hand, and demand -information regarding every separate transaction. They may also send a -representative to general meetings of stockholders and to sittings of -boards of directors and take all measures that may seem fit to enforce -the proper conduct of business. They also approve the appointment of -the auditor and assistant auditor, who are charged in each bank with -the duty of seeing that debentures are issued only upon the conditions -and within the limits legally prescribed. - -It will be observed that the mortgage business in Germany, as carried -on today, is an evolution. The same fact is evident in the changes that -have taken place in the Crédit Foncier, the greatest mortgage bank in -the world. The history of this great institution is as follows: - -It was formed in 1852 under the law enacted that year for organizing -land credit and improving agricultural credit facilities. It was -immediately placed under Government control, given a subsidy, and -granted a monopoly for twenty-five years. The monopoly was not -renewed, but all its original special privileges remain, which perhaps -accounts for its being the only land bank in France. Its relation with -the State is very close, and many of its most important features were -taken bodily from the Landschaften. Inasmuch as the institution has -been the model for all Europe and is now being widely discussed in the -American press, I will describe it at length. - -The governor and two subgovernors of the Crédit Foncier are appointed -for life by the President of the Republic. It is subject to the -surveillance of the Treasury Department of the Government, and three -of its directors must be high officers of the department. It may use -the Government treasuries for the receipt of its dues and the deposit -of its surplus funds and enjoys a reduction in stamp and registration -duties. - -Its debentures are registered or payable to bearer, and the claim of a -third party to them cannot be made in court except in case of theft or -loss. Trust and public funds may be invested in them. Its mortgages are -exempt from the decennial registration and consequent charges required -of other mortgages. It has a cheap and speedy method of "purging" the -title of real estate in case of disputes. In the event of default the -courts cannot grant the debtor any delay and payments due it upon loans -cannot be garnished or attached. It is allowed summary proceedings for -attaching mortgage property in case of violation of contracts. If dues -are not paid or if the property deteriorates it may attach and sell -the property simply upon notice and publication. During attachment -proceedings it has a right to all returns from the estate. The sale may -be by auction in a civil court or at a notary public's office, if the -court permits, and no adverse claim to the proceeds of the sale can be -allowed until its claims are fully satisfied. - -The regulations under which the Crédit Foncier transacts its business -are very strict. The mortgage loans must be first liens. The property -must have a clear and unencumbered title and yield a certain and -durable income. Loans and theaters, mines, and quarries are not -accepted. The amount loaned on any property must not exceed half its -value, or one-third the value for vine-yards, woods, orchards, and -plantations. Factory buildings are estimated without regard to their -value for particular purposes. A borrower cannot bind himself to -pay a greater annuity than the total annual income of the property -mortgaged, while on the other hand the society is not allowed to charge -borrowers 0.6 per cent over the rate at which it obtains money on its -debentures issued at the time of the loans. An excess of only 0.45 per -cent is allowed on loans to municipalities. The outstanding loans and -debentures issued must exactly correspond in amounts. - -After paying a 5 per cent dividend the Crédit Foncier must set aside -between 5 and 20 per cent of the balance of the profits each year for -the obligatory reserve, and continue to do so as long as the same -does not equal one-half of the capital stock. The investment of this -reserve is left to the board of directors. The capital stock of the -society must be always maintained at the ratio of one-twentieth or -more of the debentures in circulation and is the primary guaranty of -its obligations, especially the debentures. The capital at present is -$40,000,000, divided into 400,000 shares of $100 each; but authority -has been obtained to increase the same to $50,000,000, represented by -500,000 shares, which will be done before the debentures in circulation -pass the legal limit. One-fourth of the capital must be invested in -French rentes or other treasury bonds; one-fourth in office buildings -of the society, or by loans to French colonies, or in securities -deposited with the Bank of France as a guaranty for advances. Shares -cannot be issued at a price below par. They are nonassessable. The -surplus may be loaned on mortgages or to municipalities or may be used -in other mortgage business allowed by the statutes; and for buying its -own debentures, making advances to borrowers in arrears, or purchasing -mortgaged property in foreclosure; and for acquiring commercial paper -acceptable by the Bank of France or securities to be deposited with -that bank. - -The governor of the Crédit Foncier most be the owner of at least two -hundred shares of stock of the society. He receives a salary of $8,000. -The subgovernors must hold one hundred shares each. Their salaries -are $4,000. They perform such functions as are delegated to them by -the governor, and in order of their nomination fulfill his duties -during his absence on account of illness or other causes. The governor -appoints and dismisses all agents of the society and superintends the -organization of the service in Paris and elsewhere. He countersigns the -debentures and signs the share certificates and all other papers and -documents and must strive to promote the interests of the society in -every way. The governor is the head of the board of directors, which -is composed of himself, the two subgovernors, the auditors, and twenty -to twenty-three directors. This body possesses the administrative -powers of the society and is beholden only to the laws and the general -assembly of the stockholders for the proper exercise of the same. The -three auditors are the guardians of the society. Their duties are to -watch, investigate, and make reports. The only power they have is to -call extraordinary general meetings of the shareholders. - -The general assembly of the stockholders meets regularly once a year. -It consists only of the two hundred largest stockholders, of whom forty -make a quorum if they hold one-tenth of the stock of the society. Each -member has one vote for every forty shares of stock held, but cannot -cast more than five votes in his own name, nor more than ten in his own -name or by proxy. He has, however, a right to one vote even though his -shares be less than forty in number. The general assembly receives the -report of the governor, and also of the auditors, if any. It elects the -directors and auditors and decides on all resolutions or proposals for -the increase of capital, the amendment of the by-laws and constitution, -and generally on all matters not otherwise specifically provided for. - -The only places outside of France where the Crédit Foncier can do -business are Algiers and Tunis. Under a clause in its charter which -allows it, with the sanction of the Government, to enter into projects -for improving the soil, developing agriculture, and to extinguish -existing debts on real estate, etc., the society has been authorized -to finance drainage projects and to advance money on the paper of -the Sous-Comptoir des Entrepreneurs, an incorporated association of -builders. It may also receive deposits up to $20,000,000, one-fourth of -which must be kept in the Government treasury and the balance invested -in Government paper, treasury bonds, or high-class bankable commercial -notes and securities. In connection with its banking house it has large -deposit vaults. - -The Crédit Foncier is permitted to take short-term mortgages and does -a big business in that line. But the true purpose of its existence -and the greatest part of its operations are the granting of long -time loans. These are made on mortgages to individuals and without -mortgage to municipalities and public establishments. The periods run -from ten to seventy-five years. The annuities required to be paid -for amortizing the loan for the average period used are so small as -to appear insignificant. The success achieved by the Crédit Foncier -in popularizing the amortization principle for real estate loans is -the chief cause of its great renown. At present its interest rate for -mortgage loans is 4.3 per cent per annum, for public establishments -4.1 per cent, and 3.85 per cent for municipalities. The total annuity, -including both interest and amortization sum, for a twenty-five year -mortgage loan is a little over 6.5 per cent. With this small annual -payment the debt is gradually wiped out, and nothing is left to be -paid at the end of the term. The longer the term the smaller the -annuity, and vice versa. The loans now exceed $870,000,000. Here is an -amortization table of the Crédit Foncier: - - -_Annuity of a capital of $100, interest at 4.3 per cent, payable -semiannually._ - - Duration. Annuities. - 5 years $22.440405 - 10 years 12.409111 - 15 years 9.115217 - 20 years 7.504843 - 25 years 6.566976 - 30 years 5.964436 - 35 years 5.552593 - 40 years 5.259040 - 45 years 5.043495 - 50 years 4.881753 - 55 years 4.758395 - 60 years 4.663140 - 65 years 4.588881 - 70 years 4.530558 - 75 years 4.484483 - -The Crédit Foncier is obliged to keep the interest and amortization -payments in separate accounts, the latter going to create a sinking -fund for the retirement of outstanding debentures. As stated above, -the amounts of the loans and debentures must balance each other; -consequently, as loans are paid up debentures must be paid off. -Borrowers have the right to pay in advance, which they frequently -exercise, so the proper adjustment of the balance is beyond the control -of the society. It is for this reason that the debentures, although -calculated to be redeemed synchronously with the loans they represent, -have no fixed time for maturity and are recallable at option. In each -issue a certain number are repayable by lots, with prizes for the -lucky holders. A bond last year drew a prize of $40,000. The right to -give prizes at the lottery drawings is one of the special privileges -of the society. The debentures are of two kinds--those representing -the mortgages are called "foncières" and those representing the loans -to municipalities and public establishments are called "communales." -They are issued in series. The smallest denomination is $20. They may -be bought by installments and are the most popular form of investment -in France, being held largely by farmers and poor people in the -cities. The issue of 1912 for $100,000,000 at 3 per cent, payable -within seventy years, was oversubscribed eighteen times. The total -land mortgages and municipal indebtedness in France is figured at -$2,800,000,000. Nearly one-third of this is represented by the loans of -the society. - -Such is the Crédit Foncier of France. The control exercised over it by -the State through the appointment of its head officers, the simplified -foreclosure proceedings, and the other judicial, administrative, and -fiscal privileges accorded to it are common practices in continental -Europe. As mentioned above, all the older banks are specially -privileged, and consequently have a practical monopoly of the -mortgage-bond business in some of the nations. - -Now, gentlemen, I have gone into these details not to be slavishly -copied, because I think we would make a very great mistake to load down -our legislation with so much detail. It will be far better to allow -the managers to work out a system of operation that will he suited to -our conditions. In this way we will not be handicapped by red tape -that is ill adapted to our situation. The same penal laws that are -in force with respect to our national banks with any additions that -the peculiarities of this business call for ought, it seems to me, to -suffice. - -My suggestion would be a comparatively simple organization with broad -powers to the board of directors. In this way we will soon have an -American system of Land Credit Banks superior to any in the world, -even though we do start after all others have begun. Indeed, if we are -wise, this is the very reason why we should surpass all others. - -Now, if you will recall with me the points of change and progress made, -you will find that the tendency is away from unlimited liability, as -originally provided, and now toward a dependence upon capital and -reserves solely for protection to the debenture holders. - -In my judgment we should adopt the following as the basis of our Land -Credit Bank: - -_First_: We should confine the business to loans upon improved -agricultural lands. - -_Second_: We should make the institution strictly coöperative, but with -a limited liability to the amount of the paid-up capital. - -_Third_: Every local association, or primary unit, should be an -association of men within a restricted locality and the business should -also be confined to the immediate vicinity of the association. - -_Fourth_: I do not believe that the membership of a primary unit should -be less than twenty-five, nor more than fifty. - -_Fifth_: I think that the capital of a primary unit should not exceed -$25,000, and that the shares should be $100 each. No person should own -more than two hundred and fifty shares, or 10 per cent of the capital. - -_Sixth_: All loans made should be recommended by the local association. -In case of a loss by the sale of property taken over, one-quarter of -such loss should be borne by the primary unit, of local association, -making or recommending the loan upon which the loss was made. - -_Seventh_: All expenses connected with the examination and -recommendation of a loan shall be paid by the primary unit, or local -association. - -_Eighth_: The application for a loan should then go to a state -organization, which should be created by a union of all the local -associations. I suggest a central organization in each state for the -purpose of lessening the expenses over the entire state, as the laws -affecting real estate in the several states have some peculiarities to -those states. - -_Ninth_: Each state organization should have charge of all the business -done in that particular state; the examination and final approval of -the security; the examination and approval of the title; the collection -of all interest; the payment of all taxes and insurance, and the final -repayment of the loan. - -_Tenth_: The state organization should be a union of all the local -associations in any particular state, and should hold one-quarter of -the capital of all the local associations as its own for the purpose of -carrying on the business of that state. - -_Eleventh_: All property upon which loans are made should be conveyed -absolutely to the state institution where located with a waiver of all -rights of foreclosure; but, providing for the advertisement and sale of -the property, as if a judgment had been rendered. This is essential to -save the cost of foreclosure. - -_Twelfth_: In case of a loss, as the result of the sale of any real -estate taken over, one-quarter of it shall be borne by the state -organization. - -I make this provision because no local association could carry all -its losses, and yet it should be responsible for a sufficient amount -of loss to impose a serious obligation upon the local association -recommending the loan, and also a serious obligation upon the state -institution for having finally approved and completed the loan. - -_Thirteenth_: All the expenses of the state institution incurred by way -of caring for the business of all the local associations should be paid -by a percentage charge on all the business done in the state. This is -desirable so that the mortgages shall go to the national organization, -free and clear from any charges and obligations whatever. - -_Fourteenth_: I would have a national organization which should fix the -rate of interest to be paid by the borrowers, and the rate of interest -of all the bonds and debentures sold. All bonds and debentures should -be sold by the national organization, which should be under national -supervision for the purpose of giving to the debentures the highest -possible credit wherever they may be offered for sale. - -_Fifteenth_: I think that one-half of all the capital of all the local -associations in the United States should be transferred to the national -organization, and be held and treated by it as if it were its own -capital. And such capital shall be holden to the debenture holders as a -guarantee, and for the purpose of securing the best possible credit for -the national organization. - -_Sixteenth_: The national organization, and all state associations, and -all local associations, shall be under the supervision, and be examined -by an auditor appointed by the President of the United States. - -_Seventeenth_: To secure unqualified success for a Land Credit Bank -in the United States, no business should be attempted until the -capital paid in shall amount to at least $25,000,000; that is, until -the national organization shall have a cash capital of its own of -$12,500,000 in order that its debentures may bear the lowest possible -rate of interest that a large capital with a national organization -under national supervision will insure. - -_Eighteenth_: The debentures of a national organization should be free -of all taxes, local or national. - -In general these are my recommendations, which I hope will be -incorporated in the measure we are to prepare. - -MR. MERCHANT: Mr. Farmer, I notice that you propose to confine the -loans to agricultural land. Don't you think that a good and equally -helpful business could be carried on by loaning money on city and urban -property? - -MR. FARMER: Possibly that is so, but I do not think so, and in any -event, I never would combine these two classes of loans. If we are -to have national Land Credit Banks doing a country and city or urban -business, let them be kept entirely separate. The general business -permitted and carried on by the Crédit Foncier is a just ground for -severe criticism. It is permitted to take deposits. An American Land -Credit Bank should have no such power. It should be confined, in my -judgment, with extreme strictness to loaning money upon improved -agricultural land. Mind you, I do not say that there should be no other -Land Credit Bank to do some other kind of business. That is a matter -for future and separate consideration. - -MR. LABORINGMAN: Mr. Farmer, in all that you have said you have not -once even mentioned Credit Unions or Mutual Credit societies. I had -been betting on you to help me out in my fight for a recognition of the -principle of coöperation, but it looks as if you had deserted me. - -MR. FARMER: No, Mr. Laboringman, on the contrary, I will do anything -in my power to help you or anyone work out the great saving principle -of coöperation; but since I have been attending these talks two or -three things have stuck in my crop and I could not get them out even -if I tried, and one thing in particular applies especially to the -agricultural societies, called credit unions. - -_Mutual credit societies or credit unions are organized to furnish -capital for production; that is, it is commercial capital, or credit -for commercial purposes, not for investment purposes at all. Not -a single dollar of a credit union should ever be loaned upon real -estate. Not a single dollar! Not a single cent!!_ Such a practice would -literally destroy the principle upon which they are founded; mutual -aid to assist in production, not investment. Don't you remember how -Mr. Banker pounded that into us; and convinced us all, too? But more -convincing than anything else as to this great economic truth, that -not one single dollar of credit union money should ever be loaned -upon land, is the history of them. We must not forget that they were -organized to secure personal credit and to depart from that practice -is a perversion of their purpose and just to that extent must result in -failure. - -The coöperative idea for personal credit was originated in Germany by -Francis Frederick Schulze, a little before the middle of the nineteenth -century. It passed over into Austria and Hungary in 1851, into Italy -in 1860, into Belgium in 1864, into France in 1883, into Scotland in -1889, and into Ireland in 1894. These dates are given to show the order -of advance and the recentness of the movement in some parts of Europe. -The first German association was formed in 1849 by Frederick William -Raiffeisen. Herr Schulze did not get his started until the following -year. - -Herr Raiffeisen was poorly educated but deeply imbued with religious -feelings. He lived among peasants in a sparsely settled and -impoverished locality, and his object was to help the lowest classes. -The associations which grew up under his guiding hand were mutual -societies confined to small farming districts. The thought of profit -was discarded and they were managed by the gratuitous services of their -members. Herr Schulze was a talented writer and speaker, and when he -took up his life work was holding a judicial post in his native town of -Delitzsche. His philanthropy, although intense, leaned to the practical -side. He believed in paid services and fair returns for money. The -associations formed under his leadership were located mainly in towns. -They were managed by salaried officers, and membership was dependent -upon the purchase of shares on which dividends were allowed. But both -kinds were founded upon the fundamental principle of combining persons -together and using the credit created by their united guaranty for -providing funds for members who might wish to borrow. - -In the early days the mutual credit associations were formed simply -by articles of agreement in the nature of a partnership contract, -and members were jointly and severally liable without limit for all -the loans that were made. In course of time, when the Government -began to take official recognition of the associations, some of the -followers of Schulze favored a limit to this liability. Hence the -mark of distinction became clearly defined between "Raiffeisenism" -and the "Schulze-Delitzsche" propaganda. The German law, as it now -stands, requires mutual banks to have share capital, but allows them -to be organized upon the limited or unlimited liability plan. All true -Raiffeisen banks, in order to preserve their character, have shares of -only a nominal value and devote dividends to educational or charitable -purposes. In Germany these local banks are grouped under central banks, -which in turn are linked together by two general central banks, and -their funds are made to move freely for agriculture throughout the -Empire. The centralization of the system has also been inaugurated in -France. - -Personal credit in agricultural Europe is obtained usually by means of -the coöperative credit associations. They are also used by artisans -and small tradespeople in the towns and cities. These associations are -in fact the only banks which the farmers will patronize for short-time -loans in the nations where they abound in the greatest numbers. With -their aid poverty and usury have been banished, sterile fields have -been made fertile, production has been increased, and agriculture and -agricultural science raised to the highest point. Their educational -influence is no less marked. They have taught the farmers the uses -of credit as well as of cash, given them a commercial instinct and -business knowledge, and stimulated them to associated action. They have -encouraged thrift and saving, created a feeling of independence and -self-reliance, and even elevated their moral tone. - -The picture can hardly be overdrawn. Every traveler who visits the -places where these little associations exist speaks in glowing phrases -of the prosperity and contentment that prevail. They are organized -on such simple lines that their management requires only ordinary -intelligence. Failures have rarely occurred. In France and other -countries they hold a record of having never lost a cent. The working -capital and number of members of individual associations are so small -as to be insignificant, yet they do one-third of the banking business -of Italy; while the combined amount of their operations in Germany -equal that of the commercial banks. But the mutual banks, both in town -and country, are looked upon with favor in the financial world because -they keep millions of dollars of petty sums in circulation which, -except for them, would be idle and hoarded. They are, in fact, feeders -for the commercial banking system. - -In 1909 in Belgium 458 banks, with a membership of 25,762, had -outstanding (roughly calculated) $4,000,000 of loans; in France -ninety-six regional banks did upward of $25,000,000 of business on a -capital of $2,983,646, while the 2,983 local banks, with a membership -of 133,382 farmers, had $2,622,241 of capital and a record of over -$20,500,000 of operations. There were nearly 6,000 banks in Austria. -The membership was over 725,666, and the loans ran over $86,500,000. -In Italy 690 banks that furnished reports had a working capital of -over $170,091,946. In Germany there is one bank for every 1,600 of the -population, and the total business done was over $4,888,000,000. In -one Province there is a bank for every 3,000 acres of land; and so on -for all other nations that have coöperative credit institutions. The -rate of interest charged was one or two points lower than in commercial -circles, yet these banks, with a few exceptions, made a fair profit on -the turnover of their capital. In some instances it ran as high as 5 -per cent and 7 per cent. - -With this striking array of figures to show its stability and -usefulness, it is remarkable that the farmers of the United States -have been so slow to adopt this system of banking for temporary loans -on personal security. It has existed in Canada for twenty-two years. -In the Province of Quebec there are a number of mutual banks that -have loaned hundreds of thousands of dollars. But Massachusetts is -the only State in our country that has made an attempt to encourage -its introduction. It already has a law allowing the incorporation of -credit unions. It was passed in 1909 after a careful study of European -legislation, and furnishes an excellent example for the other States. -The first concern to start under this law was the Myrick Credit Union -at Springfield. In twelve months it had one hundred and five members, -a capital of $3,000 and $10,000 of outstanding loans. Interest rates -have been low, yet it paid over 6 per cent dividends on its capital. -Thirteen new unions were formed in 1911 and have $25,000 of capital. A -pamphlet issued by the State bank commissioner gives a comprehensive -description of the fundamental principles that a mutual association for -personal credit must adhere to. I cannot do better than to quote from -it. They are as follows: - -_First_: The association shall be organized on coöperative lines. -As the members may be either borrowers or lenders, according to -circumstances, its affairs must be conducted in such a way as to give -fair and equitable treatment to both classes. - -_Second_: The association shall be one of persons and not of shares. To -this end each shareholder has one vote, irrespective of the number of -shares he holds. Furthermore, a limit is set to the number of shares or -the amount of deposit which a member may have in the association, in -order that no one person may have a too dominating influence or be able -to damage the association by suddenly withdrawing large sums. - -_Third_: Loans shall be made only for the purposes which promise to -result in a saving or a profit to the borrower. Each applicant for a -loan must state the object for which he desires to borrow, in order -that the credit committee, which passes on all loans, may rigidly -exclude thriftless and improvident borrowing. - -_Fourth_: As loans are made only to members and as any member may -become a borrower, care must be taken to admit to membership only men -and women of honesty and industry. - -_Fifth_: As personal knowledge of the character of the members is -essential, the membership in an association must be restricted to -citizens of a small community, or of a small subdivision of a large -city, or to a small group or organization of individuals. - -_Sixth_: Every provision must be made to bring the association within -the reach of the humblest citizen. The par value of the shares should -be small (it averages about $5), and they should be payable in very -small installments. Loans of very small amounts should be made and -should be repayable by installments if desired. - -_Seventh_: In making loans it should be recognized that character and -industry are the basis of credit, and a loan may be made to a member -who has not adequate security to pledge for it, provided he can obtain -the guaranty of one or more other members, but no member is obliged to -guarantee the loan of another member unless he desires to do so. - -_Eighth_: Borrowers must carry out to the letter the conditions -of repayment and agreed upon at the time their loans are made. -Prompt payment of obligations is a fundamental requirement of these -associations. - -It should not be inferred from the great success and good accomplished -that the coöperative credit associations could be taken as models in -their entirety or that the establishment of such societies would act -as an immediate panacea for all the troubles that beset agriculture -in America. They seem to be adapted only for localities where the -population is fixed and settled and welded together in close relation -by community of interests. - -Let me call your attention to what the Government report says in -support of this position. The Germans have had their sad experiences -and it would be the height of folly for us to travel over the same -road again, only to learn by our own experience what we can now know -without paying for it. - -Too much emphasis cannot be laid on the fact that these small credit -societies are not organized for making loans on real estate. The -deposits and funds received by them are withdrawable on short notice. -This privilege must be allowed in order to attract the capital -needed. But as loans to members yield interest considerably under the -ordinary market rate, the only way they have of paying for the use -of this capital is by making quick and numerous turnovers with it. -In Germany they have taken long-time mortgages, but the practice is -strongly denounced by all students who have investigated into the cause -of the remarkable success of the Raiffeisen and Schulze-Delitzsche -systems as contrary to the theory on which they are founded. Credit is -indispensable to every business. It is the means whereby $1 is made -to do the work of $50, as the saying goes, but its classifications -and limitations cannot be ignored without danger. A loan to acquire -something merely for consumption is not tolerated, no matter what may -be the security offered. The loan must be strictly for a creative -purpose. This is the first cardinal principle, and so rigorously is it -adhered to in Europe that the credit societies invite to their circle -only those who are producers of wealth. - -_Another principle is that personal and real credit are inherently and -irreconcilably separate and distinct, and each must have specially -adapted institutions for carrying on its operations. This is only a -reaffirmation of what we have already decided over and over again._ - -The recognition and observance of these principles have done much -to prevent thriftless debt among farmers, and are undoubtedly the -reasons why the land credit is so thoroughly organized on the European -Continent. A loan on chattel or character security should naturally -be for a short time and for temporary purposes, for such security is -perishable and subject to loss or change. The long-time loan requires -an unchanging and permanent security, and the only thing possessing -this quality is mother earth herself. But when capital is once sunk -in land it becomes fixed and can never be recovered except from the -income created thereby or the amortization sums paid in representation -of that income. A debtor should not be called upon to pay back the loan -in a lump or in advance of his receipts from the land. To do so leads -only to further borrowing, usually on more burdensome terms, when the -mortgage expires. On the other hand, a private individual cannot be -expected to take his money back in driblets or wait long years for its -complete return. So private lending on real estate is a theoretical -and also a practical wrong. The proof of this lies in vast numbers of -foreclosures and the excessive interest rates of farm mortgages in -western United States, where they are largely held by persons. The -smallness of the annual payments and the length of an ordinary loan in -Europe are shown in the tables of the Crédit Foncier, which have been -given already. A glance at them makes it apparent that amortization, -the basic principle of a land loan, can be brought into full play -only by the aid of large corporations or associations with charters -perpetual or lasting a long time. - -MR. BANKER: It does not seem to me, under the circumstances, as though -we could treat the Mutual Credit Associations or Credit Unions wisely. -Indeed, I am of the opinion that legislation by us would interfere with -and retard the progress of such associations. - -UNCLE SAM: Mr. Laboringman has waited patiently to have his say about -coöperation. - -MR. LABORINGMAN: Yes, I have been biding my time, for I have something -to say that ought to interest all of you, as a possibility at least, -and if it is reasonable to do so, I hope that you will include some -sympathetic laws by way of encouragement. - -England was the birthplace of modern industrialism, as you all know. -There, too, was started the great movement of modern coöperation. -Small and insignificant was the beginning. In 1844 the Rochdale -pioneers put all their little savings into the pot, and they amounted -to only $140. With this they started a store. By 1845 they had -seventy-four members and $900 of capital, and did $3,500 worth of -business, by keeping their little business open only two evenings a -week. They were an object of derision and all sorts of jibes. - -S.P. Orth describes the situation as follows: Last year the British -Government made a careful and complete report on coöperation in -England, and found more than three million persons in the membership -of the various societies, and over three times that number under the -immediate sphere of coöperative influence. That means that one person -in every five in the United Kingdom is now interested or influenced by -this vast association of producers and consumers. During the past ten -years, the increase of membership has been 55 per cent and the trade 75 -per cent. - -The productive and distributive business alone amounts to $640,000,000. -The retail societies have $200,000,000 of capital. "Last year the sales -of these retail societies totaled more than $352,000,000, or about -$142.50 per member." It is most significant that the societies, in -their own mills and factories, produced nearly 50 per cent of these -goods themselves; that is, production and distribution are going hand -in hand. They began by making boots and butter; now they make cloth, -iron and all sorts of things. - -The average profits for the last ten years have been nearly 15 per cent -and there is now a serious discussion whether the cost of articles to -the customer should not be lowered. - -In some of the districts, notably some of the mining districts, the -coöperative stores have a virtual monopoly, and their system of banking -or keeping the surplus credits for the customer is a great boon. But -in other very poor districts, keeping up the prices has worked some -hardship. It is now proposed by some of the stronger societies to open -special stores in the poorer districts and cut the prices. - -All business, until a few years ago, was done on a strictly cash basis, -but recently the insidious credit system has crept in, and it may lead -to serious consequences. - -Last year, out of its surplus, the Union of Coöperative Societies, a -federation of all English coöperativists, voted $230,000 to charity, -$450,000 to education, i.e., libraries, lectures, and concerts, and -$50,000 to propaganda. - -The early retail societies found it hard to get good terms from -wholesale houses, owing to the enmity of the private merchants. The -law did not allow them to amalgamate and start a wholesale business of -their own. But in 1862 the law was changed, and at once two coöperative -wholesale societies were organized, the English and the Scotch. They -are the models for the world. The two societies are virtually one, -although maintaining different officers, rules, and stockholders. In -fact, the wholesale societies are the federation of the retail and -productive societies of England and Scotland. The English society -requires the constituent societies to hold one $25 share for every five -of its membership; the Scotch society one $5 share for every one of -its members: i. e., an English coöperative shoe factory of two hundred -members wishing to join the English Wholesale Society would take forty -$25 shares, or two hundred $5 shares in the Scotch Society. - -These Wholesale Societies are the grand Clearing House of nearly all -the coöperative shops and factories of the kingdom, and the suppliers -of all the coöperative retail stores. - -And they are monumental institutions. In 1907 they had a membership of -more than 2,615,000, a capital of more than $169,000,000, a surplus of -$85,000,000. Their annual sales amount to more than $600,000,000, and -their profits more than $60,000,000. - -The English Society is the larger. It is a corporation that not only -engages in wholesale trade but is a manufacturer, banker, importer; -it packs meat, cures bacon, refines lard, binds books, grows tea, -blends coffee, founders iron; it manufactures flour, butter, biscuit, -sugar, pickles, cocoa, tobacco, candles, glycerine, starch, saddlery, -furniture, clothing, corsets, underwear, brushes, crockery, tinplate, -woolens, carpets and almost everything else that an average British -home may need. It deals in coal, apricots, and wheat; has offices -in New York, Toronto, Rouen, France; Denia, Spain; Copenhagen and -Guthenberg, Sweden; has twenty-seven creameries in Ireland, tallow -and oil works in Sydney, Australia; a "bacon factory" in Denmark, a -tea plantation in Ceylon, and fruit farms in Shropshire and Hereford. -Besides, it owns four steamers for the trade between Rouen and -Manchester. - -Its main offices on Balloon Street, Manchester, are enormous and -palatial. Together with warehouses and stores, they cover a number -of city blocks. Their offices in London compare favorably with any -private establishment, and for efficiency they are second to none. -Nearly 20,000 men are employed by this society. Some of its factories -are large, e, g., the Leicester Shoe Works employ 1,446 men; the Irlam -Soap Works, 702 men; Long Sight Printing Works, 941 men; the Middleton -Pickle Works, 564, etc. - -The chief offices of the Scotch Society are on Morrison Street, -Glasgow. They manufacture umbrellas, tweeds, paislies, oatmeal, -Aberdeen finnan-haddie, and other characteristic Scotch merchandise. -Its capital is about $17,000,000. - -Germany and Belgium, too, are furnishing successful coöperative -associations. Mr. Orth describes them so well that I want to read what -he says. - -There are about two thousand of the coöperative supply societies among -the farmers, with nearly one hundred and fifty thousand members. There -are also about three thousand coöperative dairies, with two hundred -and thirty thousand members, and one hundred and sixty coöperative -wine cellars and two hundred and fifty-five coöperative warehouses and -grain elevators. - -It was natural that retail stores should be established next, on a -coöperative basis. For some reason they did not thrive until about ten -years ago. At that time a split occurred in the coöperative ranks, due -to politics, and two federations or unions of Coöperative Societies -were organized; the General Union or Liberal Union, and the Central -Union or Socialist Union. The former is remaining stationary, the -latter growing by leaps and bounds. - -In every large city the coöperative retail society has a central plant. -It usually includes a warehouse and bakery. The one located at Berlin -is a good type. It is situated at Lichtenberg, a suburb. Here you see -splendid buildings, in good architectural style, fitted up in the most -modern manner; telephones to all departments, electricity, central -heating plant, a uniform clock system for keeping time, etc. The whole -plant cost $1,750,000. The great warehouse is full of groceries. - -Although only a year in the buildings, they are already overtaxed and -additions are planned. This central supply house looks after the sixty -coöperative grocery stores in Berlin. It has a string of fine delivery -autos. Any one can become a member by paying fifty pfennigs (12-1/2c.) -admission, and forty marks ($10) a year. This, however, is taken out of -his dividends. - -The society also owns a fine row of apartment houses, which are leased -to members at a low rental. The goods used are bought in the open -market, or are supplied by the German Coöperative Wholesale Society of -Hamburg. There is very little productive coöperation in Germany. There -are 2,311 retail societies, more than two million members, and more -than $5,000,000 in their reserve fund. - -The Wholesale Society had a hard time of it until the spurt in favor of -coöperation began a decade ago. Now it thrives, doing about $12,000,000 -business a year. - -There are a great many local coöperative building societies, with two -hundred thousand members, and many other evidences that the spirit of -coöperation is abroad in the land. In 1908 there were 4,105,594 persons -actively interested in one form or another of German coöperation. In -1911 the number had increased to nearly five million. - -In the little land of Belgium coöperation is at its best; not at -its greatest showiness, nor maximum figures. But here, in this land -of congested population, of illiteracy, of low wages and depressing -conditions, the abject workingmen have taken hold of their own -problems, asking neither sympathy nor favor, and have worked out a -scheme of industrial coöperation that is a genuine achievement. - -In 1873 bread was very dear in Ghent. Times were very hard. So high was -the price of flour that many workingmen went hungry. A few of these -workers united to do what they could to supply loaves at cheaper rates. -They had $17 capital. They found an old cellar with an old oven in it, -hired an old baker, and peddled the bread in baskets. Today there is -a fine workingmen's clubhouse in Ghent, called "Vooruit." Across the -façade stands the motto, "The Brotherhood of Workingmen Means Peace on -Earth." This is the outgrowth of the cellar bakeshop. "Vooruit" stands -for everything that is superb in coöperation. Here is not only a large -lecture hall and café and offices of the unions; here is the studio of -Van Biesbroeck, the workman-sculptor; here is a library, and in the -neighborhood are stores, ware-rooms and shops. A few years ago it was -found that many women were ruining their health by the long hours of -service at the looms. "Vooruit" started a coöperative weaving shed, -where the women work eight and three-quarter hours a day. - -The bakery now does almost $1,000,000 worth of business a year; it -makes 110,000 loaves a week. The eight thousand members of "Vooruit" -have six drug stores, coal yards, many grocery stores and meat shops, -a dry goods store, and other industries. All done by workmen in thirty -years, workmen who were never highly paid and who trained themselves to -do these things. - -They meet every year, the eight thousand members, and vote on the price -of bread. Sometimes it is one cent higher than the commercial rate, but -their dividends more than cover this. - -In Brussels is the famous "Maison du Peuple," the House of the People. -It, too, began with a small bakery, employing two men and turning out -five hundred and fifty-two loaves the first week. Today the "Maison" -has twenty-five thousand members, two great bakeries, six warehouses, -four butcher shops, twenty-five grocery stores, and numerous shops -where various articles are made. - -This "House," standing on Rue Joseph Stephen, cost $375,000 and was -paid for by the Brussels workingmen out of their coöperative funds. -The café, seating eight hundred people, is an animated place; every -one seems content. The office of the savings bank is doing a rushing -business, women and children bringing in the savings of the family for -the week; the committee rooms are full of workmen planning some new -enterprise. In the evening the lecture hall or theatre is crowded, the -two thousand five hundred seats all taken, to see a play produced by an -amateur company, all members of the "Maison." - -All this, and more, in the form of coöperation. In 1907-8 the "Maison" -made a profit of $134,000; of this about three-quarters was distributed -as personal dividends to shareholders. The rest was spent on social -benefits and a reserve fund. - -In Belgium, then, you find all the coöperative activities united in -each city under one general management. It includes groceries and -clothing, medical aid, insurance, savings bank, clubhouse privileges, -lectures, libraries, entertainments. - -There are one hundred, and sixty-one distributive societies with -119,581 members; sixteen productive societies with 1,583 members. The -Productive Societies include weaving, printing, cabinetmaking, tobacco -and cigars, hardware and bakery. The total coöperative business is -$6,800,000 a year, a large amount when you consider the diminutive size -of the country and the poverty of the people. - -The fact that in all of these countries coöperation is growing at a -rate of increase of 20 per cent to 40 per cent proves that a need for -it exists. - -Now, Uncle Sam, we are starting these coöperative stores here, and -the question with us and the one we are constantly asking, is what -protection are we going to have from the trusts and monopolies which -can, if permitted to do so, destroy us with low prices at any point, -while they rob the people at some other point, to make up the losses, -while ruining us. What we must have is legislation, to protect us, and -if we can get it into this bill, I want it. - -UNCLE SAM: I do not see how any phase of what you have said can be -governed by a financial and banking bill. It is true, that incidentally -you may do a banking business in your coöperative societies. So far -as you do, you ought to conform your practices with whatever we may -decide upon in the way of banking laws. So far as you buy and sell, -or manufacture, you are engaged in production and commerce, and not -in the banking business. Under the circumstances, you are entitled to -an answer, although a little aside from the subject in hand. Let me -tell you, however, right here, and you may set it down as settled. -That, if you start any coöperative associations for the production or -distribution of goods of any kind, you shall have a square deal. I have -been waiting patiently, but getting ready all the while, to put some of -the managers of these monopolies in jail. You can take my word for it. -You are going to have equal opportunities under the operation of just -laws, if there is any way of giving them to you. And if your Uncle -Samuel understands the situation, I think there is. Unfair chances, -special privileges and monopolies cannot naturally and properly have -any place in a country where all men are born free and equal under the -law. The fact is, the law is sufficient now, but there is not a public -sentiment strong enough to compel the courts to put men in jail for -robbing their fellows through the forms of law; even if it is known -that the laws by which they rob their fellows or are permitted or -enabled to rob their fellows were passed expressly for that purpose. -That is the fault of the times through which we have just passed. The -time is now at hand when all this is to be reversed. The people have -come to realize and appreciate the fact that it is ethically, morally, -and justly speaking, as wrong to rob a man through the forms of law, -as for the bully to fell a man in the streets and pick his pockets. -The people are forming new ideals, and the judges are getting new -ideas. These new ideals, and these new ideas, will soon handcuff and -incarcerate the business culprits, the business bullies, just as the -ancient ideals of the people, and the old ideas of the judges have, in -the past, put the physical bully and the material thief in the dark, -dank dungeon. I have altogether too many men, who are always inquiring -how near they can go to the jail door and not get in. You mark my word, -I am going to push some of them in very soon now. What I want is a -nation of men who are imbued with a sense of justice and fair play in -business; and who will regard business relations as moral obligations, -and paramount to the technical letter of the law. When that day comes, -one banker will not want his fellow-bankers to carry his reserves for -him. The principle is the same, whatever the relation of men may be; -therefore, you can take my word for it, that all those who want to -coöperate to secure a greater degree of the profits of their labor, a -greater degree of justice among their fellows, will find Uncle Samuel -coöperating with them, in the preparation and execution of those laws -which will make for a juster Government. Since this Government springs -from the people, and belongs to the people, no part of the people, -certainly no small part of the people, should be able to take unfair -advantages and undue profits, by any legalized special privileges, or -by the power of monopoly. I say to you now, that these should be, and -will be destroyed, and that all men shall be equal before and under the -law. This is the predestined purpose of this Government, and it will -never come into its fulfillment until you learn, my boys, that you are -your brother's keepers. - -MR. MERCHANT: Uncle Sam, that's pretty good preaching; but how are you -going to apply it to this banking question? - -UNCLE SAM: Did not Mr. Laboringman just appeal to me to find out -whether coöperative societies were going to have a fair show? I have -just told him "Yes," and I intend they shall have it, and I know of -no better place to begin than here and now. I am going to construct -two or three pieces of machinery--a guillotine for the monopolies, -and an electric chair for special privileges, and concoct a barrel of -anesthetics for stealthy, statutory stealing. - -MR. LAWYER: But all this kind of legislation must come under the sphere -of the Sherman Anti-Trust Law. I think no one will contend that any -aspect of coöperation, as represented by Mr. Laboringman, should be -incorporated in our banking bill. - -MR. BANKER: I agree with both Mr. Farmer and Mr. Lawyer, that we -cannot make any provision for it at this stage of its development -in this country; but who shall prophesy about a movement that has -spread over the world, as this has, and is now growing at such a rapid -rate? It is estimated that at least ten million in Great Britain are -interested in it; more than five million in Germany, and that the -outstanding coöperative investments in Continental Europe must exceed -$5,000,000,000 by this time. Of course, these figures mean some -banking sooner or later, in this country, when the movement once gets -under way. - -MR. FARMER: Yes, I agree to that, but any attempt on our part at this -time to legislate in advance, would do more harm than good. - -MR. LABORINGMAN: That is probably true, as it might interfere, as you -say, with the movement. All I ask then, is that we have a fair field, -so that we can develop along natural lines, and be protected in the -exercise of our mutual coöperative rights. I thank you, gentlemen, for -giving me, and my particular cause, so much of your time. - -UNCLE SAM: Mr. Laboringman, your cause is their cause. Your cause is my -cause. Your cause is our cause. Your cause is the cause of humanity. -The principles upon which your cause rests, pushed to their logical -conclusion, will secure social and industrial justice. There are -many who have taken millions, yes, hundreds of millions, through the -forms of law, but without any ethical right whatever. From them these -millions will be taken away in time, through the forms of law; through -the power of taxation by progressive income and inheritance taxes, and -the injustice of today will be righted by the justice of tomorrow. - -MR. BANKER: Uncle Sam, you have suggested a programme outside of -banking legislation; but I must confess incidental to the cause -presented by Mr. Laboringman. - -MR. FARMER: Gentlemen, we have stayed longer tonight than on any -previous night, and I must go now. So, good night. - -UNCLE SAM: Mr. Farmer has forced an adjournment. - - - - -THIRTEENTH NIGHT - -THE CLEARING HOUSE - - -UNCLE SAM: We are on the very last lap tonight, as I understand -the situation. We have had the Standard of Value, Money, Currency, -Exchange, Value, Price, Property, Wealth, Credit, Reserves, the Bank; -and now comes the settlement of the claims against the bank in the -shape of checks, drafts and bills of exchange. - -When we finish this conversation we can, I hope, begin to put things -together, that is, make use of our material. - -MR. BANKER: Uncle Sam is right, we shall be ready to do some -constructing when we have disposed of the Clearing House, which is -destined to play a gigantic part in the future of American banking. -This is true because the Clearing House is bound to become the -machinery by which all American banks are to coöperate and protect -themselves through their combined strength; and it will be a splendid -exhibition of what true coöperation can accomplish. - -The character and origin then of the Clearing House, its present -and prospective function, must be carefully studied by us, if this -assumption is correct. - -MR. MERCHANT: The character of the Clearing House, or the principle -upon which it works, is simple enough; although its operations are -vast, and its achievements in times of financial stress have been most -striking, even though not always satisfactory. - -The principle of clearing is, as I have just said, simple indeed. If -I have a claim against Mr. Manufacturer, and he has an equal claim -against me, we clear them by exchanging our claims with each other. If -one of you gentlemen should sue another for one hundred dollars, and -the other should make a defense by pleading an offset of one hundred -dollars, and the court should allow both claims, you would clear them -through the court, the one offsetting the other; that is all there is -of the principal involved. - -MR. BANKER: Mr. Merchant, you have put this matter more simply than any -book has ever done. Indeed, I had not reduced the transaction to such -simple terms. To put it in the form of a definition, as you stated, it -would read this way: "To offset one claim against another, and pay the -balance, if any, is clearing them." - -I had thought that it would be my particular task to explain this -transaction of clearing, and after a good deal of meditation I -had worked out a thought which I am sure is next best, after your -definition; and it will take us one step nearer to the Clearing House, -without getting into any of its complexities. My illustration is this: -if there were but one bank in a town, and all the people did their -business through this single bank, by depositing their money and -checks, and then paid all their bills, with checks on the bank, apart -from any outside business, every debt in the town would be paid by -check, and there would be no need of any money at all as the claims and -debts would be exactly equal, and would always cancel each other to a -cent. - -MR. LAWYER: What you have said about one bank in a town is equally true -of two, three or four, or any number of banks, if you assume that every -person in town does his entire business through the banks, providing, -of course, that the banks get together, and offset all the checks and -drafts they receive during the day. There might be something to pay -from day to day for the time being, but all would be adjusted in the -end, without any variation or difference. - -MR. BANKER: Precisely so, but when you get those bankers together, for -the purpose of trading checks, you have created a Clearing House. - -Stephen Colwell says: "Clearing is beyond all question, the simplest, -the most economical, and when applicable, the most efficient of all -modes of paying debts; it is precisely analogous to balancing accounts." - -James G. Cannon, author of the leading work upon the history of -American Clearing Houses, describes a Clearing House "as an office, -established by the banks of a city, where their representatives meet -daily to exchange drafts and checks, and adjust balances." Again, "as a -device to simplify and facilitate the daily exchanges of items, checks, -drafts and bills of exchange, and the settlement of balances among the -banks, and a medium for muted action upon all questions affecting their -mutual welfare." - -You would think that the Clearing House was such a simple matter, and -such a great advantage that a Clearing House would have been thought -of, and put into operation as soon as banks got under way, but not so. -Their development and establishment, as we know them today, has been -slow indeed, and the early history of their origin most interesting. - -Jevons says: "About the year 1775, a few of the London bankers hired -a room where their clerks could meet to exchange notes and bills, and -settle their mutual debts. The society was of the nature of a strictly -private club; the public knowing nothing about it, and the transactions -being conducted in perfect secrecy. Mr. Gilbart tells us that even in -this form it was regarded as a questionable innovation, and some of the -principal bankers refused to have anything to do with it. By degrees, -however, the convenience of the arrangement made itself apparent, more -bankers were admitted to the Society, and a distinct committee and -set of rules were formed for its management. Although it remains to -the present day a private and voluntary association, unchartered, and -in fact unknown to the law, the Clearing House has steadily grown in -importance, and in the publicity of its proceedings. - -"Several important extensions of the clearing work have been made in -the last twenty-five years. After the rise of the London joint stock -banks, subsequent to 1833, they were for a long time refused admittance -to the Clearing House; but in June, 1854, they were at last allowed -to join the Association. The Bank of England long remained entirely -outside of the confederation, but more recently, it has become a -member." (Written in 1875.) - -The establishment of Clearing Houses in English cities, outside of -London, did not take place until a century, almost, after that in -London went into operation, or as late as 1872, which was just five -years short of a century later. - -As early as 1831 Albert Gallatin presented a plan for a Clearing House -in New York, and so perfectly outlined the scheme, finally adopted, -that I want to read it to you. And I want to impress upon you the fact -that Gallatin was one of the very ablest economists that we have ever -produced. - -"There is a measure which though belonging to the administration of -banks, rather than to legal enactment, is suggested on account of its -great importance. Few regulations would be more useful in preventing -dangerous expansion of discounts and issues on the part of the city -banks, than a regular exchange of notes and checks, and an actual -daily or semi-weekly payment of the balances. It must be recollected -that it is by this process alone that a bank of the United States has -ever acted or been supposed to act as a regulator of the currency. Its -action would not in that respect be wanted in any city, the banks of -which would, by adopting the process, regulate themselves. It is one -of the principal ingredients of the system of the banks of Scotland. -The bankers of London, by the daily exchange of drafts at the Clearing -House, reduce the ultimate balance to a very small sum; and that -balance is immediately paid in notes of the Bank of England. The -want of a similar arrangement among the banks of this city produces -relaxation, favors improper expansion, and is attended with serious -inconvenience. The principal difficulty in the way of an arrangement -for that purpose is the want of a common medium other than specie for -effecting the payment of balances. Those are daily fluctuating; and a -perpetual drawing and redrawing of specie from and into the banks is -unpopular and inconvenient. - -"In order to remedy this it has been suggested that a general cash -office might be established, in which each bank should place a sum in -specie, proportionate to its capital, which would be carried to its -credit in the books of the office. Each bank would be daily debited, -or credited, in those books for the balance of its account with all -the other banks. Each bank might, at any time, draw for specie on the -office for the excess of its credit, beyond its quota; and each bank -should be obliged to replenish its quota whenever it was diminished one -half, or in any other proportion agreed on. It may be that some similar -arrangement might be made in every other county, or larger convenient -district of the State. It would not be necessary to establish then a -general cash office. Each of the banks of Scotland has an agent at -Edinburgh, and the balances are there settled twice a week, and paid -generally by drafts on London. In the same manner the balances due by -the banks in each district might be paid by draft on New York, or any -other place agreed on." - -James C. Hallock, the highest authority in this country upon Clearing -House operations, has so succinctly stated how the checks were disposed -of, before the Clearing House was established, that I am going to read -that to you, and show you two diagrams, which we will keep on file for -future reference. "In 1853, the Banks of New York City organized a -Clearing House, the first in America; until then they had done business -without one. The method had been laborious. - -"Each of the fifty-two banks had daily received over its counter, or by -mail, checks on every other bank in town. To collect them the banks had -opened deposit accounts with one another. Each had become a depositor -in fifty-one city banks. Each also had had the others as depositors and -kept fifty-one accounts with them. The pass books used had been of the -ordinary form as 'Merchants' Bank, in account with Chatham Bank.' - -"According to the common usage of depositors, each bank would have sent -messengers to fifty-one banks daily, and each would have had fifty-one -messengers come to its own counter from the other banks. They had -done a little better than that. The Chatham Bank, for instance, would -have checks on the Merchants' Bank. It would list them on a deposit -slip, charge the Merchants' Bank with the amount in its pass book, and -place the checks in the book which the messenger would now carry to -the Merchants' Bank, and deliver to its Receiving Teller. The latter -would remove the checks, and having some on the Chatham Bank with -list attached, he would credit his bank with the amount in the pass -book, place the package in it and hand it back, thus refilled to the -messenger. - -"This exchange of checks by two banks at the counter of one was a -rudimentary clearing which, like all bank clearings, saved labor, time -and trouble. To deposit these checks in the customary manner would -have required two messengers and two pass books. By this clearing -arrangement one messenger and one pass book sufficed. Perceiving the -sensibleness of this saving, the New York banks had for many years -tacitly agreed that each should send messengers to one-half of the -banks for six months, and the other half for the next six months. They -had thus reduced the number of banks to be visited daily by each from -fifty-one to twenty-six banks, and accordingly reduced the number of -pass books in use by each. - -"The accompanying diagram representing the banks arranged in a circle, -with two of them sending messages to twenty-six each, indicates how -toilsome the exchange of checks still was, up to the formation of the -New York Clearing House, which commenced operations on Oct. 11, 1853; -though only two banks are represented as sending, in fact, all were -really sending, or being sent to; for every bank sent to all others -that did not send to it. - -[Illustration: Without a Clearing House in New York. - -_Diagram showing a Bank Messenger's 26 Trips to Exchange Checks with -other Banks._] - -"When two banks exchanged checks the amounts were almost always -unequal, leaving a balance for one to pay and the other to receive. -Every day every bank, if they had settled daily, would have had -fifty-one balances to pay, or receive. They were payable in coin. -Instead of attempting the daily adjustment of accounts, which would -have consumed hours, and caused much annoyance, it had become a tacit -agreement that a weekly settlement of balances should be made after -the exchange of Friday morning. On settlement day, the cashier of -each bank would draw checks for every debt due to him by other banks, -and send out the messengers to collect them. Over fifty porters were -out all at once, wrote a bank officer of the time, with an aggregate -of several hundred bank drafts in their pockets, balking each other, -drawing specie at some places, and depositing it in others, and the -whole process was one of confusion, disputes and unavoidable blunders -of which no description could give an exact impression. - -"The second diagram, representing the fifty-two banks in a circle -around the Clearing House, indicates how completely all this -misdirection and waste of energy stopped upon the installation of that -marvelous method which affects such amazing economy. Every bank now -sends straight to a common point. Every bank sends there all the checks -it has on all the city banks, and charges the whole amount against an -imaginary debtor--the Clearing House. Every bank receives there all the -checks all the other city banks have on it, and admits its indebtedness -for the whole amount to an imaginary creditor--the Clearing House. The -balance can now be struck. If the bank loses, it pays the Clearing -House the difference. If the bank gains, the Clearing House pays the -bank; and there is the end of it, reached by the shortest path with the -greatest ease and quickness. - -"The principal results may be summarized: - -"The Clearing House saved every bank in New York City on the average -twenty-six trips daily to exchange checks with other banks. It -abolished sending to other banks for this purpose. It substituted one -trip to the Clearing House--an economy of 96-1/2 per cent. - -"The Clearing House saved every bank in New York the payment or -receipt, mostly in coin, of fifty balances on settlement day (Friday). -It abolished settling at the counter of banks, except for checks, -sent through the clearing and returned 'not good.' It substituted one -payment, or receipt, of a net balance to or from the Clearing House, an -economy of 98 per cent. - -[Illustration: With a Clearing House in New York. - -_Diagram showing Single Trips to Exchange Checks with all other Banks -in the City._] - -"The Clearing House saved the banks of New York all the drudgery, -irritation and anxiety which had made daily settlements impracticable. -It abolished the weekly settlement; it substituted daily settlements to -the Clearing House--an economy of considerable importance. - -"The Clearing House saved all the banks of New York the trouble of -keeping accounts with one another. It abolished accounts of city banks -with city banks--closed 2,652 accounts. It substituted one account for -each bank with the Clearing House--an economy of 98 per cent. - -"These savings, not to mention others, proved beyond dispute, that -clearing checks economizes." - -It was twenty-two years before Gallatin's suggestion was adopted, -and a Clearing House was established, which, as stated, was in 1853. -The first clearing was effected on Oct. 11, 1853, and amounted to -$22,648,109.87. The balances amounted to $1,290,522.28. - -Boston followed in the footsteps of New York, and established a -Clearing House in 1856, and Philadelphia in 1858. - -The next step in the line of progress, in the matter of bank clearings, -came, as Hallock says, as a result of cheap postage and the railroads -in England, and included country checks. - -He says: "Somewhat less than half a century ago London recognized the -fact that the out-of-town check was an indispensable instrument of -civilized man, at least in Great Britain. He would use it, contrary to -custom, and despite the remonstrances of city bankers, who thought only -London drafts should be sent to London. - -"A product of modern times and method, country checks came to London -with the railroads. Few at first, when the average postage on a letter -consisting of a single sheet, was nine pence, and another sheet, or -any enclosure, however small, doubled the rate, making the postage -on a letter enclosing a check thirty-six cents, on the average. With -penny postage established in 1840, regulating the rate on a letter by -its weight (one penny per half ounce), without regard to the number of -sheets, or enclosures, country checks began to stream into London. - -"In 1858 the city bankers, perceiving their inability to suppress, or -exclude them, decided to adopt the suggestion of some country bankers, -and collect English and Welsh checks through the Clearing House. - -"The idea originated in the spring of 1858 with a young country banker, -William Gillett, the son and grandson of country bankers. He visited -the provincial banks, and interested them in the project. When prepared -to carry it out the country bankers met in London on Sept. 29th of that -year, and communicated the plan to the London clearing banks to obtain -their support. The Londoners opposed it; they suggested doubt as to the -utility and feasibility of any change in existing systems. However, -their coöperation being solicited, the London bankers held a meeting at -the Clearing House on Oct. 12th, to take the matter into consideration, -and appointed a special committee to confer with the country bankers. - -"Then, on reflection, it appeared to another young man, the son and -grandson of clearing bankers, that the organization of a large and -entirely new establishment, which the country bankers proposed, was -unnecessary, as the London bankers could give them all the facilities -they required, without any great additional labor, or expense. This -junior officer in the private bank of which his father was the head, -has since gained world-wide celebrity in science and literature as Sir -John Lubbock (now Lord Avebury). Even with the aid of such talent and -opportunities as his, it required unflinching resolution to establish -country clearing in London. After devising a method that conformed as -closely as practicable to actual usage in clearing city banks, young -Lubbock had to call at every London bank, at most of them several -times, and explain fully the exact manner in which he proposed to -carry out the system. It was very difficult for him to convince his -brother bankers. Finally the special committee requested him to meet -the principal clerks of the different banks. These clerks unanimously -recommended the adoption of his plan. - -"The London bankers then adopted it, and on Nov. 16th submitted it -to their country correspondents. The plan for an independent country -Clearing House was abandoned by the country Bankers' Committee on Nov. -19th, and the clearing of country checks commenced in London on Nov. -23, 1858. In less than eight weeks, after the idea was broached in -London, it was put in practice there." - -This system covers 60,000 square miles. - -Mr. Hallock says, "Sedalia bankers unconsciously imitated the -London plan, but modified it, as had been done abroad elsewhere; -for out-of-town checks are cleared, not only in London, but also -in other English cities, as Manchester, Liverpool, Birmingham, -Newcastle-on-Tyne, Leeds, Sheffield and Bradford, in some eight Scotch -towns and Dublin." - -The next advance, which is undoubtedly destined to revolutionize -clearing in the United States, was started in Boston in 1899 by making -New England a free check zone. - -Hallock says: "The clearing of out-of-town checks, though opposed for -years by a small minority of Boston banks, was successfully established -at Boston in 1899. The system includes checks on all points in New -England, and maintains a free zone of nearly equal extent. - -"Proposed in 1877 and 1883, the Boston movement at first resulted in -a deadlock, based on the supposed importance of having certain city -banks, who declined to come in, participate. After twenty-two years -through another movement started among the Connecticut banks, the -deadlock was broken by substituting the manager of the Boston Clearing -House for any abstaining members, and giving him checks on their -correspondents to collect. The association finally decided that all -checks passed through the out-of-town clearing should be collected by -him. - -"The only opposition exhibited by country banks has been in the refusal -of a few to pay the Clearing House in full for their checks, deducting -so-called exchange. Boston checks passed through the Clearing House -are paid in full, or not at all. New England checks should be. This -can be effected, either as in London, by Boston banks returning -checks, drawn on such banks, as not collectible through the Boston -Clearing House, or by the manager, charging to collect checks, bearing -indorsement of the non-par banks, which would cut them off from the use -of the New England free list, now enjoyed by them, without reciprocity; -that is, without being themselves on the free list." - -Mr. Charles A. Ruggles, manager of the Boston Clearing House, says: "In -the thirteen years that we have made collections in this way, we have -collected over eight thousand million dollars ($8,000,000,000). - -"Our cost now is, and has been for ten years, seven cents for a -thousand dollars. That includes the clerk hire of fifteen men, postage -and stationery, and we collect seven or eight hundred million dollars -a year; furthermore, 90 per cent of the banks in New England remit at -par. We collect 95 per cent of it in twenty-eight hours." - -It is an interesting and important historical fact that the country -banks of England and Wales forced the clearing of country checks at -London; so, too, the banks of Connecticut, thirty of them in number, -by combining under the advice and leadership of Mr. James C. Hallock, -succeeded in having the plan adopted by the Boston Clearing House. As -a result New England became a free check zone. I think we should note -in this connection that the father of Mr. James C. Hallock was the -organizer, if not, indeed, the originator of the New York Clearing -House in 1853. - -MR. LABORINGMAN: Mr. Lawyer, you talk and talk and talk, when you could -say what you really have to say, in one-tenth of the time, and in about -as many words. We have spent a whole hour in the history of the origin -of the Clearing House, and have just learned what I could repeat in -about two minutes. - -_First_: London, in a kind of a sneaking way, began to clear checks -in 1775, and kept a Clearing House in a blind alley. Nothing more was -done in England by way of advance until 1858, when the country banks -of England and Wales, covering a territory of 60,000 square miles, by -threatening to start their own Clearing House in London, compelled the -London banks to clear their checks. Not till 1872, nearly one hundred -years later, did any other city adopt it. But today many cities in -Great Britain are clearing country checks. - -_Second_: Gallatin proposed a Clearing House for New York in 1831. -Hallock established it in 1853. Boston and Philadelphia followed in -three and five years, respectively. In 1899, New England became a free -check zone, all checks being received at par at Boston. Since then -several other cities have followed suit. Atlanta, Macon, Nashville, -Sedalia and Kansas City. Now, I have said everything you said. Next! - -UNCLE SAM: Mr. Laboringman always gets a "B" line on things. - -MR. LAWYER: That is true in substance, but the very fact that Mr. -Laboringman has stated the case so well is the greatest compliment he -could pay us. It is only by iteration and reiteration, word upon word, -and precept upon precept, that has made this whole subject so plain to -all of us. We have made haste by going slowly, and we don't want to get -into a hurry now. - -MR. BANKER: I agree with you, Mr. Lawyer, patience has been our best -and truest friend in all these talks, and we should not desert her now. - -MR. LABORINGMAN: That's all right, but let us get down, right down to -business. Just where are we at now? And where are we going to in the -Clearing House matter? - -MR. BANKER: We are now going to discuss the Clearing House from five -points of view. - -_First_: The Clearing House, from its original standpoint--New York -was the pioneer, and is probably our highest type. Its clearings are -certainly by far the largest in the world. - -_Second_: The clearing of country checks, of which Boston was the -pioneer in a large way, although preceded in point of time by Sedalia, -Mo., a country city of only 15,231 people in 1900. - -_Third_: The examination of all banks clearing through the Clearing -House, of which Chicago was the pioneer, starting June 1, 1906--and -probably the best type, although there are today about twenty cities -following in her footsteps, including the following: Minneapolis, Feb. -1, 1907; St. Paul, May 1, 1908; St. Louis, Oct. 11, 1907; Los Angeles -and San Francisco following upon the heels of St. Louis; Kansas City, -March 1, 1908; St. Joseph, the early part of 1909; Philadelphia, April -5, 1909; New York, 1912, with others, not mentioned, making twenty in -all. - -_Fourth_: The centralization of the reserves of the banks at the -Clearing Houses, as a matter of convenience in settling balances, and -carrying on their common business generally, but subsequently for the -purpose of facilitating the issuance of Clearing House certificates. - -MR. LAWYER: Let me repeat to you, gentlemen, what may have been stated -before, that there is no law providing for the existence of the London -Clearing House, nor is there a single law in a single state in any way -authorizing or affecting a single Clearing House in the United States. -Therefore, all that they have done has been without any authority of -law. They are a law unto themselves; and it is not at all certain that -that has not been wise. Indeed, I am of the opinion that it has been -most fortunate for the business interests of the country. What do you -think, Mr. Banker? - -MR. BANKER: I am of the same opinion; in confirmation let us return to -the consideration of the points suggested. - -_First_: The New York Clearing House, as stated, had its first clearing -Oct. 11, 1853. Mr. Cannon says that not until August, 1854, did the -New York Clearing House have a constitution. This instrument, with -the subsequent changes, is in force today, and constitutes as perfect -an illustration of the evolution of law by practice, as can be found -anywhere. - -This institution had various homes until it took up its present -quarters in one of the most beautiful buildings in the whole -country--worthy in every way of its use and purpose. It has cost -$1,130,000 and is owned by the Clearing House Banks of New York, under -the name of the Clearing House Building Company. - -Mr. Cannon says: "The administration of the Clearing House is vested in -a President, Secretary, Manager, Assistant Manager, and five standing -committees.... The manager under the control of the Clearing House -committee, has full charge of all business at the Clearing House, -but before entering upon his duties, he is required to give bond, in -the sum of $10,000.... Although the Constitution provides for the -appointment of a manager, annually, it is the custom to retain the same -one in office, year after year. As a matter of fact, there have been -only three managers in the whole history of the association.... The -Clearing House committee is clothed with almost absolute power, being -second in authority only to the association itself. The ablest and -most experienced bank officers, therefore, are usually chosen to serve -on it. The committee is elected annually. The association at present, -1912, consists of sixty-three members and twenty-two non-members, and -the United States Sub-Treasury, located at New York. The latter makes -its exchanges only at the Clearing House, its balances being settled at -its own counter. It has no voice in the government of the association, -and pays a nominal sum for actual expenses. The privilege which the -Sub-Treasury enjoys of making its exchanges through the Clearing House -is a matter of great accommodation, both to the Sub-Treasury and to the -banks. The New York post office clears through one of the members, but -renders no compensation to the association for the privilege. - -"The membership of the association, since its organization, has been -constantly changing, owing to the admission and expulsion of members -and voluntary withdrawals, as provided by the constitution.... A bank, -the capital of which does not exceed $5,000,000, must pay $5,000; a -bank, the capital of which exceeds $5,000,000, must pay $7,500. Any -member increasing its capital is required to pay in accordance with -those rates." - -In 1899, the large number of trust companies that had come into -existence attracted the attention of the Clearing House and the -Clearing House Committee adopted a rule that no trust company could -clear that had not been in existence for at least one year, and that -every trust company clearing through a member shall furnish a weekly -statement of its condition to the manager of the association. - -The New York State law did not then provide that any trust company -should carry cash reserves, although state banks were required to -have 15 per cent cash in their vaults. It was tacitly understood that -all banks clearing, should have 25 per cent reserve. Of course the -trust companies could ride the banks, and they took advantage of their -opportunity. This caused great dissatisfaction, and rightly so. On Feb. -11, 1903, the association passed a resolution requiring that every -institution (not a bank required to maintain specified reserves) "shall -after June 1, 1903, keep in its vaults a cash reserve, equal to 5 per -cent; after Feb. 1, 1904, 7-1/2 per cent; after June 1, 1904, not less -than 10 per cent, nor more than 15 per cent, as the association might -determine." - -The trust companies kicked and protested, and almost, without -exception, withdrew from the Clearing House; but, after the panic of -1907, the New York legislature passed a law requiring them to carry 15 -per cent cash reserves. - -On June 13, 1908, the association passed a resolution compelling all -trust companies, who were members, to carry a cash reserve of 25 per -cent, and on Jan. 16, 1908, the association for the first time in its -history made a rule compelling all its members to keep a cash reserve -of 25 per cent. - -Every member of the New York Clearing House is required to furnish -to the manager, weekly, for publication, a statement showing its -condition, showing the average amount of loans, and discounts, specie, -legal tender, notes in circulation and deposits. The capital and net -profits are also given, this being the only association which gives the -latter item. - -Along the same line of legislation controlling the action or conduct -of its members, the Clearing House committee, having plenary power to -do so, passed a rule--determining just what every member and bank, -clearing through members, should charge for collections. - -The rule made some cities free, that is, there were no charges for -collection made compulsory. Some cities were under a fixed charge -of one-tenth of one per cent, and others under a fixed charge of -one-quarter of one per cent. Upon April 3, 1899, this rule became -obligatory, and if any member violated it, the penalty was $5,000 for -the first offense; for the second offense it might be expelled from the -association.[1] - -MR. LABORINGMAN: That is precisely the same rule we have in our Union, -only our limit is not so high. We fine a member $5.00 for his first -offense, and for the second offense we take away his card. By Jove, -that is a hot proposition. And these are the very fellows who are -always cussing us because of our Union rules. - -MR. LAWYER: I want to tell you something else, gentlemen, that -combination among the banks is clearly in restraint of trade and in -violation of the Sherman Anti-Trust Law. Anybody who wants to can bring -those banks to time. - -MR. BANKER: Now, gentlemen, don't you perceive that this institution, -step by step, has evolved its own laws, or rules of action, slowly -developing its present system, and regulating and controlling the -conduct of those outside institutions which enjoy its privileges? The -story of this Clearing House is the record of all of them in principle. -They are, each and every one of them, self-centered, self-contained, -and a law unto themselves. - -The operation of the New York Clearing House is practically that of all -the others. Its room is sixty feet square. Four rows of desks occupy -the floor. Each member has its own numbered desk separated from its -neighbors' by a wire net work. - -At one minute to ten o'clock the manager sounds the gong and all are -instantly ready for the exchange which begins promptly at ten o'clock. - -At the expiration of forty-five minutes usually, but sometimes in -thirty-seven minutes, and even in thirty-five minutes, every member of -the association has in its possession all the paper drawn upon itself, -which the other members have credited on their books, and has delivered -all the paper drawn upon all the other members of the association in -exchange which it has credited upon its books. - -Mr. Cannon states that the amount delivered by any member has never -been exactly equal to the amount received but has come within one -cent upon a single occasion. To complete the clearing transaction, it -is necessary, of course, for those who owe anything to pay it to the -Clearing House, and for the Clearing House in turn to distribute what -is paid to it among those who are entitled to receive it. - -As a matter of convenience for the purpose of settling the balances, -the members of the Clearing House deposit with the Clearing House gold -coin, gold certificates, silver certificates and legal tender notes, -and receive clearing house certificates, therefor, in denominations of -$1,000, $2,000, $3,000, $4,000, $5,000, $10,000, $20,000, $50,000 and -$100,000 each. All notes of a smaller denomination than $5.00 should, -according to practice, be put up in packages of not more than $5,000. -All packages are sealed and marked with the name of the institution -depositing them with the amount, date and kind of money they contain. - -The banks, also, deposit at the Sub-Treasury in New York gold coin, for -which certificates are issued by the Assistant United States Treasurer. -These certificates are in two denominations, $5,000 and $10,000 each; -the holders of these certificates are the absolute owners of them. - -_It is stated upon high authority that the amount of such money now -deposited at the various Clearing Houses throughout the United States -exceeds the sum of $200,000,000. In other words, that we have today in -the United States centralized our reserves to that extent for certain -purposes._ - -MR. MERCHANT: Mr. Banker, your history of the development of the -Clearing House and your description of its operations have certainly -been very clear, and most interesting. The second point you mention, -the clearing of country checks, will appeal to all the business men of -the country as it has to me for a long time; especially since I have a -great deal of business up in New England, where this practice has been -in force since 1899. I was up there the other day, and my partner took -me to see Mr. Charles A. Ruggles, the manager of the Boston Clearing -House. After he had described the system of clearing country checks, -he handed me a little pamphlet giving the history of its development -in Boston and setting forth its reasons and advantages so graphically, -that I am going to quote from it in telling you gentlemen about it. - -Let me say to you that I am confident that when this principle is -fully understood, and carried out, as it soon will be, to its logical -conclusion, checks, precisely like our bank notes, will be par -everywhere in the United States. I am fully aware that you are greatly -surprised at this statement; but take my word for it and remember that -what I have prophesied is going to happen. _Free zones are going to -increase until every check will be free within its own zone, and almost -immediately as a consequence, the zone centers will settle with each -other daily; that is all checks will not only be free in their own -zones, but will be free between all zones, that is all checks will be -par everywhere._ - -However, let me tell you how it developed in New England. Ruggles -describes it in these words: - -"That the use of checks has increased rapidly in the past ten years -is an undisputed fact, and the question of how to handle them to -advantage, or without loss, is a problem that has caused much -discussion. All large cities have had the same experience, and have -dealt with the question in various ways. Rather than ask his bank -to draw exchange, the country merchant sent his check to Boston in -payment of his account, and in this way, he was encouraged by the city -merchants who deposited the check in his bank, where it was received at -par. This continued until the volume handled reached such proportions -as to make the item of exchange quite prominent in the expense account, -which the city bankers sought to reduce by various methods. In many -cases checks were not sent directly to the banks upon which they were -drawn, some other route being selected to avoid exchange charges; as, -for example, a check on Stonington, Conn., deposited in Westerly, R.I., -only six miles distant, after many days, during which it traveled one -thousand miles, perhaps, passed through Providence, Boston, Newport, -then New Haven and New London and reached its destination bearing the -endorsement of nine banks. Mr. Cannon in his work on Clearing Houses -cites a remarkable case of zigzagging to avoid collection charges; -a check on Sag Harbor, N.Y., paid to a Hoboken firm was eleven days -reaching its destination. Had it been collected through the New York -Clearing House ten days' time, fifteen hundred miles of travel and a -vast amount of clerical work might have been saved." - -Here are two diagrams showing the route and the indorsements of the -check to which Mr. Cannon referred, taken from Mr. Cannon's work on -Clearing Houses. - -Mr. Ruggles further says: "The subject of the collection of the country -check in a more expeditious and economical method than that then in -force in Boston, was first agitated in 1877, when a committee of five -was appointed to consider the question. A majority reported that the -annual cost to the banks of Boston was two hundred and twenty-nine -thousand dollars for collecting New England checks and recommended -that the business be consolidated, which would very materially reduce -labor and expense. This report was received and placed on file. A -minority report was also submitted in opposition to any change, on the -ground that it would sever the social and business relations which then -existed, and the clerical force required to handle the entire business -would incur so heavy an expense that the cost of collecting would be -as much, if not more, than was the case by the method then existing. -No further action was taken until 1883, when another committee was -appointed to consider the same question. They reported that returns -from all the banks showed that double the business reported by the -former committee was then being transacted and that the probable cost -was four hundred thousand dollars; they suggested that an agency -similar to the Clearing House be established for the purpose of making -the collections. The banks failed to endorse this proposition and the -matter was dropped until 1898, when a committee was appointed by the -Bank Presidents' Association to again consider this important question; -in their report it was recommended that the Clearing House Association -act on the matter and undertake to make the collections. A committee -was appointed by that body, who endorsed the previous report. Their -report was accepted and the Clearing House Association authorized -the Clearing House committee to put in operation the present system, -and the banks of Massachusetts were first addressed on the subject on -April 14, 1899, the result being a conference between the Massachusetts -Bank Cashiers' Association and the Clearing House committee. This -conference revealed a decided difference of opinion at first, but -both sides were brought to a clear understanding of the situation -eventually. The position taken by the Clearing House was that it did -not propose to dictate to the country banker how he should transact his -business or coerce him into acting in conjunction with the Clearing -House; nevertheless, the Boston banks claimed the right to use their -own methods in making collections, and should the country banker decide -to charge exchange, checks on his bank would not be accepted at par -in Boston, and might be collected by express or such other means as -was thought advisable. Comparatively few of the banks in Massachusetts -appeared in opposition when the subject had been fully discussed. At -a second conference the Cashiers' Association asked the privilege of -making payments in New York Exchange if more convenient for them, and -this request was readily complied with. They also asked that they might -ship currency when necessary, at the expense of the Boston banks; this -request was also granted, and in a few months all were remitting at par -and checks from all the Boston banks were being collected through the -Clearing House. On Sept. 21st, Maine was added to the list, followed by -Rhode Island and Connecticut on Nov. 9th, and New Hampshire and Vermont -in January, 1900. - -[Illustration: - - Fac-simile of the Back of the Check, Showing the Numerous Indorsements - it Bore on Finally Reaching the Bank on which it was Drawn. - -_From James G. Cannon's Work on Clearing Houses._] - -"The first year the amount collected was $541,000,000 at a cost of ten -cents per thousand dollars; the second year $565,000,000 at a cost of -eight cents; the third year $607,000,000 with cost reduced to seven -cents. Since the opening of the Foreign Department, as we term it, the -average yearly business has been six hundred million dollars, and the -average cost seven cents. The expenses are met by an assessment levied -on the banks based on their daily average business. There are at -present in New England six hundred and thirty-seven banks and trust -companies to whom checks are sent daily, and the number of packages -handled will average five thousand." - -[Illustration: Map Showing the Check's Itinerary. - -_From James G. Cannon's Work on Clearing Houses._] - -MR. BANKER: Mr. Merchant, I am very much surprised that you have made -such a thorough study of this feature of the banking problem, but I -am also equally gratified. You have certainly explained the question -so clearly and fully that no one can fail to be impressed with the -future possibilities of this plan of clearing country checks, and I -am convinced that you are absolutely right that the time is not far -distant when every check in the United States will be par everywhere -precisely as our bank notes are today; and why should they not be so, -since both are identically the same thing in principle. - -MR. LAWYER: I can see what a tremendous advantage that would be to -our commerce, indeed, incalculable, and I can see that there is no -substantial difference between a check on a bank and a bank note, which -is a check of the bank on itself; both are mere credits, and as you -say, when fully comprehended and rightly understood, will be treated -in precisely the same way in the exchanges of the country. But it -does seem to me as though we shall have to have a better knowledge of -our banks, and the business houses of the country, too, if this great -reform is to be brought about. - -MR. BANKER: That is true, but the bankers of the country have realized -for a long time that their greatest peril came from the unsound -practices and reckless methods of some of their own number and have -already taken steps to protect themselves against such practices. - -You, gentlemen, will all of you, no doubt, remember the Walsh failure -at Chicago in 1906. You will also remember that Walsh had control -of three different banks with approximately $30,000,000 resources; -one was a National Bank, under national supervision; one a Trust -Company and one a Savings Bank; both of the latter being under State -supervision. This enabled Walsh to flim-flam the examiners, one -examiner being national and the other state, by juggling the assets -and then finally diverting practically all of the deposits into his -own enterprises; certainly the best part of them was used in promoting -his business schemes. It took this kind of an earthquake to wake up -Chicago and bring into the banking fraternity, or business world, one -of the greatest reforms of the commercial life of the country. I say -commercial world advisedly because about the same time Chicago had an -experience with a fish house that was really the biggest fish story -that was ever told. The sad thing about this fish story was that it was -true and cost the fishermen, the Chicago banks, and the fishermen and -bankers elsewhere, about $3,000,000. - -These two experiences capped the climax and illustrated perfectly the -need of just what followed in the Clearing House at Chicago. - -This brings me naturally to the third point that I mentioned as -important and vital in the evolution of the American Clearing House. - -On June 1, 1906, the Clearing House Association of Chicago, Illinois, -acting upon a resolution introduced by Mr. Fenton, Vice-President of -one of its banks, established an independent system of Clearing House -bank examinations. Only recently the chairman of the Clearing House -used this language: - -"The result of our experience in Chicago is most satisfactory and -gratifying. The banks have almost unanimously adopted every suggestion -made by the Clearing House Committee for their betterment and strength. -In several instances the Committee, from its wider knowledge of -the financial situation, has been able to save some of the smaller -institutions from loss by enabling them to take hold of conditions in -time. I cannot properly go into such details as would illustrate the -effectiveness of Clearing House examinations as we have experienced -it, and can only say in a general way that it has been even more -satisfactory than I anticipated it would be before it was undertaken." - -MR. LAWYER: Right on this point I want to read to you a letter I -have just received from the Clearing House examiner of Los Angeles, -California. - - Dear Sir: - - Replying to your inquiry of December 9th, will say that Clearing House - examinations were begun in Los Angeles on May 1, 1908. Since the - inauguration of the system there have been no bank failures, because - the Executive Committee of the Clearing House Association will not - permit banks to reach the danger point. - - We have had one instance where, after watching a bank for three years, - giving it a chance to correct its bad methods and put itself in good - condition, the Clearing House finally compelled it to assign all of - its assets to a trustee, and the public was notified that all claims - would be paid on demand.... - - National and State examinations have improved greatly during the last - ten years, but they will always lack the strongest element--the calm, - clear judgment of the local executive committee, whose demands are - founded on knowledge of the situation, and whose mind is not warped by - political strings. - - Yours very truly, - (Signed) John W. Wilson, - _Examiner, Los Angeles - Clearing House Assn._ - -Mr. Cannon in his admirable work on Clearing Houses, says: - -In substantially his own words the Chicago examiners operate under the -following conditions: The examinations extend to all the associated -banks in Chicago, and to all non-member institutions. The work is -conducted with the aid of five regular assistants, each fitted by -experience to thoroughly do that part of the work assigned to him. -The examinations include, besides the verification of the assets and -liabilities of each bank, so far as is possible, an investigation -of the workings of every department, and are made as thorough as is -practicable. After each examination the examiner prepares a detailed -report in duplicate, describing the bank's loans, bonds, investments -and other assets, mentioning specially all those, either direct, or -indirect, to officers, directors, or employees, or to corporations in -which they may be interested. The report also contains a description -of conditions found in every department. One of these reports is filed -in the vaults of the Clearing House in the custody of the examiner, -and the other is handed to the examined banks' president for the use -of its directors. The individual directors are then notified that the -examination has been made, and that a copy of the examiners' report has -been handed to the presidents for their use. In this way every director -is given an opportunity to see the report, and the examiner, in every -instance, insists upon receiving acknowledgment of the receipt of these -notices. - -The detailed report, retained by the examiner, is not submitted to the -Clearing House committee, under whose direct supervision he operates, -unless the discovery of unusual conditions make it necessary. A -special report in brief form is prepared in every case, and read to -the Clearing House committee at meetings called for that purpose. The -report is made in letter form, and describes in general terms the -character of the examined banks' assets, points out all loans, direct -or indirect, to officers, directors, or employees, or to corporations -in which they may have an interest. It further describes all excessive -and important loans, calls attention to any unwarranted conditions, -gross irregularities, or dangerous tendencies, should any such exist, -and expresses in a general way the examiner's opinion of each bank as -he finds it. - -The circumstances under which the first Clearing House bank examiner -was appointed and the result are well set forth by James B. Forgan, -President First National Bank of Chicago. - -"Chicago was the pioneer in Clearing House bank examinations. - -"They were inaugurated there in 1906 after the failure of a National -bank and two State banks. These institutions were under the direct -management of one man who was president of the three. The condition of -their affairs when disclosed surprised and appalled the other Chicago -bankers. The liabilities of the private ventures of the president had -gradually accumulated in the three banks until they had absorbed the -entire capital and surplus of all three, amounting to $3,500,000, and -44 per cent of their aggregate deposits of $27,000,000, one-third of -which was public funds. - -"The condition in the National bank had developed through a period -of years during which the Comptroller of the Currency, through the -semi-annual reports of his examiners, had been kept fully advised of -what was going on. Among the assets were found nineteen fictitious -loans for $90,000 each represented by so-called memorandum notes. -Each memorandum note purported to be secured by $100,000 of second -mortgage bonds of the Wisconsin & Michigan Railway Co. This road was -controlled by the bank president, and the bonds proved worthless. The -first mortgage bonds of the same road, $952,000 of which (being almost -the entire issue) were also among the assets of the banks, were finally -disposed of at about 23 cents on the dollar. These memorandum notes -did not, on the face of them, even pretend to be the obligations of -bona fide borrowers. The ostensible signatures on them, although in -different names, were all in the handwriting of the clerk who filled -them out and who wrote plainly in red ink across the face of each the -words 'Memorandum Note.' They could not deceive anyone who saw them and -they did not deceive the national bank examiners who reported to the -Comptroller the facts in connection with them. - -"Although cognizant of these irregularities and of the accumulating -obligations in the bank of the president's private enterprises, the -Comptroller apparently could not or at all events did not take measures -to stop them by other means than those of expostulation and reproof -until matters became so bad that they simply could not be permitted to -go further. - -"When at last drastic measures were decided upon the Comptroller and -the State Auditor, acting together on a Saturday afternoon after the -vaults of the three banks had been closed with time locks set for -Monday morning, notified our Clearing House committee that unless -provision were made for payment in full of the deposits none of the -banks would be permitted to open for business on Monday morning and -they would be put in the hands of receivers. - -"Business conditions were strained and the time was therefore -particularly unfavorable for permitting the failure of three prominent -banks. The effects of such a calamity it was feared would have extended -far beyond the confines of Chicago. - -"The situation was thus protected from a general disturbance of public -confidence, but it was done at the cost of a very heavy loss, foreseen -at the time and since realized by the participating banks. - -"The statements of the National bank made five times a year to the -Comptroller's department, copies of which were rendered to the Clearing -House committee and on which it had implicitly relied, failed to -disclose these conditions. - -"I have given you these details of this unfortunate affair because they -show so clearly the limitations of governmental supervision of banks -under our National banking law as it has been interpreted by the courts -and by the legal advisers of the Comptroller's department. - -"Let me draw your attention to a few of the legal restrictions which -limit the Comptroller's power to act in such cases. - -"1. Under the National Bank Act no obligation due a bank is considered -bad until interest is past due six months and not then if it is secured -or in process of collection. - -"2. The Comptroller may appoint a receiver when he concludes that a -bank is insolvent. But here again he has been hampered by the legal -definition of insolvency, which is 'inability to pay current debts as -they mature.' - -"3. The making of a National bank report to the Comptroller so long as -it is in accordance with the bank's books, however erroneous it may -be as to actual values, which alone disclose a bank's true condition, -cannot be construed as a misdemeanor. - -"These legal restrictions are presumably the reason why some banks -have been permitted to persistently publish to the public the figures -of their statements as rendered to the Comptroller of the Currency -after they are known to have met with heavy losses and have failed to -provide for them by charging them to profit and loss. That this has -been permitted in some cases is notorious. The case of the Chicago -National Bank and a recent one in a large central city [$6,000,000 of -$8,000,000 surplus was charged off] are conspicuous examples because of -their size. Undoubtedly as a rule the published statements of the banks -are reliable, but there are a few exceptions, with which, in view of -the legal restrictions which govern his action, the Comptroller finds -himself unable to cope. These exceptions, however, frequently result in -failures and catastrophes. The Comptroller cannot legally take drastic -measures with such banks until they perform some act of insolvency or -when he believes their capitals to be impaired, which, being a matter -of judgment in regard to the realizable value of their assets, is -frequently difficult to prove. - -"These disclosures in connection with the failures of these three banks -showed the associated banks of Chicago that statements so rendered, -which up to that time had been all the Clearing House Committee had to -rely upon and which, as published, form the basis of the standing and -credit of banks with the public, could not be implicitly relied upon. -It was therefore unanimously resolved to adopt a system of supervision, -under which there would be some assurance that such conditions -could never again develop in any bank connected with the Chicago -Clearing House Association. There was therefore organized a bureau of -examination in connection with the Clearing House. - - * * * * * - -"As to the practical working of Clearing House examinations in Chicago -during the six years of their existence I can only say that it has -proved in every way most satisfactory and successful. There has been -neither friction nor unpleasantness. Bank directors realize the great -benefits derived and are unstinted in their praise of them. They are -greatly assisted by these reports in keeping themselves informed on -the condition of their banks and they readily coöperate with the -Clearing House committee in the correction or elimination of anything -open to criticism. Our experience has been that the banks have almost -unanimously adopted every suggestion made by the committee. I cannot, -of course, discuss such details as would show its efficacy. I can only -say that the results have been most satisfactory to all concerned and -that much good has been accomplished for the Chicago banks individually -and collectively. - -"The organization, being entirely voluntary, partakes somewhat of the -nature of a gentlemen's agreement, under which each bank binds itself -to conduct its business under proper methods. The effectiveness of -the method lies in the fact that they are all measured by the same -standard, viz.: that their statements as rendered to the Clearing House -Association must be satisfactory to the committee, in view of the -examiner's reports upon them, otherwise they cannot continue to enjoy -Clearing House privileges." - -MR. BANKER: From Mr. Wilson's statement about Los Angeles and Mr. -Forgan's statement about Chicago, it must be perfectly clear to all of -you, as it now is to me, that if we had in this country, say thirty or -forty commercial zones, or free check zones, like New England now has, -that is thirty or forty financial centres, covering all the territory -naturally tributary to them, and so compassing, or covering the entire -country, and these zones, all organized precisely as the Chicago -Clearing House Association is organized for the examination of all the -banks of the United States, bank failures would become a thing of the -past. - -MR. LAWYER: Well, let me see now, how you would insure that result, -that is that bank failures would cease. The banks fail very often, -possibly generally, because the officers of the banks have used -the bank's assets in their own schemes, or those in which they are -interested. But bank failures are very often due to fish paper, such as -you described a few moments ago. How would you detect, check and stop -that sort of thing? That is, how would you prevent too much paper from -some one merchant, or manufacturer, getting into the banks? - -MR. BANKER: Don't you see, Mr. Lawyer, that if your examination covered -all the banks in a commercial zone, your examiners would always know, -or could very easily find out, just how much paper any business house -had in the banks of that particular zone, couldn't they? Don't you see -that if they observed that a large amount of paper of some business -house had been placed in the banks of that zone, that is, loans -made, or paper sold, they would at once be placed upon their guard -and inquiry, and would proceed to find out just how much paper that -particular business house ought to have, or was entitled to have out, -considering its capital, and the general character of its business? -Don't you see that these bank examiners could insist on knowing all -about the financial condition of any business house in their particular -zone, just as well as the banks themselves could and do insist upon -knowing? If a business house should refuse the bank examiner the -fullest possible information about its affairs, its days would be -numbered as a borrower at the banks of that zone, would they not? - -MR. LAWYER: That is just the point. A business that is over expanding -its credit by borrowing, or by selling its paper, will probably be -working some other zone, or several of them at the same time. - -MR. BANKER: You might naturally think so until you reflected upon -the situation for a moment. Don't you see that if you had, as I have -just said, thirty or forty such commercial zones, all organized, and -all united into one system, as perfectly as if they were one single -institution, that they could within twenty-four hours know to almost -a dollar how much any business house in the whole United States had -outstanding so far at least as the banks were concerned in all of -them--simply by telephoning or telegraphing to each other? - -_You must see that every one of these commercial zones would soon -become the most comprehensive and the most perfect credit bureau in the -entire world, and that taking them altogether, they could and would, by -the most exhaustive methods, not even now fully appreciated, be able -to check the whole commercial situation in the United States in an -incomprehensibly short space of time. Nothing is so essential today as -to know the facts about the situation because of the enormous increase -of trade, and consequent expansion of credit._ - -MR. LAWYER: It does seem to me, after all, now that you have finished -the details of your plan, that you have in it a perfect check upon -the whole business of the banking world. Humanly speaking, I see no -loophole nor escape whatever. - -MR. LABORINGMAN: That looks to me like an all-round scheme. It will -certainly work like the colored man's fish trap, it will catch 'em, -both "agoin' and acomin'," and would give this country the only -practical scheme I've ever heard of for insuring bank deposits; for it -does not seem possible to me for a bank to get into a position where -it ought to fail. Now, gentlemen, if there is one reform in this whole -business that ought to be accomplished it is such an administration of -these banks, as will practically prevent failures. Don't you think so -yourselves? This question is always coming home to the working people, -because a bank failure is a tragedy in their lives. - -MR. MANUFACTURER: Yes, Mr. Laboringman, I certainly do agree with you, -and I believe that this plan of having all the banks of the entire -country examined by bankers just as they are now being examined by -the clearing houses instead of politicians, and finding out, as such -clearing house examiners will, not only the condition of the banks, -but the financial condition of every business house as well, will -accomplish what you want. The laboring people are entitled to better -protection than what has yet been given them. This goes to the very -root of things. - -MR. MERCHANT: Gentlemen, I have been listening with the greatest -possible interest to the story of the growth of the American Clearing -House and the most marvelous thing about this matter to me is that -this vast system which has not yet been correlated is the product -of experience, and that there is not a single practice of this huge -machine from the Atlantic to the Pacific as it is carried on, or -operated, that is based upon a single statute. Think of the Clearing -House Associations in those twenty cities, actually examining, not only -their own members, but every other bank that clears its checks through -one of their members. Why, gentlemen, today these bank examiners could -cut off my credit at my bank without my knowing it by simply saying to -the banks that my credit was too much extended, and that I ought to cut -it down, and get into a safer position. - -MR. FARMER: Well, do you know, I am of the opinion that there is -nothing so important in these days as to have someone going around -and compelling these fellows to pull in their horns. They will never -interfere with anyone as long as he keeps in sight of the shore. It's -a good thing and will do more than anything I know of to keep our -business ship on an even keel. - -MR. MANUFACTURER: When Mr. Farmer talked about pulling in their horns, -I thought he was perfectly at home, and talked about something that he -was familiar with; but when he gets to talking about a ship and keeping -close to shore, it strikes me that he's getting out to sea. However, -this proposed supervision and checking scheme strikes me just as it -does him, as the most desirable, wholesome and healthy process by which -we can go on in the future far more steadily, and in the end far more -rapidly than we do now, with our ups and downs, and I am heartily in -favor of it. - -But, Mr. Banker, it occurs to me that if these thirty or forty zones -you speak of are going to work so closely together, as you think, and -have outlined, there will be sooner or later a tremendous business -going on between them. - -MR. BANKER: Of course there will; and that suggestion brings me -naturally to the fourth point I raised in connection with the -development of our American Clearing Houses which was a combination of -a part of their reserves for their own convenience. - -You will remember that I called your attention to the fact that it was -estimated by high authority that the banks belonging to the Clearing -House Associations were now carrying upwards of two hundred million -dollars of their reserves at the various Clearing Houses. It does not -seem to me as though it was taxing the imagination very much to see -how very easy it would be to apply the same principle to the thirty -or forty financial centers that is now being applied to all the banks -included in the Clearing Houses. Of course I realize that the reserves -will have to be upon a correspondingly increased scale, ranging from -one billion to one billion and a half, as things now stand, and that -they will all have to be actually combined, and perfectly mobilized, -precisely as the reserves are, when a Clearing House Association -fortifies itself, to protect all of its banks, and the commercial -interests of any community in times of danger and panic. - -MR. LABORINGMAN: What do you mean by Clearing House certificates? I -have seen these things mentioned time and time again in the papers, -and I must say I could not get on to them. I supposed it was just some -huggery-muggery of Mr. Banker, over there, for the purpose of getting -the best of the dear people. - -MR. BANKER: On the contrary, just the reverse is true. Clearing -House certificates, commonly so called, are issued only to protect -the people's interest. They are issued for the common good, and are -thoroughly appreciated by all those who understand their use, and the -circumstances under which they are issued. Mr. Laboringman, you have -just asked what a Clearing House certificate is. We all know what a -gold certificate is. It certifies that there are deposited in the -Treasury of the United States as many gold dollars as its face calls -for, and the holder can go and get the gold dollars by presenting -the certificate. In the early part of this evening, we learned that -a Clearing House certificate was issued by a Clearing House whenever -some bank deposited with it gold coin, gold certificates, silver -certificates, or United States Notes; that is, such a Clearing House -certificate is for such a deposit as is made, and entitles the holder -to what it calls for, as was then stated. Now, the popular name, -Clearing House certificate, is applied to something quite different -from the exact, or technical, definition above given. - -When we say that a Clearing House has issued Clearing House -certificates, in ordinary, or popular, language we mean "Clearing -House Loan Certificates," because the public never have any occasion -for discussing the usual Clearing House certificates. The Clearing -House loan certificates are issued by a Clearing House upon commercial -paper, bonds, stocks or any satisfactory security. In 1907, collateral -security amounting to $453,000,000 passed through the hands of the New -York Clearing House Committee, of which $330,000,000, or 72.92 per -cent, was commercial paper and $123,000,000, or 27.08 per cent, was -bonds, stocks and short-time railroad paper. - -MR. LAWYER: Mr. Banker, if you will allow me, I think that Mr. Cannon -has stated this phase of the question so well that I should like to -read it right here. He says: - -"Clearing House certificates are of two kinds, those issued upon the -deposit of gold coin (and in New York City and Boston on gold and -silver certificates and legal tender notes) and those issued upon the -deposit of collateral securities. The former are employed in ordinary -times solely as a method of economizing time and labor and reducing -risk in handling large sums of money. The latter are employed in times -of financial disturbance or panic, and although both are intended for -use solely in the settlement of balances at the Clearing House, the -circumstances that call them forth, the results effected by their use, -and the part they play in banking economy have little or nothing in -common. The certificates issued upon the deposit of gold, etc., are -termed 'Clearing House Certificates,' and those issued upon the deposit -of collateral security are very properly termed 'Clearing House Loan -Certificates,' with which latter only are we here concerned. - -"Clearing House Loan Certificates may be defined as temporary loans -made by the banks associated together as a Clearing House Association, -to the members thereof, for the purpose of settling Clearing House -balances. Such certificates are negotiable, as a rule, only among the -members of the association, and are not in any sense to be regarded as -currency. They are not even seen by the business community, and do not -pass from bank to bank except in payment of Clearing House balances. - -"To obtain an intelligent understanding of the real character and -purpose of such certificates it will be well to treat somewhat of the -circumstances under which they are issued. In the course of the present -century the United States has undergone periodical derangements of -business affairs, when confidence was displaced by mistrust, when the -payment of debts became difficult, when property values declined, and -business houses failed; when industry and trade were paralyzed, and -general stagnation ensued in all lines of enterprise. In such times -depositors in banks, stricken with fear and sometimes pressed by need, -draw out their deposits, in many cases to such an extent as to render -it difficult or even impossible for the banks to contract their loans -sufficiently to meet the demands thus made upon them. Under our present -currency system no adequate method is provided for expanding the money -volume as occasion demands, whereby the banks can continue their -usual loans and discounts, and thus prevent a panic with all its evil -consequences. Hence it is left in a large measure to the financiers -of each community to work out their own remedy, supplemented by such -mutual assistance as a courteous regard for each other may dictate or -as business relations may demand. - -"Quick to see the defects in our currency system, and the desirability -of in some way supplying it, the bankers of New York, nearly fifty -years ago, devised the scheme of issuing Clearing House Loan -Certificates as a method of relief from temporary stringencies. -Subsequently, nearly all the Clearing Houses in the great centers -adopted the same device, and by their heroic resort to the measure -they have at different times relieved the business community of untold -disaster, for which invaluable service they have justly received the -grateful recognition of the entire country. - -"The great value of Clearing House loan certificates lies in the fact -that they take the place of money in settlements at the Clearing House, -and hence save the use of so much actual cash, leaving the amount to be -used by the banks in making loans and discounts, and in meeting other -obligations. The volume of currency, to all intents and purposes, is -expanded by this means to the full amount of the certificates issued." - -In the history of the past the denominations have varied from 25 cents -to $100,000 in the different associations and in proportions varying -from $50 to $100 of certificates to $100 of collateral deposited. - -The total amount of its balances is not always paid in Clearing House -loan certificates by a bank to which such certificates have been -issued. Thus, for example, the debit balance of a given bank may be -$500,000, which in ordinary times would be paid in money or gold -certificates. In a time of panic a part of this sum--say $300,000--is -paid in Clearing House loan certificates and the remaining $200,000 -in currency. Another, with the same balance, might pay the whole in -Clearing House certificates, while still another would pay the full -amount without the use of any certificates whatsoever. - -The first issue of Clearing House certificates occurred in 1860. In -the autumn of that year there was a rapid shrinkage in bank deposits -and a corresponding contraction in loans and discounts. The situation -grew more and more serious as the end of the year approached. The -presidential election was a disturbing factor of more than ordinary -significance. Immediately succeeding the election of Abraham Lincoln -to the presidency the situation began to assume a critical aspect. -Distrust and uncertainty were universally felt. - -In accordance with the authority thus given, the first issue of -certificates was made Nov. 23, 1860, and the beneficial effect was -immediately felt. The banks rapidly extended their loans, deposits -increased, and commercial paper, which formerly could not be sold for -20 per cent, was now freely marketed at 7 per cent and 8 per cent. As -a result of the pressure the association passed a resolution in the -following September, authorizing another issue of loan certificates, -and on Sept. 19, 1861, the first issue was made. - -In 1863 the association issued certificates for the third time. The -first bore the date of November 6th, and the largest amount outstanding -at any one time was $9,608,000. - -Owing to the prolongation of the war, with the consequent unrest in -business circles, the issue of certificates for the fourth time began -March 7, 1864, and reached its maximum, $16,418,000, on April 20th of -the same year. - -No more loan certificates were issued until the year 1873, when for -the first time the Clearing House associations of other cities, -seeing their great practical utility, began to avail themselves of -their use. In the year mentioned the association at New York followed -the precedent established in 1860, and the same course was taken by -the Clearing House Associations at Boston, Philadelphia, Baltimore, -Cincinnati, St. Louis and New Orleans. The panic which called forth -such united action was one of unusual severity. It reached its climax -in September, and so severe were its ravages that the New York Stock -Exchange closed its doors on the 20th of the same month, for an -indefinite period, but reopened them ten days thereafter. - -The usual resolutions were passed by the Clearing House Association, -authorizing the issue of certificates, and on September 22d the first -issue was made. The amount was fixed at the outset at $10,000,000, -which, with the announcement that the Government would purchase the -same amount of bonds, caused an immediate subsidence of the panic, and -in less than three days its most acute stages were over. During the -two months referred to, certificates to the amount of $26,565,000 were -issued. - -New Orleans alone issued certificates in 1879, the amount being -$54,000. New York alone issued certificates in 1884, the amount being -$24,915,000. - -The next certificates were issued Nov. 12, 1890, and the issue ceased -December 22d, amounting in the aggregate to $16,645,000; the largest -amount outstanding at any one time was $15,205,000, on December 12th; -and the last certificates were retired February 7, 1891, less than -three months from the date of the first issue. Boston and Philadelphia -followed. Then came one of the memorable panics, 1893. - -The issue was commenced June 21, 1893, and ceased September 6th of -the same year, the total issue having been $41,490,000. The largest -amount outstanding at one time ($38,280,000) was attained August 20th, -which amount remained unaltered until September 6th. Then followed -Philadelphia, Baltimore, New Orleans, Cincinnati, Buffalo, Atlanta and -Birmingham. Birmingham to protect its cash issued denominations all the -way from twenty-five and fifty cents up to $1, $2, $5, $10, and all the -larger amounts. - -Besides the loan certificates issued in 1893, there was a considerable -amount of emergency circulation taken out by the banks in the -Southeast, under the title of "Clearing House certificates," in cities -where no Clearing Houses existed. In adopting the name of Clearing -House certificates, it was not the purpose of the banks to practice -deception on the people, but to indicate what was really true and -what the term would seem to imply, namely, that such certificates -were temporary loans made by the banks associated together, and that -the banks were pledged for their redemption. The denominations in -the cities referred to were: Albany, Ga., $10, $5, and $1; Chester, -S.C., $10, $5, and $1; Columbia, S.C., $50, $20, $10, $5, $2 and $1; -Danville, Va., $100, $50, $20, $10, $5, $2, and $1; Newman, Ga., $10, -$5 and $1; and Rock Hill, S.C., $5, $2 and $1. There is no doubt that -the relief afforded in this manner was of great public assistance in -the several communities where it was given, effecting results similar -to those accomplished by the actual Clearing House loan certificates in -the great centres. Business houses and corporations came to the relief -of the situation and among them was the New Bedford Mfg. Co., Social -Mfg. Co., Hartford, Conn., Eagle and Phoenix Mfg. Co., Columbus, Ga., -Swift Mfg. Co., Columbus, Ga., Arnold Print Works, North Adams, Mass., -Richmond Locomotive Works, Richmond, Va., Minneapolis and Northern -Elevator Co., City of Tacoma, City of Richmond, City of Johnstown, Pa., -Loomis and Hart Mfg. Co., Chattanooga, Tenn. - -So much for panics up to our last. Then came the panic of 1907. Of -this a prominent banker and economist has said: "The truth is that -responsibilities for the panic of 1907 lie at the door of our currency -system. No other adequate cause can be found. We do business by the -modern system of bank credits, but we have failed to supplement this -machinery with the means for readily converting bank credits into cash." - -On Oct. 26, 1907, New York issued Clearing House loan certificates. On -Oct. 26, 1907, Chicago also issued Clearing House loan certificates. -On Nov. 6th, Chicago issued Clearing House checks for $1, $2, $5, $10, -amounting to $7,500,000. These checks were secured by Clearing House -loan certificates. - -On November 16th, Philadelphia issued Clearing House certificates and -the business houses issued pay checks for wages which were cleared -through the Clearing House. - -During the fall many cities issued Clearing House checks in small -denominations which were used for currency. Canton issued pay checks -for $1, $2, $5 and $10, amounting to $200,000, which had no security -back of them. - -In November pay checks in denominations of $2, $5, $10, $20 were issued -to the fourteen banks of the Clearing House of Cincinnati. - -Cleveland followed Chicago in denominations of $1, $2, $5, $10. - -Fargo, Dakota, issued $5, $10, $20, $100 and $500. - -Los Angeles issued October 30th "Clearing House certificates or scrip," -designed as a circulating medium for the general use of the public. - -Mr. Cannon records the action taken by the associated banks of Group -No. 2 of the Ohio Bankers' Association, which includes twelve counties, -and is worthy of comment since it offers the first concrete example of -the possibilities of the banks of any particular section of any state, -uniting in an effort to overcome the disastrous consequences resulting -at times from false rumors in panic periods. - -MR. MERCHANT: _Now, gentlemen, why all this frightful agony, this -terrific straining, this ever-recurring tragedy and universal ruin, -simply because we persist in being utterly ignorant of the simplest -economic truths which our own actions on every such occasion have -demonstrated--that there is absolutely no difference between a bank -book credit and a bank note credit, except that the people want -something that passes current in greatly increased quantities, when -loaning stops or credit is checked. You have only to go to Scotland, -and note the fact that there has been in operation there two hundred -and seventeen years the vital principle involved, the conversion of -bank book credits into bank note credits, and the current redemption of -all bank credits in gold coin, whenever called for._ - -Why, gentlemen, if the man who wants to find the cure would only shake -the moss from off his back, and take time to read what I am going to -submit to you now, or pull the cobwebs out of his eyes and go up to -Montreal, or Toronto, or any Canadian city, and see the bank notes come -into the Clearing Houses, with the checks and drafts, he would wonder -why he had been such a complete idiot all his life, when our nearest -neighbor was enjoying perfect immunity from our troubles. - -L. Carroll Root, an American economist and historical student of the -first rank, after a most thorough and exhaustive investigation of banks -and banking in New England before the war, concludes his comment as -follows: - -"When the National Banking System appeared upon the scene it found the -channels of circulation in New England filled by a State bank currency -of well recognized soundness. - -"In general, it was a currency based upon the 'banking principle.' It -was issued against general assets--not against the deposit of bonds. -It was secured in addition, in most of the states, by the further -liability of officers and stockholders, or by a first lien upon all the -assets of the bank, or both. It was limited--rather loosely, we would -now say--to one hundred and twenty-five or one hundred per cent of -the capital. But though issued under the legislation of six different -states, it was in reality a single currency system--made so through the -agency of a commercial enterprise, established and carried on without -the aid of law. The bills of banks in any one part of New England -passed at par in every other part; and for years the notes of New -England banks had been enjoying an extended circulation in the west, -where its reputation found for it ready acceptance. At home, too, its -valuable points were appreciated and its forced transference to the -national system a matter of regret. - -"The history of New England bank currency, thus closed, is significant -for two developments which characterize it: - -"First, the steady growth, under the teachings of experience, of the -system as to the issue and regulation of bank currency, which has since -then become generally approved among the English-speaking peoples of -the New World. In one direction after another special opportunities for -fraud or exploitation of a confiding public by rash banking developed -their legitimate disasters and prompted the invention of remedies -'to fit the crime.' Conditions were so nearly alike throughout the -New England states that each was prompt to suffer from any financial -disease affecting any other, and equally prompt to adopt, with such -improvements as its own enterprise might suggest, the remedies which -had been found effectual elsewhere. As a result, the complete system, -at the time of its practical suppression by the National Bank Act, -was utilizing nearly every expedient to secure safe and conservative -banking that were then or have since been incorporated in our own -National Banking system, or in that of Canada--the two great plans -which have since been matured. - -"A second feature was the development of redemption facilities and -methods. Starting with absolute chaos, assisted by no law, progressing -tentatively as each necessity prompted the invention of new means to -meet it, the result was a carefully buttressed and easily working -system, under which, to an extent never approached in its efficiency -by any plan elsewhere created by law, the bank note currency of New -England was made elastic, safe and ideally convenient and inexpensive -in use. - -"For a full generation before the war, the amount of ultimate loss to -noteholders was too small to be reckoned as an appreciable percentage -on the amount of currency outstanding, while the delays and minor -inconvenience in the prompt cashing of the bills of broken banks -were the result rather of the imperfect communication and exchange -facilities of those days than of material defects in the banking system -itself; indeed, so satisfactory had been the workings of what is known -as the 'Suffolk Bank Redemption Plan'--that the need even of the most -modest guarantee fund for instant redemption of broken bank bills was -not felt until after the panic of 1857; and even then the total loss -was petty when compared with the total circulation, and such as the -most moderate plan of subsidiary guarantee would have forever obviated." - -MR. MANUFACTURER: That is most astonishing, actually astounding; they -went through identically the same experiences during the first fifty -years of this country that we have been going through during the last -fifty, and they perfected a banking system which we killed by the 10 -per cent tax on bank notes. Now we are gradually, whenever necessary, -even in defiance of law coming back to the same principle of credit -currency, for certainly, whatever may be said of the Clearing House -loan certificates, generally speaking, all those $1, $2, $5, $10, $20, -$50 and $100 Clearing House checks were nothing but a pure credit -currency, and we do not seem to have sense enough to see it, and adopt -that principle. - -New England redeemed all her currency at the Suffolk Bank at Boston, -the financial centre of that commercial zone. New England did before -the war, precisely in the redemption of her bank currency what she has -been doing since 1899, in redeeming New England checks at Boston. We -must take our hats off to New England. All we want to do is to adopt -the currency system which she worked out, and her free zone system for -check redemptions. - -Canada obtained her original banking law by copying the statutes of -Massachusetts before the war. She has improved upon them in detail, but -the great underlying principle is the same. - -MR. MERCHANT: The total amount of certificates in one form or other, -cash checks, etc., issued in 1907, was stated by the Comptroller of -the Currency to be $248,279,700. It is a most interesting fact to note -that just prior to the panic Hon. Charles N. Fowler, then Chairman of -the Committee on Banking and Currency, of the House of Representatives, -introduced a bill for the purpose of allowing the banks to issue -$250,000,000 of bank notes of the pure credit currency character, and -urged its adoption, as a measure of relief for the impending crisis. -You will note the amount was only one million and three quarters -in excess of the amount actually issued, or an estimate within -three-fifths of one per cent of the amount actually used. - -Never before in the history of the country was such license taken -by the banks of the country as in 1907 in using bank credits in the -form of cash checks indiscriminately; but they demonstrated this -great economic truth that the nearer they approached to a pure credit -currency, the nearer right they were. And they demonstrated this fact -also to the satisfaction of every intelligent man on this question; -that, if this country had been blessed with a credit currency redeemed -through the Clearing Houses every day, precisely as these Clearing -House certificates and pay checks were, the panic of 1907 would never -have marred the commercial history of this country. - -With all of our own experience before us, from the establishment of the -banks of Virginia in 1803, is our stupidity to continue. And are we -now to do something possibly more than stupid when we are naturally, -even in defiance of law, as we have seen, finding our way out? If left -alone, we shall soon adopt these same principles, now in practice in -Scotland, Ireland and Canada? Principles which, without statutory laws, -gave New England, before the war, the most perfect banking system that -has ever existed anywhere in this world, all things considered. - -MR. FARMER: Then why in thunder don't we adopt it now? I suppose we are -through with the Clearing House now, aren't we? I hope so, for I am due -at the farm. They are waiting for me. - -UNCLE SAM: Just hold on a minute. If I understand the facts, you are -all wrong about one thing, and this includes both Mr. Cannon and Mr. -Hallock. The first Clearing House on this continent was not at New -York at all, but it was established at Boston, where I held my first -Tea Party, and it was started in 1818, thirty-five years before New -York got to going. It only took two clerks to do the business for the -first six years. By 1855, just two years after New York started, it -took seventy clerks to do the business, and the redemptions amounted to -four hundred million dollars per year. Transactions in New England in -those days were comparatively very small, and the business was carried -on as it is in France today, very largely with bank notes instead of -checks. You remember, we learned one night that the Bank of France owed -$1,000,000,000 (one billion) in notes, and only one-tenth as much, or -only $100,000,000 subject to check; and that if a bank could issue -notes, as freely as take deposits, the habits of the people would -always determine whether the amount of bank notes was greater than the -deposits. - -From 1840 to 1860 the note issue of the 510 banks in New England ranged -from $30,000,000 to $57,000,000, and averaged $43,000,000, while the -deposits ranged from $15,000,000 to $47,000,000, and averaged only -$31,000,000, or the note issue was nearly 50 per cent greater than -the deposits. The note issue then was the main feature of the banking -business, precisely as it is at the Bank of France, and they started a -Clearing House to clear the bank notes and it was called "The Suffolk -Bank," where all the New England bank notes were cleared, precisely -as New England checks and drafts are cleared today. New England was -a free bank note zone before the war precisely as it is a free check -zone today. All notes were par at Boston, as all checks are par today, -and the Suffolk Bank, where the bank notes were cleared, was just -as much a Clearing House as the one they have in Boston today, for -clearing the checks and drafts. There is not the slightest difference -between the two, and the fact that no one of you men recognized it as a -Clearing House, convinces me that you do not yet fully comprehend and -appreciate the fact that there is not the slightest difference between -deposits subject to check, and a true credit currency, or a bank note -issue. This is the great fundamental, economic truth, and unless you -understand and recognize it, you might as well quit now. - -MR. BANKER: I thoroughly appreciate what you say, Uncle Sam, and I -think we all do, but you have driven this matter home, so that I -don't think we will ever forget it, or fail to apply it under such -circumstances again, will we, boys? - -MR. LABORINGMAN: No, never. That discovery of Uncle Sam's was a centre -shot, a real bull's eye. - -UNCLE SAM: The result of this evening's talk is then, as I recall it: - -_First_: There is no statutory authority for any Clearing House, either -in England or the United States. - -_Second_: The first Clearing House started in London in 1775. The -second Clearing House started in Boston in 1818 under the Suffolk Bank. -The third started in New York in 1853. - -_Third_: Clearing country checks was established in London in 1857. New -England became a free zone for country checks in 1899. - -_Fourth_: Clearing Houses without any authority of law have adopted -the following functions: (_a_) They have fixed charges for services; -(_b_) they have provided reserves for their convenience; (_c_) they -have forced all those banks, which are members, and all those clearing -through them to submit to examinations; (_d_) they have not only issued -Clearing House certificates for use in settling balances, but for -circulation as currency in denominations of $1, $2, $5, $10, $20, $50, -$100, to meet the demands of trade. - -If you'll give them fifty years more, and will not interfere with them, -they will in actual defiance of law reëstablish the currency system of -New England before the war and now in operation in Canada. - -It's too late to detain you a minute longer. You may go now, but -remember that it took your Uncle Samuel to discover the important -historical fact that the first Clearing House established in this -country was the Suffolk Bank at Boston. - - Good Night. - -FOOTNOTES: - -[Footnote 1: Since the above was written New York City has become a -free check zone for a large territory tributary to it.] - - - - -FOURTEENTH NIGHT - -BANKING IN 1860 - - -UNCLE SAM: This is the fourteenth night, boys, since we began to meet, -and discuss what in a way concerns me far more than any other question -except the morals of the people. The tariff you can change, any time, -any day, and, as I think should be changed schedule by schedule, so -that there would not be any disturbance of business. Nor could corrupt -trades between the various interests be made, if that policy were -pursued. When we take up our money plan we must be sure we are right, -before we adopt it. I mean absolutely right; for there is no hope -apparently of changing our monetary laws when once they get upon the -statute books. - -MR. LAWYER: That is certainly true, Uncle Sam, for we've not made a -single substantial change in our National Bank Act since it was passed -Feb. 23, 1863, almost fifty years ago. Of course, we dotted an "i" here -and crossed a "t" there, but that is all. - -MR. BANKER: I never thought of that before, but it is literally true. -The only change ever made, worth mentioning, in the National Bank Act -was that made in connection with the funding of the National Debt -in the Act of March 14, 1900. Then Congress adopted word for word a -provision contained in Congressman Fowler's first general Financial -and Banking bill of March, 1897. This provision provided: That the new -bonds should be payable in gold coin and bear interest at the rate of -2 per cent per annum and that the banks could issue circulation up to -par of the bonds, and that the tax of 1 per cent should be reduced to -one-half of 1 per cent. Not another change has been made, and this was -incidental, rather than the direct purpose of the Act. - -MR. LAWYER: This indifference, or non-interference with monetary -laws, is not peculiar to ourselves, however. You find the same is true -in England. There has been no change in the English Bank Act since -it was adopted in 1844, although practically all the English banking -economists during the past fifty years have agreed that it is most -faulty in some respects, particularly in its currency provisions. -The same is true of the Bank of France which was established in 1803 -by Napoleon, who proved to be as great an economist as he was a -general. The same was true during the first fifty years of our banking -legislation. The same will always be true in every country, for nothing -is ever done, affecting a financial system, until the situation becomes -intolerable as it is in this country today, and as it is fast becoming -in Germany. Of course, the reason is not far to seek; it arises out of -the fact that there is a general fear that any change in the banking -practices, or system of any country, will disturb the existing business -conditions, or arrangements. Hence nothing is ever done, as long as the -people will put up with it. It takes the terrors and wastes of business -misfortune to bring any change however obviously needed; therefore, -we must be very patient, and most thorough in our work of preparing a -measure for the reformation of our present banking practices which have -been correctly described as "archaic," "barbaric" and "the worst in the -world." - -MR. MERCHANT: That is right, we must be both patient and thorough; and -to be thorough I think we ought to know what the situation was in this -country in 1860, at the breaking out of the war; because if there is -one fact that has impressed me more than any other, it is this, that -all the real progress we have made during the past fifty years or since -the war, has been either without any law, or in actual defiance of law. -Under these circumstances I think it is of the utmost importance that -we find out if we can what progress, if any, this country had made up -to 1860, which was certainly a breaking up point in banking, as well as -in all other lines. - -MR. BANKER: I agree with Mr. Merchant, and ever since we began these -discussions I have taken every opportunity to go back and investigate -the banking situation, before 1860, hoping and expecting that our -experience then would help us now. I have been literally amazed at what -I have discovered in the way of sound banking in many of the states, -and I have been profoundly impressed with the fact that then, too, as -well as now, all that they had secured that was good was the outgrowth -of experience. - -MR. MANUFACTURER: I was so greatly impressed with the complete and, as -it seemed to me, practically perfect system that had grown up under -the Suffolk Clearing House, which started at Boston in 1818, that I -have been wondering whether there were not other instances like that -which would help us; for, gentlemen, whatever we may think, or want, -personally, one thing is certain, and that is this, that we must take -things largely as we find them, and legislate as far as possible in -harmony with them, bringing the inefficient, the laggard and the -"sucker" up to the approved standards of our banking experience and -compelling every individual bank to do its part in providing its own -insurance by carrying equal and adequate reserves and by carrying -on its business in accordance with the highest standards of banking -practices today. Then we must bring all of the banks of the country -under the reign of economic law, and into one harmonious whole for the -benefit of all the people. We must protect our gold reserves against -the demands of the rest of the commercial world. - -Now, if any one of you has any information about banking conditions -before the war that can possibly be helpful, I hope he will give it to -us for our consideration. - -MR. BANKER: I have no hesitation whatever in saying that there were -better banking institutions in the United States in 1860 than there -are today, so far as the principles are concerned upon which they were -operated. But, of course, we must note two things in this connection: -First, banking generally was not nearly as good upon the average as -it is today; nor could you expect it to be. Second, banks generally -were small, and only in a very few states was banking any more under -governmental direction and control than the grocery business, stock -buying or horse trading. The result was that sharpers all over the -country were using the word "bank" or "banker" to swindle the unwary -people and defraud the public generally. Third, in some states the -legislators were so ignorant of economic law that the laws passed by -them only facilitated the schemes of the swindlers in their diabolical -work. - -It was the reaction against the disastrous and disgusting experiences -in one state after another because of the rotten conditions prevailing -that some of the states finally passed laws for the establishment of -banking systems, which for soundness and efficiency had never been -surpassed, nor even equalled for the territory covered and services -rendered. - -Let me cite you a few instances; I will take first Louisiana. - -The State of Louisiana passed a Bank Act which, though erring in one -or two particulars, was nevertheless almost ideal; and under it, the -state in 1860 stood fourth in banking capital, and held more specie -than any other state except one. No limit was placed upon the amount of -credit notes the banks could issue, nor the deposits they could receive -and no security was pledged for their redemption. The virtue and real -substance of the Act was in requiring a coin reserve of 33-1/3 per cent -of all liabilities, deposits as well as notes, and confining the loans -outside of capital to paper running for ninety days, or less. - -Not a single bank organized under this law suspended specie payments -during the panic of 1857, and all were conforming to the requirements -of redemption when General Butler marched down the streets of New -Orleans. The capital of the banks in 1860 amounted to $24,496,000, the -$12,115,000, the circulation $11,579,000 and the deposits $19,777,000. - -On Feb. 24, 1845, the Legislature of Ohio passed a Bank Act under which -the Ohio State Bank was organized, with the right to establish branches -and to issue credit bank notes. Each bank was required to deposit 10 -per cent of the amount of its circulation to create a safety fund to -redeem the notes of any branch that might fail. In 1846 there were -seventeen branches; in 1848 twenty-five branches; in 1849 thirty-eight -branches and in 1850 thirty-nine branches. - -The note issues were of a purely credit character, and were -proportioned to the capital as follows: For the first $100,000 of -capital, there might be $200,000 of notes; for the second $100,000 of -capital, $150,000 of notes; for the third $100,000 of capital, $125,000 -of notes; for the fourth $100,000 of capital, $100,000 of notes, and -for each additional $100,000 of capital, $75,000 of notes. - -The evident purpose of the Act was to give the people a uniform and -sound currency, and the plan succeeded admirably. The State Bank of -Ohio was regarded as one of the soundest in the country. - -The essence of the Act was in the requirement that the notes issued -by the respective branches should be redeemed in gold or silver coin, -the lawful currency of the United States, and in the insurance given -of this result by a reserve equal to 30 per cent, of which at least -one-half should be gold or silver and the balance equivalent to gold or -silver coin. - -John Jay Knox says: "The banks authorized under the laws of 1845 and -1851 were uniformly successful and furnished a currency for the people, -not one dollar of which was ever lost by the holder thereof." - -The capital in 1863 was $5,674,000, specie $3,033,000, circulation -$9,057,000 and deposits $11,697,000. - -MR. MERCHANT: I have often heard my father speak of the State Bank of -Indiana. Can you give us the history of that system? - -MR. BANKER: Indiana presents the anomaly of having organized the most -admirable system of banking of any state in the Union, and also of -having had a banking system or banking practices at one time so vicious -that under it the banks bankrupted nearly the whole people. The State -Bank of Indiana and its successor, the Bank of the State of Indiana, -stood all the tests of financial panic from 1834 until the banks were -all absorbed by the National Banking System, without closing their -doors for a minute, or losing a dollar to bill holders, depositors or -stockholders. It is a proud distinction for Indiana that its State -Bank was long the model bank of the country. So well were its affairs -managed that in a period of twenty-two years of actual business, the -profit to the state on its $800,000 of stock amounted to three and a -half millions of dollars. - -The Bank of Indiana, which became a model, was chartered in 1834, with -a capital of $1,600,000, and the state was divided into ten districts, -afterwards increased to seventeen, there being a branch of the bank in -each. - -Under its charter the bank could receive deposits, buy and sell gold, -silver, bullion and foreign coins, discount commercial paper, and issue -bills payable to bearer--a true credit note. A forfeiture of 12-1/2 per -cent was imposed upon all notes not redeemed in coin. - -The institution was hardly under way when the panic of 1837 broke upon -the country. The New York banks suspending, compelled the Indiana Bank -to follow in order that it could protect itself. John J. Knox says: "No -bank in the country stood higher than did the State Bank of Indiana -during the panic. In all the western and southern states its notes -commanded a premium, and in the east were taken at a small discount.... -Its loans were made in small amounts and scattered all over the entire -state, thus affording the greatest possible measure of relief." - -Great as was the success of this splendid institution, the Jacksonian -democrats, coming into power, at once began an assault upon it, -precisely as their leader had laid the axe to the roots of the United -States Bank. - -The Indiana democrats failed to destroy the Bank of Indiana, but -succeeded in passing a general banking law permitting banks to be -established upon filing with the auditor of the state the bonds, or -other evidences of debt, of the Federal Government, or of any of the -states, as security for the notes to be issued. - -The State of Indiana itself went into the business of issuing notes, -and even plank-road companies issued them. The Indiana state notes -could be had for sixty cents on the dollar and were called "Red Dog." -The plank-road notes and others of similar value were called "Blue Pup." - -The Bank of the State of Indiana organized in 1855 with twenty branches -to take the place of the Indiana State Bank, maintained the same high -standard as its predecessor, going through the panic of 1857 without -suspension, although every private bank in the state, except two at -Indianapolis and one at Fort Wayne, went down. - -Like its predecessor, the Bank of the State of Indiana fell on evil -times soon after its organization. The panic of 1837 came two years -after the organization of the State Bank; and in 1857, before the Bank -of the State had been in operation quite two years, a great financial -panic swept over the country, precipitated by the failure of the Ohio -Life Insurance & Trust Co. Every bank in the east, except the Chemical -Bank of New York, suspended specie payment, and all in the west, except -the Bank of the State of Indiana and the Bank of Kentucky. The Indiana -Bank weathered the storm, and redeemed all its obligations in gold, -as fast as they were presented. Many of the branches of the Bank of -Kentucky were at remote points from the railroads, and could not be -easily reached by the brokers and other bill holders, but those of the -Bank of the State of Indiana were within easy reach and holders rushed -for the specie. - -In 1860 the capital was $3,323,000, specie $1,917,000, circulation -$5,753,000, deposits $1,186,000. - -MR. MANUFACTURER: I can tell you all about the Kentucky banks -myself--and I want to tell you there were no better then and there are -no better anywhere today. - -The Legislature of Kentucky in the session of 1833-4 granted a charter -to the Bank of Kentucky with $5,000,000 of capital and the privilege -of six branches. Charters were also granted to the Northern Bank of -Kentucky, with a capital of $3,000,000, and the Bank of Louisville, -with a capital of $5,000,000, each institution having the power or -right to issue credit notes to double the amount of their capital. - -While the Northern Bank of Kentucky liquidated in 1898 and the Bank -of Louisville was merged into the Southern Bank in 1899, the Bank of -Kentucky had in the latter year a capital of $1,645,000 and a surplus -of $1,103,000, giving indubitable proof that no one had ever suffered -because of its power of note issue. And there the Bank of Kentucky -stands today, occupying the building it purchased from the United -States Bank, a monument to the sound principles upon which it was -founded. - -It may be most fittingly observed before passing, that when in May, -1837, the blighting wave of suspension swept from New York across -the country, these three banks of Kentucky held $1,900,000 in specie -against $3,300,000 of notes in circulation--an object lesson for those -who may possibly fear that the banks cannot obtain sufficient gold -today to protect the notes they are permitted to issue. - -The panic of 1857, which was severe in many parts of the country, and -which caused great alarm in Kentucky, produced no ill effects on the -banks, all of them continuing to pay in specie, even after the New York -banks had suspended. - -In 1860 the capital of these banks was $12,660,000 and the circulation -was $13,520,000. - -MR. BANKER: The record made by the Kentucky banks was excellent, -but for organization the State Bank of Iowa, like that of the State -of Indiana, has had no superior anywhere in the world, and humanly -speaking, the administration and working of both was practically -perfect. Iowa in the morning of her statehood was opposed to banking as -a business; her first constitution provided that "the general assembly -shall provide for the organization of all other corporations except -with banking privileges, the creation of which is prohibited." - -The Constitution also provided, that "the general Assembly shall -prohibit any person or persons, association, company, or corporation -from exercising the privilege of banking or creating paper to circulate -as money," the penalty for each offense being one year in the county -jail and a fine. - -During the intervening years down to 1857, when the new Constitution -was framed, Iowa had suffered so severely from the _bond-secured -circulation_ of Illinois in particular, known as "Wild Cat," "Red Dog" -and "Yellow Dog" money that a provision was incorporated permitting -the legislature to create corporations with banking power, subject, -however, to a vote of the people, and also to establish a State Bank -with branches founded on actual specie basis. - -I want to call the attention of you fellows to the fact that they had a -referendum, a state referendum, in Iowa in those days. - -It was provided that the branches should be mutually responsible for -each other's notes; that the stockholders should be liable for an -additional amount equal to their stock; that the bank could issue _pure -credit notes for double the amount of the paid-up capital_; that in -case of insolvency the bill holders should have a prior lien over other -creditors and that specie redemption must be maintained. - -To secure this solvency beyond peradventure, each branch was required -to deposit with the State Bank either coin, United States stocks or -interest-bearing state stocks at their market value in New York, but -in no case above par. This deposit was equal to 12-1/2 per cent of the -note issue, and was known as "the Safety Fund" to redeem the notes of -the branches in case any of them failed to do so. In addition each -branch must have on hand an amount of coin, equal to 25 per cent of its -notes outstanding and deposits held. Here is a replica of the banking -system of the Bank of the State of Indiana, and it contains all of the -prerequisites of a well-nigh perfect banking system; and the result -proved the soundness of the plan. - -This bank was prohibited from paying interest upon deposits. The parent -bank was not a bank of issue or of deposit. It transacted no business, -except with and for the branches. - -Certainly there is no bank in the United States today with so good a -charter as that of the State Bank of Iowa. - -By an act approved in February, 1862, County Treasurers and the State -Treasurer were authorized to accept the notes of these branches in -payment of taxes, and by an Act approved March 10, 1864, payment of -taxes and the interest and principal on the school fund might be paid -in United States Treasury Notes, National Bank Notes, or _Notes of the -State Bank of Iowa_, thus showing the unquestionable value of the State -Bank Circulating Notes. - -When the National Banking System was established in 1865, and the 10 -per cent tax on circulation was imposed, the life was choked out of -one of the most perfect banking systems that had ever existed; and -every note of the $1,439,000 outstanding on Jan. 2, 1865, was redeemed -without the loss of a single cent to the holders. - -The capital was $1,048,000; specie, $389,800; circulation, $1,439,000; -deposits, $2,851,000. - -MR. LAWYER: In 1898 I heard an attorney from Richmond speak upon the -State Banks of Virginia so boastfully, that out of pure suspicion I -investigated them, not believing anything he said at the time. - -About 1800 there sprung into life in Virginia a system of state banks -based on the old Scotch system under which a half dozen banks of issue -were authorized, with numerous branch banks in every part of the state. -The charter provisions of these banks were the basis of the few laws -that have been enacted in relation to banking since that day. - -The first of the banks to be established under state control was the -Bank of Virginia, incorporated by the General Assembly, Jan. 13, 1804, -with a capital stock of $1,500,000 in shares of $100 apportioned; three -thousand seven hundred and fifty shares to Richmond, three thousand to -Norfolk, two thousand two hundred and fifty to Petersburg, one thousand -to Fredericksburg, five hundred and twenty-five to Winchester, four -hundred and fifty to Staunton and five hundred and twenty-five to -Lynchburg. - -The Charter provided that the banks should hold real estate and other -effects to the value of $3,500,000, including the capital stock. -The cashier was required to give bond for $50,000; the total amount -of notes to be put into circulation by the banks, together with the -debts, were restricted to $4,500,000, over and above the money actually -deposited in the bank; that is, the issue could be three for one on its -cash capital, and this was the established rate for this class of banks. - -The bank was well managed and was highly successful. Its notes, all -payable in gold, had a wide circulation and were at only one-fourth of -1 per cent discount in New York. - -Five other banks were established with the power of establishing -branches. These mother banks, six in number, were great institutions, -and held the complete confidence of the people. The law did not require -that they should keep any reserves and they kept none, except the -specie held in their vaults to redeem their notes. - -The law provided that the total amount of paper circulation of these -banks should _never exceed five times the amount of the coin in -possession and actually the property of the bank_. If the coin of the -bank was reduced below one-fifth of its circulation, it was required to -stop all discounts until the ratio was restored. As a matter of fact -some of the banks issued as high as 8 to 1. - -The banks at such times kept their coin reserve up by keeping the -discounts down. - -The banks of Virginia from 1827 to 1860 had a prosperous period, -keeping on an average $10,000,000 of notes in circulation without loss. - -It is reported that occasionally drafts drawn on New York were placed -in the safe to make up a balance, and called "coin." Be that as it may, -there is no case on record where a bank of circulation and deposit -failed, and it is claimed by those acquainted with the banking of that -day that no one ever lost a dollar by a Virginia bank note previous to -the war of 1861, and they were at a discount of only one-quarter of one -per cent in New York. - -On Jan. 31, 1860, the capital was $16,000,000, specie was $2,943,000, -circulation was $9,812,000, deposits $7,729,000. - -The Bank of the State of Missouri was started in 1837, with authority -to issue notes at the ratio of three to one for the specie in its -vaults, and with a branch at each of five considerable towns in -different sections of the state; Lexington, Fayette, Palmyra, Cape -Girardeau and Springfield. Its capital was $3,450,000. - -In 1856, when the population of Missouri was eight hundred and forty -thousand and that of St. Louis one hundred and twenty-five thousand, -and the indications of substantial prosperity were to be seen in every -department of business, the bank circulation was only $2,200,000, -although its stock of $1,400,000 specie warranted notes to the -amount of $4,200,000, and a considerable part of its circulation was -doing duty in California, Oregon and New Mexico, whither it had been -carried by emigrants and traders. It is no wonder that under these -circumstances Missouri offered an inviting field for the "Wild Cat" -money issued so profusely by banks in other western states and that -its people became victims of an inconvertible and unreliably currency, -which the bank note reporter quoted at a discount all the way from 5 to -25 per cent. - -So valuable were the notes of the banks of the State of Missouri in -California in the '50's that a gang of counterfeiters took advantage of -their popularity, and struck off imitations of them in large quantities. - -It was a remedy for this evil, which had become unendurable, and -in response to the persistent demands of the important commercial -interests of the chief city of the state that the legislature, in 1857, -chartered seven banks of issue, with branches conveniently located for -the accommodation of business. - -These banks were promptly organized in the spring of 1857, immediately -after the Act authorizing them was passed; for the state was -prosperous, and offered a fair field for legitimate investment. The -monetary crisis which was impending but not discerned fell upon the -country shortly after they had opened for business; but they stood -the strain well; two of them, the Mechanics and the Exchange of St. -Louis, refused to suspend specie payment, and continued to redeem in -coin through the panic; and when the Civil War broke upon the country -four years later, these two banks again refused to join in the general -suspension, and maintained coin payment under all conditions that -followed. - -The system of banks organized under the Act of 1857 rendered the -important service of partially displacing the uncertain and variable -currency issued by the banks of other states and territories which had -found so easy a field in Missouri. The legislature had also authorized -the old banks in the state to establish additional branches and to -issue notes for $5.00, and in a short time every considerable town in -the state had a bank, and the notes of Missouri banks, issued at the -rate of $3.00 to every dollar of specie on hand, afforded a local -currency better than that brought in from the outside, which had for -years almost monopolized the field. The "Wild Cat" money nevertheless -made a stubborn contest, and the last of it did not disappear until the -National Bank Act went into operation. - -In the wild, reckless period, when almost anything in the shape and -appearance of an engraved bill, with the name of a bank on it, was -good enough to buy public land with, and good enough, therefore, -for all other purposes--and in the latter period when other western -states _authorized banks to issue notes based on various kinds of -bonds_ with the place of redemption out of the way and difficult -of access--sometimes in a forest or in a swamp--the legislature of -Missouri refused to charter institutions to multiply such currency -within the limits of the state. - -The notes of the Bank of the State of Missouri were preferred to -specie in New Mexico, Utah and on the Pacific coast, and the same high -character marked the issues of the system of banks authorized by the -general law of 1857. - -The capital in 1863 was $11,247,000; specie, $3,666,000; circulation, -$4,037,000; deposits, $3,434,000. - -Everything I have just said I have taken from John Jay Knox's "History -of Banking." - -During all this varied experience in the west and south, there -was a most conspicuous illustration of a complete banking system -demonstrating and proving every economic principle that is involved -in constructing a financial and banking system for the United States. -It was the Suffolk System of New England. Here were six states, the -laws varying in each. Portions of these states were far more remote -from Boston in those days than any part of the United States is from -any other part today, so far as business relations and convenience are -concerned. - -There were no railroads, nor telegraph lines, nor long distance -telephones. Indeed, almost every essential to anything like a sound -banking system as conceived and observed from the standpoint of today -was wanting. There was no law requiring a uniform reserve. There was -no law requiring coin redemption. There was no law requiring bona fide -capital. There was no check upon the amount of notes that might be -issued if a bank was dishonestly inclined. - -There were, in 1848, three hundred and six banks, deriving their -authority from six states, and one hundred and fifty-nine of them did -not possess an average capital of $100,000; nor was the average capital -outside of Boston more than $160,000, and including that city, it was -not more than $206,000. - -By 1860 there were five hundred and four banks. There are only seven -hundred and forty banks today in the same states. Can any fair-minded, -impartial man deny that the conditions today are vastly in favor of -better results than they were then? One law for all; a bona fide -capital; a required reserve; a system of redemption established by law; -notes furnished by the United States Government; a common national -supervision. These all unite to compel the admission that any system -that could prove its adequacy under such adverse conditions as existed -from 1840 to 1860 would certainly approximate perfection today. - -Nowhere in the whole range of banking experience have so many things, -which the student of this subject wants to know, been demonstrated -beyond cavil. - -To all intents and purposes the possible issues were without limit. The -actual circulation in 1840 was only 23 per cent of that permitted. The -circulation of 1850 was only 40 per cent of that permitted; and the -circulation in 1860 was only 36 per cent of that permitted. - -During every year from 1840 to 1860, except one, the note issues were -greater (and usually nearly double) than the deposits, illustrating -with what certainty and perfect nicety such a system adapted itself to -the ever varying needs of the people who were fortunate enough to have -it, and how it invariably, with peculiar fitness, met the needs of the -rural districts where currency and not checks was especially required. - -The States of New Hampshire and Vermont had bank capital amounting to -$8,150,000 in 1850, and notes outstanding amounting to $7,300,000, -while Boston with $33,200,000 of capital had only $7,500,000 of notes -outstanding. - -_A marvelous exhibition of this interplay and interchange of bank book -credits and bank note credits occurred in the six New England States as -a result of the panic of 1857. The authorized note issue of the five -hundred and ten banks constituting the Suffolk System with capital -ranging all the way from $25,000 to $500,000 each was $131,000,000. -In 1856, the year before the panic, the note issue amounted to -$50,000,000, and the deposits amounted to $32,000,000. In 1857, as -the result of the panic, the note issue rose to $55,000,000 and the -deposits dropped to $25,000,000; in 1858, one year after the panic, the -note issue had fallen to $36,000,000, and the deposits had risen to -$47,000,000, or there had been a conversion of $20,000,000 of bank note -debts into deposit debts. The exigency for cash had disappeared and the -depression had come._ - -Do not fail to observe three important facts in this connection: - -_First_: That although the banks were authorized to issue $131,000,000, -they never exceeded $57,000,000, which was the highest point of -circulation, and that was reached as the result of the panic of 1857, -and that they averaged $43,000,000 from 1840 to 1860. - -_Second_: That there was a perfect adaptation of the deposits and note -issues to the peculiar and ever changing demands of the people during -the panic, and during the depression in trade that followed the panic. - -_Third_: That the number of banks in New England in 1856, the year -before the panic, was four hundred and ninety-five, and in the year -1858, the year after the panic, there were four hundred and ninety-nine -banks, or four more banks the year after the panic than there were the -year preceding the panic, an unquestionable tribute to the principle of -current coin redemption. - -Now, mark this, that the very heart and the very soul of the Suffolk -System was in the fact that the notes were redeemed in Boston in coin. -So good were these notes considered to be throughout the entire west, -that at Buffalo, Chicago, Milwaukee and all commercial points in the -then far west, they were always taken at a premium of from 1 to 5 per -cent. It was not the size of the bank of issue that made them good and -desirable, but the fact that they were redeemed in coin in Boston. - -When the soundness of this system is tested by a comparison with that -of the national banks, the result more than justifies the assertion -that the Suffolk Bank System of New England was incomparably better -than the National Bank System; for, when the conditions during the -twenty years from 1840 to 1860 are compared with those of the past -thirty years, all must admit that argument is futile and the conclusion -is inevitable. - -Mark this, that while a tax of one-eighth of 1 per cent of all the -notes in circulation would have paid all the notes of the banks that -failed under the Suffolk System from 1840 to 1860, it would have taken -a tax of one-fifth of 1 per cent on all the notes outstanding issued by -the national banks to pay the notes of the failed national banks. - -In confirmation of what I have said in praise of the Suffolk System let -the bank commissioners of Connecticut, Vermont, Maine, Massachusetts -and the _New York Courier and Enquirer_ testify. - -"The currency of this state is of the first order and can not be -improved, being equal to gold and silver. This is strong language, we -admit, yet perfectly true, for every bill holder can on demand convert -his bills into coin." (Connecticut Bank Commissioners' Report, 1841.) - -"The bills of any country bank, redeemed at par in any commercial city, -will always be current throughout the extent of region whose business -channels flow to that city. Hence, New England money is worth more in -the cities of New York and Philadelphia than the bills of their own -country banks. Vermont bills have uniformly borne a premium in the -eastern cities without loss, while bills of their own states are at a -heavy discount." (Vermont Bank Commission's Report, 1852.) - -"The 'Suffolk System,' though not recognized in our banking law, has -proved to be the great safeguard to the public. Whatever objections may -exist to this 'system' in theory, its practical operation is to keep -the circulation of our banks within the bounds of safety. No sound bank -can have any well-founded reason for refusing to redeem its bills in -Boston, and a bank that is not sound can not long do business under -that system and ceases to be in good credit when it is 'thrown out at -the Suffolk.'" (Maine Commissioners' Report, Dec. 31, 1857.) - -"If there was no check upon circulation there might be some danger, -but the frequent redemptions at the Suffolk Bank and the rapid -communications between different parts of the country will prevent any -greater circulation than the natural business wants of the country -will sustain.... Indeed, this system of par redemption seems to be -a most perfect regulator upon all the New England banks. It would -seem somewhat surprising that something has not been adopted in other -parts of the country that should produce the same beneficial results." -(Connecticut Bank Commissioners' Report, 1848.) - -"The charters of the banks have been renewed. If the laws by which -they are constituted the agents of the people to provide a currency, -and by which their faithfulness in the discharge of such agency is -secured, remain unchanged, there is every reason to believe that the -currency of Massachusetts will be for the next twenty years what it -has been for the twenty years past--as perfect as any in existence, as -perfect as in the nature of things it can be. No reasonable man, no -practical man, no man who is not bound hand and foot in the fetters of -mere theory, can desire for the people a currency better adapted to -meet all the circumstances of a business community than that which has -been furnished by the banks of Massachusetts for the last quarter of a -century." (James B. Congdon, cashier Merchants' Bank, New Bedford, in -memorial to Governor of Massachusetts, 1851.) - -"We said that the Massachusetts currency was apparently unsecured. In -reality their bank paper is well secured. The experience of the last -fifteen years has demonstrated that the losses from bank issues in the -State of New York are four or five times greater than in Massachusetts. -The system of the latter is better than our own." (_New York Courier -and Enquirer_, 1854.) - -"It is by no means wonderful that a system which has stood the test -of time and struck its roots so deep as to have become incorporated -with and formed a part of our banking system should be abandoned -with hesitation for one which is new and untried." (Maine Bank -Commissioners' Report, 1865.) - -"The State parts with these objects of her care and solicitude with -many regrets, but with a just pride in their career, inspired by the -belief that their capital has been highly instrumental in promoting the -prosperity of the state, and that they have furnished as good a paper -currency, based on individual credit, as any part of the country has -ever enjoyed." (Massachusetts Banking Report, 1865.) - -MR. LAWYER: _If, as we have gradually come to understand and firmly -believe, the true service of a bank is to furnish credit to its -customers, as they want it, and in such form as they need it, then -these institutions which you have been describing were certainly far -better suited to the purposes of their day than any banks we now have -in existence._ - -Two things seem to have been present in all of these various -institutions: ample coin reserves, which ranged from 20 to 33 per -cent, to meet any demand for credit redemption and perfect freedom -in changing bank credits from the form of book credit to the form of -note credit, and the form of note credit to the form of book credit, -according to the desires and needs of the customers of those banks. - -As a result of interchangeability of book and note credits, a bank -could always protect its coin reserve, for if the customer was just -as well satisfied to take the bank's notes, instead of coin, or its -reserves, it must be apparent to all of you that the cost to the bank -would only be from one-sixth to one-fourth as great, and that the bank -would have several times as much credit to loan, and at the same time -be in a much stronger position. - -Let me illustrate what I mean by calling your attention to what happens -over in New York every fall. Let us suppose that the New York banks owe -the country banks, say $500,000,000 and that the country banks call -for it from July to January for the purpose of moving the crops. The -banks of New York with the right kind of a currency system would not -need to disturb the situation in New York at all because they could -send their correspondents their credit notes, or cashier's checks, for -$500,000,000. You see the New York banks would simply convert a deposit -credit subject to check or draft into a note credit. The amount of the -debt would remain the same, the amount of the reserves would remain -exactly the same; but, instead of the country banks continuing to keep -the deposits subject to check at the banks, they would take the notes -which would serve their purpose, because they could in turn send the -notes into the corn and cotton fields, to help harvest and gather the -crop; and, just as soon as the notes had served their purpose, they -would be returned to the country banks and by them in turn sent on to -the New York banks, and would have been reconverted into book credits. -Not a single dollar of actual money would have been used in the whole -transaction, and yet the country would have been served just as well, -as though every bank note sent out had been a gold certificate. - -On the other hand, if the New York banks should continue to be as they -are today compelled to ship the $500,000,000, they would have to call -loans and shift conditions until they could scrape up $500,000,000 -with as little injury as possible to their customers and send it west; -nearly every dollar so sent out is reserve money of some form, gold -certificates, silver certificates and United States notes. Now mark -this, the credit notes cost the bank only the interest on the reserves -behind the notes; but when the banks ship out their reserves, the cost -must necessarily be four or five times as much, to say nothing of the -injury they have done to the business conditions in New York. And so -this same principle runs on throughout all of our banking business -today from one end of the country to the other. - -MR. MERCHANT: Well, Mr. Lawyer, your entire argument goes to -demonstrate with mathematical certainty that the country banks would -never have any occasion whatever to send to New York for currency, as -they would create their own currency by converting bank book credits -into bank note credits to meet all ordinary demands, a fact that not -only accentuates, but proves more conclusively what you are saying, and -reinforces your argument. - -Should we be fortunate enough to secure a right kind of banking -system in this respect, we could almost double our bank reserves, -that is, make them twice as large, and yet make two or three times -as much profit on that part of the banking business, growing out of -the substitution of credit notes for reserves, and at the same time -be vastly better able to protect the balance of our business from -disturbance due to the fact that we are compelled to use reserve money -for currency purposes. This now seems to me a very simple matter when -you once have grasped it. - -MR. BANKER: In this connection I want to call your attention to this -fact, and I want to note that it is a very important fact which was so -obvious in connection with every single statement of capital, specie, -circulation and deposit, that has been given, when referring to the -banking systems before the war, and that's this: that the note issues -did not begin to average one-half the authorized amounts, proving -conclusively that the currency of these banks invariably adapted itself -to the exact needs of the people. - - Notes Outstanding Possible Issue was Per Specie Held Deposits - Cent of - Possible - Issue - - Louisiana - $11,579,000 No limit except $12,115,000 $19,777,000 - 33% Coin Reserve - - Ohio - $9,057,000 $10,000,000 About $9,057,000 $11,697,000 - Par - - Indiana - $5,753,000 No limit but a $1,917,000 $1,186,000 - 12-1/2% penalty for - failure to redeem - in coin - - Iowa - $1,439,000 $2,096,000 70% $389,800 $2,851,000 - - Virginia - $9,821,000 $14,725,000 70% $2,943,000 $7,729,000 - - Missouri - $4,037,000 $10,998,000 38% $3,666,000 $3,434,000 - - Suffolk System - $44,000,000 $131,000,000 30% $10,058,995 $41,208,000 - -_Can anyone doubt, after noting these figures, that the note issues of -the various banking systems kept as perfect pace with the requirements -of trade, as checks and drafts do? Certainly it is perfectly evident -that the bank notes came and went precisely as all bank credit should._ - -MR. LAWYER: While all these splendid banking systems were snuffed out -by the 10 per cent tax upon circulation, the sound principles upon -which they were all founded are still most successfully exemplified by -the Canadian Banking System which you will remember took its charter -from the statutes of Massachusetts. - -There are today 27 banks in Canada, with 2,000 branches. The general -principle of the Canadian Banking System is identical with that of the -Virginia, Kentucky, Louisiana, Indiana, Ohio, Iowa and Missouri banks. -It is true there are some differences in matters of detail. The amount -of notes that can be issued regularly is that of the capital of the -bank. The notes are a first lien upon the assets of the bank, including -a double liability of the stockholders; the bank notes are also secured -by a guarantee fund of 5 per cent, which is contributed by the banks -issuing the notes; there is a provision that the notes shall bear -interest at the rate of 5 per cent until notification of redemption. -No holder of a Canadian bank note has ever lost a cent since these -provisions have been in force. - -You remember that we have a chart which shows very graphically with -what marvelous accuracy, year in and year out, month in and month out, -day in and day out, the Canadian Bank note currency meets the actual -requirements of trade; no more, no less, but always just adequate. - -The precision with which the currency rises and falls with the demands -of trade is the result of the daily redemption of all bank notes, -concurrently with the checks and drafts, through the Clearing Houses, -or over the counters of the banks, or at the points fixed by law for -note redemption for the purpose of keeping the notes at par, all over -Canada. - -We want to keep this diagram here on file, because it speaks louder -than words possibly can. - -MR. BANKER: One striking characteristic of the Bank of the State -of Indiana and the State Bank of Iowa was that the parent, or home -institution, did no business at all, except for the branches, and -examined and supervised them. Hugh McCulloch, the president of the Bank -of the State of Indiana, said, "that the soundness of the bank was due -to the frequent examinations." - -Another feature to be found in both these systems, and so far as I know -peculiar to them, was this: that all the branches were responsible -for the failure of any one of them; but the branches did not share in -each other's profits. The result of this law was to make every branch -the watch dog of every other branch; there was only one instance in -which the home, or parent institution, took charge of a branch in -either state, and that was in 1860. The executive committee of the -State Bank of Iowa having heard that one of the branches had made -some unsafe investments, "promptly took charge of its affairs, and -authorized a reorganization, calling upon other branches for such aid -as was required, which was given so that the branch, with no delay, and -without loss of a cent to its customers, or note holders, or suspension -even of its legal business, was again put on a firm and solvent basis." - -Undoubtedly this plan of supervision by the parent, or home -institution, which did no business, was a wise precaution. Mark this, -it is precisely the same principle put into operation that is now being -followed by twenty of our Clearing Houses, and was then, and as I -believe it will prove now, a practical guarantee of all the liabilities -of all the banks that are subject to such examinations and supervision. - -The most significant fact, and the one to be noted particularly, is -that the parent, or home institution, like the Clearing House, only -acted for the branches, precisely as the Clearing House acts for its -members, and examined and supervised them. Economically this principle -is absolutely sound. Historically, it is of essential importance -because here history is repeating itself, after a lapse of fifty years, -and in both instances this protective principle and practice has grown -out of precisely the same conditions--the unsound and dangerous methods -of certain members of the banking fraternity itself. - -MR. MERCHANT: Gentlemen, the astounding thing to me is that when this -country had once learned and practiced so sound, complete and perfect a -banking system, it should have lost it. - -MR. MANUFACTURER: I don't think that that is at all strange when you -remember that it only existed in a few states and consider just how we -lost it. You will remember that the Virginia banks which were founded -upon the old Scotch system started in 1804, and worked perfectly -until the war broke out. The other banks, or systems of banks, were -established from time to time, some of them as late as 1857, and as Mr. -Banker remarked several nights ago, modeled very largely after the two -United States banks, the charter of the last of which expired only in -1837. - -From a close study one can discover both of these two systems combined -in some instances. In this way we were gradually working out a national -system precisely as we are today under new and vastly more varied -conditions, but the war coming on, destroyed all that had been done. - -You will remember that Secretary Chase, desiring to sell Government -bonds for the purpose of carrying on the war, secured legislation -which put a tax of 10 per cent upon all bank note issues and compelled -banks desiring to issue currency to buy Government bonds as a basis -of their circulation. As a result, he produced a currency of uniform -appearance that was of equal value everywhere and a great blessing -to the country. This condition was a very great and most agreeable -change in the currency experience of the country, because there had -been practically no legislation except in a few states that in any way -controlled banking practices, or currency issues. The result was that -we had "Blue Pup Money," "Red Dog Money," "Wild Cat Money," "Yellow Dog -Money" and every other kind of "Dog Gone Money," that could be gotten -up with paint and paper to fool and defraud the people. On top of this -situation there arose a terrific political prejudice engendered through -political controversy toward a Central Bank. The conditions brought -about by the legislation, secured by Chase, have kept up the present -régime until it has become so utterly intolerable, because utterly -unsound economically, and so disturbing to the general welfare as to -compel immediate consideration and reconstruction. - -It is really the first time since the Civil War that the finances and -banking of the country have become a serious question outside of the -acute phases presented in the Government issues, or the Greenback craze -of 1875 and the silver hallucination of 1896. Today, the question is -not a specific one, or a mere detail, but one of fundamental principles -and of a most comprehensive character. It involves the whole subject -of governmental finance and banking and it is well that it should; for -our business is so vast now, almost 50 per cent of the banking power -of the world being within our borders. Our annual productions are -approximately thirty-five billions. Our annual clearings will pass the -fabulous mark of $170,000,000,000 (one hundred and seventy billions). -So that every recurring financial disaster will be worse, if possible, -than the one going before it. - -MR. BANKER: Right you are, Mr. Manufacturer, and this is true because -the principles involved are as fundamental and immutable as the law of -gravitation; and if we persist in our folly, when dealing with these -enormous volumes of credit, the destruction that is sure to follow -will be on a scale with that of worlds in collision. - -MR. MERCHANT: That seems to describe the situation somewhat graphically -and impressively, but I must say truthfully. We are undoubtedly "up -against it" as the boys say. Only the other day I was talking with a -president of one of the largest national banks in the country, and he -told me that unless something was done very soon, he would get out of -the business, because he could not stand the strain; but the bankers' -troubles are no worse than those of every business man, and it seems -to me as though we were on a perpetual strain, and living in a sort of -terror of what may happen at almost any time. The business atmosphere -is unnatural. Certainly this cannot be necessary. - -MR. LABORINGMAN: Well, I don't see anything very strange or unnatural -about this thing, if it is as you have already stated that there have -been no changes in your banking laws worth speaking of, since 1863. -Look at your railroad development. Fifty years ago the locomotive that -weighed thirty-five tons was a whopper, but now they turn them out -weighing one hundred and thirty-five tons. We used to have thirty-five -and fifty-pound rails, and our ties forty inches apart. Now we have -a hundred-pound rail, yes, one-hundred-and-fifteen-pound rail, with -the ties twenty-five inches apart. The other day, I counted one -hundred cars with one hundred thousand pounds capacity each, every one -loaded full in a single train. Now, what would you think of running a -hundred-ton engine, and that kind of a train of cars over a railroad -built fifty years ago? Ties only eight inches thick and forty inches -apart, on a corresponding road-bed. Why, men, I can tell you we don't -want a single-track railroad of that character now, with a switch out -every ten miles to let trains pass; but we want a four-track road, -with twelve to fifteen-inch ties, only twenty-five inches apart, and -equipped with signal and block systems of the latest type, and most -perfect automatic operation. - -UNCLE SAM: Gentlemen, when it comes to getting down to brass tacks, and -hitting the thing plump square between the eyes, Mr. Laboringman gets -away with all of you. Now, can you beat that as an illustration of our -financial and banking needs? If you will construct a banking system -up-to-date, and just add to these domestic requirements the necessary -provisions growing out of the fact that I am now a world power, I -should have said, I am the world power, and prepare an international -financial and banking system, we shall meet the demands of this -new century; but otherwise I shall find myself wholly incapable of -protecting the very foundation of commercial credit, my gold reserves, -when the test comes. - -MR. BANKER: Mr. Laboringman and Uncle Sam have laid down the right -kind of a program in telling terms, if not explicit. It is clearly -up to us to work out a plan as comprehensive and perfectly adapted -to our needs today, as were the banking systems of Louisiana, Ohio, -Indiana, Kentucky, Virginia, Iowa, Missouri and the Suffolk Banking -System of New England was to the needs of those various sections of the -United States at that time; for they were practically perfect from the -standpoint of economic principles and the needs of those times. The -principles upon which they were founded are eternal and are just as -applicable today as they were then. The principles have not changed, -although the conditions have, and that most amazingly. - - - - -FIFTEENTH NIGHT - -OUTLINE OF BILL - - -UNCLE SAM: For nearly four months, for this is our fifteenth night, we -have been studying the principles of economics and the practices of -banking, and we have gone over with the greatest care the experiences -of American banking institutions from the beginning. - -No body of men could have been more faithful in attendance, nor -more sincere in their desire to know the facts, and understand the -fundamental principles as they are; nor more determined to get to -the bottom of things; nor more ready to yield, and renounce even -hoary-headed fallacies when it was demonstrated that you were wrong, -than you have been. - -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. - -It may be objected by some self-satisfied, selfish, ignorant and -unpatriotic banker, who is doing all of these things now in some -way with ample or even more than satisfactory profits, that the -combination of these different forms of the banking business is -theoretically wrong. But let it be distinctly understood and observed, -and remembered, that we are not dealing with a theory now. Nor are we -organizing something new. We are dealing with an actual, serious and -most dangerous fact, and that is, that the banks of the country are now -doing all these things in a conglomerate way, largely unsupervised and -uncontrolled. - -Our unit of banking, the individual, independent bank, should have -its parts coördinated, unified and brought into a system, and under -one common supervision and control. That supervision should not be -political, but should be a supervision of the banks by the banks in the -interest of the people and the banks themselves. - -_Now we are also dealing with another most dangerous fact. It is this: -First, the national banks are carrying cash reserves amounting to 17 -per cent. The reserves of all the other banks amount to only 5 per -cent; and, excluding the mutual savings banks, the reserves of all the -remaining banks amount to only 7 per cent. The cash reserves of the -banks of the United States should under no circumstances fall below 15 -per cent, and under some circumstances they should amount to at least -30 per cent. Second, the reserves, such as they are, are all broken up -into small fragments, and scattered broadcast over the land._ - -The result is that our reserves lack the element of true reserves, -and are robbed of their efficiency, which is essential to commercial -safety. The highest degree of efficiency and utility of reserves can -only be secured by a centralization of 50 or 60 per cent of our cash -reserves, or say 10 per cent of our individual deposits, and 5 per -cent of our time deposits or savings accounts. In this way, we shall -centralize and mobilize about $1,250,000,000 of our gold, which now -exceeds $1,850,000,000. - -It will be observed that the reform here proposed is in perfect accord -with the evolution of all our Anglo-Saxon law. It is merely putting -into statutory form the present universal practices of the country -which have grown up as a result of those new conditions which are -peculiar to ourselves, and compelling conformity with those great -economic laws that cannot be violated or disregarded without suffering -the consequent penalty. Again, it is the only way that each bank can be -compelled to carry its share of the burden of our commerce, and furnish -its share of insurance to the business interests of the country, so far -as sufficient and uniform reserves will do it. - -The second great reform, then, that is essential is also in perfect -harmony and accord with the most approved practices of the banking -world. - -It will be noticed that here, too, a method or system from approved -practices has grown up, not only without the sanction of law, but in -part actually in defiance of law. I refer to the fact: - -_First_: That there is no law in any state authorizing the organization -of the Clearing House, and yet there are over two hundred and fifty of -them in the United States. - -_Second_: That there is no law authorizing any Clearing House Committee -to examine the banks composing it. But in twenty cities at least the -Clearing Houses are not only examining their own members, but go even -further than that and insist that no bank shall clear through any -Clearing House bank which does not submit to an examination by the -examiner appointed by the Clearing House. This has been found essential -to the safety of the banking situation in these cities, but is no more -essential in these twenty cities than in five hundred or one thousand -other cities; in fact, essential throughout, and all over every state -of the Union. This has come to be an established practice, and is being -taken up rapidly, all over the United States, and yet there is no law -whatever that authorizes it, suggests it, or by implication justifies -it. - -_Third_: With the consent and approval of public officials, both State -and national, but without authority of law, the banks of many of -our Clearing Houses are carrying at all times a large part of their -reserves at their Clearing Houses for their convenience and as an aid -to commerce. Undoubtedly they are doing just what they should do. It -is stated upon high authority that the amount of reserves that are now -centralized and mobilized at the Clearing Houses today will exceed -$200,000,000. This practice is the result of experience, not only in -the times of panic, such as 1893 and 1907, but also for the daily needs -of their gigantic transactions. - -_Fourth_: In like manner, not only without law, but actually in -defiance of law, these self-contained, self-centred, self-governing -Clearing Houses, whenever necessity calls for it, very wisely and -properly issue a true credit currency, in principle, at least in the -form of Clearing House certificates which serve all the purposes -of legal currency itself. They are issued in $1 certificates, $2 -certificates, $5 certificates, $10 certificates, $20 certificates, $50 -certificates and in denominations of $100, $1,000, $10,000, and on up -to as many or more millions. All this is done not only without the -authority of law, but in the latter case in actual defiance of law. - -Here then again we have purely as a result of evolution in modern -American banking the second naturally developed unit, the Clearing -House, by combining, coördinating and unifying all the banks, or -simple units, coming within its jurisdiction. They exist without law -and operate without law, and in one respect, as I have just said, in -defiance of law. - -This Clearing House unit consists of the following elements: - - FINANCIAL CENTRE - (with one hundred banks), - - CLEARING HOUSE COMMITTEE - (without law), - - CLEARING HOUSE BANK EXAMINER - (without law), - - CLEARING HOUSE RESERVES - (without law), - - CLEARING HOUSE CERTIFICATES - (in defiance of law). - -If this system has been the means of purging the banks coming within -its influence and jurisdiction and strengthening the situation, -wherever adopted, and if no city where it has been in practice, of -which there are now more than twenty, would not give it up, let any -man say why this safe principle should not now be extended until every -bank in the United States is brought within its beneficial influence. -However, this result can only be attained by having a uniform and truly -national banking system. - -As was pointed out only a moment ago, that if the national banking -powers mentioned are granted to the national banks, no bank can afford -to remain outside of the system, because the advantages gained by going -into it are so great. - -However, if there are bankers, who by running double-headed or -triple-headed institutions believe that they cannot then do some things -that they are now doing, and which they, therefore, probably should -not do, should undertake to argue that banking cannot be brought under -national supervision and control, let them consider the following facts: - -_First_: That the United States Government put a tax of 10 per cent -upon all State bank notes and that they died a natural death. Of -course, it is true they were suffocated. But would any one go back to -the days when they had to pay exchange upon a bank note every time they -crossed a State line? Would anybody take a step that would substitute -a local currency for a national currency of uniform character and -quality? Let every antagonist mark this, and remember it well that the -same power that put a tax of 10 per cent upon bank note issues can -also put a tax of 10 per cent upon deposits for any one of a number of -good reasons; for example, it could and should impose such a tax, if -necessary, to compel all the banks of the country to carry their part -of the commercial burden in the shape of equal and adequate reserve. - -_Second_: Can any one give a single reason, valid reason, why the -postal savings bank was made a national institution that would not -apply with equal, if not greater, force to the $17,000,000,000 -individual deposits of which $6,480,000,000 are savings? - -_Third_: Can any one deny that it is interstate commerce for note -brokers to ship millions, yes billions upon billions, of promissory -notes, or so-called commercial paper, from one State to another by -express, mail or freight? Will any one deny that promissory notes are -property? Will any one assert that shipping promissory notes differs -in the slightest degree from shipping eggs, apples, potatoes, cotton, -grain or live stock on the ground that promissory notes are not -property, but that eggs, apples, potatoes, cotton, grain and live stock -are property? - -Will any one deny that the same power that passed the "food and drugs -act," giving the Government power to stop the use of poisons in -medicines and food; the "insecticide act," giving the Government power -to prescribe the character of poison to be used to kill bad bugs; -the "plant quarantine act," giving the Government the right to stop -lice from traveling across a State line; the "meat inspection act," -giving the Government power to insist upon decent meat; the "live -stock quarantine act," giving the Government the right to prevent a -man from driving his cattle under certain conditions over a State -line; the "twenty-eight hour law," requiring shippers to treat cattle -humanely; the "employers' liability act," the "safety appliance act," -the "white slave act," the "hours of service act," the act regulating -the transportation of explosives; will any one deny, I say, that the -same power that passed all these acts cannot be exercised to protect -forty-seven States in the Union against such bank practices in the -forty-eighth State, as will at any moment throw the entire country into -a panic and destroy all public confidence in our banks and bring in its -wake the destruction of credit and consequently the destruction of vast -property values? - -Certainly no one will deny that any State has the power, and that it -is its duty to compel every person, firm or corporation using the word -"banker" or "bank" to submit themselves to jurisdiction, supervision -and control of that State. Every State has the power to protect any of -its citizens against the wrongdoings of other citizens, and one bank or -banker against the evil practices of other banks or bankers. - -In eighteen States no bank reserves are now required by law, and -in many States there is no supervision whatever of State banking -institutions by the State. Is it possible that the National Government -has no power to act in the light of these facts when the banking -business of the country is essentially not only one kind of a business, -but, indeed, one single business, each one being a wheel in the great -credit machine? - -_It is so interlaced, and so interwoven that one rotten spot map prove -as dangerous to the whole fabric of credit as a box of dynamite under -one's chair. Is it possible, I say, in the light of all these facts, -that there is no redress, no protection to our vast commerce, and to -labor through the National Government? Is it possible that we could be -compelled to continue for a thousand years in the midst of our present -terrors from bad supervision and want of adequate reserves?_ - -The manufacturers, the merchants, the farmers, the laboring men, and -business interests of every kind have a right to demand and undoubtedly -will demand protection, and demand it now. Unless I misunderstand the -present temper of the American people, they will now demand that their -interests be safeguarded, and that they be protected against the always -impending dangers growing out of the present conglomerate condition of -the banking business. - -I assert that this end can only be achieved by extending the same -organization which many of the larger cities have already adopted to -all the natural, financial centres of the country and include with them -all the territory naturally tributary to such centres; in other words, -that we should now extend the same organization to every commercial -zone of the country of which these natural financial centres are the -dominating commercial cities. This diagram will indicate more forcibly -just what I mean than words can convey. - -[Illustration: Diagram Illustrating District System of Bank -Organization to Give Stability in Commercial Zones.] - -The straight lines are drawn from some centre in a city arbitrarily, -and purposely so, in order to eliminate all political machinations and -gerrymandering in forming the districts for any reason that may arise -from time to time. They are so drawn as to divide the whole number of -banks in the entire commercial zone into seven equal districts. That -is, if there should be seven hundred banks in the commercial zone there -would be one hundred banks in each district. - -The one hundred banks in each district organize in precisely the same -way, and as follows: - -_First_: Upon coming together the one hundred banks of District No. 1 -proceed to organize formally by electing a president and secretary. -Then they select and elect their portion of the "bankers' council" -of the whole zone, which corresponds exactly to the Clearing House -Committee of the financial centre. - -The one hundred bankers of each district elect one banker and one -business man from the respective districts, or seven bankers and seven -business men, or fourteen in all, and the fourteen so selected then -proceed to select and elect their president, who shall not be one of -the fourteen so selected by the bankers of the several districts. - -These fifteen men so selected constitute the "bankers' council," and -bear identically the same relation to the whole commercial zone as -the Clearing House Committee bears to the banks which constitute the -Clearing House. - -_Second_: The one hundred bankers of each district then proceed to -select and elect a banker as a member of the board of control, or seven -in all, whose duty will be, among other things, to examine the banks of -the entire zone precisely as the Clearing House bank examiner examines -the banks of the Clearing House of the financial centre; provided, -however, that the district from which the bankers' council have -selected their president shall accept such president as their member of -the board of control. - -Will any one say that with such supervision as this board of control -will give to the banks of the commercial zone, each bank having been -compelled to qualify in the outset--will any one say, I repeat, that -such supervision will not absolutely prevent bank failures? - -This is not only important to the depositors of the country but also to -the general business of the country as well. - -Thereupon all banks of the zone will transfer to the board of control -a part of their required reserves; that is, 7 per cent of their -deposits and 7 per cent of their note issues will be deposited with the -board of control. Later this should be increased to 10 per cent. - -Let us assume that this 7 per cent of their deposits and 7 per cent of -the notes issued amount to $100,000,000, which will be the central or -economic reserve of the commercial zone and be under the control and -management of the board of control. - -You will recall that the bankers' council, which bears the same -relation to the commercial zone that the Clearing House Committee bears -to the financial centre of the zone, was composed of seven business -men and seven bankers, who selected their own president. These fifteen -men will select a representative from their respective zones. So -that we shall have a board of directors representing the thirty or -forty commercial zones directly and not indirectly. Each zone will be -represented alternately by a business man and a banker, so that the -board at Washington would always consist of fifteen or more business -men and fifteen or more bankers; the business interests and banking -interests equally, the inside and outside of the bank counter; the -depositors and the banks or the trustees of the depositors. - -The next logical and necessary step is a national central gold reserve -if we hope to prevent our gold leaving us at the will of foreigners, -and also if we hope to serve the whole nation, just as the Clearing -House is serving its members today, and as the commercial zone will -be able to serve all of its members, when it has been once organized. -Therefore, as a sequel to the organization of the commercial zones, say -thirty or forty of them in the United States, they in turn will all -unite their gold in one great central gold reserve, which will amount -to approximately $1,250,000,000 (one billion two hundred and fifty -million dollars). We should then have the "American Reserve Bank." The -amount of gold held by this institution would be twice that held by -any other in the world, and would be under the control of a board of -directors which I have just hastily described; I have used and suggest -the name "American Reserve Bank," because we are known the world over -as "The Americans," and, therefore, I think it peculiarly fit to use -the name "American Reserve Bank." - -This institution, with the specific powers granted to the individual -banks as outlined, will be able not only to protect each individual -bank, but to protect the reserves of all the banks; that is, the -reserves of the United States against the drafts of the world, -precisely as the Bank of England protects her gold, or adds to it by a -rate of discount; that is, by fixing a price for the use of gold. - -MR. MANUFACTURER: By the way, before I forget it, I want to make one -suggestion right here, because it seems to me as though this was the -right place to bring it in, and that is this: I am firmly convinced -that a bank like yours, and all commercial banks, should be allowed -to write their acceptance across the face of notes or drafts, and so -develop what is called a discount market in the United States, such as -they have in other countries. - -MR. BANKER: Mr. Manufacturer, I am glad that you have spoken of that -matter, and here is just the place to discuss it. A great many people -are deluding themselves about the matter of acceptances. It must be -remembered that the banks are not going to increase their own capital -by increasing their liabilities through acceptances. Indeed, this -practice would only add fuel to a conflagration of their credits, -unless the banks should confine themselves to accepting only such paper -as had grown out of actual transactions in which the goods had been -sold and delivered, or were actually in transit. Moreover, by way of -assurance, every piece of such paper so accepted by a bank should state -upon its face that the goods for which it was given had been sold and -delivered, or were in transit. - -_Such acceptances are absolute agreements to pay a specific sum of -money upon a specific day, and therefore are just as much a liability -as a deposit subject to check, with this disadvantage, that the -property is not within the control of the bank, as the deposits are, -against which a check is drawn, and therefore every bank should carry -precisely the same reserve against its acceptances that it carries -against its deposits._ - -Acceptances of the approved sort will not necessarily, if at all, -greatly increase production; but they will create a new form of -investment, that is, a guaranteed commercial paper of which billions of -the single name sort are being sold today. Of course, two-name paper -with the acceptance of a bank of high standing will soon bring into -being here, just as it has in London and other financial centres of -Europe, new capital. That is, capital will be attracted to the business -of buying and selling such high-class paper. It will be a profitable -investment for the idle funds of merchants and manufacturers at those -seasons of the year when all of their capital is not occupied in -their business, and also for the banks of the country at those times -of the year when the local demands are not equal to their supply of -funds. It is undoubtedly true that such paper would also soon find a -market abroad, as well as at home, and to that extent would facilitate -American manufacture and commerce. But we must not deceive ourselves -about the fact that the banks will just to that extent increase their -liabilities while they have not increased their actual capital to the -extent of a single cent. - -MR. MANUFACTURER: I must confess that I have misapprehended the -effect of an acceptance, but you are certainly right with regard to -it, and unless we should keep the business of the country in a sound -condition, the acceptance business might prove a two-edged sword, and -this emphasizes the fact that we must keep a close watch upon what our -commercial fund is all the time, and prevent it from being transferred -and absorbed in fixed investments, which is always a bane to the -commerce of a country. - -We must not forget these three important factors which are always -present here in the United States: first, the vast, undeveloped -resources of our country, and the ever-inviting opportunities; second, -the intelligence, the ambition, the impulsiveness and the optimism of -our people; third, the peculiar, local relations of our twenty-five -thousand, individual, independent banks, which are always in close -sympathy with and affected by the growth and development of their -locality and the varied interests, and the enthusiasm of the people. -The vision of our local banker is largely confined to his immediate -vicinity. - -MR. FARMER: How absolutely true that is, and therefore how great must -be our caution in opening up the flood gates of credit, before we know -that we have guarded the situation at every point. I notice that those -banks before the war were all so sound and successful because they -had to get the coin to make redemption with. Here is something I read -in a book yesterday, and it strikes me that it is right in point now: -"Redemption is the breath of life to all credit." You bet I have found -it's death to a fellow who's got to, and can't pay. - -MR. BANKER: Yes, and when you realize that credit is the very soul of -trade and commerce, as it is carried on today, how absolutely essential -it becomes that credit be kept within the limits of certain coin -redemption, if we are to have sound business conditions. - -MR. MERCHANT: Well, Mr. Banker, how do you propose to keep credit -within safe boundaries, and so insure sound business conditions all the -time? - -MR. BANKER: In just two ways: - -_First_: By having the reserves of gold on hand in the various banks, -sufficient at all times to prove all commercial credits, say from -5 to 20 per cent, according to the peculiar business and varying -responsibility of the banks to their banking obligations; and in -addition, such a central gold reserve as will to all intents and -purposes be unlimited, so far as any possible demands may be made upon -it--say 10 per cent ultimately of all individual deposits and 5 per -cent of savings deposits. This would give us at the present time about -one billion dollars ($1,000,000,000) of cash reserve, and about one -billion two hundred and fifty million dollars ($1,250,000,000) of gold -in a central reserve to meet the emergencies of commerce. - -_Second_: Such a supervision of the banks by the banks themselves as -will keep their assets in liquid form, at least to the extent that -their assets are commercial assets and are liable for individual -deposits on demand. - -In this connection I want to call your attention to the fact that not -a single bank has yet failed which has been under the supervision of a -clearing house. You will remember that this principle was adopted in -Chicago in 1906, and that today the banks in at least twenty of our -leading cities are under clearing house supervision. - -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: - -"A relief measure reforming the banking and currency system must -include, among its necessary features, provisions for never-failing -reserves and never-failing currency, and for the perfect elasticity -and flexibility of both; for the permanent organization and organized -coöperation of the banks, which are now suffering and causing the -nation to suffer by reason of their unorganized state; for a central -agency, to represent and act for the organized and coöperative -banks--this agency to be securely free from political or trust control, -but with the Government having adequate and intimate supervision -of it; for independent banking units--so independent that no one -bank can be owned, controlled, or shared in in any degree, directly -or indirectly, by any other bank; for the equality of all banks, -National or State, both as to standards and as to functions--so that -every requirement made of a National bank must be complied with -equally by a State bank, and every function or privilege enjoyed by a -State bank shall be enjoyed by a National bank; for the utilization -and the fluidity of bank assets; for the scientific development of -exchanges--domestic and foreign; for foreign banking as an adjunct of -our foreign commerce, and for taking the Treasury Department out of the -banking business." - -MR. FARMER: Well, you have forgotten the thing that interests me more, -generally speaking, than all else, and that is the Land Credit Bank, -which we went into last Wednesday night. Of course you intend to -include this when you prepare your bill. - -UNCLE SAM: You bet they will, for I think it's about time that the -corn raiser, cotton planter and grain producer and all the rest of the -toilers of the turf, should be getting their money at as low rates as -anybody else on first-class security for a long period of time, and I -am determined to give the farmers of the country the benefit of my good -name to aid them in this matter. - -MR. BANKER: Of course we had all agreed to that, and shall include it -in the draft of the bill. - -MR. MANUFACTURER: Uncle Sam, I move that Mr. Banker, Mr. Lawyer, and -Mr. Farmer be a committee of three to prepare a bill to be submitted to -us next Wednesday evening. - -MR. MERCHANT: I second the motion. - -UNCLE SAM: It's a go. - - Good Night. - - - - -SIXTEENTH NIGHT - -DRAFT OF BILL - - -UNCLE SAM: Well, boys, here we are ready for the report of the -committee on legislation, I suppose you would call it. Are you ready to -report now? - -MR. FARMER: Yes, Mr. Lawyer will make our report and speak for the -committee. - -MR. LAWYER: Uncle Sam, your committee has been deeply impressed with -the duty you have imposed upon it. - -That the solution and settlement of our financial and banking problem -is the most important economic question that has ever confronted the -civilized world must be admitted by all who will take the trouble to -investigate it and institute a comparison between our conditions and -those of any other country at the time when it adopted its financial -and banking system. - -In 1803, when the Bank of France was established, the financial -resources of France were without official record, but comparatively -nominal. - -In 1844, when the bank act under which the Bank of England is conducted -was enacted, the banking resources of that country were probably in -the neighborhood of $500,000,000. The total note issue of England, -Scotland, and Ireland was less than $200,000,000; the public and -private deposits in the Bank of England were less than $75,000,000; and -the gold in the Bank of England was less than $75,000,000. - -In 1873, when the Imperial Bank of Germany took its present form, -industrial Germany was still slumbering; and the bank resources -probably did not exceed $1,000,000,000. The capital of the incorporated -banks was about $425,000,000, the notes were about $325,000,000, and -the reserves held about $30,000,000. - -The banking resources of the United States are today more than -($25,000,000,000) twenty-five thousand million dollars and our foreign -trade more than ($4,000,000,000) four thousand million dollars. -The question we are dealing with, therefore, is not only the most -stupendous of its kind, but it must be considered both from a domestic -and foreign point of view. It is from both these points of view that we -have approached the preparation of this measure. - -As I proceed to read the bill I shall make some comment by way of -explanation in order that our purpose may be understood. - -A bill to establish a complete Financial and Banking system for the -United States of America. - -SECTION 1. _Be it enacted by the Senate and House of Representatives of -the United States of America in Congress assembled_, That a complete -financial and banking system for the United States of America shall be, -and is hereby, created, organized, and established as follows: - - _First_: The commercial zone. - _Second_: The bankers' council. - _Third_: The board of control. - _Fourth_: The American Reserve Bank. - -SECTION 2. That upon the passage of this Act the President of the -United States shall appoint three persons, who, with the Secretary -of the Treasury and the Comptroller of the Currency, shall proceed -immediately to designate such cities in the United States, not less -than twenty-eight in number and not to exceed forty-two in number, -for the location of the financial centres of the commercial zones, -numbering them consecutively as shall best accommodate and serve the -business and banking interests of the United States. - -SECTION 3. That within ninety days after the designation of the cities -for the location of the financial centres of the commercial zones every -national bank, with the approval of the five persons designated in -section two of this Act, shall select one of the centres so designated -as the place for its clearing house, and thereupon the Comptroller -of the Currency shall notify all the national banks to meet at their -respective financial centres on a given day and at a designated place -for the purpose of organizing the several commercial zones, of which -there shall not be less than twenty-eight nor more than forty-two in -number. - - COMMENT:--Referring to sections two and three I would urge upon your - attention these points: - - - _Geographical Considerations_ - - Great Britain has only 120,000 square miles of territory. France - has 204,000 and Germany 208,000 square miles. All Europe, outside - of Russia, is only about half the size of the United States. It - has 1,600,000 square miles, while we have 3,026,000 square miles. - Including Russia, all Europe has only 3,600,000 square miles. - - Extended as our territory is, our products are far more varied and - more universally important to the human race than those of any other - nation. They exceed in value $35,000,000,000 a year. - - - _Local Interests_ - - New England is essentially a manufacturing center of dry goods, - wearing apparel, and metal wares. Pennsylvania is known the world over - for its coal, iron, and oil industries. New Orleans is the market for - cotton, sugar, and rice. Kansas City is the emporium for live stock - and grain. Chicago, the greatest food market on earth, is fast coming - to be one of the greatest manufacturing points in almost every line - of industry. St. Paul and Minneapolis supply us with wheat and flour. - The cities of the Rocky Mountains are growing in importance year by - year, each one entitled to distinction for some particular industry. - The development of the Pacific coast, from San Diego to Seattle, is - challenging universal attention. - - It is the opinion of your committee that it is highly important, - indeed, absolutely essential, for the best interests of the people, - industrially, commercially, socially, and politically, that each - geographical zone of common business interests should have independent - self-government in matters of banking, precisely as the several States - have control of their local affairs. - - At the same time, these commercial zones should be so harmonized - and federated as to give to each the financial strength and power - of all combined, precisely as every State is as strong and powerful - politically as the Federal Government itself. - - All the governments of Europe are traditionally monarchical and - imperialistic. Their banking institutions not only all bear the - insignia of their political origin, but also characteristically mark - the times and conditions that gave them birth. - - In England alone self-government found true expression in the - selection of the board of directors of the Bank of England. The - British Government has no relation to the management, either directly - or indirectly. It neither appoints a single representative on the - board, nor has any voice whatever in his selection. - - Again, it is to be noted that the Englishman, ever tenaciously jealous - of his rights, excluded from the board of directors all bankers. No - banker has ever sat upon the board of directors of the Bank of England. - - The French Empire of 1803 and the German Empire of 1873 are each - reflected in the organization of the Bank of France and the Imperial - Bank of Germany. - - This Government was organized as a protest against royal rule and - imperial power. It has been fighting the evils of centralization for - more than a hundred years; and of nothing has it shown such persistent - jealousy as the possible centralization of financial interests and the - control of commercial credits. - - Will it be said by some one who thinks only in the terms of the - special interests that, notwithstanding this watchfulness and constant - anxiety, great aggregations of capital in the business world have come - practically to control the business situation; that our commerce is - practically centralized now, and that our banking should be so, to - make it the counterpart of the existing state of things? - - Let us not assume that the problems of coördinated power and wealth - have all been solved. Let us believe that the study of this modern - mystery has just begun. Let us hope that if it is possible for us so - to solve the financial and banking problem as to recognize the best - traditions of the Republic and the highest aspirations of the American - people, keeping steadily in view every economic law involved, we shall - then save our beloved country from the tragic consequence of political - controversies directly affecting our commercial credit and indirectly - affecting every day's labor and every dollar of capital until the - question is settled right. - - We must not forget that every conceivable phase of the so-called - "money question" has been the football of American politics from the - organization of the First and the Second United States banks, down - through the greenback madness, the silver craze and the gold standard - fight. Not a single subject has aroused such intense bitterness as - this one, excepting slavery alone. - - Whoever, then, tries to solve this problem must recognize at every - turn the origin of our political institutions, the genius of our - people, and the peculiar characteristics of the American citizen or he - will fail utterly in his undertaking. - -SECTION 4. That each bank shall be entitled to one vote, which shall -be cast by an officer of the bank who has been duly authorized by -a vote of the board of directors thereof, such authorization to be -evidenced in writing and under the seal of the bank. Each bank shall be -identified in its zone by a number. - - COMMENT:--It is our judgment that every bank should have equal power - in organizing and consequently in controlling the respective zones; - because we believe the business interests of the country will be - better conserved thereby. - -SECTION 5. That the association of all national banks clearing or -redeeming their notes at each of the cities so designated shall be -known as "The ---- Commercial Zone." - -SECTION 6. That all the national banks of each of the commercial zones -so constituted and established shall organize themselves into "The ---- -Commercial Zone" by electing a chairman, a secretary, and a treasurer, -who shall all hold office until the first Monday of the following May, -and by proceeding in the following manner: - -SECTION 7. That they shall take some point in the financial centre of -their respective commercial zones, from which they shall draw seven -radial lines, so cutting the territory as to divide the whole number of -banks, as nearly as possible, into seven district groups, each district -containing approximately the same number of banks, and may from time to -time thereafter shift said radial line for the purpose of maintaining -such equal subdivision of the banks. - - COMMENT:--It is a matter of great importance that these districts - shall be automatically and arbitrarily constituted, if possible; and - this plan will accomplish it. By this method every part of every - commercial zone will be represented by business men as well as - bankers. Neither particular sections nor particular banks can have any - direct advantage. - -SECTION 8. That each subdivision of the commercial zone so created -shall be known as a district, and they shall bear numbers respectively -from one to seven, inclusive. - -SECTION 9. That the board of the bankers' council shall be constituted -as follows: - -_First_: The bankers of each district of the respective zones, voting -as prescribed in section four of this Act, shall elect a banker and a -business man as members of said board. - -_Second_: The term of office shall be seven years; but the terms of -the members of the first board shall be for one, two, three, four, -five, six and seven years, respectively; that is, the board shall -arrange itself into seven groups, each being composed of one banker and -one business man, and thereupon the seven groups shall determine by lot -how long each group shall serve. - -_Third_: The fourteen members of the board of the bankers' council of -the respective zones shall then elect their president, who shall not -be one of the fourteen so selected, but shall be a resident of one of -the districts in their own zone. The term of service of the president -of said board shall be left to the respective boards of the bankers' -council in the several zones. - -SECTION 10. That the services to be rendered by the bankers' council -shall be advisory to the board of control whenever the board of control -may call them in consultation, or an appeal is made to them from the -action of the board of control by some citizen or citizens of their -particular zone. - -SECTION 11. That the members of the bankers' council shall receive no -salary, but all expenses incurred by them severally incidental to such -consultation and services shall be paid. - - COMMENT:--The relation of the Bankers' Council is the same to the zone - as the Clearing House Committee is to the Clearing House. It will be - the supreme court of the zone. It has the last word upon all business - questions growing out of banking in the zone, in case of appeal. - -SECTION 12. That the president of the bankers' council shall be -chairman of the board of control. - -SECTION 13. That the president of the bankers' council shall be a -deputy United States comptroller. - -SECTION 14. That each of the deputy comptrollers of the currency shall -from time to time furnish such information and make such reports to the -Comptroller of the Currency as the board of directors of the American -Reserve Bank shall prescribe: _Provided, however_, That the Comptroller -of the Currency may ask for reports as now provided by law. - -SECTION 15. That the board of control shall be constituted as follows: - -_First_: The bankers of each district, excepting the district in which -the chairman resides, voting as prescribed in section four of this Act, -shall elect a banker who resides in their district as a member of the -board of control. - -_Second_: The term of office shall be seven years, but the terms of the -members of the first board shall be for two, three, four, five, six -and seven years, respectively, and the six members so elected shall -determine by lot how long each shall serve. - -SECTION 16. That before any member of a board of control enters upon -the performance of his duties he shall sever all connection as officer -or stockholder with every bank in his commercial zone, and he shall be -ineligible to any position in any bank in his zone during the time for -which he shall have been elected to serve. - - COMMENT:--The Board of Control will be composed of a body of men who - are younger than the Bankers' Council; but of the same high order. - They will be men who have the undoubted confidence of the banking - fraternity; men who are to win the prizes in the banking world. This - position will be a sure stepping stone to the best positions; but it - must not be used for that purpose, at least until each man has served - out his time. - -SECTION 17. That compensation of the members of the board of control -shall be five thousand dollars per annum, payable monthly, including -the chairman, except that the chairman may receive any salary in -addition thereto that the bankers of his zone may determine to pay him: -_Provided_, That such additional salary shall be assessed upon the -capital and surplus of all the national banks in that zone. - - COMMENT:--The President of the Bankers' Council, Chairman of the - Board of Control, and Deputy United States Comptroller should all be - represented by the same individual for these reasons: - - _First_--The relation between the two bodies of men should be easy and - constant for the best interests of the people. There should be no slow - machinery to put into operation in case of necessity. Quickness and - harmony will always be essential. - - _Second_--The power of the United States Government should always be - present to enforce orders. - - _Third_--A man of the greatest ability obtainable should be secured to - occupy this place; therefore his salary and length of service should - be left open for arrangement with the Bankers' Council. This man ought - to be the leading man in banking in his zone in point of character and - wisdom. - -SECTION 18. That the services to be rendered by the board of control -shall be as follows: - -_First_: Each board of control shall have supervision of all the -national banks located in its zone. - - COMMENT:--The expense and annoyance of bank examinations as they are - carried on today would be reduced one-half and they would be worth ten - times as much as they are today with the exception of those made by - clearing house examiners. - -_Second_: The boards of control shall have power to employ all the -examiners and such other assistants as may be necessary to properly and -efficiently supervise the banks under them, and such examiners, as far -as possible, shall be paid stated salaries. - -_Third_: Each board of control shall have power to purchase commercial -paper or bills of exchange from the banks in its zone whenever they -desire to build up their reserves by obtaining additional gold or for -the purpose of crop moving or any special or extraordinary demand of -trade: _Provided, however_, That all the paper so purchased by them -shall bear the unqualified indorsement of some bank in their respective -zone. - - COMMENT:--MR. MERCHANT: Now it seems to me as though that organization - is as simple, direct and complete as it can possibly be. It makes - every zone an absolutely independent banking democracy. No outside - influence is permitted to interfere with the zone. It is certainly - local self-government from top to bottom. The fact that anyone in the - zone may appeal to the Bankers' Council for redress and that every - district has two representatives upon that board, will insure fair - consideration at the hands of the Board of Control. - -SECTION 19. That in case of a bank failure in any commercial zone one -of the members of the board of control in that zone shall be appointed -the receiver thereof and shall not receive any additional compensation -for the services rendered as such receiver. - -SECTION 20. That the board of directors of the American Reserve Bank -shall be constituted as follows: - -_First_: The bankers' council of each commercial zone shall elect a -member to the board of the American Reserve Bank. The commercial zones -bearing the odd numbers shall elect bankers and the commercial zones -bearing the even numbers shall elect business men, and every seven -years thereafter the bankers' council of the respective zones shall -alternately elect a banker or a business man, so that the elective -members of the board of directors of the American Reserve Bank shall -always be composed of an equal number of bankers and business men. - -_Second_: The term of service shall be seven years; but the terms of -service of the first elected board shall be for one, two, three, four, -five, six, and seven years, respectively; that is, the board shall -arrange itself into seven groups, each composed of two or more bankers -and two or more business men, and thereupon the seven groups shall -determine by lot how long each group shall serve. - -SECTION 21. That it shall be the duty of the board of the American -Reserve Bank, and it shall have the power, to fix the rate of interest -or discount at which all the commercial paper or bills of exchange -shall be purchased or discounted by all the boards of control. - -SECTION 22. That it shall be the duty of the board of directors of the -American Reserve Bank to issue a bulletin the latter part of each week, -giving a statement showing a balance sheet of the American Reserve Bank -and making such suggestions and comment and giving such advice as their -wisdom may determine; and it shall make such arrangements as to insure -the presence of this bulletin at practically every national bank in the -United States every Monday morning. - -SECTION 23. That the place of business of the American Reserve Bank -shall be Washington, District of Columbia. - -SECTION 24. That the members of the board of the American Reserve Bank -shall reside in Washington, District of Columbia, and shall give their -time and personal attention to the business of the bank. - -SECTION 25. That the members of the board of the American Reserve Bank -shall receive as compensation ten thousand dollars per annum each, -payable in monthly installments. - - COMMENT:--Each independent zone will send its own man to represent it - in the board of the American Reserve Bank--so that every financial - centre will have a spokesman to present its claims on the one hand and - to give full and reliable information on the other; also to guide the - whole board in its policy. The board shall give weekly advice to all - the banks in the United States upon the condition of business at home - and abroad. The American Reserve Bank, as we shall see, will hold all - central reserves of the United States for the benefit and protection - of each and all of the zones precisely as the zones must protect all - the individual banks within their borders. - - Since our gold reserves are now a part of the common reserves of the - whole commercial world, the price for the use of gold must be under - the control of the Board of Directors of the American Reserve Bank. In - this capacity they are acting for every individual bank in the United - States whose agent they are. - -SECTION 26. That the board of directors of the American Reserve Bank -shall elect as the president of the American Reserve Bank some one who -is not a member of the board so constituted. They shall also elect a -vice-president of said American Reserve Bank and such other officers as -they may decide from time to time to be necessary to the best conduct -of the business of said bank. - - COMMENT:--Since the board of directors are the direct representatives - of the respective zones, and since the American Reserve Bank is only - the servant of the combined zones working in coöperation, it is clear, - that the board should elect its own president and vice-president. - - If there is one thing, more than any other, that should be kept out - of this coöperative organization, it is politics. If the appointment - should be the perquisite of the President of the United States it - might be used as a bribe or a reward; such a thing should not be - thought of. The policy of such an institution should be beyond the - reach or influence of party politics. - -SECTION 27. That the term of service of the president and -vice-president of the American Reserve Bank shall be three years, and -the salary of the president shall be twenty-five thousand dollars -per annum, payable in monthly installments, and the salary of the -vice-president shall be eighteen thousand dollars per annum, payable -in monthly installments. The salaries of all the other officers or -employees of said bank shall be fixed by the board of directors of said -bank. - - COMMENT:--The term of service should not be too long, for it would - follow that a good officer would be retained, while a mistake could be - corrected within a reasonable time. The salary should be sufficient to - secure the ablest men that the country affords. - -SECTION 28. That the Comptroller of the Currency shall ex officio be a -member of the board of directors of the American Reserve Bank. - -SECTION 29. That the Secretary of the Treasury of the United States -shall ex officio be a member of the board of directors of the American -Reserve Bank. - - COMMENT:--Since the United States Government would carry its balances - with the American Reserve Bank, the Government should be recognized - by making the Secretary of the Treasury and the Comptroller of the - Currency ex-officio members of the board. - -SECTION 30. That the President of the United States, with the approval -of the United States Senate, shall appoint three directors of the -American Reserve Bank, who, for their first term, shall serve five, -six, and seven years, respectively, and thereafter seven years, and -each such director shall receive a salary of ten thousand dollars, -payable in monthly installments. - - COMMENT:--While it is true that the matter of management should be - kept out of politics, it may be granted that it might be wise to - have a small number of directors, appointed by the President of the - United States, who would have only their respective votes in the - deliberations of the board--but no official place. They might serve - some good purpose at times; while they certainly could do no harm. - The policy of the institution should not and would not be involved in - these appointments. - -SECTION 31. That vacancies in any one of the three boards as organized -in this Act may occur by death, resignation, or expulsion, and shall -occur whenever a member of any of the boards shall be a director or -officer of a suspended, insolvent, or failed bank. All such vacancies -shall be filled by the respective boards in which they occur until the -first Monday in the month of May following, except those appointed by -the President of the United States. - -SECTION 32. That the term of office of each member of the three boards -herein described shall begin at the time elected, but shall continue -from the first Monday in the following May as if that day were the -beginning of the time for which they were severally elected. - -SECTION 33. That on the first Monday in May each year after one full -year of service has expired the bankers of each commercial zone shall -meet at the city in which the financial centre is located to fill any -vacancies that may have occurred in any one of the boards described in -this Act, and also to elect any members to said boards where terms of -members have expired. - -SECTION 34. That each commercial zone shall have all the attributes -and powers of a body corporate and may sue and be sued in the United -States courts having jurisdiction of the action brought; it may receive -deposits from banks and act in every capacity of a bank for other -banks, but shall not allow or pay any interest on such deposits; it -shall have power to receive, collect, and forward bank notes; it shall -have power to buy and sell commercial paper and bills of exchange from -and to the banks which are members of such zone; it shall have power to -act as the agent or attorney in fact of the banks which are members of -any of the commercial zones, so far as it may be necessary to do so to -carry into effect the purposes of this organization; it shall have the -power to do and perform any and all acts that may be necessary for the -proper performance of its duties in the supervision of all banks under -it, and in the conduct and operation of the commercial zone. - -SECTION 35. That each commercial zone shall maintain and keep in -operation at its financial centre a clearing house where all the bank -notes, checks, drafts, bills of exchange, and other instruments of -credit, drawn upon any bank located in the zone, may be cleared, and -for any other purpose that may come within the purview of this Act; -and all such instruments of credit shall be accepted and settled for -at par at such clearing house, under and in accordance with such rules -and regulations as may be established from time to time by the board of -directors of the American Reserve Bank. - - COMMENT:--MR. MANUFACTURER: You have now completed the functions of - the zone, it seems to me; and everything that you have proposed is - based upon the approved practices of the American Clearing House. - - The free check zone, provided for in this last section, is identical - with that at Boston, where, ever since 1899, every New England bank - check has been at par at the centre. - - Atlanta, Nashville, Kansas City and several other cities are working - out the same plan. This plan is also identical with the plan that New - England worked out before the war, with respect to the redemption of - bank notes, when bank notes were the chief form of bank credit then - used. - - From 1818 to 1865, you will remember, the Suffolk Bank acted as a - clearing house for all New England bank notes which were par at - Boston, precisely as checks are today. - - Here we are getting back to the simple fundamental principle of - current redemption of bank credit without charge to commerce in - whatever form the people may choose to use it. - - It is bank notes and checks in France, Scotland, Ireland and all over - Canada. Why should it not be bank notes and checks all over the United - States just as well, in order that the people may have bank credit in - the most convenient and cheapest form possible? - - Then, you have extended to every commercial zone the same organization - for supervision and administration that the most advanced clearing - houses have; the Board of Control to examine them and the Bankers' - Council as a court of appeal to settle all difficulties that may arise. - - MR. MERCHANT: Is it practical to have the zones conform to State lines? - - MR. BANKER: Such a thing should not be thought of. Economic laws do - not follow State lines. There is not a single State in the Union that - is a natural economic zone. Some States should have several financial - centres; some none. To attempt to make a commercial zone conform to - State lines would be absurd. Bank credit flows to centres as water - rushes to the ocean, and we should not violate a great economic law - to the irreparable injury of commerce. Sense and not sentiment should - control our action. - - St. Louis and Kansas City are natural financial centres, but Jefferson - City is not. St. Louis draws its bank credits from eastern Missouri, - southeastern Iowa, northeastern Arkansas and southern Illinois. - - Kansas City draws its bank credits from western Missouri, southwestern - Iowa, southeastern Nebraska, all of Kansas and some of Oklahoma. These - cities illustrate the principle that must not be violated or we may do - more harm than good. - - Vermont has no economic centre, and it would do violence to trade and - commerce to make one arbitrarily. - - Tennessee has three such centres. Indiana and several other States - have but one. - -SECTION 36. That the American Reserve Bank shall have all the -attributes and powers of a body corporate and may sue and be sued in -any United States court having jurisdiction of the action brought. It -shall have power to buy and sell gold bullion and gold coin; to buy and -sell United States Government securities; to loan money to the United -States Government, and to act as banker, fiscal agent, representative -and attorney in fact for the United States Government; to buy and -sell bills of exchange, domestic and foreign; to act as fiscal agent, -attorney in fact, for all members of the respective commercial zones, -and shall have full power to carry into effect the object for which -this organization is created; it may receive deposits from banks and -act in every capacity of a bank for other banks, but shall not allow -nor pay interest upon any deposits that may be made with it. - -SECTION 37. That the board of directors of the American Reserve -Bank shall define from time to time the nature and character of the -promissory notes, checks, drafts, and bills of exchange that may be -purchased by the respective zones and the length of time they may have -to run: _Provided, however_, That every piece of paper purchased by any -commercial zone shall bear the unqualified indorsement of some national -bank in its zone. - - COMMENT:--It would be unwise to fix now arbitrarily by statute just - what kind of paper the banks of every zone should buy. This ought to - be left to the board of the American Reserve Bank. They will meet it - wisely as it arises. - -SECTION 38. That the United States Government is hereby authorized and -empowered to prepare, upon the passage of this Act, bank notes for the -respective banks applying for them without the following superscription -upon them: "This note is secured by bonds of the United States or other -securities," but in all other respects like the bond-secured bank notes -now in use: _Provided, however_, That the notes delivered to any bank -for issue and circulation shall have in bold type, first, and to the -left of the centre, the number of its zone, and, second, to the right -of the centre, the number of the bank by which it is identified in its -zone. - - COMMENT:--This section provides a true bank note by erasing that - barbaric superscription that makes our present bank notes a bond - speculation; and by bold numbers identifies every bank note with a - zone and with the bank issuing it, thereby greatly facilitating the - quick redemption of the notes. - - MR. MERCHANT: How much more economical would this currency be than a - currency furnished by the Government or purchased from some central - bank or other central institution? - - MR. BANKER: It would cost just one-fifth as much, or the difference - between _par_ that would have to be paid for the currency purchased - and the average reserve carried; or about 20 per cent. The average per - cent of gain to the banks would be about 5 per cent upon the amount - of notes outstanding (approximately $1,250,000,000) or $60,000,000. - Of course, this gain would come to the people, sooner or later; in - the end, the expense of the bank is borne by commerce. The present - enormous cost of shipping currency to and fro across the country would - be saved also, and this amounts to several million dollars a year, to - say nothing of the added trouble of shipping commercial paper with - which to pay for it. - -SECTION 39. That upon the completion of the organization of the several -commercial zones as hereinbefore provided any national bank may retire -all or any part of its present bond-secured note circulation by -depositing with the United States Treasurer an amount of the present -bond-secured notes or lawful money, or both, which shall be equal to -the amount of its circulation so retired, and may thereupon, with the -approval of the Comptroller of the Currency, take out for issue and -circulation an amount of bank notes, which shall be known as "national -bank notes," that does not exceed in amount its paid-up and unimpaired -capital without depositing United States bonds or any other securities -to secure the payment thereof as now provided by law: _Provided, -however_, That before any national bank shall have the right to retire -its present bond-secured circulation and take out national bank notes -for circulation as in this section prescribed, it shall first, unless -located in its financial centre, make arrangements with a national bank -which is located in its financial centre for the redemption of its bank -notes in gold coin or other lawful money: _And provided further_, That -it shall first deposit in gold coin or gold coin certificates with -the American Reserve Bank an amount of money equal to 7 per centum of -its average deposits during the preceding calendar six months, and in -addition thereto an amount equal to 7 per centum of the national bank -notes it proposes to take out for issue and circulation. - - COMMENT:--The amount of notes is limited to the amount of capital as - a matter of convenience only. Some banks will not be able to keep out - 25 per cent of their circulation, because their customers use checks; - other banks will need at certain times of the year in some sections - of the United States an amount of circulation largely in excess of - the amount of their capital. The habits of the people will always - determine what the amount of currency in use is, if permitted to - choose between checks and notes; but crop-moving times will greatly - increase the normal demand, as we have seen in the case of Canada. - -SECTION 40. That thereafter every national bank shall have upon deposit -upon the tenth days of January and July of each year with the American -Reserve Bank an amount of gold coin equal to 7 per centum of its -average deposits during the preceding calendar six months and 7 per -centum of its national bank notes taken out for issue and circulation: -_Provided, however_, That this reserve shall be increased at the rate -of 1 per centum each year for a period of three years thereafter; and -that thereupon and thereafter every national bank shall have upon -deposit upon the tenth days of January and July of each year with the -American Reserve Bank an amount of gold coin equal to 10 per centum -of its average deposits during the preceding calendar six months and -10 per centum of its national bank notes taken out for issue and -circulation. - -SECTION 41. That every national bank shall carry a cash reserve of 6 -per centum of all of its individual deposits subject to check up to six -million dollars and one-half of 1 per centum additional for each five -hundred thousand dollars up to ten million dollars, and upon this and -all additional individual deposits a reserve of 10 per centum in cash. - -SECTION 42. That every national bank shall carry a cash reserve of 20 -per centum of its deposits from banks, or upon its bank balances. - - COMMENT:--There is no doubt whatever that banks should carry larger - cash reserves against bank balances than against those of individuals. - The banks of Europe which carry such balances carry all the way from - 33 per cent up to 50 per cent. - -SECTION 43. That any national bank may at any time fall 75 per centum -below its required cash reserve: _Provided, however_, That its average -cash reserve from January 1st to December 31st shall be equal to its -required cash reserve. - -SECTION 44. That the amount that any national bank located outside of -a financial centre shall be required to carry with a national bank -located in a financial centre for the purpose of redeeming its notes -may be counted as a part of its required cash reserve. - -SECTION 45. That any national bank desiring to build up its reserve may -rediscount or sell any of the commercial paper or bills of exchange -owned by it by applying to the board of control of the commercial zone -in which it is located. - -SECTION 46. That if any national bank shall not maintain its required -average cash reserve, as prescribed by this Act, it shall pay at the -end of the year as a penalty therefor, 10 per centum upon all loans in -excess of such required cash reserve; and such penalty so paid shall -be paid without any reference to any rediscounts made with the board of -control for gold: _Provided, however_, That the board of directors of -the American Reserve Bank may at any time suspend the whole or any part -of said 10 per centum penalty that may result from a demand for gold -during a panic, crop-moving period, or any unusual or extraordinary -condition. - -SECTION 47. That any national bank desiring to take out for issue and -circulation an amount of national bank notes in excess of its paid-up -and unimpaired capital, without depositing United States bonds or any -other securities to secure the payment thereof, may do so to an amount -not to exceed 100 per centum of its paid-up and unimpaired capital -stock, provided the board of control of the commercial zone to which -such bank belongs first gives its approval thereto. - -SECTION 48. That the United States Government shall print and place in -the hands of the respective boards of control an amount of national -bank notes for each national bank in its zone equal to the paid-up -capital thereof in addition to the bank notes taken out in accordance -with Section 30. - - COMMENT:--You will observe, gentlemen, that by Section 43 a bank is - allowed to fall 75 per cent below its average cash reserve; that - by Section 45 it can buy gold from the Board of Control with its - commercial paper and build up the reserve; also that by Section 47 it - can take out an additional amount of currency to meet any emergency - that may arise. Now, when you appreciate the fact that the Board of - Control is going to make every bank qualify in the outset, as sound - and then is virtually responsible for its condition, with the power to - aid it in case of necessity, it is difficult to even imagine a case - where a bank would fail. - - MR. MERCHANT: That is so; every bank ought to be kept in liquid shape - by the Board of Control; then its means of defense, as you have - just pointed out, are unlimited. Of course it would then have all - its present resources by way of rediscounting paper with its city - correspondent; and on top of that the provisions of your bill. You - could not possibly bust a bank. - -SECTION 49. That national bank notes shall be a first lien upon all the -assets of the bank issuing them, including the double liability of the -stockholders, and any person or bank holding any of the national bank -notes of a failed bank shall be entitled to recoup the amount thereof -out of the first moneys received on account of the failed bank. - - COMMENT:--These credit notes should be a first lien precisely as our - present bank notes are; as the Scotch notes are and as the Canadian - notes are. Bank notes should be made a first lien, because they are a - public convenience and because the holder is morally and practically - compelled to take them in the ordinary course of business. - - MR. MANUFACTURER: He could refuse if he chose and demand legal tender, - could he not? - - MR. LAWYER: Certainly, but public policy should put the goodness of - bank notes beyond question under all circumstances. - -SECTION 50. That the expense of transmitting national bank notes by a -bank to its financial centre, except its own bank notes, shall be paid -by the board of control of the commercial zone in which such financial -centre is located. - -SECTION 51. That the expense of transmitting national bank notes from -a financial centre outside of the zone to which they belong to the -financial centre to which they belong shall be paid by the bank issuing -the national bank notes so returned. - - COMMENT:--It will not cost bankers anything to forward notes for - redemption, as the expense of transportation will be paid by the - commercial zones. This fact will insure the immediate return of all - notes for redemption. - -SECTION 52. That the national bank notes issued in accordance with the -provisions of this Act shall be received at par in all parts of the -United States in payment of taxes, excises, public lands, and all other -dues to the United States, including duties on imports, and also for -all salaries and other debts and demands owing by the United States to -individuals, corporations, and associations within the United States, -except interest on the public debt and in redemption of the national -currency. Said notes shall be received upon deposit and for all -purposes of debt and liability by every national banking association -at par and without charge of whatsoever kind. - -SECTION 53. That from and after the passage of this Act no bank shall -receive or have on hand deposits exceeding in amount ten times the -amount of its paid-up and unimpaired capital. - - COMMENT:--Capital is a sort of insurance fund precisely as reserves - are, and there should always be a reasonable relation sustained - between capital and deposits. - -SECTION 54. That any national bank may, with the approval of the board -of control, establish a branch bank in any town, village, or locality -within its own zone and within a radius of twenty miles, where there is -no national bank; but such branch bank shall be discontinued as soon as -an incorporated bank is established at that point with a capital of at -least ten thousand dollars. - -SECTION 55. That whenever any body of men desire to establish a -national bank, or to nationalize a private bank, State bank, or trust -company, they must first secure the approval of the board of control of -the commercial zone in which the proposed bank is to be located; and if -such application shall not be approved by the board of control for any -reason, the applicant or applicants may then appeal to the board of the -bankers' council for approval. - -SECTION 56. That the decision of the board of the bankers' council upon -all appeals by applicants for the privilege of starting a national bank -shall be final, and their decision shall also be final in all other -matters in which appeals may be made from the board of control. - -SECTION 57. That all the rules and regulations under which branches are -carried on shall be fixed and established by the board of directors of -the American Reserve Bank. - -SECTION 58. That any national bank which has taken out national bank -notes for issue and circulation in accordance with this Act shall -pay the American Reserve Bank on the tenth days of January and July -of each year 1 per centum upon the average amount of notes in actual -circulation during the preceding six months. - - COMMENT:--The tax is placed at 2 per cent per annum because that is - the usual rate of interest now allowed on good balances all over the - United States, and the notes are only another form of deposits made by - the public who carry or use the notes. - -SECTION 59. That the tax so paid by the banks upon the national bank -notes, as provided in Section 58 of this Act, shall be appropriated for -the following uses and purposes: - -_First_: To pay all the expenses of whatsoever kind growing out of the -administration of the four organizations established by this Act. - -_Second_: To pay 1 per centum per annum upon all the United States 2 -per centum bonds or consuls until their maturity in nineteen hundred -and thirty. - -_Third_: To establish and maintain in the American Reserve Bank a bank -note redemption fund equal to 5 per centum of the average amount of the -notes outstanding each six months preceding the first days of January -and July of each year for the purpose of redeeming the notes of failed -banks. - -_Fourth_: The balance remaining, if any, shall, on the tenth day of -January in each year, be paid into the division of the reserve fund of -the United States Treasury in gold coin for the purpose of converting -the United States notes into gold certificates. - -SECTION 60. That to any national bank which has complied with section -thirty-nine of this Act the United States Government shall return the -5 per centum fund deposited with it for the purpose of redeeming its -bond-secured bank notes. - -SECTION 61. That any national bank desiring to wind up its affairs and -go out of business shall be entitled to receive back all its advances -made upon its deposits and note issue to the American Reserve Bank: -_Provided, however_, That all the liabilities of such bank have been -paid in full and satisfied, or any amount of lawful money equal -thereto has been paid into the American Reserve Bank for that purpose, -and the Comptroller of the Currency approves the repayment of said sum. - -SECTION 62. That from and after the first day of January, nineteen -hundred and fourteen, no national bank shall pay out over its counter -any bond-secured bank note, but shall send the same to its financial -centre, and the financial centre shall forward it to the United States -Treasurer for redemption, cancelation and destruction. - -SECTION 63. That any national bank that shall count any national bank -note or notes as a part of its reserve shall pay into the American -Reserve Bank a penalty of 10 per centum per diem on the amount so -counted, and any national bank that shall, after January first, -nineteen hundred and fourteen, count any bond-secured bank note as a -part of its reserve shall pay into the American Reserve Bank a penalty -of 10 per centum per diem upon the amount so counted. - - COMMENT:--If there is one evil that should be crushed out in this - country more than any other it is the practice of carrying debts as - reserves. No bank should be allowed to carry any other bank's notes, - any more than any other check or draft which it thinks is good. It - has been this abuse of bank credit that has led to more trouble - than almost any other single thing. It was the requirement of coin - reserves and current coin redemption that made the banks of Virginia, - Louisiana, Kentucky, Ohio, Indiana, Iowa, Missouri and the Suffolk - System such perfect successes. - - Here is the crux. The very soul of sound banking is current coin - redemption. So let us not fool ourselves by putting wind and water - into our reserves. - -SECTION 64. That any national bank may and is hereby authorized to -accept any note, check, draft, or bill of exchange, with not more than -four months to run, for any one of its regular customers: _Provided, -however_, That the instrument of credit so accepted shall be for goods -or merchandise sold and actually delivered or in transit to the buyer: -_And provided also_, That the instrument of credit states this fact -upon its face: _And provided further_, That the bank so accepting -any such instrument of credit shall keep and maintain against such -acceptance identically the same reserve as it is required to keep and -maintain against a deposit subject to check, and it shall be subject to -the same penalty as provided in section forty-six of this Act. - - COMMENT:--Let us not fool ourselves by supposing that by creating - liabilities we are actually creating new capital. By acceptances a - class of paper will undoubtedly be created that will in turn create a - market for itself. The object therefore of acceptances should be to - facilitate the handling of commodities in transit. - -SECTION 65. That any national bank having a paid-up capital and surplus -of at least two million dollars may establish a branch in any foreign -country with the consent and approval of the board of directors of the -American Reserve Bank. - - COMMENT:--If we hope for our share of profit upon our foreign - trade and if we hope to secure for the American merchant an equal - opportunity in securing that foreign trade, we must prepare here two - aids: one is banking facilities and the other is shipping facilities. - Is it not perfectly clear that a foreign banker would do anything in - his power to divert all the traffic he could over the shipping lines - of his country? We shall find in the end then that our foreign trade - will be aided not by our foreign bank alone but by American shipping - as well. - -SECTION 66. That any national bank that has a paid-up capital of at -least fifty thousand dollars, and the surplus required by law, may act -as a guardian, administrator, executor, or trustee and in such capacity -in any State, by whatever name known, in accordance with the laws of -the State or Territory where situated or located, and the reserves -required against trust funds shall be as follows: - -_First_: Seven per centum thereof shall be deposited with the American -Reserve Bank. - -_Second_: Six per centum cash shall be carried against all trust -funds up to six million dollars and one-half of 1 per centum for each -additional five hundred thousand dollars up to ten million dollars, -and upon this amount and all additional amounts, 10 per centum in cash -shall be carried, but any national bank accepting trust accounts shall -keep the same separate and apart from all other accounts in said bank, -and shall establish a trust account department; and all such deposits -shall be invested in such securities as are prescribed by the laws of -the State where such bank is located. - -SECTION 67. That if the laws of the State where any national bank -accepting trust accounts is located do not prescribe how trust funds -shall be invested, then the board of the American Reserve Bank shall -fix rules and regulations for the investment of such funds. - -SECTION 68. That any national bank may accept savings accounts, as -distinguished from commercial accounts, but any national bank accepting -savings accounts shall keep the same separate and apart from all -other accounts in said bank, and shall establish a savings account -department; and all such savings deposits shall be invested in such -securities as are prescribed by the laws of the State where such bank -is located. - -SECTION 69. That if the laws of the State where any national bank -accepting savings accounts is located do not prescribe how savings -funds shall be invested, then the board of the American Reserve Bank -shall fix laws and regulations for the investment of such funds. - -SECTION 70. That all investments made for the benefit of the savings -depositors of any national bank shall be held primarily and exclusively -for the benefit of the depositors in the savings department; and in -case of a bank failure, if the investments made for the benefit of -the depositors in the savings department do not satisfy their claims -in full, then the depositors of the savings bank shall be entitled -to such a part of the capital, surplus, and capital liability as the -savings deposits bear to all other deposits up to and until the savings -accounts are paid in full. - -SECTION 71. That any national bank accepting savings accounts shall, -on the tenth days of January and July of each year, have with the -American Reserve Bank an amount in gold coin equal to 5 per centum -of the average deposit in such department during the preceding six -months, and such national bank shall be required to carry cash reserves -amounting to 5 per centum against such savings account. - -SECTION 72. That the said 5 per centum so paid by the national banks to -the American Reserve Bank as reserves against their savings deposits -shall be invested in United States Government bonds or securities for -the exclusive benefit of the savings depositors in the national banks -as a savings bank fund, and the full interest earned upon said bonds -shall be credited to the savings bank fund in the American Reserve -Bank, and no part thereof shall be deducted for any other purpose -whatsoever than the protection of savings bank depositors. - - COMMENT:--This trust fund would absorb about $350,000,000 of the - present bonds held by the national banks for circulation, as the total - savings now approximate seven billion dollars ($7,000,000,000). - -SECTION 73. That any national bank accepting a savings bank account -may at any time demand the right to have thirty days' notice of an -intention to withdraw the same, and may also reserve the right to pay -all savings accounts in two installments--50 per centum thereof in -three months, 50 per centum in six months. - -SECTION 74. That from and after the first day of January, nineteen -hundred and fourteen, every person, firm, partnership, or corporation -using the word banker or bank, and every State bank and trust company -in the United States receiving deposits subject to check, or saving -accounts in the usual way, or trust funds shall keep and maintain -identically the same reserves against these respective funds as is -provided for by the provisions of this Act; and any person, firm, -partnership, or corporation using the word banker or bank, and every -State bank and trust company, except mutual savings banks, that fails -to comply with the provisions of this Act shall pay a tax of 10 per -centum to the United States Government on the tenth day of January -in each year upon all the deposits or trust funds against which the -foregoing prescribed reserves have not been kept and maintained. - -SECTION 75. That any person, firm, or corporation using the word banker -or bank, and every State bank or trust company that shall, after -January first, nineteen hundred and fourteen, hold as a part of its -required reserves, as prescribed in section sixty-three, any national -bank note, check, draft, or other instrument of credit, shall pay a tax -thereon to the United States of 10 per centum per diem on the amount so -held; and every person, firm, or corporation using the word banker or -bank, and every State bank or trust company accepting deposits or trust -funds as described in section sixty-three shall, upon the first day -of January in each year, make a sworn statement to the United States -Government showing exactly the amount and the character of reserves -held during the preceding year against all of its deposits, and upon -failure to do so shall pay a fine of one thousand dollars per day until -such report is made. - - COMMENT:--These Sections, 74 and 75, provide that every person or - corporation in the United States shall not only carry its proper share - of reserves, as we have all agreed they should, but the right kind of - reserves as well. Quantity and quality must both be made obligatory if - we are to have a banking system that amounts to anything. - -SECTION 76. That as soon as the amount of money deposited by the -national banks with the American Reserve Bank, as aforesaid, shall -reach the sum of five hundred million dollars all the bonds now -deposited by national banks to secure Government deposits shall be -returned to the respective banks to which they belong; and from and -after that date any national bank holding a Government deposit shall -pay interest thereon to the Treasurer of the United States at the -rate of 2 per centum per annum, and the said interest so received -shall be paid into the division of reserve fund in the Treasury, and -United States notes of an equal amount shall be retired, canceled, and -destroyed and gold certificates issued therefor. The said interest -shall be payable as follows: 1 per centum on the tenth days of January -and July of each year on the average balance during the preceding six -months. - -SECTION 77. That all the profits growing out of the operations of -the several commercial zones and the American Reserve Bank combined -may be distributed between the United States Government and all the -national banks pro rata, according to the amount they have respectively -deposited with the American Reserve Bank, whenever in the judgment of -the board of the American Reserve Bank it is advisable to do so, having -made such provision for a reserve as is deemed necessary: _Provided, -however_, That the distribution of profits shall not exceed 2 per -centum per annum until practically all of the United States notes have -been converted into gold certificates; and for that purpose all the -profits in excess of 2 per centum shall be paid into the reserve fund -of the United States Treasury in gold coin. - -SECTION 78. That subject to the disposition made and provided for in -this Act of all the various sums of money to be paid to the American -Reserve Bank all such sums of money shall be combined and held in one -common fund and be known as the American Reserve Bank Fund, and this -fund shall guarantee the repayment of all Government deposits made with -the American Reserve Bank and the redemption of the national bank notes -of any failed bank. - - COMMENT:--In paragraph three, under Section 59, provision was made for - a 5 per cent guarantee fund to redeem the bank notes of any bank which - has failed. This fund is held by the American Reserve Bank, which - under Section 78 will be used to redeem the notes of all failed banks - immediately and the amount of the notes so redeemed shall be recouped - from the assets of the bank that issued the notes; if, by chance, one - should fail after it has become a part of the proposed system, which - I, for one, do not believe is possible. - -SECTION 79. That the American Reserve Bank shall, on the first days -of January and July of each year during the life of the 2 per centum -United States consols up to nineteen hundred and thirty, pay into the -Treasury of the United States an amount of cash in equal payments which -shall be equal to 1 per centum per annum of all the United States 2 per -centum bonds or consols now aggregating about seven hundred and thirty -million dollars. - -SECTION 80. That when the American Reserve Bank shall have paid -into the United States Treasury the first half of 1 per centum in -accordance with the preceding section, the United States Government -shall thereupon refund all of the 2 per centum bonds or consols into 3 -per centum bonds or agree to pay 3 per centum thereon; and thereafter -the Government shall pay 3 per centum interest upon all of said 2 per -centum consols. - - COMMENT:--By this section all the 2 per cent bonds will be converted - into 3 per cent bonds and they will then be returned to the banks to - which they belong. They can then be sold by them, bringing into the - commercial fund of the country $730,000,000. - - This change ought to enable the banks to loan money more cheaply to - the people; we must remember that the more expensive we make banking - in this country the higher the rates of interest will be; for, in the - end, the people bear every added burden. - -SECTION 81. That when the United States Government shall have made -provision for refunding the 2 per centum bonds or consols into 3 per -centum bonds and the American Reserve Bank Fund shall amount to the -sum of five hundred million dollars, the United States Treasury shall -transfer to and keep with the American Reserve Bank a sufficient -balance--upward of fifty million dollars--to meet all of its checks and -drafts; and thereupon the American Reserve Bank shall become the fiscal -agent of the United States Government for all purposes, except for the -collection and current daily deposits of its revenues, which shall not -be deposited thereafter in the United States Treasury or Sub-treasuries. - -SECTION 82. That from and after the date that said American Reserve -Bank Fund shall amount to the sum of one thousand million dollars the -Secretary of the Treasury of the United States shall deposit from day -to day all Government receipts from whatsoever source received in the -American Reserve Bank. - - COMMENT:--According to these two Sections, 81 and 82, the United - States Treasury will cease to be a disturbing factor in the commerce - of the country; and it will do its business, precisely, as any - municipality, by check and draft upon the American Reserve Bank, where - its money will be deposited, from day to day, currently, as received. - -SECTION 83. That beginning on the first day of January after the -"American Reserve Bank Fund" shall amount to one thousand million -dollars, every National bank shall pay to the American Reserve Bank a -tax of one-fifth of 1 per cent upon all of its deposits held upon said -first day of January, and upon the first day of January thereafter for -two successive years a tax of one-fifth of 1 per cent upon the amount -of deposits held. - -SECTION 84. Every National bank shall thereafter contribute a -sufficient amount on the first day of January in each year to make the -total amount that it has contributed equal to three-fifths of 1 per -cent of its deposits. - -SECTION 85. The fund so created by the payment of the said three-fifths -of 1 per cent to the American Reserve Bank shall constitute and be -known as "The Depositors' Insurance Fund." - -SECTION 86. Any bank that shall come into the National banking system -at any time after the passage of this act shall immediately proceed to -make its contribution to "The Depositors' Insurance Fund" as prescribed -in sections eighty-three and eighty-four of this Act. - -SECTION 87. If any National bank shall fail after three years from the -time that the first tax upon deposits was paid, all depositors shall be -paid in full, as hereinafter provided, as soon as the amount due them -respectively has been ascertained. - -SECTION 88. The Board of Control of the commercial zone where the -failed bank is located shall issue in the name of its commercial zone -perpetual securities subject to call equal in amount to the amount of -the deposits held by the failed bank. The securities so issued shall be -in the denomination of five hundred dollars and multiples thereof, and -be known as Bank Bonds of ---- Commercial Zone, and shall bear interest -at the rate of 6 per cent per annum, payable annually. - -SECTION 89. The Board of Control issuing Bank Bonds as in the foregoing -section prescribed, may deposit an amount thereof with the American -Reserve Bank equal to all deposits less than five hundred dollars and -all fractions of deposits less than five hundred dollars, and receive -in exchange therefor, an equal amount of money. - -SECTION 90. The Board of Control may at its option sell the Bank Bonds -so issued, and pay the depositors in cash in full or may pay the -depositors in cash in part and in Bank Bonds in part. - -SECTION 91. From time to time as cash is realized from the assets of -the failed bank the Board of Control shall retire a corresponding -amount of Bank Bonds, the bonds so retired to be determined by lot. - -SECTION 92. As soon as the loss resulting from the failure of the bank -is determined, the Board of Control shall proceed to assess a tax at -the rate of one-fifth of 1 per cent per annum upon all the deposits of -all the National banks in the commercial zone where the failed bank was -located until one-half of such loss has been collected from such banks. -The remaining one-half shall be borne by "The Depositors' Insurance -Fund." - - COMMENT:--Since the commercial zone where the failed bank is located - is directly responsible for the failure because its board of control - could have prevented it, that particular zone should bear at least - half the loss. This is essential to impress upon all the bankers of - the zone the importance of selecting the very best men upon the board - of control. - -SECTION 93. The board of directors of the American Reserve Bank may -invest such part of "The Depositors' Insurance Fund" in United States -Government securities as they may deem wise. - -SECTION 94. If at any time in the future the board of directors of the -American Reserve Bank shall find it necessary to reimpose upon all the -deposits of the National banks the tax of one-fifth of 1 per cent to -carry this act into effect, they are hereby authorized and empowered to -do so. - -SECTION 95. If the board of directors of the American Reserve Bank -shall at any time deem "The Depositors' Insurance Fund" unnecessarily -large, it may distribute a portion of the same among the banks as their -interests may appear. - - COMMENT:--MR. LAWYER: Gentlemen, by Sections 83 to 95 we have provided - for the insurance of depositors, as you will perceive. We have - accomplished this by financing, as it were, the assets of the failed - banks so that all depositors can have their money immediately. We - believe that the result of this plan will be not only to absolutely - protect all depositors and give them their money immediately; but, to - save the depositors from a world of worry; to protect the banks from - panics and runs; to stop hoarding; to protect storekeepers, merchants, - manufacturers and all business interests from the consequences of the - inability of the people to meet their obligations because their money - or cash resources are tied up in bank failures as heretofore. Our - problem was to meet the condition confronting a community when a bank - closed its doors, and I think we have solved it. - - MR. BANKER: There can be no possible question but what this plan, - which will put into the American Reserve Bank at least $35,000,000 - before it becomes operative, will accomplish the purpose sought, since - the total loss to all depositors in the National banks in forty-nine - years have been only $38,000,000, and the estimated loss where the - failed banks have not been closed out is only $6,000,000, or a total - loss for the whole time of only $44,000,000. - - MR. MERCHANT: You have undoubtedly solved every difficulty connected - with this great and most benevolent purpose. - - MR. LABORINGMAN: Gentlemen, I want to thank you from the bottom of my - heart for what you have just done. I want to thank you in the name of - the millions of toilers. If I have had any influence in bringing this - great reform about, I feel that I have been repaid a thousandfold for - the time I have spent with you. - - MR. LAWYER: To you, Mr. Laboringman, more than to all the rest of - us, is due the insurance of depositors in our National banks; for - you may rest assured now that it will come about sooner or later. Of - course, that letter to Mr. Farmer from the Comptroller of the Currency - paralyzed all opposition, and to you two men belongs the glory of this - victory; to you two men will be due the gratitude of all depositors. - -SECTION 96. That whenever the accumulations from the tax upon the -national bank notes shall reach an amount equal to 5 per centum of -the national bank notes outstanding during the preceding six months -after paying all the expenses growing out of the administration of the -four organizations established by this Act--the commercial zone, the -bankers' council, the boards of control, the American Reserve Bank--and -the 1 per centum per annum upon all the 2 per centum bonds or consols -is being currently paid, the excess from whatever source remaining -over, allowing for such a reserve as is deemed necessary, shall, on -each succeeding tenth days of January and July in each year, be paid -into the division of the Reserve Fund of the United States Treasury in -gold coin; and as soon as the Secretary of the Treasury shall receive -and cancel an amount of United States notes equal to the gold so paid -in, he shall issue gold certificates therefor. - -SECTION 97. That when the Secretary of the Treasury of the United -States shall have received from the interest paid by the banks upon the -Government deposits, and from all other sources, the sum of one hundred -and ninety-six million six hundred and eighty-one thousand and sixteen -dollars in gold coin for the purpose of redeeming and converting a -like amount of the United States notes into gold certificates, and -he shall have received, canceled and destroyed substantially all of -the remaining United States notes outstanding, making due allowance -for the United States notes estimated to be lost or destroyed, he -shall then transfer all the gold coin and gold bullion in the Reserve -Fund, amounting to one hundred and fifty million dollars, with all -the accumulations, to the division of redemption of the trust fund; -and thereafter no national bank shall hold a United States note as a -part of its reserve, nor shall there be paid out of the United States -Treasury any United States notes; but the same when received shall be -canceled and destroyed, and gold certificates shall be issued therefor. - - COMMENT:--You will have noted in Sections 77 and 96, also in Section - 97, that provision has been made for paying gold into the Reserve - Fund, which is the fund behind the Greenbacks or United States notes, - and that a corresponding amount of greenbacks are to be canceled and - the same amount of gold certificates are to be issued in their place. - - The amount of greenbacks is $346,681,016. The present amount of the - Reserve Fund is $150,000,000. Now after we have paid into this fund - $196,681,016, the greenbacks will be converted into gold certificates. - We estimate that this will take twelve to fifteen years. - - Then all our bank reserves will, practically, be in gold coin or gold - certificates, because the silver certificates will be cut up into one - and two dollar pieces and will be token money, in the pockets of the - people, the tills of the stores and will constitute small cash for the - banks. - - UNCLE SAM: Glory Halleluiah! That will be the day I long have sought - and mourned because I found it not! Boys, your work will be a great - relief to me. - -SECTION 98. That when substantially all the United States notes shall -have been converted into gold certificates, as in this Act provided; -when practically all of the bank notes secured by Government bonds have -been returned to the United States Treasury and canceled; and when -practically all the silver certificates of the larger denominations -have been cut up into one and two dollar certificates or coined into -subsidiary coins; and when the American Reserve Bank shall be acting as -the fiscal agent of the United States Government, it shall thereupon -assume the maintenance of the parity of the silver certificates and -silver coins with gold coin. - - COMMENT:--Uncle Sam may well rejoice because this section, you will - observe, provides that the American Reserve Bank shall then maintain - the parity of all his silver with his gold. - - MR. MERCHANT: Gentlemen, have you estimated how much gold your plan - would bring into the American Reserve Bank? - - MR. BANKER: Yes, sir; we should have approximately one thousand two - hundred and fifty million dollars ($1,250,000,000). - - MR. MERCHANT: Where would this gold come from? - - MR. BANKER: Partly from what the banks now hold, and partly from - the channels of trade. There is about $900,000,000 now in the banks - and $978,000,000 in the channels of trade, or $1,878,000,000 in the - United States. The present _dead reserves, I mean dead reserves held - by the banks under a legal prohibition against their use_, and the - gold floating around in the cotton fields, corn and wheat fields, in - the mining camps, in the stores, and in the pockets of the people - generally, would at once be brought to their proper use, vitalized, - and mobilized into a common defense of the bank credit of the country; - all of it, ready all the time, to meet the demands of commerce, and to - protect every bank in a liberal and wise use of its credit. - - MR. MANUFACTURER: I presume that you have been deeply impressed, as - I have, with the importance of protecting our gold reserves from the - standpoint of a nation among the great commercial nations of the - world. We have learned that there are many forces now acting upon - gold, because it is the universal reserve of the world. - - MR. BANKER: Precisely so, and this fact necessitates this - centralization of gold, and that a power be lodged somewhere to - protect it from those influences, which, if set in motion, and - unobstructed, will rob us of it almost in the twinkling of an eye. - Only a year ago we saw these influences at work in Germany. It was - stated that at least $350,000,000 was withdrawn in about sixty days. - Tomorrow, these same influences may be drawing away our foundations of - credit in a similar manner, and we would suffer an irreparable injury, - because we are without any means of defense. There are those who seem - to think that if we have a balance of trade in our favor, we are safe; - but this is only one factor; nor are we certain of this, for any - length of time. We are today, literally, living in a fool's paradise, - that may disappear while we contemplate it in serenity. History has - already taught the world many lessons upon this point, and if we are - wise, we will heed them. - - MR. MERCHANT: Mr. Banker, just what are the influences that affect the - movement of gold to or from the country? - - MR. BANKER: In our case, the causes that may influence the movement of - gold to or from us, may be summed up as follows: - - _First_: The balance of trade. - - _Second_: The state of foreign exchange throughout the world. - - _Third_: The state of our currency, that is, the use of substitutes - for real reserves; such as United States notes, silver, and bank - notes, in place of gold. The present plight of Germany is due to her - use of bank notes as reserves. It is a vivid illustration. History - has furnished hundreds of illustrations; but the most forcible in - our recent history was the issue of the United States notes in the - Sixties, and the effect of the silver purchase act of 1890. Gresham's - law put into operation will overcome all opposing forces. - - _Fourth_: Foreign financing. - - _Fifth_: Political disturbances. - - _Sixth_: The state of the money market in foreign financial centres. - - _Seventh_: Demands for capital in periods of speculative development - in foreign countries. - - _Eighth_: Changes in our tariff laws. - - It is easy to imagine how complicated and powerful these forces might - become, and how essential it is that we should be ready to combat - them, when the tide turns against us. We must be in a position to - buy and sell gold bullion, and to buy and sell domestic and foreign - exchange, and to loan a large sum of money, gold, I mean, quickly, - through a board of control to stop a panic in some financial centre, - and last--and above all, we must hold the chief key to the situation. - That key lies, mainly, in the power to fix and enforce a price for the - use of gold, in what is popularly called a discount rate for gold, and - make it universal throughout the United States. - - All these objects will be attained by the centralization of about - one-half of our reserves in the American Reserve Bank, and by having - them under the direction of a board of men, who come directly from - each of the commercial zones, and who are, therefore, responsible to - the people of their respective zones. - - MR. MERCHANT: Now, gentlemen, you seem to have completed your report - so far as the commercial bank is concerned, and I must say your plan - looks good to me; but, I want to ask you something before we leave - this question, and that is, why did the English Bank Act of 1844 - provide that only the Bank of England should issue bank notes, and why - did Germany follow in her footsteps in 1874, by giving to the Imperial - Bank the sole right of note issue? - - MR. BANKER: I am very glad that you have asked that question, because - it is often a stumbling block to those beginning the study of this - subject. One naturally says to himself, if this plan of a Central Bank - of issue is good enough for England and Germany, why should we not - adopt it here? In the first place, the two banks act upon entirely - different principles, and in both cases their theories, so far as - their note issues are concerned, have broken down. - - In 1797 the Bank of England suspended specie payments, and during the - Napoleonic wars issued an unwarranted amount of paper or notes, which - led to wild speculation. At the same time, the country banks joined in - the frenzy, and issued large quantities of notes also. All the paper - became greatly depreciated, causing such a derangement of commerce - as to call for a public investigation. The Bullion Report of 1810, - the most profound economic and important statement ever made in the - history of banking, followed. This declared that the mere numerical - amount of notes in circulation at any time was no criterion whatever - of their being excessive. The Bullion Report declared _that the only - sure criterion was to be found in the price of gold bullion and the - state of the exchanges_. - - Ricardo says: - - "The issuers of paper money should regulate their issues solely by - the price of bullion and never by the quantity of their paper in - circulation. The quantity can never be too great or too little, while - it preserves the same value as the standard." - - If Ricardo had used the words _bank credit_, instead of _paper money_, - it would have been technically more correct. - - This statement of Ricardo, and that contained in the Bullion Report, - constitute the very soul of this subject, so far as bank credit in any - form (bank notes or bank deposits, which are identical) and gold are - concerned. - - Reserves in gold, in sufficient quantity to redeem all bank credit, - deposits as well as notes, are essential. Do not forget that. Of - course, gold will be seldom called for, but it must be forthcoming if - demanded. No better illustration of the Ricardo principle can be found - anywhere in the history of banking than in the banks of Virginia, - Louisiana, Kentucky, Ohio, Indiana, Iowa, and Missouri before the war. - - This principle, announced in the Bullion Report was rejected by the - House of Commons, and was not recognized by the Bank of England, or - English bankers generally. From 1800 to 1844 bank notes were thought - good enough for reserves, that is, the basis of other credit. There - were constantly recurring business disturbances and banking troubles - up to 1821, when the Bank of England resumed specie payments. - - In 1824 gold began to leave England again, and continued to go - throughout 1825, when the crisis came. - - In 1827 the Bank seemed to be convinced that the principles of the - Bullion Report were correct, and it tried to apply them in part. - - In 1836 and 1837 there was more financial trouble, and again at the - end of 1838 another serious period arrived. By the end of 1839 the - specie had dropped from $50,000,000 to $14,000,000. All these adverse - experiences convinced the public that something was radically wrong. - - There then appeared upon the scene Lord Overstone, Mr. Norman, Col. - Torrens and other influential writers, who maintained that the amount - of bank notes should not exceed the amount of bullion, and that it was - the excess of bank notes over the amount of bullion or gold that sent - the gold out of the country. They carried the day, and even converted - Peel to their way of thinking. - - The Bank Charter expired in 1844. They thought that they had now - found a panacea for all their ills; it was the so-called _Currency - Principle_; that is, that bank notes should not exceed the amount of - specie. In adjusting the matter, they did issue bank notes against - $72,000,000 of Government securities, which was in direct violation - of their own contention. They did not have to wait long to see how - completely they were mistaken. Their contention was, that if the bank - only issued notes against specie, the people would have to bring - the notes to get specie. The bank kept right on taking deposits and - making loans, apparently with no knowledge of the fact that it made no - difference what kind of debt the bank incurred, whether in the form of - a deposit or in the form of a note, it would have to be paid in specie - if the check holder wanted the specie, just as much as the note holder - wanted the specie. - - Many business disasters occurred in 1846. The new scheme was to be put - to the test within two years after the English Bank Act was passed. - - On Aug. 29, 1846, the amount of bullion in the bank was $81,000,000. - The bank notes outstanding were $102,000,000. By Jan. 9, 1847, the - bullion was down to $71,000,000. The bank notes outstanding were - $104,000,000. By April 10, 1847, the bullion was down to $48,000,000. - The bank notes outstanding were $101,000,000. - - _It was demonstrated beyond question, you see, that you could get - gold with a check just as easily as with a bank note; for, while - $30,000,000 of bullion had disappeared, the amount of the bank notes - outstanding remained the same. In other words, the bank notes were not - retired as the gold was withdrawn, which was the whole theory upon - which the Bank Act of 1844 was based._ - - The Bank Act had failed completely and utterly to accomplish what it - was designed to do. There could have been no more abject failure. - - It was upon this occasion that the bank employed, for the first - time, either by accident or with intention, the principle that was - subsequently, in 1856, expounded by MacLeod. He states the principle - thus, "That when the rate of discount between two places differs by - more than sufficient to pay the cost of transmitting bullion from one - place to another, bullion will flow from where discount is lower to - where it is higher." - - While the Bank of England seemed to have employed this principle in - 1847, it acted too slowly and very feebly. It lost a large part of its - gold before it raised its rate of discount, and then it raised it only - to 3-1/2 per cent, then to 4 per cent, and finally to 5 per cent. - - The world has since learned the power of this weapon; but it is - not all-powerful against any odds, as we have seen in watching the - withdrawal of gold from Germany during the time when there was a - possibility of war with France. - - When I started to answer your question, I said that both the English - and German banks had failed to accomplish the particular things which - they had set out to do. - - I think you will admit that I have demonstrated my contention with - regard to the Bank of England. Now, the plight of Germany is this: - She had supposed that she could create true bank reserves out of - bank credits, but that scheme has completely broken down. Her own - commission appointed to revise the bank act during the past year - has just recommended that the individual banks carry their own coin - reserve. - - Now, gentlemen, there is no point in common between England, Germany, - and France, so far as note issues go. The Bank Act of 1844 took away - from the Bank of England the power of note issue, and reduced the - bank to identically the same position that the United States Treasury - is in, with regard to the gold certificates; that is, the Bank Act - reduced the bank to a mere warehouse, with the power to issue gold - certificates in the form of bank notes. The Bank of England has no - more authority to issue bank currency than the New York Clearing House - has; not a bit. - - The Imperial Bank of Germany issues notes against 33 per cent of coin - and other collateral. - - The Bank of France issues notes without reference to any particular - amount of coin, but carries an enormous gold reserve, averaging about - 65 per cent of its note issue. - - The Bank of England usually carries about $150,000,000 in gold, and - has outstanding about $250,000,000 bank notes; the difference between - the gold and this amount being covered by Government securities. Her - deposits are $250,000,000. The Imperial Bank of Germany carries about - $200,000,000 of gold, and has outstanding about $700,000,000 bank - notes. Her deposits are about $250,000,000. The Bank of France holds - about $650,000,000 of gold, and has outstanding about one billion - dollars of notes ($1,000,000,000). Her deposits are usually about - $100,000,000. - - MR. MERCHANT: It is true that there does not seem to be any great - similarity in the condition of these three institutions. The points of - contrast are as great as the points of likeness. - - England is a great check using country; hence, there are few notes. - France is a great note using country; hence, comparatively few - deposits are kept, while Germany seems to occupy a middle ground - between the two. - - The Bank of France has been operated upon the principle laid down - in the Ricardo axiom, and also in accordance with the principles - enunciated in the Bullion Report. But France is handicapped by the - load of silver she is carrying, which amounts to about $200,000,000; - and Germany is greatly handicapped by the fact that her use of bank - notes as reserves has prevented her, as she now discovers, from - accumulating a proper amount of gold to adequately protect her bank - credits. The result is, that neither Germany nor France are open - markets for gold; both throwing trammels and obstacles in the way, if - you desire to get gold in either country. - - The entire commercial world is conscious of the difficulties you are - under when trying to take gold away from Paris or Berlin. - - Bills of Exchange drawn in pounds, shillings, and pence are preferable - the world over to any other; because the Bank of England is an open - market for gold at the current price. - - MR. LAWYER: Mr. Banker, since you cannot institute a comparison - between these three banks in the matter of note issues, in what - respect do they have a common purpose? - - MR. BANKER: In only one single respect is there a common factor in all - of them, and that is, that each of them carries the final reserves - of its country. This is the one common fact, the all important fact, - because without this massing of their reserves two essential results - could not be achieved. First, a panic of any proportion could not be - quickly and successfully met. Second, no one of them would have any - means whatever of protecting its gold against the drafts that the rest - of the commercial world is likely to make upon it at any time, nor any - power of adding to its gold in case of some great necessity growing - out of a crisis. - - MR. MERCHANT: Recently we have heard repeatedly that, while we were - having our ever-recurring spasms or panics in business, the countries - with central banks were not suffering in the same way. Is it not a - fact that Canada has been just as free from these spasms and panics as - any country in the world, and yet Canada has no central bank? - - MR. BANKER: Yes, that is true. It never occurred to me before, but - I should say that Canada was, if anything, much freer from these - convulsions and panics, as you call them, than any other country. - - MR. LAWYER: I agree with you. There has not been the suggestion of - such a thing, as far back as I can remember--thirty or forty years. - Now, since Canada has not a central bank but twenty-seven banks, the - protection against these disturbances or panics must lie deeper and - more fundamental. What is it? It cannot be the central bank idea, - because Germany has been having a vast amount of trouble for more than - a year, and at the present time seems to have plenty in store for her. - - MR. BANKER: Yes, it does lie deeper than your mere form of - organization; I think I can explain it so that every man here can - understand and appreciate it. The reasons are fundamental and - economic: _First_, There must be ample _gold reserves and elasticity - in those reserves_. Without any law with regard to the amount of - reserves to be carried the banks of Canada carry about 14 per cent, - and since no specified reserves are required there is perfect - elasticity in their reserves. - - _Second_: There must be convertibility, if necessity requires it and - precisely to the extent required, of bank book credits into bank note - credits. Bank credit currency in Canada amounts at its maximum to $16 - per capita and the variation averages now about $4 per capita. The - same ratio would give us an expansion and contraction every fall of - about $400,000,000 without changing our reserves to the extent of a - single cent. - - MR. FARMER: I catch on to that. Two principles are involved and it - doesn't make any difference how you apply them, only so that they - are in operation. _The first is the principle of ample coin reserves - and their elastic adjustment to current commercial needs. The second - principle is the interchangeability of bank book credits and bank note - credits and their current convertibility into coin._ - - MR. BANKER: That is the whole thing in a nut-shell, outside of - the principle of a central gold reserve, and it doesn't make any - difference whether you apply those principles to one bank or to - twenty-seven banks, as in Canada at present, or to five hundred - banks, as in the Suffolk System before the war, or to our twenty-five - thousand banks today. - - MR. MANUFACTURER: As I understand the bill you have prepared, our - American Reserve Bank will have no liabilities whatever, and yet it - will have more gold than all of these three countries combined. - - MR. BANKER: That is correct. You see, there are just three reasons for - the existence of the American Reserve Bank: - - _First_: By it, all the banking power of the United States stands - ready to help every individual bank move the crops; and, in case a - panic breaks out, to protect every individual bank. - - _Second_: By it, we shall always be in a position to control and - direct the movement of gold to and from the United States. - - _Third_: By it, we have completely decentralized bank credit; because - each zone can rely absolutely upon the centralization of the gold - reserves to assist it whenever necessary; so also can every individual - bank. - - -NATIONAL LAND CREDIT BANK - -SECTION 99. That the National Land Credit Bank is hereby created and -established upon the organization of the following institutions as -prescribed: - -_First_: The Local Land Credit Association. - -_Second_: The State Land Credit Association. - -_Third_: The National Land Credit Bank. - -SECTION 100. That no more than fifty persons and no less than -twenty-five persons may associate themselves together in any State of -the United States under the name of ---- Land Credit Association, and -be known as a local association. - -SECTION 101. That the capital stock of each local association shall be -twenty-five thousand dollars, no more, no less; and it shall be paid -up in full in cash. The par value of the stock of such association -shall be one hundred dollars. - -SECTION 102. That any person may become a member of a local association -by owning one or more shares of the stock, but no member of an -association shall own more than twenty-five shares thereof. - -SECTION 103. That every local association, each member voting the -number of shares owned by him, shall elect an executive committee -composed of five members and a secretary and treasurer of said local -association. The committee shall choose its own chairman. - -SECTION 104. That the term of service of the members of the committee -shall be one year. - -SECTION 105. That no member of a local association shall transfer -his stock to any other person without the unanimous approval of the -executive committee, evidenced by the signatures of such committee -upon the records of the association and by the signature of the -chairman of said committee upon the certificate of stock, which shall -be transferable only by such signature: _Provided, however_, That any -person desiring to sell his stock may appeal from the decision of the -executive committee to the members of such local association. - -SECTION 106. That the total amount of loans that any local association -can make is twenty times the amount of its capital stock, or five -hundred thousand dollars. - -SECTION 107. That the executive committee may take applications for -loans and recommend the same for favorable consideration to the board -of managers of the State association, but no loans shall be made except -upon improved productive agricultural lands, and then only for 50 per -centum of a fair valuation thereof. - -SECTION 108. That all compensation, if any, to the executive committee -and the secretary and the treasurer and all expense of the local -association of every kind whatsoever shall be derived from charges made -for services rendered in connection with the various applications made -to them and for services rendered in connection with loans already -made. Each association shall fix its own scale of charges, if any are -made. - -SECTION 109. That no loan shall be considered or consummated in any -State until there are organized in such State at least twenty local -associations in accordance with sections two, three, four and five of -this Act and until at least five hundred thousand dollars have been -paid up in cash. - -SECTION 110. That when at least twenty such local associations have -been organized in any one State the governor of such State, upon being -informed of this fact, shall name a time and place for meeting, and the -members of the several associations shall meet in person, or by legal -proxy duly representing their respective shares, for the purpose of -organizing a State Land Credit Association. - -SECTION 111. That the State Land Credit Association shall be organized -under the name of (here insert name of State where located) Land Credit -Association and be known as a State Association. - -SECTION 112. That every State association shall have a board of -managers, which shall consist of seven members, who shall be elected by -the shareholders of the several local associations in the State present -or duly represented by legal proxies. - -SECTION 113. That the members of the board of managers shall hold -office for the period of seven years: _Provided, however_, That the -seven first elected shall hold office for one, two, three, four, five, -six, and seven years, respectively, and they shall determine by lot how -long each member shall serve. - -SECTION 114. That the officers of each State association shall consist -of a president, vice-president, secretary, treasurer, and attorney. The -said officers shall be members of the board of managers, except the -secretary and treasurer, who may or may not be members. - -SECTION 115. That the officers named in the preceding section shall be -appointed by the shareholders of the several local associations present -or duly represented by legal proxies. - -SECTION 116. That the salaries to be paid the officers of each State -association shall be fixed by the shareholders of the several local -associations of such State present or duly represented by legal proxy. -All such salaries and all the expenses of whatsoever kind incurred in -carrying on the business of the State associations shall be paid out of -fees or charges made upon the business done in that State. - -SECTION 117. That the place of business of the State association -shall be fixed by the shareholders of the local associations of the -respective States present or duly represented by legal proxy. - -SECTION 118. That all applications for loans made to any local -association and duly recommended by the executive committee thereof -after a personal examination of the property and a full report in -accordance with such rules, regulations, and forms as the board of -managers of the State association may prescribe shall be examined and -considered by said board of managers. - -SECTION 119. That no loan shall be made by any State association unless -the same has been approved in writing by at least five members of the -board of managers in a record of loans kept especially for that purpose -by the State association; nor until such approval shall also be signed -by the attorney of the State association stating that he has examined -the title to the property and that it is free and clear and that the -loan is a first lien upon the property described in the conveyance. - -SECTION 120. That no loans shall be made upon any property unless an -absolute conveyance of the same shall be made by the owner thereof to -the State association of the State where the land is located, in such -form and manner as the attorney of such association shall prescribe; -and the owner shall lawfully waive any claim or right of defense that -he might otherwise have in case of foreclosure proceedings under the -laws of the State in which the real estate is located. And, further, -the owner of said real estate shall, in such manner and form as -the attorney of the association shall prescribe, appoint the local -association through which the loan was negotiated as a trustee for the -benefit of the State association to take possession of the property -in case of default in payment of interest, taxes, or insurance, or in -case of waste of any kind, and shall give such local association full -authority and power to manage the property, or sell the same whenever, -in the judgment of the executive committee of such local association, -it is advisable to do so: _Provided, however_, That such sales shall -be made only after the property has been duly advertised in accordance -with the law made and provided for sale of real estate in the State -where located after foreclosure proceedings have been had and judgment -entered. - -SECTION 121. That all money loaned shall be furnished through the -several State associations, and shall be paid by check or draft, -and full records shall be kept by the several State associations -of all loans made in their respective States of every transaction -connected with such loans. The State association shall have full and -entire charge of all loans made and outstanding in their respective -States, the collection of interest, the payment of taxes, the care of -insurance, and the repayment of the loan by the borrower, which shall -always be to the State association of the State where the real estate -is situated. - -SECTION 122. That no loans shall be made by any State association -until-- - -_First_: There have been organized in the United States at least one -thousand local associations, in accordance with sections ninety-nine, -one hundred, one hundred and one, and one hundred and two of this Act. - -_Second_: Until at least twenty State associations have been organized -in accordance with sections one hundred and ten, one hundred and -eleven, and one hundred and twelve of this Act. - -_Third_: Until there has been paid up in cash the sum of twenty-five -million dollars. - -_Fourth_: Until there has been organized, as hereinafter provided, the -National Land Credit Bank. - -SECTION 123. That as soon as there have been organized at least one -thousand local associations and at least twenty State associations, -as herein provided, the President of the United States shall be -notified of these facts, and he shall thereupon name a time and place -in the city of Washington, District of Columbia, for the organization -of the National Land Credit Bank, and he shall advise all the local -associations whose names and addresses have been furnished him of such -time and place of meeting and the purpose therefor. - -SECTION 124. That, pursuant to the notice of the President of the -United States provided in the preceding section, each local association -of the several States where State associations shall have been -organized shall send one representative to Washington for the purpose -of organizing the National Land Credit Bank. Each representative of -a local association shall have one vote, but any association may be -represented by a proxy in such legal form as is prescribed by the laws -of the State where such local association is situated. - -SECTION 125. That the board of directors of the National Land Credit -Bank shall consist of seventeen members, as follows: - -_First_: Fifteen members of such board of directors shall be elected by -the representatives of the local association present in person or by -proxy. - -_Second_: The Secretary of Agriculture of the United States shall ex -officio be a member of said board. - -_Third_: The President shall appoint a United States auditor, with the -consent and approval of at least two-thirds of the members of the board -elected by the representatives of the association. The term of service -of the auditor shall be five years, and he shall be a member of the -board of directors of said National Land Credit Bank. - -SECTION 126. That the members of the board of directors of the National -Land Credit Bank who have been elected by the representatives of the -local associations shall serve for a period of five years: _Provided, -however_, That those first elected shall serve for one, two, three, -four, and five years, respectively, and they shall divide themselves -into five groups, and thereupon determine by lot how long each group -shall serve. - -SECTION 127. That the officers of the National Land Credit Bank shall -consist of a president, vice-president, secretary, treasurer, and -auditor. - -SECTION 128. That the officers of the National Land Credit Bank, -except the auditor, shall be appointed by the board of directors of -said National Land Credit Bank, and they shall receive such salaries -as the board of directors may determine: _Provided, however_, That the -president shall receive eighteen thousand dollars per annum and that -the auditor shall receive six thousand dollars per annum. - -SECTION 129. That the city or place where the National Land Credit Bank -shall conduct its business shall be selected and determined by the -representatives of the local associations present in person or by proxy. - -SECTION 130. That the annual meetings of the local associations shall -be held on the first Monday of April in each year. The annual meeting -of the State association shall be held on the first Monday of May in -each year. The annual meeting of the National Land Credit Bank shall be -held in the first Monday of June in each year. - -SECTION 131. That upon the completion of the organization of the -National Land Credit Bank, as herein provided, each local association -shall transfer and pay over to the National Land Credit Bank 50 per -centum or one-half of their cash paid-up capital amounting in the -aggregate to at least twelve million five hundred thousand dollars, -and they shall also transfer and pay over to their respective State -associations 25 per centum or one-quarter of their cash paid-up capital -amounting in the aggregate to at least six million two hundred and -fifty thousand dollars. - -SECTION 132. That the cash capital so paid over to the National Land -Credit Bank and the cash capital so paid over to the several State -associations, as provided in the preceding section, shall become the -absolute property of the National Land Credit Bank, and of such State -associations, as completely and absolutely as if the same amount had -been paid directly to them for stock issued. For the amount of money so -received by the National Land Credit Bank and the amount so received -by the State association from the local associations the said National -Land Credit Bank and the several State associations shall issue their -several receipts in such legal form as to entitle them to a pro rata -share of the assets of the said National Land Credit Bank and the -several State associations upon the distribution thereof, subject, -however, to the claims of all holders of the obligations of whatsoever -kind issued and outstanding of the National Land Credit Bank. - -SECTION 133. That every local association, every State association, -and the National Land Credit Bank shall each of them be, and they are -hereby, made legally constituted bodies corporate that may sue and be -sued in any United States court which may have jurisdiction of the -subject matter of the action brought. - -SECTION 134. That the said National Land Credit Bank, the several State -associations, and the several local associations may severally invest -their capital and surplus in mortgages token as herein prescribed, -or in the obligations of the National Land Credit Bank, or in United -States Government securities. They may severally borrow money in -the regular course of their business either upon their credit or by -pledging any of the securities they may own. - -SECTION 135. That neither any local association nor any State -association nor the National Land Credit Bank shall take deposits in -any form, either subject to check or upon time, except for investment -in the obligation of the National Land Credit Bank; and any one of -these institutions that shall take a deposit of any kind, except -as herein provided, shall pay to the United States Government a -tax thereon of 10 per centum per annum, nor shall any one of these -institutions loan money in any other manner or form than as herein -provided. Upon any loan made by any one of them upon personal security, -or in any other manner or form than as herein provided, shall pay a tax -thereon to the United States Government of 10 per centum per annum. - -SECTION 136. That the National Land Credit Bank shall have power, -and is hereby authorized, to issue and sell or dispose of its own -obligations in the form of bonds, debentures, or under any other name, -and bearing such rates of interest, and in such manner and form, and -upon such terms and conditions as to time to run, and manner and method -of payment as the board of directors may determine from time to time. - -SECTION 137. That the mortgages held by any local association, or -by any State association, or by the National Land Credit Bank, such -mortgages having been taken in accordance with the provisions of -this Act, and all the obligations, bonds, or debentures issued by -the National Land Credit Bank under the authority granted by this -Act, shall be exempt from all taxes or duties of the United States -Government, as well as from taxation in any form by or under any State, -municipality or local authority. - -SECTION 138. That all advances of money upon loans made by the several -local associations shall be under the control and under the direction -of the board of directors of the National Land Credit Bank, and the -rate of interest to be charged on all such loans made shall be fixed -from time to time by said board of directors. - -SECTION 139. That at the end of each year the United States auditor -shall make a full report of all the institutions organized under this -Act, and such reports shall show what the profits are of the National -Land Credit Bank, and of the several State associations, and of each of -the local associations, respectively. Thereupon the board of directors -of the National Land Credit Bank shall set apart one-half of the net -profits so certified to by the United States auditor as a part of its -surplus account, and may carry the balance as undivided profits, or -may declare such a dividend out of its undivided profits as in their -judgment seems wise. - -SECTION 140. That the amount paid out in dividends by the National -Land Credit Bank shall always be divided equally between the State -associations and the local associations in proportion to the capital -held by them and the local associations. - -SECTION 141. That the board of managers of the several State -associations shall thereupon set apart one-half of the net profits so -certified to by the United States auditor as a part of its surplus -account and may carry the balance as undivided profits and may declare -and pay such a dividend out of the undivided profits as in their -judgment seems wise. - -The executive committee of the several local associations shall set -apart one-half of the net profits so certified to by the United States -auditor as a part of its surplus account and may carry the balance as -undivided profits, or may declare and pay such a dividend out of the -undivided profits as in their judgment seems wise. - -SECTION 142. That when the surplus account of the National Land Credit -Bank shall be equal to 50 per centum of the capital money so paid over -to it by the several associations, the board of directors may declare -such additional dividend as in their judgment may seem wise: _Provided, -however_, That no such increase, or extra dividend, shall ever reduce -the surplus below said 50 per centum of the capital so held by it. The -same rule herein laid down for the payment of dividends by the National -Land Credit Bank shall apply to the several State associations and -each and all of the local associations. - -SECTION 143. That if it shall become necessary at any time for a -local association to take possession of real estate upon which a loan -has been made and sell the same, the profit or loss thereon shall -be shared by the several institutions in the same proportion as the -capital is held by them; that is, the National Land Credit Bank shall -share one-half of the profit or loss, the State institution making -the loan shall share one-quarter of the profit or loss, and the local -association recommending the loan shall share one-quarter of the profit -or loss. - - COMMENT:--_First_: Sufficient responsibility should be imposed upon - each local association to compel it to look after all delinquents - diligently. - - _Second_: Sufficient responsibility should be imposed upon each State - association to compel it to look after every loan in the State with - promptness and persistency. - -SECTION 144. That if any local association shall be formed at any time -after the organization of the National Land Credit Bank, before it -goes into actual operation such local association desiring to become a -member of a State association shall first be compelled to obtain the -unanimous consent of the board of managers of the State association in -which the proposed local association is situated and shall pay for its -shares such a price as may be fixed from time to time by the board of -directors of the National Land Credit Bank for the admission of new -associations. - -SECTION 145. That all the expenses of whatsoever kind growing out of -the management of the National Land Credit Bank shall be paid out of -the earnings thereof. - -SECTION 146. That the entire surplus of the National Land Credit Bank -and the surplus of the State associations and the surplus of the local -associations shall be held as a working balance, and also as a fund -which may be withdrawn for investment in bonds or other securities of -the United States. The President of the United States may direct that -the whole of said surplus be invested in the bonds or other securities -of the United States if, in his judgment, the general welfare and the -interests of the United States require. - -SECTION 147. That for the purpose of creating and establishing the -organization provided for in this Act and putting the same into -operation there is hereby appropriated the sum of three hundred -thousand dollars, or so much thereof as may be necessary, as a loan to -the National Land Credit Bank, at the rate of 3 per centum per annum -until paid: _Provided, however_, That this loan shall not extend beyond -the period of ten years. - -SECTION 148. That to accomplish the purpose of this Act the governor of -each State is hereby authorized and empowered to appoint some citizen -of his State to organize at least twenty local associations in his -State in accordance with the provisions of this Act, and such appointee -is hereby authorized to expend not to exceed six thousand dollars in -such undertaking. Upon the completion of the organization of at least -twenty local associations under and in accordance with the provisions -of this Act the amount of money so expended not to exceed six thousand -dollars will be repaid to such appointee of any governor upon the -presentation of vouchers for the money so actually expended duly signed -by the governor of the State to the Treasurer of the United States. - -SECTION 149. That the governor of the State in which at least twenty -of such local associations have been organized as in this Act provided -shall thereupon report in detail to the President of the United -States, giving him the names and addresses of the local associations -so organized, the names of the chairmen of the respective executive -committees and their post-office addresses, and the names of the banks -and their respective post-office addresses in which the several local -associations have deposited the paid-up capital of twenty-five thousand -dollars each, together with duplicate letters of receipt of the money -from said bank. - -SECTION 150. That if any governor of any State shall fail to make a -report within nine months after the passage of this Act that at least -twenty local associations have been organized as in this Act provided, -then and in that event the allotment of the six thousand dollars to pay -the expenses for the organization of at least twenty local associations -in his State may be used proportionately to pay the expenses, if any, -of organizing local associations in any other State or States in excess -of the required number necessary to establish a State association--that -is, the amount remaining unearned by any of the States shall be -apportioned to the several States reporting more than twenty local -associations directly in proportion to the number in excess thereof, -preference, however, always being given to the States whose average -expenses are lowest for the organization of their several associations. - -MR. LAWYER: Gentlemen, this concludes the results of our labor and I -want to express the solicitude of your committee in proposing this bill -and the hope that it may in a large measure meet your expectations. - -UNCLE SAM: Well, boys, speaking for the crowd, I want to say that I did -not believe that the committee would be able to make its report for -a month. Upon my soul, I did not expect that they would ever make so -satisfactory a report. They seem to have thoroughly comprehended all -the subjects we have discussed and to have produced a Financial and -Banking Bill that will meet every question that can possibly arise; one -that will protect every individual bank in its independence; one that -will protect every commercial zone in its independence; and one that -will protect my reserves against the demands of all the rest of the -world. - -MR. LAWYER: Those are precisely the things we have striven to -accomplish, Uncle Sam. - -MR. MERCHANT: During the past week I ran into a friend of mine who -is in the banking business and considering that we were practically -through with our work, I told him what I had been doing the past four -months without giving him your names. "Well," he said, "I want to give -you a pointer. If you are following along the trail of the Aldrich -scheme you had better drop it; you had better save your time, because -the people are on to that deal and they won't stand for it. You will -have to make it clear that you are working from an entirely different -point of view." - -This remark of his opened my eyes and I am going to suggest that we -spend one night demonstrating the striking, the fundamental points of -difference between our bill and that Aldrich scheme. - -MR. MERCHANT: I am convinced that we should do that very thing and I -propose and move that we meet next Wednesday night for that purpose. - -MR. BANKER: To make a clean job of our work, I believe that is -essential; because hundreds and hundreds of thousands of dollars have -been expended in promoting that scheme, therefore, I second that motion. - -UNCLE SAM: The motion is carried and now good night, all. - - * * * * * - -To you, UNCLE SAM, we, the representatives of the FARMERS, BANKERS, -LAWYERS, LABORING-MEN, MERCHANTS and MANUFACTURERS, dedicate the result -of our endeavor, our future services, indeed, our lives; and we pledge -our callings, every one of them, to continue the work here begun with -that degree of vigilance and patriotism of which this great cause is -worthy, confident that the result of our efforts will be to safeguard -your honor and establish you upon the solid foundations of a sound -Financial and Banking System. - -[Illustration: - - WONT YOU WALK INTO MY PARLOR - SAID THE SPIDER - TO THE - FLY - -THE ALDRICH PLAN AND PLOT EXPOSED] - - - - -SEVENTEENTH NIGHT - -ALDRICH PLAN AND PLOT EXPOSED - - -UNCLE SAM: From what you boys intimated the other night, I got the -impression that the so-called Aldrich scheme demonstrated almost -everything that we should not do in working out a financial and banking -system. It must have been more or less of a warning to you, then, when -you started out. - -MR. LAWYER: To tell the truth, I had become so convinced of its -ulterior purposes from the standpoint of management, that I never -studied it seriously from an economic point of view, until this last -week. - -MR. BANKER: My position was just the reverse of that of Mr. Lawyer, for -while I had studied it from an economic point of view and that of a -practical banker, and had become so convinced of its utter unsoundness -on the one hand, and unfitness for use to ninety-nine out of every -hundred of American banks, I never dug into the soul of its management, -until the past week. So we compared notes, and found the situation -particularly interesting. - -MR. MERCHANT: Before you go any further, I want to read something from -a speech, delivered in Congress March 29, 1910, two years before the -Aldrich plan was born. You are all doubtless aware that the Aldrich -scheme was nothing more nor less than an attempt to transfer to this -country the German scheme of note issue and banking generally. - -MR. LABORINGMAN: I heard the other day, that the Aldrich bill was -deader than a door-nail. Why do we want to spend any time on that? Or, -are you fellows like the Irishman, who said that he was kicking a dead -dog to teach him that there was such a thing as punishment after death? - -MR. MERCHANT: You must remember, Mr. Laboringman, that error is always -repeating itself, and that sin and iniquity never die; so, the economic -blunders of the Aldrich Bill and its administrative purposes should be -exposed and held up as a lesson and an illustration to guide us in the -future. - -What I wanted to read, was a part of Congressman Fowler's speech, -delivered in the House of Representatives. Referring to the German -banking situation, he said: - -"The position of both England and France, under present conditions, -would seem sound and impregnable from a governmental as well as a -banking point of view. Each has planted itself upon the gold standard, -with certain precautions peculiar to its circumstances. Germany, on the -other hand, has not pursued the course of England, with its limited -gold reserve, forcing the public into the deposit and check system to -meet the current demands of trade. This would have been impossible -without a long-continued ruinous revolution, considering that there -is a quarterly settlement in Germany that calls for an expansion in -currency amounting to $125,000,000. Nor has Germany pursued the course -of France, which has a gold reserve large enough to meet any test or -burden that either the Government or the commerce of Germany might have -imposed upon it, but has adopted a middle course which has not the -strength of the position of either England or France, nor the credit -facility of France. - -"Its gold reserve is of the halfway sort, and its bank note issue is -also of the halfway sort. The result is that the financial and banking -situation of Germany must necessarily prove weak upon the first great -test when the bank notes of the Imperial Bank of Germany must be made a -legal tender. - -"Indeed, upon the declaration of war by Germany or against Germany, the -first step taken in a financial way would be for her to declare her -bank notes a legal tender. It is hardly problematical what would soon -happen, with the wide divergence between her gold fund and the amount -of her note issue." - -Gentlemen, within eighteen months after he made that statement, when -war seemed probable with France, Germany made her bank notes a legal -tender. - -Further along in the same speech, commenting upon the unsoundness of -the German plan, he said: - -"Imagine for a moment a central bank in the United States, like the -Imperial Bank of Germany, issuing all our bank note currency and these -notes going into the reserves of our myriad of banks as the basis of -loans which, under our system, in turn become our deposits. - -"The natural, first, and immediate effect would be an expansion of -credit, an inflation to just the extent to which the notes were used -for reserves. - -"As soon as the situation became obviously dangerous, a halt would be -called and a contraction in loans would follow. But a contraction of -loans calls for liquidation, and liquidation produces an exigent demand -for currency. We all learned that lesson only so short a time ago as -1907. - -"But in the very face of the increased demand for more currency the -currency would be contracting, because the loans would be reduced by -calling in bank notes which were being used for reserves; or, in other -words, the loans called would be paid in bank notes. - -"For every $100,000 of notes so called in the loans might be reduced to -an average of $500,000, and yet this very process of liquidation would -be concurrently destroying the only instruments of credit that would -adequately meet the demand created by forced contraction. It would -clearly lead to self-destruction, to commercial suicide. - -"The best thought of England recognizes this subtle but obviously -destructive contradiction in the use of credit, and therefore opposes -the use of credit notes by the Bank of England." - -_Gentlemen, the fact that we can force our banks to carry a specified -amount of reserves and of a specified quality, by the power of -taxation, will preclude the use of bank notes as reserves in the United -States._ - -Mr. Fowler then concludes as follows: - -"There are then, in addition to all of the objections to the Bank of -France, three other unanswerable objections to the establishment in -this country of any central organization approaching in character the -Imperial Bank of Germany: - -"_First_: It would give us a financial and banking structure so weak -that it could not stand any great strain such as necessarily comes with -a great war, if, indeed, it were not so weak as to lead to a suspension -of gold payments even in time of peace. - -"_Second_: No thought whatever should be given to any suggestion that -makes it possible for one bank credit to be used in the reserves of -another bank and so substitute any form of credit for gold in our bank -reserves. - -"Unless gold alone is ultimately recognized as fit for bank reserves, -we shall continue to pay dearly for our mistake until it is corrected. - -"_Third_: No proposal whatever should be entertained by us that -involves the possibility of the suspension of gold payments, for no -country can become the clearing house of the world that is not a free -market for gold. The United States and not England ought to be the -clearing house of the world." - -These words, as I have said, were spoken about two years before Mr. -Aldrich attempted to import the German Bank into this country. - -MR. BANKER: That is very interesting and prophetic, but not more so -than his speech at the Republican Club of New York, January 20, 1912. -Let me read that to you, gentlemen, by way of an exposition of the -economic faults of the so-called Aldrich scheme. He said: - -"I wish to speak purely from an economic point of view and to cover -only one single phase of the proposal; its dangerous expansion, -unbounded inflation and certain expulsion of gold from the country. - -"'_First_: Nothing should ever go into the reserves of the banks of a -country except what is coined out of its standard of value. - -"'_Second_: The poorer money always drives out the better.' - -"Every single note of the so-called Reserve Association used in the -reserves of our banks will displace just that much gold and drive it -out of the country. - -"Judged, therefore, from a purely economic point of view, I assert that -the Reserve Association plan is the most unsound, the most dangerous; -indeed, it is absolutely the worst proposal that has been brought -forward for serious consideration by any respectable body of men since -the adoption of the Constitution, with the two following exceptions: -First, the issue of legal tender money by the Government such as -greenbacks; second, the free and unlimited coinage of silver at the -ratio of 16 to 1. - -"An officer of one of the largest banks of the United States recently -used this language: 'Mr. Fowler, it is incredible that we should be -called upon to consider such a proposition.' - -"If this is really true, how does it happen, that so many business men -and so many bankers approve it, is a most natural inquiry. The cause is -not difficult to perceive. - -"There is not a business man nor hardly a banker who is not even now -still living in a state of fright from the terror of 1907. One thought -alone seems to have taken possession of the country to the exclusion of -everything else, and that thought is this: That we must hereafter be -able to convert our commercial credits into bank or current credits. -There seems to be something approaching madness; indeed, there seems -to be an insane haste lest they be caught again, possibly tomorrow, -certainly next fall. But they need not worry, for danger is not -imminent; 1907 will not come again right away. - -"During the past two years up to the present time the entire thought -of the country has been directed to a mere mechanism to achieve this -result, without any reference to or consideration whatever of those -fundamental, eternal principles of banking economics that demand -recognition and obedience if we are to escape the frightful penalties -which their violation always inflicts. - -"In the outset I want to lay down two fundamental laws that I wish were -burned into the minds of every banker and every business man within the -borders of this republic. They are these: - -"One--Nothing should ever be counted as a reserve which is not coined -out of the standard of value. Our standard of value is gold, therefore -nothing should go into the reserves of our banks except gold. - -"Two--The poorer money always drives out the better. - -"I hope that whoever hears these words will commit these two laws to -memory, for they are as fundamental and eternal in their operation as -the law of gravitation. - -"I assert that the plan of the so-called reserve association is in -direct violation of the first of these laws, and will put the second -law into operation to a dangerous and destructive degree. - -"Every intelligent student knows that the plan proposes to transport -to this country the German system of banking, which I assert has -completely broken down at home during the past six months. Now, if -this system has broken down in Germany, where there are a few great -banks with hundreds of millions of assets and not more than 500 banks -all told, what can you expect it to do here with more than 25,000 -individual, independent banks, directly responsible to their depositors? - -"The following letter was given to me by an officer of one of our -largest banks, accompanied with these words: - -"'I realize that in giving you this letter I am, in a way, betraying a -business confidence, but I regard it as my patriotic duty to give it to -you, to use in any way you may see fit. For what would happen to this -bank if we should send out such a letter to our depositors? Our doors -would be closed inside of twenty-four hours.'" - -The letter referred to was written by the Deutsche Bank of Berlin, -which has assets approximating $500,000,000, and is as follows: - -"'In consequence of the restrictions recently made by the Imperial -Bank, with regard to the supply of money at the end of every quarter -of the year, we are, to our regret, compelled to ask you, when drawing -against your account with us upon our head office and our branches -by mail, kindly to advise us by cable of such drafts on them as are -likely to come forward for payment during the last three working days -of the quarter and the following two working days, so as to enable us -to provide from here especially the necessary funds at the office drawn -upon. - -"'As to cable transfers which, during the five days in question, you -may have to order on our head office or branches, to the debit of your -account with us, we shall feel obliged by your ordering them only if -you can advise us by cable one day before, the amounts to be placed by -us to your debit on receipt of such advice, or ordering upon us for -mail transfer from here. - -"'The foregoing, of course, does not apply to small amounts.' - -"As a further proof that the system has broken down at home, let us see -what has been going on in Germany during the past six months to further -demonstrate the weakness of their system. - -"The great banks of Germany have been scouring the markets of the -world, going into every nook and corner, hunting for gold. At what -price? Was it at 5 per cent, 6 per cent, 7 per cent, 8 per cent, 9 -per cent, 10 per cent? No. The New York _Evening Post_, in its annual -review, says it was from 12 per cent to 20 per cent. I have been -credibly informed that the great banks of Germany, with hundreds of -millions of assets, were borrowing money in our own markets at 7-1/2 -per cent and 1-1/2 per cent for three months, or upwards of 13 per cent. - -"I was told of one loan to one of the largest banks in Berlin, running -for a whole year at 7 per cent. - -"Think of it! What would the condition in our country have to be before -The National City, The Bank of Commerce and the First National of New -York, and the First National and Continental Commercial of Chicago, -were scouring all quarters of the globe for gold and paying from 15 to -20 per cent for the loans? - -"The Imperial Bank of Germany could not save the few great banks of -Germany. What would the same kind of an institution in the United -States do for 25,000 independent banks under the same circumstances, -all pulling at the skirts of this proposed financial balloon? The -Imperial Bank could not make real money out of paper credit when the -crisis came. - -"Let me ask the 25,000 individual independent banks of America, what -they would do when the day of contraction and refusal came? Where would -you go for gold with your comparatively small capital and limited -credit? - -"The financial situation in Germany is by far the weakest of all the -great nations of Europe and the cause is not far to find nor difficult -to detect. - -"Their notes, which are based upon only 33 per cent of gold and 66 -per cent of commercial credits, are used as reserves and made the -basis of additional credits. Economically speaking, whenever a bank -puts anything into its reserves it makes that thing a legal tender -and exactly to that extent displaces that much gold, if gold is the -standard of value. - -"During the ten years from 1900 to 1910 the gold accumulated by Russia -amounted to upward of $200,000,000; that accumulated by France, upward -of $300,000,000; that accumulated by England, where nothing but gold -is treated as reserves and where there has been comparatively little -growth in business, $32,000,000. The United States accumulated -$1,100,000,000, while Germany, with all her development of trade during -the last ten years, accumulated only $40,000,000 of gold when it ought -to have been ten times as much, all things considered, or $400,000,000. -If she had done this she would not have been compelled to send her -great financial institutions all over the globe in search of gold and -been compelled to pay 15 per cent and 20 per cent for it." - -Gentlemen, within sixty days after those words were uttered, this -conversation was reported to have taken place. The German Emperor asked -Herr Havenstein, the President of the Imperial Bank of Germany, whether -Germany was prepared, financially, to carry on a war with a first-class -power. Herr Havenstein said: "No." To this the German Emperor replied, -"I do not want that answer to that question when I ask it again." - -Herr Havenstein immediately called the managers of the thirty great -banks together, and told them that they must collect at least a -15 per cent reserve. To this they protested, saying that it meant -the accumulation of at least $250,000,000 in gold; but Havenstein -persisted and insisted upon his demand. Now, gentlemen, if you add the -$40,000,000 they had accumulated, to what Havenstein insisted that they -should accumulate, or $250,000,000, you have $300,000,000 as a minimum. -It is altogether probable that $400,000,000 was nearer what they should -have accumulated. - -It should be noted in this very connection, that Germany recently -appointed a commission to investigate her banking system, and that -this commission reported that the individual banks of Germany should -carry their own reserves, precisely as Congressman Fowler has always -contended, declaring that it is especially important in the case of our -individual, independent banking system. From what has been said, it has -been demonstrated that every criticism that he has made of the German -system, has been confirmed by their own subsequent action. - -The rest of his speech was as follows: - -"Mark this: If we did not have the $346,000,000 United States notes or -greenbacks, the $650,000,000 of legal tender silver and a part of the -$750,000,000 national bank notes in the reserves of our banks, we would -now have in the United States $2,500,000,000 of gold instead of only -$1,850,000,000. Does all this prove nothing to us? - -"Every intelligent student of economics knows that after Alexander -Hamilton, with the acquiescence and approval of Jefferson, had fixed -the ratio of the gold and silver dollar in 1792, a differential of -only one-half to one per cent drove all the gold out of the country by -1832, and that from 1834 to 1860 the changed ratio drove every dollar -of silver out of circulation. Who does not know that from 1861 to 1865 -the issue of fiat Government paper drove every dollar of gold out of -the country; that for seventeen years we were off the gold standard, -resuming specie payments in 1879? - -"Has any banker over fifty years of age forgotten the silver struggle -from 1879 to 1894, when, because of the silver purchase act by which we -only added $50,000,000 a year to our reserve money, we came to the very -precipice of repudiation and national dishonor? - -"These four great and significant lessons have been taught us--since -the establishment of this Government--the poorer money invariably -drives out the better, and yet we are confronted by such stuff as the -following falling from the lips of the reputed author of the so-called -Reserve Association: - -"'The banks will be able to replenish their reserves indefinitely.' The -counterpart of this proposition is that the banks will be able to make -loans indefinitely. Think of such a proposition! And again, he says it -was deemed necessary 'to provide such effective regulation of discounts -and note issues as would enable the organization to respond promptly at -all times to normal or unusual demands for credit or currency without -danger of undue expansion or inflation.' If this proposition survives -at all it will be as the curiosity of the century. I submit that -neither of these propositions could have emanated from a mind capable -of thinking in the terms of economics. - -"I assert that if we adopt a sound financial system in the near future -we shall have in the course of ten years upward of $3,000,000,000, -possibly $3,500,000,000, of gold in the United States. I assert further -that if we adopt the proposed so-called reserve association scheme we -shall have at the end of five years thereafter in the neighborhood of -only $1,250,000,000, allowing for a differential of $250,000,000 either -way as a possibility. In other words, we would have as a result not -more than 40 per cent and possibly not more than 30 per cent of the -gold that we shall have if we pursue a wise economic policy. - -"The scheme provides that any deposits with the association may count -as reserves; also that any of its notes may be held as reserves. - -"Since the average reserve of all national banks is and has been for -many years about 20 per cent, let us assume, first, that a national -bank called 'X' has $5,000,000 of deposits and holds a 20 per cent -reserve, or $1,000,000 of gold; second, that X National Bank deposits -this million of gold with the reserve association; third, that a -national bank called the 'Y National Bank' exchanges $1,000,000 -of commercial paper for $1,000,000 of the notes of the reserve -association, which it puts into its reserves. - -"In the course of time it will have a million of deposits, largely -in the shape of loans based upon this million of notes; so that the -original $1,000,000 which stood guard over $5,000,000 of debts now is -called upon to protect $12,000,000 of debts, or only about an 8 per -cent reserve as against 20. - -"The X National Bank owes $5,000,000 of deposits against $1,000,000 -deposited with the association. The association owes the X National -Bank the $1,000,000 deposited with it and $1,000,000 of notes -outstanding which it issued to the Y National Bank. The Y National -Bank has liabilities outstanding of $5,000,000 with the notes as -reserves, or a net expansion and inflation of $7,000,000. - -"It has been assumed or claimed by some advocates of the scheme -that probably $1,000,000,000 of gold would be deposited with the -association, in which event there would be an expansion and inflation -of $7,000,000,000, or a total liability of $12,000,000,000 where now -there are only $5,000,000,000. - -"While this expansion and this inflation have been going on the notes -have been going into the banks as reserves, and a corresponding amount -of gold has been driven out of the banks and out of the country. - -"Now, mark you, I have not pursued this expansion, this inflation, -beyond the 50 per cent gold reserve for all the liabilities of the -reserve association. When you turn your imagination to all the -possibilities remaining in rediscounts, borrowing direct, acceptances -and falling in your reserves, and the credits which grow out of -credits directly and indirectly, the prospect becomes bewildering. The -expansion and inflation becomes a matter of planetary distances and -astronomical figures. The proposal leads into the nebulous somewhere, -into the bottomless nowhere. - -"Every student recognizes that the weakest point in our national bank -system is the superimposed credit resulting from the deposits with our -reserve cities and then with our central reserve cities. But in the -very face of that fact here is a proposal that accentuates that fault -one hundred fold. - -"The strangest thing about this whole proposal is that it is based -upon the fact that we have not sufficient capacity for expansion and -inflation of credit. Will any one say that what we wanted during the -years of 1913-4-5-6-7 was more inflation? Does not every intelligent -student of banking economics know that what we should have had was some -way of checking the delirium instead of increasing the mad speculation? - -"To determine now what we want we must first ascertain with some degree -of accuracy just what happened. - -"Until we come to realize that there are two distinct kinds of capital -involved in our banking business, and learn to treat them according -to their peculiarities, we shall continue to have the same kind of -trouble, to a greater or less degree, that we have had in the past. - -"There is the trust fund or the savings of the people and money -belonging to estates or the investment fund. Then there is the -commercial fund or that capital engaged in production and trade. The -law should compel the segregation or separation of these two funds, so -that we know with some degree of certainty whether the investment fund -has all been exhausted and our commercial funds or capital are being -encroached upon and absorbed in fixed investments. This is precisely -what happened by 1907. - -"To illustrate this thought, let us assume that a railroad needs one -hundred flatcars to carry its peculiar freight and needs one hundred -passenger cars for the accommodation of the people. It is self-evident -that if the road uses all the flatcars and half the passenger cars to -carry its freight, the balance of the passengers will have to make some -other provision for transportation or walk. This is just what occurred -in 1907, and a great many people are still walking as a result of -that misadventure. Liquidation is still going on, with a probability -that we shall be well into 1913 before normal or really good business -conditions will prevail all round. - -"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. - -You will remember that when Aldrich made his first announcement -about his plan, he said that we must have a _Central Bank_ and that -immediately President Taft declared at Boston, "Senator Aldrich desires -to round out his career with a financial system for the United States, -and says that we should have a _Central Bank_." I never will forget -what an eminent citizen of this state said when he read that statement. -It was this: "Well, God help the American people if Nelson W. Aldrich -ever rounds out _his career_ with a financial system for the United -States." - -You will all of you remember, I am sure, what a cold reception the idea -of a "Central Bank" at the hands of Aldrich received. Does anyone of -common intelligence believe that Aldrich ever changed his scheme below -its throat? It is true he put a mask on its head; but that is all. He -hunted around for an all-concealing name to hide the thing under--"The -National Reserve Association." _I assert that his proposal would mean -the greatest and most centralized Central Bank in the world._ - -Note these figures and draw your own conclusion: - - Nat. Reserve Bank of Bank of Bank of - Assn. France England Germany - - Capital - $400,000,000 $36,500,000 $72,000,000 $45,000,000 - - Deposit - 1,500,000,000 100,000,000 250,000,000 200,000,000 - - Note Issue - 2,400,000,000 1,000,000,000 (See Note.) 400,000,000 - - Possible Note Issue - 4,500,000,000 Possible issue - large with tax. - -NOTE.--_The Bank of England is not in any sense a bank of issue, -because the amount of notes it issues is limited to the amount of gold -coin in the issue department. The notes are gold certificates. There is -an exception to the law, to the extent of the arbitrary amount of notes -issued against the Government debt and securities, held in the issue -department, amounting to $90,000,000._ - -Now, gentlemen, here you have a proposal to organize in this country -an institution with a capital greater than the combined capital of the -Central Banks of England, France and Germany, because the capital of -all of our banks now exceeds $2,000,000,000, and the subscription to -the National Reserve Association must be 20 per cent of this amount, -to entitle them to participate. Certainly the idea must have been that -they all would participate in so beneficent an institution. "It was to -be a bank of banks for all the banks." - -It was the declared purpose of the author of the scheme that the banks -should surrender all their real money, now carried as reserves, to this -central institution in exchange for its notes; or that the banks would -deposit more than $1,500,000,000 with the National Reserve Association. -This would be a deposit nearly three times as great as all the deposits -of the Central Banks of England, France and Germany combined. - -The bill provides, Section 51, that the National Reserve Association -can issue $900,000,000 of its notes, _and as many more_ as are covered -"by an equal amount of lawful money" (United States notes, silver, or -silver certificates, and gold in some form), without paying any tax. -But if the banks turned over their present reserves, amounting to -$1,500,000,000, as contemplated by the author of the National Reserve -Association, it could issue $2,400,000,000 before beginning to pay any -tax on circulation. By paying a tax of 1-1/2 per cent per annum, it -could put out $300,000,000 more notes, not covered by lawful money, -or $2,700,000,000; then, by paying a tax of 5 per cent, it could go -any limit until its lawful money reserve was reduced to 33 per cent. -This makes a possible issue of $4,500,000,000, or a possible note -issue today two or three times as great as all the note issues at any -time outstanding of the Central Banks of England, France and Germany -combined. _Every dollar of this vast amount is only the credit of the -so-called National Reserve Association, and yet is a lawful reserve for -over twenty-five thousand banks to hold._ - -MR. MERCHANT: By the way, Mr. Banker, I would like to ask you what you -think of a tax upon bank notes to be paid by the Central Bank of Issue -as it is practiced in Germany where they got this idea. - -MR. BANKER: Economically speaking, a tax paid under such circumstances -is of no more use than your appendix. - -MR. MERCHANT: My appendix! I have had my appendix removed. - -MR. BANKER: Well, that makes no difference. I still insist that a -tax paid upon bank notes under such circumstances is of no more use, -economically speaking, than your appendix, whether it has been removed -or not. - -MR. LAWYER: Section 23 provides, "The National Reserve Association -shall be the principal fiscal agent of the United States. The -Government of the United States shall, upon the organization of the -National Reserve Association, deposit its general funds with said -association and its _branches_, and thereafter all receipts of the -Government, exclusive of trust funds, shall be deposited with said -association and its _branches_, and all disbursements by the Government -shall be made through said association and its _branches_." - -The Central Bank of any country may be defined to be the bank at which -the other banks carry their reserves, and at which the Government -carries its balance. - -But will some advocate say "it is only the bank of all the other -banks"? This is the very quintessence of a Central Bank. - -Upon this evidence will any candid man say that the so-called -National Reserve Association is not a Central Bank? It was to have -fifteen branches. The Bank of England has none. The Bank of Germany -has nineteen main branches. The Bank of France has one hundred and -twenty-seven main branches. - -"SECTION 34.--The National Reserve Association shall have power both at -home and _abroad_ to deal in certain things." - -SECTION 36.--"The National Reserve Association shall have power to open -and maintain banking accounts in foreign countries, and to _establish -agencies in foreign countries_ for certain purposes." - -Have the Central Banks of England, France or Germany any power to -maintain accounts and establish agencies in foreign countries? With -"A baby stare," and under cover of "Sunday-school pretences," we are -told that this all-comprehending scheme is just a simple coöperative -enterprise for the exclusive benefit of the individual American banks. -Indeed, that it is the only truly altruistic banking institution that -was ever conceived. - -Now, as the chief argument for the adoption of this scheme, its main -promoters and sponsors have persistently declared that the country -was now being dominated and controlled by certain great banking -interests, and, therefore, that the people should liberate themselves -from these sinister and dangerous banking powers by running into the -warm and enticing embrace of the National Reserve Association. Upon -investigation, we find this anomaly, this surprising, this astounding -fact: that the promoters and advocates of this gigantic machine are -these self-same sinister banking influences who have the country by the -throat today. - -Hon. Leslie M. Shaw has pertinently inquired, "Is it not strange that -Nelson W. Aldrich and his affiliations are tired of their great power -and vast opportunities, and are now trying to divest themselves of -them," through the innocent-looking National Reserve Association? -It will be well remembered by all of you, that at the time that the -Aldrich scheme made its first bow to the dear people, the public -discovered that the National City Bank owned bank stock to the amount -of $10,000,000 in other National Banks located throughout the United -States. Possibly the same interests owned several times that amount. I -was informed about that time that they controlled at least one hundred -banks in the leading cities of the United States. Now, let us assume -that to be true, and let us meditate upon what such an organization -could accomplish if they wanted to elect every officer in every local -association, and every officer in charge of every branch, and the board -of directors of the National Reserve Association, and so name the -"_Governor_" and the rest of the executive committee of nine which is -to control this great Central Bank. - -To appreciate the power of such an organization, you must keep in -mind the fact that practically every bank in the United States would -be carrying a balance with some one of these banks immediately under -their control. There is your machine. It is a perfect duplicate of the -political machine in this state. The state "Boss," whom you know stands -in precisely the same position as the National City Bank would stand. - -As you are fully aware, I am the "Boss" of this county; and I am in -identically the same position that one of these hundred banks would be -that are controlled by the National City Bank. When I get my orders, -I immediately communicate with every so-called local leader in every -township. This political machine works three hundred and sixty-five -days and three hundred and sixty-five nights in the year. In the -sense of an organization, we are working all the time, and it is the -organization work that does the business. All the rest of the people -are unorganized. So it would be with the banks. The men who belong to -the organization or machine "_like it and fear it_"; because as things -have stood, no one could get anywhere without being a part of the -machine. This fact forces acquiescence. It has been, as you know, a -perfect feudalism from top to bottom. We have had a machine government -in this state as perfect as the Manchu Government in China. - -Can you imagine anything easier than for the National City Bank with -this complete banking organization all over the United States to name -every man practically that went into this organization from top to -bottom? This would not be done by holding a majority of the stock in -all the twenty-five thousand banks; they don't care about that; because -it is a matter of no consequence to them, and if they attempted to do -anything so crude, it would spoil their whole game. They attain their -ends in more subtle but no less certain and powerful ways. They get -influences to work. They put forces into operation. Their interests are -not limited to the banking business. They have affiliations with great -transportation companies and manufacturing interests, and therefore -control large bank deposits everywhere that the banks want and are -always working to get. Then there are favors to be granted; commissions -to be paid; "melons to be cut." Opportunities are suggested. In one -respect at least they are like the Lord, they "work in a mysterious way -their wonders to perform." - -They had established their ramifications throughout the United States -by making the National City Bank a holding company of bank stocks, -and the culmination of their power was to be realized through the -devious methods of organizing the National Reserve Association. The -same money and the same power that filled the columns of the newspapers -of the country with the unqualified praise of the Aldrich scheme for -two years--the same power that rushed resolutions of one uniform -stereotyped kind through twenty or thirty state bank associations, and -steam rollered the same unconsidered declarations through two annual -conventions of the American Bankers' Association, would have made this -so-called _altruistic, benevolent, coöperative association_ the most -powerful machine ever organized; because, it would have absolutely -dominated all the bank credit in the United States, or 45 per cent of -the banking power of the world. You must remember that these interests -are by far the greatest speculators in the United States. Yes, the -greatest in the world. - -MR. BANKER: But don't you remember that the bill provided in Section -26 that the paper rediscounted by it must "be issued or drawn for -agricultural, industrial, or commercial purposes," and not "for the -purpose of carrying stocks, bonds, or other investment securities"? - -MR. LAWYER: Yes, but that is all folderol. It is the purest kind -of poppycock. If a bank wanted to take on a speculative deal, it -could sell its commercial paper, could it not, and use the money for -speculation just the same? That is on precisely the same level with its -declaration that the institution was not a Central Bank. It is such -subterfuges that disgust every candid man. - -Listen to Mr. Aldrich in his report upon the bill upon the selection of -the "Governor" of the National Reserve Association by the President of -the United States. He says, "Further restraint upon the administration -of the association upon narrow or selfish lines, is imposed by the -provision that four of the highest officials of the Government are made -ex officio members of the controlling board, _and by the requirement -that the governor shall be selected by the President of the United -States_. The fear has been expressed that the _selection of the -governor by the President_, and the provisions making the Secretary of -the Treasury, the Secretary of Agriculture, the Secretary of Commerce -and Labor, and the Comptroller of the currency, ex officio members of -the board of directors of the reserve association, _might lead to an -attempt to control the organization for political purposes_." - -Please note the sham, fraud and false pretense covered by this comment. -The bill provides that the "Governor" of the association, as they -call him, shall be selected by the President of the United States -_from a list of at least three names, furnished by the directors_. -Will any honest man say that the President of the United States would -have had any more to do with the selection of the "Governor" of the -so-called National Reserve Association than the King of Siam? Again -note this cheap, false pretense, "Fear has been expressed that the -selection of the governor by the President," and the four ex officio -members of the board of directors, "might lead to an attempt to control -the organization for political purposes." These four ex officio -members have just four votes upon a board of forty-six which proceeds -immediately to eliminate all of the ex officio members forever, by -selecting an executive committee consisting of nine members to manage -its affairs, from which all of them are excluded except the Comptroller -of the currency. Can any intelligent man doubt the purpose of all these -sham declarations and false pretenses? If so, let him spend a day or -two trying to find out how the members of the boards of the local -associations are to be chosen; try to unravel the process by which the -members of the boards of the branches are to be evolved; and, having -grown tired and dizzy with his task, let him undertake to prove how -the board of directors of the National Reserve Association are to be -manufactured through the machinations born of ulterior purposes. - -I have studied puzzles before, but for complications, wheels within -wheels, evident designs upon evident designs, occult purposes under -occult purposes, and a combination of powerful forces, born of sinister -influences, this project will forever stand alone as an illustration of -what the human mind can do to conceal its real object. - -There is not one man in a hundred, indeed I do not believe that there -is one man in a thousand, taking the business men, farmers, working -men, and bankers all together, who can solve the riddle, and tell -how it is done. Such a mystery could not have just happened. It must -necessarily have been the product of a purpose. - -_Simplicity, publicity and direct methods are the guaranties of common -honesty. Intricacy, secrecy and indirect methods are invariably used -to hide uncommon dishonesty. I do not mean petty larceny, taking a -few pennies, or a loaf of bread; but the absorption of hundreds of -millions, without returning anything to the world in exchange for them._ - -Should the United States have been so unfortunate as to have been -bound hand and foot for fifty years, the life of the proposed charter, -by the trammels and intricacies of the National Reserve Association -under control of an executive committee, consisting of only nine men -who had been the evolutionary product of a preconceived purpose and -well-defined plan, can anyone doubt what the result would have been? -Can anyone doubt that all of their banks and all of their business -interests would have gotten all the money they wanted all the time? - -The advanced information from week to week and, at times, possibly, a -month ahead, of what the discount rate would be--a very natural way for -some member of that executive committee to show his or their proper -appreciation of his or their promotion to their positions--would have -been worth more every year, during the fifty-year grant, than all the -wealth that the American people could produce during any twelve months; -for this advanced information about the discount rate would have made -profits a mathematical certainty upon the billions and billions of -stocks and bonds that are quoted upon the Stock Exchange, the fertile -field of the man who knows that he has a sure thing. - -MR. MANUFACTURER: Mr. Lawyer, that smells pretty bad. - -MR. LAWYER: Yes, I admit it; but does it smell any worse than oil has -been smelling for more than twenty years? Than certain United States -senators have been made to smell? Than robbing rebates smell? Is it not -the natural sequel to this train of abuses to which the country has -been treated? - -This whole situation was so graphically depicted, precisely as it has -developed, two years before Mr. Aldrich gave birth to this conception, -that I want to read it to you: - -"A central bank could easily be so organized as to sap the commercial -blood of this country at every turn and direct the silent and unseen -currents of advantage into the channels of favored institutions, and -all these favored institutions might turn out, upon investigation, to -be, in the end, one institution. - -"And if, unfortunately, the subterranean connection could not be -detected, and even if detected, could not be broken, what a power for -evil and injustice such an organization would prove in the life of this -Nation. - -"This is not only regarded as possible, but as probable; indeed, it is -charged that it is the preconceived, cunning design of the advocates of -a central bank to accomplish this purpose. - -"Under these circumstances, with what suspicion and jealousy will every -act of the central bank be watched! Localities will become envious -of localities. Cities will bitterly attack their neighboring cities. -Nine-tenths, if, indeed, not ninety-nine out of every hundred, of the -banks will imagine spears in needlecases, and, right or wrong, fling -their accusations upon the wings of the wind; and we will be living in -a commercial world of unrest and constant controversy surpassing in -suspicion, envy, jealousy and bitterness anything this Republic has -ever witnessed. The consequences no man can prophesy; no imagination -can paint." - -These words were spoken by Hon. Charles N. Fowler, March 29, 1908, -just two years before Mr. Aldrich made his report to Congress upon his -National Reserve Association. - -MR. LABORINGMAN: You know I said that I had heard that the Aldrich Bill -was dead; for one, I hope so. If the people ever get a lick at it they -will finish it for certain. - -MR. FARMER: You are right, and you bet that if they ever get a chance -to discuss this banking bill question, they will come mighty near -settling upon the right proposition in the end. - -MR. BANKER: I agree with you, and furthermore I am thoroughly convinced -that we shall never reach a satisfactory conclusion until we have had -just the same kind of a hand-to-hand fight over this question that we -had over the gold standard. - -MR. MANUFACTURER: It looks so to me. That gold-standard fight taught -me that you could trust the American people to make a wise decision, -if you would only have a country store, schoolhouse, cornfield debate, -in which every man in the country got into the game--preacher, lawyer, -teacher, farmer, merchant, manufacturer, laboringman, townfolks and -country folks, all alike. - -MR. MERCHANT: Nothing more true has been said since we have been -talking about this question than that remark about the importance of a -public discussion of this whole matter. I know any number of men who -when this Aldrich scheme came out were ready to swallow it, but who now -realize what a fatal blunder it would have been. The reason was, that -they knew absolutely nothing about the question and they were living in -such a state of terror on account of the panic, that they were ready to -take anything that would shield them from experiences such as they had -just passed through. The Aldrich scheme was the only thing in sight, -because hundreds of thousands of dollars had been spent in promoting -it. They are just beginning to study and think about the subject. Our -hope of wise action by Congress rests upon a red-hot debate among the -people, exactly as you said. - -MR. BANKER: Well, it will be easy enough to show them what the real -reforms demanded are. - -_The reforms we demand are these_: - - _First: Holding companies in the banking business must be completely - wiped out._ - - _Second: Every National Bank should be authorized to do_ - - _(1) A commercial banking business._ - - _(2) A Savings bank business._ - - _(3) A Trust company business._ - - _(4) A note issue business, precisely as the Canadian banks do._ - -_Third: All the various accounts--commercial, savings, trust and note -issues--should be segregated._ - -_Fourth: Every bank in the United States should be compelled to carry -the same amount of bank reserves._ - -_Fifth: All bank reserves should consist of gold or gold certificates, -as soon as the United States notes can be converted into gold -certificates._ - -_Sixth: Every bank in the United States should be brought under -national control, because banking is essentially Interstate Commerce._ - -_Seventh: Every natural financial centre in the United States should -become the clearing centre for all the checks, drafts and bank notes -that are payable in the territory that is economically and naturally -tributary to that Financial centre; such territory should constitute a -commercial zone._ - -_Eighth: There should be organized at each of these financial centres a -Clearing House at which all the checks, drafts and bank notes payable -within the commercial zone shall be at par._ - -_Ninth: The banks of each commercial zone should elect a board of -control to examine, supervise and control all the banks within such -commercial zone, precisely as the Clearing Home bank examiners are -examining and supervising all banks clearing through them today._ - -_Tenth: The banks of each commercial zone should also elect a court of -appeals, or a banker's council, composed of an equal number of business -men and bankers, to settle all banking and business questions that -would properly come before them._ - -_Eleventh: The Board of Control in each commercial zone should be -presided over by a deputy United States Comptroller, for the purpose -of securing immediate and efficient action._ - -_Twelfth: The banks of the United States should all contribute a -percentage of their deposits to a Central Reserve, which should be -composed of gold, and gold alone. The percentage of deposit should be -7 per cent at the outset, and be gradually increased to 10 per cent, -which would amount, at the present time, to a central gold reserve of -upwards of $1,250,000,000. This reserve would correspond to the reserve -held today by the Clearing Houses for their banks._ - -_Thirteenth: This central gold reserve should be held in trust by a -body of men composed of one man from each commercial zone, for the -benefit of all the commercial zones._ - -_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 - - Loan Certificates, clearing house, 328 - amount of, issued, 336 - are bank credit currency, 336 - denominations of, 329-333 - lessons of, 333 - - London, clearing started in, 291, 302 - - Los Angeles, Clearing House, 316 - - Louisiana, bank act of, 343 - statement of banks of, 361 - - Lubbock, Sir John, 299 - - - MacVeagh, Franklin, 240, 405 - - Madison, James, 164, 165 - - Maine, Report of Bank Commissioner 1857, 357 - and 1865, 358 - - Marshall, John, 58, 164 - - Mason, George, 163 - - Massachusetts, Report of Bank Commissioner, 358 - - Missouri, Bank of the State of, 73, 351 - statement of Bank of, 361 - - Money, amount held by banks in United States, Appendix B - amount of, in United States, Appendix A - coin and commodity must be of equal value, 44 - credit must not be called money, 33 - description of, 29 - functions of, 30 - gold is our, 26 - how made, 26 - what are the pieces of, 27 - "wild cat," "red dog," etc., 348 - - Morrill, Justin S., 17 - - Mortgages, amount of, 249 - rate of interest on, 249 - - Mutual Credit Societies, number of, 274 - in Massachusetts, 275 - resources for short loans, 277 - - - Ohio, Bank of the state of, 73 - bank act of, 344 - statement of bank of, 361 - - - Paper, accommodation, 128, 131 - commercial, 120 - difference between commercial and accommodation, 129 - - Paine, Thomas, 162 - - Panic of 1907, 471 - - Pinckney, Charles, 163 - - Population, shifting of, 32 - - Price, what is, 104 - - Prices, causes of higher, 31 - - Printing, importance of, 112 - - Promissory note, what is a, 86 - note and draft identical, 87 - - Property, what is, 104 - difference between property and wealth, 104 - - Postal Savings Banks, 384 - - - Raiffeisen, Friedrich Wilhelm, 272 - - Real estate, unfit as basis for currency, 136 - - Redemption, in coin essential, 50 - - Reforms demanded, 494, 495, 496, 497 - - Reserves, amount of, 200 - amount held by national and other banks, Appendix B, 381 - amount of central, 222, 381 - additional, where obtained, 409 - Bagehot, 202 - bank notes as, 204 - circumstances should control amount of, 200 - character of, 201 - average, in United States, 208 - elasticity of, 208, 219 - from what points considered, 199 - how increased, 220, 221 - Jevons on, 202 - legal tender quality unnecessary to, 188 - national banks, 207 - promises to pay as, 204 - present, inefficient, 218 - penalty for not maintaining, 423, 431, 432 - present method of, useless, 218 - are measure of value, therefore must be coin, 205 - state or city debts as, 204 - silver, not used in Bank of England, 206 - should be national, 211 - superimposed, 218 - State bank, 207 - taxation to compel equal, 212 - unfair to permit unequal, 209 - United States notes not actual, 206 - what constitutes proper, 203 - - Ricardo, 441 - - Root, L. Carroll, 334 - - Ruggles, Charles A., 301, 310 - - - Scotland, description of, currency by Conant, 68 - currency by White, 68 - effect of bank credit in, 67 - - Schulze, Francis Frederick, 272 - - Shaw, Leslie M., 487 - - Shaw, William A., 17 - - Sherman, John, 183 - - Sherman, Roger, 150, 166 - - Silver certificate, a warehouse receipt, 40 - - Silver dollars, amount of, Appendix A, 36, 43 - a government debt, 40 - a subsidiary coin, 39 - a demand for gold, 38 - not money, 38, 40 - weight of, 36 - - Spaulding, E.G., 183 - - Stevens, Thaddeus, 183 - - Steam, importance of, 113 - - Standard of value, 9 - changes in ratio of gold and silver as, 17 - gold, the natural selection of, as the, 24 - qualities of gold as, 17 - - Sub-Treasury, deposits in, 243 - - Suffolk Bank system, 73, 353, 354, 355, 361 - achievements of, 334, 335 - Bank was first clearing house in United States, 337, 338 - commissioner's reports on, 357, 358 - description of, 75 - destroyed by 10 per cent tax, 74 - - Sumner, Charles, 179 - - - Talbot, Joseph T., 205, 231 - - - Uap, money of, 15 - - United States, bank clearings of, 373 - financial center of world, 404 - foreign trade of, 373 - important interests of, 409 - production of 1912, 373 - size of, compared with Europe, 409 - total business transactions of, 373 - - United States Government, nature of, 410 - taxing power, only resource, 189, 191 - time obligations only should be incurred, 192, 410 - unfit to meet demand debts, 189 - - United States notes or greenbacks, additional cost of war due to, 185 - agreement to pay gold, 34 - amount of, Appendix A and 35 - bonds issued for, 52 - constitutionality of, 185-187 - cost of, as currency, 50, 56 - cost of, since 1879, 53 - depreciation of, 184 - drive gold out, 206 - how converted into gold certificates, 427, 438 - issues of, 183 - lowest value of, 35 - not money, 35 - price of, a quotation of government credit, 41 - resumption of payment of, 53 - suspended payment of, 34 - unfit for currency, 55 - - - Walsh, John R., failure of, 314 - - War, Civil, first loan for, 177 - - Washington, George, 162, 165 - - Wealth, what is, 104 - difference between property and, 107 - - Webster, Daniel, 111, 170 - - White, Horace, 30, 155 - - Wilson, John W., clearing house examiner, Los Angeles, 316 - - - Zone, credit bureau of, 323 - organization of, 338, 411 - organization, repetition of National Government, 483 - places of, discount limited to, 479 - publicity of organization, 476 - should not stand alone, 480 - state lines do not conform to economic, 419 - - - - - - -End of the Project Gutenberg EBook of Seventeen Talks on the Banking Question, by -Charles Newell Fowler - -*** END OF THIS PROJECT GUTENBERG EBOOK SEVENTEEN TALKS *** - -***** This file should be named 60029-8.txt or 60029-8.zip ***** -This and all associated files of various formats will be found in: - http://www.gutenberg.org/6/0/0/2/60029/ - -Produced by MFR, Graeme Mackreth and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - -Updated editions will replace the previous one--the old editions will -be renamed. - -Creating the works from print editions not protected by U.S. copyright -law means that no one owns a United States copyright in these works, -so the Foundation (and you!) can copy and distribute it in the United -States without permission and without paying copyright -royalties. 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You may copy it, give it away or re-use it under the terms -of the Project Gutenberg License included with this eBook or online at -www.gutenberg.org. If you are not located in the United States, you'll -have to check the laws of the country where you are located before using -this ebook. - - - -Title: Seventeen Talks on the Banking Question - -Author: Charles Newell Fowler - -Release Date: August 1, 2019 [EBook #60029] - -Language: English - -Character set encoding: ISO-8859-1 - -*** START OF THIS PROJECT GUTENBERG EBOOK SEVENTEEN TALKS *** - - - - -Produced by MFR, Graeme Mackreth and the Online Distributed -Proofreading Team at http://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - - - - - -</pre> - - -<div class="hidehand"> -<p class="center"> -<img src="images/cover.jpg" alt="pic" /> -</p></div> - -<p class="center" style="margin-top: 5em;"> -<img src="images/illus01.jpg" alt="pic" /> -</p> -<p class="caption"> <i>Very truly Yours Charles N. Fowler</i></p> - - - - - -<p class="ph1" style="margin-top: 10em;">SEVENTEEN TALKS</p> - -<p class="ph3">ON THE</p> - -<p class="ph1">BANKING QUESTION</p> - -<p class="ph3">BETWEEN</p> - -<p class="ph1">UNCLE SAM</p> - -<p class="ph3">AND</p> -<table summary="title" width="45%"> -<tr><td>MR. FARMER,</td> <td>MR. BANKER,</td></tr> -<tr><td>MR. LAWYER,</td> <td>MR. LABORINGMAN,</td></tr> -<tr><td>MR. MERCHANT,</td> <td>MR. MANUFACTURER</td></tr> -</table> -<p class="ph4">BY</p> - -<p class="ph2"><span class="smcap">Hon. Charles N. Fowler</span></p> - -<p class="ph4">WHO WAS A MEMBER OF THE HOUSE OF REPRESENTATIVES -FOR SIXTEEN YEARS, A MEMBER OF THE -BANKING AND CURRENCY COMMITTEE FOR -FOURTEEN YEARS AND CHAIRMAN -OF THE COMMITTEE FOR -EIGHT YEARS</p> - -<p class="ph4" style="margin-top: 5em;">PUBLISHED BY THE</p> -<p class="ph3">FINANCIAL REFORM PUBLISHING CO.</p> -<p class="ph4">ELIZABETH, NEW JERSEY</p> - - - - - -<p class="center" style="margin-top: 5em;"> -<small> -<span class="smcap">Copyright, 1913, by</span><br /> -FINANCIAL REFORM PUBLISHING CO.</small></p> - - -<p class="center"><small> -THE TROW PRESS<br /> -NEW YORK</small> -</p> - - - - -<p class="ph2" style="margin-top: 5em;">FOREWORD</p> - - -<p>This book is written in the form of a conversation between Uncle Sam -and six men of various occupations. It begins with the A, B, C of the -subject and by question and answer goes over all the different phases -of the subject precisely as you would expect them to arise under such -circumstances. After weeks of study and investigation they finally -reach an agreement, based upon their talks, and formulate a Financial -and Banking system for the United States.</p> - -<p style="margin-left: 30%;"> -<span class="smcap">The Author.</span><br /> -</p> - - - - -<p class="ph2" style="margin-top: 5em;">TABLE OF CONTENTS</p> - - - - - -<table summary="toc" width="65%"> -<tr><td></td><td><small>PAGE</small></td></tr> - -<tr><td><a href="#FIRST_NIGHT">FIRST NIGHT.</a> The Standard of Value</td> <td align="right"><a href="#Page_7">7</a></td></tr> - -<tr><td><a href="#SECOND_NIGHT">SECOND NIGHT.</a> What Is Money?</td> <td align="right"><a href="#Page_26">26</a></td></tr> - -<tr><td><a href="#THIRD_NIGHT">THIRD NIGHT.</a> What Is Currency?</td> <td align="right"><a href="#Page_46">46</a></td></tr> - -<tr><td><a href="#FOURTH_NIGHT">FOURTH NIGHT.</a> Bank Credit Currency</td> <td align="right"><a href="#Page_62">62</a></td></tr> - -<tr><td><a href="#FIFTH_NIGHT">FIFTH NIGHT.</a> What Is Exchange?</td> <td align="right"><a href="#Page_84">84</a></td></tr> - -<tr><td><a href="#SIXTH_NIGHT">SIXTH NIGHT.</a> Value, Price, Wealth, Property, -Credit</td><td align="right"><a href="#Page_101">101</a></td></tr> - -<tr><td><a href="#SEVENTH_NIGHT">SEVENTH NIGHT.</a> Commercial Credit, Land -Credit, Government Credit</td> <td align="right"><a href="#Page_118">118</a></td></tr> - -<tr><td><a href="#EIGHTH_NIGHT">EIGHTH NIGHT.</a> Colonial Credit Money</td> <td align="right"><a href="#Page_144">144</a></td></tr> - -<tr><td><a href="#NINTH_NIGHT">NINTH NIGHT.</a> United States Notes or Greenbacks</td> <td align="right"><a href="#Page_173">173</a></td></tr> - -<tr><td><a href="#TENTH_NIGHT">TENTH NIGHT.</a> Reserves</td> <td align="right"><a href="#Page_195">195</a></td></tr> - -<tr><td><a href="#ELEVENTH_NIGHT">ELEVENTH NIGHT.</a> The Bank</td> <td align="right"><a href="#Page_224">224</a></td></tr> - -<tr><td><a href="#TWELFTH_NIGHT">TWELFTH NIGHT. </a>Land Credit Bank</td> <td align="right"><a href="#Page_248">248</a></td></tr> - -<tr><td><a href="#THIRTEENTH_NIGHT">THIRTEENTH NIGHT.</a> The Clearing House</td> <td align="right"><a href="#Page_289">289</a></td></tr> - -<tr><td><a href="#FOURTEENTH_NIGHT">FOURTEENTH NIGHT.</a> Banking in 1860</td> <td align="right"><a href="#Page_340">340</a></td></tr> - -<tr><td><a href="#FIFTEENTH_NIGHT">FIFTEENTH NIGHT.</a> Outline of Bill</td> <td align="right"><a href="#Page_368">368</a></td></tr> - -<tr><td><a href="#SIXTEENTH_NIGHT">SIXTEENTH NIGHT.</a> Draft of Bill</td> <td align="right"><a href="#Page_405">405</a></td></tr> - -<tr><td><a href="#SEVENTEENTH_NIGHT">SEVENTEENTH NIGHT.</a> Aldrich Plan and -Plot Exposed</td> <td align="right"><a href="#Page_459">459</a></td></tr> -</table> - -<p class="center"> -<img src="images/illus02.jpg" alt="pic" /> -</p> - - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_7" id="Page_7">[Pg 7]</a></span></p> - - - - -<p class="ph2"><a name="FIRST_NIGHT" id="FIRST_NIGHT">FIRST NIGHT</a></p> - -<p class="center">THE STANDARD OF VALUE</p> - - -<p><span class="smcap">Uncle Sam</span>: Gentlemen, I have invited you to take part in one -conversation a week upon the much-vexed and all-important question -of a financial and banking system for my country. We shall continue -these conversations until we arrive at some conclusion which will be -satisfactory to all of us, although this may seem difficult at the -outset.</p> - -<p>To begin with, I want to assure you that our talks shall be absolutely -confidential, and nothing that is said at these meetings shall ever -go any farther, unless we agree to announce our conclusion. With this -understanding we can be brutally frank with each other, and I can -expose my hand to you.</p> - -<p>The present situation is one demanding immediate attention, and only -our ignorance, greed or political cowardice can prevent us from -arriving at a satisfactory solution of this problem. We must be sincere -and patriotic in our purpose, for we represent practically every -phase of our citizenship, and I assume you are typical of the average -intelligence of the people.</p> - -<p>Here is Mr. Lawyer to steer us clear of legal obstacles, Mr. -Laboringman to speak for our millions of daily toilers, Mr. Farmer -to point out the disadvantage of agricultural loans, Mr. Merchant -to illustrate the defects of our present commercial credits, Mr. -Manufacturer to caution us against the conversion of our liquid capital -into fixed investments and Mr. Banker to tell us of his woes and -enlighten us upon the remedies for all his ills.</p> - -<p>What we don't know now, we will each attempt to find out before -our talks come to an end. Certainly there is some solution to this -question. In short and in fact it must be solved.</p> - -<p><span class="pagenum"><a name="Page_8" id="Page_8">[Pg 8]</a></span></p> - -<p>I am the laughing stock of the entire civilized world today. For -our persistent folly we suffer losses in the aggregate amounting to -hundreds of millions of dollars every year. We ought to have, and can -have the best and the most efficient banking system in the world. -Indeed, we ought to give the laugh to all the other countries in -banking, as we do practically in everything else. It is up to us.</p> - -<p><span class="smcap">Mr. Banker</span>: Uncle Sam, I agree absolutely with what you have -just said. I believe it is our duty to sit every week, as you suggest, -continuously until we arrive at some conclusion upon which we can all -agree. If we do this I believe, since we represent so many callings and -are so representative of the various lines of business, we shall find -the public approving of our conclusion.</p> - -<p>I suggest that we begin with the very A, B, C of this question, and -settle one point after another as we go along. If we do this, our -differences will disappear as we progress, and the X, Y, Z of this -question, or the formation of a financial and banking system, will be -comparatively easy in the end.</p> - -<p>For example, we must first fix clearly in our minds what a standard -of value is, and what our standard of value is, what money is, what -currency is, what capital is, what a bank is, and so continue step by -step to the end, leaving absolutely nothing for guesswork, if that is -at all possible.</p> - -<p>The experience of the world has been so broad and complete that our -solution of this question is entirely possible, although we have some -problems that are peculiar to ourselves.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That plan suits me exactly, for only recently I -made a thorough study of the question of our standard of value. My -investigation took me back more than 6,000 years, and I found the -subject amusing often as well as intensely interesting, while the -result of my research was most satisfactory.</p> - -<p>I discovered that everything from baked clay to the<span class="pagenum"><a name="Page_9" id="Page_9">[Pg 9]</a></span> credit of -practically every government that has ever existed had been used at -some time or other, as a standard of value, or a measure of value.</p> - -<p><span class="smcap">Mr. Farmer</span>: Mr. Lawyer, just what do you mean by a "standard -of value"?</p> - -<p><span class="smcap">Mr. Lawyer</span>: A "standard of value" is anything that may be -selected by which all other things in some particular locality or -country are measured.</p> - -<p>The Indians of British Columbia used haiquai shells; one string being -equal to one beaver skin. In Australia tough green stone and red ochre -were used. In Central Africa slaves were used. In Iceland the law made -cattle the standard of value. In the Fiji Islands whales' teeth. In the -South Sea Islands red feathers were used. In Mexico and Abyssinia salt -was used.</p> - -<p>Agriculture has produced its standard of value; corn, maize, olive oil, -cocoanuts, cocoa-nut oil, tea, tobacco, cacao, beans, wheat, rice.</p> - -<p>The pastoral life produced its standard of value; sheep, cattle, goats, -horses and practically every other domestic animal, according to the -time and place.</p> - -<p>The following history of American experience in the development of -a standard of value cannot be better restated, and is practically a -repetition of the experience of mankind in all the ages, therefore I -want to read what Horace White says upon the subject:</p> - -<p>"It may be said that Virginia grew her own money for nearly two -centuries, and Maryland for a century and a half.</p> - -<p>"The first settlers of New England found wampumpeage, sometimes called -wampum and sometimes peage, in use among the aborigines as an article -of adornment and a medium of exchange. It consisted of beads made from -the inner whorls of certain shells found in sea water. The beads were -polished and strung together in belts or sashes.</p> - -<p>"They were two colors, black and white, the black being double the -value of the white. The early settlers of<span class="pagenum"><a name="Page_10" id="Page_10">[Pg 10]</a></span> New England, finding that -the fur trade with the Indians could be carried on with wampum, easily -fell into the habit of using it as money. It was practically redeemable -in beaver skins, which were in constant demand in Europe. The unit of -wampum money was the fathom, consisting of 360 white beads worth sixty -pence the fathom. In 1648 Connecticut decreed that wampum should be -'strung suitably and not small and great uncomely and disorderly mixt -as formerly it hath been.' Four white beads passed as the equivalent -of a penny in Connecticut, although six were usually required in -Massachusetts and sometimes eight. In the latter colony wampum was at -first made legally receivable for debts to the amount of 12d. only. In -1641 the limit was raised to fifty pounds sterling, but only for two -years. It was then reduced to forty shillings. It was not receivable -for taxes in Massachusetts. The use of wampum money extended southward -as far as Virginia.</p> - -<p>"The decline of the beaver trade brought wampum money into disrepute. -When it ceased to be exchangeable in large sums for an article of -international trade the basis of its value was gone. Moreover it was -extensively counterfeited, and the white beads were turned into the -more valuable black ones by dyeing. Nevertheless it lingered in the -currency of the colonies as small change till the early years of the -eighteenth century. While it was in use it fluctuated greatly in value.</p> - -<p>"The first General Assembly of Virginia met at Jamestown July 31, 1619, -and the first law passed was one fixing the price of tobacco 'at three -shillings the beste, and the second sorte at 18d. the pounde.' Tobacco -was already the local currency. In 1642 an act was passed forbidding -the making of contracts payable in money, thus virtually making tobacco -the sole currency.</p> - -<p>"The Act of 1642 was repealed in 1656, but nearly all the trading -in the Province continued to be done with tobacco as the medium of -exchange.</p> - -<p>"In 1628 the price of tobacco in silver had been 3s. 6d.<span class="pagenum"><a name="Page_11" id="Page_11">[Pg 11]</a></span> per pound -in Virginia. The cultivation increased so rapidly that in 1631 the -price had fallen to 6d. In order to raise the price, steps were taken -to restrict the amount grown and to improve the quality. The right to -cultivate tobacco was restricted to 1,500 polls. Carpenters and other -mechanics were not allowed to plant tobacco 'or do any other work in -the ground.' These measures were ineffective. The price continued to -fall. In 1639 it was only 3d. It was now enacted that half of the -good and all of the bad should be destroyed, and that thereafter all -creditors should accept 40 lbs. for 100; that the crop of 1640 should -not be sold for less than 12d., nor that in 1641 for less than 2s. -per lb., under penalty of forfeiture of the whole crop. This law -was ineffectual, as the previous ones had been, but it caused much -injustice between debtors and creditors by impairing the obligation of -existing contracts. In 1645 tobacco was worth only 1-1/2d. and in 1665 -only 1d. per lb.</p> - -<p>"These events teach us that a commodity which is liable to great and -sudden changes of supply is not a desirable one to be used as money.</p> - -<p>"In the year 1666 a treaty was negotiated between the colonies of -Maryland, Virginia, and Carolina, to stop planting tobacco for one year -in order to raise the price. This temporary suspension of planting made -necessary some other mode of paying debts. It was accordingly enacted -that both public dues and private debts falling due 'in the vacant year -from planting' might be paid in country produce at specified rates.</p> - -<p>"In 1683 an extraordinary series of occurrences grew out of the low -price of tobacco. Many people signed petitions for a cessation of -planting for one year for the purpose of increasing the price. As the -request was not granted, they banded themselves together and went -through the country destroying tobacco plants wherever found. The evil -reached such proportions that in April, 1684, the Assembly passed a -law declaring that these malefactors had passed beyond the bounds of -right, and<span class="pagenum"><a name="Page_12" id="Page_12">[Pg 12]</a></span> that their aim was the subversion of the Government. It was -enacted that if any persons, to the number of eight or more, should go -about destroying tobacco plants, they should be adjudged traitors and -suffer death.</p> - -<p>"In 1727 tobacco notes were legalized. These were in the nature of -certificates of deposit in Government warehouses issued by official -inspectors. They were declared by law current and payable for all -tobacco debts within the warehouse district where they were issued. -They supply an early example of the distinction between money on the -one hand, and Government notes, or Bank notes, on the other. The -tobacco in the warehouses was a real medium of exchange. The tobacco -notes were always payable to bearer for the delivery of this money. -They were redeemable in tobacco of a particular grade, but not in any -specified lots. Counterfeiting the notes was made a felony. In 1734 -another variety of currency, called 'crop notes,' was introduced. These -were issued for particular casks of tobacco, each cask being branded -and the marks specified on the notes.</p> - -<p>"The circulating medium of the New England colonies was quite as -fantastic as that of Virginia. Merchantable beaver was legally -receivable for debts at 10s. per pound. In 1631 the General Court of -Massachusetts ordered that corn should pass for payment of all debts -at the price it was usually sold for, unless money or beaver skins -were expressly stipulated. In other words, a debt payable in pounds, -shillings, and pence might be paid at the debtor's option in any one of -three ways; in corn at the market price, in beaver at 10s. per pound, -or in the metallic money of England. For more than half a century this -order continued in force and operation, other things being added to the -list from time to time.</p> - -<p>"In 1635 musket balls were made receivable to the extent of 12d. in one -payment.</p> - -<p>"In 1640 Indian corn was made current at 4s. per bushel, wheat at 6s., -rye and barley at 5s., and peas at 6s.<span class="pagenum"><a name="Page_13" id="Page_13">[Pg 13]</a></span> Dried fish was added to the -list. Taxes might be paid in these articles and also in cattle, the -latter to be appraised.</p> - -<p>"The need of metallic currency was severely felt. In 1654 it was -ordered that no coin should be exported, except 20s. to pay each one's -traveling expenses, on penalty of forfeiture of the offender's whole -estate.</p> - -<p>"The cost of carrying the country produce taken for taxes amounted to -10 per cent of the collections. A constable once collected 130 bushels -of peas as taxes in Springfield. He found that he could transport this -portion of the public revenue most cheaply by boat. Launching it on the -Connecticut River, he shipped so much water on board at the falls that -the peas were spoiled. Thus we learn that money ought to be easy of -carriage and not liable to injury by exposure to the elements.</p> - -<p>"In 1670 it was ordered for the first time that contracts made in -silver should be paid in silver.</p> - -<p>"In 1675, during King Philip's war, the need of metallic money for -public use was so great that a deduction of 50 per cent was offered on -all taxes so paid.</p> - -<p>"The first local currency of New Netherlands was wampum, but it was -subordinate to the silver coinage of the mother country; that is, -it was reckoned in terms of that coinage as fixed by the Dutch West -India Company from time to time. It was fixed at six white beads for -a stiver. Wampum was not made in the province, but was imported from -the east end of Long Island, the principal seat of production. It is -mentioned in a letter from the Patroons of New Netherlands to the -States General in June, 1634, as 'being in a manner the currency of the -country with which the produce of the country is paid for,' the produce -of the country being furs.</p> - -<p>"Beaver soon became current here, as in New England, and for the same -reason, its currency value being fixed by the company at 8 florins -per skin. As 5 wampum beads were equal to 1 stiver and 20 stivers to -1 florin, and 8 florins to 1 skin, the ratio of wampum to beaver was -960 to 1. The market ratio did not coincide with the<span class="pagenum"><a name="Page_14" id="Page_14">[Pg 14]</a></span> legal ratio very -long. Nor was the legal ratio of either wampum or beaver to silver -maintained; for, in 1656, Director Stuyvesant wrote to the company -urging that beaver be rated at 6 florins instead of 8, and wampum at 8 -for a stiver instead of 6, as these rates were nearer the commercial -values.</p> - -<p>"In 1719 the Assembly of South Carolina made rice receivable for taxes, -'to be delivered in good barrels upon the bay in Charlestown.' In -the following year a tax of 1,200,000 pounds of rice was levied, and -commissioners were appointed to issue rice orders to public creditors, -in anticipation of collection, at the rate of 30s. per 100 lb., in the -following form:</p> - -<p>"'This order entitles the bearer to one hundred weight of well-cleaned -merchantable rice to be paid to the commissioners that receive the tax -on the second Tuesday in March, 1723.'</p> - -<p>"Rice orders were made receivable for all purposes, and counterfeiting -was made felony without benefit of clergy.</p> - -<p>"In eastern Tennessee and Kentucky, early in the nineteenth century, -deer skins and raccoon skins were receivable for taxes and served the -purposes of currency.</p> - -<p>"When California was first invaded by gold seekers there were a few -Mexican coins in circulation there, not nearly sufficient to answer -the needs of the growing community. The immigrants brought more or -less metallic money with them. The smaller coins were those of many -different countries, chiefly Spanish. For want of sufficient coins, the -first trading was done largely with gold dust, sometimes by weighing -it in scales, sometimes by guesswork. A 'pinch' of gold dust about as -large as a pinch of snuff had a current value and was a common measure -in places where there was no means of weighing. At a public meeting -in San Francisco, September 9, 1848, it was resolved by unanimous -vote that $16 per ounce was a fair price for placer gold. This rate -was at once adopted in all business transactions. By and by private<span class="pagenum"><a name="Page_15" id="Page_15">[Pg 15]</a></span> -coiners of gold came into the field. The Legislature was at first -alarmed by the appearance of these unaccustomed pieces, and passed a -law to prohibit circulation and to close the shops where they were -made. It was soon found, however, that they were a great convenience. -Then the law was repealed. Several establishments immediately went -to work assaying and coining gold. One of these was at Salt Lake -City, whose productions were known as Mormon coins. Only one of these -establishments, that of Moffat & Co., of San Francisco, conformed -exactly to the government standard of weight and fineness. All the -others, however, including the Mormon ones, circulated freely, and were -received on deposit by the banking houses until the government set up -an assay office and began to stamp octagonal pieces of $50, called -'slugs,' and afterwards those of $20 each. This was done in 1851; the -San Francisco mint was not ready till 1854. The Moffat coins continued -to circulate after the mint had gone into operation, since everybody -had confidence in their goodness. It is estimated that $50,000,000 of -private coins were struck. They were received in the Atlantic cities at -their assay value only."</p> - -<p>The foregoing illustrations drawn from our own history serve to explain -the nature of money and the processes by which mankind learns to -distinguish between good money and bad.</p> - -<p><span class="smcap">Mr. Farmer</span>: In all that has been said there is nothing -stranger nor more interesting than what is going on today.</p> - -<p>Uap is one of the most interesting of the South Sea Islands. It is the -Western outpost of the Carolines, which were purchased by Germany from -Spain for $3,300,000 at the close of the Spanish-American War. The -form of money used by the people and the perfection of the system of -currency is as interesting as anything in the history of the human race.</p> - -<p>The small change consists of pieces of pearl shell and small round -stones. Large sums are represented by fei.<span class="pagenum"><a name="Page_16" id="Page_16">[Pg 16]</a></span> These are big circular -stones in the form of wheels ranging in diameter from one to twelve -feet. In the centre of each is a hole through which a pole is thrust to -facilitate carriage from one spot to another.</p> - -<p>These coins are not minted on the island, nor has any addition been -made to the supply of them for a number of years. They were originally -fashioned in the Pelao Islands, and brought thence to Uap in canoes -over a stretch of four hundred miles of ocean. A very large fei could -not be changed into smaller coin without seriously disturbing the -currency of the island. The owner of one of these twelve-foot masses of -wealth is a sort of J.P. Morgan. Like the man with the million dollar -bill in Mark Twain's story, he does not need to break his money in -order to pay for anything he may buy, but readily secures all that he -desires on credit.</p> - -<p>It speaks volumes for the honesty of the islanders that all this stone -money is left out of doors standing against the sides of the huts. The -annals of Uap do not contain a single record of the theft of a fei, -but perhaps the difficulty of disposing of such unwieldy cash may be -a potent factor in the matter. Not only is the ownership of a large -fei equivalent to the command of an unlimited amount of currency, but -abstract possession seems to entail the same advantage.</p> - -<p>Many years ago a canoe carrying one of these large stones was sunk a -few miles off the island. Although the fei went to the bottom of the -ocean and has lain there ever since, the man to whom it was consigned -enjoyed all the advantages that would have accrued from its delivery to -him. During his lifetime he was accredited one of the wealthiest men of -Uap. Not only that, but he bequeathed his interest in the submerged fei -to his son, and it has been passed on in like manner through four or -five generations, securing all the advantages of substantial wealth to -each.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Metal of some kind has been used as far back as -the records of time go, and strange as it may<span class="pagenum"><a name="Page_17" id="Page_17">[Pg 17]</a></span> seem, gold was the first -metal to be used as well as the first to be discovered, as a standard -of value, or measure of value. Iron was used in Sparta, spikes in -Central Africa, nails in Scotland, lead in Burmah, copper, tin and -silver in Rome. Silver and gold were used in China a thousand years -ago. In her palmy days gold bracelets and rings were weighed out in -Egypt, measuring value.</p> - -<p>For the past two hundred years there has been a distinct evolution of -the world's present standard of value going on, sometimes it has been -gold, sometimes it has been silver, sometimes nations have tried to -have both. During the last hundred years the struggle to use both has -gone on persistently until within the last twenty-five or thirty years.</p> - -<p>William A. Shaw states that in France during a period of one hundred -years, the ratio between gold and silver had been changed one hundred -and fifty times. The controversy of this period has well been called -the "Battle of the Standards."</p> - -<p>A constantly increasing trade between the nations of the earth has -made a common standard of value more and more important, while the -ever-increasing refinement in the exchange of commodities among the -peoples of the earth has made a single standard absolutely essential.</p> - -<p>Experience has wrought the change, and now the entire commercial world -has gold as its standard of value.</p> - -<p>It is interesting to observe how gold because of its peculiar fitness, -as compared with any other commodity, was finally selected and adopted -as the world's standard of value.</p> - -<p>If we were to study for months for the purpose of ascertaining what the -characteristics of the world's standard of value should be, we would -define the characteristics of gold as particularly distinguished from -any other metal or thing.</p> - -<p><i>First</i>: Gold has by far a greater stability of value than any other -substance. It is very doubtful whether there<span class="pagenum"><a name="Page_18" id="Page_18">[Pg 18]</a></span> is a perceptible change, -at least any such change of value, as could be agreed upon. It is so -small.</p> - -<p><i>Second</i>: Gold has portability, or the facility of transportation from -one part of the country to the other, or from one nation to the other, -that makes it desirable as compared with any other metal, that is to -be thought of for a standard of value. For example, the same value in -silver weighs thirty times as much.</p> - -<p><i>Third</i>: The divisibility of gold at the mint into convenient pieces -for trade and commerce is all that can be desired.</p> - -<p><i>Fourth</i>: It has, practically speaking, perfect durability. It will -not corrode, or waste away, except by wear, and waste by wear is now -largely obviated by the use of some representative, such as our gold -certificate.</p> - -<p><i>Fifth</i>: Gold possesses homogeneity or perfect uniformity of structure -and material.</p> - -<p><i>Sixth</i>: Gold possesses cognizability, or can be readily known or -recognized.</p> - -<p>It was undoubtedly all these inherent qualities, these prerequisites -that led to those legislative enactments which have during the last -hundred years singled out this yellow metal as the most fit arbiter of -the world's trade.</p> - -<p>The first legislative act that seemed to lead to this ultimate decision -of the world was passed by the House of Commons in 1774, but not until -1816 was the law passed that definitely settled the question of the -standard of value for Great Britain. The very same law passed in that -year, now nearly one hundred years ago, remains in force to this day.</p> - -<p>In 1853, the United States followed Great Britain in an attempt to -establish the gold standard. We reduced the weight of our silver -coins, smaller than one dollar, and made them legal tender for only -five dollars in amount. The silver dollar was not considered in -this legislation of 1853, and not until February 12, 1873, did the -gold dollar become the unit of value, when the gold standard was -unequivocally established. The silver dol<span class="pagenum"><a name="Page_19" id="Page_19">[Pg 19]</a></span>lar was at that time worth -about two cents more than a gold dollar, and therefore it was omitted -from the coinage. This was the famous crime of '73, about which the -men now wearing gray hair, or no hair, heard so much in the '80's and -early '90's. Yes, we were hearing this as late as 1896, when it was the -Battle Cry of the Presidential Campaign.</p> - -<p>It may be stated that practically the whole civilized world, with -the single exception of Great Britain, has come to the single gold -standard, since 1873.</p> - -<p>The only country now remaining upon the silver basis, or that has not -taken steps to place itself upon a gold basis, is, according to the -report of the Director of the Mint, the Central American States, which -are of comparatively no commercial importance whatever.</p> - -<p><span class="smcap">Mr. Merchant</span>: How much gold is there in the world today?</p> - -<p><span class="smcap">Mr. Lawyer</span>: It was estimated in 1890 that the amount of gold -accumulated was approximately $4,000,000,000 (four thousand million -dollars).</p> - -<p>The amount of gold produced during the last twenty-two years, or since -1890, by all the countries of the world approximates $6,500,000,000 -(six thousand five hundred million dollars). Of course a deduction, -or allowance, must be made for what has been used outside of monetary -purposes, or in industrial consumption, approximately $1,500,000,000 -(one thousand five hundred million dollars). A deduction should also -be made for what has been absorbed by India, about $700,000,000 (seven -hundred million dollars), and also by Egypt, about $200,000,000 (two -hundred million dollars), or nearly $1,000,000,000 (one thousand -million dollars), by these two countries.</p> - -<p>The Director of the Mint in his report, Page 53, says:</p> - -<p>"In statistics of the precious metals India is the most important -country of Asia, and has long been one of the most important in the -world. The Government of India has advised this bureau that the -uncoined gold imported<span class="pagenum"><a name="Page_20" id="Page_20">[Pg 20]</a></span> into that country might be considered to be -used for ornaments and in manufactures. This amounted in 1910 to -$47,026,698.</p> - -<p>"The movement to India deserves to be treated in a class by itself. A -large part of the gold and silver that goes there sinks out of sight, -and whether it is made into ornaments or buried in the ground, is -withdrawn at least in large part from the monetary stock of the world. -Some of it may be brought out in periods of emergency, such as times of -famine, and reconverted into money, but in the past a steady stream of -the precious metals has moved into India and disappeared as a factor -in the commercial world. Sir James Wilson, K.C.S.I., for many years in -the Government service in India, in a comprehensive address delivered -before the East India Association of London, on June 14, 1911, reported -the net imports of gold by India since 1840 at about $1,200,000,000, or -one-tenth of the world's production in that time.</p> - -<p>"It may be questioned whether the economists who are expressing fears -as to the effects that may result from the production of gold at the -present rate are aware of the amount of that metal taken by India since -the gold standard was definitely established, and the Government began -to pay out sovereigns freely. That occurred in 1900. For the ten-year -period, 1890-1899, the net imports plus the country's own production -were $135,800,000; for the eleven years, 1900-1910, they aggregated -$433,800,000. For the British fiscal years ended March 31, 1911, they -amounted to $90,487,000, or about one-quarter of the world's production -after the industrial consumption was provided for.</p> - -<p>"<i>If this ability on the part of India to take and pay for gold proves -to be permanent, it is apparent that there will be no over supply to -trouble the rest of the world.</i>"</p> - -<p>The finance department of the Government of India, in its report for -the fiscal year ended March 31, 1911, commenting upon these figures, -says:</p> - -<p>"'The gold figures are striking, but it is equally re<span class="pagenum"><a name="Page_21" id="Page_21">[Pg 21]</a></span>markable that the -increase in gold has not been at the expense of silver; the country, in -other words, continues to take practically the same amount of silver, -but it prefers that the addition to the imports of treasure which it -has been able to claim should be in the form of gold.'"</p> - -<p>Sir James Wilson, in the address alluded to, sums up his explanation by -saying:</p> - -<p>"'As for India, her prosperity is steadily advancing. Great numbers of -her people prefer to spend their savings on gold rather than on other -commodities. The probability is that altogether apart from questions -of currency India will continue to absorb gold in ever increasing -quantities.'</p> - -<p>"The Egyptian situation is somewhat like that of India. The country is -on a gold basis, and for thirty years has been steadily taking gold -in the settlement of its trade balances. The high price of cotton in -recent years, and the increasing production of the country explains -the trade balances, but there is some mystery about the way the gold -disappears from view. It does not enter into bank stocks, and it is -difficult to understand how a country of its size and population, and -in which the masses of the people are so poor, can absorb so much gold -coin. In the first period under review the customs records show net -imports by $58,670,000, and in the second period, $146,660,000. For the -year 1910 they were $30,000,000.</p> - -<p>"Some light is shed upon the situation by the following statement in an -address by Lord Cromer, made in London, in 1907:</p> - -<p>"'A little while ago I heard of an Egyptian gentleman who died leaving -a fortune of £80,000 [$400,000], the whole of which was in gold coin in -his cellars. Then, again, I heard of a substantial yeoman who bought -property for £25,000 ($125,000). Half an hour after the contract was -signed he appeared with a train of donkeys bearing on their backs the -money, which had been buried in his garden. I hear that on the occasion -of a fire in a provincial town no less than £5,000 ($25,000) was found<span class="pagenum"><a name="Page_22" id="Page_22">[Pg 22]</a></span> -hidden in earthen pots. I could multiply instances of this sort. There -can be no doubt that the practice of hoarding is carried on to an -excessive degree.'"</p> - -<p>In round figures the approximate amount of gold remaining for -commercial or banking purposes is approximately $4,000,000,000 (four -thousand million dollars), in addition to what we had in 1890, making a -total of $8,000,000,000 (eight thousand million dollars).</p> - -<p>Of this total amount the United States has $1,800,000,000 (one thousand -eight hundred million dollars), or nearly one-quarter of the monetary -gold supply of the world.</p> - -<p>However, if we had our proper proportion of the world's monetary gold, -considered from the standpoint of our bank resources, we should have -upwards of $3,000,000,000 (three thousand million dollars).</p> - -<p><span class="smcap">Mr. Banker</span>: How do you make that out?</p> - -<p><span class="smcap">Mr. Lawyer</span>: The banking resources of the entire world are -now about $55,000,000,000, while those of the United States are about -$25,000,000,000, or two-fifths of the bank resources of the world, -and therefore we are entitled to two-fifths of the eight billion of -monetary gold of the world. This would give us $3,200,000,000.</p> - -<p>While, as I have just said, it is true that there have been no -discoveries of new fields since 1890, with the exception of the -Klondike, a most important event occurred in the discovery of the -Cyanide process, which was, with the circumstances attending it, well -described by the Mining World and Engineering Record of London, which -said:</p> - -<p>"The discovery of the Cyanide process must be regarded as one of the -greatest achievements of modern time. And there can be no doubt that -Cyaniding will be held by the coming generation for its importance, not -so much to the mineral industries directly, as for its bearing upon -world economies in rendering possibly a greatly increased output of -gold and silver year after year. In a comparatively brief twenty-year -interval since<span class="pagenum"><a name="Page_23" id="Page_23">[Pg 23]</a></span> 1890, when Messrs. McArthur and Forrest brought the -modern perfected Cyanide process prominently before the mining world, -the output of gold has amounted to 284,081,289 fine ounces. This is a -most astonishing showing, especially when compared with a total output -of 401,311,148 fine ounces for the entire 397 years previous from 1493 -to 1890, a period lacking just three years of being four centuries.</p> - -<p>"For the great expansion in the world's output, particularly noticeable -in the past fifteen years, the spread of the Cyanide process is -directly responsible. Nor, if we except the Klondike, has this record -production been boomed by the development of new fields. The cream of -the world's gold fields had already been skimmed in previous years in -California, Australia, South Africa, Siberia, India, and elsewhere. It -is mainly on the cast-off leavings of the old field that the Cyanide -process has achieved a record production of the yellow metal. And among -those leavings, we must not forget the innumerable low-grade properties -whose exploitation has been rendered fundamentally possible only by -the Cyanide process. It is these latter which now furnish the bulk of -the world's supply of gold, and upon which the world must depend very -largely for its future requirements."</p> - -<p><span class="smcap">Mr. Banker</span>: Those figures are startling. We must be getting -more gold than we need for banking purposes.</p> - -<p><span class="smcap">Mr. Lawyer</span>: On the contrary, our banking resources are -increasing faster than our gold supply. In 1890 the banking resources -of the world were estimated at $16,000,000,000, less than one-third of -what they are today. That is, the banking resources have trebled since -1890, and the gold supply for reserve or monetary purposes has only -doubled.</p> - -<p><span class="smcap">Mr. Banker</span>: What about the gold supply for the future?</p> - -<p><span class="smcap">Mr. Lawyer</span>: The production during the past four years has been -about stationary, averaging $450,000,000 each year. You must remember -there have been no gold<span class="pagenum"><a name="Page_24" id="Page_24">[Pg 24]</a></span> discoveries of any consequence during the past -ten years, and it is very probable that the production will remain -almost stationary for a few years to come. At present it looks as -though the gold supply, and the demand for gold for monetary purposes, -would run along about equal. Of course the more intimate the business -relations of the nations of the earth become, the more efficient will -the reserve of gold become, because the reserves of the world will -become more and more mobilized, and therefore more efficient in the -conduct of the world's business.</p> - -<p><span class="smcap">Mr. Merchant</span>: From what you have said, and as a result of my -own study, I am convinced that the adoption of the Gold Standard was a -natural selection. It was the survival of the fittest.</p> - -<p>Thousands of books have been written upon this subject, and libraries -literally filled with them.</p> - -<p>In 1896, when the Presidential campaign was fought out on this -question, my investigation led me into an extended historical review -of the use of metals as money. I found that it had been in use by -the Babylonians, the Egyptians, the Greeks, the Romans, the Chinese, -the Europeans during the middle ages, and that the struggle between -gold and silver during the last two hundred years had resulted to the -advantage of the people, to the commerce of every nation and to the -whole world. This last struggle was not whether gold or silver should -be the standard of value, but whether both should or could be used as -the standard of value. That is, could we have a double standard. The -decision has been unequivocal and universally in favor of a single -standard of value, and that standard gold.</p> - -<p>But the double or bi-metallic standard had been a troublesome question -long before that. Professor Ridgeway says that from the first to the -last the Greek communities were engaged in an endless quest after -bi-metallism * * *, but while the gold unit never varies in any part -of Hellas, until a late epoch, the silver coins exhibit differences -not merely between one district and<span class="pagenum"><a name="Page_25" id="Page_25">[Pg 25]</a></span> another, but even between one -period and another in the same city or state. There is incontrovertible -evidence to prove that the same trouble was caused by the fluctuation -in the relative value of gold and silver, as arises in modern times. -DelMar also states that gold Greek coins remained constant while the -silver ones varied, and had to be adjusted.</p> - -<p>At present, it may be stated as a general truth, that all other -things throughout the commercial world are now measured by gold, or -very soon will be, as all the commercial nations of the earth, with a -single exception, have taken steps looking to the adoption of the Gold -Standard.</p> - -<p>The Gold Standard is the evolution of the ages.</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_26" id="Page_26">[Pg 26]</a></span></p> - - - - -<p class="ph2"><a name="SECOND_NIGHT" id="SECOND_NIGHT">SECOND NIGHT</a></p> - -<p class="center">WHAT IS MONEY?</p> - - -<p><span class="smcap">Uncle Sam</span>: At our talk last Wednesday evening we all agreed -upon two facts, and these were fundamental to the consideration of a -financial and banking system for me.</p> - -<p>The first fact was this: that Gold is the Standard of Value all the -world over, as well as our standard.</p> - -<p>The second fact: that a Standard of Value was something by which the -value of all other things is measured.</p> - -<p>It must necessarily follow then, and be perfectly clear to all of us -that everything we produce, and everything that we buy and sell is -measured by Gold. In other words <i>that Gold is our money and that our -money is Gold</i>.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Uncle Sam, you say "Gold is our Money." Now, it -seems to me as though there must be something done to gold to make it -money, even though all our money is gold.</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, something is done to gold to make it money, -and to circulate it as money. Just three things are done to gold to -make it possible to circulate it as money.</p> - -<p><i>First</i>, we have established a degree of fineness. The gold coin we -circulate as money is nine-tenths pure gold, or nine-tenths fine, and -one-tenth of cheaper metal. This is added to give it an increased -hardness so that the loss by rubbing the gold against other things will -not be so great. This loss is called the abrasion of gold.</p> - -<p><i>Second</i>, we have established a unit of value in gold which is one -dollar, composed of twenty-five and eight-tenths grains of gold, -nine-tenths pure, or fine.</p> - -<p><i>Third</i>, Uncle Sam here cuts up the gold into pieces as follows: he -makes a two dollar and a half piece, which contains two and a half -times as much gold as our unit<span class="pagenum"><a name="Page_27" id="Page_27">[Pg 27]</a></span> of value and stamps each piece two and -a half dollars. It is known as a quarter eagle, being one-quarter of -the ten dollar piece which is called the eagle. He makes a five dollar -piece which contains five times as much gold as our unit of value and -stamps each piece five dollars. It is also known as a half eagle. He -makes a piece which contains ten times as much gold as our unit of -value and he stamps it ten dollars. It is also known as the eagle. He -makes a piece which contains twenty times as much gold as our unit of -value and stamps it twenty dollars. It is also known as the double -eagle. This is called making coins, or coining money.</p> - -<p>These four gold coins constitute all the money there is in the United -States, for Uncle Sam does not make pieces containing twenty-five and -eight-tenths grains of gold, nine-tenths pure, or fine any more, and -stamp them one dollar because this piece of gold was so small as to be -inconvenient, indeed an actual nuisance. Uncle Sam stopped making these -coins in 1890.</p> - -<p><span class="smcap">Uncle Sam</span>: That is right, and I don't make any more gold -pieces now containing fifty times as much gold as my unit of value -for the same reason that I don't make any of the dollar pieces. A -fifty dollar piece was found to be inconvenient and in a way an actual -nuisance.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, Uncle Sam, I would like to have a few -of such nuisances, and if any of you fellows have any of these two -nuisances, even the one dollar pieces about your persons, I wish you -would allow me to relieve you of all you have of either kind. When it -comes to getting rid of that kind of a nuisance, you don't seem to be -in a hurry about it. However, just remember that I stand ready at all -times to remove a nuisance of that kind, if it happens to be bothering -any of you.</p> - -<p><span class="smcap">Mr. Merchant</span>: We will remember that and give you the first -chance.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, you might as well forget it, for I'll -never get the chance.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Mr. Banker, did I understand you<span class="pagenum"><a name="Page_28" id="Page_28">[Pg 28]</a></span> to say -that the four gold coins you have mentioned, the two and a half, the -five dollar, ten dollar and twenty dollar gold pieces constitute all -the money that there is in the United States?</p> - -<p><span class="smcap">Mr. Banker</span>: That is precisely what I said, and I stand ready -to prove it. Yes, to demonstrate it absolutely, and if I don't convince -everyone of you that I am right, I'll eat all the other stuff you call -money that you can bring me.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Here is a gold certificate, isn't that money?</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Lawyer, please hand me that certificate. -Here is what it says on its face: "<i>This certifies that there have -been deposited in the Treasury of the United States of America Ten -Dollars in Gold Coin payable to the bearer on demand</i>." It is perfectly -evident, Mr. Lawyer, that this is nothing but a warehouse receipt for -ten dollars, stored in Washington subject to the demand of the holder. -There is just the same difference between that and the gold coin as -there is between a trunk and a trunk check. You would not hold up a -trunk check, and tell me that it was a trunk. This certificate is no -more money than a trunk check is a trunk.</p> - -<p><span class="smcap">Mr. Lawyer</span>: You are right, Mr. Banker. There is nothing so -absolutely essential in our talk, as illustrated by this incident, as -the use of correct, exact language. And I am very glad that you have -impressed this fact so indelibly upon our minds at the outset.</p> - -<p><span class="smcap">Mr. Farmer</span>: Did you say, Mr. Banker, that all the money there -was in the United States were the gold coins? Then you said that if you -didn't convince the rest of us that that was the fact, you would eat -all the other stuff that we call money that we would bring you. Now, it -seems to me as though that was just one of your smooth, slick tricks of -getting what we have got in our pockets, as usual. How does that strike -the rest of you boys? Now, I have a few silver slugs here, Mr. Banker, -that will<span class="pagenum"><a name="Page_29" id="Page_29">[Pg 29]</a></span> keep you busy chewing until you pass over, if you try that -game on us.</p> - -<p><span class="smcap">Mr. Banker</span>: That is all right, Mr. Farmer, but you wait until -you hear me out.</p> - -<p>Now, let us agree upon one fact, and that is this, that Uncle Sam over -there is not making or coining any other pieces of gold than the four -pieces I have just described, and that none of the one dollar or fifty -dollar pieces are now in circulation. Do you all agree that that is a -fair assumption under the circumstances?</p> - -<p><span class="smcap">Uncle Sam</span>: Yes, that is a perfectly fair assumption that all -of the gold now in circulation consists of the four pieces I am now -making, the two and a half, five, ten and twenty dollar pieces. But, -if they constitute all the money I have in circulation, I am mightily -fooled, and it is high time I was put right.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, that is what I am going to do. I am going to -put you right, for you have not only been fooled yourself, but you've -been fooling the people long enough as well.</p> - -<p>Three hundred and fifty years B.C., one of the greatest philosophers, -and one of the wisest men that ever lived, described the development -and evolution of money, and defined what money was better than any man -ever has since, I think. That man was Aristotle. Aristotle's account of -the origin and definition of money was as follows:</p> - -<p>"It is plain that in the first Society (that is in the household) there -was no such thing as barter, but that it took place when the community -became enlarged: for the former had all things in common, while the -latter, being separated, must exchange with each other according to -their needs, just as many barbarous tribes now subsist by barter; for -these merely exchange one useful thing for another, as, for example, -giving and receiving wine for grain and other things in like manner. -This kind of trading is not contrary to nature, nor does it resemble -a gainful occupation, being merely the complement of<span class="pagenum"><a name="Page_30" id="Page_30">[Pg 30]</a></span> one's natural -independence. From this, nevertheless, it came about logically that as -the machinery for bringing in what was wanted, and of sending out a -surplus was inconvenient, the use of money was devised as a matter of -necessity. For not all the necessaries of life are easy of carriage; -wherefore, to effect their exchanges, men contrived something to give -and take among themselves, which being valuable in itself, had the -advantage of being easily passed from hand to hand for the needs of -life—such as iron, or silver, or something else of that kind, of which -they first determined merely the size and weight, but eventually put a -stamp on it in order to save the trouble of weighing, for the stamp was -placed there as <i>the sign of its value</i>."</p> - -<p>Wilbur Aldrich says: "Gold, and no other thing, sustains all the -functions of money. Gold is money as soon as it is taken from the -earth, without smelting, without refining, without minting and without -limitation."</p> - -<p>Horace White says: "Nobody would give that which has cost him labor in -exchange for something which he could obtain without labor."</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, you quoted a man there, Mr. Aldrich, -I think it was, who said that gold alone possessed all the functions of -money. Just what do you mean by the "functions of money"?</p> - -<p><span class="smcap">Mr. Banker</span>: I am glad that you asked that very question, -because those functions have determined the place of gold in the -world's business, and made it the standard of value of the world, and -consequently the money of the world.</p> - -<p>Those functions are these:</p> - -<p><i>First</i>: Gold is a measure of value; that is, all other things are -measured in gold.</p> - -<p><i>Second</i>: Gold is divided into units, such as our dollar, the English -sovereign, the French franc, the German mark, and so determines prices.</p> - -<p><i>Third</i>: Gold is a medium of exchange.</p> - -<p><i>Fourth</i>: Gold is a storehouse of value; that is, the peo<span class="pagenum"><a name="Page_31" id="Page_31">[Pg 31]</a></span>ple of the -world hold it as an absolutely safe form of property, varying less in -value than anything else they can possess.</p> - -<p><i>Fifth</i>: It is such a permanent form of value that it is made the basis -or standard of future or deferred payments: not only at the end of a -year, but at the end of twenty-five or fifty years.</p> - -<p><span class="smcap">Mr. Merchant</span>: I would like to ask you whether you think there -is anything in this claim that gold is cheaper today than twenty years -ago? Whether it is falling in value, and as a consequence prices of -everything else, which must be compared with gold, are rising?</p> - -<p><span class="smcap">Mr. Banker</span>: No, sir, I do not think that the increased output -of gold is the cause of higher prices. The increased prices can be more -than accounted for in other ways. Think of it. There are:</p> - -<p> -<span style="margin-left: 0.5em;">1. The Trusts,</span><br /> -<span style="margin-left: 0.5em;">2. The Middleman,</span><br /> -<span style="margin-left: 0.5em;">3. Advertising,</span><br /> -<span style="margin-left: 0.5em;">4. Unscientific Management,</span><br /> -<span style="margin-left: 0.5em;">5. Overcapitalization,</span><br /> -<span style="margin-left: 0.5em;">6. Monopoly! Monopoly!</span><br /> -<span style="margin-left: 0.5em;">7. Extravagance,</span><br /> -<span style="margin-left: 0.5em;">8. Militarism,</span><br /> -<span style="margin-left: 0.5em;">9. Exhaustion of Soil,</span><br /> -<span style="margin-left: 0.5em;">10. High Rates of Interest on Agricultural Loans,</span><br /> -<span style="margin-left: 0.5em;">11. Unnecessary Disease,</span><br /> -<span style="margin-left: 0.5em;">12. Concentration of Population in Cities,</span><br /> -<span style="margin-left: 0.5em;">13. Shorter Hours by one-quarter,</span><br /> -<span style="margin-left: 0.5em;">14. Increased Wages by one-quarter at least; in some instances, 150%,</span><br /> -<span style="margin-left: 0.5em;">15. Shorter Hours for Women,</span><br /> -<span style="margin-left: 0.5em;">16. Child Labor Laws,</span><br /> -<span style="margin-left: 0.5em;">17. Minimum Wage Laws,</span><br /> -<span style="margin-left: 0.5em;">18. Workmen's Compensation Acts,</span><br /> -<span style="margin-left: 0.5em;">19. Insurance Against Unemployment,</span><br /> -<span style="margin-left: 0.5em;">20. Old Age Pensions.</span><br /> -</p> - -<p><span class="pagenum"><a name="Page_32" id="Page_32">[Pg 32]</a></span></p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, I don't know what you fellows think, -but I am for everyone of these forward movements that make for a better -humanity, morally, intellectually and physically; and I'm utterly -opposed to the unfair advantages that any man, or corporation, has over -any other man, or any other corporation. A just government rules its -people through just laws, and guarantees equal opportunities under the -operation of those laws.</p> - -<p><span class="smcap">Mr. Banker</span>: So I think we all are, or will be, very soon. -Every lover of his country, everyone who recognizes that the government -exists for man—manhood and womanhood—must be for these purposes, but -all these things will require a readjustment, and will take time. I -am only saying that these things more than account for all your high -prices, but let me finish.</p> - -<p>21. During the past ten years, 10,000,000 of our people have shifted, -or gone, from the country to the cities. Food producers have decreased, -and food consumers have increased by 10,000,000. Our population has -increased 47% and our food products only 30% since 1890.</p> - -<p>22. The hundreds of millions that have gone into automobiles, not one -dollar in a thousand of which produces anything but a good time, or a -joy ride, is a burden on production, and has been affecting prices, -because they are nothing but luxuries.</p> - -<p>23. Then there are all the other conveniences of life, such as -telephones, electric light, etc.</p> - -<p>Again, gentlemen, let us note where the gold has gone to during -the last ten years, the period of increase in price. Germany got -only $40,000,000, although her business has expanded enormously. -England took only $30,000,000, while France took $300,000,000, Russia -$200,000,000, and we absorbed $1,100,000,000. During the same time -India took $433,000,000. Will anyone say that the prices in these -various countries have in any way shown or reflected the amount of gold -taken or absorbed?</p> - -<p>Let some one come forward and prove that gold has<span class="pagenum"><a name="Page_33" id="Page_33">[Pg 33]</a></span> become cheaper by -pointing out that prices in the various countries indicate its effects -upon commodities. Lastly, let them explain the fact that while the -banking resources of the world have increased from $16,000,000,000 -to over $55,000,000,000, or increased three and one-half times, -the gold for monetary purposes has only doubled, or increased from -$4,000,000,000 to $8,000,000,000.</p> - -<p><span class="smcap">Mr. Merchant</span>: I am more than satisfied and pleased that I -asked you that question, for I knew it would be constantly bobbing up -and bothering us, as we went along. When I interrupted you, you were -speaking of gold and its functions as money.</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, and I assert that no other substance or thing -possesses these functions, qualifications or characteristics, at least -in no such degree as gold. Does anyone here deny that?</p> - -<p><span class="smcap">Mr. Lawyer</span>: I think we must all agree to that, and further -I would say that anything that did not possess all these functions, -qualifications or characteristics in combination cannot very well -be called money. To illustrate, if anything was used as a medium of -exchange but depended upon its relation to gold for its acceptance it -could not be called money.</p> - -<p>I am fully aware that we speak of "cash" and "money," as anything we -get in exchange for property, but this language does not mean anything -definite, except as to the transaction.</p> - -<p>I want to lay this down as an absolute rule, and something that no one -of us should forget or overlook during our conversations.</p> - -<p>"<i>We should be careful to avoid calling any kind of credit instrument -money, no matter how much used as a medium of exchange.</i>"</p> - -<p>Let me read that again.</p> - -<p><span class="smcap">Uncle Sam</span>: Now, let me see just what you mean by that. If I -understand you, I think that is an attack upon me, upon my credit. -For if my recollection serves me right, the United States Notes, or -Greenbacks, have been<span class="pagenum"><a name="Page_34" id="Page_34">[Pg 34]</a></span> called money, and treated as money ever since I -issued them during the war, way back in 1862, I think it was.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, Uncle Sam, do you think calling a thing -something which it is not makes it that thing? To say that the moon -is made of green cheese does not make it so. Now, here's one of your -United States Notes, or Greenbacks. Do you recollect what you printed -on that at the time you issued it, and have been printing on it ever -since? This is what it says:</p> - -<p>"<i>The United States will pay the bearer $5.00.</i>"</p> - -<p>That promise, or agreement, can mean but one thing, and that is -that you will pay the bearer five times one dollar, or five times -twenty-five and eight-tenths grains of gold, nine-tenths fine.</p> - -<p>Now, it must be perfectly clear to you, indeed, the conclusion is -incontrovertible, that that $5.00 United States Note, by which you -agree to pay me $5.00 cash, can't be the $5.00 itself.</p> - -<p><span class="smcap">Mr. Farmer</span>: No, by jocks, I know that is true. Tom Jones gave -me a written agreement to deliver me a horse last Monday morning. I -sent my boy over with his written promise for the horse, and he refused -to deliver the horse. Certainly, his promise was not the horse; that's -perfectly clear to me, for I did not get the horse, and that's the same -kind of a deal that this United States Note is.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Yes, but Uncle Sam is no such flunker as that.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, he flunked from 1862 until 1879, for about -seventeen years, and he came within an ace of flunking again in 1894. -He is liable to flunk any time it suits him, if he should get into a -tight place.</p> - -<p><span class="smcap">Uncle Sam</span>: That's so, and the misfortune and the shame of it -is, that I am left in a position where I am compelled to flunk.</p> - -<p><span class="smcap">Mr. Banker</span>: I agree with you, but that only adds additional -proof that this $5.00 bill, which is your promissory note, your I.O.U., -or old due bill, given for boots,<span class="pagenum"><a name="Page_35" id="Page_35">[Pg 35]</a></span> mules and ammunition during the war, -is not money at all, but a mere promise to pay money.</p> - -<p>As you have just said, it is most unfortunate that you have been left -in this position by your boys who have been going to Congress for the -past fifty years, apparently without the intelligence, or courage, to -relieve you of this disgraceful situation.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, if these United States Notes are nothing -but my promissory notes, or due bills, agreeing to pay money, it is -self-evident that they are not money. You have completely satisfied me -on that point. Mr. Banker, how much of that kind of stuff have I got -out?</p> - -<p><span class="smcap">Mr. Banker</span>: $346,000,000.</p> - -<p><span class="smcap">Uncle Sam</span>: Great Scott, I presume if I should get into trouble -with some first-class nation, and have to go to war for a few years, -and the people began to wonder whether I was going to pull through and -pay my debts, that is to doubt my ability to stand the bill, and all -that $346,000,000, then that $5.00 United States Note would not pass -for $5.00.</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so; that very note passed for only $1.75 -at one time in 1864, or only 35 cents on the dollar.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, I wish Congress would get busy and pay these -things off, so that I would be prepared for business, if anything -should turn up compelling me to fight.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: From what you have said, Mr. Banker, and -what Uncle Sam admits, I guess we all agree that the United States -Notes, or Greenbacks, are not money at all, but just ordinary debts, or -demands for money, and therefore cannot themselves be money, of course. -But what have you to say about this National Bank Note here? How does -this differ from the United States Notes or Greenbacks? Don't you admit -that this is some sort or kind of money?</p> - -<p><span class="smcap">Mr. Banker</span>: I do not. It is no more money than the United -States Note. Just read what it says:</p> - -<p><span class="pagenum"><a name="Page_36" id="Page_36">[Pg 36]</a></span></p> - -<p><span class="smcap">Mr. Manufacturer</span>: I will. This is what it says:</p> - -<p>"<i>The First National Bank of New York will pay the bearer $5.00.</i>"</p> - -<p>Mr. Banker: Don't you see that that bill is a mere I.O.U. of the Bank, -nothing but a promise to pay five times twenty-five and eight-tenths -grains of gold, nine-tenths fine, to the bearer? It does not differ in -the slightest degree from the United States Note except that one is -the promise of the First National Bank of New York, and the other the -promise of Uncle Sam to pay $5.00. You can no more say that a promise -of a bank to pay money is money than you can say that a promise of -Uncle Sam to pay money is money. Both are debts, and both are demands -for money, and therefore neither can be money.</p> - -<p><span class="smcap">Mr. Farmer</span>: Gentlemen, while I must admit that Mr. Banker has -completely, yes, absolutely, gotten away with the United States Notes -and National Bank Notes and convinced us that they are not money at -all, just watch me choke him with this silver slug, weighing 412½ -grains, and bearing two invincible superscriptions.</p> - -<p><i>First</i>: "In God we trust."</p> - -<p><i>Second</i>: "United States of America, One Dollar." Mr. Banker, what -have you to say about our Silver Dollar? Do you mean to tell me it is -not money? That's what I want to know. Think of it, this dollar of our -daddies not money.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, Mr. Farmer, if you'll follow me for half a -minute, I will only have to ask you whether you yourself think it is -money; and I will abide by your own decision. But, what I would rather -do is to put it to a vote of the crowd, and if it is not unanimous I'll -give it up.</p> - -<p>Here is a 1 cent piece, bearing one of your invincible superscriptions, -"United States of America, One cent." We have more to trust God for in -one of these cents than we have in your Silver Dollar, and therefore -it was a<span class="pagenum"><a name="Page_37" id="Page_37">[Pg 37]</a></span> grave oversight when Uncle Sam left off the other invincible -superscription, "In God we trust," since this piece of bronze is worth -only about one-thousandth part of a one-hundredth part of our Gold -Dollar, or .0011890. Here is one of our nickels, bearing the same -invincible superscription, "United States of America, V cents," which -is worth about two-thousandths of one-hundredth part of a Gold Dollar, -or .0026743. Here is a 10 cent piece, worth about 4 cents, or .04456, -and here is a 25 cent piece, worth about 11 cents, or .11141. Here is -a 50 cent piece, worth about 22 cents, or .22283. Here is the sacred -dollar of our daddies, worth about 47 cents, or .47651.</p> - -<p>Now, all these pieces of metal belong to the same class of coin from -the cent to the dollar included, and are merely token coins.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, what is a token coin?</p> - -<p><span class="smcap">Mr. Banker</span>: A token coin is a piece of metal bearing the stamp -of the Government, and passing at its face value, though the metal it -contains is worth less than its face value.</p> - -<p>This definition covers every piece of metal coin Uncle Sam makes except -our gold coins, which are worth just as much and no more in the form of -coin than they are in the form of metal, or gold bars. Now, Mr. Farmer, -I want you to understand that the silver dollar is included in these -token coins.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Well, please tell me why do people take -these pieces of money at their face value, when they are worth so much -less than they pretend to be?</p> - -<p><span class="smcap">Mr. Banker</span>: For the very simple reason that Uncle Sam over -there redeems all the coins, smaller than one dollar, when presented to -him in sums of five dollars or more, and because it is made the duty of -his Secretary of the Treasury to maintain the face value of our silver -dollar with our gold dollar by exchanging gold dollars for silver -dollars, if anyone asks him to do so.</p> - -<p>If the Government should pass a law refusing to re<span class="pagenum"><a name="Page_38" id="Page_38">[Pg 38]</a></span>deem our silver -dollars with gold dollars, our silver dollar would then pass for just -what the silver it contains would be worth from day to day. It is now -worth 47 cents. In 1902 it was worth 40 cents. In other words, our -silver dollar is not its own redeemer at 100 cents any more than the -United States Notes or the National Bank Notes are their own redeemers. -A silver dollar is a demand or a check calling for a gold dollar. The -silver dollar, the United States Note, the National Bank Note all -pass at their face value because they are convertible into gold, and -are temporarily redeemed by Uncle Sam in gold, while gold is its own -redeemer, and a ten dollar gold piece, or any other gold coin, is worth -just as much, if hammered into a spike, or melted into a slug, as -when it bears the stamp of Uncle Sam, certifying its quality and its -quantity.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Banker, what are subsidiary coins?</p> - -<p><span class="smcap">Mr. Banker</span>: All these token coins are properly called -subsidiary coins. Let me read to you what Horace White says on that -point:</p> - -<p>"The word 'subsidiary' is usually applied to coins which constitute the -small change of a country, and which are legal tender only for limited -amounts. In the United States the silver dollar must be classed as -subsidiary also; for, although it is full legal tender, the Government -does not coin it for private individuals as it coins gold. It is -subsidiary or subordinate to gold coin."</p> - -<p><span class="smcap">Mr. Laboringman</span>: Uncle Sam, why do you make these token or -subsidiary coins?</p> - -<p><span class="smcap">Uncle Sam</span>: I make token or subsidiary coins out of silver, -nickel, and copper just as a matter of convenience to the people, and -as a result of custom also.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I think what Horace White says upon that point -is particularly good, and answers your question, Mr. Laboringman, -completely. White says:</p> - -<p>"If subsidiary silver coins circulate at a value which is largely -imaginary, the question may be asked, why not make them of some other -metal, or even of paper?<span class="pagenum"><a name="Page_39" id="Page_39">[Pg 39]</a></span> There are no reasons except custom and -convenience. A coin, not heavier than a half dollar, is more convenient -than a piece of paper; it is cleaner, and in the long run is probably -cheaper, as it does not require frequent renewal. A cheaper coin might -be made out of some other metal, but it is generally best to conform -to the habits of the people. Having been always accustomed to a silver -subsidiary coinage no good reason is apparent why we should depart from -it."</p> - -<p><span class="smcap">Mr. Merchant</span>: Of course, you must use something besides gold -to make the 50, 25, 10 and 1 cent pieces out of, because even a gold -dollar would be found to be impracticable on account of its size. It -would take a microscope to find a piece of gold worth only 5 cents.</p> - -<p><span class="smcap">Mr. Laboringman</span>: And it would take a telescope to find a piece -of gold worth only 1 cent.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. White has this to say also about the silver -dollar: "The silver dollar is a larger kind of subsidiary coin, and -should be treated by the Government exactly as the smaller ones are -treated. The Government has received the value of a gold dollar for -every silver one emitted, and is therefore bound in equity to redeem -the dollars as it redeems the halves, quarters and dimes.... There -are additional reasons, however, for direct redemption of the silver -dollar. One is that such coins are unlimited legal tender between -individuals. Another is that there is a certain amount of public -apprehension and lack of confidence touching any coin which passes for -more than its metallic value."</p> - -<p>"McLeod says that in 1691 in a posthumous work Sir William Petty -pointed out that one metal only should be adopted as the standard unit, -and other metals should be issued as subsidiary to the standard unit. -The same doctrine was advocated with great force and at great length by -Locke in 1693, and also by Harris in the middle of the last century, -and was finally embodied in the great masterpiece of the subject 'Lord -Liverpool's Coins of the Realm,' published in 1805."</p> - -<p><span class="pagenum"><a name="Page_40" id="Page_40">[Pg 40]</a></span></p> - -<p>Now, gentlemen, it must be apparent to everyone that a silver dollar is -only another form of a debt of Uncle Sam over there, and that unless he -continues to stand ready to exchange gold dollars for silver dollars, -and so keep the silver dollars in circulation at 100 cents, they would -circulate at their metal or bullion value, or at about 47 cents.</p> - -<p>Mr. Farmer, do you think that stamping One Dollar upon that silver -coin, added one-hundredth part of a cent to it, or affected its value -in the slightest degree? Are you not convinced that it is not money at -all, but a mere debt of Uncle Sam and that it is a mere demand for One -Dollar in gold, and nothing more?</p> - -<p><span class="smcap">Mr. Farmer</span>: I am bound to admit that you have surprised me, -indeed paralyzed me, for I thought the Silver Dollar was money, but it -is certainly exactly the same sort of thing that the Greenback and the -National Bank Note is, and if they are not money, neither is the Silver -Dollar money.</p> - -<p><span class="smcap">Mr. Merchant</span>: I am sure we all agree on that point now, but -what about this silver certificate? Do you pretend, Mr. Banker, that -all our Silver Certificates are not money either?</p> - -<p><span class="smcap">Mr. Banker</span>: That is just what I assert, but I claim still -more than that with regard to the Silver Certificate; for, if you will -read it, you will find that it is only a warehouse receipt for silver -dollars, which have been deposited in the United States Treasury; and -therefore is not a promise to pay anything, but simply to deliver -so many silver dollars, which, as I have just demonstrated, must be -redeemed in gold to keep them going for 100 cents on the dollar.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I am going to ask one question in this connection, -and that is this. The United States Notes are a legal tender for -everything except to pay taxes on goods coming into the country and -interest on the debt and silver dollars are a legal tender, unless the -contract is made payable in something else. Does not the fact that the<span class="pagenum"><a name="Page_41" id="Page_41">[Pg 41]</a></span> -United States Note and the Silver Dollar are legal tender, make them -money?</p> - -<p><span class="smcap">Mr. Laboringman</span>: What's legal tender?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Anything which can be lawfully used in payment of -a debt, or which creditors are compelled to accept, is called legal -tender currency.</p> - -<p><span class="smcap">Mr. Banker</span>: The fact that the United States Note and Silver -Dollar are legal tender does not change the real character of either -of them. Don't you know that the very fact that you are compelled, or -think you are compelled, to make anything legal tender, to make it go -for something it is not, lowers its value and depreciates that very -thing?</p> - -<p>The price of the United States Notes or Greenbacks from the day they -were issued, until January 1, 1879, the date Uncle Sam redeemed his -promise to pay gold for them, was simply a quotation of the government -credit. This credit ranged from $1.00 to 35 cents. White says: "The -difference between these extreme quotations may be taken to represent -changes in the public credit, or various vicissitudes and states of -mind, dependent upon the war."</p> - -<p>Again he says: "In 1864 Congress attempted to check the depreciation -of the currency by closing the gold exchange, and prohibiting sales -of gold or foreign exchange for future delivery. The premium on gold -advanced more rapidly after the passage of this Act than before, and -Congress repealed it two weeks later."</p> - -<p><span class="smcap">Mr. Laboringman</span>: Now, men, let me see if I understand what -this is all about. If I have caught on to just what you have been -saying about gold, which is all the money we have, and all these -promises to pay money, these United States Notes, Bank Notes and Silver -Dollars, the difference between gold coins and these promises is the -same as the difference between a meal and a meal ticket. And when you -come to the Silver Certificate that is only an order for a meal ticket.</p> - -<p><span class="smcap">Uncle Sam</span>: By Jove, he's hit the thing plump and<span class="pagenum"><a name="Page_42" id="Page_42">[Pg 42]</a></span> square on -the head, hasn't he, boys? But what I want to know now is how many -of these meal tickets I've got out in one form or another? And, Mr. -Banker, I want to know another thing. I want to know how many cans of -pork and beans I have on hand to meet the meal tickets with?</p> - -<p><span class="smcap">Mr. Banker</span>: Well, Uncle Sam, as I look at it you have -1,659,000,000 meal tickets out, and only 150,000,000 cans of pork and -beans to meet the demand for meals.</p> - -<p><span class="smcap">Uncle Sam</span>: Great Scott, what unbounded confidence the people -must have in me not to shove those meal tickets in, before I get ready -to supply the meals. What is worrying me is this, if anything should -happen to cause any suspicion on that score, the jig would be up with -me, and I can see the end of my credit; but of course that wouldn't be -my finish. Now, what I want done is this: I want to shift these meal -tickets over to the banks where they belong, or make full provision -for them myself, so that I can stop worrying, and shall be ready for -business, if called upon to meet a first-class nation in a protracted -war.</p> - -<p>By the way, Mr. Banker, just how did you make those meal tickets amount -to 1,659,000,000 and that I had on hand only 150,000,000 cans of pork -and beans to meet the meal tickets with? You must remember it takes one -can of pork and beans to redeem one meal ticket.</p> - -<p><span class="smcap">Mr. Banker</span>: Uncle Sam, you will remember that you have -$346,000,000 of United States Notes to pay. You have also $563,000,000 -Silver Dollars to redeem, and there are $750,000,000 National -Bank Notes, making a total of $1,659,000,000, all resting on your -$150,000,000 of gold in the reserve of your Treasury.</p> - -<p><span class="smcap">Uncle Sam</span>: Yes, but I don't have to pay those National Bank -Notes, do I?</p> - -<p><span class="smcap">Mr. Banker</span>: Well, Uncle Sam, it's this way, you know, you have -to pay them out of a 5% fund created by the bankers, but the bankers -can turn right around and ask<span class="pagenum"><a name="Page_43" id="Page_43">[Pg 43]</a></span> you to redeem the United States Notes -which you pay them for the National Bank Notes, in gold.</p> - -<p><span class="smcap">Uncle Sam</span>: Mr. Banker, tell me another thing. If these silver -certificates are nothing but warehouse receipts calling for silver -dollars, and the silver dollars are nothing but token coins, then all -these silver certificates are nothing but token or subsidiary coins in -another form.</p> - -<p><span class="smcap">Mr. Banker</span>: That is literally true.</p> - -<p><span class="smcap">Uncle Sam</span>: And you say I have $563,000,000 of silver dollars -out good for nothing but token or subsidiary coin?</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so.</p> - -<p><span class="smcap">Uncle Sam</span>: Now, what I want to know is this. How much of -this silver is needed today to supply the people with the token or -subsidiary coin, up to and including the $2.00 bills; that is, the -$2.00 bill, the $1.00 bill, 50, 25, 10 and 5 cent pieces?</p> - -<p><span class="smcap">Mr. Banker</span>: There are in circulation today about $400,000,000 -of these various forms of subsidiary or token coins, or about $4.00 for -every man, woman and child in this country.</p> - -<p><span class="smcap">Uncle Sam</span>: What is the total amount of silver in the country -then, of all kinds, silver dollars and pieces of silver less than one -dollar? Tell me that.</p> - -<p><span class="smcap">Mr. Banker</span>: There are, as I just said a moment ago, -$563,000,000 of silver dollars and $147,000,000 of silver pieces less -than one dollar, or a total of $710,000,000.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, well, you frighten me, for at the rate of -four dollars each, the amount necessary for the convenience of the -people, I am stacked up ahead for at least fifty years, or until -we have about 200,000,000 of people; for you say we have all told -$710,000,000 of silver coins in the country now. I want to tell you -gentlemen, right now, that I want to get out of this hole, and I want -to keep your mind steadily on that point as we go along.</p> - -<p>The whole situation is a most embarrassing one. Tell me how much gold -coin we have scattered about everywhere over the country?</p> - -<p><span class="pagenum"><a name="Page_44" id="Page_44">[Pg 44]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: There is about $1,850,000,000 of gold available in -the country.</p> - -<p><span class="smcap">Uncle Sam</span>: Then I am confident there is great plenty for the -present, if we can devise some plan, or scheme, to avail ourselves of -it.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I am convinced of that also, but the trouble is -going to be to bring it together, centralize it and so mobilize it -that we can make the most of it. We have learned one great and most -important lesson tonight, and that is that the only money we have is -gold, and that we cannot substitute an agreement to pay gold, a debt, a -mere demand for gold itself, for it. Such a proposal when you think of -it is an absurdity, a contradiction of terms.</p> - -<p>To state the result of our conversation, or our conclusion, as I -understand it, it is this: Money must be coined out of a commodity that -is just as valuable in the form of a commodity as it is in the form of -coin. A piece of gold weighing just the same as a $20 gold coin, if as -pure, is worth just as much as a $20 gold piece.</p> - -<p>Last Wednesday evening we all agreed that, as the result of our -conversation, gold was the standard of value of the entire world, and -was our standard of value as well.</p> - -<p>Tonight, as I understand the result of our talk, we all agree that the -only money we have in this country is gold coin; that our money is gold -coin, and that our gold coin is our money.</p> - -<p>Next Wednesday night let us investigate our currency and ask ourselves -"What is currency?"</p> - -<p>Before we separate, I want to read to you what Webster says currency -is, because I want you to be thinking over the matter in the mean time. -Webster says:</p> - -<p>"Currency is the state or quality of being current; a continual course -or passing from person to person or hand to hand; general acceptance; -circulation."</p> - -<p><span class="smcap">Mr. Laboringman</span>: You mean something that everyone takes and is -glad to get.</p> - -<p><span class="pagenum"><a name="Page_45" id="Page_45">[Pg 45]</a></span></p> - -<p><span class="smcap">Mr. Lawyer</span>: Precisely so; it is that which is in circulation, -or is given and taken as having value, or is representing value, as the -currency of the country.</p> - -<p>If we all keep this definition in mind, we shall have very little -trouble next Wednesday evening in agreeing upon what currency is, and -what it ought to be.</p> - -<p><span class="smcap">Uncle Sam</span>: I want you men to remember one thing, and that is -this, that we want no currency in this country that isn't as good as -gold, and currently redeemed in gold coin to prove it. Nothing will -satisfy Uncle Sam but the best, and don't you forget it. On top of -that I want to plant another proposition, and that is this: It's not -my business to be exchanging gold for that currency either. Compel the -banks to do that, for that is their business.</p> - -<p>But first, we will settle what our currency is, and what it ought to be.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_46" id="Page_46">[Pg 46]</a></span></p> - - - - -<p class="ph2"><a name="THIRD_NIGHT" id="THIRD_NIGHT">THIRD NIGHT</a></p> - -<p class="center">WHAT IS CURRENCY?</p> - - -<p><span class="smcap">Uncle Sam</span>: Well, boys, when we parted last Wednesday night, -it was agreed that we should take up for consideration and discussion -tonight the question, "What is Currency?" And just before we left Mr. -Lawyer read Webster's definition of Currency.</p> - -<p><span class="smcap">Mr. Merchant</span>: I am very glad that he did so because it gave -me a start, and set me to thinking, and as a result I became very much -interested in the subject.</p> - -<p><span class="smcap">Mr. Banker</span>: I have made the question of currency a study -now for several years, and regard it of prime importance in any -financial and banking system; but especially so considering the -peculiar conditions existing in this country with our vast extent of -territory, and the many distinct commercial centers there are here, -each specializing in some one kind of production or industry. But more -particularly is a right form of currency essential in this country -because of the great number of our individual, independent banks now -exceeding 25,000.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Well, Mr. Banker, it strikes me that you are -getting a trifle on to a side line. Let us get right down to business, -and see if we can make any progress in determining just what Currency -is, what kind we have and what kind we ought to have, if any change is -to be made.</p> - -<p>To my mind, and I have put all the spare time I had upon the question, -that definition when fully understood described currency perfectly, -and will help us amazingly in arriving at a clear idea of just what -currency is as well as what it is not. Let me restate a part of -it, which I think covers all of it. "Currency is that which is in -circulation, or is given and taken as having value, or as representing -value." That is, currency may have value<span class="pagenum"><a name="Page_47" id="Page_47">[Pg 47]</a></span> in itself, as illustrated by -our gold coin, or may only represent value, as illustrated by our gold -certificate.</p> - -<p>Again, the definition described another quality, when it said that -"currency passes from person to person, or from hand to hand; general -acceptance; circulation." To be a piece of currency then, a thing may -or may not have actual value, as a gold coin, or as a gold certificate, -which can be exchanged for the coin. But the thing must have general -acceptance, that is, it must be received by the people generally, as a -matter of course, and without hesitation, and without taking anything -from it, or adding anything to it, such as a stamp, or a signature.</p> - -<p>That is, a piece of currency having passed through a thousand hands, -remains identically the same thing, except the ordinary wear to which -it has been subjected.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, taking that explanation as correct, -what would you say that our currency consists of?</p> - -<p><span class="smcap">Mr. Banker</span>: Our currency consists of the following things:</p> - -<p><i>First</i>: Gold coin, which is generally accepted, and has actual full -value.</p> - -<p><i>Second</i>: Gold certificates, which are generally accepted, but have no -actual value.</p> - -<p><i>Third</i>: All token, or subsidiary coin, including the silver dollar.</p> - -<p><i>Fourth</i>: Silver certificates.</p> - -<p><i>Fifth</i>: United States Notes.</p> - -<p><i>Sixth</i>: Bond-secured National Bank Notes.</p> - -<p><span class="smcap">Mr. Merchant</span>: I read an article recently in which checks and -drafts were spoken of as currency. Can it be possible that they can -properly be called "currency"?</p> - -<p><span class="smcap">Mr. Banker</span>: Certainly not. They come under an entirely -different head, and I hope we shall spend an evening considering them -very soon. Checks and drafts never pass from person to person and from -hand to hand and are not of general acceptance. Herein lies the mark -of distinction. Checks and drafts do not pass from person<span class="pagenum"><a name="Page_48" id="Page_48">[Pg 48]</a></span> to person -and from hand to hand and are always of special acceptance, that is, -they are considered before they pass. They are taken according to the -strength of the makers, acceptors and endorsers and usually pass only -by endorsement. We must make no such mistake because it will lead to a -confusion of ideas.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, you have just told us of what our -currency consisted. Gold coin, gold certificates, token coins, silver -certificates, United States Notes and our bond-secured Bank Notes. -Taken altogether I presume you would call that our currency system. Do -you call it a good system?</p> - -<p><span class="smcap">Mr. Banker</span>: It is our currency system, but it is without doubt -the worst currency system in the world, if you include only respectable -commercial nations.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, Mr. Banker, what is wrong with it?</p> - -<p><span class="smcap">Mr. Banker</span>: To tell you what is wrong with our currency -system, I would first have to tell you what a right kind of currency -system is. And I will proceed to do so in a word. A right kind of -currency system consists of three forms of currency only.</p> - -<p><i>First</i>: Gold coin, or the gold certificate.</p> - -<p><i>Second</i>: Token, or subsidiary coin.</p> - -<p><i>Third</i>: A credit bank note or bank credit currency.</p> - -<p>All these forms of currency are absolutely essential to a right -currency system, as I shall proceed to demonstrate.</p> - -<p><i>First</i>: Gold coin, or its substitute, the gold certificate, is the -very foundation of a right currency system, because there must always -be present, or immediately available, a sufficient amount of gold to -prove, protect and redeem, if necessary, all other forms of currency.</p> - -<p><i>Second</i>: Subsidiary coins are absolutely essential as a matter of -convenience to carry on the small trade of the country.</p> - -<p><i>Third</i>: A credit bank note which will always spring into being, -precisely as a check does, to perform some<span class="pagenum"><a name="Page_49" id="Page_49">[Pg 49]</a></span> special transaction, is the -most efficient and most economic form of currency in the world, because -it always just equals the demand for currency, and costs no more than a -deposit account, subject to check.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Just what do you mean when you say that a -credit bank note currency will cost no more than a deposit account -subject to check?</p> - -<p><span class="smcap">Mr. Banker</span>: I mean just this, that if you had a deposit at -a bank of $1,000, and the bank upon receiving your check for $1,000 -could convert that book account, or book debt, into a note account, or -note debt, by giving you its bank notes for $1,000, in exchange for -your check, the bank note currency would cost only the interest on the -reserve carried against the notes, which would be identical in amount -with the reserve carried against the deposit.</p> - -<p>To illustrate, if the bank were in the country it would carry 15 per -cent reserve, if a National Bank, or $150 in cash against that deposit -of $1,000. The interest on that $150 for one year at 6 per cent would -be $9. Now, if that deposit were convertible into notes, and you kept -the same reserve of 15 per cent against them, the thousand dollars -in notes would cost only $9 per year, and could and would in turn be -reconverted into a deposit, subject to check.</p> - -<p>Not only does this form of currency cost only about one-sixth as -much as our present currency in the form of United States Notes and -bond-secured Bank Notes, but it is the only form of currency that will -always be precisely equal to all the demands of trade. It will never -be too great in amount. It will never be too small in amount. It will -always just exactly equal the ever varying requirements of business and -will always be as good as gold, because currently redeemed in gold.</p> - -<p>The principle of converting bank book credits into bank note credits, -in accordance with the requirements of the customers of a bank, is the -bank credit currency principle<span class="pagenum"><a name="Page_50" id="Page_50">[Pg 50]</a></span> and there is not a single instance in -the history of banking where it has ever been tried and failed.</p> - -<p>Let this be laid down as one of the eternal laws of banking. <i>Current -coin redemption is the very soul and breath of life to bank credit.</i></p> - -<p><span class="smcap">Mr. Merchant</span>: That is certainly most interesting and I must -say a most impressive fact, if we can secure a currency, equal at all -times to the requirements of trade, and always as good as gold coin, -and at an expense of one-sixth of what our present currency costs us -in the form of United States Notes and bond-secured Bank Notes. There -are today outstanding $346,000,000 United States Notes and $750,000,000 -of bond-secured Bank Notes, or about $1,100,000,000 in all. Now, since -any bank must pay par, or 100 cents on the dollar, to get possession of -either of these forms of currency, the cost of carrying either of them -will be 6 per cent on the total of $1,100,000,000, or $66,000,000 per -annum. Of course if the banks are compelled to use such an expensive -form of currency, they will have to charge their customers accordingly, -and in the end it comes out of me, Mr. Manufacturer and so on down the -line, until, finally, the cost or burden reaches Mr. Farmer over there, -or Mr. Laboringman over here.</p> - -<p>Now, you assert that a credit currency would only cost the country -one-sixth as much, or only eleven million per year, whereas the same -amount of currency in United States Notes and bond-secured Bank Notes -now cost us $66,000,000 a year, or $55,000,000 more than it should. Of -course every cent of that must in the end come out of labor.</p> - -<p><span class="smcap">Mr. Banker</span>: I said one-sixth for the country bank. The average -reserve held by all the National Banks is 20 per cent, not 15 per cent. -So that the unnecessary cost to the people of our present United States -Notes and bond-secured Bank Notes is five times as much as it should -be, or we are losing every year $53,000,000, every dollar of which must -come out of labor.</p> - -<p><span class="smcap">Mr. Merchant</span>: Now, let me see whether I understand<span class="pagenum"><a name="Page_51" id="Page_51">[Pg 51]</a></span> this -matter correctly; to illustrate, let us suppose that your bank needed -today $1,000 more currency than it has on hand to accommodate a -customer. You would have to go out and buy it, and pay $1,000 for -it, or obligate your bank to do so. With interest at 6 per cent it -would average $60 per year to carry it, but if you could exchange -your bank's notes, amounting to $1,000, for your customer's note of -$1,000, and carry a reserve against your bank notes outstanding of -say 20 per cent or $200, and interest is at 6 per cent, it would cost -you only 6 per cent on $200, instead of 6 per cent on $1,000; or you -would make a saving of $48 on the $1,000 of currency. Am I correct in -my understanding of the difference of cost upon these two forms of -currency?</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, you are absolutely right. No one could state -the principle better than you have.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, then, it is clear, that if there is a -saving of $48 a thousand on $1,100,000,000, we are wasting annually on -that one item alone $52,800,000.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: But, gentlemen, let me call your attention -to another fact. This country is losing several times as much as -that every year on the average, because of our present rigid form -of currency. Just as soon as there is any fear anywhere in this -great country about a bank of any consequence, or about the business -generally in the country, every banker from Dan to Beersheba begins -to grab currency in whatever form he can get it, because he knows -the amount is fixed and limited. It is not nearly so much a run on -the banks by the depositors, as it is a run by the bankers on each -other, just to accumulate cash. Everything comes to a dead stop, just -as it did in 1907, and it always will under present conditions. Now, -it seems to be perfectly plain that if the banks could convert their -book credits into note credits, they could immediately meet the demand -for cash, and so avert these commercial catastrophes, which set us -back years. You know we are just now beginning to realize that we are -getting over the panic of 1907.</p> - -<p><span class="pagenum"><a name="Page_52" id="Page_52">[Pg 52]</a></span></p> - -<p>Gentlemen, instead of the panic of 1907 costing us $53,000,000 a year, -it costs the people of the United States more than ten times as much as -that every year. God only knows what these commercial tragedies mean in -the life of a nation like ours, and it is up to us to prevent them, if -possible, and it must be possible. It looks to me as though Mr. Banker -was on the right track.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, you fellows have got to show me a thing or -two, before we make the proposed changes, because I am from Missouri, -as well as from forty-seven other unsuspecting states, and don't you -forget it. In the first place, I want you to show me why my I.O.U.'s or -the United States Note, so-called Greenbacks, are not a good currency. -In the second place, I want you to show me why the present National -Bank Notes, which are secured by my bonds, dollar for dollar, are not -the best currency in the world. I have been told this for the last -fifty years, and if it is not true, it is about time I waked up.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, Uncle Sam, they've been fooling you, for -both the United States Notes and these bond-secured Bank Notes are the -worst form of currency in the world, and I can prove it.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, you will have to prove it, that's all.</p> - -<p><span class="smcap">Mr. Banker</span>: In the outset, I will tackle the United States -Note, and incidentally, I will state all the other objections to them, -as well as the objections to them as currency.</p> - -<p><i>First</i>: They are demand obligations against you amounting to -$346,000,000, and you must stand ready at all times to redeem them in -gold. This fact always has and always will imperil your credit. It -was the same greenbacks that sent your credit down to 35 cents on the -dollar during the war, and again they came within an ace of wrecking -your credit in 1894 when the gold in the treasury went down, down and -down, until there was only $41,000,000 left, between you and national -dishonor. Don't you remember that you then sold $262,000,000 of your -bonds to protect your credit which was being sapped<span class="pagenum"><a name="Page_53" id="Page_53">[Pg 53]</a></span> by these very same -United States Notes? Pretty expensive business that, when you could -have had a currency that the banks of the country, and not you, would -have been compelled to redeem in gold whenever necessary.</p> - -<p>You will no doubt remember that in 1879 when you began to keep your -promise, and redeem these greenbacks in coin, and make your old -due bills as good as gold, you issued $100,000,000 of bonds for a -corresponding amount of gold to establish your reserve or guarantee -fund, in order that you might keep your promise good in the future. If -you add this $100,000,000 to the other $262,000,000 you have issued -since to protect your credit against these United States Notes, -you will find that you have issued altogether $362,000,000 of your -bonds, or $16,000,000 more than the total amount of the greenbacks, -$346,000,000, and that you have also obligated yourself to pay interest -on these bonds from first to last amounting to $362,000,000 more. Now, -the astounding fact is that these old due bills, these I.O.U.'s, these -United States Notes, or so-called greenbacks, are still out and you -still owe them, just as you did in 1879, when you began keeping your -promise to redeem them in gold.</p> - -<p>One of your expert clerks in the Treasury Department at Washington, the -Chief of the Loan and Currency Division, published a calculation in the -Congressional Record of April 29, 1908, Page 5638, that showed that, if -the greenbacks had been funded on the 1st day of January, 1879, into -4 per cent 30 year bonds, and canceled and destroyed, the total cost -to the Government for principal and interest to July 1, 1907, would -have been $741,897,340, whereas the total cost and liability actually -incurred on account of them has been $1,081,881,562; the difference in -favor of converting into bonds being $339,984,222.</p> - -<p>Now, don't you think, Uncle Sam, that as a matter of business you'd -better get rid of these demand debts, these United States Notes?</p> - -<p><i>Second</i>: Don't let this most important fact escape your<span class="pagenum"><a name="Page_54" id="Page_54">[Pg 54]</a></span> attention -either; that if you should be called upon to use your credit -extensively, as would be necessary in case of a great war, these demand -notes would be a very black cloud upon your credit, and your loans -would cost you vastly more, on account of the interest you would have -to pay, because they were still outstanding. I hope that you are not -hugging that sweet delusion that war is impossible.</p> - -<p><i>Third</i>: These United States Notes, as you are aware, are made legal -reserves for the national banks, who hold them against their deposits. -Now, if your credit goes to pieces, the credit of the banks will go -with it of course; because precisely to the extent that the banks hold -these debts of yours as reserves, they are driving gold out of the -country, and therefore instead of being better able to help you, they -will attack your credit by demanding gold from you for these old demand -debts.</p> - -<p>You are also, of course, familiar with Gresham's law, so-called, under -the operation of which, the poorer money always drives out the better. -I assert without any fear whatever of successful contradiction, that if -you had paid off these United States Notes in 1879, you would not only -have saved $340,000,000 by so doing, but that today there would be in -the United States in our banks, and in circulation among the people, -$346,000,000 more gold than we now have. In other words, instead of our -gold amounting to $1,850,000,000, it would now amount to $2,196,000,000.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, you have certainly demonstrated that I have -made some very expensive mistakes. Let's see just what the net result -of this blundering has been. I have lost $340,000,000 on account of the -greenbacks and I have lost the great advantage of having $346,000,000 -more gold to further strengthen the commercial credit of the country; -and yet, I still owe every cent of these due bills and what seems to me -equally certain is this: that if I should get into a great war, these -very greenbacks will make me more trouble by injuring my credit<span class="pagenum"><a name="Page_55" id="Page_55">[Pg 55]</a></span> in the -future to a much greater extent than they ever have done at any time -in the past. There is no doubt whatever about that. By the eternal, -something must be done to get me out of this apparently bottomless pit.</p> - -<p>But you have not told us yet why these I.O.U.'s of mine, or United -States Notes, are not fit for currency, as you declare. You know that -you sort of hurt my feelings, and for half a minute I was fighting -mad, but as I said I am from forty-seven states, besides Missouri, and -therefore I am ready to be shown.</p> - -<p><span class="smcap">Mr. Banker</span>: I am coming to their use as currency right now. -There are three distinct reasons why the United States Notes are a bad -form of currency.</p> - -<p><i>First</i>: Any Government issue of bills, or of I.O.U.'s such as these -are, must be very limited, if they are kept as good as gold.</p> - -<p><i>Second</i>: The United States Notes do not spring into existence in -connection with business transactions, as the right kind of a currency -always does.</p> - -<p><i>Third</i>: It costs those who use it, as currency, five times as much as -currency should.</p> - -<p>It is precisely as Mr. Manufacturer over there asserted a moment ago. -Any system of currency that is of necessity limited in amount, and -fixed as these United States Notes must be from the very nature of -the case, breeds panics, because everybody realizing that the amount -is limited, begins to scramble for cash upon the first intimation -that there is any business trouble brewing. For this reason, they are -utterly unfit as a system of currency.</p> - -<p>Again, a right currency system is the natural product of business, and -the amount of the currency will always rise and fall with the demands -of trade. This can never be the case with the United States Notes, and -they are on that account utterly unfit for currency.</p> - -<p>And finally, certainly, if they cost the users of currency five times -as much as the right kind of currency would, then we should replace -them at once with the right kind<span class="pagenum"><a name="Page_56" id="Page_56">[Pg 56]</a></span> of currency. Now, let me illustrate -and demonstrate this.</p> - -<p>If, over at my bank, we are compelled to furnish an average of $10,000 -in currency a week, our average expense for the year will undoubtedly -be $10,000 invested for that purpose. And if money is worth 6 per cent -interest, it will cost us $600 to supply that amount of currency. If -we can buy United States Notes as cheap as any other kind of currency, -and we should carry them in stock, they will cost us $600 per annum. -Now, our bank, being a country bank, we carry 15 per cent of all our -deposits to meet current demands. Is it not a perfectly simple and -self-evident fact that if instead of being compelled to buy this -$10,000 of United States Notes every week, and so keep $10,000 invested -all the year around at a cost to us of $600, the interest on $10,000, -we could convert $10,000 of our deposit debts into $10,000 note debts -of the bank it would only cost us 6 per cent on $1,500, the amount -we are carrying as reserve against our deposits of $10,000, or only -$90. In other words, we would save $510 on the transaction. Of course, -if we have to pay out $510 more in the one way than in the other, we -will have to get it back from Mr. Merchant here, Mr. Manufacturer, Mr. -Lawyer, Mr. Farmer and Mr. Laboringman; and if we should collect it -from Mr. Merchant and Mr. Lawyer, they will in turn take it out of Mr. -Farmer and Mr. Laboringman.</p> - -<p><span class="smcap">Mr. Farmer</span>: You bet they will. We always get the gaff in the -end.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Where do I come in? I don't come in anywhere -except to carry the load, as usual. I come out at the little end of the -horn, as always heretofore.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, fellows, you see, don't you, that everything -gets back, sooner or later, to the producer? He carries the load.</p> - -<p><span class="smcap">Mr. Merchant</span>: But we carry the worry.</p> - -<p><span class="smcap">Mr. Banker</span>: I wish you did. You would have an easy time then, -but—</p> - -<p><span class="pagenum"><a name="Page_57" id="Page_57">[Pg 57]</a></span></p> - -<p><span class="smcap">Mr. Laboringman</span>: You needn't say "but" to me. You have it on -all of us. There is no doubt about that. However, Mr. Banker, I'm not -going back on you, for you have helped me out of several tight pinches.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, it does really look to me as if I had been -living in a fool's paradise. Those dear old greenbacks they have been -about as much of a fraud as the dollar of our daddies. I do declare -this whole thing makes me half sick. But if you are actually finding -out what really ails me, I'll get over that pretty soon, and, boys, if -we stick to this job, and play fair and honest, we'll have the best -banking system in the world yet, and don't you forget it.</p> - -<p>But you forgot to tell me about the safest and best banking system in -the world because every bank note was secured by one of my Government -bonds. That's what they've been telling me, you know. Now, what about -that?</p> - -<p><span class="smcap">Mr. Banker</span>: Well, I could not interfere with your confession -that you had been living in a fool's paradise, and dreaming dreams -about making something out of nothing, while your credit was in peril, -and you were losing hundreds of millions and furnishing the country a -currency that was costing the people five or six times as much as the -right kind of currency would.</p> - -<p>Now, a word about your bond-secured bank note illusion, and I will -be through. Uncle Sam, you remember that during the war, you were -looking around in every direction to find some new method for obtaining -means to carry on the war. You had busted your credit wide open with -your United States Note issue, and the question was how to find some -new resource. Your Secretary of the Treasury, Mr. Chase, concocted -this scheme of giving the banks the right of issuing notes if they -purchased Government bonds, and deposited them to secure the payment -of the notes. It is very strange, but he did not get much from this -source, as there were only $98,896,488 of notes out when the war -closed. However, the scheme was started, and has been going ever since, -precisely as it was<span class="pagenum"><a name="Page_58" id="Page_58">[Pg 58]</a></span> inaugurated, a bond investment scheme. The amount -of notes in circulation has never borne any direct relation to the -demands of trade, as you can see by the following facts: In 1880 the -notes outstanding amounted to $352,000,000, and in 1891, eleven years -afterwards, they amounted to only $162,000,000, or about $100,000,000 -less, although the country was growing and business expanding all -the while. We ought always to expand our currency during the fall -months about $300,000,000, and we ought to contract it during the -succeeding months, or during the springtime just as much. But a careful -investigation shows that these bond-secured notes have decreased as -often in the fall months as they have increased, and have increased -in the spring months as often as they have decreased. This proves -conclusively that the amount of notes outstanding has never borne any -relation whatever to the requirements of trade. The scheme is today -precisely what it was when first concocted, purely a bond investment -affair.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, well, now that is mighty strange, but my -greatest Chief Justice, John Marshall, pointed out the necessity of -having a currency directly related to the business of the country, -when upholding the constitutionality of the Act incorporating the -second United States Bank. He said: "The currency which it circulates -by means of its trade with individuals is believed to make it a more -fit instrument of government than it could otherwise be." One of my -presidents, James A. Garfield, used this language: "<i>No currency can -meet the wants of this country that is not founded on business.</i>" Boys, -both of these great men must have referred to credit currency, and -declared that it was essential to our business.</p> - -<p><span class="smcap">Mr. Banker</span>: Furthermore, Uncle Sam, these bond-secured Bank -Notes are indirectly just that much more of a burden resting upon the -United States Treasury, upon you, if you want to know the truth, as I -explained to you last Wednesday night.</p> - -<p>The fact is, these bond-secured Bank Notes are only<span class="pagenum"><a name="Page_59" id="Page_59">[Pg 59]</a></span> another form -of Government credit put into circulation through the disguise of -Government bonds.</p> - -<p>Every single criticism and objection that I have made tonight to the -United States Notes are applicable equally to these bond-secured Bank -Notes.</p> - -<p><i>First</i>: For all banking purposes, economically speaking, they are -practically rigid and inflexible, at least so far as current needs go.</p> - -<p><i>Second</i>: These bond-secured notes do not spring into existence, or -into being, as checks and drafts do in connection with some business -transaction, but are tied up with a bond speculation.</p> - -<p><i>Third</i>: They cost those who use them as currency from five to six -times as much as the right kind of currency would.</p> - -<p><i>Fourth</i>: If we adopt the right kind of a currency system, it will set -free $750,000,000 of capital which is now tied up in these Government -bonds, and this vast sum which would be realized from the sale of the -bonds will assist to an amazing degree in supplying much needed capital -to the commerce of the country.</p> - -<p><span class="smcap">Mr. Merchant</span>: How is that?</p> - -<p><span class="smcap">Mr. Banker</span>: The banks could then sell all the bonds now -deposited to secure these bond-secured Bank Notes. They amount to -$750,000,000.</p> - -<p>That these bond-secured Bank Notes are a monument of our stupendous -folly, and have been a curse to the business interests of the country, -I am sure no one here will attempt to deny.</p> - -<p><span class="smcap">Mr. Lawyer</span>: The Japanese, thinking that we were a smart -people, copied this bond-secured bank scheme from us, but immediately -discovered that it was worse than worthless and repudiated it. No one -else has been foolish enough to adopt it.</p> - -<p><span class="smcap">Mr. Banker</span>: I challenge anyone here to urge a single reason -in favor of either the United States Notes, or the bond-secured Bank -Notes, which are only another form of United States Notes. No one can -meet the objections<span class="pagenum"><a name="Page_60" id="Page_60">[Pg 60]</a></span> raised to them. In fact, there are two objections -to the bond-secured notes, in addition to those urged against the -United States Notes. First, as stated, they have tied up $750,000,000 -in the bonds. Second, they have proved such a successful delusion as to -prevent any sane legislation until sad experience has driven us to take -the matter up seriously and compelled us to act.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, boys, so far as I am concerned, I am -thoroughly convinced that you don't want any of my I.O.U.'s for -currency. Nor do we want any bond-secured Bank Notes, which are really -only another form of my I.O.U.'s. But I am still from Missouri, as I -have not yet been convinced what we ought to do by way of a substitute. -Mr. Banker has told us something about credit currency, and he declares -that it is the only real thing in the way of currency.</p> - -<p>Now, I suggest that we take that matter up next Wednesday night, -and decide definitely whether we want to adopt that principle, and -substitute that system, or some other. What do you all say to that?</p> - -<p><span class="smcap">Mr. Merchant</span>: I think that should be the programme. In the -meantime, let us all dig into the question and go to the very bottom of -it, and if possible stump Mr. Banker.</p> - -<p><span class="smcap">Mr. Banker</span>: All right, gentlemen, I am ready for you, and if -I don't convince you that the only thing for us to do is to adopt a -credit currency system, I will retire in favor of anybody you name. -Possibly you'll select Nelson W. Aldrich.</p> - -<p><span class="smcap">Uncle Sam</span>: No, you won't do anything of the kind. We'll look -around a long time before we'll take him on. It is my candid opinion -that he don't know a thing on earth about the question. I have known -Nelse about thirty years. He came to my house after he had been engaged -in the grocery jobbing business, and he has been a jobber ever since. A -man who could stay in Congress for thirty years, declaring that we had -the best banking system in the world, would not recognize an economic -principle, on a cloudless day, walking down the middle of<span class="pagenum"><a name="Page_61" id="Page_61">[Pg 61]</a></span> Pennsylvania -avenue at noon time. Now, as I said, Nelse has always been a jobber, -and he would detect a crooked political deal crawling down a gutter, -lizard-like, in the densest fog at midnight. He was prominent in a way -in my home town, but it was only as a broker in senatorial favors. He -kept books with the rest of his associates, his fellow senators. He was -the clearing house of the United States Senate. That's all. He would -be the very last man in the United States, the very last to join in -clear, intelligent, unselfish, patriotic thinking. He just couldn't do -it. Why, boys, he had rather go down a ram's horn than a gun barrel. -He likes the twisting sensation. We don't want him at any price. Mark -my word. What we want is honesty, intelligence, patriotism, unselfish -devotion to duty and some good hard work.</p> - -<p>Let us hope that we shall find a way out.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_62" id="Page_62">[Pg 62]</a></span></p> - - - - -<p class="ph2"><a name="FOURTH_NIGHT" id="FOURTH_NIGHT">FOURTH NIGHT</a></p> - -<p class="center">BANK CREDIT CURRENCY</p> - - -<p><span class="smcap">Uncle Sam</span>: When we parted last Wednesday night, we had an -understanding that everybody would give all the time he could to -looking up Credit Currency. Now, I think before we take up that -subject, it might be well to recall and review what we've settled among -ourselves up to the present time.</p> - -<p><i>First</i>: We learned that gold is our standard of value.</p> - -<p><i>Second</i>: We all agreed that our money consisted of our gold coin alone.</p> - -<p><i>Third</i>: We agreed that our money, which consists of gold coin, is -identical in amount with our gold currency; that they are one and the -same thing.</p> - -<p><i>Fourth</i>: We found that we had at present a large amount of other -currency, consisting of subsidiary coins (including the silver dollar), -the United States Notes and our bond-secured Bank Notes.</p> - -<p><i>Fifth</i>: We came to the conclusion, however, after our last talk, that -neither the United States Notes nor the bond-secured Bank Notes were -fit for currency; and, in our quest for the best substitute possible, -Mr. Banker proposed a Credit Currency currently redeemed in gold -coin as the form of currency best suited to our condition. Indeed he -asserted that it was the only form of currency we should think of.</p> - -<p>I have gone over the road we have traveled so far and called attention -to all the mile posts so that we should become perfectly familiar with -them; for unless there is a complete harmony between our conclusions -reached from time to time, our talks will in the end lead us to no -practical results.</p> - -<p>At our last talk it was decided, you will remember, that both on -account of the peril to my credit, and because<span class="pagenum"><a name="Page_63" id="Page_63">[Pg 63]</a></span> the United States Notes -and the bond-secured Bank Notes were unfit for currency, we should -tonight consider Credit Currency as a substitute.</p> - -<p><span class="smcap">Mr. Merchant</span>: Uncle Sam, I am more than gratified that you -have called our attention tonight to just those things we have agreed -upon, because unless we keep all these points constantly in mind, we -will have trouble in the end in reconciling our views. On the other -hand, it has began to dawn on me that possibly what we have always -considered beyond our comprehension may after all prove a comparatively -simple matter, because I have discovered, since our talks began, that -truth here as in all other subjects is simple when we arrive at and -comprehend it. Our great problem in this connection is to disentangle -the great or fundamental truths and make each one stand out in bold -relief. So far, I think we have succeeded to a remarkable degree.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: We must have done so, for we have not yet -struck a single point upon which we have not unanimously agreed. Let us -hope that we shall be as successful in the future. At present, I must -say I am a little dubious about the results of tonight's discussion, -for I have run up against a snag or two, which I half fear will stump -Mr. Banker, when he tries to pull them. However, he has been pretty -successful so far in holding his own, and he may surprise us tonight.</p> - -<p><span class="smcap">Mr. Banker</span>: I have no desire, or hope, of surprising you, but -I have perfect confidence in convincing all of you, that there is only -one system of currency for us to adopt, or even think of adopting, and -that is a pure Credit Currency.</p> - -<p>Let us assume that two men, A and B, who are of equal and unquestioned -standing in some country town, start in the banking business at the -same time.</p> - -<p>A begins by taking the deposits of his neighbors, and continues until -he has received $100,000, and has loaned the same out to the people -of the community. He now<span class="pagenum"><a name="Page_64" id="Page_64">[Pg 64]</a></span> owes $100,000 subject to check, and he has -$100,000 owing to him, as he has loaned out all his deposits.</p> - -<p>B starts a banking business, but upon an entirely different plan, or -basis. He takes no deposits in the ordinary way, but if anyone comes to -him desiring to borrow, or sell him promissory notes, he will lend his -credit, and take all good notes and checks offered him, and in exchange -give his own notes in such denominations and form as are suitable for -circulation as currency, until he has exchanged $100,000 of his notes -for $100,000 of the notes of the same people who have borrowed the -$100,000 from the other banker.</p> - -<p>Now, this is not a strange thing for B to do, because the bankers of -Scotland did this for one hundred and forty years before they took -deposits subject to check.</p> - -<p>Now, let us return to A and B. As a matter of course, some of these -notes of B will be deposited in A's bank, and B will have taken in some -of the checks on A's bank. At 10 o'clock each morning A and B meet; -A presents B's notes for redemption and B presents checks upon A for -redemption, and the one pays the other the difference. Sometimes the -balance is due to A and sometimes it is due to B. At the end of six -months or a year, it will be at a stand off. A has paid B as much as B -has paid A.</p> - -<p>Now, can anyone of you men here tell me what difference there is in the -transactions of A and B, except this, that the notes of B amounting -to $100,000 payable to bearer on demand are outstanding, while the -deposits at A's bank amounting to $100,000 and payable to order are -outstanding. Those notes of B's amounting to $100,000 are a bank Credit -Currency. They are issued against, or upon B's credit. They pass from -person to person, from hand to hand and are currently redeemed every -day. While the deposits at A's bank amounting to $100,000 are against -A's credit, and the checks against them are redeemed every day. It is -perfectly evident that if the capital of A and B combined is ample -to meet the business requirements of that town, the form of credit -offered by<span class="pagenum"><a name="Page_65" id="Page_65">[Pg 65]</a></span> them will also adapt itself to the peculiar needs of each -citizen. In other words, on a limited scale, you have a perfect banking -system in that country town; bank credit being given to each person in -precisely the form he wants it.</p> - -<p>Now, let us go a step further. Let A and B unite and incorporate the -A-B Bank with a paid-up capital of $100,000, each man paying in $50,000 -and the bank, so organized, taking over the liabilities.</p> - -<p>The one bank could then furnish the people of that community their -deposit, or order credit, and their current credit, or currency at -exactly the same cost to the bank; for the amount of the reserve will -determine the cost of the note credit as well as the book credit. The -bank being a country bank will carry a 15 per cent reserve, or $15,000 -cash, to protect the deposit of $100,000 subject to check, and also a -15 per cent reserve, or $15,000 cash, to protect the $100,000 of demand -notes outstanding. The actual cost to the bank in each case is 6 per -cent on the reserve of $15,000 or $900 per annum.</p> - -<p>If this bank should be located in the cotton-growing section of the -country, and from August until January, the people needed more currency -than at any other time of the year to pay for picking and handling the -crop, and the customers of the bank came in and drew their checks for -$50,000 and asked the bank for currency for that amount, and the bank -should, as it ought to be able to do, under such circumstances change -its deposit debt of $50,000 to a note debt of $50,000, so that instead -of owing $100,000 in deposits, it owed only $50,000 in deposits, and -instead of owing only $100,000 in notes, it owed $150,000, would it -make any difference whatever to the bank except the trouble of making a -few book entries?</p> - -<p>In the springtime, probably, the situation would be just the reverse. -The notes having served the convenience of the cotton-planters would be -returned to the bank by various people, and deposited to the credit of -the depositors, so that now the deposits are $150,000, and the notes -out<span class="pagenum"><a name="Page_66" id="Page_66">[Pg 66]</a></span>standing, or note debts, are only $50,000; the total debt of the -bank being precisely the same all the time, $200,000. It has made no -difference whatever to the bank, but the customers of the bank, and all -the people of that community, have been perfectly accommodated at the -smallest possible expense to them. Now, if that bank had been compelled -to go to some financial centre and buy that $150,000 of currency in the -form of United States Notes, bond-secured bank notes, or the notes of a -central bank, it would have cost the bank at the rate of 6 per cent per -annum on $150,000, or $9,000; whereas, it has only cost the bank 6 per -cent on the reserves carried to protect the $150,000, at the rate of -$15,000 for each $100,000, or six per cent on $22,500. The cost to the -bank you will see would be only $1,550, as against $9,000, if compelled -to buy the currency, or would result in an actual saving to the bank of -$7,450, an item, gentlemen, well worth saving.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, as I understand your contention from -the illustration you have just completed, it is this, that there is -absolutely no difference whatever, either in principle or in practice, -between a bank book credit and a bank note credit, except as a mere -matter of bookkeeping. That it is wholly immaterial whether there are -1,000 men walking about the streets of a town, each having a $10 bank -note of the local bank in their pockets, or a thousand men walking -about with check books from which they can issue 1,000 checks for $10 -each. It is wholly a question of having a banking system that will -adjust itself every hour of the day, and every day in the year, to the -requirements of trade in that town, at the least possible expense to -the people.</p> - -<p><span class="smcap">Mr. Banker</span>: You comprehend my contention perfectly.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I will agree that your plan is structurally -perfect to accomplish this purpose; but, before I can concede that -the plan is all that can be desired, and all that we must insist upon -having, I must know that your plan contemplates the current redemption -of these bank notes in gold coin. For, as we have already agreed, -our<span class="pagenum"><a name="Page_67" id="Page_67">[Pg 67]</a></span> currency must be as good as gold coin, and this can only be -demonstrated by daily gold coin redemption.</p> - -<p><span class="smcap">Mr. Banker</span>: These bank notes or this Credit Currency will -always be interchangeable with the deposits of the bank of issue, -and, like the checks against the bank, will be daily redeemed over -the counter of the bank, and also at some clearing house centre. The -life of the notes will probably not exceed on the average thirty days. -I hold that it is the duty of the bank to supply its customers with -exactly that form of credit, either current credit in the form of -notes, or book credits subject to check, which their business demands, -and that both forms of credit must be kept as good as gold by giving -gold if gold is demanded.</p> - -<p><span class="smcap">Mr. Lawyer</span>: With this point of current gold redemption -covered and settled, I am willing to agree that theoretically you have -completely convinced me. Now, what have you to offer in support of your -theory by the way of any practical illustrations?</p> - -<p><span class="smcap">Mr. Banker</span>: I am glad that you have demanded illustration -and proof by way of banking experience; but, before taking up the -historical evidence in support of my condition, I want to define a -Credit Currency, so that you will have a concrete idea, if I may -express myself that way, in your mind.</p> - -<p>I define a Credit Currency as follows: <i>a note issued by a bank against -its credit, without depositing United States Bonds, or any other kind -of security, to guarantee its payment, is bank Credit Currency</i>.</p> - -<p>In speaking of the marvelous prosperity of Scotland, MacLeod used this -language in 1860 about the effect of Credit Currency in Scotland, where -it has now been in use 217 years.</p> - -<p>"All these marvelous results which have raised Scotland from the lowest -state of barbarism up to her proud position in the space of 170 years -are the children of pure credit."</p> - -<p>The great achievement of the Scotch system of credit<span class="pagenum"><a name="Page_68" id="Page_68">[Pg 68]</a></span> notes is -exceedingly well stated by Mr. Charles A. Conant in these words:</p> - -<p>1. It has provided Scotland with an elastic currency adapted to the -condition of her industries and adequate in volume to their changing -needs.</p> - -<p>2. It has enabled the people to carry on numerous commercial and -agricultural transactions for which they could not have found the -necessary quantity of coin, and has economized the locking up of -capital in the precious metal.</p> - -<p>3. It has made the use of notes of small denomination familiar and -popular, and has taught the people the distinction between bank notes -as the representatives of credit, and the precious metals as the -measures of value.</p> - -<p>4. It has brought into active use the available savings and capital of -the country.</p> - -<p>5. It has afforded an opportunity for entering upon business to -thousands of poor, but honest men, and enabled them to lay the -foundation of a comfortable home, and in many cases of a fortune.</p> - -<p>6. It has convinced the people so conclusively of the value and safety -of the banking currency system that no serious panic has ever lasted -beyond a few days, or has ever affected any of the banks, except those -which were justly the subject of distrust.</p> - -<p>Horace White, describing the Scotch system, says:</p> - -<p>"Notes are issued in denominations of five dollars, or one pound, and -upwards. They are exchanged daily at the Edinburgh Clearing House, -and settlements are made between banks by drafts on London. The notes -remain in circulation on the average eighteen days after issue, the -whole circulation being redeemed twenty times each year. Noteholders -have a prior lien on the assets."</p> - -<p>That is, if a bank should fail, the noteholders are paid first, and -before anyone else gets anything.</p> - -<p><span class="smcap">Mr. Merchant</span>: What is that? Did you say that the noteholder -had a first lien on the assets of the Scotch<span class="pagenum"><a name="Page_69" id="Page_69">[Pg 69]</a></span> Bank: that is, that the -noteholders are paid in full before anyone else gets anything?</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, sir, and for the very best reasons in the -world.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Certainly, the noteholders should have a first -lien upon the assets of the bank issuing them, because bank notes are -a public convenience. Bank deposits, on the other hand, primarily are -a private convenience. It is a matter of public importance that bank -notes should flow through the channels of trade, pass from person to -person and hand to hand unquestioned by any member of the public, and -have ready as well as general acceptance. The man who selects his bank -for the purpose of making deposits has time to investigate and decide -deliberately which one he will choose. While a man in a transaction -must accept the currency of the country offhand. At all events, it is a -matter of the greatest public importance that he should do so without -hesitation, and yet be protected, be absolutely safe in doing so.</p> - -<p><span class="smcap">Mr. Merchant</span>: Come to think it over, I believe you are -absolutely right. Our present bank notes are made a first lien upon the -assets of the bank issuing them. We were talking about that the other -day over at the bank, and while I had never thought of it before, the -cashier of the bank explained the matter fully to me, and gave the same -reason for making bank notes a first lien that Mr. Lawyer has. When -I told him that I did not quite understand the thing as he did, he -satisfied me completely by using his own bank as an illustration.</p> - -<p>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 de<span class="pagenum"><a name="Page_70" id="Page_70">[Pg 70]</a></span>posits 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.</p> - -<p>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:</p> - -<p>"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."</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p><span class="smcap">Mr. Laboringman</span>: 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<span class="pagenum"><a name="Page_71" id="Page_71">[Pg 71]</a></span> 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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Banker</span>: Now, if you will allow me, I will produce some -further historical evidence.</p> - -<p>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.</p> - -<p>The highest note issue of the first United States Bank was $5,900,000, -and deposits were $5,000,000.</p> - -<p>The highest note issue of the second United States Bank was -$23,000,000, and the deposits were $2,600,000.</p> - -<p>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 prin<span class="pagenum"><a name="Page_72" id="Page_72">[Pg 72]</a></span>ciple. 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.</p> - -<p>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.</p> - -<p>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:</p> - -<p>"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<span class="pagenum"><a name="Page_73" id="Page_73">[Pg 73]</a></span> stopped for the night at -the taverns and cabins on the way in perfect safety."</p> - -<p>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.</p> - -<p>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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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 marvel<span class="pagenum"><a name="Page_74" id="Page_74">[Pg 74]</a></span>ous 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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p>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,<span class="pagenum"><a name="Page_75" id="Page_75">[Pg 75]</a></span> and at -no time worth less than the credit of the Government, or the current -value of the United States Note.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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."</p> - -<p>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.</p> - -<p>Let me outline the situation:</p> - -<p>1. It covered six different states.</p> - -<p>2. It covered a large territory.</p> - -<p>3. The facilities for communication were bad. Some parts of New England -were as far from Boston then as San Francisco is now.</p> - -<p>4. There were 500 individual, independent banks.</p> - -<p>5. There was no branch banking.</p> - -<p>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.</p> - -<p>7. The Bank Notes of the Suffolk System were universally accepted at -par throughout New England.</p> - -<p>8. They were redeemed every day at Boston, in coin by the Suffolk Bank.</p> - -<p>9. They were accepted in all commercial centers of the West, Buffalo, -Cincinnati, Chicago, Milwaukee and<span class="pagenum"><a name="Page_76" id="Page_76">[Pg 76]</a></span> St. Louis at a premium of from 1 to -5 per cent, because redeemed at Boston <i>in coin.</i></p> - -<p>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.</p> - -<p>Horace White says:</p> - -<p>"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....</p> - -<p>"Under the Suffolk System of Bank Note redemption specie was seldom -asked for, but it was always paid when demanded; <i>the metallic reserve -was the touchstone of the whole business</i>."</p> - -<p>The following is Mr. White's description of the operation of the bank:</p> - -<p>"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.</p> - -<p>"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<span class="pagenum"><a name="Page_77" id="Page_77">[Pg 77]</a></span> -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."</p> - -<p>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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>I do not need to state the fact, except for the purpose of calling your -attention to it, that this currency did not<span class="pagenum"><a name="Page_78" id="Page_78">[Pg 78]</a></span> 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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?</p> - -<p>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?</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Manufacturer, that's sound and looks mighty -good to me. Do you see any objection to it, any flaw in it?</p> - -<p><span class="smcap">Mr. Manufacturer</span>: No, I do not, except to persuade the people, -as Mr. Banker has persuaded and con<span class="pagenum"><a name="Page_79" id="Page_79">[Pg 79]</a></span>verted us. Of course we will be up -against some legal difficulties, won't we, Mr. Lawyer?</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p><span class="smcap">Uncle Sam</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: Are the Canadians using this credit currency -system?</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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.</p> - -<p><span class="pagenum"><a name="Page_80" id="Page_80">[Pg 80]</a></span></p> - - -<p class="center"> -<img src="images/illus03.jpg" alt="pic" /> -</p> -<p class="caption"> This diagram demonstrates that the Canadian bank notes -adapt themselves every year, every month, every day, with unvarying -precision, to the ever changing demands of trade.</p> - -<p><span class="pagenum"><a name="Page_81" id="Page_81">[Pg 81]</a></span></p> - -<p class="center"><i>Total circulation of the chartered banks of Canada for each month of -1912 to Nov. 30th.</i></p> - -<table summary="canada" width="65%"> -<tr><td>January</td> <td align="right">$88,065,521</td></tr> -<tr><td>February</td> <td align="right">88,920,598</td></tr> -<tr><td>March</td> <td align="right">95,918,404</td></tr> -<tr><td>April</td> <td align="right">95,145,371</td></tr> -<tr><td>May</td> <td align="right">93,819,333</td></tr> -<tr><td>June</td> <td align="right">102,011,848</td></tr> -<tr><td>July</td> <td align="right">95,827,534</td></tr> -<tr><td>August</td> <td align="right">101,501,270</td></tr> -<tr><td>September</td> <td align="right">104,334,287</td></tr> -<tr><td>October</td> <td align="right">110,696,877</td></tr> -<tr><td>November</td> <td align="right">115,473,098</td></tr> -<tr><td>Maximum issue</td> <td align="right">115,473,098</td></tr> -<tr><td>Minimum issue</td > <td align="right">88,065,521</td></tr> -<tr><td></td><td align="right">—————</td></tr> -<tr><td>Amount of Expansion</td> <td align="right">$27,407,577</td></tr> -<tr><td>Population of Canada</td> <td align="right">7,204,838</td></tr> -<tr><td>Per Capita Expansion</td> <td align="right">$3.80</td></tr> -<tr><td>Same expansion in the United States -would amount to</td> <td align="right">$380,000,000</td></tr> -</table> - -<p>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.</p> - -<p>The above figures correspond in their <i>expansion and contraction</i> 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.</p> - -<p><span class="pagenum"><a name="Page_82" id="Page_82">[Pg 82]</a></span></p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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<span class="pagenum"><a name="Page_83" id="Page_83">[Pg 83]</a></span> good enough to issue my own notes upon. The present situation is -simply absurd and most troublesome, as well as most expensive.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I agree with you, it certainly is. I was -talking the other day with a Congressman about the Canadian Currency -system, and he said, "yes, it works fine up there, but they have a -branch banking system up there, and only 27 banks." Well, I said, it -works just as well in France with one bank. It has been working in -Scotland just as well with 12 banks for 217 years. It worked in Indiana -with one bank and 17 branches. It was just as efficient and successful -in Louisiana under a General Bank Act, where several banks were -incorporated. And it worked in New England under the Suffolk system -with 500 individual independent banks—why won't it work here? All he -could say was, "Well, I don't know."</p> - -<p><span class="smcap">Uncle Sam</span>: Pinhead. Didn't know the difference between a -principle and a fact, and he didn't even know the fact.</p> - -<p>Now, boys, I am completely satisfied and if any one here is not, let -him speak up, or forever hold his peace. I believe you must all be -satisfied.</p> - -<p>You must all be on time next Wednesday night so that we will not have -to wait as we did tonight.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_84" id="Page_84">[Pg 84]</a></span></p> - - - - -<p class="ph2"><a name="FIFTH_NIGHT" id="FIFTH_NIGHT">FIFTH NIGHT</a></p> - -<p class="center">WHAT IS EXCHANGE?</p> - - -<p><span class="smcap">Uncle Sam</span>: Now, boys, let us see just what we have settled -during the four nights we have been talking this matter over.</p> - -<p>The first night we learned that gold was the standard of value, the -whole world around.</p> - -<p>The second night we agreed that gold coin was the only money we had.</p> - -<p>The third night we agreed that the only currency that we had and -ought to have was gold coin, the foundation and redeemer of all other -currency and our token or subsidiary coins. We came to the conclusion -and unanimously agreed that neither the United States Notes nor -bond-secured bank notes were fit for currency, because not related to -business transactions in their origin, that they were unresponsive to -the demands of trade, and were five times as expensive as the right -kind of currency.</p> - -<p>The fourth night we agreed that the only true or correct currency was a -credit bank note, currently redeemed in gold coin.</p> - -<p><i>In other words, we agreed that gold was our standard of value, gold -coin our money, and that our currency should consist of gold coin, the -subsidiary coins and bank credit currency.</i></p> - -<p>Tonight we want to find out, if we can, what Exchange is. This is a -mighty important question for probably 90 per cent or nine-tenths of -all our business is transacted in some form of Exchange. Mr. Lawyer, I -want to put it up to you first. What is Exchange?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Well, Uncle Sam, the best definition I can give, -is to take one thing for or in the place of another. It is illustrated -in a way by the old saw, "a fair exchange<span class="pagenum"><a name="Page_85" id="Page_85">[Pg 85]</a></span> is no robbery." That -describes the act of exchange, but I imagine that what you have in -mind is the system or practice of exchange, as carried on today. That -practice or system is only a multiplication of transactions where one -man takes one thing in place of another. In this connection it means to -take one credit in place of another credit; to take one debt in place -of another debt. As now developed and applied to the commerce of the -world, I would say that <i>the science of exchange is to substitute one -credit for another credit, or to make one debt pay another debt</i>.</p> - -<p>A debt is what is due from one person to another person. I have a -deposit with Mr. Banker there, and I owe Mr. Farmer $20 for a load of -potatoes; if I draw a check upon Mr. Banker for $20 in favor of Mr. -Farmer, and hand it to him, I have paid my debt to Mr. Farmer with Mr. -Banker's debt to me.</p> - -<p><span class="smcap">Mr. Merchant</span>: Now, Mr. Lawyer, just hold on a minute until I -find out a thing or two before we go any further. In fact, I am sure -everyone here would like in the outset to find out the same things, -except possibly Uncle Sam, who ought to know everything, and is -probably omniscient, Mr. Banker, who deals in these things, and you, -Mr. Lawyer, who are presumed to know about them, and must know them, as -a matter of necessity in your practice. What I want to know is:</p> - -<p>1. What is a promissory note?</p> - -<p>2. What is a check?</p> - -<p>3. What is a draft?</p> - -<p>4. What is an acceptance?</p> - -<p>5. What is a bill of exchange?</p> - -<p>Until we know precisely what these various terms signify, or mean in -banking, when put into use, we shall soon be so far out at sea that we -will not know what we are saying, because we do not know the meaning of -the words we are using. This will be true of some of us at least. We -must familiarize ourselves with these words, or terms.</p> - -<p><span class="pagenum"><a name="Page_86" id="Page_86">[Pg 86]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: If you will allow me, I will try and explain and -tell you what these various terms mean, and what use we make of these -several instruments in writing.</p> - -<p><i>First</i>: A Promissory Note is a written promise to pay some one a sum -of money. It may be either to pay it immediately, or on demand, or at -some future day; to pay it either with or without interest; or to pay -it at some particular place.</p> - -<p><span class="smcap">Mr. Merchant</span>: It is just a written acknowledgment of a debt, -isn't it?</p> - -<p><span class="smcap">Mr. Banker</span>: It is a written acknowledgment of a debt, -coupled with a promise to pay it. If A owes B $1,000, and gives his -note for that amount, and B sells the note to C, the note has become -exchange. It is not the usual form of what is called exchange, but is -nevertheless just as truly exchange; for suppose that C owes A $1,000, -he can then cancel the debt by delivering him the note for $1,000. C -has paid his debt to A with A's debt to B.</p> - -<p><i>Second</i>: A check is a written order on a bank to pay money on demand. -It may be drawn to cash, or it may be drawn to bearer, or it may be -drawn to the order of some one. If A owes B $1,000 and A has a deposit -at a bank for that amount, A can cancel his debt to B by giving him a -check on the bank for $1,000. The check is exchange, though not in the -usual form of what is known as exchange, for A has canceled his debt to -B by giving B the bank's debt to him.</p> - -<p><i>Third</i>: A draft is a written order from one person to another to pay a -third person a sum of money.</p> - -<p>An acceptance is to write across the face of a draft, payable at a -future time, the word "accepted," and the signature of the person -accepting it.</p> - -<p>If A is owing B $1,000 and C is owing A $1,000, the debt to B can be -paid by A's draft upon C. The draft is identical in every respect with -the check, the difference is in form only, and the use of them. A check -is only used when the order to pay money is upon a bank. A<span class="pagenum"><a name="Page_87" id="Page_87">[Pg 87]</a></span> draft may -be, and often is used when the order to pay money is upon a bank. A -check, properly or correctly speaking, is never used in an order to pay -money upon an individual or corporation, but a draft is invariably used -in such cases.</p> - -<p>The transactions are identical in effect, though the conditions, or -circumstances, are different. Both the check and the draft are exchange.</p> - -<p><i>Fourth</i>: When a draft has been accepted, it becomes the promissory -note of the one accepting it, as he promises to pay it on the day named -in the draft. An accepted draft is only another form of a promissory -note, for if A owes B $1,000, and B draws upon A for that amount, and A -accepts the draft, A is in precisely the same position as he would have -been if he had sent B his promissory note for $1,000.</p> - -<p>In the banking world a draft, after it has been accepted, is often -called and known as an "Acceptance."</p> - -<p><i>Fifth</i>: A Bill of Exchange in its ordinary or usual sense, is an order -of one person upon another to pay a third person a sum of money.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: That is precisely what you said a draft was.</p> - -<p><span class="smcap">Mr. Banker</span>: Just wait a moment, please, until I finish, and -you will note the difference. The Bill of Exchange is the medium of -settling accounts or debts between parties residing at a distance from -each other, without the intervention of money by exchanging checks or -drafts.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Then they are identically the same thing -except a bill of exchange acquires its name from the fact that it -settles debts at a distance.</p> - -<p><span class="smcap">Mr. Banker</span>: That is the exact distinction, if one is to -be made at all, and I think it will be well for us to make this -distinction to save confusion in our conversation, although in the -ordinary and usual language of the street, or the business world, the -terms, or words, "draft,"<span class="pagenum"><a name="Page_88" id="Page_88">[Pg 88]</a></span> "acceptance" and "Bill of Exchange" are used -indiscriminately the one for the other.</p> - -<p>If the definition of Mr. Lawyer stands, and I think it is a very good -one, when he said "the science of exchange is to make one debt pay -another debt," the science of Bills of Exchange is to make one debt -pay another debt at a distant point. This is not a distinction fully -without a difference, because it helps us to classify the transactions -and distinguish them in a way as we go along.</p> - -<p>A simple illustration is this: A, who lives in Boston, owes B, who -lives in San Francisco, $1,000, and C, who lives in San Francisco, owes -D, who lives in Boston, $1,000. B and D could exchange drafts with each -other; then B and D could collect each other's drafts. But B could sell -his draft on A to C for $1,000 and C could pay his debt of $1,000 to -D by forwarding him the draft on A. D would then collect the draft on -A. It will be seen at once that this transaction has saved the expense -of sending $1,000 in money from Boston to San Francisco, and also of -sending $1,000 in money from San Francisco to Boston at great expense -by express. This transaction between Boston and San Francisco is known -and called a transaction in Domestic Exchange.</p> - -<p>If A, who lives in New York, owes B, who lives in London, $1,000, and -if C, who lives in London, owes D, who lives in New York, $1,000, B, -the resident of London, can draw on A in New York, and sell the draft -to C, who resides in London, and C could pay his debt to D, who resides -in New York, by forwarding B's draft to D, who resides in New York. -D could then collect the draft from A. It is perfectly clear that by -means of this transaction, the expense of sending $1,000 in gold from -New York to London, and also the expense of sending $1,000 in gold from -London to New York, has been saved.</p> - -<p>This draft would be Foreign Exchange, because the cities are in two -different countries.</p> - -<p><span class="smcap">Mr. Merchant</span>: According to your illustration, Mr.<span class="pagenum"><a name="Page_89" id="Page_89">[Pg 89]</a></span> Banker, -if our sales of cotton, grain and meat to Great Britain should amount -to $1,000,000,000 a year, and the sales of Great Britain to us of -woolens, silks, cotton and cloth and other manufacturies should amount -to $1,000,000,000, we would not have to transmit a single dollar of -gold either way, because the debts would just cancel each other. If the -debtors in the United States could find out who the debtors in Great -Britain were, then they could exchange debts with each other. The debts -of the two countries would just offset each other.</p> - -<p><span class="smcap">Mr. Banker</span>: That is absolutely true, and it is entirely -possible that the $2,000,000,000 worth of goods in the two countries -could be bought and sold without moving a single dollar's worth of gold -either way across the Atlantic.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Well, that is just what we want to do and -save the expense and trouble of transmitting the money, and it is up to -you, Mr. Banker, to explain just how we are to accomplish this trick or -feat, because it will save a tremendous expense, if this can be done.</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, and will bring other advantages to the -business interests of the country of almost incalculable importance, -as we shall soon see. Now, the question is how to gain these ends. Two -things must be accomplished in this connection, if we are to profit -by every advantage that can possibly be taken in our trade with each -other, as well as in our trade with other countries.</p> - -<p><i>First</i>: The Bills of Exchange must be of such a high character -as to invite those, who need them to pay debts with, to take them -unhesitatingly.</p> - -<p><i>Second</i>: The Bills of Exchange must become known to those who may want -to use them to pay debts with, instead of shipping the actual money.</p> - -<p><span class="smcap">Mr. Merchant</span>: Of course, you gentlemen are aware that our -debts abroad are being settled in just this way today to a very large -extent, and I do not think that you need worry very much about the -Bills of Exchange not becoming known to those who need them to pay -debts with,<span class="pagenum"><a name="Page_90" id="Page_90">[Pg 90]</a></span> if they are made of such a high character as to command -a market, for the market will at once develop and make itself felt. -That is, I mean a general market for Bills of Exchange of unquestioned -character. The only thing for us to do is to give our Bills of Exchange -such a standing as to command ready and general acceptance in the -commercial world. How can we do that?</p> - -<p><span class="smcap">Mr. Banker</span>: That can be accomplished in a very simple, easy -and natural way, if we will only adopt it. Let me illustrate what I -mean.</p> - -<p>Today, A, living in this country, sells a bill of goods, say for -$50,000, to some one in Great Britain; the purchaser in Great Britain -arranges with his bank to accept a 60 or 90 day bill drawn on it by the -American shipper. Such drafts are drawn on well-known bankers, and when -accepted become virtually a time-deposit at the bank, and therefore -can always be disposed of at the lowest current rate of interest. This -arrangement is a very great advantage to the English business man, as -it enables him to use the high credit of the bank in carrying on his -business.</p> - -<p>At the present time our National Banks are not authorized to accept -drafts made in this way, but if they were authorized to do so, the -credit of our banks would be given to the drafts made by one business -man upon another whether the drafts were domestic or foreign. Such an -obligation is the most desirable one for a bank or an investor to hold, -as a temporary investment for the following reasons:</p> - -<p><i>First</i>: The draft arises out of a transaction where goods passing from -buyer to seller are equal in value to the face of the draft. The goods -are actually in transit, and the draft is economically a title to the -goods.</p> - -<p><i>Second</i>: The seller is invariably good, or at least thought to be.</p> - -<p><i>Third</i>: The buyer is invariably good, or thought to be.</p> - -<p><i>Fourth</i>: The bank accepting the draft is invariably good, or believed -to be. But above and beyond that no<span class="pagenum"><a name="Page_91" id="Page_91">[Pg 91]</a></span> bank will engage in such a -transaction, without making itself absolutely safe in some way.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, if we should adopt that principle -in this country, we would at once make every dollar's worth of goods -in transit, or ready for shipment, a liquid asset, practically a cash -asset, as we shall see, for the American merchant and manufacturer; -because a large amount of capital would at once be attracted to this -field for steady employment, or temporary investment.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: There is nothing so essential to relieve -the constant strain upon individual credit and mobilize the really -liquid wealth of the country, as the creation of the kind of paper you -have just described. Think of it for a moment; there are the goods in -transit, the shipper, the buyer and the banker back of the paper that -will be coming due within the next sixty or ninety days. You can hardly -imagine anything safer, and more quickly convertible into cash.</p> - -<p>Money available for the purchase of such paper would come from many -sources, among them the following:</p> - -<p><i>First</i>: Corporations would immediately be organized to deal in such -paper.</p> - -<p><i>Second</i>: All strong business houses, merchants and manufacturers would -prefer to hold such paper instead of stocks or bonds, for their surplus -funds during their slack seasons.</p> - -<p><i>Third</i>: Bankers of all classes, both in the country and city, would -find such paper preferable to any other form of investment for a -secondary reserve, and for their surplus funds during slack periods in -their respective sections.</p> - -<p><i>Fourth</i>: If acceptances are limited as they should be to goods in -transit, or on the road to consumption, the adoption of this principle -will mark, indeed will accentuate, the strong, the fundamental -difference between liquid assets and the more fixed forms of -investment, such as bonds and stocks. Banking capital employed in<span class="pagenum"><a name="Page_92" id="Page_92">[Pg 92]</a></span> -this way can far more readily adjust itself to the exigent demands of -liquidation in the case of a panic, or a commercial crisis.</p> - -<p><i>Fifth</i>: Undoubtedly, to a very large degree, foreign capital would be -attracted to our market for this kind of paper, because its strength -and liquidity has already been proved to the bankers and capitalists on -the other side of the Atlantic. And whenever capital was required, the -rate of interest would be such as to be inviting. In other words, the -rates of interest would rise, correspondingly with our needs, and the -entire commercial world would be our possible market for the commercial -paper representing the economic title to the five or six billions -of finished goods that are always passing from the producer to the -consumers in this country, and to the consumers abroad.</p> - -<p><span class="smcap">Mr. Banker</span>: Undoubtedly, we should soon have right here a -general market to take care of all this kind of paper; and it ought to -become soon the strongest and broadest market in the world for this -kind of an investment, considering our vast commercial resources. All -of our Bills of Exchange would be drawn in dollars, not francs, marks -or pounds sterling, and we would put upon them the stamp of the eagle, -and not the lion and the unicorn.</p> - -<p><span class="smcap">Uncle Sam</span>: I like that. It stirs my blood, warms the cockles -of my American heart. That's business.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I understand that for such Bills of -Exchange, those accepted by banks, there has grown up in London, Paris, -Berlin, Amsterdam and many other European centers, a large market, -known as a discount market. Indeed, that this form of paper constitutes -a very essential feature of the commercial transactions of all European -financial centers.</p> - -<p><span class="smcap">Mr. Banker</span>: That is true, and unless we follow them and adopt -the same principle, and facilitate in the same way the protection, -transportation and distribution of our commodities, needed for current -consumption, we<span class="pagenum"><a name="Page_93" id="Page_93">[Pg 93]</a></span> will continue to work under a very great handicap, as -compared with our foreign competitors. Moreover, we will again find -it difficult, if not impossible, to adjust ourselves to those periods -of contraction which must come from time to time, without almost -immeasurable losses, and the consequent stagnation in business that is -sure to follow.</p> - -<p><span class="smcap">Mr. Merchant</span>: I appreciate what Mr. Banker has just said. I -am confident from my observation during the panics of 1893 and 1907 -that our greatest injury came from the shock to business due to the -fact that there seemed to be no real relief from the strain until there -was an actual breakdown all along the line. Now it is evident that if -a large amount of capital were employed in the economic titles, as it -were, to our consumable commodities in the form of Bills of Exchange -and the market for them extended to the financial centers of Europe, as -seems probable, indeed certain, whenever the rate of interest was high -enough, we should pass through any future strain, without the usual -tragic results. Of course this added facility to the investment of our -Bills of Exchange will not be a cure-all, but it will certainly correct -an obvious and a very great defect in our present method of doing -business.</p> - -<p><span class="smcap">Mr. Banker</span>: Certainly it will not be a cure-all, because it -is only an added facility in our credit system, and therefore must be -provided for precisely as a corresponding amount of loans should be. -You see, don't you, that an acceptance by a bank is practically the -same thing as a loan to the buyer and seller of the goods jointly, or -to one of them with the other as an endorser. The only difference is -this: that if a loan is made the money would be placed at once to the -credit of one of them, subject to his check, while the acceptance is -an agreement to pay the amount on a future day. The bank must take -precisely the same precaution in securing or protecting itself, and -should carry identically<span class="pagenum"><a name="Page_94" id="Page_94">[Pg 94]</a></span> the same reserve against acceptances that it -does against its deposits subject to check.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is true, for if the buyer and seller fail to -make good, and meet the draft, the bank must pay it precisely as a bank -must pay the checks of its depositors, even though the borrowers of -those deposits do not pay their promissory notes when due. In reality -and in fact the results are identically the same, therefore I agree -with you, Mr. Banker, that a bank should carry the same reserve against -its acceptance liability as against its deposit liability.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Mr. Banker, have Bills of Exchange and bank -acceptances been used very long, or are they something quite new and -modern?</p> - -<p><span class="smcap">Mr. Banker</span>: The Lord only knows how ancient they are. However, -it is undoubtedly true that the use of them, especially acceptances, -has grown enormously in recent years. For it is now a universal -practice at all financial centers throughout Europe.</p> - -<p>The bank liabilities of the whole world were only $16,000,000,000 in -1890, while today they are upwards of $50,000,000,000, possibly as much -as $55,000,000,000. This almost appalling increase is due not only -to the growth of international trade and the expansion of the credit -system in foreign trade, but to domestic production as well. Of course -an acceptance is the natural counterpart of a Bill of Exchange.</p> - -<p>Bills of Exchange, or something accomplishing the same purpose, were -in use among the Greeks. The history of the subject is buried in much -obscurity.</p> - -<p>It is stated upon high authority that among the bankers of the Roman -world there existed a certain method or means of effecting payments -abroad.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Here is what one author, Wilbur Aldrich, says:</p> - -<p>"From the beginning of the Christian era the Jews became dispersed -and, shut out from other trades and occupations, became usurers, or -money-lenders at inter<span class="pagenum"><a name="Page_95" id="Page_95">[Pg 95]</a></span>est, a business which by the Canon law was -forbidden to Christians. The Jews were united by such strong ties that -their business assumed almost a corporate aspect. They bought, sold and -transferred for collection part of the many debts constantly owed to -them, and became practically an international exchange community. Their -practice gradually evolved the Bill of Exchange.</p> - -<p>"Rivals of the Jews, and more given to money changing, Lombard and -other Italians naturally also became exchangers. Many large Italian -houses included whole families, and had branches in many cities widely -separated. The financiers from each city in Italy and from associated -leagues of such cities, frequently united for exchange purposes. -Italian finance thus grew into a great system of international -exchange. Among the great fairs of the Middle Ages, under the influence -of the Italians, some became connected chiefly with the business of -exchange; Piazenca, the most noted of the fairs of exchange, was -practically a clearing house for foreign exchanges.</p> - -<p>"The Bill of Exchange was already in frequent use in the middle of the -thirteenth century, but at this time its form was that of a document -certified before a notary. At the end of the fourteenth century, it had -approached the form now in use. It should be added that the Bill of -Exchange was drawn only by the money changers and the bankers that had -branches or agents.</p> - -<p>"The business of bill broking grew up in England towards the end of -the fourteenth century. The issuance of Bills of Exchange, based upon -genuine business sales of goods, was recognized as a legitimate source -of gain by the Canonists; or the ecclesiastic lawyers."</p> - -<p><span class="smcap">Mr. Banker</span>: You <i>see</i>, Mr. Manufacturer, from what Mr. Lawyer -has just read, Bills of Exchange, in practically the same form that -we now have them, have been in use about 500 years. However, we are -not now so much interested in a post mortem of the Bill of Exchange as -we are in its place in our commerce. What we<span class="pagenum"><a name="Page_96" id="Page_96">[Pg 96]</a></span> are most interested in -is, just what part the Bill of Exchange is playing in the trade and -commerce of today. What we want to get clearly fixed in our minds is -what it is, and what it does, as distinguished from other instruments -of trade.</p> - -<p><i>First</i>: For the purpose of a definite idea of just what exchange is, -let us remember that exchange includes every written promise or order -to pay money that is used to substitute one credit for another credit, -or to make one debt pay another debt.</p> - -<p><i>Second</i>: That Bills of Exchange (sometimes called drafts, or -acceptances, indiscriminately) are promises or orders to pay money -which are used to substitute one credit for another credit, or to make -one debt pay another debt, at some distant city. If the cities are in -the same country, the Bills of Exchange are called Domestic Exchange. -If the cities are in different countries, the Bills of Exchange are -called Foreign Exchange.</p> - -<p><i>Third</i>: Let us agree, gentlemen, that so far as we are concerned we -should not, and shall not, consider the acceptance of any draft by a -bank as legitimate, unless the draft has grown out of an actual sale -and shipment of goods. In other words, what I want to impress upon you -is that if the draft is the economic title to goods, which are moving -from the producer to the consumer, the liability of a bank upon an -acceptance is reduced to a minimum. Acceptances of drafts growing out -of sales and shipments of goods will never be a source of dangerous -expansion, because they will liquidate, or pay themselves out, as the -goods will be wanted to eat, to wear, to use, or to go into other -manufactures, almost immediately.</p> - -<p><i>Fourth</i>: I want to nail one fact down right here so that no one of -you will ever overlook it, or forget it; and that fact is this: An -acceptance is just as much a bank liability as a deposit subject to -check, for if the seller and buyer, or the drawer and the drawee, don't -pay the debt on the day named, the bank will have to pay it, just<span class="pagenum"><a name="Page_97" id="Page_97">[Pg 97]</a></span> as -much as it will have to pay the checks against its deposits, although -the people who borrowed the deposits have not paid their notes. It is -clear, therefore, that the same reserve should be carried to protect -acceptances as deposits.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I am convinced of that, and I think we cannot -insist upon this conclusion too strongly for two reasons. First, the -credit facilities for trading, or carrying on business, are increasing -at a tremendous rate, and this particular form of credit is probably -increasing at a greater pace just now than any other. Second, there -is no form of credit more indirect, subtle and liable to mislead than -this; therefore, it will require double diligence to keep it as good as -gold. We must remember that since gold is our standard of value, gold -alone is the touchstone of all credit, acceptances as well as deposits -and bank notes.</p> - -<p><span class="smcap">Mr. Banker</span>: There is no question whatever about that. If we -want an absolutely sound and impregnable financial and banking system, -we must meet checks and acceptances with gold just as well as bank -notes, for they are all identical and the same thing—only in different -forms—bank credit. Gentlemen, if you place our banks in a position -where they can pay gold no one will ever ask for gold, except for some -special purpose like that of export.</p> - -<p><span class="smcap">Mr. Merchant</span>: Is it not a fact that credit transactions in -business are increasing every year?</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Mr. Merchant, I presume you mean, -relatively. That is, that the proportion of business transactions in -credit as distinguished from cash is greater now than formerly.</p> - -<p><span class="smcap">Mr. Merchant</span>: That is precisely what I mean, of course. I am -aware that there is on the average a great increase of business every -year.</p> - -<p><span class="smcap">Mr. Banker</span>: In some localities credit transactions are -increasing, but in others they are practically at a standstill. -For example, I suppose if you should take some<span class="pagenum"><a name="Page_98" id="Page_98">[Pg 98]</a></span> country town in a -cotton-growing district, the amount of cash used from August to -January might be 75 per cent of all the transactions; for the planter -pays the pickers and all the laborers cash, and they in turn pay the -storekeeper; during other periods of the year, when accounts are -running, the cash used is much smaller. The average amount of cash used -gradually falls as the people come to use banks more and more, the -bank checks taking the place of currency. Generally speaking, however, -the average country community does about 60 per cent of its business -with currency, while the medium sized cities, or towns, do possibly as -much as 60 per cent of the business with checks. In the largest cities -as much as 90 per cent of the business is done with checks, while the -clearing houses settle their differences or balances with about 5 per -cent of actual money, where money is used. Sometimes the differences or -balances at the clearing houses are settled by checks or drafts on a -financial center.</p> - -<p>While we have no definite figures that justify a positive statement, -it is generally estimated that about 90 per cent of all the business -of the country is done with some form of credit instrument, checks, -drafts, or bills of exchange.</p> - -<p><span class="smcap">Mr. Merchant</span>: Then all forms of exchange, promissory notes, -checks, drafts and bills of exchange are really mediums of exchange in -precisely the same sense that gold coin and currency are mediums of -exchange.</p> - -<p><span class="smcap">Mr. Banker</span>: Certainly they are all just as efficient as -mediums of exchange, as gold coin and other forms of currency, although -not as facile for small trade. But, in large transactions they are far -more expeditious, more convenient, cost much less, and involve less -risk. These are the reasons they are used instead of cash to so large -an extent.</p> - -<p><span class="smcap">Uncle Sam</span>: Boys, from the attention that you have given this -subject it is evident that you are mightily interested, for you have -had to work a good deal<span class="pagenum"><a name="Page_99" id="Page_99">[Pg 99]</a></span> harder to understand what you were talking -about than usual. But we have arrived, we have really gotten somewhere, -difficult as Exchange is generally thought to be.</p> - -<p>Now, in order to fix in your minds just what progress we have made -during these five talks, I want to review what we have accomplished, or -agreed to.</p> - -<p>The first night we found out that our standard of value was gold. The -second night we decided that our money was gold coin and that nothing -else would do. The third night we found out that our currency was -gold coin, token money, United States Notes and bond-secured notes; -we also found out that the United States Notes and bond-secured bank -notes were not fit for currency. The fourth night we determined that -the only currency in addition to our gold coins and token coins -worth considering for our purpose was a credit bank note, or bank -credit currency. Tonight we have found out what Exchange is and that -nine-tenths of our business is done in some form of it; but that we -must keep it as good as gold by holding adequate reserves to protect -this form of credit as well as any other.</p> - -<p>Now, I call that going some.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Uncle Sam, last Wednesday evening, during -our discussion, Mr. Banker frequently used the word "reserve" in -connection with our currency, and insisted that the reserves should be -such as to protect the currency, and tonight he has again used the word -"reserve" in the same way in connection with exchange. While I know in -a general way what he means, I am not at all sure that I comprehend -fully what a reserve is in its true and broader sense.</p> - -<p><span class="smcap">Mr. Farmer</span>: Nor do I, and to confess the truth I am a little -dazed on that very point, and I want to suggest that we spend the next -night finding out what a bank reserve is. If all that Mr. Banker has -been saying is true the reserve is certainly the hub of this wheel, and -I want to tell you now that unless the hubs<span class="pagenum"><a name="Page_100" id="Page_100">[Pg 100]</a></span> of your wheels are all -right, you won't have much of a wagon when you get through.</p> - -<p><span class="smcap">Mr. Banker</span>: That's right. Your reserves are the very heart of -the whole question, the hub of the wheel.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, then, we'll have reserves up next Wednesday, -and let us hope that our reserves will never get down, at least to a -dangerous point.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_101" id="Page_101">[Pg 101]</a></span></p> - - - - -<p class="ph2"><a name="SIXTH_NIGHT" id="SIXTH_NIGHT">SIXTH NIGHT</a></p> - -<p class="center">VALUE, PRICE, WEALTH, PROPERTY, CREDIT</p> - - -<p><span class="smcap">Uncle Sam</span>: Well, boys, what about reserves?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Uncle Sam, soon after we departed the other -night, I began to think over the subject of reserves; but soon found -myself considering several other points, which, it seemed to me, we -should take up before reserves. Therefore, without consulting you, I -telephoned Mr. Merchant, Mr. Banker, Mr. Manufacturer, and I saw Mr. -Laboringman and talked the matter over with him. We all agreed that -there were several other points that we should discuss tonight instead -of reserves. I knew that Mr. Farmer lived on a Rural Free Delivery -route, and that I could reach him by noon the next day or Thursday -morning; so here we are ready to talk about something else. And we came -to this conclusion without even consulting you, for which possibly we -ought all of us now to beg your pardon.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, there you go again. Really, I feel as though -I were in about the same position that one of my wisest Presidents, -Abraham Lincoln, said he was in, with regard to his influence over his -Cabinet. You will remember he once said, "I don't believe I have any -influence with the present administration, anyway." Of course, we all -know that was one of Honest Abe's sly drives, because he knew deep down -in his soul that in the end he was always the master of ceremonies. -However, what is it that you want to talk about? Of course, you -understand, that under the circumstances, having made the arrangement -to talk about reserve, "I am completely upsot."</p> - -<p><span class="smcap">Mr. Farmer</span>: Well, I'm the fellow that suggested that we talk -about reserves tonight; but I am sure that the change made was most -advisable. To use an ugly<span class="pagenum"><a name="Page_102" id="Page_102">[Pg 102]</a></span> illustration, possibly ugly to this august -assembly, we now have our horses representing the standard of value -hitched up to our wagon which represents our currency and exchange, the -things that carry the value, wealth, property, and all commodities that -go by price, the trades having been made on credit, but calling for -capital. I think with Mr. Lawyer that we had better find out just what -these various words or terms mean before going any further. Otherwise -we will certainly be using words whose meaning we do not know, or, at -least, do not properly appreciate.</p> - -<p><span class="smcap">Mr. Merchant</span>: Now just what did you say; value, wealth, -property, capital and credit? That all sounds very well, but I suggest -that you include one more word that has always been a source of -annoyance to me when I want to buy anything, and most unsatisfactory -when I want to sell anything, and that is "price."</p> - -<p><span class="smcap">Mr. Farmer</span>: Oh, I had that in all right, but I will admit, in -a sort of backhanded way.</p> - -<p><span class="smcap">Mr. Banker</span>: All right, then, let us include price in the list; -then the programme for tonight is, value, price, wealth, property, -capital and credit.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Just what do you mean by the value of -anything? That is, what is value anyway?</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I have been studying over that very thing, -and I believe I can give you a definition that will wash. The value of -anything is measured by the use to which it is put, and is expressed in -anything for which it is exchanged.</p> - -<p><span class="smcap">Mr. Farmer</span>: I have been mulling over this question of value a -little myself, and I think that Mr. Manufacturer has that about right. -I worked it out this way: I have an old horse down on the farm that I -traded for, giving Hiram Johnson, my neighbor, a mule. That mule was -a mighty handy animal. I could do anything with him on the farm, but -he was a little too handy with his hind legs occasionally, so I traded -him off to let him practice on my neighbor Johnson. Now the value of -that<span class="pagenum"><a name="Page_103" id="Page_103">[Pg 103]</a></span> mule was that horse that I got in exchange for it; and the value -of that horse was the mule. So, too, if I traded a hog for a sheep the -value of the hog is the sheep, and the value of the sheep is the hog.</p> - -<p><span class="smcap">Mr. Merchant</span>: Hold on just a minute before you go any further, -as I want to know whether anyone here can tell me what intrinsic value -is. We heard so much about that during the campaign of 1896; and I want -to know whether there is anything in it or not. I ran up against the -same expression in one of the books that I thumbed away back in 1896. -And today you sometimes hear men say that gold has intrinsic value. -Now, according to your definition, if no one could use gold, or rather -did not use it and you could not exchange it for anything else, it -would not have value.</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so. Nothing is more absolutely true than -that. Gold, like everything else, gets its value from the demand for -it, which comes from its use and its consequent exchangeability.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is undoubtedly true, all the value that gold -has arises from its use and exchangeability, and its exchangeability -arises from its universal use.</p> - -<p>It may be said, possibly, that the value of anything is measured by the -use to which it can be put; but I believe that it is all covered by the -latter part of the definition given by Mr. Manufacturer: <i>The value of -anything is any other thing for which it can be exchanged.</i> Anything -has value when it is exchangeable; when it is not exchangeable it has -no value. What is really more in keeping with our common everyday -language, is the definition of the Roman Law, "The value of anything is -what it can be sold for."</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, that is true in one sense, but I think we had -better make a distinction between receiving money and something else. -If you exchange anything for money, the amount of money received is -more properly called its price.</p> - -<p><span class="smcap">Mr. Lawyer</span>: You are right; I think we should make<span class="pagenum"><a name="Page_104" id="Page_104">[Pg 104]</a></span> just -that distinction: "The value of anything is the thing you receive in -exchange for it." <i>The price of anything is the money you receive in -exchange for it.</i> Of course in everyday conversation, we are constantly -using value and price indiscriminately. We ask, what is the value of -something, when we want to know the price of it.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, you have made short work of two topics or -points raised already.</p> - -<p><span class="smcap">Mr. Farmer</span>: Yes, and if we keep our noses to the grindstone, -our eyes on the sickle we are grinding, and our feet on the ground, -we'll make headway right along.</p> - -<p><span class="smcap">Mr. Laboringman</span>: I think anybody can understand this subject, -at least so far anyway. We may get over our heads before we get -through, but I know I'm all right yet.</p> - -<p><span class="smcap">Uncle Sam</span>: The great thing to do in a discussion of this kind -is just what you do in any other matter. Talk common sense. Just talk -horse sense. Do you know I flatter myself that the common sense of the -American people is the wealth of the country?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Wealth, did you say, Uncle Sam? Why that is -just what we are going to talk about. It may be that common sense is -the source of most of the wealth of the American people, but really, -Uncle Sam, with all due deference to you, I do not think you can call -it wealth. Aristotle said: "We call wealth everything whose value is -measured by money."</p> - -<p><span class="smcap">Mr. Banker</span>: That definition of Aristotle has never been -improved upon, and today all students, scholars and economists have -accepted it as correct. And, while others have talked without limit and -written books without number about wealth, no one has improved upon -what Aristotle said wealth was. Just keep this simple inquiry in your -minds: "Can it be sold for money," and, remember that "whatever can be -exchanged for money is wealth."</p> - -<p>Let me illustrate just what I mean. If I have land, houses, cattle, -horses, cotton, corn, or any other material<span class="pagenum"><a name="Page_105" id="Page_105">[Pg 105]</a></span> thing that I can convert -into money, they all constitute wealth. Again, if I were a lawyer, a -doctor, farmer, bricklayer, engineer, musician, or painter, my services -would be wealth because I can sell them or exchange them for money. -Again, there is still another kind of wealth that may be described by -the single word "rights," such as mortgages, bonds, stocks, bank notes, -checks, drafts, bills of exchange, copyrights, patents, good will of a -business, etc., all these various things are also wealth because they -can be exchanged for money. They can all be bought and sold.</p> - -<p>Let us remember this then, that all wealth is one of these three things:</p> - -<p><i>First</i>: Wealth is material, land, etc.</p> - -<p><i>Second</i>: Wealth is labor, work, etc.</p> - -<p><i>Third</i>: Wealth consists of rights, checks, notes, bonds, etc.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Then, if I understand you correctly, you say a -man is wealthy because he has a good deal that he can turn into money. -Of course I am aware that a man may be considered wealthy in one -community, and in another community the same man with the same amount -of wealth may be considered a comparatively poor man—in other words, -everything is relative. A man worth $50,000 in some small country town -may be considered, and properly so, a very rich man; but on Fifth -Avenue, New York, he would be considered a comparatively poor man, -because it might take $50,000 to pay a year's rent for a house.</p> - -<p><span class="smcap">Mr. Laboringman</span>: You bet I can see that point all right.</p> - -<p><span class="smcap">Mr. Farmer</span>: It seems to me as though you have made that -perfectly clear, but I want to tell you boys that when I tried to study -up on this question during the week, I got all balled up on the words -property and wealth, for I cannot see the slightest difference between -these two words.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Well, I think there is a very great dif<span class="pagenum"><a name="Page_106" id="Page_106">[Pg 106]</a></span>ference; -and I think I can demonstrate to you by an illustration right in your -own neighborhood just what the distinction is between these two words. -You will remember, Mr. Farmer, when that mill located over on Carroll -River, and that big dam was put in, Mr. Adams, a man whom you and I -both know very well, owned all the land in that neighborhood. You will -remember that he proceeded to borrow money and build houses for the -employees who wanted to come and work in the mill. I think he built as -many as 150 houses for that purpose. You will remember the dam washed -out and that they did not rebuild it; and as a consequence the mill -closed down. The result was the employees all left, and Mr. Adams was -involved to a very large extent, I think something over $200,000 all -told. Now he still has the property, but the insurance company has -the mortgages—in fact, Mr. Adams has a great deal more property now -than he had before the mill located there, because he has the land and -the 150 houses, but he has a good deal less wealth. For when the mill -located there, Mr. Adams' wealth exceeded $100,000, but after the mill -closed he could not rent or sell the houses to anyone. Now the evident -result was that he had increased the amount of his property, for he had -150 houses, but he actually had no wealth left. His property was what -we lawyers call corporeal property, that is, material property, land, -and buildings. The insurance companies which held the mortgages had -a very different kind of property, called by the lawyers incorporeal -property, that is, not material property but an interest in the real or -material property.</p> - -<p>I think you will all agree that while Mr. Adams still has all his -property, all the wealth there is left belongs to the insurance company -which holds the mortgages.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Lawyer, is it not true that you could and -would say that a man had a lot of property if he owns say 100,000 acres -of land worth only 25 cents an acre, even if it was not salable at all?</p> - -<p><span class="pagenum"><a name="Page_107" id="Page_107">[Pg 107]</a></span></p> - -<p><span class="smcap">Mr. Lawyer</span>: Yes, I think that is true, and illustrates in -another way that there is or may be a real difference between property -and wealth; however, it may be said that in conversation we often use -the words wealth and property without much, if any, distinction. It -seems to me that we should note this particular difference. <i>Wealth -consists of property convertible into money, and therefore implies -exchangeability, while property may not mean wealth at all, because the -property has no exchangeable value.</i></p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Lawyer, I think that that last statement of -yours will assist Mr. Farmer very greatly in understanding the real -difference between wealth and property. The difference is certainly -very evident.</p> - -<p><span class="smcap">Mr. Farmer</span>: Yes, I have caught on. There may be a very -great difference between wealth and property, although we are in the -habit of using these two words without any reference to the special -meaning that really attaches to them. In our conversation we use them -indiscriminately, and I don't know as that makes any difference; but -for our purposes, that is, for the purposes of these discussions, -I think it is very important that we should know the difference; -because something may arise that will compel a recognition of the real -difference between these two words.</p> - -<p><span class="smcap">Mr. Banker</span>: I was just going to remark that the very -difference between these two words suggests one of the other words we -have agreed to consider tonight, and that is the word "capital"; for -capital is a form of wealth, although all wealth is not capital.</p> - -<p>Wealth, as we have seen, consists:</p> - -<p>(1) Of material things, such as houses, land, etc.;</p> - -<p>(2) Of productive power, called labor, etc.;</p> - -<p>(3) Of rights, such as checks, notes, bonds, etc.</p> - -<p>The owner of these things may use some of them for his convenience. He -may so use some of them as to produce a profit. Now, when anything is -traded with, or so<span class="pagenum"><a name="Page_108" id="Page_108">[Pg 108]</a></span> used as to produce a profit, or as we often say -used productively, it is called capital.</p> - -<p>Stephens defines capital thus: "Capital, the source whence any profit -or revenue flows."</p> - -<p>So Senior says: "Economists are agreed that <i>whatever</i> gives a profit -is properly called <i>capital</i>."</p> - -<p>Again M.D. Fontenay says: "Wherever there is a <i>revenue</i>, you perceive -<i>capital</i>."</p> - -<p>MacLeod says: "Capital is an economic quantity used for the purpose of -profit." I would suggest that we say <i>Capital is anything used for the -purpose of profit</i>.</p> - -<p>MacLeod uses this language also: "If a person has a sum of money, he -may expend it on his household requirements; or in gratifying his -personal taste by buying books, or statues, or pictures, etc. Money -spent in this way is not <i>capital</i>.</p> - -<p>"But if he buys goods of any sort for the purpose of selling them again -with a <i>profit</i>: Then the money so employed is '<i>capital</i>,' and the -goods so purchased are also <i>capital</i>, because they are intended to be -sold with a '<i>profit</i>.'</p> - -<p>"So money let out at interest is <i>capital</i>.</p> - -<p>"In a similar way any material thing may be used as capital. If a -landlord lets out his land for the purpose of profit, it is capital.</p> - -<p>"All modern economists class personal skill, ability, energy and -character, as wealth, because persons can make a profit by their use. -Hence they may be used as capital, as well as material objects.</p> - -<p>"If a man digs in his garden for his own amusement such labor is not -capital; or if he sings or acts or gives gratuitous lectures on any -subject to his friends, such labor is not capital.</p> - -<p>"But if he sells his labor in any capacity for money: then such labor -is capital for him. Thus Huskisson says: 'that he had always maintained -that labor is the poor man's capital.' So Mr. Cardwell addressing his -constituents said 'labor is the poor man's capital.' And a writer<span class="pagenum"><a name="Page_109" id="Page_109">[Pg 109]</a></span> in a -daily paper, speaking of agricultural laborers, said: 'The only capital -they possess is their labor, which they bring into the market to supply -their daily wants.'</p> - -<p>"So if a man expends money in learning a profession such as that of an -advocate, physician, engineer, or a profession of any sort which he -practices for profit, the money laid out in acquiring such knowledge -is capital: and his skill, ability and knowledge are also capital. He -makes an income which is measurable and taxable, just in the same way -as if he had made profits by selling goods.</p> - -<p>"Now, there are two fundamentally distinct ways in which capital may -increase:</p> - -<p>"1. By direct and actual increase of quantity; thus flocks, and herds, -and all the fruits of the earth increase by adding to their number and -quantity.</p> - -<p>"2. By exchange.</p> - -<p>"That is by exchanging something which has a low value in a place, for -something which has a higher value.</p> - -<p>"Now, it is clear that money produces a profit, and becomes capital, by -the second of these methods. Money is used as capital by exchanging it -for some goods or labor, the produce of which may be sold or exchanged -again, for a greater sum than they cost."</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Banker, that is very simple and very clear, -but it strikes me that a distinction which is of greater importance to -us is the form that capital takes, and I would say, as preliminary to -a distinction in the different forms of capital, that we should have a -broad definition of what capital is, concretely expressed. <i>Capital is -that part of the accumulated wealth of the country that is used for the -purpose of profit. It is either Active, Passive, or Fixed.</i></p> - -<p>The Active Capital is that portion of the wealth of the country -which is employed in the production, transportation and distribution -of consumable commodities, and is more accurately described as the -commercial fund of the country.</p> - -<p>The Passive Capital is that portion of the wealth of<span class="pagenum"><a name="Page_110" id="Page_110">[Pg 110]</a></span> the country which -is derived from the commercial fund in the form of earnings, profits, -savings and income from investments, and is more accurately described -as the investment fund of the country. It is represented by bonds, -mortgages, and other investment securities.</p> - -<p>The Fixed Capital is that portion of the wealth of the country which is -represented by real estate, buildings and all permanent improvements, -such as railroads, mill property, irrigation enterprises, etc.</p> - -<p><i>If we transfer the Active Capital, or commercial fund of the country, -to the Passive Capital, or investment fund, or what is still more -serious, convert it into Fixed Capital, we can no more keep the people -working and producing new wealth than you can keep a steam engine -producing power without coal and water.</i></p> - -<p>What invariably happens in the so-called good times but almost -invariably what, by experience, proves "boom" times, is that business -men and in fact everybody, not only take all of their spare money, and -go into speculations, but they exhaust their credit as well; and what -they have to pay so far exceeds what they have to pay with, that when -the chain of credit breaks at any one point, the whole fabric falls.</p> - -<p>It then takes years, usually, to catch up and reconstruct and reach -a normal condition in which, after "paying for the dead horses," so -to speak, the profits on business, savings from labor and the income -from rents and investments again begin to supply investment funds. -For example, it took at least four years to get the American people -to thinking naturally and normally, after the panic of 1907—and the -fact is some "dead horses" have not been paid for yet; but generally -speaking, we are now ready to turn a considerable sum from various -sources into the investment fund of the country, or into bonds, -construction of new work, and into fixed investments, lands, buildings, -railroads and other permanent improvements.</p> - -<p><span class="pagenum"><a name="Page_111" id="Page_111">[Pg 111]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: I think that you will all perceive from what -Mr. Lawyer has just said with regard to the various directions into -which capital may be turned and the fatal mistake that is ever and -ever recurring—the transfer of active or productive capital, or the -commercial fund, into the investment fund, or fixed forms, is what -invariably, as he said a moment ago, breaks the chain of credit at some -point.</p> - -<p>You can readily see, indeed it takes no argument to show, that nothing -in the business world should be guarded so jealously as the commercial -fund of the country, in order that credit may be maintained and labor -steadily employed.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Our discussion has brought us most naturally to -the last word suggested for our consideration, and that is the word -"credit." I remember what Daniel Webster once said in a speech when -speaking on the continuance of the charter of the United States Bank -in 1837. It was this: "Credit is the vital air of the system of modern -commerce. It has done more, a thousand times, to enrich the nations -than all the mines of all the world." And again in another place he -says: "We owe more to credit and to commercial confidence than any -nation which ever existed; and ten times more than any nation, except -England. Credit and confidence have been the life of our system, and -powerfully productive causes of all our prosperity. They have covered -the seas with our commerce, replenished the treasury, paid off the -national debt, excited and stimulated the manufacturing industry, -encouraged labor to put forth the whole strength of its sinews, felled -the forests and multiplied our numbers, and augmented the nation, so -far beyond all example, as to leave us a phenomenon for other nations -to look at with wonder."</p> - -<p><span class="smcap">Mr. Banker</span>: That might have been true in 1837, but today -other commercial nations could truthfully reverse that comment, for -they have in some respects and in some places passed us in credit -facilities—they have<span class="pagenum"><a name="Page_112" id="Page_112">[Pg 112]</a></span> beaten us as it were at our own game, that is, -in having worked out a more highly developed use of credit.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: When you recall the fact that between 90 -and 95 per cent of our business is carried on in some form of credit, -you realize that we have become so accustomed to this marvelous device -that we have lost appreciation of its power for human achievement and -advancement.</p> - -<p><span class="smcap">Mr. Banker</span>: You are right. Do you know that I regard credit as -one of the three greatest instrumentalities of modern civilization?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Well, no, I never thought of credit in that -connection. That suggestion is so unusual that I am quite interested to -know what you regard as the three and in what order of importance you -would place them.</p> - -<p><span class="smcap">Mr. Banker</span>: I regard the invention of printing as the greatest -influence in the world's advancement, because it opened up the paths -of knowledge to the poorest as well as the richest, and completely -destroyed the supremacy of wealth in the acquisition of knowledge. We -have observed what gigantic strides have been made during the past -twenty years, and with what increasing and amazing facility information -is now being disseminated, the progress of the last ten years -outstripping the imagination itself. Everybody can now know everything, -if they have the time and ability to acquire it.</p> - -<p><span class="smcap">Mr. Farmer</span>: How absolutely true that is. There are no less -than ten magazines on my table at home. They cover every conceivable -subject from electrical science, in which my son is deeply interested, -to the fashion plates of the latest style of women's dresses, current -events, current literature, fruit growing, intense farming, stock -breeding, eugenics and euthenics.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Hold on there, Mr. Farmer, or you'll prove -conclusively that you fellows out in the country know more than we do -in town.</p> - -<p><span class="smcap">Mr. Farmer</span>: Well, between you and me, I think that's so.</p> - -<p><span class="pagenum"><a name="Page_113" id="Page_113">[Pg 113]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: The second most powerful agent in the advancement -of the human race is that instrumentality by which all the resources -of the human mind have been developed and brought into requisition in -meeting the ever-increasing demands of mankind throughout the world. -It has destroyed the supremacy of money, and provided the means by -which the most humble of the race can place his foot upon the ladder of -opulence. That instrumentality is credit.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I doubt whether such a proposition was ever -thought of, certainly it has never been advanced to my knowledge -before; but when you stop to think of it, I do not believe that anyone -can successfully controvert that statement. Look about you, and -imagine, if you can, what the condition of the people would have been -without the advantage of credit. Who of all your acquaintances has not -made his way to success by means of credit. Credit is certainly the -gateway to opportunity, and opportunity is the everlasting hope of the -world.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Lawyer, unless you stop your flow of eloquence -upon this newly discovered means of human happiness, I will not get a -chance to state the third greatest contributing cause to the uniform -and universal development and advancement of mankind. It is steam and -its modern companion electricity. Through the application of steam to -ocean craft and railroads, transportation has brought the people of the -whole world practically into one market zone, and we are now all eating -the same food and wearing the same clothes, and to the last degree, -every people, and broadly speaking, every man, is doing that which he -can do most efficiently and profitably.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Mr. Banker, you have certainly opened up -an entirely new strain of thought to me; and yet when you grasp the -full force of the idea, and comprehend fully these three elements or -forces: printing, the general transmission or diffusion of thought or -knowledge; credit, the fullest use of all our talents by opening<span class="pagenum"><a name="Page_114" id="Page_114">[Pg 114]</a></span> up a -world of opportunity; and transportation, the fullest exchange of all -the products of the mind and hand of man, you have actually covered -the realm of human life up to date. And yet, who ever thought of -placing this relative importance upon credit. We have been discussing -the comparative importance of gun powder that brought the knight and -soldier to a common level, the cotton gin, electricity, the telegraph, -the telephone, chemistry, surgery, wireless, printing and steam, but -whoever heard of credit in this connection?</p> - -<p><span class="smcap">Mr. Merchant</span>: What you say is distinctly true, but all these -other things I can readily see are only additional facilities in making -the three great fundamental instrumentalities for the advancement of -the human race more efficient; and the more one thinks it over, the -more impressive Mr. Banker's statement becomes.</p> - -<p><i>First</i>: Printing, the means of spreading knowledge;</p> - -<p><i>Second</i>: Credit, the fullest opportunity of developing and using the -powers of mind and body;</p> - -<p><i>Third</i>: Steam and electricity, the means of distributing on land and -sea the products of all mankind.</p> - -<p>These three, printing, credit and power are certainly the three -greatest forces of modern civilization.</p> - -<p><span class="smcap">Mr. Banker</span>: Now, gentlemen, having convinced you as I assume -I must have done, of the tremendous part that credit is playing in the -world of today, let us try to find out and comprehend just what credit -really is, and how it happens to be so essential to our present life.</p> - -<p>The word "credit" means, "I believe," "I trust." That is, I believe -in a man, in a man's character, and in his ability, and therefore I -trust him to do something tomorrow, three months from now, six months -from now, nine months from now, one year, or possibly a longer time, -which he cannot do today. That is credit. What a limitless field of -opportunity and then of speculation this confidence of man in man opens -up. Credit is to money what steam is to water, and credit like steam -must always be kept within control, and within safe bounds, as in the<span class="pagenum"><a name="Page_115" id="Page_115">[Pg 115]</a></span> -case of steam, or there will be an explosion of credit, a most direful -thing. Now, there never will be an explosion or crisis in the world of -credit, so long as credit is subjected constantly to the test of coin -redemption, that is, the conversion of credit into money, gold. So long -as credit can be extinguished by payment in gold, it is under control. -But, gentlemen, when gold redemption becomes impossible, look out! Let -me read what MacLeod says about that:</p> - -<p>"It is unextinguished credit which produces those terrible monetary -cataclysms which scatter ruin and desolation among nations. It is by -the excessive creation of credit that overproduction is brought about, -which causes those terrible catastrophes, called 'commercial crises,' -and the inability of credit-shops to extinguish the credit they have -created, commonly called the failures of banks, is the cause of the -most terrible social calamities of modern times."</p> - -<p><span class="smcap">Mr. Lawyer</span>: Now, we have the other side of the picture. On the -one hand, we have Daniel Webster painting the possibilities of human -achievements through credit—its tremendous power for good, when under -control, and, on the other hand, the words of MacLeod pointing out the -awful danger, the tragical consequences of credit beyond control. The -years of 1873, 1893 and 1907 are illustrations of what happens when -credit has passed the boundaries of control.</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so, and what we want to do is to prevent -the recurrence of those commercial tragedies which interrupt the -currents of prosperity, spreading desolation and death throughout the -length and breadth of the land.</p> - -<p><span class="smcap">Mr. Laboringman</span>: It is to be hoped that we can do it, for no -class suffers so much as the working masses during these periods of -disaster, depression and distress. Don't you see that if any one of us -has succeeded in laying aside by painful saving a little nest egg, in -some<span class="pagenum"><a name="Page_116" id="Page_116">[Pg 116]</a></span> savings bank, that it is wiped out, and he has to begin all over -again? And if one of us fellows has accumulated enough to start some -little business of his own, ninety-nine times out of one hundred he is -cleaned out, and through no fault whatever of his own.</p> - -<p><span class="smcap">Mr. Farmer</span>: In this very connection I want to call your -attention to another thing, and that's this. These men who have the -intelligence, ambition, perseverance and moral courage to pinch and -save, even if they have to starve to get a start for themselves, -constitute the true and the greatest ultimate source of wealth of this -nation. They are the chaps that make two blades of grass grow where -only one grew before. You don't want to forget that. They are not only -the hope of every community in which they live, but they are a constant -inspiration to the young.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Now, gentlemen, you are talking sense. If -we can devise some scheme to keep business from running away with us, -and running off the track, and down the embankment every few years, and -plumb over the precipice, we'll be doing something worth while. In a -word, what we want, it seems to me, is to keep business on a more even -keel, if possible; and if we could only get control of credit, and keep -it within reasonable limits, always subject to a current gold test, we -will be in a fair way to accomplish it.</p> - -<p><span class="smcap">Mr. Banker</span>: That is just what we are after; to find some way -to keep credit within reasonable limits. You have struck the keynote of -this whole question.</p> - -<p>In the first place, I want to call your attention to the fact that -there are several kinds of credit, and that we must familiarize -ourselves with all of them, in order that we may know how to deal with -them. A doctor, you know, is a mighty poor stick, if he cannot diagnose -your case, and tell you just what ails you, and yet proceeds to give -you some kind of medicine, any kind of medicine for the right or the -wrong disease. Indeed, he's about the most dangerous individual to -have in a community.<span class="pagenum"><a name="Page_117" id="Page_117">[Pg 117]</a></span> Now, unless we can become convinced that we are -proceeding along right lines, because we have actually discovered the -evils from which we are suffering, we had better let things alone. But -our case is not hopeless, for the disease from which we are suffering -has a well-known specific antidote, and it is up to us to first find -out what ails us, and then to administer it.</p> - -<p>The treatment of the credit phase of the situation, or what may be in a -way termed the mental aspect of the case, is probably as important as -any other, and I will now try to analyze and describe credit, so that -we can understand it, at least from my point of view.</p> - -<p>There are five well defined forms of credit.</p> - -<p><i>First</i>: Credit granted to aid production.</p> - -<p><i>Second</i>: Credit to distribute production.</p> - -<p><i>Third</i>: Credit granted upon accommodation paper.</p> - -<p><i>Fourth</i>: Credit granted upon real estate.</p> - -<p><i>Fifth</i>: Credit granted to the Government, or forced by the Government.</p> - -<p><span class="smcap">Uncle Sam</span>: Say, Mr. Banker, do you know what time it is? Don't -you see it's half past ten o'clock? It will take you till morning to -tell all about credit, and I don't know but what it would take you -until "Kingdom Come."</p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, I've got to be up at six o'clock in the -morning, and be at my job by seven, and I want to go home. I move, we -adjourn.</p> - -<p><span class="smcap">Mr. Farmer</span>: So do I, for I've four miles to go yet tonight.</p> - -<p><span class="smcap">Mr. Lawyer</span>: What difference does that make? The trolley goes -right by your door, and you'll be there in twenty minutes.</p> - -<p><span class="smcap">Mr. Farmer</span>: That's all right, Mr. Lawyer, I don't get my -breakfast at nine o'clock as you do, but I've got to be up in the -morning at five o'clock to feed my stock. I'm a-going, so good night.</p> - -<p><span class="smcap">Uncle Sam</span>: This is a rather informal break-up, but I guess it -will be of no use to call in the police, so good night.</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_118" id="Page_118">[Pg 118]</a></span></p> - - - - -<p class="ph2"><a name="SEVENTH_NIGHT" id="SEVENTH_NIGHT">SEVENTH NIGHT</a></p> - -<p class="center">COMMERCIAL CREDIT, LAND CREDIT, GOVERNMENT CREDIT</p> - - -<p><span class="smcap">Uncle Sam</span>: Mr. Farmer isn't here yet. He left in such a huff -the other night, possibly he is sore—no, he is not, here he comes.</p> - -<p><span class="smcap">Mr. Lawyer</span>: When our meeting broke up last Wednesday night, -Mr. Banker had just outlined the different forms of credit, and I was -very glad that he did, because it gave me an opportunity to read up on -the subject and be prepared to listen intelligently, at least, to what -any of you may say tonight.</p> - -<p><span class="smcap">Mr. Merchant</span>: I did some investigating, too, and found the -subject far more interesting than I supposed it could possibly be. -Indeed, that is true of any subject. Your interest is always measured -by your knowledge, and many matters that seem to us difficult to -understand, become exceedingly simple as you get into them, and -comprehend them. How often the apparently impossible task completely -dissolves under persistent attacks.</p> - -<p><span class="smcap">Mr. Banker</span>: I am more than pleased that you gentlemen have -given your spare time to this subject. Simple in function it is, but it -is immeasurably great in its possibilities, extent and responsibilities -from the standpoint of the banker.</p> - -<p>Just as we parted last Wednesday I had described or defined the -different forms of credit, so far as they enter into banking directly -or indirectly. As I then stated, the first and simplest use of credit -is that granted for the production of something to eat, wear or -use—what we call consumable commodities, that is, credit granted to -aid in production.</p> - -<p>If Mr. Farmer over there should come into my bank now as he used to -before he got rich, and ask<span class="pagenum"><a name="Page_119" id="Page_119">[Pg 119]</a></span> for a thousand dollars to pay his expenses -while he was planting, cultivating and harvesting his crop, and then -in the fall should come again and ask me for three thousand dollars -more to buy some steers and hogs with, because he thought he could make -more money feeding than by selling his corn outright, and I had let -him have the total amount of $4,000 from time to time as he wanted it, -because I believed in his honesty and intelligence, and also because I -regarded the venture as a good one, that would be granting credit for -the production of beef and pork, food products—the very necessities of -life.</p> - -<p>Just as soon as his steers and hogs had become fit for market, and -had ceased to gain anything to speak of, by holding them and further -feeding, he must sell or lose the cost of holding on the chance of a -rise in the market. But even this delay must be temporary. Virtually -he is compelled to sell from the very nature of the case. When he -sells his steers and hogs, suppose he should receive $5,000. First, -he pays me the $4,000 and interest, and has about $1,000 profit on -the transaction. You will all perceive and understand, that as I gave -Mr. Farmer this credit of $4,000 from time to time, he gave me his -promissory note for an equal amount, so that as fast as I granted -credit he created a debt. I acquired the right to demand payment of -$4,000 and he incurred the duty or obligation to pay $4,000.</p> - -<p>So for every credit granted a corresponding debt is created; and if -every debt is paid every credit will be canceled. Though the credit -granted to Mr. Farmer was for the production of the necessities of -life, it was not the safest kind of a loan to make as we shall soon -see—his personal responsibility aside of course; because after I had -given the $1,000 he might have to replant his corn. The summer might be -dry and the frost might come early and cut off his crop; but passing -over these possible dangers to his crops, if we assume that his crop is -the biggest he ever raised, and that that very fact makes it desirable -to borrow the additional $3,000, pleuro-pneu<span class="pagenum"><a name="Page_120" id="Page_120">[Pg 120]</a></span>monia might strike his -cattle, and cholera might seize his hogs and the transaction might -result in a loss of $1,000 instead of a profit of $1,000; or even a -greater loss than $1,000.</p> - -<p>It is these risks that the banker takes in making loans to farmers -that justifies higher interest rates than are charged under some other -circumstances. Again it is these risks that lead a banker out of -caution to take real estate loans in addition, to cover the accidents -of crop raising, although the National Bank Act forbids making loans -upon real estate.</p> - -<p><span class="smcap">Mr. Farmer</span>: Under such circumstances, I think it ought to be -possible for a bank to take real estate loans. I believe it would help -the farmer to get his money at a trifle lower rate of interest.</p> - -<p><span class="smcap">Mr. Banker</span>: I agree with you, and provision should be made for -just such cases; but the rule of the National Bank should still prevail -with regard to loans upon real estate so far as a regular business is -concerned, unless the bank is doing a savings bank business or a trust -company business, in which event it would be entirely proper to use -such funds for that purpose.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, a moment ago you said that the loan -to Mr. Farmer, apart from his personal standing, was not the safest -kind of a loan to make. Just what did you mean by that?</p> - -<p><span class="smcap">Mr. Banker</span>: I am glad that you asked that question, for -it should be explained right here. Suppose that you, Mr. Merchant, -should purchase $4,000 worth of pork and beef in the barrel, at some -distant point, and should come to me for the money to pay for it. In -all probability I should ask you for the bill of lading covering the -shipment, and also insist upon your getting an insurance policy on the -goods before giving you the money. In this case, I am loaning money -upon the necessities of life, consumable commodities, and unless the -insurance company fails, and the goods are destroyed, I cannot possibly -lose a cent. I have, humanly speaking, eliminated all<span class="pagenum"><a name="Page_121" id="Page_121">[Pg 121]</a></span> chances of -loss. You will observe that if I should hold the bill of lading and -the insurance policy, I have the title or ownership of the pork and -beef, in any event. In such cases, comparatively speaking, the rate of -interest ought to be the lowest possible, as far as the risk goes.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: But this kind of a transaction constitutes a -comparatively small part of the commerce of the country.</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, that is true, and if credit was limited to -such transactions, credit crises would be very few, indeed, probably -never would arise as a result of over trading under such circumstances; -trade would be greatly hampered, and business curtailed to a -destructive degree.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: That is certainly true. You men all know -that I am a manufacturer of high class clothing. I want to give you an -illustration of how business is being carried on today in the way of -multiplying credit.</p> - -<p>A manufacturer of woolen goods at Lancashire, England, sold to a -wholesale merchant on the other side, $10,000 worth of goods on three -months' time. The wholesale merchant sold the goods for $12,000 to an -English exporter on three months' time. The English exporter sold the -goods to an American importer for $20,000, duty paid; the importer -sold them to an American jobber for $22,000; the jobber sold them to -me for $24,000. All these sales occurred within thirty days, and not -a single man paid a cent of money on account of his purchases. By way -of payment, this is what happened. I gave my note due in ninety days -to the jobber, and he discounted it at his bank. The jobber gave his -note due in ninety days to the importer, and the importer discounted it -at his bank; the English exporter sent over a draft upon the American -importer at ninety days sight, and he accepted it and it was returned -to England, where the exporter discounted it at his bank. In the -meantime, the wholesaler drew a draft on the exporter at ninety<span class="pagenum"><a name="Page_122" id="Page_122">[Pg 122]</a></span> days -sight, and he accepted the draft, whereupon the wholesaler discounted -the draft at his bank. At the same time the manufacturer drew on the -wholesaler at ninety days sight, and the draft was accepted by the -wholesaler, and was discounted by the manufacturer at his bank. Thus we -see that goods which sold originally for only $10,000 went through five -different hands and became the basis upon which credits were granted -for $88,000, and debts were created for $88,000. Every single debt was -sold just as though it was so much woolen goods. Every man had his -money and not one of them had paid his debt, and yet every transaction -was legitimate and in the ordinary course of business.</p> - -<p>Within sixty days I shall have turned these goods into clothes and sold -and delivered them, giving my customers in turn credit upon my books, -or will have accepted their promissory notes, which I may discount at -my bank if I should need the money in my own business. Now mark and -note this. If I should deliver to the American jobber my check today, -and he should send his check to the American importer and the American -importer should send a draft to the English exporter, and the English -exporter should deliver his check to the wholesaler, and the wholesaler -should send his check to the manufacturer, debts amounting to $88,000 -would have been paid and credit amounting to $88,000 would have been -canceled; and yet not a single cent of cash in the form of coin or -currency has been used.</p> - -<p>Every one of the checks, notes or drafts taken in the transaction is -property, just as much as the note taken for a single sale of the goods -would have been property. Indeed, every one of the five notes or drafts -was just as much property as the goods themselves were, and could be -bought and sold just as well as the goods themselves could be bought -and sold. Now it must be evident to all of you that in the production, -transportation and distribution of commodities, credit performs exactly -the same function as money. So far, therefore, credit is<span class="pagenum"><a name="Page_123" id="Page_123">[Pg 123]</a></span> in all -respects equivalent to money. So long, therefore, as the operations -through credit are successful, everything goes well.</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so, Mr. Manufacturer, so long as -the operations are successful, everything goes well; but it is the -sudden breaking of the chain of credit that brings or precipitates a -disturbance.</p> - -<p>MacLeod uses this language in referring to the destruction of -confidence: "It is the sudden failure of confidence and extension -of credit which produces what is called in commercial language, 'a -pressure on the money market' and which causes money to be 'tight.' -When money is said to be scarce, it does not mean that there is a -smaller quantity of money actually in existence than before; there may -be more, or there may be less in the country; no one can tell what the -amount of money in existence is, but a great amount of credit which -serves as a substitute, and was an equivalent of money, is either -destroyed altogether, or is suddenly struck with paralysis, as it -were, and deprived of its negotiable power, and therefore, practically -useless. A vast amount of property is expelled from circulation, and -money is suddenly called upon to fill the void."</p> - -<p>It must be observed and noted right here, therefore, that streams of -gold, of gold, I say, must be constantly and swiftly running through -the channels of trade, and so intimately connected with a practically -unlimited supply or an inexhaustible reserve of gold, in the form of a -central reserve for the whole country, to immediately extinguish any -conflagration of credit as soon as it breaks out, precisely as a flood -of water extinguishes a fire when it first makes its appearance.</p> - -<p>For the past ten or fifteen years, the banks of England have realized -the necessity of pursuing this principle, by carrying their own -individual reserves, and accordingly have been gradually accumulating -cash reserves of their own, instead of depending upon the Bank of -England, except as a last resort.</p> - -<p><span class="pagenum"><a name="Page_124" id="Page_124">[Pg 124]</a></span></p> - -<p>Germany, too, within the past year, has suffered severely because -adequate reserves have not been present in her channels of trade; and -having discovered this weakness in her banking practices, appointed -a commission to pass upon that and other questions. The commission -reported that the individual banks should carry their own reserves; -and Herr Havenstein, President of the Imperial Bank, a short time ago -demanded that the banks of Germany should carry their own cash reserves -up to 15 per cent of their liabilities.</p> - -<p>How much more important, then, gentlemen, must it be that we, when -you consider the extent of our country, our vast and varied banking -interests which are being carried on by 25,000 or 30,000 individual or -independent banks, should require everyone of these banks to be in a -position to test its credits with the touchstone of gold, and at the -same time take the precaution of protecting itself by a central reserve -of gold far beyond any possible demand that may be made upon it.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, from what you have been telling us -it is perfectly clear that every promissory note, check, draft, or -bill of exchange, which are acknowledgments of debt, are just as much -property as land, houses, cattle, corn, iron, or anything else material -that can be bought and sold. Credit itself is merchandise and the -subject of a gigantic commerce of its own.</p> - -<p>"A well-managed credit amounts to tenfold the funds of a merchant; and -he gains as much by his credit as if he had ten times as much money." -This maxim is generally received among all merchants. Credit is, -therefore, the greatest wealth to every man who carries on commerce.</p> - -<p>Demosthenes says: "There being two kinds of property, money and general -credit, our greatest property is credit."</p> - -<p>Again he says: "If you were ignorant of this, that credit is the -greatest capital of all toward the acquisition of wealth, you would be -utterly ignorant."</p> - -<p><span class="pagenum"><a name="Page_125" id="Page_125">[Pg 125]</a></span></p> - -<p>So Melon says: "To the calculation of values in money, there must be -added, the current credit of the merchant, and his possible credit."</p> - -<p>So also Dutot says: "Since there has been regular commerce among men, -those who have need of money have made bills, or promises to pay in -money. The first use of credit, therefore, is to represent money by -paper. This usage is very old; the first want of it gave rise to it. It -multiplies specie considerably. It supplies it when it is wanted, and -which would never be sufficient without this credit; because there is -not sufficient gold and silver to circulate all the products of nature -and art. So there is in commerce a much larger amount in bills than -there is specie in the possession of the merchants."</p> - -<p><span class="smcap">Mr. Banker</span>: While it is true, as a general principle, that -by the sale and transfer of the same property, as we have seen in the -case of the woolen goods, many credits are granted and a corresponding -amount of debts are created, it is also true that a single debt in the -form of a promissory note, check, draft or bill of exchange, may be the -medium of exchanging or transferring many different pieces of property. -This is just the reverse of the transaction that Mr. Manufacturer has -explained to us.</p> - -<p><span class="smcap">Mr. Farmer</span>: That is right. I want to tell you fellows -something. One day about six months ago I was thinking of taking an -automobile trip, but hesitated on account of the weather signs. I hung -around town here for an hour or two and happened to drop into the -office of a certain lawyer (I never go there any more now). We talked -politics. While there, I asked him what he thought of the weather, and -the political situation, and then went out. At the end of the month I -got a bill from that lawyer for $50. I called upon the gentleman (I -suppose I have got to call him a gentleman on account of his neighbor -here) to find out what his bill meant, and he claimed that while we -talked about politics, the Presidential election prospects and the -weather, that I had pumped him about<span class="pagenum"><a name="Page_126" id="Page_126">[Pg 126]</a></span> some very important legal matters -upon which he had given me valuable advice. Upon my soul I never knew -it, but what could I do. My only possible escape was to pay some other -lawyer, possibly Mr. Lawyer over there, $100 to defend the case. As -is the practice nowadays, I took the short cut and paid it by sending -him my check. That lawyer indorsed and gave that check to a neighbor -of mine for a Jersey cow. My neighbor indorsed and gave the check to a -country grocery store out there and paid his bill with it. The country -storekeeper indorsed and gave the check to Mr. Merchant over there -for $50 worth of boots and shoes. Mr. Merchant indorsed and gave the -check to Mr. Manufacturer for $50 worth of clothing. Mr. Manufacturer -indorsed and deposited that check with Mr. Banker, right here, who -charged it up to my account. Now, by Jove, you wouldn't think that was -possible, but here is the check with those five indorsements.</p> - -<p>Mr. Manufacturer has just given us an instance where the same identical -property worth only $10,000 in Lancashire, England, was sold five -times, and that credits amounting to $88,000 were being granted, and a -corresponding amount of debts were created. Now here is a case where -my debt to that blasted lawyer acknowledged by my check, paid him -$50; paid my neighbor for a Jersey cow $50; paid the country grocery -store for groceries $50; paid Mr. Merchant for boots and shoes $50; -paid Mr. Manufacturer for clothing $50; paid the bank on account of -Mr. Manufacturer's debt $50; or six separate debts in all, amounting -to $300. And the joke is, I never ought to have given the check at -all. This is the reverse side of the use of credit. The instance given -by Mr. Manufacturer was one illustrating the tremendous expansion of -credit. The instance I have given is one of the contraction of credit.</p> - -<p><span class="smcap">Mr. Banker</span>: Right on that point Mr. MacLeod says that sixty -years ago almost the entire circulating medium of Lancashire, England, -consisted of bills of exchange<span class="pagenum"><a name="Page_127" id="Page_127">[Pg 127]</a></span> in no way different from Mr. Farmer's -debt, and that they sometimes had as many as 115 indorsements upon them -before they came to maturity. So that the useful effect of a bill of -exchange is indicated by the number of indorsements upon it, supposing -that every transfer is accompanied by an indorsement, which is not -always the case. We see here the fundamental difference between bills -of lading and bills of exchange, because the indorsements on the former -denote the number of transfers of the same identical property; the -indorsements on the latter denote the number of transfers of distinctly -different property.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, in every form of credit granted -so far and debts created, we have certainly been dealing only in a -legitimate way with consumable commodities, the necessities of life, -and ordinarily, if not always, this kind of credit will take care of -itself. And yet the marvelous facility and power of credit has been -illustrated so vividly, that I am sure all of us appreciate it and can -readily see how it might be abused and lead to disaster if not confined -to the actual production of articles of food, clothing and daily use, -or, in a word, to the production of the necessities of life.</p> - -<p><span class="smcap">Mr. Farmer</span>: I object to your including that lawyer's bill as -one of the necessities of life.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I beg your pardon, but we lawyers are a necessity. -Possibly necessary evils, but nevertheless, I insist that we are -necessary.</p> - -<p><span class="smcap">Mr. Banker</span>: Passing over this little quarrel between Mr. -Farmer and Mr. Lawyer, Mr. Merchant has hit upon the vital distinction -that should always be maintained in commercial banking as distinguished -from investment banking as we shall soon see.</p> - -<p><span class="smcap">Mr. Lawyer</span>: There is not one man in a thousand that -comprehends the distinction that you have just called our attention to, -and I include the bankers when I say that, too. I did not appreciate it -myself a week ago, but it is fundamental and must not be overlooked. -I want<span class="pagenum"><a name="Page_128" id="Page_128">[Pg 128]</a></span> to call your attention to one form of credit that does not -grow out of actual transactions in the production and distribution of -consumable commodity, and that is accommodation paper.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Accommodation paper? It strikes me as though -that was just the kind of paper I wanted. I certainly will take any -accommodation that Mr. Banker over there will give me.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Speaking of accommodation paper, Mr. MacLeod says: -"We now come to a species of credit which will demand great attention, -because it is the curse and plague spot of commerce, and it has been -the great cause of those frightful commercial crises which seem to -occur periodically; and yet, though there can be no doubt that it is in -many cases essentially fraudulent, yet it is of so subtle a nature as -to defy all powers of legislation to cope with it."</p> - -<p>The obvious distinction between accommodation paper and promissory -notes or bills of exchange here referred to, and all legitimate -commercial paper, is this: the accommodation paper represents a future -transaction, something to be done, while the true commercial paper -represents a past transaction, or something that has been done; for -example, goods that had been manufactured and are ready for sale or -have been sold and shipped.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Lawyer, will you allow me to illustrate that -distinction?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Certainly.</p> - -<p><span class="smcap">Mr. Banker</span>: If Mr. Manufacturer there should make ten -different sales of clothing of $5,000 each, and then send out ten -drafts to his ten customers, who accepted them and returned them, these -ten drafts would be called real bills of exchange, or let us call them -true commercial bills, because the ten men have purchased and agreed -to pay for the goods received by them. Should the ten men have sent -their promissory notes to Mr. Manufacturer, they would be identically -the same thing as the<span class="pagenum"><a name="Page_129" id="Page_129">[Pg 129]</a></span> drafts which they had accepted, and answer -identically the same purpose.</p> - -<p>The real beneficiaries in these ten transactions are the ten purchasers -of the goods which they have received; and if Mr. Manufacturer should -sell me these ten bills of exchange or promissory notes as the case -might be, with his indorsement, the ten men would all individually -regard themselves as primarily liable; and they will, therefore, each -of them, prepare to pay his note when it comes due, although Mr. -Manufacturer is the guarantor. But if Mr. Manufacturer should go to -these same ten men and ask each of them as a favor or <i>accommodation</i> -to him to accept the draft or indorse his note for the same amount of -$5,000, each due in 90 days, no goods having been purchased by any one -of them, all these drafts would be accommodation paper, and no one of -these men would look upon his note as his debt, and therefore would -expect that Mr. Manufacturer would take care of the paper when it came -due.</p> - -<p>In the latter case, Mr. Manufacturer, having gotten the money -and the ten men having no interest in the transaction, except as -an accommodation to Mr. Manufacturer in the form of a favor, Mr. -Manufacturer becomes the real maker of the ten notes, and the ten men -who are indorsers are, as I have said, without any interest in the -transaction, except that of accommodation acceptors.</p> - -<p>Mr. MacLeod has described this whole transaction so fully and forcibly -I want to read it to you: "There is in fact only one real principal -debtor and ten sureties. Now these ten accommodation acceptors are -probably ignorant of each other's proceeding. They only give their -names on the express understanding that they are not to be called upon -to meet the bill: and accordingly they make no provision to do so. If -anyone of them is called upon to meet his bill, he immediately has -a legal remedy against the drawer (or the note maker). In the case -of real bills, then, the bank would have ten persons who would each -take care to be in a position to meet his own engagement;<span class="pagenum"><a name="Page_130" id="Page_130">[Pg 130]</a></span> in the -case of accommodation paper there is only one person to meet the ten -engagements. Furthermore, if one of the ten real acceptors fails in his -engagement, the bank can safely press the drawer: but if the drawer of -the accommodation bill fails to meet one of the ten acceptances, and -the bank suddenly discovers that it is an accommodation bill, and they -are under large advances to the drawer, they dare not for their own -safety press the acceptor, because he will, of course, have immediate -recourse against his debtor, and the whole fabric will probably tumble -down like a house of cards. Hence the chances of disaster are much -greater when there is only one person to meet so many engagements, than -when there are so many each bound to meet his own.</p> - -<p>"We see, then, that the real danger to a bank in being led into -discounting accommodation paper is that the position of principal and -surety is reversed. They are deceived as to who the real debtor is, and -who the real surety is, being precisely the reverse to what they appear -to be, which makes a great difference in the security to the holder of -the bills...." In carrying on a legitimate extension of credit, the -bank never permits the advance to exceed a certain definite limit; but -it never can tell to what length it may be inveigled to discounting -accommodation paper until some commercial reverse happens, when it -may discover its customer has been carrying on some great speculative -operation with capital borrowed from it alone....</p> - -<p>"This is the rationale of accommodation paper; and here we see how -entirely it differs from real commercial paper. Because with real -commercial paper, and bona fide customers, though losses may come, -still directly the loss occurs, there is an end of it. But with -accommodation paper the prospect of a loss is the very cause of a -greater one being made, and so perpetually in an ever-widening circle -till at last the canker may eat into a banker's assets to any amount -almost."</p> - -<p>"The insurmountable objection, therefore, to this spe<span class="pagenum"><a name="Page_131" id="Page_131">[Pg 131]</a></span>cies of paper, is -the dangerous and boundless facility it affords for raising money for -speculative purposes."</p> - -<p><span class="smcap">Mr. Merchant</span>: That is absolutely true. Accommodation paper -and speculation go hand in hand. They are twin sisters. Siamese twin -sisters. Pardon me, if I take a moment to demonstrate its terrors -by relating the experience of a friend of mine who was led into an -irrigation scheme:</p> - -<p>"My friend was in the grocery business in a western town and had a -stock of groceries worth $75,000, and he had $25,000 cash in the bank. -The dam and water ditch was to cost $100,000. My friend sold off a -part of his goods, realizing $25,000 of additional cash. He moved the -balance of his goods out to the point where the dam was to be located, -forty miles away, and began operations. He succeeded in finishing -the dam after paying out for work all that he had, and in securing -indorsers up to $100,000 upon accommodation paper in the city where -he had carried on the grocery business. Two hundred thousand dollars -had been paid for groceries and clothing. The laborers had gone to -his store and obtained food and clothing during the two years he was -engaged in constructing the work, and they had consumed all their wages -in living, and more, too. He put an issue of bonds on the dam but could -not sell them; therefore he could not pay the banks. His indorsers -could not pay the banks, and most of them were ruined because of their -indorsements for accommodation purposes. He was wiped out. He turned -over everything to the bank, bonds and all. The banks had to carry -those bonds ten years before they could sell them."</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Merchant, you have given a splendid -illustration of the result of accommodation paper, but you have proved -far more than you set out to demonstrate. You have not only shown the -ruin wrought by the $100,000 of accommodation paper, but also the -extreme danger accompanying accommodation paper, when the proceeds go -into a real estate investment or improvement;<span class="pagenum"><a name="Page_132" id="Page_132">[Pg 132]</a></span> especially an irrigation -enterprise that usually requires a long time to reach results. The -same is true with regard to railroad investments, town lots, or any -kind of real estate investments. Your friend put into that grocery -store from first to last $200,000 worth of groceries and clothing, and -the laborers who did the work ate up the groceries and wore out the -clothing.</p> - -<p><span class="smcap">Mr. Merchant</span>: That is just what they did, for he simply gave -them credit at the store for their wages, and they were charged for -what they bought, and at the end of two years, the $200,000 worth of -groceries and clothing were consumed and converted into that dam and -ditch. He used to say he was ruined by the dam ditch.</p> - -<p><span class="smcap">Mr. Banker</span>: Now you have proved another thing by your -illustration and that is this. When the $200,000 worth of food and -clothing represented by two years' work of 100 men were converted into -a real estate improvement, instead of into consumable commodities, -the necessities of life, you have, so to speak, destroyed that much -commercial capital, by converting or changing it into fixed capital. -This is true because your friend could not begin and build another dam, -for he had no money with which to do it.</p> - -<p><span class="smcap">Mr. Merchant</span>: But, Mr. Banker, he could sell his bonds.</p> - -<p><span class="smcap">Mr. Banker</span>: If he could, yes, but you just said he could not, -and that he turned everything over to the bankers and that they carried -the bonds for ten years. Now suppose that a flood should have come and -taken out his dam and destroyed his irrigation ditch, it would then -be perfectly clear to all of us, would it not, that $200,000 worth of -food and clothing had gone down the stream and had been forever lost; -completely wiped out, just as completely as if the goods had been -consumed by fire.</p> - -<p><span class="smcap">Mr. Merchant</span>: That is perfectly plain, but suppose that he -could have sold the bonds, he would have gotten his money back, would -he not?</p> - -<p><span class="pagenum"><a name="Page_133" id="Page_133">[Pg 133]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: Yes, we would say in that case, that he had gotten -his money back, but he could not get the $200,000 of food and clothing -back, for they are in the dam and ditch. The $200,000 he gets for -his bonds, if he sold them for that price, is an entirely different -$200,000, as you must admit after a moment's thought. Your friend had -groceries and clothing which he could sell for $200,000 in money. Now, -suppose that you had had at the same time, $200,000 in your business. -Your $200,000 with the $200,000 your friend had put into the dam, -when finished would amount to $400,000. Now, if he had come to you to -dispose of his bonds, and you had thought well enough of them to sell -out your business and buy them, your $200,000 bonds would represent the -food and clothing in the dam and ditch, and are no longer cash capital -any more than a farm is cash capital, and it might take you longer to -sell your irrigation bonds than to sell a farm. You said it took the -bank ten years to get rid of them.</p> - -<p><span class="smcap">Mr. Merchant</span>: Oh, I see that now. We have simply converted -$200,000 of cash capital into $200,000 of passive or fixed capital. -Before he built the ditch he had $200,000 and before I sold out my -grocery business I had $200,000, making $400,000 of cash capital. Now -he has $200,000 of cash capital and I have $200,000 of fixed capital, -possibly an eternal investment in the bonds. That is what you would -call a permanent investment, I suppose, for it might take me twenty -years to demonstrate the value of the enterprise as it did the bankers.</p> - -<p><span class="smcap">Mr. Banker</span>: Now, Mr. Merchant, I want you to mark and remember -this; in fact, I want all of you gentlemen to set this down in your -memories so that it can never be dislodged. These irrigation bonds -would continue as passive or fixed capital until the earnings or sale -of the property, covered by the ditch, should not only pay the interest -upon them, but should pay off the principal as well, even if it took a -thousand years to accomplish this result.</p> - -<p><span class="pagenum"><a name="Page_134" id="Page_134">[Pg 134]</a></span></p> - -<p><span class="smcap">Mr. Laboringman</span>: That is nothing but a straight real estate -loan as far as I can see, and not a very good one at that.</p> - -<p><span class="smcap">Mr. Banker</span>: That is just what it is, and for the very -same reason a banker should no more buy such bonds or loan on such -securities, his commercial deposits than he should loan money on real -estate. The principle is the same. If we bankers loan on cotton, -cattle, hogs, wheat, corn, or manufactured goods of any kind, we know -there is a constant and ready market at some price for these things, -for they are all in current demand at some price, somewhere, while a -real estate loan, however good it may be, is not what we call a quick -asset, or liquid asset; that is, something that you can turn into -money at once. A commercial bank should never take a real estate loan, -except as additional security for money advanced for some legitimate -commercial purpose as distinguished from an investment. The commercial -funds should be used for the production of crops, or goods of some -kind, and if a real estate mortgage is taken in addition, it should be -only within reasonable limits, for it is the easiest thing in the world -to tie up all a bank's capital and deposits in real estate loans; that -is, to turn the capital and deposits into passive or fixed capital, -mortgages or real estate, which might be selling readily in boom times, -but which are utterly unsalable when the break comes.</p> - -<p><span class="smcap">Mr. Laboringman</span>: What do you mean by tying up the capital and -deposits of a bank in mortgages and real estate?</p> - -<p><span class="smcap">Mr. Banker</span>: I will explain that to you in such a way that -I am sure you cannot fail to understand and appreciate it. Suppose -that I had $100,000 in cash in my bank to meet the demands of my -depositors; but should give it to farmers in exchange for mortgages -upon their farms. I could not pay my depositors the mortgages; they -want money. I might not be able, and probably would not be able, to -sell the mortgages in time to pay the depositors<span class="pagenum"><a name="Page_135" id="Page_135">[Pg 135]</a></span> their money; and if -money happened to be scarce, possibly not for a long time would I be -able to pay them their money. I would have that $100,000 tied up in -mortgages. This is granting credit on land. Now, these mortgages will -continue in existence until the farmers can make enough out of their -crops to pay the interest upon them from year to year, and finally to -pay them off; it may take ten or twenty years. If I had loaned $100,000 -on cotton or cattle, the products of the farm, they could have been -converted immediately into money at some price to meet the demands of -my depositors.</p> - -<p><span class="smcap">Mr. Laboringman</span>: I see now that you bankers must keep the -money you receive from us depositors, either in cash or in something -you can instantly convert into money, and when you don't do that, you -have tied it up, as you say; and if we happen to find it out we are -apt to want our money; and if we all want it at the same time, you -call it a run on your bank. Now when you say a banker is ready for a -run, you mean, as I now understand it, that he has all his deposits -on hand in cash, or has all his deposits invested in something -that he can turn into cash: good notes that have been taken in the -course of business, that is, in the production and transportation of -consumable commodities, the necessaries of life. Of course, anybody -must understand that if a bank bought a lot of farms or a lot of farm -mortgages (and it might be worse off if it bought city mortgages with -our deposits), he could not convert them or turn them into money on -demand. I am on to this thing now; neither mortgages nor land can be -considered what you described a minute ago as quick assets, or as -liquid assets, because you cannot convert them into money practically -on demand.</p> - -<p><span class="smcap">Mr. Farmer</span>: I grasp that idea now myself. Do you know I -have always thought, until within an hour, that we farmers ought to -be able to get something to pay out in the shape of currency that -represented our land, or in exchange for a mortgage, just because I -knew a mort<span class="pagenum"><a name="Page_136" id="Page_136">[Pg 136]</a></span>gage was good or worth its face; but I see now that a bank -must not only have something that is good and worth its face, but it -must be exchangeable for, and convertible into, real money or gold, at -any time, or the bank must shut up. And you can't turn all our farms -into some form of currency, and expect the banks to redeem it any more -than you can sell a farm every hour. I have been trying to sell one -farm for ten years. Now I see that would not make very good currency. -Since I cannot sell it, the only way for me to convert that farm into -cash capital is to take the net earnings, and lay them aside until they -equal its value or what it cost me; that might not be within twenty -years, as I might not be able to save for that purpose more than 3 per -cent or 4 per cent a year which, at compound interest, would about make -it. It is perfectly clear to me, now, that real estate is not a proper -basis for a currency, which must be currently redeemed in gold. It -cannot be done; that is a sure thing.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Farmer, you have reasoned out for yourself a -thing that has fooled many a man, and the world has had many bitter -experiences trying to do the very thing you now so clearly see cannot -be done; that is, make currency out of real estate, or, rather, as you -would say, make money out of real estate, when, as we have already -seen, gold is the only money we have or can have, so long as gold is -our standard of value.</p> - -<p>Jevons, a great English writer, has well said: "Land is doubtless one -of the best kind of security for the ultimate repayment of a debt; and -it is therefore very suitable when money is lent for a long time. But -representative bank notes purport to be equivalent to gold, payable -on demand, and nothing is less readily convertible into gold in an -emergency than land."</p> - -<p><span class="smcap">Mr. Farmer</span>: And we cannot have any more currency than we can -redeem daily in gold. Therefore we can't make currency out of all of -our real estate, even our agricultural land, which is according to -our last census<span class="pagenum"><a name="Page_137" id="Page_137">[Pg 137]</a></span> worth sixteen billions or $160 for every man, woman -and child in the United States. The average value per acre is $15.57. -Now, at first thought, anyone would say that it would be safe to issue -money for this value, or sixteen billion dollars; but who would redeem -it? That is the question. One hundred and sixty dollars for every man, -woman and child. That would certainly be absurd; and yet I have always -thought that we could do that very thing until tonight. I see how it -is, currency must be currently redeemed in our standard of value, or it -will become first worth less than 100 cents on the dollar, and if the -thing goes far enough, it would actually become practically worthless, -although it might be based upon valuable real estate. How perfectly -simple and plain this all is now.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Indeed, it is simple and plain, but do you know -that that scheme of making currency or money out of real estate, or -converting real estate into currency or money, was tried twice in -France upon a most gigantic scale? First, John Law, in 1717, worked out -a scheme whereby he tied the government of France to a land enterprise -in the United States, the "Mississippi Scheme," covering a large -French grant, and through his plan issued money, Government money, -that represented about one-quarter cash and the balance real estate. -But everybody has heard of John Law and the "Mississippi Bubble," so -I won't say any more about that. Nearly a century afterward the same -scheme was tried again, and strange as it may seem, in France, too.</p> - -<p>From 1789 to 1796, during the French Revolution, the credit of the -French Government was added to vast real estate holdings, so that the -security was doubled, such as it was. I have just looked this matter -up with a good deal of care, and the best description I found was -substantially as follows:</p> - -<p>Assignats were a form of paper money issued in France from 1789 to -1796. Assignats were so termed because land was assigned to the holders -of them. The<span class="pagenum"><a name="Page_138" id="Page_138">[Pg 138]</a></span> financial strait of the French Government in 1789 was -extreme; coin was scarce, loans were not taken up, taxes had ceased to -be paid, production and the country were threatened with bankruptcy. -In this emergency Assignats were issued to provide a substitute for -metallic currency. These Assignats were originally of the nature -of mortgage bonds on the National lands. These lands consisted of -the church property confiscated on the motion of Mirabeau by the -Constitutional assembly on Nov. 2, 1789, and the Crown lands which had -been taken over by the nation on Oct. 7th. Subsequently the lands of -the Emigres, the princes and royal followers, 30,000 of the nobility -who were exiled from the soil of France, were added to the list of -lands against which the Assignats were issued.</p> - -<p>These Assignats were first to be paid to creditors of the State; -with them the creditors could purchase National land, the Assignats -having for this purpose a preference over other forms of money. If the -creditor did not care to purchase land, it was supposed that he could -obtain the face value for them from those who desired land. Those -Assignats which were returned to the State as purchase money were to -be canceled, and the whole issue, it was argued, would consequently -disappear, as the National lands were distributed.</p> - -<p>A first issue was 400,000,000 francs or ($80,000,000) worth of -Assignats, each note being 100 francs or $20 value and bearing interest -daily, at 5 per cent. They were to be redeemed by the product of the -sales, and from certain other sources, at the rate of 120,000,000 -francs ($24,000,000) in 1791; 100,000,000 francs ($20,000,000) in 1792; -80,000,000 francs ($16,000,000) in 1793 and 1794, and the balance in -1795. The success of this first issue was undoubted, as all such first -issues are.</p> - -<p>Mirabeau was a strenuous advocate of the Assignats. "They represent," -he said, "real property, the most secure of all possessions, the soil -on which we tread. There cannot be a greater error than the fear so -gener<span class="pagenum"><a name="Page_139" id="Page_139">[Pg 139]</a></span>ally prevalent as to the overissue of Assignats, reabsorbed -progressively in the purchase of the national domain; this paper money -can never become redundant."</p> - -<p>In 1790 the interest was reduced to 3 per cent, and as the Treasury had -again become exhausted, a further issue was decided upon; it was also -decreed that the Assignats were to be accepted as legal tender, all -public departments being instructed to receive them as the equivalent -of metal money. The second issue amounted to 800,000,000 francs -($160,000,000) and carried no interest. It was solemnly declared in -the decree authorizing the issue that the maximum issue was never -to exceed one billion two hundred million francs (1,200,000,000) -($240,000,000). This pledge, however, was soon broken, and further -issues brought the total up to three billion seven hundred and fifty -million francs (3,750,000,000) ($750,000,000). The consequence of these -further issues was instant depreciation, and the note of 100 francs -($20) sank to less than 20 francs ($4) in coin. Recourse was then had -to protective legislation. The first step was to decree the penalty -of six years' imprisonment against any person who should sell specie -for a more considerable quantity of Assignats, or should stipulate a -different price for commodities, according as payment was to be made -in specie or Assignats. For the second offense, the penalty was to be -twenty years' imprisonment (August 1, 1793). For this the death penalty -was ultimately substituted (May 10, 1794). This severe provision was, -however, repealed after the fall of Robespierre. Notwithstanding these -precautions, the value of the Assignats still declined, till the -proportion of specie had become that of sixty to one. Then came the -passing, by the convention, on May 3, 1793, of the absurd maximum. The -decree required all farmers and corn dealers to declare the quantity -of corn in their possession and to sell it only in recognized markets. -No person was to be allowed to lay in more than one month's supply, a -maximum price was fixed above<span class="pagenum"><a name="Page_140" id="Page_140">[Pg 140]</a></span> which no one was to buy or sell under -severe penalties. These measures were soon stultified by further issues -and by June, 1794, the total number of issued Assignats aggregated -nearly eight billion francs ($1,600,000,000), of which only two billion -four hundred and sixty-four million francs had returned to the Treasury -to be destroyed. The extension of the maximum price to all commodities -only increased the confusion. Trade was completely paralyzed and -all manufacturing establishments were closed down. Attempts by the -convention (legislature) to increase the value of the Assignats were of -no avail. Too many causes operated in favor of the depreciation; the -enormous issue, the uncertainty as to their value, if the revolution -should fail; the relation they bore both to specie and commodities -which retained their value and refused to be exchanged for money of -constantly diminishing power. Even between the Assignats themselves -there were differences. The Royal Assignats themselves, which had been -issued under Louis XVI had depreciated less than the Republican ones. -They were worth from 8 per cent to 15 per cent more, a fact due to the -hope that in case of a counter-revolution they would be less likely to -be discredited.</p> - -<p>The Directory was guilty of even greater abuses in dealing with the -Assignats.</p> - -<p>By 1796 the issue had reached the enormous figure of forty-five billion -francs ($9,000,000,000), and even this gigantic total was swollen -still more by the numerous counterfeits introduced into France by the -neighboring countries. The Assignats had now become totally valueless, -the abolition of the maximum the previous year, 1795, had produced -no effect; and, though by various payments into the Treasury, the -total number had been reduced to about twenty-four billion francs -($4,800,000,000), their face value was about thirty to one of coin. -At this value they were converted into eight hundred million francs -($160,000,000) of land warrants or Mandats Territoriaux, which were to -constitute a mortgage<span class="pagenum"><a name="Page_141" id="Page_141">[Pg 141]</a></span> on all the lands of the republic. These Mandats -were no more successful than the Assignats; and even on the very day of -their issues were at a discount of 82 per cent. They had an existence -of six months, and were finally received back by the State at about -the 70th part of their face value in coin. That is, the State gave one -dollar in coin for seventy dollars in the paper.</p> - -<p>This experience of France has been the experience of practically the -entire world, Italy, Russia, Germany, Great Britain. The South American -countries are now going through it. Even the very best of them, Brazil -and Argentina, although their notes are not backed up by the land as -those of France were, have suffered the same consequences of their -folly. They are the notes issued by the Government against their own -credit. They were issued as fiat money, but are gradually being retired -just as the Assignats were as depreciated currency.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, we haven't anything on the South American -countries to speak of ourselves from Colonial times down to the present -day.</p> - -<p><span class="smcap">Uncle Sam</span>: Now, Mr. Banker, just hold up; you can't get into -that tale of woe tonight, for I always have a bad dream when I think of -it; a veritable nightmare. We must quit for tonight. Mr. Farmer over -there has gone to sleep on my hands already.</p> - -<p><span class="smcap">Mr. Farmer</span>: No, he hasn't; not on your life, and I hope it's a -very long life, Uncle Sam.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Mr. Farmer, you are the first man I ever saw -who snores when he is awake. You snored loud enough to wake the dead. -Your snoring actually kept me from going to sleep.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, boys, let me see whether I can recollect just -what points we have made tonight.</p> - -<p><i>First</i>: There is credit, which is the result of confidence and trust. -It is the right to demand payment.</p> - -<p><i>Second</i>: For every credit granted, a debt is created.</p> - -<p><span class="pagenum"><a name="Page_142" id="Page_142">[Pg 142]</a></span></p> - -<p><i>Third</i>: If every debt is paid every credit will be canceled.</p> - -<p><i>Fourth</i>: Credit is never excessive no matter what its absolute -quantity is, so long as it always returns into itself; that is, cancels -itself.</p> - -<p><i>Fifth</i>: Credit from a commercial point of view, when granted to create -consumable commodities, the necessaries of life, is filling its proper -function.</p> - -<p><i>Sixth</i>: Credit granted to facilitate the sale, transfer and -distribution of consumable commodities, the necessaries of life, is -filling its proper function from a commercial point of view.</p> - -<p><i>Seventh</i>: Credit extended in the form of acceptances of checks, -drafts or bills of exchange, growing out of the actual production and -distribution of the necessaries of life, is filling its proper function -from a commercial point of view.</p> - -<p><i>Eighth</i>: Credit obtained through accommodation acceptances or -indorsements is a bane to and peril of commerce, especially if such -credit is used in real estate investments, and more particularly in -speculation.</p> - -<p><i>Ninth</i>: Credit granted upon real estate securities should depend -entirely upon the investment fund of the country for its cancelation. -So far as such credit is canceled by appropriating the commercial fund -of the country, labor will be thrown out of employment, production and -consumption will cease to a corresponding degree, and this will measure -the amount of human suffering that is sure to follow.</p> - -<p><i>Tenth</i>: Real estate is not a proper basis for currency, because it -is not a consumable commodity with a ready market where it can be -converted into gold and because the value of real estate from the -standpoint of our currency needs is unlimited and therefore necessarily -not convertible into gold coin which is always essential to a sound -currency.</p> - -<p>The history of credit granted to our Government or forced by our -Government from the people will furnish<span class="pagenum"><a name="Page_143" id="Page_143">[Pg 143]</a></span> plenty of food for our -appetites, humble our pride, and recall most sickening experiences one -week from tonight. Don't you think so, Mr. Banker?</p> - -<p><span class="smcap">Mr. Banker</span>: I certainly do.</p> - -<p><span class="smcap">Mr. Lawyer</span>: So do I. And even then we cannot do the subject -half justice; but I suppose that we must get through some time.</p> - -<p><span class="smcap">Uncle Sam</span>: I see that Mr. Farmer is now wide awake, but that -Mr. Laboringman over there is starting for the land of nod, because Mr. -Farmer is not keeping him awake by his snoring, so I think I'd better -say good night.</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_144" id="Page_144">[Pg 144]</a></span></p> - - - - -<p class="ph2"><a name="EIGHTH_NIGHT" id="EIGHTH_NIGHT">EIGHTH NIGHT</a></p> - -<p class="center">COLONIAL CREDIT MONEY</p> - - -<p><span class="smcap">Uncle Sam</span>: When we parted last Wednesday night, we all agreed -to make our experiences in Government issues of money the subject of -inquiry tonight, and I presume you have all been spending your days and -nights in studying American history, that is, in studying me.</p> - -<p><span class="smcap">Mr. Merchant</span>: I have put more work into the question of our -Government issues of money than into any subject in my life in the same -length of time, principally because I knew Mr. Farmer used to be what -we called a Green-backer some years ago and I wanted to be ready if he -happened to still entertain those ideas and was still subject to those -fits of madness that came over him before he paid off the mortgage on -his farm. But that's ancient history now, and he's holding the mortgage -on the other fellow's farm. Now, Mr. Farmer, don't get hot, for I don't -mean any disrespect to you, but only to recall that craze for fiat -money when you and I were much younger than we are now. Then again, -you seem to have had a real revelation during our last talk, and to -have been converted to the principle that there could be too much paper -money.</p> - -<p><span class="smcap">Mr. Farmer</span>: That's all right, Mr. Merchant, but I well -remember that I was not alone when I used to advocate greenbacks -without limit. Mr. Banker over there was in the same boat with me.</p> - -<p><span class="smcap">Mr. Banker</span>: Right you are, Mr. Farmer, and there was not a man -in this immediate neighborhood then except old Judge Jones who did not -agree with us, but we've traveled some since then.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Well, gentlemen, I am a little surprised to find -you all so completely convinced that Government<span class="pagenum"><a name="Page_145" id="Page_145">[Pg 145]</a></span> issues of money -are to be condemned before a fair trial. I half imagine that Mr. -Manufacturer over there will sympathize with me in my contention for -the constitutional power, and the wisdom of issuing United States Notes.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: You are very sadly mistaken about me; I -am ready to prove that you are mistaken, both as to the wisdom and -constitutional right of the Government to issue money even if you are a -lawyer, and ought to know all about the constitution. I don't claim to -know very much about the money question, generally speaking, but like -Mr. Merchant I have made a special study of this particular feature of -it. I am convinced there is only one side to this question, however -many sides there may be to some other phases of it, and we do not have -to leave the history of our own country for overwhelming proof of the -folly of it. I for one do not believe that the Government has any -constitutional right to issue money.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Well, Well!</p> - -<p><span class="smcap">Mr. Merchant</span>: We'll make you say "well, well" before we get -through with you, if it takes till morning.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: It won't take until morning and when we get -through with him, he will be finished for fair, I think.</p> - -<p><span class="smcap">Mr. Laboringman</span>: We are evidently going to have some fun -tonight. You seem to think that you have Mr. Lawyer in chancery. Now, -blaze away. I want you to nail Mr. Lawyer on the greenback question, if -you can; for he has been getting the best of you on several occasions; -personally, I hope I will never get any less of the greenbacks as they -are good enough for me.</p> - -<p><span class="smcap">Mr. Merchant</span>: But they are not good enough for you, Mr. -Laboringman, nor for anyone else, if they are not worth one hundred -cents on the dollar; or if they are ever liable to be worth less than -one hundred cents on the dollar; or if they are teaching an economic -falsehood, so long as they remain in existence; or if they are -posi<span class="pagenum"><a name="Page_146" id="Page_146">[Pg 146]</a></span>tively doing the business interests of the country actual harm by -excluding a corresponding amount of gold, and finally, if they have no -legal right for existence today, even though one may admit for the sake -of the argument that it was necessary to issue them to save the nation, -an admission which I will not make.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Good for you, Mr. Merchant, that statement -has the right ring to it. The greenback is guilty of every one of the -charges that you make from my point of view, and so it must always be -with every Government issue of money.</p> - -<p>You may go back to the very first Government issue of paper money in -this country, and follow the practice down to this very hour, and it -has left a trail of dishonesty, disaster, ruin and misery unmatched by -any other single cause. In my contention for this statement I am going -to rely for my historical facts upon George Bancroft, the greatest -American historian of our earlier period.</p> - -<p>In the fall of 1690, upon the return of an unsuccessful expedition -which Massachusetts had sent out to capture Quebec, the general court, -the then legislative power, ordered an issue of "£7,000 ($35,000) of -printed bills of equal value with money." And the balance of the cost -which was £40,000 or $200,000 was issued the following day.</p> - -<p>In July, 1692, within nineteen months of the earliest emission, -the first legislature under the new charter which transformed the -self-governing colony of Massachusetts Bay into a direct dependency -of Great Britain, made "all these bills of public credit current -within this province in all payments equivalent to money, excepting -specialties and contracts made before the publication" of this new law. -Their credit was supported by receiving them in all public payments at -a premium of 5 per cent.</p> - -<p><i>Immediately all the coins then in Massachusetts were exported to -England and the new stock followed as fast as it came in from abroad.</i> -The vain sorrow of the province expressed itself in 1697 by the -prohibition of "the export<span class="pagenum"><a name="Page_147" id="Page_147">[Pg 147]</a></span> of coin, silver money or bullion." In June, -a joint committee of the Council and representatives, to be aided by -the advice of merchants and others, was appointed to consider how to -revive trade, and find out some suitable medium to supply the scarcity -of "money"; and it is to be noted that the word "money" in all colonial -legislation was used exclusively for gold and silver coin.</p> - -<p>The first issue of Bills of Credit of Massachusetts, after it became a -Royal Province, was in November, 1702, for £10,000 in value "equal to -money," but to be accepted in all public payments at the advance of 5 -per cent.</p> - -<p>The passion for borrowing spread like flame on the dry prairie. In -November, 1714, Massachusetts ordered £50,000 to be let out by trustees -to the inhabitants of the province for five years on real security, -at 5 per cent per annum, to be paid back in five annual installments. -The Act was a sacrifice of the public interests to borrowers, who -were to return their loan only after a lapse of time, sufficient to -insure the very great depreciation of the paper in which it was to -be paid. Moreover, the borrowers needed an enforcement by law of the -circulation of the paper which they borrowed: swiftly, therefore, in -December, 1715, under a pretext "to prevent the oppression of debtors" -a stringent statute made the bills legal tender for all debts that had -been, or should be contracted, between the 30th of October, 1705, and -the 30th of October, 1722.</p> - -<p>The loan of Bills of Credit by Massachusetts in 1714 was managed at -the seat of Government. But why should Boston be favored? "That the -husbandry, fishery and other trades of the province might be encouraged -and promoted," Bills of Credit on the province to the amount of -£100,000 were in 1716 ordered to be distributed to a loan office in -each county. But why should borrowers in the smaller townships be -forced to travel to their shire towns? Let a public money lender be -near every man's door. By the statute of March, 1721, £50,000 were -distributed among borrowers in each of the several towns<span class="pagenum"><a name="Page_148" id="Page_148">[Pg 148]</a></span> according -to its proportion in the last province tax. Again in 1728, £60,000 in -Bills of Credit were proportionately loaned among the several towns, -even on personal security, at the rate of 6 per cent for six years, -after which repayment was to be made in five yearly installments. Of -course, "money" disappeared; not even a single penny was to be had; the -small change became of paper.</p> - -<p>The next development of the colonial system of paper money was a -partial repudiation, so far as Massachusetts was concerned. In -February, 1737, less than forty-seven years after the first emission -of Bills of Credit by Massachusetts, that colony issued £9,000 of a -new tenor of which one dollar was to be equal to three of the old, -and which, after five years, was to be redeemed at par in silver and -gold. When the time of redemption came around they were not paid off, -but by a further repudiation four pounds for one was made the rate in -exchanging the old tenor for the new.</p> - -<p>On the 9th of January, 1739, the general court in Massachusetts made -this confession: "The emissions of great quantities of bills of public -credit, without certain provision for their redemption by lawful money -in convenient time, have already stripped us of all our money and -brought them into contempt to the great scandal of the government; for -the remedy thereof this province hath fixed the value of their bills in -lawful money, and the time of their redemption in 1742 new style."</p> - -<p>But that year went by and relief had not been found. In 1744, James -Allen, the preacher of the annual election sermon, from the pulpit, -addressed the Governor in this wise: "Be the means of delivering us -from the perplexing difficulties we are involved in by an unhappy -medium, uncertain as the wind and fluctuating like the waves of the -sea, through the unrighteousness thereof the land mourneth, and the -cries of many are going up into the ears of the Lord of Sabaoth."</p> - -<p>In 1745, people of Massachusetts took the largest part in the brilliant -enterprise which ended in the Louisburg<span class="pagenum"><a name="Page_149" id="Page_149">[Pg 149]</a></span> campaign, and were to receive -from the British Parliament some payment for their extraordinary -expenses in the expedition.</p> - -<p>In February, 1748, Massachusetts, while awaiting its share of this -remuneration, invited the governments of Connecticut, New Hampshire and -Rhode Island to join in abolishing the use of Bills of Credit; but as -no one of the three gave effectual heed to the summons, the people of -Massachusetts proceeded alone. It was estimated that about £2,200,000 -of their Bills of Credit would be outstanding in the year 1749, that -is, $11,000,000. In January of that year an act was passed redeeming -the bills of the old issue or tenor at the rate of 45 shillings, those -of the new issue or tenor at the rate of 11s. and 3d. for one Spanish -dollar; a rate which somewhat exceeded their market value at the time.</p> - -<p>The Bills of Credit of New Hampshire, Rhode Island and Connecticut were -excluded by most stringent laws, and Massachusetts, with its quickened -industry and established credit, "sat as a Queen among the Provinces."</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Manufacturer, you must have gotten your -information from the same source that I obtained mine; all that you've -said sounds very much like George Bancroft, whose history of this -question I've just read. Since my ancestors came from Connecticut, I am -going to tell her tale of woe.</p> - -<p>In June, 1709, Connecticut put forth £8,000 of bills, or $40,000; then -soon followed that by £11,000 more, which were "to be in value equal to -money, and to be accordingly accepted in all public payments."</p> - -<p>In October, 1718, Connecticut, to prevent oppression by the rigorous -exaction of money, declared its Bills of Credit legal tender for -debt contracted between the 12th day of July, 1709, and the 12th day -of July, 1727. The time for the operation of the law was afterwards -extended to 1735.</p> - -<p>In the year 1733 Connecticut loaned interest-bearing bills for nearly -£50,000. In May, 1740, it issued £30,000<span class="pagenum"><a name="Page_150" id="Page_150">[Pg 150]</a></span> of a new issue of which -£22,000 were to be loaned to freeholders of the colony on mortgage, -or personal security, to be repaid one half in four years, the other -half in eight years in current bills, or hemp, or duck, or canvas at -their current market price. These bills were made legal tender in all -payments. But this provision was censured by the lords of trade in -England, and in the following November it was repealed.</p> - -<p>Roger Sherman, the greatest statesman of Connecticut, gave his mind -to the questions about money and mediums, commerce and exchanges, -and having mastered them in 1752, under the name of Philoeuonomos, -"the lover of just laws," he addressed to the men of Connecticut "a -caveat" against injustice or an inquiry into the evil consequences of -a fluctuating medium of exchange. These are some of his words: "The -Legislature of Connecticut have at length taken effectual care to -prevent a further depreciation of the Bills of this colony; the other -Governments (meaning New Hampshire and Rhode Island) not having taken -the like prudent care, their Bills of Credit are still sinking in their -value...." "<i>Money ought to be something of certain value it being that -whereby other things are to be valued</i> ..." and this I would lay down -as a principle that can't be denied that a debtor ought not to pay -any debts with less value that what was contracted for, without the -consent of, or against the will of the creditor.... "If what is used as -a medium of exchange is fluctuating in its value, it is no better than -unjust weights and measures, both of which are condemned by the law -of God and man; and, therefore, the longest and most universal custom -could never make the use of such a medium either lawful or reasonable.</p> - -<p>"We in this Colony are seated on a very fruitful soil, the product -whereof with our labor and industry and the divine blessing thereon, -would sufficiently furnish us with and procure us all the necessaries -of life and as good a medium of exchange as any people in the world<span class="pagenum"><a name="Page_151" id="Page_151">[Pg 151]</a></span> -have or can desire. But so long as we part with our most valuable -commodities for such Bills of Credit, as are no profit, we shall spend -a great part of our labor and substance for that which will not profit -us; whereas, if these things were reformed we might be as independent, -flourishing and happy a colony as any in the British Dominion."</p> - -<p>In May of the same year, the famous traveler, John Ledyard, and -twenty-five other merchants of Connecticut caught up the theme, and in -a petition to their legislature said: "The medium of trade whereby our -dealings are valued and weighed, ought to be esteemed as sacred as any -weights and measures whatever, and, to maintain justice, must be kept -as stable, for as a false weight and a false dollar is an abomination -to the Lord, a false and unstable medium is equally so, as it occasions -as much iniquity, and is at least as injurious."</p> - -<p>The Connecticut Assembly supported these memorialists, excluded -the bills of paper money of Rhode Island, and overcoming every -embarrassment, at last, like Massachusetts, redeemed every nine -shillings of its paper money with one shilling in specie. After the -first day of November, 1756, all accounts in Connecticut were kept in -lawful money.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: The experience of the other New England -States is practically the same as that you have just recited in -Connecticut. In 1717 the Council of New Hampshire was zealous to follow -the fashion of issuing paper money by loan and issued £15,000.</p> - -<p>Rhode Island, also, in July, 1710, on its first emission of Bills -of Credit, declared them equal in value to "money," and made them -receivable in all public payments. In November, 1711, Rhode Island -discharged a claim by a loan of its Bills of Credit to the amount of -£300 for four years free of interest.</p> - -<p>New Jersey, too, tried its hand at the same scheme, following the lead -of Pennsylvania. In December, 1783, it issued £31,250, and in 1786, it -struggled hard to issue<span class="pagenum"><a name="Page_152" id="Page_152">[Pg 152]</a></span> a larger amount, but William Patterson, who -was afterwards a member of the Supreme Court, resisted the proposal -with inflexible courage, and here are some of the words which he -employed: "An increase of paper money, especially if it be a tender, -will destroy what little credit is left, will bewilder conscience in -the mazes of dishonest speculations, will allure some and constrain -others into the perpetration of knavish acts, will turn vice into a -legal virtue, and sanctify iniquity by law. Men have, in the ordinary -transactions of life, temptations enough to lead them from the path -of rectitude; why then pass laws for the purpose, or give legislative -sanction to positive acts of iniquity? Lead us not into temptation -is a part of our Lord's prayer worthy of attention at all times, and -especially at the present."</p> - -<p>In March, 1723, when there was universal peace, borrowers undermined -the scruples of Pennsylvania, and that colony issued bills of credit -for loans to individuals, and not only compelled creditors to receive -the bills at par, or "lose their debts," but ordered sellers to -receive them at their nominal value in the sale of goods, or lands, or -tenements or "forfeit a sum from 30 shillings to £50."</p> - -<p>Again, on March 21, 1783, Pennsylvania, which hardly knew what it was -doing and had not yet gathered up the strength of its will, was the -first to renew in peace the evil usage of the times of war, and issued -$300,000 in what was called Treasury Notes, the lowest of one-quarter -of a dollar, the highest at twenty dollars. Two years later, but after -great resistance, its legislature issued £150,000, the lowest note -of 3 pence. But in the decisive hour Pennsylvania, too, proved the -implacable foe of paper money.</p> - -<p>In 1733, £90,000 in its bills of credit were brought into circulation -by loans of 4 per cent by the legislature of Maryland.</p> - -<p>Virginia was involved from May, 1755, in measures of war, and immediate -and increasing issues of paper bills<span class="pagenum"><a name="Page_153" id="Page_153">[Pg 153]</a></span> were made which from the -beginning were a lawful tender for private debts. For the new "notes" -of April, 1757, it was further ordered that any seller who should -demand more for his goods in notes than in gold or silver coin, should -"forfeit 20 per cent of their value." ... In 1781, in the month of -March, Virginia directed the emission of £10,000,000 and authorized -£5,000,000 more; and the Continental paper currency and its own were -made a legal tender in discharge of all debts and contracts, except -contracts which expressly promised the contrary.</p> - -<p>In 1780 North Carolina directed the emission of more than £1,000,000, -and such further sums as the exigencies of the state might require; in -the next year gave authority at one dash to issue $26,250,000 of paper -dollars bearing 6 per cent interest. Again in 1783, North Carolina -emitted £100,000, declaring each pound of the emission equal to two and -one-half Spanish milled dollars, and a tender in all payments whatever. -In 1785, the state emitted £100,000 more.</p> - -<p>South Carolina, too, as late as 1785, permitted itself to be persuaded -to lend among the constituents of its legislature £100,000 in paper -bills of the state, which were to pass in payments to the treasury of -the state but were not otherwise made legal tender. The state soon -perceived that the paper banished more gold and silver than the amount -of the bills which were to take their place.... This was done, although -its legislature on the pretext of creating a fund to sink former Bills -of Credit, and to encourage trade and commerce in July, 1712, had -ordered £52,000 in new bills of credit to be stamped and put out at -interest in loans. In December, 1717, they passed this statute: "It is -found by experience that the multiplicity of the Bills of Credit hath -been the cause of the ruin of our trade and commerce, and hath been the -great evil of this province, and that it ought with all expedition to -be remedied."</p> - -<p>Finally, the great Empire State, with all the rest, en<span class="pagenum"><a name="Page_154" id="Page_154">[Pg 154]</a></span>tered eagerly -into the defense of its northern frontier, and in November, 1709, -for the first time involved itself in the use of Bills of Credit. In -1770, the legislature of New York passed an Act for emitting £120,000 -in Bills of Credit to be put out on loan. Again in April, 1786, the -opening year of the final great movement for a closer union of the -state, it placed an emission of £200,000 in Bills of Credit with loan -officers, to be loaned on mortgage security; and they were made a legal -tender in any suit for debt or damages, and the costs of suit. The -bills were further to be received for duties to be collected at the -Port of New York by the state. Gen. MacDougal, the brave soldier and -patriot, though sick unto death, insisted upon being carried to the -Senate, that, as the last act of his public life, he might give his -voice against the proposal to emit paper money.</p> - -<p>In 1780, the United States began repudiation by issuing a new paper -dollar equal to forty of their previous issues. After their new -constitution was established, all that remained of the bills of the -Continental Congress were called in at the rate of one dollar in silver -for one hundred dollars impressed on paper.</p> - -<p><span class="smcap">Mr. Farmer</span>: While you gentlemen were studying Bancroft, I have -been reading Horace White upon this question of Government issues of -money, and thought I would not give myself away until after you exposed -your hands. You've piled up facts, but you've given us a very slight -impression of the effect that these money issues had, and therefore I -am going to give you the benefit of my explanation which I think throws -another and very important light upon the subject.</p> - -<p>Mr. White refers to a pamphlet circulated in 1743, which speaks of the -Bills of Credit in New England issued on loan "to themselves, members -of the legislature and to other borrowers, their friends, at easy -and fallaceous Lays, to be repaid at very long Periods; and by their -provincial laws made a tender in all contracts, trade and business, -whereby currencies, various and illegal,<span class="pagenum"><a name="Page_155" id="Page_155">[Pg 155]</a></span> have been introduced which -from their continued and depreciated nature in the course of many -years, have much oppressed widows and orphans and all other creditors."</p> - -<p>The same writer gives special attention to the colony of Rhode Island, -which had "defrauded more in a few years than any of the most wicked -administrations in the several nations of Europe have done in several -centuries. A contract made thirty years ago for £100,000 sterling in -value is at present reduced to a nominal 32 shillings."</p> - -<p>White says that in addition to legal tender acts there was a great -variety of laws to compel people to sell their property at the same -price for bills of credit as for silver. The debtor class was not -satisfied with forcing depreciated paper upon creditors for past -obligations, but insisted that they ought to be able to buy as much -property with the paper as with specie. Those who had been forced to -take the paper for past debts naturally joined in this demand, and the -legislatures agreed with them. Hence we find in nearly all the colonies -severe penalties on those who charged more for their goods, lands or -services in Bills of Credit than in money. In some cases the penalty -was a fine, in others imprisonment, in others confiscation of property -offered.</p> - -<p>The usual course of events where Bills of Credit were issued was as -follows: (1) emission; (2) disappearance of specie; (3) counterfeiting; -(4) wearing out of bills; (5) calling in and replacing worn and -counterfeited issues with new ones; (6) extending the time for old -ones to run, especially those which had been placed on loan; (7) -depreciation; (8) repudiation of early issues in part and the emissions -of others called "New Tenor."</p> - -<p>Dr. Douglas says that Massachusetts had at one time "old tenor, -middle tenor, new tenor first, new tenor second." Rhode Island had an -indefinite number of tenors.</p> - -<p>All sorts of opprobrious epithets were heaped upon them. They were -called invidious statutes, old, worn,<span class="pagenum"><a name="Page_156" id="Page_156">[Pg 156]</a></span> torn, tattered, shattered, -ragged, mutilated, defaced, obliterated, illegible and "unfit to pass."</p> - -<p>The depreciation of the Colonial bills varied in the different -colonies. In Massachusetts the maximum depreciation was 11 for 1 (the -standard being "proclamation money"). In Connecticut it was 8 for 1. In -1763, the value of the New Hampshire shilling was a little less than a -half penny; in 1771, it vanished altogether. Rhode Island owed tenor -bills in 1770 that were worth 26 to 1. Those of North Carolina were 10 -for 1; of South Carolina 7 for 1.</p> - -<p>Here is Mr. White's graphic description of the times: "The pamphlets -and records of the colonial period are filled with accounts of the -distress and demoralization caused by depreciated paper made legal -tender. As all loans were so payable, the accumulations of age, and -the inheritance of orphans dwindled. So, too, did the earnings of the -wageworker. In order to avoid the losses from a depreciating standard -of value, resort was had by working men to 'store pay,' and here they -were generally cheated. Trustees and executors, who had money in their -hands which belonged to other people, and who saw how things were -going, often postponed the payment on frivolous pretext, since each -delay enabled them to settle their accounts with less value, thus -devouring widows' houses. Not only was bad blood stirred up by the -resistance of the Royal Governors, but a spirit of lawlessness was -engendered against the local assemblies, if they showed a disposition -to resist the demands of the <i>green-backers</i> of that day. Even after -the revolution the legislature of New Hampshire was mobbed because it -refused to legal tender bills. One of the demands of Shays' rebellion -in Massachusetts was for more paper money. In Rhode Island, after -the revolution, a general system of repudiation of debts, public and -private, was undertaken, and carried through by means of legal tender -paper in spite of the decisions of her courts."</p> - -<p>However bad these colonial bills of credit proved to<span class="pagenum"><a name="Page_157" id="Page_157">[Pg 157]</a></span> be, if it were -possible those of the revolutionary period were still worse.</p> - -<p>Even before the Continental Congress assembled the separate colonies -began to issue Bills of Credit. When the Continental Congress met in -June, 1775, Franklin urged that the bills should bear interest, in -order to prevent depreciation. He even urged that the interests should -be payable in "hard dollars," but this was voted impracticable.</p> - -<p>All seemed to be in confusion, and in this unsettled state it was voted -in July, 1775, to issue due bills for 2,000,000 Spanish milled dollars, -to be sunk by taxes in four successive years, beginning November 30, -1779, the taxes to be levied and collected by the states in proportion -to their population. These bills were not legal tender at the time of -their issue. The Congress had no power to make them so, but in January, -1777, it was recommended that the States should do so, and this they -did, one after another, in one way or another. Before the two millions -were issued, another million was wanted, and was authorized with three -million more, before the end of the year; and still they came nine -millions more, or until fifteen in all were out, before independence -was declared. This was called Continental Currency to distinguish it -from the issues of the separate states. Mr. White says from this time -the demon of "fiat money" had possession of the country, and worked -its will on the inhabitants. The issues ran on in an increasing volume -till they amounted to $240,000,000 in the year 1779. In 1781 the whole -mass became worthless. On this subject the essays of Pelatiah Webster -have become classic. Mr. Webster, it is thought by some, was the author -of the Constitution. He was a merchant of Philadelphia and an ardent -patriot. He wrote "we have suffered more from this than from every -cause of calamity; it has killed more men, pervaded and corrupted the -choicest interests of our country more and done more injustice than -even the arms and artifices of our enemies."</p> - -<p><span class="pagenum"><a name="Page_158" id="Page_158">[Pg 158]</a></span></p> - -<p>Professor Sumner says that when the depreciation was going on rapidly a -man might lose his whole wages while earning them.</p> - -<p>Naturally, the next thing in order was the establishment of prices, for -which purpose conventions were called. The first one held at Providence -was composed of delegates from the four New England states. It fixed -the prices at which imported goods might be sold, but an exception was -made of arms and ammunition in order to encourage their importation.</p> - -<p>Of course the proceedings in Connecticut were substantially the same. -This state, however, had a law to prohibit persons from buying any more -goods than the select men, or county commissioners, should judge to -be necessary for the use of their respective families. Anything like -prudence in laying in supplies was thus forbidden.</p> - -<p>A Price Convention of the six Middle States was held at York, Pa., in -March, 1777, but was unable to agree upon a single point.</p> - -<p>When the Price Conventions failed of their object, new ones were held -fixing new limits, for example fourfold the prices of 1774, then -eightfold, then tenfold, then twentyfold—terrorism being applied in -each case to enforce the decrees. Country folks accused town folks -of extortion, and threatened to come in and take what they wanted by -force. Town folks accused country folks of withholding their produce, -and so laws were enacted against withholders. Anonymous hand bills and -broad-sides were circulated threatening vengeance on merchants.</p> - -<p>As a result of such irrational business disturbances, Boston was, in -October, 1779, on the verge of starvation; money transactions had -nearly ceased and business was done by barter.</p> - -<p>A soldier's pay had dropped by depreciation from $7.00 per month to 33 -cents, although it had been twice raised by Congress. Washington could -not move his sol<span class="pagenum"><a name="Page_159" id="Page_159">[Pg 159]</a></span>diers to Yorktown till Robert Morris had borrowed hard -money from Rochambeau for their back pay.</p> - -<p>In March, 1780, Congress tried the colonial experiment of "new tenor" -in a very awkward and roundabout way, and declared that "old tenor" -to be worth 40 to 1; the actual depreciation being 60 for 1. As it -was supposed that $200,000,000 of Continental money was out, this -was a repudiation of all but $5,000,000 of it. The depreciation then -went on more rapidly than before. The "new tenor" bills started at -a depreciation of 2 for 1, which became 3 for 1, even before they -reached the army, and dropped to 6 to 1 in a few months. Old tenor -went at a galloping pace at 500 for 1 in Philadelphia, when it ceased -to circulate. In the remoter districts of the South, it continued -in circulation nearly a year longer, and until the depreciation had -reached 1,000 to 1. The southern people, when they learned that -they had been using the stuff long after it had become worthless in -the North, thought that they had been cheated by the Yankees, thus -intensifying the sectional distrust which was already so dangerous.</p> - -<p>Continental money was now an object of execration and afterwards of -derision. "Not worth a continental" became a synonym for absolute -worthlessness, and remains an axiom to this day. In the Act of Congress -approved August 4, 1790, authority was granted for funding the bills -in 6 per cent bonds "at the rate of $100 in the said bill for $1.00 in -specie." Only $7,000,000 turned up to take advantage of this provision.</p> - -<p><span class="smcap">Mr. Banker</span>: I want to be perfectly frank with the rest of you -men. Last Thursday I was over at Mr. Lawyer's office and we got into -a discussion about this matter. I was literally astounded to find him -in favor of Government issues of money, and that he actually thought -such issues were constitutional. I knew how Mr. Merchant and Mr. -Manufacturer stood, for we had talked the matter over some time ago. -So we got together and di<span class="pagenum"><a name="Page_160" id="Page_160">[Pg 160]</a></span>vided up the work we should each of us do in -order to convince Mr. Lawyer that he was wrong on both points.</p> - -<p>From what has been shown with respect to the facts I am sure that Mr. -Lawyer must be convinced that the principle at least of Government -issues of legal tender paper money is unsound; for all the evidence, -as we have seen for 100 years, from 1690 to 1790, is all on one side. -Indeed not a single exception can be found anywhere. You will remember -that everyone of the thirteen original states tried fiat legal tender -paper money, and then when they all united under the Continental -Congress, they tried it altogether; but the result was precisely the -same.</p> - -<p><i>First</i>: You will remember, came the issuance of the Bills of Credit, -as they called them, or Greenbacks, as we call them, paper money.</p> - -<p><i>Second</i>: And immediately all the gold and silver disappeared because -driven from the channels of trade, with something cheaper with which -the debtor could cancel his obligations.</p> - -<p><i>Third</i>: Dishonesty, dishonor, fraud, disaster, ruin and repudiation -followed each other in quick succession.</p> - -<p><i>Fourth</i>: Then came the return to sound conditions when paper issues -were discarded and the effort to make something out of nothing was -abandoned.</p> - -<p>Mr. Lawyer, I want to ask you now whether you do not think we have made -a case against you so far as the unwisdom and utter folly of Government -issues of paper money is concerned.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I must admit that the facts are overwhelming. -I had never taken the time nor trouble to investigate the subject, -but had assumed that one of the functions of our Government was the -issuance of money, even paper money, if you like. It seems from what -has been shown here and last Wednesday night as well that this scheme -of issuing paper money has been tried, not only by everyone of our -thirteen Colonies and the Continental Congress, but by practically -every country of the world at some time or other. It was tried in -Austria,<span class="pagenum"><a name="Page_161" id="Page_161">[Pg 161]</a></span> England, France, Germany, Italy, Russia and is now going -on in nearly every one of the South American countries with the same -experience, I am informed, that other countries have suffered. Now, so -far as the facts have been disclosed, there is not a single instance -in which the scheme has been tried that has not resulted in precisely -the same way—complete failure and ultimate dishonor and repudiation if -persisted in as a principle.</p> - -<p>Under the circumstances I must say, as every fair-minded man must, -that the practice has been an absolute failure, and therefore it must -be admitted that the principle must be unsound, for it seems to have -worked nowhere, although tried under every conceivable condition. Of -course I am compelled to give in on the unsoundness of the scheme. Now, -you understand, that my admission as to the unsoundness and unwisdom of -the practice does not carry with it my admission that the United States -Government has no constitutional right or authority to issue paper -money if it chooses to do so.</p> - -<p><span class="smcap">Mr. Banker</span>: I understand perfectly well that your admission -of the one point has nothing whatever to do with the constitutional -question, but I wanted to know your conclusion after a consideration of -the facts as presented first.</p> - -<p>I think everyone here will agree that the disastrous experiences of -the colonies and of the Continental Congress in issuing paper money -must have forced this question upon the minds of the framers of the -Constitution, as one of the very greatest importance to be settled by -them. Certainly what they thought about it would indicate what they -intended to do. I will first show this by what they said, and then I -will demonstrate what they intended to do by what they actually did do -in the Constitutional Convention.</p> - -<p>Alexander Hamilton, in June, 1783, set forth explicitly in a resolution -for a new Constitution of the United States of America his deliberate -opinion in these words: "To emit an unfunded paper as the sign of value -ought not to<span class="pagenum"><a name="Page_162" id="Page_162">[Pg 162]</a></span> continue a formal part in the Constitution, nor ever -hereafter to be employed; being in its nature pregnant with abuses -and liable to be made the engine of imposition and fraud; holding out -temptations equally pernicious to the integrity of Government and to -the morals of the people."</p> - -<p>In 1786, Thomas Paine, the author of "Common Sense," in an opinion on -Paper Money used this language: "The laws of the country ought to be -the standard of equity and calculated to impress on the minds of the -people the moral as well as the legal obligation of political justice. -But tender laws of any kind operate to destroy morality and to dissolve -by the pretence of law what ought to be the principle of <i>law</i> to -<i>support</i>, reciprocal justice between man and man; and the punishment -of a member who should move for such a law ought to be <i>death</i>."</p> - -<p>In the summer of 1785 Richard Henry Lee, then president of Congress, -warned Washington of a plan formed for issuing a large sum of paper -money in the next assembly of their state, adding as his opinion: "The -greatest foes in the world could not devise a more effectual plan for -ruining Virginia. I should suppose every friend to his country, every -honest and sober man, would join heartily to reprobate so nefarious a -plan of speculation."</p> - -<p>Washington replied to Lee in these words: "I never have heard, and I -hope I never shall hear, any serious mention of a paper emission in -this state. Yet ignorance is the tool of design and is often set to -work suddenly and unexpectedly."</p> - -<p>In 1787, on the 9th day of January, Washington wrote to Jabes Bowen as -follows: "Paper money has had the effect in your state that it will -ever have, to ruin commerce, oppress the honest, and open the door to -every species of fraud and injustice."</p> - -<p>To Mr. Stone, a member of the Senate of Maryland, who appealed to -Washington to allow his opinion on this subject to be made publicly -known, Washington wrote<span class="pagenum"><a name="Page_163" id="Page_163">[Pg 163]</a></span> just three months before the opening of the -Constitutional convention, as follows: "As my sentiments thereon have -been fully and decidedly expressed long before the assembly either of -Maryland or of this state was convened, I do not scruple to declare, -that if I had had a voice in your legislature, it would have been given -decidedly against a paper emission upon the general principles of its -utility, as a representative and the necessity of it as a medium.</p> - -<p>"To assign reasons for this opinion would be as unnecessary as -tedious. The ground has been so often trod that a place hardly -remains untouched. In a word the necessity arising from the want of -specie is represented as greater than it really is. I contend that -it is by the substance, not with the shadow of a thing, we are to be -benefited. The wisdom of man, in my humble opinion, cannot at this -time devise a plan, by which the credit of paper money would be long -supported; consequently, depreciation keeps pace with the quantity of -the emission, and articles for which it is exchanged rise in a greater -ratio than the sinking value of the money. Wherein then is the farmer, -the planter, the artisan benefited? An evil equally great is the door -it immediately opens for speculation, by which the least designing, and -perhaps most valuable part of the community are preyed upon by the more -knowing and crafty speculators."</p> - -<p>In 1785, George Mason wrote "they may pass a law to issue paper money, -but twenty laws will not make the people receive it. Paper money is -founded upon fraud and knavery."</p> - -<p>On the first day of August, 1786, Washington wrote to Jefferson: "Other -states are falling into the very foolish and wicked plans of emitting -paper money."</p> - -<p>In May, 1788, Charles Pinckney, in a speech in the Convention of South -Carolina, said: "I apprehend these general reasons will be found true -with respect to paper money; that experience has shown that in every -state<span class="pagenum"><a name="Page_164" id="Page_164">[Pg 164]</a></span> where it has been practiced since the Revolution, it always -carries the gold and silver out of the country, and impoverishes it."</p> - -<p>John Marshall, the greatest of all our Chief Justices, the man who -breathed into the dry bones of a constitutional contract, the soul of -nationality, expressed himself at various times in these words: "He -had 'an unabated zeal for the exact observance of public and private -engagements.' He rightly insisted that the only ways of relief for -pecuniary 'distresses' were 'industry and frugality'; he condemned -'all the wild projects of the moment; he rejected as a delusion every -attempt at relief from pecuniary distresses' by the emission of 'paper -money' or by 'a depreciated medium of commerce.'" George Bancroft said: -"These were his opinions through life. He gave them to the public in -1807, and twenty-four years later in a revised edition of his 'Life of -Washington,' he confirmed his early convictions by the authority of his -maturest life."</p> - -<p>James Madison, who was probably more responsible for the Constitution -than any other single individual, used these words in addressing the -delegates of Virginia in the year 1786: "Paper money is unjust; to -creditors, if a legal tender; to debtors, if not legal tender, by -increasing the difficulty of getting specie. It is unconstitutional, -for it affects the rights of property, as much as taking away equal -value in land. It is pernicious, destroying confidence between -individuals; discouraging commerce; enriching sharpers; vitiating -morals; reversing the end of government, and conspiring with the -examples of other states to disgrace Republican Government in the eyes -of mankind." As the result of his words and the well-known opinions -of Washington, Lee and Mason, the House of Delegates of Virginia on -the first day of November resolved by a vote of 85 against 17 that an -emission of paper money would be "unjust, impolitic and destructive of -public and private confidence, and of<span class="pagenum"><a name="Page_165" id="Page_165">[Pg 165]</a></span> that virtue which is the basis -of Republican Government."</p> - -<p>Disquieting symptoms having appeared in Virginia, Madison, in April, -enjoined Monroe, a member of its assembly, to battle paper money.</p> - -<p>Madison enumerated among the evils for which the new Constitution -should provide a remedy, the "familiar violation of contracts in the -form of depreciated paper, made a legal tender." In his notes for his -own guidance in the Federal Convention, he laid down the principle -that "Paper money may be deemed an aggression on the rights of other -states," and just five weeks before the time for the meeting of the -convention, he wrote from Congress, then sitting in New York, to Edmund -Randolph, as follows: "There has never been a moment since the peace, -at which the federal assent would have been given to paper money."</p> - -<p>In conclusion, Mr. Lawyer, I want you, because you are a particularly -good reader, and ought to be more interested in this subject than -anybody else, if you are wrong, to read the story of the Constitutional -Convention as related by George Bancroft.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I will very gladly do so.</p> - -<p>"The convention of the states for the reform of the confederacy -organized itself by electing as its president George Washington, who of -all the public men in his day was the most decided in his convictions -and the most outspoken in his words on the inherent dishonesty of -irredeemable paper bills.</p> - -<p>"Virginia took the lead, and Randolph, its governor, in his opening -speech drew attention to paper money by reminding its hearers that the -patriotic authors of the confederation did their work 'in the infancy -of the science of constitutions and of confederacies, when the havoc of -paper money had not been foreseen.'</p> - -<p>"Among the delegates from Connecticut were Oliver Ellsworth, who in -the Federal Congress had repeatedly served on committees for the -reform of the federal con<span class="pagenum"><a name="Page_166" id="Page_166">[Pg 166]</a></span>stitution, and Roger Sherman, who, in -1752, had published his conviction that good laws and poor money are -irreconcilable. They agreed to insist in the convention 'that the -legislatures of the individual states ought not to possess a right to -emit bills of credit for a currency, or in any manner to obstruct the -recovery of debts, whereby the interests of foreigners or the citizens -of any other state may be affected.'</p> - -<p>"The refusal of the convention to confer on the legislature of the -United States the power to emit bills of credit or irredeemable paper -money in any form is so complete that, according to all rules by -which public documents are interpreted, it should not be treated as -questionable; but as the truth in this case is of infinite importance, -and has been questioned by those in authority, the wrong done to the -Constitution may justify a simple narrative of the facts, which ample -and indisputable records establish, and which no power can alter.</p> - -<p>"The journal of the convention for framing the Constitution was kept -under the supervision of its members, and its authority is vouched for -by Washington, not only as the presiding officer of the convention, but -as President of the United States in a special message to Congress.</p> - -<p>"By a clause in the ninth article of confederation of the United States -of America, and only by that clause, the confederated states had -authority 'to emit bills on the credit of the United States.'</p> - -<p>"Of the legislature of the United States, under our present -constitution, the court insists that 'Congress is clearly authorized to -emit Bills of Credit.' But is it so?</p> - -<p>"The eighth clause of the seventh article, in the first draft of the -Constitution, was as follows: 'The legislature of the United States -shall have the power to borrow money and emit bills on the credit of -the United States.' The journal of the convention for August 16th -makes this record: 'It was moved and seconded to strike out the words -"and emit bills," and the motion to strike out these words "passed in -the affirmative. Yeas: New<span class="pagenum"><a name="Page_167" id="Page_167">[Pg 167]</a></span> Hampshire, Massachusetts, Connecticut, -Pennsylvania, Delaware, Virginia, North Carolina, South Carolina, -Georgia—9. Nays: New Jersey, Maryland—2." So the convention by a -vote of more than four to one, refused to grant to the legislature of -the United States the power "to emit bills on the credit of the United -States."'</p> - -<p>"For the interpretation of this record, Madison, the best possible -witness, has left this note: 'Striking out the words cut off the -pretext for a paper currency, and particularly for making the bills a -tender either for public or private debts.'</p> - -<p>"Madison was the chief author of the new Constitution. Its opponent, -Luther Martin, the attorney-general of Maryland, a delegate to the -Federal Convention and present at the debate, read to the Maryland -House of Delegates a paper, in which he gave his account of the purpose -of the Convention; his evidence agrees exactly with that of Madison, -and for nearly a hundred years his fidelity as a witness was as little -questioned as that of Madison. Here are two witnesses: Madison, who -approved the prohibition, and Martin, who condemned it; the court -pushes the testimony of Madison aside as if he had 'not explained -himself,' though on the point in question his words are as clear as -sunlight. The address of Martin the court rejects as a 'philippic,' -though it contains not a word of invective against any individual, and -does contain the clearly expressed wish of its author 'not to wound the -feelings of any person.'</p> - -<p>"We have a record of what was spoken and of what was done in the -Federal Convention kept by Madison, who took upon himself the most -solemn engagement to preserve the truth for the instruction of coming -generations, and whose opportunity, capacity, and integrity no one -questions. His report of what was said and done on the 16th of August -in the Federal Convention preserves the testimony of many witnesses, -taken down as it were by the most capable notary.</p> - -<p>"The question before the Convention was: Shall power<span class="pagenum"><a name="Page_168" id="Page_168">[Pg 168]</a></span> be granted to the -legislature of the United States 'to emit bills of credit'? The first -witness is Gouverneur Morris, a man free from illusions; a delegate -from the state which contained Philadelphia, then the most opulent city -in the thirteen states; and as by its interests he was nearly connected -with the city and state of New York, he thoroughly represented the -interests of commerce. He moved to strike out the grant of power to -'emit bills on the credit of the United States,' saying: 'If the United -States have credit, such bills will be unnecessary; if they have -not, will be unjust and useless.' The seconder of Gouverneur Morris -was Pierce Butler, a delegate from South Carolina, then the richest -commercial state in the South. He remarked in the course of debate that -'paper is a legal tender in no country in Europe,' and he was urgent to -withhold from the Government of the United States the power to make it -so.</p> - -<p>"Madison interposed: 'Will it not be sufficient to prohibit the making' -the bills 'a tender'? Gorham, in reply to Madison, held that no -accompanying prohibition was sufficient to make it safe to grant to the -legislature of the United States the power to emit bills of credit. He -spoke absolutely 'for striking the words out,' saying: 'If the words -stand, they may suggest and lead to the measure.'</p> - -<p>"The words of Oliver Ellsworth, our third chief justice, were: 'This is -a favorable moment to shut and bar the door against paper money. The -mischiefs of the various experiments which have been made are now fresh -in the public mind, and have excited the disgust of all the respectable -part of America.'</p> - -<p>"Randolph expresses 'his antipathy to paper money'; but, 'could -not agree to strike out the words, as he could not foresee all the -occasions that might arise.'</p> - -<p>"James Wilson, in concurrence with Ellsworth, said: 'It will have a -most salutary influence on the credit of the United States to remove -the possibility of paper money. This expedition can never succeed -whilst its<span class="pagenum"><a name="Page_169" id="Page_169">[Pg 169]</a></span> mischiefs are remembered; and, as long as it can be -resorted to, it will be a bar to other resources.'</p> - -<p>"George Reed spoke for Delaware: 'The words, if not struck out, would -be as alarming as the mark of the beast in Revelation.'</p> - -<p>"John Langdon, of New Hampshire, conforming to the wise instructions of -the towns of his state, said: 'I had rather reject the whole plan than -retain the three words "and emit bills."'</p> - -<p>"Madison, agreeing with the journal of the convention, records that -the grant of power to emit bills of credit was refused by a majority -of more than four to one. Eleven men took part in the discussion; and -every one of the eleven whether he spoke for or against the grant of -the power, Gouverneur Morris, Pierce Butler, James Madison, Nathaniel -Gorham, George Mason, John F. Mercer, Oliver Ellsworth, Edmund -Randolph, James Wilson, George Reed and John Langdon, each and all, -understood the vote to be a denial to the legislature of the United -States of the power to emit paper money. Take the men, one by one, and -see how weighty is the witness of each individual; take them together -and add the consideration that they, every one of them, unanimously -support each other and are contradicted by no one, and who shall dare -question their testimony? The evidence is perfect; no power to emit -paper money was granted to the legislature of the United States.</p> - -<p>"By refusing to the United States the power of issuing bills of credit, -the victory over paper money was but half complete. The same James -Wilson, who twelve days before, with Oliver Ellsworth, had taken a -chief part in refusing to the United States the power to emit paper -money, and the same Roger Sherman, who in 1752 had put forth all his -energy to break up paper money in Connecticut, jointly took the lead. -The first draft of the Constitution had forbidden the states to emit -bills of credit without the consent of the legislature of the United -States; on the 28th of August they jointly offered<span class="pagenum"><a name="Page_170" id="Page_170">[Pg 170]</a></span> this motion: 'No -state shall coin money, nor emit bills of credit, nor make anything -but gold and silver coin a tender in payment of debts,' making the -prohibition absolute. Roger Sherman, animated by zeal for the welfare -of the coming republic of countless millions, exclaims in the debate: -'This is the favorable crisis for crushing paper money.' His word was -the will of the convention, and the states, by a majority of eight -and a half against one and a half—that is, by more than five to -one—forbade the states, under any circumstances, to emit bills of -credit. This is the way in which our Constitution 'shut and barred the -door against paper money' and 'crushed' it.</p> - -<p>"Nothing is wanted to the perfect strength of the truth, that the -constitution put an end to paper money in all the United States and -in all the several states.... 'No suggestion of the existence of a -power to make paper a legal tender can be found in the legislative -history of the country. Had such a power lurked in the Constitution, -as constructed by those who ordained and administered it, we should -find it so recorded. The occasion for referring to it has repeatedly -arisen; and had such a power existed, it would have been recognized and -acted on. It is hardly too much to say, therefore, that the uniform and -universal judgment of statesmen, jurists, and lawyers has denied the -constitutional right of Congress to make paper a legal tender for debts -to any extent whatever.'"</p> - -<p>Thomas Jefferson's opinion: "The Federal Government—I deny their power -to make paper a legal tender."</p> - -<p><span class="smcap">Mr. Banker</span>: Now, Mr. Lawyer, you undoubtedly with all your -profession will recognize Daniel Webster as the greatest expounder of -the Constitution. I want you to read what he says and then my case will -be closed on the constitutional right and authority of the Government -to issue paper money.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I will gladly do so. "Most unquestionably there is -no legal tender, and there can be no legal<span class="pagenum"><a name="Page_171" id="Page_171">[Pg 171]</a></span> tender, in this country, -under the authority of this Government or any other, but gold and -silver, either the coinage of our own mints, or foreign coins, at rates -regulated by Congress. This is a constitutional principle, perfectly -plain, and of the very highest importance. The states are expressly -prohibited from making anything but gold and silver a tender in -payment of debts; and although no such express prohibition is applied -to Congress, yet as Congress has no power granted to it, in this -respect, but to coin money and to regulate the value of foreign coins, -it clearly has no power to substitute paper, or anything else, for -coin, as a tender in payment of debts and in discharge of contracts. -Congress has exercised this power, fully, in both its branches. It -has coined money, and still coins it; it has regulated the value of -foreign coins, and still regulates their value. The legal tender, -therefore, the constitutional standard of value is established and -cannot be overthrown. To overthrow it would shake the whole system. The -constitutional tender is the thing to be preserved, and it ought to be -preserved sacredly, under all circumstances."</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, Mr. Lawyer, what do you really think about -the constitutional question now?</p> - -<p><span class="smcap">Mr. Lawyer</span>: In the light of the facts preceding the -Constitutional Convention, the personal opinions of those who framed -it, and what they actually did in the convention, I will admit I have -not a leg to stand on. The story of our experience so well told by you -gentlemen demonstrating the utter unwisdom of government issues of -money, and the overwhelming evidence on the constitutional question -has completely converted me to your contention. But I was relying in a -sort of a blind way upon the fact that our Supreme Court has held that -the United States notes were lawfully issued. How about that? Have you -investigated it?</p> - -<p><span class="smcap">Mr. Banker</span>: I have, but the story of the Greenback will take -the best part of another night. Therefore, I move we adjourn. It is -enough glory for one night to<span class="pagenum"><a name="Page_172" id="Page_172">[Pg 172]</a></span> have a layman knock out a lawyer upon a -constitutional question.</p> - -<p><span class="smcap">Mr. Lawyer</span>: There is no humiliation in being shown that -you are wrong upon so great a question; I regard it as a piece of -disgraceful cowardice for a man to persist in holding to a position -when he is clearly wrong.</p> - -<p><span class="smcap">Uncle Sam</span>: That is the way I like to hear my boys talk. This -is really the longest siege we have had, and you all look as though you -had been undermined, and so we had better say good night.</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_173" id="Page_173">[Pg 173]</a></span></p> - - - - -<p class="ph2"><a name="NINTH_NIGHT" id="NINTH_NIGHT">NINTH NIGHT</a></p> - -<p class="center">UNITED STATES NOTES</p> - - -<p><span class="smcap">Uncle Sam</span>: Here we are again and all present. Not a single -man has been sick or even reported as indisposed or indifferent since -we began these discussions. You must all be thinking that we are -engaged in a religious duty, a patriotic service, or you are mightily -interested in the subject.</p> - -<p>Before we begin, let me recall what was so fully presented last -Wednesday night so that we can keep the mile posts constantly before us.</p> - -<p>We then learned that during a hundred years, from 1690 to 1790, every -one of the thirteen colonies experimented with "Bills of Credit," -"Legal tender" "paper money," or "Greenbacks," as we call them, -and that they issued fiat or "legal tender money" in almost every -conceivable shape, form and way. They issued money against their own -credit; they issued it against real estate mortgages, that is, in -the form of loans secured by mortgages; they issued it against the -personal credit of men in the form of ordinary loans; they issued it -under the authority of the Continental Congress when the Colonies -were all united. But in no case did any one of them, or all of them -combined, escape the certain and universal fate of all such efforts. -The order of events was always the same: (1) Emission of paper money; -(2) depreciation of the issue; (3) disappearance of coin; (4) emission -of more paper money to make up for the depreciation of that already -issued; (5) defrauding of creditors; (6) repudiation; (7) cancelation; -(8) reappearance of gold and silver; (9) resumption of species or coin -payment; (10) a return of that degree of prosperity that the times and -the conditions of the country justified.</p> - -<p><span class="pagenum"><a name="Page_174" id="Page_174">[Pg 174]</a></span></p> - -<p>Then came that review of the opinions of the framers of the -Constitution and the vote in the Constitutional Convention to strike -out the power to issue "bills of credit" by the general Government by -the decisive vote of 9 to 4, backed up subsequently by the opinions of -Thomas Jefferson and Daniel Webster.</p> - -<p>As a result of the night's discussion, Mr. Lawyer was forced to admit -the unwisdom of any such issue of legal tender money, and that in the -light of the evidence, such an issue was without authority of law and -unconstitutional.</p> - -<p><span class="smcap">Mr. Banker</span>: Uncle Sam, I think it should be stated right here -that every President of the United States and every successive Congress -of the United States down to 1862 recognized the fact that it was the -intention of the members of the Constitutional Convention "to shut and -bar the door against any such issue." Here is what Horace White says: -"During the war of 1812, the Government of the United States issued -Treasury notes to the amount of $36,680,794. All except $3,392,994 -were payable to order and payable at a definite time and bore interest -at the rate of five and two-fifths per cent. About two-thirds of them -were of denominations of $100 or more. They did not become a part of -the circulating medium and were not intended to. They were paid to -such creditors of the Government as were willing to receive them, and -they were generally at par until specie payments were suspended in -September, 1814. On November 12, 1814, Mr. Hall, a member of Congress -from Georgia, introduced a bill into the House for an issue of Treasury -notes to be legal tender. The House, by vote of 42 to 95, and without -debate, refused to consider this bill. No other attempt was made to -pass a legal tender bill until 1862.</p> - -<p>"In the panic and crisis of 1837-43, during a portion of which time -specie payments were suspended, the Government issued Treasury notes -to the amount of $47,000,000 to meet deficiencies of revenue. All of -these notes<span class="pagenum"><a name="Page_175" id="Page_175">[Pg 175]</a></span> bore interest, and were payable at a fixed time. They -did not become a part of the circulating medium. A few were issued by -the Secretary of the Treasury in 1842, bearing only a nominal rate -of interest (one mill per $100 per annum). Such notes had not been -contemplated by Congress. The Committee of Ways and Means of the -House, to whom the subject was referred, reported that the Secretary -had exceeded his authority, but Congress took no action on the report. -It was the opinion of the Committee that these notes were 'Bills of -Credit' within the meaning of the Constitution, and that Congress had -no power to issue 'Bills of Credit.' In 1847, during the war with -Mexico, Treasury notes to the amount of $26,122,100 were issued. They -bore interest at the rate of five and two-fifths and six per cent. -They did not enter into the circulation, and were not intended to. -The foregoing issues of interest bearing Treasury notes were merely -Government loans, of which the securities were in small denominations -and had only short periods to run.</p> - -<p>"When specie payments were suspended in 1814, and again in 1837, silver -and small change disappeared because it was worth more per dollar than -the bank notes in circulation. On both occasions private notes and -tickets or less denomination that $1.00, and copper coins were issued -and put in circulation by bridge, ferry, and turnpike companies and -by tradesmen and manufacturers. One hundred and sixty-four varieties -of private copper coin of the period of 1837 have been preserved in -numismatic collections. Most of them bore the names of the issuers who -promised to redeem them.</p> - -<p>"Prior to the Civil War, the fiscal operations of the Government were -transacted exclusively with coin, by its own officers, without the -intervention of banks."</p> - -<p><span class="smcap">Mr. Merchant</span>: Now it seems to me an interesting question why -after maintaining this policy for more than seventy years from 1789 to -1862, a fundamentally different view was taken in 1862.</p> - -<p><span class="pagenum"><a name="Page_176" id="Page_176">[Pg 176]</a></span></p> - -<p><span class="smcap">Mr. Lawyer</span>: I think I can answer that question, if you will -allow me. You see, I have been looking this matter up since our last -discussion, when you fellows knocked me out, and I am now loaded for -bear myself.</p> - -<p>Salmon P. Chase, Secretary of the Treasury, probably knew as little -about finance as any man of his great ability could. He did not seem to -be able to think in the terms of economics at all. When the war broke -out he happened to do the natural thing by first going to the bankers -of New York, Philadelphia and Boston, and making loans amounting to -one hundred and fifty million dollars. Though prior to that time -the Secretary of the Treasury had had no authority to deposit the -Government money in the banks, Congress then authorized him to do so, -and he was enabled to leave it in the banks until he wanted it; but he -did not know enough to do that even. He required the banks to pay the -gold into the Treasury at New York at the rate of $5,000,000 per week. -Fortunately, the public creditors knew more about this question than -he did, or had more confidence in the country than he seemed to have; -and so when they received the gold they immediately returned it to the -banks. Chase's utter incapacity to deal with the question in his report -as Secretary of the Treasury in the fall of 1861, and a threatened -war with Great Britain, growing out of the Trent affair, so shocked -public confidence that by January 1, 1862, our national finances were -in a state of complete and utter collapse, and the consequence was -that specie payments were suspended. I do not see how anyone can fail -to conclude, after a careful study of the situation, that had Chase -allowed the bankers to finance the war, we should have fared very -much better than we did. We should probably have saved thirty-three -per cent of the cost of the war, or approximately one billion dollars -($1,000,000,000), the total cost of the war being three billion two -hundred million ($3,200,000,000).</p> - -<p><span class="smcap">Mr. Banker</span>: I agree with you absolutely, Mr. Lawyer, Chase -seemed to be as unfit to run the Treasury<span class="pagenum"><a name="Page_177" id="Page_177">[Pg 177]</a></span> Department, as a fish is to -run a foot race. If he had allowed James Gallatin, Moses Taylor and -George S. Coe, three great New York bankers, who arranged the first -loan to formulate a financial policy for him, the war could undoubtedly -have been carried on without issuing greenbacks, or any "legal tender -money." But after specie payments had been suspended, the situation -was certainly critical, and became more difficult to manage. However, -there were those who thought, and I agree with them, that it was never -necessary at any time, even then to resort to "legal tender money," or -greenbacks.</p> - -<p><span class="smcap">Mr. Farmer</span>: How do you think it could have been avoided? How -do you think James Gallatin, Moses Taylor and George S. Coe would have -provided the money for carrying on the war?</p> - -<p><span class="smcap">Mr. Banker</span>: By selling the bonds of the Government upon the -best terms possible, as to rates and interest and time, and by such -a system of taxation, as would help produce the necessary means for -prosecuting the war. These bankers had already furnished one hundred -and fifty million dollars ($150,000,000), and stood ready to go on and -finance the war as they certainly could have done, if they had been -permitted to do so.</p> - -<p>When they, in August, 1861, arranged to furnish the first $150,000,000, -the banks of New York, Philadelphia and Boston held gold amounting -to $63,200,000, and on December 7th, they held practically the -same amount, or $58,100,000, although they had already furnished -$100,000,000 of the $150,000,000 they had loaned. However, Chase was -both ignorant and obstinate and the result was a crisis in our national -affairs.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is the fact, and as you said a moment ago -even then there were those, and they were among the greatest of -our public men, who were convinced that it was unwise, dangerous, -unconstitutional and unnecessary to issue "legal tender money," or -greenbacks, as they are called. Just hear what some of them<span class="pagenum"><a name="Page_178" id="Page_178">[Pg 178]</a></span> said. -Justin S. Morrell used this language in the House of Representatives: -"If this paper money is a war measure, it is not waged against the -enemy, but one that may well make him grin with delight. I would as -soon provide Chinese wooden guns for the army, as paper money alone for -the Treasury.</p> - -<p>"What is it that we most need? Clearly we lack money, and wish to -inspire our own people with that confidence that will induce them to -lend the requisite amount. But the very first step we propose is one -to destroy whatever of confidence yet remains among those who have a -dollar to lend. We proclaim by an engraved advertisement—to be forced -into the pockets of every man by the fiat of the Government—that we -will hereafter liquidate all of our debts with paper only....</p> - -<p>"I object to this bill on the ground of its utter impolicy. I admit -that from the contracts entered into—many of which are now due—I -regret have not been paid as promptly as they deserve to be, and from -the heavy monthly disbursements to our armies, that the Government can -flood the country with even $150,000,000 of paper dollars. But from -that amount, you would vastly increase the cost of carrying on the war; -prices would go up and the addition we should pile upon our national -debt would prove that it might have been even wiser to have burned our -paper dollars before they were issued; the inflation of the currency -would be inevitable....</p> - -<p>"It will be conceded that the power is no where contained in the letter -of the Constitution, and that, in all our history since the adoption -of the Constitution, it has never been exercised.... By making paper -a legal tender, no more specie will be seen, except through offers -of rewards to draw it from its hiding places, until we emerge from -our present difficulties, and not for an indefinite period perhaps, -thereafter. The $300,000,000 of specie said to be in the country, -though I think there is not quite so much, will be hoarded and remain -useless and<span class="pagenum"><a name="Page_179" id="Page_179">[Pg 179]</a></span> idle for the rest of the war. I am for keeping this, the -vital fluid of commerce, in healthy, active circulation."</p> - -<p>Charles Sumner used this language in the United States Senate: "Is -there not bad faith toward creditors who are compelled to receive what -is due to them in a depreciated currency? Is there not bad faith toward -all abroad who, putting trust in our integrity, national and personal, -have sent their money to this country, in gold or its equivalent? -And, surely, just in proportion as this is so, you cannot doubt that -we shall suffer alike in character and resources; for what resource -is greater to a nation, or to an individual, than a character for -integrity?... Is it necessary to incur all the unquestionable evils of -inconvertible paper, forced into circulation by an Act of Congress—to -suffer the stain upon our national faith—to bear the stigma of a -seeming repudiation—to lose for the present that credit which in -itself is a treasury—and to teach debtors everywhere that contracts -may be varied at the will of the stronger? Surely there is much in -these inquiries which may make us pause. If our country were poor or -feeble, without population, and without resources, if it were already -drained by a long war, if the enemy had succeeded in depriving us of -the means of livelihood, then we should not even pause. But our country -is rich and powerful, with a numerous population, busy, honest and -determined, and with unparalleled resources of all kinds, agricultural, -mineral, industrial and commercial; it is yet undrained by the war -in which we are engaged; nor has the enemy succeeded in depriving us -of any of the means of livelihood. It is hard—very hard—to think -that such a country, so powerful, so rich and so beloved, should be -compelled to adopt the policy of even questionable propriety."</p> - -<p>James A. Bayard, of Delaware, used this language: "The thing is to my -mind so palpable a violation of the Federal Constitution, that I doubt -whether in any Court of Justice in this country, having a decent regard -for its respectability, you can possibly except that this bill, which<span class="pagenum"><a name="Page_180" id="Page_180">[Pg 180]</a></span> -you now pass, will not, whenever the question is presented judicially, -receive its condemnation as unconstitutional, and void in this clause."</p> - -<p>Roscoe Conklin used this language in the House: "I propose to assign -my reasons briefly for voting against the attempt by legislation to -make paper a legal tender. The proposition is a new one, no precedent -can be found in its favor; no suggestion of the existence of such a -power can be found in the legislative history of the country; and I -submit to my colleague as a lawyer, the proposition that this amounts -to affirmative authority of the highest kind against it. Had such a -power lurked in the Constitution as construed by those who ordained -and administered it, we should find it so recorded. The occasion for -resorting to it, or at least referring to it, has, we know, repeatedly -arisen, and had such a power existed, it would have been recognized and -acted on. It is hardly too much to say, therefore, that the uniform and -universal judgment of statesmen, jurists and lawyers has denied the -constitutional right of Congress to make paper a legal tender for debts -to any extent whatever....</p> - -<p>"It will, of course, proclaim throughout the country a saturnalia -of fraud, a carnival for rogues. Every agent, attorney, treasurer, -trustee, guardian, executor, administrator, consignee, commission -merchant, and every debtor of a fiduciary character, who has received -for others money, hard money, worth 100 cents on the dollar, will -forever release himself from liability by buying up for that knavish -purpose, at its depreciated value, the spurious which we shall have put -afloat. Everybody will do it, except those who are more honest than the -American Congress advises them to be. Think of Savings Banks, entrusted -with enormous aggregates of the pittances of the poor, the hungry and -the homeless, the stranger, the needle woman, the widow and the orphan; -and we are arranging for a robbery of 10 per cent, if not of 50 per -cent, of the entire amount, and that by a con<span class="pagenum"><a name="Page_181" id="Page_181">[Pg 181]</a></span>trivance so new, as never -to have been discovered under the administrations of Monroe, Adams or -James Buchanan....</p> - -<p>"Such a step, if it should ever be taken by a Government, should be -taken when everything else has failed, and the last extremity has -been reached. It is the last expedient to which kings and nations can -resort."</p> - -<p>William Pitt Fessenden, of Maine, used this language:</p> - -<p>"With regard to the particular bill now before the Senate, we all know -that it was resorted to as a temporary measure, not in the beginning, -but in consequence of the necessities of the treasury, arising from -a greater expenditure than the Secretary could have imagined, and -arising from the necessary delay with reference to other measures. Can -it be said that a measure like the one now pending before the Senate -and the country is a measure of a day or an hour? Why, what does it -propose? It proposes something utterly unknown in this government from -its foundation; a resort to a measure of doubtful constitutionality, -to say the least of it, which has always been denounced as ruinous to -the credit of any government, which has recourse to it; a measure, -too, about which opinions in the community, as perhaps they never have -been divided upon any other subject; a measure which, when it has been -tried by other countries, as it often has been, has always proved a -disastrous failure....</p> - -<p>"Everybody who has spoken on this question, I believe without an -exception—there may have been one or two—but all the opinions I have -heard expressed, agree in this: that only with extreme reluctance, only -with fear and trembling as to the consequences, can we have recourse to -a measure like this of making our paper a legal tender in the payment -of debt....</p> - -<p>"A measure of this kind certainly cannot increase confidence in the -ability, or the integrity of the country. It can make us no better -than we are today, so far as the foundation of all public credit is -concerned.</p> - -<p><span class="pagenum"><a name="Page_182" id="Page_182">[Pg 182]</a></span></p> - -<p>"Next, in my judgment it is a confession of bankruptcy. We begin and go -out to the country with the declaration that we are unable to pay or -borrow, at the present time, and such a confession is not calculated to -increase our credit.</p> - -<p>"Again, say what you will, nobody can deny that it is bad faith. If it -be necessary for the salvation of the Government, all considerations -of this kind must yield; but to make the best of it it is bad faith, -and encourages bad morality both in public and in private. Going to the -extent that it does to say that notes thus issued shall be receivable -in payment of all private obligations, however contracted, is in its -very essence a wrong, for it compels one man to take from his neighbor -in payment of a debt that which he would not otherwise receive, or be -obliged to receive, and what is probably not full payment....</p> - -<p>"Again, in my judgment it must inflict a stain upon national honor. We -owe debts abroad. Money has been loaned to this country, and to the -people of this country, in good faith....</p> - -<p>"Again, it necessarily changes the values of all property. It is very -well known that all over the world gold and silver are recognized as -money, as currency; they are the measure of value. We change it here, -what is the result? Inflation, subsequent depression, all the evils -which follow from an inflated currency....</p> - -<p>"Again, a stronger objection than all that I have said to this -proposition—I am stating the objections which everybody must -entertain, because I suppose these facts are palpable—is that the -loss is to fall most heavily upon the poor. I believe it never was -disputed, it cannot be in the light of experience, that those who are -injured most by an inflated currency are the laboringmen, the poor.... -The poor laborer suffers in the first place more than all; then small -capitalists, if I may so call them; and the rich capitalist, last -of all. Such is the necessary result and consequence always of this -system."</p> - -<p><span class="pagenum"><a name="Page_183" id="Page_183">[Pg 183]</a></span></p> - -<p>Thaddeus Stevens used this language in the House:</p> - -<p>"This bill is a measure of necessity, not of choice. No one would -willingly issue paper currency, not redeemable on demand and make it -a legal tender. It is never desirable to part from that circulating -medium which by the common consent of civilized nations forms the -standard of value. But it is not a fearful measure, and when rendered -necessary by exigencies, it ought to produce no alarm."</p> - -<p>John Sherman used this language:</p> - -<p>"I agree that this measure can only be justified on the ground of -necessity. I do believe there is a pressing necessity that these demand -notes should be made a legal tender, if we want to avoid the evils of a -depreciated, dishonored paper currency."</p> - -<p>E.G. Spalding, the reputed father of the legal tender act, used these -words:</p> - -<p>"These are extraordinary times, and extraordinary measures must -be resorted to, in order to save our Government, and preserve our -nationality....</p> - -<p>"This being accomplished I will be among the first to agitate a speedy -return to specie payment, and all measures that are calculated to -preserve the honor and dignity of the government in time of peace."</p> - -<p><span class="smcap">Mr. Merchant</span>: From what transpired there was undoubtedly an -overwhelming opinion that there was a necessity, and therefore the -issue of United States Notes was justified. No one will deny this -power, if placed upon that ground, that the issuance of the Notes was -essential to the preservation of the life of the Nation. But certainly -that reason no longer exists, and therefore we should now act as we -would then have acted, if we had not believed that it was a national -necessity.</p> - -<p>The measure for the first issue of $150,000,000 of United States Notes -was passed and signed by the President February 25, 1862. The second -issue of $150,000,000 came very soon, on July 11, 1862. The third -issue of $150,000,000 followed on March 3, 1863, making a to<span class="pagenum"><a name="Page_184" id="Page_184">[Pg 184]</a></span>tal issue -in about a year of $450,000,000. If the result of the war had been -doubtful and long continued, God only knows what the results would -have been, as these United States Notes came very near reaching the -zero point, as it was. The astounding fact, as the result of having -practiced the law of making something out of nothing, followed in 1868 -when one of the great political parties in the hot pursuit of political -success declared in its platform that it was in favor of paying off -the national debt with the I.O.U.'s of the Government or United States -Notes. Of course, this action would have been the natural and necessary -prelude to national repudiation.</p> - -<p><span class="smcap">Mr. Farmer</span>: What I want to know is how much those greenbacks -actually depreciated.</p> - -<p><span class="smcap">Mr. Banker</span>: I have a sheet here furnished by the Government -showing precisely what they were worth from February, 1862, to January -1, 1879, when we resumed specie payment, and began their current -redemption in gold coin. It shows that they were worth 97 cents on the -dollar in February, 1862, when the President signed the bill; in one -year, or February 15, 1863, they were worth 60 cents on the dollar; and -in a little more than a year afterwards, in July, 1864, they were worth -only 35 cents on the dollar. That is, if you had bought a horse for -$100 in January, 1862, and given a note due in July, 1864, you could -have paid for the horse with $35.</p> - -<p>You will perceive that every creditor was defrauded going down hill -until you struck the bottom on that July day in 1864, when it took -$2.85 of United States Notes to buy $1.00 of gold coin, and you -defrauded every debtor climbing up that long hill from that July day in -1864, when the United States Notes were worth 35 cents, until January -1, 1879, when they became worth 100 cents. It took us just two years to -go down the hill, and fifteen years to reach the top of the same hill, -only to find the crater of a sleeping financial volcano beneath our -feet; for if war clouds should now encompass us, or we should take one -single step in the wrong direction, our National<span class="pagenum"><a name="Page_185" id="Page_185">[Pg 185]</a></span> Credit would again be -shattered, and must fall into utter ruin.</p> - -<p><span class="smcap">Mr. Farmer</span>: Well, it then came out just as those men said it -would, didn't it?</p> - -<p><span class="smcap">Mr. Banker</span>: Certainly, and I want to call your attention to -another thing, and that is that the additional cost of the war, because -of issuing United States Notes, was greatly increased precisely as they -predicted it would be.</p> - -<p><span class="smcap">Mr. Farmer</span>: Oh, yes, we must find out about that. You remember -we investigated the cost of the greenbacks since the war, and that Mr. -Banker then demonstrated to our entire satisfaction that the United -States Government would have been better off by $339,984,222, if at the -close of the war we had issued bonds, bearing 4 per cent, and taken up -these United States Notes and paid them off. Now, it would be mighty -interesting to know just how much the war cost because we issued these -United States Notes, and went off the Gold Standard.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I have something here right on that point. Let -me read it: In his work on Public Debts, Prof. H.C. Adams computes -the extra cost of the war to the tax payers in consequence of the -depreciated currency at $850,000,000. And Mr. Wesley Hill, in the -"Journal of Political Economy," March, 1897, computes the net cost of -the war, due to this cause at $528,000,000. Now to be fair and take the -average of these two estimates or $689,000,000, and add the cost of -meeting greenback redemption since the war, or $339,984,222, we have -$1,028,984,222, or about one-third of the cost of the war which, as I -told you a while ago, was three billion two hundred million dollars, -proving everything that was said by those who were opposed to issuing -the greenbacks.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I beg your pardon, sir, except one -thing, Mr. Lawyer. According to the decisions of the Supreme Court, -up-to-date, and that is, that they are constitutional. You remember, of -course, that the question of the constitutionality of the Legal Tender -quality<span class="pagenum"><a name="Page_186" id="Page_186">[Pg 186]</a></span> of the United States Notes has been before the United States -Supreme Court three different times.</p> - -<p>This question came up in the case of Hepburn vs. Griswold, December, -1869, and was held by five judges against three, the Court then -consisting of eight judges, the opinion of the Court being delivered -by Salmon P. Chase, himself, who was then Chief Justice, "that the -making of the Notes, or Bills of Credit, a legal tender in payment of -pre-existing debts, is not a means appropriate, plainly adapted, or -really calculated to carry into effect any power vested in Congress; is -inconsistent with the spirit of the Constitution, and is prohibited by -the Constitution."</p> - -<p><span class="smcap">Mr. Farmer</span>: Well, this man Chase, who was then Chief Justice, -was Secretary of the Treasury, and favored the issuance of these same -United States Notes, didn't he?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Yes, he is the same person. But you must remember -that he was a politician in the one case, and a Chief Justice in the -other. Possibly, I should have said a statesman in the first place, -but Thomas B. Reed said that a statesman was a dead politician, and -probably, you might say, according to his theory, that Chase is a -statesman now.</p> - -<p>Chase also held that the clause in the Acts of 1862 and 1863, which -makes United States Notes legal tender in payment of all debts, public -and private, so far as it applies to debts contracted before the -passage of these Acts, is unwarranted by the Constitution: "The legal -tender quality," Chase said, "was valuable only for the purpose of -dishonesty, every honest purpose was answered as well without it."</p> - -<p>Just one year afterward, in December, 1870, the question of the legal -tender of the United States Notes was again before the United States -Supreme Court, which now consisted of nine members. In a decision of -five against four, the above decision was reversed; one judge had -died, and a new judge had been created, and these two joined the three -formerly in favor of the Act.</p> - -<p><span class="pagenum"><a name="Page_187" id="Page_187">[Pg 187]</a></span></p> - -<p><span class="smcap">Mr. Manufacturer</span>: That looks a little as though General Grant -wanted that kind of a decision, and had picked out the right kind of -men to get it. Possibly it was more this decision than pressure of -business that called for the creation of an additional member of the -Court—was it not?</p> - -<p><span class="smcap">Mr. Lawyer</span>: A great many have thought so, and that makes it -look as though the Supreme Court does some legislating occasionally -on its own account. However, the same question came up again in the -case of Juillard vs. Greenman, and was decided the same way in March, -1884. It was then held that Congress has the constitutional power to -make Treasury Notes of the United States a legal tender in payment of -private debts in time of peace, as well as in time of war.</p> - -<p>Justice Gray uses this language: "The power is incident to the power of -borrowing money, and issuing Bills or Notes of the Government for money -borrowed, of impressing upon those bills or notes, the quality of being -a legal tender for the payment of private debts was a power universally -understood to belong to sovereignty in Europe and America at the time -of the framing and adoption of the Constitution of the United States." -It appears that he based his decision upon this fact, but George -Bancroft, the historian, reviewed this opinion in both its legal and -historical aspects. And referring to the statement quoted above, this -great historian declared it to be a stupendous error, and further -affirmed that no such power was understood to belong to sovereignty in -Europe at the time of the adoption of the Constitution, that is, in -1788.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Well, I assume that we have another guess -coming yet, haven't we? You know this same Court has guessed four -times already on the Sherman Anti-Trust Law. In the Knight case, -they declared that manufacturing was not and could not be considered -as United States Commerce. Then came the Trans-Missouri case, then -the Northern Security Co. case,<span class="pagenum"><a name="Page_188" id="Page_188">[Pg 188]</a></span> and last the Tobacco and Standard -Oil cases, wherein this august body ran amuck the word "reasonable," -although that very word was not in the Act at all, and although it had -been impossible to get Congress to put it into the Act. But after all, -is it not the very soul of the whole question? And is it not a fact -that the Supreme Court of the United States ought to be constantly -interpreting the Constitution of the United States in the light of -changed conditions, and ever advancing public opinion?</p> - -<p><span class="smcap">Mr. Lawyer</span>: It looks as though it might be well to give the -Supreme Court one more chance to guess; they might possibly guess right -next time. It is certainly "reasonable" to hope so, both in accordance -with the Constitution, and in accordance with economic law, and in -accordance with the experience of the whole world.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, what would happen if, when the Supreme -Court guesses again, it should guess right? Would the fact that the -Court declared that Congress had no power to make paper money a legal -tender render the greenbacks unfit for reserves, or illegal, as -reserves?</p> - -<p><span class="smcap">Mr. Banker</span>: Congress cannot, by law, make anything fit for -reserves, which by economic law is unfit for reserves; but Congress may -make anything, however unfit for reserves from an economic point of -view, a legal reserve; they might make potatoes, wheat, corn, a bale of -cotton, or a bundle of hay reserves. Therefore, although the Supreme -Court should declare the Legal Tender Act unconstitutional, as it -ought to, the United States Notes might still be held as reserves. The -silver certificates and the gold certificates are both legal reserves, -but neither of them are made legal tender by law, nor should they be, -as nothing but gold, which is our standard of value, should be made -legal tender. However, all of these barbarous forms of currency, United -States Notes, Silver Certificates, bond-secured National Bank Notes -should, and must be maintained upon a parity with gold, if possible, -as they now are; because the faith and honor<span class="pagenum"><a name="Page_189" id="Page_189">[Pg 189]</a></span> of the Government is at -stake. It is this very fact that is the source of our weakness from a -national point of view, for the United States has no assets with which -to meet these enormous liabilities. The United States has no resources, -such as a bank has. It has nothing to sell in the way of grain, meat, -cotton, or manufactured goods, or personal property of any kind. It has -no capital, and no deposits, as our banks have, whose resources today -exceed twenty-five billion dollars ($25,000,000,000). The individual -deposits of the United States today exceed seventeen billion dollars -($17,000,000,000). Every month about three billion dollars' worth of -notes come due. Compare this situation with the condition of the United -States Treasury, and its ability to meet obligations. The Treasury does -not control a single dollar's worth of assets, except the incoming -taxes, which are more than pledged every year to meet the current -demands arising from the expenses of the Government.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is correct, as we learned upon a former -evening. The United States is bound for more than one billion seven -hundred million of demand liabilities, directly and indirectly, and has -only one hundred and fifty million of gold with which to meet them. All -the Government has is the power to tax the property of the people. Of -course it can anticipate this taxing power by selling bonds to meet an -emergency; but let us imagine for a moment what may happen. This very -night we may be looking out upon a perfectly clear and peaceful sky, -and even so soon as tomorrow morning war clouds may curtain the rising -sun, and before nightfall blacken the zenith of the heavens, and hang -low and lowering the whole horizon round, presaging the most titanic -and wicked struggle in blood that has ever stained the history of the -human race. What do you think the effect would be upon our credit, with -all these demand obligations outstanding? Would not that fact, coupled -with a great war on our hands, impair our credit to a very great -degree, compelling us to sell our bonds at<span class="pagenum"><a name="Page_190" id="Page_190">[Pg 190]</a></span> much lower prices, and at -rates of interest far higher than could be possibly necessary, if there -was no question whatever about our remaining steadfastly upon the Gold -Standard instead of resorting to fiat paper money, as we did the very -last time we had to meet a similar difficulty, or crisis?</p> - -<p><span class="smcap">Mr. Banker</span>: There is no doubt whatever about the imperative -necessity of our relieving the United States Treasury from the load it -is now carrying, and placing the United States Government in the same -position precisely that every state and municipality is in, so far -as its credit is concerned; for the treasury of the Government, when -filling its normal and proper functions, is no more fit to carry on the -banking business than a man who may be wealthy in land, but has no cash -assets; or a township, city, county or state is. And until the United -States Government divests itself of these unnatural burdens, which it -is unfitted to carry, we shall continue to suffer immeasurably whenever -called upon to use our national credit to any great extent.</p> - -<p>Let me explain this principle a little more fully so that we will all -get it so thoroughly fixed in our minds that we shall not forget, -or overlook it, as we go on. A farmer, however wealthy in lands and -prosperous he may be, even though he may be worth half a million, or -a million dollars, should not have demand obligations outstanding for -any considerable amount because his resources are in lands or fixed -investments. If he borrows to enable him to produce his crops, he -should make his notes come due when he can meet them with the money he -receives from the sale of his crops, and the balance, or his profits, -will go to pay the interest on the mortgage, and possibly reduce it. -So a township, a city, county, or state has no personal property worth -considering to meet demand obligations. It has no liquid property of -any kind, in fact, nor any resources whatever, except its power to -tax the property within its jurisdiction; and therefore, if it needs -money, it may borrow to meet ex<span class="pagenum"><a name="Page_191" id="Page_191">[Pg 191]</a></span>penses; but it will make its notes come -due when the taxes come in, precisely as the farmer times his notes' -maturity with the sale of his crops. If a municipality has no demand -obligations, and its bonded debt is low, it can borrow on its bonds -at a low rate of interest. But if its demand obligations are enormous -in proportion to its ready cash, high rates of interest, and possibly -even bankruptcy, will always be staring it in the face. Granting or -assuming that the United States Government has no power to issue legal -tender, or fiat money, which is the greatest peril and most unmitigated -curse that ever hung over any country, the United States Treasury is in -precisely the same position, or situation, that the farmer is, whose -property is in land; that the township, the city, the county and the -state is in, and should always keep itself in a position where, in case -of war, or any other great emergency, it could use its credit to the -best possible advantage to itself; that is, to us, the people who must -pay the taxes to liquidate whatever debt it may incur.</p> - -<p><span class="smcap">Mr. Farmer</span>: I for one want to thank you for this explanation, -for I have always had a sneaking idea that the United States Government -owned everything, and was, as we say, the richest Government on earth, -when it could not possibly mean anything except that the people who -constitute the nation are the richest people on earth. Of course the -Government doesn't own anything worth speaking of, and cannot take -any property, without due process of law, that is, either through the -process of taxation or through condemnation proceedings, for public -uses. It is perfectly plain to me now that the United States Government -is no more fitted to carry on the banking business than Lorrain -township, where I live, nor this city, this county, nor this state, -except that it operates on a bigger scale, that's all. Do you know -that's as clear as a pike staff to me now.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Now, gentlemen, I want you to correct me -if I don't state this credit question right, from<span class="pagenum"><a name="Page_192" id="Page_192">[Pg 192]</a></span> beginning to end; -for I'm not sure that I have followed all that has been said with -sufficient care to understand it perfectly. I appreciate the fact that -we must grasp this question of credit, and comprehend it very clearly, -if we are going to prepare a banking bill in which credit must play a -most important part.</p> - -<p><i>First</i>: We have credit, which is the result of confidence and trust -and gives us the right to demand payment.</p> - -<p><i>Second</i>: If credit is granted for the purpose of producing and -distributing consumable commodities, it should be for a short period, -proportioned to the time involved to complete the transaction.</p> - -<p><i>Third</i>: If credit is granted upon real estate, it should be for a long -period, because the security is not readily convertible into cash.</p> - -<p><i>Fourth</i>: Credit granted to a Government, by purchasing its bonds, -should be for a long period, unless for some temporary purpose.</p> - -<p><i>Fifth</i>: Neither real estate nor Government credit are a fit basis for -currency, because neither is a fit security for a demand debt, nor cash -credit, such as consumable commodities are.</p> - -<p><i>Sixth</i>: Government credit should never be used in the form of legal -tender money, because it must itself be redeemed in coin. It never -has been, and never can be its own redeemer, and is always subject -to unlimited abuse which must necessarily result sooner or later in -repudiation.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Manufacturer, you have summarized the -discussion upon credit remarkably well, I think.</p> - -<p><span class="smcap">Mr. Merchant</span>: So do I, and I am sure that we all understand -what constitutes the difference between the right and wrong basis of -demand obligation—convertibility or non-convertibility—quick assets -or slow assets—the commercial fund and the investment fund. If we keep -this thought steadily in view it will help us amazingly when<span class="pagenum"><a name="Page_193" id="Page_193">[Pg 193]</a></span> we come -to draw a banking bill demanding the recognition of this fundamental -distinction.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Gentlemen, don't you see that the very nature of -things forces the recognition of this fundamental distinction, because -you can keep your currency, if of the right kind, and all your credit -used in the production and distribution of consumable commodities -convertible into gold coin. But you cannot keep all the railroad -bonds, all the municipal bonds and all the real estate of the country -convertible into coin, practically on demand. That is impossible, and -has been proved times without number, as we have already seen.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Mr. Lawyer, I have been sitting here with a -very hazy kind of an idea about this credit matter, until this moment, -but that last point you made seems to me to clinch things, for I saw in -the "Evening Journal" last night that there was about one hundred and -twenty-five billion dollars' worth of property in the United States. -Of course you can't cash that all in tomorrow, nor next week, nor next -month, nor next year even, and the fortunate thing about it is that the -owners don't want to. When you come to think of it, there is a mighty -small part of it that the people want to turn into cash each day.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Laboringman, that is the point exactly, -and our problem is to make it absolutely sure that those who have a -right, and want to demand cash, can always get it. This can only be -accomplished by two things, adequate gold reserves to protect all -current demands, and such assets or commercial credits as can be -converted into gold, at once to meet any extraordinary demands—yes, -even satisfy the panic-stricken mob, and carry the country through such -crises as 1893 and 1907 without unnecessary loss, indeed, prevent the -recurrence of any such experiences again.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Do you really think that that can be done? -What a blessing that would be to labor.</p> - -<p><span class="smcap">Mr. Banker</span>: I certainly do believe it can be done;<span class="pagenum"><a name="Page_194" id="Page_194">[Pg 194]</a></span> indeed, I -know it. But every banker must be compelled to do his part; that is, be -ready at all times to carry his proper share of reserves against his -deposits. One half of the bankers of this country cannot ride the other -half, that is certain.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, what amount, or percentage of -reserves do you think a banker should carry?</p> - -<p><span class="smcap">Mr. Farmer</span>: Now, hold on, just a minute. You can't get into -that subject, because I want to hear it, and I've got to go home right -now.</p> - -<p><span class="smcap">Mr. Banker</span>: Very well, gentlemen, we will put it off, if you -say so, until next Wednesday night.</p> - -<p><span class="smcap">Uncle Sam</span>: This is the second time you men have said that -you would take up reserves. Indeed, it has been so long since you -talked about taking it up before, that I was afraid that it would be -overlooked entirely, and yet nothing but the standard of value itself -is more important. Now, mark this, we want the right kind of reserves, -and plenty of them.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_195" id="Page_195">[Pg 195]</a></span></p> - - - - -<p class="ph2"><a name="TENTH_NIGHT" id="TENTH_NIGHT">TENTH NIGHT</a></p> - -<p class="center">RESERVES</p> - - -<p><span class="smcap">Uncle Sam</span>: Here we all are, every man in his accustomed place -for the tenth night. Not a man has been late on a single occasion, -although Mr. Farmer just got in under the wire one night by the skin -of his teeth. It is most agreeable and satisfying to note that there -has been no lagging in interest since we began. Indeed, there seems to -me to have been a most pronounced gain in your enthusiasm, at times -amounting almost to religious fervor.</p> - -<p><span class="smcap">Mr. Laboringman</span>: That's the way it always is; the more you -know about anything, the more interesting it becomes.</p> - -<p><span class="smcap">Mr. Merchant</span>: Certainly the man who has a fad or who is even -a crank upon any subject, enjoys life a good deal more than a dead -level commonplace fellow, who never takes any particular interest in -anything—just passes the time. Every man for his own pleasure, if for -no other reason, ought to have something in which he is interested -outside of his regular employment. It may be a good horse, a good cow, -a good dog, or some fine chickens—a good garden, a fine front yard, -or just some flowers, or some subject affecting the welfare of his -fellows. Every man ought to have something; it doesn't matter so much -what it is, so long as he is devoted to it intensely. Of course, if he -can profit by it, or help his fellows at the same time, so much the -better. However, we have our hands full just now with a subject which -has become mighty interesting, I think, to all of us, and I hope that -our work will prove not only interesting to us, but profitable to our -fellows. At all events, it can do no one any harm, and will better fit -everyone of us for our duties as citizens. There is too little work -of<span class="pagenum"><a name="Page_196" id="Page_196">[Pg 196]</a></span> this kind done all over the country; men can accomplish so much -more, if they only get together in small groups like this, instead of -plugging along alone. It's a good deal like the football game, where -team work counts for so much. It may be that what we are now doing -will inspire thousands of other little groups to get together and -discuss this, the greatest, the most important business question that -can possibly come before the American people, and then when this is -finished, they will, as a matter of habit, take up others, in precisely -the same way.</p> - -<p><span class="smcap">Uncle Sam</span>: Hold on there, Mr. Merchant, you've lectured us -long enough this evening, now let us get down to business. You know if -there is anything that your Uncle Samuel is noted for all the world -over, it is business, and business is business, you know. But, before -we tackle the tenth topic, tonight, I am going to retrace the road -we have traveled, and see if you can all recall and recognize the -mileposts we've passed.</p> - -<p><i>First</i>: There was the Standard of Value, gold.</p> - -<p><i>Second</i>: Money, our only money is gold.</p> - -<p><i>Third</i>: Currency, the wrong kind.</p> - -<p><i>Fourth</i>: Currency, the right kind.</p> - -<p><i>Fifth</i>: Exchange by which one debt is made to pay another.</p> - -<p><i>Sixth</i>: Value, the value of anything is measured by the thing for -which it is exchanged.</p> - -<p>Price, the amount of money received for anything.</p> - -<p>Wealth, what can be exchanged for money.</p> - -<p>Property, the right of ownership.</p> - -<p>Capital, anything that may be so used as to result in a profit.</p> - -<p>Credit, result of confidence and trust; creates a debt, and is the -right to demand payment.</p> - -<p><i>Seventh</i>: Land or Government credit is unfit as a basis for money or -currency.</p> - -<p><i>Eighth</i>: Our Colonial experience proved that land and<span class="pagenum"><a name="Page_197" id="Page_197">[Pg 197]</a></span> Government -credit were unfit as a basis for money or currency.</p> - -<p><i>Ninth</i>: Our United States Notes again demonstrated the fact that -Government credit should never be used as a basis of legal tender -money. Tonight we are to discuss Reserves, which are the protection or -guarantee of credits granted or debts created.</p> - -<p>Is that a correct definition of reserves?</p> - -<p><span class="smcap">Mr. Banker</span>: Uncle Sam, I don't think anyone could give a -better one.</p> - -<p><span class="smcap">Uncle Sam</span>: By way of encouragement to you men, before you -begin to discuss the subject of reserves, I want to gamble the prophecy -that if you will work out some method or plan that will make it -possible for the banker to pay all his deposits on demand, and at the -same time will enable him to continue to use practically all of them in -profitable employment, I will guarantee you now the support of every -banker for your plan, when you've completed it.</p> - -<p><span class="smcap">Mr. Merchant</span>: I don't think you assume any risk in that -guarantee, Uncle Sam.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Uncle Sam, you say that you will guarantee -that every banker will support it. That insurance policy won't be -any risk at all. Won't cost you a cent. I tell you now that if you -can work out a plan that will amount to an absolute guarantee of -deposits, as a matter of administration, I will guarantee the support -of every depositor in the country, and if I could prove it to their -satisfaction, every depositor would gladly pay me from one-quarter to -one-half per cent on his deposit. Do you know what I would get at that -rate, say at one-quarter per cent, only $42,000,000 every year; for our -deposits you say are now seventeen billion ($17,000,000,000).</p> - -<p>Have you men ever looked up bank failures in the United States? Here is -something I stumbled upon yesterday.</p> - -<p><span class="pagenum"><a name="Page_198" id="Page_198">[Pg 198]</a></span></p> - -<p>Our country is so extensive and our banks are so numerous that -nothing whatever is thought in one part of a bank failure in another -part. Especially is this so since they occur so frequently. Like the -operation of the guillotine during the French Revolution and the -automobile manslaughter of today, bank failures in the United States -have become mere passing occurrences. Is this putting it too strongly? -Let us see.</p> - -<p>Since the establishment of the national system in 1864, 518 national -banks have failed, with liabilities reaching $244,000,000. The direct -losses of the failed banks amount to $38,000,000.</p> - -<p>Two thousand and fourteen state and private banks have failed since -1864, with liabilities amounting to $825,000,000, and probable losses -of $200,000,000.</p> - -<p>The total liability of all banks, national, state and private, failing -since 1864 is $1,069,000,000. Their aggregate is 2,532 banks. In other -words, fifty-six banks have failed every year on an average, or nearly -five banks every month, and more than one bank every week.</p> - -<p>Three hundred and fifty-one national banks have failed since 1890, with -liabilities aggregating $174,000,000.</p> - -<p>One thousand four hundred and six state and private banks have failed -since 1890, with liabilities aggregating $694,000,000.</p> - -<p>The total liabilities of all banks failing since 1890 aggregate -$898,000,000.</p> - -<p>The total number of all banks failing since 1890 is 1,757. In other -words, eighty-eight banks have failed every year on an average, or -more than seven banks every month, and one bank about every four days, -during the last twenty years.</p> - -<p>But who can estimate the indirect losses or depict the consequences of -these bank failures?</p> - -<p>If this tragic condition can be obviated, it is a crime against the -people of the United States, it is a crime against civilization itself, -to permit its continuance.</p> - -<p><span class="smcap">Mr. Banker</span>: No, indeed, neither Uncle Sam nor Mr.<span class="pagenum"><a name="Page_199" id="Page_199">[Pg 199]</a></span> Laboringman -assume any risk in their guarantees. They certainly do not, and I -will go still further, and under those circumstances will guarantee -the support of every merchant, manufacturer, farmer, laboringman, and -every man, woman and child, whether depositors or not, as we would -be the greatest benefactors of the human race, if we could devise a -plan that would remove all risk from every deposit. And yet, humanly -speaking, I am not sure that this very result, the absolute guarantee -of all deposits may not be accomplished, and the chief factor in the -accomplishment of so great a blessing to the people is locked up in the -principle of reserves, assuming, of course, that the administration of -the banking business is such as to keep it sound.</p> - -<p>If all the deposits made with the bank were in gold, or were -convertible into gold, and held to meet the deposits when called for, -the problem would be simple indeed, and would be solved already. But -such a plan would be impracticable and archaic. Indeed, it would -preclude all profit, unless a charge were made for such service, and -would reduce a bank to a safe deposit company. It would exclude the -use of all credit, and therefore destroy the possibility of doing -approximately more than nine-tenths of the business carried on today, -unless we should go back to actual barter. Our problem is to make the -business of banking absolutely safe and yet preserve the great credit -structure by which the business of the country and the world is carried -on.</p> - -<p><span class="smcap">Mr. Merchant</span>: For the purpose of this discussion we must -assume that the business is honestly managed, and is, therefore, -ordinarily sound, and confine ourselves to just the single subject of -reserves, which my study leaves me to think, may be considered; 1st, -from the standpoint of the single bank; 2d, from a standpoint of the -community or a single city; 3d, from a standpoint of the whole country; -4th, from the standpoint of the whole world or our relation to the rest -of the commercial world.</p> - -<p>Now, generally speaking, we mean by reserves in bank<span class="pagenum"><a name="Page_200" id="Page_200">[Pg 200]</a></span>ing that part of -the capital which is retained in order to meet the average demands upon -deposits. But this, of course, varies with every bank to some extent; -and, while 5 per cent cash would be ample reserve for a high-class -mutual savings bank, a commercial bank, in equally good standing, may -require from 10 per cent reserve up to 50 per cent, according to the -character of the business carried on. A country bank dealing with -the farmers might require the smaller amount, while a bank dealing -entirely with bankers would require the largest possible reserve, to -meet any emergency at any time. Each individual bank must be judged by -itself and its reserves adjusted accordingly. In the second instance, -as suggested, the locality or environment must be taken into account; -in many instances the character of the neighboring banks and their -peculiar business are all factors of great importance, and no one of -them can be overlooked. So also when the bank credit is considered as a -unit of the structure of the nation, the general situation from one end -of the country to the other has a bearing upon it, and from some cause -terror may sweep over the entire land in a single day, and every nerve -of trade be paralysed.</p> - -<p>Then, finally, if our nation is an integral part of the commercial -world, we must devise some method that will conserve our reserves when -possibly for a hundred of various reasons, they may be steadily leaving -us or be drawn away by foreign influences.</p> - -<p><span class="smcap">Mr. Banker</span>: Your statement of the condition and forces that -are always playing upon every center of credit from the single bank in -the country town to the largest and strongest in our financial centers -makes it necessary for the welfare of the whole people, that we should -develop in the United States an atmosphere of absolute confidence that -nothing can shake. Unless we can do this we shall continue to have -commercial earthquakes of ever increasing violence and destructiveness.</p> - -<p>How to develop, establish and retain a defense of<span class="pagenum"><a name="Page_201" id="Page_201">[Pg 201]</a></span> impregnable -confidence should be then our purpose, and if we succeed, this must be -our great achievement.</p> - -<p>Speaking of the matter in a more definite way, we must assume that from -the primary form of reserve, which is what we started out with, such a -part of our capital in gold as will always prove equal to the average -demands upon deposits must be kept constantly available.</p> - -<p>We must have what are aptly called secondary reserves, which will -meet all ordinary, yes extraordinary, or unusual calls; but, finally -we must have such access to an almost incomprehensible store of gold, -as to impress and overwhelm the imagination, and place its possible -exhaustion beyond human conception.</p> - -<p>Mark this, your cash on hand of the reserve order, that is in gold -coin, ought under all circumstances, to be ample to care for current -requirements, while your credits, subject to call, with other banks, -or arrangements for credit, ought to be ample to meet all ordinary, or -seasonal, or periodic demands—and your general assets, which most of -necessity be your ultimate reserve, must be of such a liquid character -that if a panic comes, and the necessity arises, they can be converted -into cash, of the reserve order; that is gold coin.</p> - -<p>You perceive, of course, that such a condition assumes two things; -first, that gold should always be running through the channels of trade -in sufficient quantities to touch and characterize the quality of all -credits; book credits, as well as note credits; both must always be -equal to gold, and commerce must be kept conscious of that fact by the -persistent presence of gold.</p> - -<p>There must be kept before the business eye, the people's eye, the -national eye, such a vast horde of gold concentrated for the purpose as -to compel even the most timorous to feel safe, beyond a peradventure. -There must be a conviction everywhere that the system cannot break down -or fail.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Mr. Banker, your position, or<span class="pagenum"><a name="Page_202" id="Page_202">[Pg 202]</a></span> statement, is -in perfect accord with Bagehot, the great banking economist of England. -Here's what he said: "I have tediously insisted that the natural system -of banking is that of many banks keeping their own cash reserves, with -the penalty of failure before them if they neglect it." In another -place he says: "Of course, in such a matter the cardinal rule to be -observed is that errors of excess are innocuous, but errors of defect -are destructive. Too much reserves only means a small loss of profit, -but too small a reserve may mean ruin. Credit may be at once shaken, -and if some terrifying accident happens to supervene, there may be a -run on the banking department, that may be too much for it, as in 1857 -and 1866, and may make it unable to pay its way without assistance, as -it was in those years." And again he writes: "Why should a bank keep -any reserve? Because it may be called upon to pay certain liabilities -at once and in a moment."</p> - -<p>Upon the same point I want to support your position by another great -English economist, Stanley Jevons. He says: "There is a tendency -to frequent severe scarcities of loanable capital, causing sudden -variations of the rate of interest, almost unknown thirty years ago. -I will therefore in the next chapter offer a few remarks intended -to show that this is an evil naturally resulting from the excessive -economy of the precious metal which the increasing perfection of our -banking system allows to be practiced, but which may be carried too -far, and lead to extreme disaster." Again he says: "The vast trade of -the country cannot be placed upon a sound basis, until the force of -public opinion among bankers imposes upon each member the necessity of -holding a cash reserve, bearing a fair proportion to the liabilities -incurred. It matters little who holds the reserve, provided it actually -does exist in the form of metal, and is not evaporated away, <i>by being -placed at par</i>, or deposited with other banks which make free use of -it. In the absence of some common action among bankers, it is<span class="pagenum"><a name="Page_203" id="Page_203">[Pg 203]</a></span> certain -that the sensitiveness of the money market will increase, and it is -probable that commercial crises will from time to time recur, even -exceeding in their violence and disastrous consequences those whose -history we know too well."</p> - -<p>The want of the conservation of proper gold reserves is what has led -to the weakness of the German situation today and compels them to take -steps to strengthen the reserves of the individual banks in accordance -with the finding of the commission appointed to revise the banking laws -of Germany. The individual banks of England have also been increasing -their cash reserves for several years past, recognizing the force of -what Jevons wrote several years ago.</p> - -<p><span class="smcap">Mr. Farmer</span>: That's all right, Mr. Banker, as a statement of -principles, and I think it is perfectly clear to me just what you mean; -but there is one point that I would like to have settled, and that's -this: what is a reserve in the United States? That is, what can you -call a reserve? You know I am a director of our little bank down in the -village below. The other day I asked them what they held for reserves -and the cashier brought out this list; $3,000 silver certificates; -$3,500 of United States notes, or greenbacks; $4,500 National bank -notes; $2,500 gold certificates; $1,500 gold coin; and some silver -change. As quick as I saw that bunch of stuff, I said to myself, just -what you pounded into me some nights ago, that those bank notes ought -never to be held as reserves, because they were nothing but another -bank's debts, nothing but another bank's I.O.U.'s. Do you know that -idea never penetrated my cranium until that very minute. Now, that is -an absolute absurdity, that one bank's debts should be used as another -bank's reserves. Just imagine what a high old time we would have, if -the banks went around the country exchanging their debts with each -other for the purpose of creating reserves. The sky would be the limit. -Just think of it; where would it stop?</p> - -<p><span class="pagenum"><a name="Page_204" id="Page_204">[Pg 204]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: Well, Mr. Farmer, that is precisely what the -bankers of this country are doing. I know of one National banker who -took $3,000,000 of his own bank notes, and put them into the reserves -of a Trust Co., and all the stock of the Trust Co. was owned by his -bank, and was locked up in the safe of the bank. I know another -National bank that got a large Trust Co. to bury $3,500,000 of its -notes down at the bottom of its reserves, so that they could not get -out; and this is a fair sample of just what is going on all over this -country today. This is done just to keep their notes out, so that they -can make the extra 1 per cent or 1¼ on the notes in circulation, as -we call it. Some one of you may say, well! these notes are secured by -Government bonds. Yes, suppose they are, what of it? Congress has just -passed a law providing for $500,000,000 more just like these present -National Bank Notes, which are to be secured by State Bonds, Municipal -Bonds, Railroad Bonds and Promissory Notes and what not, and the boast -of that wonderful economist Aldrich was that you could not tell them -apart. Any fraud, apparently, would suit him, so long as no one found -it out. Now, I assert, and challenge any man to deny it, that if any -good debt is fit to be used for reserve money, then every good debt -is equally fit. If a Government debt is good reserve money, then New -York State debts, Pennsylvania, Illinois, and all state debts; and if -all state debts, then New York city, Philadelphia, Chicago and all -city debts; and if New York, Chicago and Philadelphia debts are good -reserve money, then the United States Steel, Standard Oil and all -corporation debts; and if all corporation debts are good reserves, -then the debts of J.P. Morgan, John D. Rockefeller, Andrew Carnegie -and all private debts are good reserves. When you stop to think of it, -what a preposterous proposition it is to make any debt a reserve for -another debt. The State of California has just waked up, and will not -permit her state banks to hold a National Bank Note as reserve; but the -great State of<span class="pagenum"><a name="Page_205" id="Page_205">[Pg 205]</a></span> New York specifically provides that her banks may hold -National Bank Notes as reserves.</p> - -<p><span class="smcap">Mr. Merchant</span>: I must confess that I never knew that before; -such a scheme as that is perfectly rotten, and it seems to me as -though something ought to be done to correct so obvious an evil. Why, -gentlemen, these men who are using bank notes as reserves, must have -known that they were driving just that much gold out of the country, -and weakening the basis of credit to just that extent.</p> - -<p><span class="smcap">Mr. Banker</span>: I don't know whether they know enough to know that -or not, and I don't know whether it would have made any difference with -them if they did. When a man's cupidity and greed make a slave of him, -they drive all patriotism out of his soul, just as debts, promises to -pay, or wind money drives the gold out of the country.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: This scheme of banks exchanging their -promissory notes or their debts for the purpose of making reserves is -a new one to me, too. But, if any one thing can be much worse than -another, it must be this scheme.</p> - -<p>Gentlemen, a true reserve must be the measure and touchstone of credit, -therefore a reserve cannot be a credit itself nor a debt created by -granting credit. Now, what is the thing by which we are measuring the -value of all credit? Indeed, the thing by which we are measuring the -value of everything? It is gold, is it not? Then certainly gold is the -only thing that ought to be considered as a reserve.</p> - -<p><span class="smcap">Mr. Banker</span>: Right you are, Mr. Manufacturer, no greater -economic truth was ever uttered, or better said, than you have just put -this one. In support of that, I want to read something just written -by Joseph T. Talbert, Vice-President of one of our greatest banks. It -is this: "What is a Bank Note? It is the available gold behind a Bank -Note that gives it value. Substitution of any form of credit paper, the -greenback, for instance, is<span class="pagenum"><a name="Page_206" id="Page_206">[Pg 206]</a></span> a substitution of a deferred promise of -a thing, for the thing itself. A statute which forces such notes upon -the people as a legal tender, works a fraud and vitiates all reason in -regard to money and banking. It perverts the moral sense of right and -justice."</p> - -<p><span class="smcap">Mr. Farmer</span>: There is no doubt whatever that all the true -reserves that that little country bank really had, was only the gold -and gold certificates amounting to $4,000 out of the total of $14,250, -the rest being only a substitution of some form of credit which must -itself be redeemed by gold which is certainly the only redeemer. We -settled that a long time ago, but it never came home to me until right -now. This thing is growing on me so rapidly that I shall soon be a -real, unregenerate Gold Bug. I guess I am that now. But, how plain and -self-evident that truth is when we get close to it. We are living and -teaching a gigantic economic fraud, an economic lie.</p> - -<p><span class="smcap">Mr. Banker</span>: Some reference may have already been made to this -fact; however, it will do no harm to repeat it right here because of -its force and great importance. Under the English Bank Act of 1844, -permission was given to count silver as one-quarter or 25 per cent of -the reserves of the Bank of England; but it has never done so, since -it is regarded as an economic falsehood. The reason is obvious. If the -bank today held $50,000,000 of silver and $150,000,000 of gold, the -gold would not only have to carry the $50,000,000 of silver, which -is nothing but another form of credit money, because actually worth -only 50 cents on the dollar in bullion, but the gold would also have -to carry $150,000,000 additional; that is, all the credit based upon -this $50,000,000 of silver, a condition that is wholly misleading; for -the silver instead of being a reserve at all, as it seems, or pretends -to be, would actually be, so to speak, a bundle of dynamite under the -whole structure of English credit.</p> - -<p>So, in the United States our $346,000,000 of United States Notes, or -greenbacks, instead of being an actual<span class="pagenum"><a name="Page_207" id="Page_207">[Pg 207]</a></span> reserve to that extent, are not -only a burden resting upon our gold, to the amount of their face value; -but the burden our gold is carrying is multiplied to the extent of all -the credit that is resting, or is based upon these United States Notes, -which may be anywhere from one billion to three billion according to -the per cent of the reserves the banks using them carry. They may be -used as a 5 per cent reserve, and carry twenty times the amount of -the reserves, or more than six billion; it is possible that they may -be carried as a 17 per cent reserve, the average of all the National -Banks, or only 7 per cent, the average reserves of all the other State -Banks, excluding the Mutual Savings Bank.</p> - -<p><span class="smcap">Mr. Merchant</span>: What's that? Do you mean to say that the State -Banks do not carry more than an average of 7 per cent reserve, and that -the National Banks carry an average of two and a half times as much or -17 per cent cash?</p> - -<p><span class="smcap">Mr. Banker</span>: I have the statement of the Comptroller right -here, which shows that the average cash reserves of all the State Banks -is 5 per cent, including the Mutual Savings Banks, but excluding them, -only an average of 7 per cent, and that the average reserves of all the -National Banks is 17 per cent.</p> - -<p>The report of the Comptroller also shows this fact, that while all -other banks than the National Banks, excluding the Mutual Savings Bank, -hold only 7 per cent cash reserves of their individual deposits, or -demand liabilities, they have 24 per cent of their assets invested in -bonds and other securities, which must of necessity be slower than -current commercial paper, while the National Banks, which hold 17 per -cent in cash of their individual deposits, have invested only 17 per -cent of their assets in bonds, or other securities.</p> - -<p>The inconvertibility of a great per cent of the assets of the State -institutions is another burden then, thrown upon the total cash -bank reserves of which the National Banks carry $996,000,000, with -$5,825,000,000 individual<span class="pagenum"><a name="Page_208" id="Page_208">[Pg 208]</a></span> deposits, while the other banks, excluding -the Mutual Savings Banks, have only $577,000,000 cash reserves, with -individual deposits amounting to $7,589,000,000.</p> - -<p>The average cash reserves of the United States therefore are only a -trifle over 11 per cent, when they should not be less than 16 per -cent under any circumstances at the low level, reaching nearer 20 per -cent at the high level. That is, reserves should be held for use, not -ornament. There should be such an elasticity in the use of reserves, as -to enable any community or section of the country to adjust itself to -the ever-changing conditions of trade.</p> - -<p>Let me make this point perfectly clear by giving you an illustration. -Under the law of today, our bank carries 6 per cent cash, which -amounts to about $120,000. There are times of the year when I could -carry $180,000 or even $200,000 a good deal easier than I could carry -$60,000, or even $50,000 at another time. Common sense would say that -I ought to be able to adjust my business and my reserves somewhat to -the varying conditions, but no, I am tied down by a cast-iron rule, so -that I cannot bend without breaking the law. There is no doubt that -my reserves ought to average for the year fully 6 per cent cash. In -addition to this, I ought to carry at least 10 per cent more that I -know absolutely is available at any time. Yes, and this should be so -carried with the combined reserves of my fellow bankers all over the -United States, as to make any amount available that could possibly be -necessary at any time under any circumstances. <i>This is the principle -of the elasticity of reserves.</i></p> - -<p>The wide variation between the State reserves and the reserves of the -National banks is not difficult to explain. There are eighteen states -today which have no reserve requirements at all. In the remaining -states, the reserve requirements range all the way from 5 per cent to -25 per cent. The reserve laws in some of the states are excellent, just -as good as that of the National Bank Act, while<span class="pagenum"><a name="Page_209" id="Page_209">[Pg 209]</a></span> in an adjacent state, -there may be no provision whatever requiring reserves. The result is -that half of the banks of the country which are compelled to carry -adequate reserves are carrying the other half, a condition that is -unfair, unjust and manifestly unsound.</p> - -<p><span class="smcap">Mr. Merchant</span>: It is not only manifestly unfair as between -the bankers themselves, but such a condition imperils the banking -situation as a whole, and more than any other single cause, brings on -a general commercial disaster, as things now stand. The banking of -the United States and all the productive and transportation interests -are, comprehensively speaking, but one single business, so intimately -associated and interwoven are their affairs. The banks put up their -capital as an insurance fund, to protect their customers, and should -handle their resources, and should keep such an amount of reserves on -hand or at their command as to guarantee the payment of all depositors -upon demand, or in accordance with their contracts. Since the banks, -commerce and the people are all bound up together, the contracts of -the banks with the people should take one common form, and each bank, -from one end of the country to the other, should be compelled to assume -its proper share of the burden, both as to paid-up capital and as to -reserves.</p> - -<p>It is interesting to note that the capital of the 7,312 National -banks amounting to $1,033,000,000 is just about equal to the capital -of the other 17,804 banks, outside the National System reporting, -and the estimated capital of $70,000,000 of the non-reporting banks, -$1,047,000,000.</p> - -<p>The surplus of the National banks is 92 per cent of their capital, -and strange and fortunate to say, excluding the Mutual Savings bank, -the surplus of all other state banks is exactly 92 per cent of their -capital.</p> - -<p>That is, the National banks have $1,983,000,000 capital and surplus to -insure $5,825,000,000 individual deposits and $2,178,000,000 due to -the other banks, or a capital and surplus to all deposits of nearly 25 -per cent, while all the other banks have $2,010,000,000 capital and -sur<span class="pagenum"><a name="Page_210" id="Page_210">[Pg 210]</a></span>plus to insure individual deposits $5,089,000,000 and $454,000,000 -due to banks, or a little over 24 per cent. Insurance expressed in -capital and surplus, therefore, is about equal, but a great and serious -divergence comes, as we have seen, in the average cash reserves of the -two classes of banks.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: This is the weakness of the present -situation from the standpoint of reserves, and some of the states are -beginning to realize the importance of protecting the well-conducted -banks from the consequences of those recklessly or dishonestly managed; -and they are passing laws compelling all persons or firms doing a -banking business to submit to State supervision and control. They are -compelling them to incorporate their business within a reasonable time. -These States do not propose to have the innocent depositors swindled -through a misuse of funds; nor do they propose to permit bankers to -so conduct their banking business within their borders, that they -can, if they so desire, commit gigantic frauds, or by the misuse of -the people's deposits, bring on bank panics and a complete paralysis -of business. I think that Ohio has just passed such a law and that -Illinois is about to put the same kind of a statute into operation. -The people of all the states are beginning to understand that banking -is a quasi-public business, and that the banker, though not strictly -speaking a trustee, is in fact a quasi-trustee, and must conduct his -business upon that basis.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Manufacturer, you are quite right in what you -have said, but you have not gone far enough; nor as far, I am sure, -as you will be inclined to go when I have outlined the necessity of a -police regulation of the banking business, from a National rather than -from a State point of view. Just stop and think the matter over. To -use your own observation with regard to the action of the state, no -one will deny that a state has the right to supervise every person, -firm or corporation that takes deposits under the name of bank, or -banker,<span class="pagenum"><a name="Page_211" id="Page_211">[Pg 211]</a></span> with a view of protecting the people against foolish or -dishonest bankers. By the same course of reasoning, the United States, -or National Government, has the right, and it is clearly its duty, to -protect one state against the unwise and dangerous course of some other -state and one section of the country against misconduct in the banking -business in some other section of the country. Bad banking is not only -a local mishap, but a national misfortune. Nine-tenths of the country -might be under such supervision and control of its banking business -as to insure practical immunity from such conditions and practices as -breed panics and the remaining tenth be so conducted as to preclude -the possibility of a day's freedom from the danger of a commercial -cataclysm.</p> - -<p>Will anyone say that such a condition should continue for a day, or -a year, or for ten years, or for a hundred years, or for a thousand -perchance, because the general Government has no right or power to act -in the matter for want of constitutional authority? Let me ask you, Mr. -Lawyer, whether there is anything that will so certainly conserve the -peace, the prosperity and the "general welfare" of the United States as -a sound and uniform financial banking system extending over the whole -country.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I certainly cannot conceive of anything of so much -importance as a sound and uniform banking system for the whole country. -If there is one single factor in our life that is distinctly national -in its character and scope, it is this.</p> - -<p>During the past week, I devoted much time to that phase of this -question, because, as we have gone along during the last two or three -months, and this problem has been under discussion, I have become more -and more impressed with its vast importance, and above all with its -distinctly national character. I have not butted in tonight, as you -will observe, as I was anxious to see how you gentlemen would treat -this subject of Reserves, whether from a standpoint of individual -banks, or from the standpoint of the community, the commercial center,<span class="pagenum"><a name="Page_212" id="Page_212">[Pg 212]</a></span> -or our country as a whole, or upon the broad proposition that gold -today constitutes the world's banking reserves and that we are a -very great part of that commercial world. For my own part, I had -come to the conclusion that there could not be a system of reserves -established that would be efficient and of the highest use, and really -protective unless it were national in its extent, and universal in -its application. Therefore, realizing the absolute necessity of some -common power to control all reserves, in order to compel each bank to -perform its part by carrying its share of the burden that commerce -imposes, I have been unable to find any solution, except in a uniform -national system; and why not? Certainly the National Government could -compel every bank to carry certain specified reserves, and failing to -do so to pay a tax of 10 or 20 per cent per annum upon all deposits -not so protected; that is, upon all deposits in excess of the required -reserve. This could be done under the taxing power of the Government, -precisely as a tax of 10 per cent was put upon all bank notes. Would -any patriotic banker refuse to coöperate with his fellow bankers in -such a reform, unless he wanted some unfair advantage by compelling the -other bankers to carry his load for him?</p> - -<p>You gentlemen will remember that the National Government was given -jurisdiction of the Postal Savings Banks under these words which it was -understood at the time were written by the President: "Sixty-five per -cent of the deposits could remain with the banks as a working balance, -and also a fund which may be withdrawn for investment in bonds or -other securities of the United States, but only by direction of the -President, and only when in his judgment 'the general welfare' and the -interests of the United States so require." Similar words could be -used with regard to a per cent of the surplus of the banks, and if the -one was tenable, certainly the other would be especially so, since the -latter involves seventeen billion of individual deposits, of which six<span class="pagenum"><a name="Page_213" id="Page_213">[Pg 213]</a></span> -billion four hundred and eighty million ($6,480,000,000) are savings -deposits. Again Article I, Section 8 of the Constitution, empowers -Congress "to regulate commerce with foreign nations and among the -several states and with Indian tribes."</p> - -<p>Upon this clause of the Constitution rests the Anti-Trust Law. What -have we not done under this clause of the Constitution and the general -welfare clause?</p> - -<p>We have passed the Food and Drugs Act, giving the Government power to -stop the use of poisonous substances in food products and drugs:</p> - -<p>The Insecticide Act, giving the Government power to determine what kind -of poison shall be used to annihilate bugs:</p> - -<p>The Plant Quarantine Act, giving the Government power to regulate -the importation of nursery stock and other plants and products and -to enable the Secretary of Agriculture to establish and maintain -Quarantine Districts for plant diseases and insect pests:</p> - -<p>The Livestock Quarantine Act, to enable the Secretary of Agriculture to -effectually suppress and extirpate contagious pleuro-pneumonia, foot -and mouth diseases and other dangerous infectious and communicable -diseases in cattle and other live stock:</p> - -<p>The Meat Inspection Act that, for the purpose of preventing the use in -Interstate, or Foreign Commerce, of meat and meat food products, which -are unsound, unhealthy, unwholesome, or otherwise unfit for human food, -the Secretary of Agriculture at his discretion may cause to be made, by -inspectors appointed for that purpose, an examination and inspection -of all cattle, sheep, swine, and goats before they shall be allowed -to enter into any slaughtering, packing, meat-canning, rendering or -similar establishments in which they are to be slaughtered, and the -meat and meat food products thereof are to be used in interstate or -foreign commerce.</p> - -<p><span class="pagenum"><a name="Page_214" id="Page_214">[Pg 214]</a></span></p> - -<p>The twenty-eight Hour Law by which the Government compels the humane -treatment of cattle:</p> - -<p>Employers' Liability Act:</p> - -<p>The Safety Appliance Act:</p> - -<p>The Hours of Service Act:</p> - -<p>The Transportation of Explosives Act:</p> - -<p>The Newspaper Publication Act:</p> - -<p>The White Slave Act.</p> - -<p>Can anybody doubt that we shall have a "National Health Act" by which -the Government can stop the invasion of this country by yellow fever, -cholera, bubonic plague, or any other scourge that may possibly visit -our shores, and sweep over the land?</p> - -<p>Can anybody doubt that we shall soon have a National Child Employment -Act by which the childhood and youth of the land may be protected -against those labor practices that imperil our chief national resource, -the human resource?</p> - -<p>Can anyone doubt that we shall soon have a National Woman's Employment -Act that future generations may not be pauperized in health, strength -and character?</p> - -<p>Can anyone doubt that we shall soon have a National Workmen's -Employment Act to the end that American citizens in all parts of the -United States engaged in our productive industries shall have equal -opportunities in matters of hours of labor?</p> - -<p>The general welfare of this nation demands strength, power and -greatness; but the strength, power and greatness of this nation reside -and consist in the character, health, strength and power of the people, -and therefore conservation of our greatest national resource is the -conservation of our human resource. The citizen is a national asset.</p> - -<p>Can anyone doubt that justice between the employers of labor in our -various states, and the general welfare of this republic, demand -uniform health and labor laws to the end that the citizenship of this -republic may be the best product of the human race?</p> - -<p><span class="pagenum"><a name="Page_215" id="Page_215">[Pg 215]</a></span></p> - -<p>Gentlemen, if all these things are done, can be done and ought to be -done by the National Government, can anyone doubt the soundness of -this proposition: That it is interstate commerce to ship by mail, or -freight, any kind of property?</p> - -<p>What is property? "Property is a thing or things subject to ownership; -anything that may be exclusively possessed and enjoyed; chattels, -lands, possessions." Gold, gold certificates, silver, silver -certificates, United States notes, checks, drafts, promissory notes are -all certainly within this definition.</p> - -<p>H.D. MacLeod, the highest authority I know of on banking economics, -says: "Property, therefore, in its true sense, means solely a right, -interest or ownership, and consequently to call goods or material -things property is as great an absurdity as to call them right, -interest or ownership.</p> - -<p>"To call goods themselves property is, comparatively speaking, a modern -corruption, and we cannot say when it began."</p> - -<p>Therefore, property is primarily and essentially the very things with -which banking is solely concerned.</p> - -<p>Will anyone deny that gold is property? Remember that when gold is -shipped in large quantities, it is by weight and not by count.</p> - -<p>Will anyone deny that gold certificates are property?</p> - -<p>Will anyone deny that silver is property?</p> - -<p>Will anyone deny that silver certificates are property?</p> - -<p>Will anyone deny that United States notes are property?</p> - -<p>Will anyone deny that promissory notes are property?</p> - -<p>Can anybody have the hardihood to say that if a note broker in New York -ships a million dollars' worth of commercial paper to purchasers in the -west upon a commission of a quarter or a half per cent, and receives -his payment, for the sake of the argument, let us say, by a shipment of -gold coin, that such broker is not engaged in Interstate Commerce? Does -this transaction become<span class="pagenum"><a name="Page_216" id="Page_216">[Pg 216]</a></span> a different transaction, forsooth, because it -is carried out by a banker?</p> - -<p>Will anybody deny that checks and drafts and bills of exchange are -property?</p> - -<p>Will anybody deny that a bank has property, although it may be the -owner of one million dollars' worth of promissory notes?</p> - -<p>Will anybody declare that a bank has no property when it has a million -dollars' worth of gold coin in its vaults?</p> - -<p>If a bank in Chicago should by any chance own one million dollars' -worth of wheat, and should sell and ship the same to a New York bank, -and the New York bank should ship the Chicago bank one million dollars' -worth of gold, will anybody deny that they are engaged in interstate -commerce? Now, suppose that the Chicago bank should sell the wheat in -Chicago to Mr. Armour, instead of shipping it, for his promissory note -for one million dollars, due in thirty days, and that the Chicago bank -should then sell, and mail the note to the same New York bank, and the -New York bank should ship the Chicago bank one million dollars in gold, -in payment for the note, will anyone have the hardihood to assert that -this transaction is not interstate commerce?</p> - -<p>Will anyone deny that the sale and shipment by note brokers of billions -upon billions of promissory notes from one state to another every year -is not interstate commerce, but that to ship eggs, apples, potatoes, -chickens, grain, cotton and live stock is interstate commerce?</p> - -<p>I assert that it is just as proper and important that the National -Government inspect this paper, and the banks that create it, or -ship it, or buy it, as it is to inspect the sheep, hogs, cattle, -slaughterhouses and the meat they turn out in order that it can protect -the people of the United States. If the paper so shipped is infected -by the hand of a rotten maker, commercially speaking, and the bank -sending it out and responsible for it is<span class="pagenum"><a name="Page_217" id="Page_217">[Pg 217]</a></span> not carrying an adequate -reserve to meet the paper, should the maker fail to pay it, the harm -done is vastly greater than that resulting from slightly infected meat. -How much infected meat would it take to do the harm, the damage to the -American people that resulted from the panic of 1907? And yet, if we -had had a wise, national financial and banking system, we need never -have passed through that harrowing, wasting panic that resulted in -destroying property values into the billions; in the death of thousands -of the people directly and indirectly; in the ruined health of tens of -thousands more; in the non-employment of hundreds of thousands; and in -the unknown and immeasurable suffering that ensued.</p> - -<p>Such a national system must be supported by every banking unit; by -every individual bank carrying its part of the commercial burden, and -providing its proper share of the insurance of commercial safety by -contributing its proper proportion of the necessary reserves, both -local and national.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, I heartily approve of every word -that you have said, and there can be no possible doubt about the result -of a discussion of this phase of this question by the American people.</p> - -<p>There is one question, however, that I desire to ask you before we pass -on, as we may overlook it. Is it not true that our National Banks are -now carrying 20 per cent reserves of which 17 per cent are cash? Are -not these reserves large enough to meet all emergencies?</p> - -<p><span class="smcap">Mr. Banker</span>: I presume you gentlemen all know just how the -National Banks carry their reserves; but fearing that you do not, -I will explain the system to you. All so-called country banks are -required to carry 15 per cent reserves; that is $15,000 cash against -every $100,000 of deposits; that they may send 9 per cent or $9,000 for -every $100,000 of deposits away to what we call reserve cities. Now, -there are 320 banks in 48 of these reserve cities. These reserve cities -are required by law<span class="pagenum"><a name="Page_218" id="Page_218">[Pg 218]</a></span> to carry a reserve of 25 per cent, or $25,000, for -every $100,000 deposits; but they may send away 12½ per cent, or -$12,500, for every $100,000 of deposits to a central reserve city, of -which there are three: New York, Chicago and St. Louis.</p> - -<p>These central reserve cities must carry 25 per cent cash reserves or -$25,000 in cash for each $100,000 of deposits. Experience shows that -these 320 banks in the 48 reserve cities and these 55 banks in the -three central reserve cities keep all of their money loaned out all of -the time; that is, right up to the reserve limit. Since they have no -margin, when called upon for anything more than the usual daily current -requirements, something extraordinary must be done to meet the demand. -Loans must be called in and paid off. But since these same banks that -are calling loans are supposed to be carrying the real, the final, the -ultimate reserves, a deadlock follows, and the borrower is up against -it; rates go almost anywhere that the banks want to put them; from 1 -per cent to 10 per cent, to 20 per cent, to 100 per cent, or even 1,000 -per cent; I believe that's the record rate. In other words, we have no -true, final reserves in this country at all, for you cannot break the -Government limit fixed by statute, and therefore we have a complete -lockup all along the line, until through straining, something breaks -somewhere.</p> - -<p>There is absolutely no use of sending a part of your reserves away, if -you cannot get them when you want them; for then it is no reserve at -all, and that is the actual position or situation in the United States -today. Our so-called central reserves are not reserves; it may be -written down as a purely fictitious scheme, for there cannot be found -a single year in which any substantial arrangement has ever been made -by running the reserves up in the central reserve cities until they -amounted to an average of 35 or 40 per cent, which would be the only -practical way of providing for the crop-moving period.</p> - -<p>If there is one thing more barbarous in our banking<span class="pagenum"><a name="Page_219" id="Page_219">[Pg 219]</a></span> practices than a -bond-secured currency, it is our system of superimposed bank reserves, -especially in connection with the fixed limit, established by the -Government. What would you think of a railroad company which ran out -through the wheat country, having one-quarter of all its freight cars -idle all the time as a reserve, and yet when thrashing time came, -refused to use them, although the wheat was rotting on the ground, -because the management of the road demanded that the railroads should -always have at least one-quarter of the cars idle, as a reserve to meet -the demands during the crop-moving period. Wouldn't you think that that -was idiotic?</p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, I should say so.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Banker, there is another point in that -connection, and that's this. You started off to get a central reserve, -a true reserve, as I supposed, as distinguished from the reserves of -the National Banks that are all loaned out all the time. Then, your -reserves were all broken up in the end, first into three hundred and -twenty banks, and at the end into fifty-five banks, located in New -York, Chicago and St. Louis. What we must have, it seems to me, is a -real central reserve in the form of unloaned gold, and then permit the -banks to use their cash reserves, if by any chance they needed them in -part at least.</p> - -<p>I notice that you carry about $100,000 in accordance with the legal -requirement. Now, just as you said a while ago, there are times of -the year when you could easily carry $200,000; but again there are -times when you want to use a part of the $100,000, possibly as much -as $75,000 of it. Why should you not do it, and then accumulate the -necessary excess in the slack time to make up your average for the year.</p> - -<p><span class="smcap">Mr. Banker</span>: That is precisely what we ought to be permitted to -do.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Then, Mr. Banker, instead of sending as you now -do, 9 per cent of your deposits, or $175,000, to a reserve city, and -that city in turn sending a part of it to<span class="pagenum"><a name="Page_220" id="Page_220">[Pg 220]</a></span> some central reserve city, -your balance with your reserve city should be sufficient to carry your -exchange account, and the balance go to a great central gold reserve, -upon which you and your fellow bankers throughout the country could -rely absolutely when the emergency came.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I have been listening to you gentlemen with -intense interest, and must say that you have worked this plan out -completely and practically.</p> - -<p>I see what an enormous advantage it would be to a bank to use its -reserve as a reserve should be used, and what an absolute guarantee -of protection it would be to have all the reserves of all the banks -centralized, and ready to help anyone of them in need of gold, because -the gold was actually on hand, and had not been loaned out as the banks -now do; but I have been wondering where the State Banks and Trust -Companies were going to get 10 per cent more reserves of their demand -deposits to put up in this central gold reserve. You must remember that -they have five billion of deposits.</p> - -<p><span class="smcap">Mr. Banker</span>: I can tell you how to do that; that is very easy.</p> - -<p>When the State Banks come into the National system as they certainly -will, if you have the right kind of a system, they will exchange their -notes for the gold or gold certificates that are now in circulation, -as they come in over their counters. You see that all the gold and -gold certificates that are now held by the banks only amount to -$879,000,000, although there is in the country $1,850,000,000 of gold, -practically one billion of gold, or $10 of gold for every man, woman -and child out in the corn, cotton and wheat fields; in the mining -camps, when as a matter of fact, this gold should be in the reserves -of our banks, protecting our bank credits; and bank notes should be in -the corn, cotton and wheat fields, in the mining camps filling the true -function of currency, and where gold, or gold certificates are not at -all needed.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Now, wait a moment, Mr. Banker, and<span class="pagenum"><a name="Page_221" id="Page_221">[Pg 221]</a></span> let me see -if I grasp that. It is very important that we should all understand -this. I am exceedingly anxious to, and it strikes me that we are at a -mighty interesting juncture of this subject. If a State Bank with a -reserve of $70,000 came into your National system and had to increase -its present reserve, which is only 7 per cent, by as much as 10 per -cent, it could do so by simply retaining the gold and gold certificates -as they were deposited from day to day, and pay out its bank notes to -the extent of one hundred thousand dollars. The result would be that -the bank would increase its liabilities by $100,000, but it would also -increase its reserves by $100,000. That is certainly a perfectly sound -proposition. Before the bank came into the system, its reserves were -only 7 per cent, or $70,000, since its deposits were $1,000,000. After -it goes into the National system, it has changed $100,000 of its notes -for $100,000 of gold, or gold certificates, as they came in over the -counter; it now owes $1,100,000, of which $100,000 is of notes, but it -now has $187,000 of reserves of all of its demand liabilities, or 17 -per cent, instead of $70,000, or 7 per cent, as before.</p> - -<p><span class="smcap">Mr. Merchant</span>: Isn't that a simple and very easy thing to -do? And what tremendous strength it would give to the whole banking -situation immediately.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Then when you think of it, what a stupendous -piece of folly it is, to have all this gold floating around the -country, doing no possible good, when a piece of credit paper, or bank -note, would do the work just as well.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Anybody can see that. A man that can't ought -to be arrested for want of brains. He'd have to plead guilty. Putting -that gold that you need in your bank reserves at the rate of one dollar -of gold for five or six dollars of credit into the streets, cotton -fields, corn fields and in the mines, is no greater piece of folly than -it would be to send a six-horse team to haul Mr. Farmer home, when one -horse would do just as well.</p> - -<p><span class="smcap">Uncle Sam</span>: Mr. Laboringman has got this thing dead<span class="pagenum"><a name="Page_222" id="Page_222">[Pg 222]</a></span> right. In -fact, in my judgment, he has the horse sense of this crowd. Give him a -show, I'll bet on him every time, he always takes a short cut, and hits -the nail square on the head.</p> - -<p><span class="smcap">Mr. Merchant</span>: Suppose, Mr. Banker, that all the banks of the -country should come into the National system, and put up, say 10 per -cent, as you suggested a while ago, of their demand or individual -deposits, and 5 per cent of their savings deposits, what would your -central gold reserve amount to?</p> - -<p><span class="smcap">Mr. Banker</span>: On June 14, 1912, the Comptroller of the Currency -reported that the individual deposits amounted to ten billion five -hundred million ($10,500,000,000), and that the savings deposits, -outside of the mutual savings bank, amounted to two billion eight -hundred and seventy-two million ($2,872,000,000).</p> - -<p>If the State Banks and Trust Companies should become National Banks, -and bring their reserves up to the National standard, by exchanging -their notes for gold; that is, exchanging $468,000,000 of their notes -for that much gold, the result would be as follows:</p> - -<table summary="deposits" width="47%"> -<tr><td>Individual</td><td></td><td></td><td></td></tr> -<tr><td> Deposits</td> <td align="right">$10,500,000,000</td> <td>@10%</td> <td align="right">$1,050,000,000</td></tr> -<tr><td>Savings</td><td></td><td></td><td></td></tr> -<tr><td> Deposits</td> <td align="right">2,872,000,000</td> <td>@ 5%</td> <td align="right">143,600,000</td></tr> -<tr><td>Bank Notes</td> <td align="right">1,219,000,000</td> <td>@10%</td> <td align="right">121,900,000</td></tr> -<tr><td></td><td></td><td></td><td align="right">———————</td></tr> -<tr><td colspan="3">Making a total central gold reserve of</td> <td align="right">$1,315,500,000</td></tr> -</table> - -<p>This is just double what the gold reserve of France is, the largest -gold reserve in the world today, but when you consider the fact that -our banking resources are 45 per cent of the total banking resources of -the world, it should be even more than that. It is interesting to note -that in making this readjustment for a central gold reserve it would be -just $100,000,000 larger than our bank note circulation.</p> - -<p><span class="pagenum"><a name="Page_223" id="Page_223">[Pg 223]</a></span></p> - -<p>With this central reserve of gold created, the United States could then -control the inflow and outflow of gold to and from the United States, -precisely as England controls the movements of gold today by fixing the -rate of discount or a price for the use of gold.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, boys, if there is one phase of this question -that you have treated with a greater thoroughness and more satisfactory -results than any other, to my mind, it is your plan for protecting our -bank credits with ample gold reserves. They are so disposed of as to -keep at all times all bank credits in touch with gold, and therefore -as good as gold; at the same time have developed a great central gold -reserve in harmony with the practice of the great commercial nations of -the world, and commensurate with my importance as a banking power in -the world. You have made this subject so clear and conclusive that I -need not restate the points you have made.</p> - -<p>I hope our next night will be as satisfactory as this has been.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_224" id="Page_224">[Pg 224]</a></span></p> - - - - -<p class="ph2"><a name="ELEVENTH_NIGHT" id="ELEVENTH_NIGHT">ELEVENTH NIGHT</a></p> - -<p class="center">THE BANK</p> - - -<p><span class="smcap">Uncle Sam</span>: At our last meeting you considered the very -important element in banking, of reserves, and seemingly the final -factor that enters into the structure of a bank. You have run the whole -schedule off, I think. Standard of value, money, currency, exchange, -capital, credit, government credit as money and as currency, land -credit as money and as currency and reserves. What else can there be?</p> - -<p><span class="smcap">Mr. Banker</span>: I do not think there is any particular topic for -us to tackle now, but the bank itself, and I want to be permitted -in the outset to describe just what a bank is, and what it does. I -do not think there is any single thing in business life that is so -misunderstood. People think of a bank as a kind of mystery.</p> - -<p>The banker is a merchant in money and credit, and precisely as you can -say that a man is a hardware merchant, cotton goods merchant, grain and -flour merchant, so you can say that the banker is a money and credit -merchant. He deals in these two things.</p> - -<p>Let me illustrate this in a simple way. If Mr. Farmer should come to -me to borrow a thousand dollars for three months, and I should make -him the loan, as we say, I, as a banker, would buy his note, due in -three months. That is just what happens every time a bank makes a loan; -it simply buys the note. Now, in all probability I would not give Mr. -Farmer any actual money, but would simply give him credit for one -thousand dollars on the books of the bank, so that he could draw his -check against it. In other words, I would owe him one thousand dollars. -I have created a debt to him of one thousand dollars; in short, I have -traded debts with him. He has given me his note, which is a debt for -one thousand dollars due<span class="pagenum"><a name="Page_225" id="Page_225">[Pg 225]</a></span> in three months, and I have given him credit -on the books of the bank, a debt due to him on demand. The transaction -does not differ in the slightest degree from the trade of horses for -cattle. Let me demonstrate this. Suppose that Mr. Farmer came to me and -offered me two of his Jersey cows for my horse and buggy, because he -does not want the cows, but does want the horse and buggy to do a lot -of running around. I want the cows to milk, and so make the exchange -with him. He gets something that meets his pressing needs in the horse -and buggy, and I get something from which I receive an income, the cows -from which I get milk. This corresponds to the interest on his note, -and by the way, the cream would be my profit.</p> - -<p><span class="smcap">Mr. Laboringman</span>: That's it; you bankers are always milking the -public, and the interest you get is all cream; all profit.</p> - -<p><span class="smcap">Mr. Banker</span>: Oh, no! it is not as bad as that. Don't make such -a mistake. The average cost to the bankers of the country, outside of -any losses, is about 4 per cent upon their deposits for interest paid -on deposits, rent for building, clerk hire and other general expenses. -So you see that it is not all profit by any means.</p> - -<p>But let me get right back to what I was saying. The banker is nothing -but a trader who keeps an open shop for the purpose of trading his -debts for the debts of his depositors; or to put it in another way, -for the purpose of exchanging his credit for actual money which is -deposited with him, or for checks and drafts that are deposited with -him, or for promissory notes which he buys when he loans money to his -customers, and gives them credit on his books for the amount of the -loans. All these different things, money, checks, drafts and promissory -notes are bought by the banker with his credit, and the greater the -amount he buys with his credit the greater will be his debt. But, you -will probably say<span class="pagenum"><a name="Page_226" id="Page_226">[Pg 226]</a></span> these are his deposits. Very true, but his deposits -are his debts. Don't forget that.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Banker, you have accurately described the -situation, just as it exists today, and that, of course, is what we are -interested in; but it seems to me as though it would be a great help to -us to follow the development of banking, as we have it now.</p> - -<p>MacLeod, the highest authority upon banking credit, and the theory of -banking, used this language: "The first business of a banker is not to -lend money to others, but to collect money from others."</p> - -<p>Bagehot used this language, in describing the business of the bank: -"Thus, a banker's business—his proper business—does not begin while -he is using his own money; it commences when he begins to use the -capital of others."</p> - -<p>Many writers have maintained that a bank should only be allowed to -create exactly as much credit as the specie paid in, and that its -sole function should be to exchange its credit for coin, and coin for -credit; and that the quantity of the bank's credit should always be -exactly the same as the coin it displaces. This principle is called the -currency principle.</p> - -<p>Many banks in the world's history have been constructed on this -principle, especially those famous banks at Venice, Hamburg, Amsterdam -and several others.</p> - -<p>These cities, small in themselves, were the centers of great foreign -commerce; and as a natural consequence, an immense quantity of coin -and denominations of all sorts of different countries was brought -by the foreigner who resorted to them. These coins were, moreover, -greatly clipped, worn and diminished. The degraded state of the current -coin produced intolerable inconvenience, disorder and confusion among -merchants, who, when they had to make or receive payment of their -bills, had to offer or receive a bag full of all sorts of different -coins. The settlement of these bills, therefore, involved perpetual -dispute—which coins were to be re<span class="pagenum"><a name="Page_227" id="Page_227">[Pg 227]</a></span>ceived, and which were not, and -how much each was to count for. In order to remedy this, it finally -became absolutely necessary that some fixed uniform standard of payment -should be devised, to insure regularity and a just discharge of debts. -In order to do this, the magistrates of those cities instituted a -Bank of Deposit, in which every merchant placed all his coins of -different kinds and nations. These were all weighed, and the bank gave -him credit, either in the form of notes, or a credit on their books, -exactly corresponding to the real amount of the bullion deposited. The -owner of this credit was entitled to have it paid in full weighted coin -on demand. These capital credits, therefore, always insured a uniform -standard of payment; and it was enacted that all bills upon these -respective cities, above a certain amount, should be paid in these Bank -Credits, which were called <i>Bank Money</i>. The consequence was evident, -as this Bank Credit, or Bank Money, was always exchangeable for money -of full weight on demand; it was always at a premium.</p> - -<p>These banks professed to keep all the coin and bullion deposited with -them in their vaults. They made no use of it in the way of business, -as by discounting bills. Thus the credit created was exactly equal to -the specie deposited and their sole function was to exchange specie for -credit and credit for specie.</p> - -<p>These banks were examples of the currency principle; they were of no -further use to commerce than this, that they served as a safe place -to keep money in—and they insured a uniform standard of payment for -debts. They made no profit by their business, but those who kept their -accounts with them paid certain fees to defray the expenses of the -establishment.</p> - -<p>Later and during the civil war in Great Britain the goldsmiths of -London began to receive the cash of the merchants on deposit. They not -only agreed to repay it on demand, but to pay 6 per cent per annum -for the use of it. Consequently, in order to enable them to do that,<span class="pagenum"><a name="Page_228" id="Page_228">[Pg 228]</a></span> -the deposits necessarily became their property to trade with as they -thought best.</p> - -<p>When, therefore, these goldsmiths received this money on deposit, -they gave in exchange for it, or issued to their customers a credit, -or right to demand back an equal amount of money at will. And it must -be noted that it is this banker's credit which in banking language is -termed a deposit. The money itself is called an asset, or resource.</p> - -<p>MacLeod says that in practice it will be found that in ordinary -times a banker's balance in cash will seldom differ by more than one -thirty-sixth part from day to day. So that if he retains one-tenth part -of his cash to meet any demands for payment that may be made, that is -ample and sufficient in ordinary times.</p> - -<p>The banker, therefore, can see that if an amount of cash was sufficient -to support ten times the amount of his liabilities, he might safely buy -debts to several times the amount of cash in his hands.</p> - -<p>From this you see clearly by evolution a banker is a trader, just as -Mr. Banker said a few moments ago, whose business consists in buying -money and debts by creating other debts. If he has taken actual money -on deposit, he has bought it, and if he has received checks and drafts -on deposit, he has bought them likewise with his credit.</p> - -<p>Thus, it is seen that the essential and distinctive feature of a bank -and a banker is to issue credit payable on demand, and that this credit -may be put into circulation and serve as money.</p> - -<p><i>First</i>: They might demand payment in cash; if they did so, the banker -canceled his debt.</p> - -<p><i>Second</i>: The banker, if his customer wished it, gave him his -promissory note to pay him or the bearer on demand such sum as he -might wish; this neither created nor extinguished a deposit, it merely -recorded it on paper for the convenience of transferring it to someone<span class="pagenum"><a name="Page_229" id="Page_229">[Pg 229]</a></span> -else. This promise to pay was at first called a "Goldsmith's Note," and -is now called "A Bank Note."</p> - -<p><i>Third</i>: If the customer wished to make a payment he might write a note -to his banker desiring him to pay the money to some particular person, -or to his order, or to bearer. These notes were then called "Cash -Notes," but are now called "Checks."</p> - -<p>Now, it is perfectly clear that neither a bank note, nor a check -creates any new right; it merely records on paper a right to have money -which already exists, and it is used for the purpose of transferring -that right to have money to someone else.</p> - -<p>It will be noted now, and I want you to keep this observation clearly -in mind, that all banks are banks of issue, that is issues of credit. -MacLeod says that the very meaning of the words "To Bank" is to issue a -right of action or a credit, in exchange for money or other debts; and -when once the banker has issued this right of action, or right to have -money, to his customer by writing it down to his credit, it makes not -the slightest difference as to his liability whether he delivers his -own promissory note, that is a bank note, to his customer, or whether -he merely creates the credit, and gives him the right to transfer it to -someone else by means of a check.</p> - -<p>When a person deposits money at the bank, it is not his intention to -deprive himself of the use of it; on the contrary, he means to have -as free use of it as if it were in his own purse. The depositor, -therefore, lends his money to his banker, but yet at the same time has -the free use of it, as the bank employs that same money in promoting -trade; upon the strength of the money being deposited with the bank, -it buys debts with its promises to pay, either in the form of "Bank -Notes," or of credit on its books, several times exceeding the amount -of the cash placed with it; and the depositors who sell the bank their -debts, have the free use of the very same coin which the depositor has -the right to demand; thus the lender that is, the depositor, and the -borrower that is, the banker,<span class="pagenum"><a name="Page_230" id="Page_230">[Pg 230]</a></span> have the same right at the same time to -the free use of the same money. All banking depends on the calculation -that only a certain small portion of each set of depositors will demand -the actual cash, but that the majority will be satisfied with the mere -promise, the "Bank Notes" or the credit on the books of the bank.</p> - -<p>Banking is a species of insurance; it is theoretically possible that -a banker may be called upon to pay all his deposits at once, just as -it is theoretically possible that all the lives insured in an office -may end at the same instant; or it is theoretically possible that all -the houses insured may be burned at the same hour. The depositors and -noteholders of the Bank of England could demand payment the same day. -All the depositors and noteholders of the Bank of France could demand -payment the same day. All the depositors of any bank could demand -payment the same day. But all banking, as well as all insurance, is -based upon the expectation that these contingencies will not happen, -and the average experience of life proves that they do not happen. A -banker multiplies his debts to be paid on demand and keeps buying a -sufficient amount of cash to insure the immediate payment of all claims -which are <i>likely</i> to be demanded at one time. If a pressure comes upon -him he must sell some of the securities he has bought, or borrow money -on them.</p> - -<p>When the customer discounts a note at his bank he parts with the -property in it, just as when he sells any other article. The note -becomes the absolute property of the banker and he may sell it again, -or pledge it, or deal with it in any way that suits his own interests -best.</p> - -<p>The notes in the safe of a banker are exactly similar to the goods in -the shop of a retail dealer. The retail dealer buys the goods from the -wholesale dealer and sells them at a higher price to his customers; -and, as he makes a profit by doing so, the goods are <i>capital</i> to him. -Notes likewise are goods, or merchandise, which the bank buys from its -own depositors at a discount, or bear<span class="pagenum"><a name="Page_231" id="Page_231">[Pg 231]</a></span>ing interest for a time, and as -the bank makes a profit by so doing, the notes are <i>capital</i> to the -bank precisely in the same way that the goods in the shop of the retail -dealer are <i>capital</i>.</p> - -<p>Now, lest we shall be misled, I want to call your attention to an -error which is very common. Many persons not being aware that the word -"<i>Deposit</i>" in banking language means the credit created in exchange -for money, checks, drafts or notes bought, when they hear or read that -a bank has such an amount of deposits conceive or suppose that the bank -has that amount of cash on hand to trade with.</p> - -<p>When it is said that a bank has $10,000,000, $50,000,000 or -$100,000,000 or $200,000,000 of deposits, they are not deposits in -cash at all; they are almost entirely pure credit, and are exactly -equivalent to just as many "Bank Notes." They are nothing but an -enormous superstructure of <i>Credit</i> built up on a comparatively small -basis of reserves exactly like the note circulation. These figures do -not show the quantity of cash at the command of the bank that can be -traded with; but they show the quantity of business the bank has done, -and the debts or liabilities it has created. These deposits, then, -which so many think are cash, are in fact nothing but the credits the -banks have created in exchange for the cash and notes which figure on -the other side of the balance sheet as assets or resources.</p> - -<p>This play of bank credit has been graphically described by Joseph -T. Talbot, the Vice-President of one of our largest National Banks; -he says: "A customer holding a bank note may present it for deposit -and credit, instead of demanding redemption in cash. In this case, -there is a conversion from the circulating form of credit, payable to -bearer, back to a 'Book Credit,' payable to order, as was ordinarily -the case. Thus it will be seen that all these forms of 'Bank Credits' -are interchangeable, one for another, at the pleasure of the holder -of the credit. The difference between these<span class="pagenum"><a name="Page_232" id="Page_232">[Pg 232]</a></span> several forms of credit -involves no changes whatever in the bank's liabilities. They amount to -about the same difference which exists, let us say, between a coupon -bond and a registered bond. The one is payable to bearer, the other -is not. At one time a bank note may best serve a customer's needs; at -another time he might prefer a deposit in the bank; or again he might -prefer 'exchange.' All these interchangeable uses of credit actually -and continuously take place. It will now be clear that a circulating -'Bank Note' in the hands of the public does not differ essentially from -a 'Deposit Credit' on the bank's books.</p> - -<p>"If one of your local bankers were asked how much he allowed his bank -to issue in cashier's checks, he would tell you that he issued whatever -sums his customers wanted; either against their balances, or against -new loans. He would tell you the same in respect of the amount of -exchange he issued; his sole rule and guide being the amount of such -credit which his customers require, and which he is in position to lend -afresh, and to maintain against, or to redeem in cash, if demanded. If -asked how long these obligations were allowed to remain outstanding, -he would tell you that he had no control whatever over the period of -their circulation; that these obligations stood out just as long as the -holders wanted to use them in that form, and no longer; that his only -concern was in being prepared to redeem the obligations on demand in -cash.</p> - -<p>"Thus it is that the volume of bank credits, whether in the form -of deposits, checks or notes, responds in a rise or fall according -as there is legitimate trade demand; and over this the bank has no -control, except by ceasing to make loans. This is why deposits increase -as loans increase, and these increase as the volume of business -increases."</p> - -<p>Now, if we understand the real nature of these so-called deposits, the -reason for their diminution is plain. Deposits fall because loaning -stops. When you stop<span class="pagenum"><a name="Page_233" id="Page_233">[Pg 233]</a></span> loaning, you stop creating credit. You can -readily see that it is not a diminution of deposits in cash, but it is -a contraction of credit, a refusal to make loans.</p> - -<p>This erroneous notion of the real meaning and nature of deposits -in banking language may lead to very great mistakes in estimating -the stability of a bank. That a bank's stability depends on a due -proportion being kept between the deposits or the liabilities and -the cash; and it may very well happen that while the deposits are -apparently mounting high, and might lead many persons to believe -that the actual quantity of cash was increased, it might be nothing, -perhaps, but a dangerous extension of credit. And if this were carried -too far, the bank might be in the most dangerous position just when it -was apparently most flourishing.</p> - -<p>Now, let us consider how a banker who has purchased either money or -notes from his customers by creating deposits or debts, may be used -by his depositors. That is how the depositors may use these credits. -Of course, every banker does business exactly in the same way, or -practically so, and when their customers begin to use checks these -different results may follow:</p> - -<p><i>First</i>: The actual money may be drawn out.</p> - -<p><i>Second</i>: The credit may be transferred to the account of another -depositor of the same bank.</p> - -<p><i>Third</i>: The check may be an order to pay another bank. But in this -case, if the first bank is ordered to pay the second bank so much, -the chances are that the second bank will be ordered to pay the first -bank practically the same amount. If the claims of the two banks on -each other were exactly equal, the respective checks or orders are -interchanged, and the credits readjusted to the different customers' -accounts accordingly, without any payment in money. If it should happen -that the claims of all the banks against each other exactly balanced, -any amount of business might be carried on, without requiring a single -dollar of gold coin. If the mutual claims of the different banks -against each other<span class="pagenum"><a name="Page_234" id="Page_234">[Pg 234]</a></span> do not exactly balance, it is only necessary to pay -the differences in coin.</p> - -<p>Now, exactly to the degree that banks are brought into a closer -relationship with each other by such means, the smaller is the quantity -of coin required to carry on the business of the country; or the more -gigantic is the superstructure of credit which can be reared upon a -given reserve.</p> - -<p>From what I have already said, you must all see that a merchant deals -with credit; but a banker is a dealer in credit. A merchant brings -his notes or debts, that are payable some time in the future, to the -banker for sale, and the banker buys them for credits in the form of -deposits, or debts payable instantly, which have precisely the same -effect in commerce as so much gold. He reaps exactly the same profit -by creating a credit in favor of his depositor as if he gave him the -actual cash. The checks drawn against these credits so created by the -banker circulate commodities in trade precisely in the same way that -bank notes do which circulate commodities precisely in the same way -that gold coin does. Consequently, these bank credits so created by -the banker, whether upon his books subject to check, or in the form of -bank notes, are exactly equal in their practical effects, so far as -exchanging commodities is concerned, to the creation of so much gold -coin.</p> - -<p>This being true, you must realize how absolutely essential it is that -every bank credit must be kept as good as gold by current redemption in -gold everywhere, whenever demanded.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Lawyer, in all that you have said you have -only affirmed what I said in the outset; the banker is a shopkeeper, a -trader exchanging his credit for money and debts.</p> - -<p>The development of the banking business in the United States is most -interesting, and its growth has been simply marvelous.</p> - -<p>On Feb. 25, 1863, almost fifty years ago, when the<span class="pagenum"><a name="Page_235" id="Page_235">[Pg 235]</a></span> National Banking -System was inaugurated, there were in the eastern states, including -New York, New Jersey and Pennsylvania, what are known as Mutual -Savings Banks. These institutions are run solely for the benefit of -the depositors. This is upon the theory that those using savings -banks are the wards of the state. These Mutual Savings Banks have no -capital and the trustees, or directors, serve without pay. There are -today in the United States 650 of these Mutual Savings Banks, with -deposits amounting to $3,608,000,000. Practically all of these Mutual -Savings Banks are located in the east, there being only thirty-one -west of Buffalo. These few got a start before the present conditions -of banking grew up. Today it is quite impossible to start a Mutual -Savings Bank anywhere, because the State Banks and Trust Companies -are able to pay such high rates of interest, owing to the fact that -they can conduct the Savings Bank business as a part of their regular -commercial business, or as a part of their Trust Company business. That -is, the Savings Bank business is incidental to their regular business, -and requires no separate and special organization. If there are any -extra charges they would be nominal at most. The savings business being -conducted over the same counter, this particular branch of banking may -be regarded as done at no cost to them. Under the circumstances it is -very easy to see how the State Banks, and those banking institutions -more recently organized, known as Trust Companies, have absorbed all -the savings business where the Mutual Banks had not already been -permanently established.</p> - -<p>Another reason that has enabled them to do this is the fact that -in most states there are no prescribed rules for the investment of -savings bank deposits, and the banks are using the savings deposits for -commercial purposes, and also in speculative ventures, particularly -in the way of underwritings where the profits are much larger than -could be realized from such funds if they were limited to investments -of the highest order where,<span class="pagenum"><a name="Page_236" id="Page_236">[Pg 236]</a></span> as you know, the rates of interest are -comparatively much lower.</p> - -<p><span class="smcap">Mr. Merchant</span>: How many such institutions are there?</p> - -<p><span class="smcap">Mr. Banker</span>: There are today thirteen thousand three hundred -and eighty-one State banks, with four hundred and fifty-nine million of -capital and two billion nine hundred million of deposits.</p> - -<p>Side by side with these state banks are 1,292 State Savings Banks, with -seventy-seven millions of capital and eight hundred and forty-three -millions of deposits. These State Savings banks differ only in name -from the regular State banks. The only point to be noted in this -connection is that the local statutes, or the laws of the State where -the bank is located, always determine whether the name will be a State -Savings bank, or a State bank. It may be assumed that whatever the -name, the business carried on is practically the same all over the -United States, with here and there some slight difference, but no -substantial variance.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: These institutions you have named do not -include the Trust Companies, do they? There seems to be a perfect craze -to start Trust Companies now. Why is that?</p> - -<p><span class="smcap">Mr. Banker</span>: Within the past twenty-five years there has grown -up, almost as if by magic, the class of banks you have just mentioned, -differing from State banks and State Savings banks only in one single -respect, but that is an all-comprehending one. Enterprising men in -almost every state have secured the passage of laws for what they call -a Trust Company business. Generally speaking, what you cannot do under -a Trust Company Charter is some kind of a business that has not yet -been thought of.</p> - -<p>There are 1,410 of such Trust Companies, so called, with capital -amounting to $419,000,000 owing individual deposits amounting to -$3,674,000,000 with $450,000,000 additional liabilities, or something -over four billion dollars, all told.</p> - -<p><span class="pagenum"><a name="Page_237" id="Page_237">[Pg 237]</a></span></p> - -<p>This vast business has grown up outside of the National banking -system, simply because the National bank could not, but these other -institutions could develop along natural lines of business progress.</p> - -<p>Notwithstanding these obstacles, however, there is no kind of a banking -business that the National banks of the country are not doing in some -way or other. Of course, they are not all of them doing all kinds of -business, but they have worked out methods by which they can, if they -desire to do so. Of the 7,397 National Banks, nearly half of them, -3,039, are now doing a regular savings bank business, without any -express authority of law, and 2,340,226 depositors have deposited with -our National banks $659,500,000.</p> - -<p>Who is there who does not know that either downstairs in the same -building, or upstairs in the same building, or around the corner in -some other building, with the back ends of the two buildings adjoining, -many, if not all, the National Banks have attachments, where they are -carrying on the Savings bank business and the Trust Company business -under state charters. National banks are under National supervision, -while the State banks and Trust Companies, owned and manipulated by -them, are under State supervision, or possibly under no supervision at -all.</p> - -<p>There are many National banks holding the stock of other banks, either -Savings banks, State banks, or Trust Companies in their treasury, and -some of them are holding the stock of two or more banks. Only recently -it was discovered that a National bank had invested ten million -dollars, directly or indirectly, in other banks throughout the country; -possibly an examination would show that this ten million was partly -the stock of other National banks, and partly the stock of state bank -institutions such as Savings banks, State banks and Trust Companies.</p> - -<p>Now, if there is one holding company more to be criticised, and more to -be abjured than any other, it is a bank holding company, controlling -the stock of a great<span class="pagenum"><a name="Page_238" id="Page_238">[Pg 238]</a></span> many other banks, particularly so under different -supervision.</p> - -<p>When we behold the malformation of banking as now carried on in this -country, due to the struggle of the various institutions to adjust -themselves to these new conditions and to take advantage of all the -opportunities in modern business, it reminds one of the crooked, -twisted, knotted, and sadly misshapen tree-trunk that has grown up -amidst and between huge rocks, that stand in the way of an upright -and symmetrical development. These huge bowlders and rocks are the -obsolete laws on our statute books, our ignorance, our selfishness, our -prejudice, our political cowardice and our demagoguery.</p> - -<p>Like our mutual savings banks, the original idea was that a Trust -Company could only do a Trust business in the strict sense of that -word. They could hold a railroad mortgage, and pay interest to the -bondholders, perform similar functions for other corporations, and -could act as a trustee in case of estates. Today you may assume that -no kind of business will escape the scope of the charter of the -so-called trust company, from the care of estates and the execution of -corporate trusts to banking in all of its forms, and agencies of every -conceivable kind. In other words, the all-round charter of the American -Trust Company, popularly so called, permits it to do anything that the -varied affairs of the American citizen may by any chance require.</p> - -<p>Just as there are in the east mutual savings banks, which are relics -of former days, so the Trust Companies, with their limited powers, -are only a landmark in the evolution of American banking, and must -disappear as a separate institution in time.</p> - -<p>The growth and development in fifty years has produced in the United -States a banking unit, doing in a conglomerate way what it ought to be -doing as a departmental business, with four distinct functions: viz., -a commercial business, the manufacturing of credit; a savings bank -business, accumulating the savings of the laboring<span class="pagenum"><a name="Page_239" id="Page_239">[Pg 239]</a></span> masses, which is a -sacred trust fund that should be placed in high grade investments; a -trust company business, executing trusts, and carrying on agencies of -every kind; a note-issuing business, which is only another form of the -commercial business, as the bank note is in fact only another form, as -we have learned, of a deposit—a circulating credit in place of a check -credit for the convenience of the people.</p> - -<p>From Feb. 1, 1863, the birth of the National Bank Act, down to the -present time there has not been one single change in the National -Bank law worth mentioning. It is true we have dotted an "i" here, and -crossed a "t" there; but as for a substantial change there has not been -a single one made. Now, this is truly a most marvelous fact, when you -consider how great have been the changes, especially since 1890, or -during the past twenty-two years. Our banking resources have increased -fourfold. In 1890 they were about six billion, today they are more than -twenty-five billion.</p> - -<p><span class="smcap">Mr. Lawyer</span>: This growth in our banking power is not so strange -because it only reflects the growth of our business. The clearings of -the United States in 1890 were only thirty-seven billion, while the -clearings this year must pass the hundred and seventy billion dollar -mark. The productions of the United States in 1890 were only seventeen -billion. The productions of the United States in 1912 will exceed -thirty-five billion dollars. The wealth of the United States in 1890 -was only sixty-five billion dollars. The wealth of the United States in -1912 is estimated at about one hundred and twenty-five billion dollars. -The imports in 1890 were seven hundred and eighty-nine million; the -imports the present year will be one billion eight hundred million; the -exports in 1890 were eight hundred and forty-five million; this year -our exports will exceed two billion three hundred million dollars.</p> - -<p><span class="smcap">Mr. Farmer</span>: And do you mean to say with this vast, almost -incalculable increase of production and wealth and consequent increase -of banking resources, there has<span class="pagenum"><a name="Page_240" id="Page_240">[Pg 240]</a></span> not been a single step taken by the -National Government to facilitate it?</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Farmer, there has not been a single change -made to facilitate the handling of this vast business. On the other -hand, there seems to have been such a profound ignorance on the part of -Congress, or such an abject fear, lest they might aid business, that -every progressive movement of a legislative character has been left to -the states, which have given us laws as varied as Jacob's coat of many -colors; indeed, rivaling the fifty-seven varieties of the famous pickle -man.</p> - -<p>Not only have they left the banking business to just "grow up" like -Topsy in Uncle Tom's Cabin; but the Government itself has been one of -the greatest obstructionists to the national growth of our banking -business in its interference with the natural movement of the money of -the country which by every economic law, and business right, belongs in -the channels of trade, and not in the strong boxes of the Government.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: That is absolutely true. I was greatly -impressed only yesterday by a statement made by the Secretary of the -Treasury right on that point of Government interference with current -business by withdrawing money from circulation and piling it up in the -vaults of the treasury. In the light of what we have learned during our -talks, it is simply appalling; indeed, it does not seem possible in a -civilized country.</p> - -<p>Secretary MacVeagh says in the outset, "No reform of your banking and -currency system can be adequate which does not take the United States -Treasury out of the banking business," and then adds:</p> - -<p>"When the independent Treasury system was established the idea was -that all the funds of the Government should be stored in the Treasury -vaults in the form of money, just as the mediæval war lords kept -their treasures in strong boxes. The independent Treasury system was -established in troublesome financial days, when the State banks were -not the safest places for the<span class="pagenum"><a name="Page_241" id="Page_241">[Pg 241]</a></span> deposit of money. The people decided -that the public funds must be kept in Government vaults for safety.</p> - -<p>"In this country, with our rigid laws fixing the minimum reserves -the banks must hold, any loss of cash by the banks means an instant -contraction of their loaning power. If the banks of New York and -Chicago lose $100,000,000 cash, they must at once reduce their -liabilities by $400,000,000. This means that they must reduce by that -amount their loans to the business community.</p> - -<p>"With the volume of bank credit moving in the reserve cities four times -as fast as the volume of cash, and throughout the country ten times as -fast as the volume of cash, it is plain that the machinery of credit -is extremely sensitive to variations in the amount of cash held by the -banks. For this reason, an institution like the United States Treasury, -alternately accumulating and disbursing many millions of cash, is -likely to create widespread disturbance in the money market.</p> - -<p>"The funds held by the great European Governments vary from $25,000,000 -to $50,000,000. The coin, bullion, and paper money held as assets in -the United States Treasury during the present Administration has varied -from $300,000,000 to $350,000,000. In other words, nearly one-tenth -of all the money in the country is held idle in the Treasury vaults. -If this money were all deposited in the banks it would increase their -reserves 20 per cent.</p> - -<p>"The receipts and disbursements of the Treasury are most irregular. -The Treasury receipts in 1907 exceeded the disbursements by -$91,000,000. Two years later the disbursements exceeded the receipts -by $118,000,000. For the past two years receipts have again exceeded -disbursements. The general fund in the Treasury was $272,000,000 in -1907; three years later it had fallen to $106,000,000. Under our -present system of keeping a large surplus Government fund idle in the -Treasury these wide variations in the yearly balance not only seriously -disturb the money market and the business of the country, but force the -Secretary of the Treasury to en<span class="pagenum"><a name="Page_242" id="Page_242">[Pg 242]</a></span>ter actively into the money market as a -paternal overseer of the machinery of credit.</p> - -<p>"It not infrequently happens that surplus revenues accumulate in the -Treasury just at a time when the banks are straining their resources to -grant all the credits needed to finance a business boom. The Treasury -then takes money out of the banks and hoards it just at the time when -the country most needs it. If the business boom goes so far as to -strain credit to the breaking point, then the Treasury must come 'to -the relief of the situation,' by depositing some of its hoarded cash -in the banks. In recent years the Treasury has been carrying a large -surplus, and it has been in a position to relieve financial tension by -depositing funds in the banks. In December, 1907, following the money -panic, the special deposits in the banks by the Treasury had reached -$256,000,000. Three years later they were reduced to $4,000,000. In -the fiscal year 1908-1909, the Treasury withdrew $100,000,000 from the -banks.</p> - -<p>"This state of affairs places in the hands of the Secretary of the -Treasury a power greater than any American should have. The power of -the Secretary to influence the money market by deposits or withdrawals -of public funds is always dangerous. No Government officer should have -this power. It has been a great burden, I believe, on the shoulders of -every recent Secretary of the Treasury Department.</p> - -<p>"If the people realized how dangerous is the power in the hands of -the Secretary of the Treasury, they would insist that the Treasury -be at once taken out of the banking business. Accustomed as we are -to Government interference with the money market, few of us realize -how the Treasury in the past few years has exercised the central-bank -function of regulating the discount rate. The Treasury, by alternate -deposits and withdrawals of the public money in the banks, as well as -by other devices, has attempted to regulate the discount rate.</p> - -<p>"The Treasury Department should be divorced from<span class="pagenum"><a name="Page_243" id="Page_243">[Pg 243]</a></span> the money market and -from the banking business, and the way to effect the reform is plain. -We should have in this country a quasi-public institution not only to -hold the ultimate cash reserves of the banks and to regulate the rate -of discount, but to act as the fiscal agent of the Government. Such an -institution would hold the Government balances as deposits, and the -Government could check against them just as any large business concern -checks against its balances in bank. With the Government balances -deposited in such an institution the business of the country would -never be disturbed by the Treasury hoarding up cash, and the Secretary -of the Treasury would no longer be forced to meddle in the money market.</p> - -<p>"As long as we have the present banking and currency system, we -shall have panics—and no longer. Does not this alone create a state -of emergency? What doubt should there be of the urgency of this -legislation? Why should it take another wasteful and degrading panic to -impress Congress? Why cannot 1907 suffice? There are many other things -of prime importance to be secured through monetary reform, but if -nothing were to be secured but emancipation from panics there would be -abundant imperative reasons for immediate action by Congress."</p> - -<p><span class="smcap">Mr. Merchant</span>: This statement of Secretary MacVeagh proves -absolutely just what you said a moment ago, that the situation was -appalling, and when you realize that this practice has been kept up -ever since 1846, when the sub-treasuries were established, it is -unbelievable.</p> - -<p>The Act of Aug. 5, 1846, declared it a felony to deposit public money -in banks.</p> - -<p>The United States Government has been committing an economic felony -ever since. It has been committing an economic crime against commerce -and the laboring interests of the country ever since that Act was -passed, and is doing it this very hour.</p> - -<p><span class="pagenum"><a name="Page_244" id="Page_244">[Pg 244]</a></span></p> - -<p>The Act of Feb. 25, 1863, establishing National Banks, authorized -their use as depositaries of the public money except "receipts from -Customs." Forty-four years later the Act of March 4, 1907, struck out -the words "except receipts from customs." By the Act of March 2, 1911, -bank checks were made receivable for Customs dues, but no step has been -taken by the Treasury of the United States to make them so at New York, -Baltimore, Boston, Chicago, Cincinnati, New Orleans, Philadelphia, St. -Louis, San Francisco and Washington, where the United States Government -still has its morgues for our money. Every day the checks are presented -which are sent in in accordance with the law, and the actual money -is withdrawn from the channels of trade; that is, the United States -Government withdraws reserve money to the full extent of every dollar -that is due it.</p> - -<p><span class="smcap">Mr. Lawyer</span>: While Mr. Manufacturer was reading what Secretary -MacVeagh said, I have been wondering what the people would do if the -United States Steel Corporation, the Standard Oil Co., J.P. Morgan or -John D. Rockefeller, or any of the railroad companies, or any other -great interest, should collect and hold in safe-deposit boxes hundreds -of millions of money, just as the United States Treasury does.</p> - -<p><span class="smcap">Mr. Farmer</span>: I'll tell you what we would do. We would blow them -up mighty quick, and hang them to boot, that's what we'd do.</p> - -<p><span class="smcap">Mr. Merchant</span>: Gentlemen, just think what it means to withdraw -these hundreds of millions of reserve money from the channels of trade, -say in the fall, keeping in mind that every dollar that the Government -grabs and withdraws, will support from five to ten times that amount -of credit. The withdrawal, as Mr. MacVeagh said, of one hundred -million dollars, means the contraction of from five hundred million to -a billion dollars; this is not only a fool's practice, but it is an -actual crime against the commerce of the country; a crime against the -producers, a crime against the laboring men of the country.</p> - -<p><span class="pagenum"><a name="Page_245" id="Page_245">[Pg 245]</a></span></p> - -<p><span class="smcap">Mr. Lawyer</span>: How long, O Lord, how long, shall we remain the -laughing stock of the rest of the world? But, let us see, can any man -here give me a single reason why the United States Government should -not deposit its money with the banks, precisely as all the other -governments of the world do? It seems to me perfectly clear that the -United States Government should treat its income precisely as this -town does, this county does, this state does. Is there any conceivable -reason why it should not act in this matter precisely as New York City, -Chicago, New York State and Illinois, and every city and every state -does?</p> - -<p><span class="smcap">Mr. Banker</span>: Not one in the world.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: This discussion upon the development of -banking in the United States and the present treasury situation brings -out the necessary reforms most vividly to my mind from these two points -of view, the banks, and the treasury.</p> - -<p><i>First</i>: Assuming that we are all agreed as to the result of our talk -last Wednesday night upon reserves, that they must be national to be -equal and adequate, our conclusions now are inevitable, (1) we must -give to the National banks the power to do a Savings bank business, as -well as a Commercial business; (2) we must give our National banks the -power to do a Trust Company business; (3) we must give our National -banks the power to issue a pure credit Bank Note precisely like that -issued by the Scotch Banks and the Canadian Banks, and was issued by -the five hundred banks in New England before the war. These notes will -go to the Clearing Houses every day with the checks and drafts to be -cleared at precisely the same time, and precisely in the same way.</p> - -<p><i>Second</i>: We must take the United States Government out of the banking -business, so that its transactions will cease to be a disturbing factor -in the everyday affairs of the commercial world.</p> - -<p><span class="smcap">Mr. Banker</span>: You have outlined these necessary reforms -splendidly, but there are just two more points in<span class="pagenum"><a name="Page_246" id="Page_246">[Pg 246]</a></span> this connection that -must not escape our attention. They are these:</p> - -<p><i>First</i>: All these various forms of banking are distinct in character -and economically the funds of each perform a peculiar function that -must be recognized and observed or we shall make a great fundamental -error in constructing what we hope will prove a sound financial and -banking system. We must provide that the commercial function, the -savings function, the trust function shall be kept apart by separating -the funds arising from each, and keeping them completely segregated, in -order that the country may always know just what its commercial fund -is, as distinguished from its investment fund.</p> - -<p><i>Second</i>: There is such a great demand for Farm Mortgage Loans by those -who are pursuing agriculture that I am convinced that some provision -should be made whereby the farmers of this country could obtain -money upon their lands, as cheaply as our great railroads and other -corporations are able to do. I have given this matter much study, and -as you gentlemen are aware, I am a member of the Committee appointed by -the American Bankers' Association to investigate and report the best -method possible to accomplish this purpose. Therefore I think that we -had better consider it here.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I am in perfect accord with what you are aiming -at, but it is almost eleven o'clock.</p> - -<p><span class="smcap">Mr. Laboringman</span>: I have been waiting patiently to see whether -you gentlemen were going to provide in some way for coöperative credit, -but up to date, you've not peeped a word.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Both of these subjects are really outside -of a financial and banking system, the particular thing we set about -creating. However, I am perfectly willing to take a night to discuss -them, and if we should find that either or both of them should -constitute a part of our plan I am ready to adopt them.</p> - -<p><span class="smcap">Mr. Banker</span>: All right, I am agreed, and I think we all<span class="pagenum"><a name="Page_247" id="Page_247">[Pg 247]</a></span> are -agreed that it is not only fair, but advisable, that we take up the -whole subject next Wednesday night.</p> - -<p><span class="smcap">Uncle Sam</span>: Do you know, boys, I am really proud of the work -you are doing; you've gotten on swimmingly. You have shown such fine -moral courage in caving in when you found out that you were wrong -instead of playing the part of the jackass that has not intelligence -enough to discern when he is in error, and too obstinate to change, if -he happens to find out by accident that he is wrong.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Uncle Sam, I am a Democrat, and I look upon -that as a personal stab.</p> - -<p><span class="smcap">Uncle Sam</span>: Just wait a minute, or playing the part of the -elephant, that is so turgid, or possibly designedly stupid, or so calm -and by self-satisfaction lulled into a conservatism that amounts to -reaction, and therefore refuses to move.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, I'm a Republican, and that looks like a -slap at me. However, I guess Uncle Sam is just in for a housecleaning -tonight.</p> - -<p><span class="smcap">Uncle Sam</span>: You're both all right, personally, but your -organizations have been in wrong until just now there seems to be -a patriotic soul-awakening, and it's up to you to redeem them, or -there will be a housecleaning, and don't you forget it. I want men; -men who have intelligence and conscience; men who are capable and -have convictions; men who have moral courage; men who will fight if -necessary to have peace; I mean that peace that rules only when right -prevails and justice reigns.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_248" id="Page_248">[Pg 248]</a></span></p> - - - - -<p class="ph2"><a name="TWELFTH_NIGHT" id="TWELFTH_NIGHT">TWELFTH NIGHT</a></p> - -<p class="center">LAND CREDIT BANK</p> - - -<p><span class="smcap">Uncle Sam</span>: Boys, by unanimous vote we agreed at our last -meeting to devote tonight to the subjects that seem to lie close to the -hearts of Mr. Farmer and Mr. Laboringman. You will remember that Mr. -Farmer insisted that our work would not be complete unless we included -in our plan a Land Credit Bank, while Mr. Laboringman declared that -he had waited patiently to hear what we had to say about coöperative -credit, but in vain.</p> - -<p>Since Mr. Farmer is a member of the committee appointed by the -agricultural society of his State to investigate the subject of Land -Credit Banks, I presume he is loaded to the guards and can tell us all -about it, and convince us, too, that he is right in his contention. I -suggest that we let him lead off tonight.</p> - -<p><span class="smcap">Mr. Farmer</span>: Well, gentlemen, I can assure you of my confidence -of my ability to convince you of the importance of recognizing my -contention; but I shall have to ask you all to be patient and agree to -assist me in working out the plan that is best adapted to our needs and -conditions. In studying this aspect of the banking problem, I think it -will be well to follow the steps of development up to date, just as we -have in considering other phases of this question, because experience -is our surest guide to tell us what not to do as well as what we ought -to do.</p> - -<p>In the outset, however, I want to call your attention to the fact, -that there is no subject of broader interest and more world-wide -discussion than the productivity of the soil. You are all aware, no -doubt, that there has been established at Rome the International -Institute of Agriculture, and that last summer fifty different -governments were represented there. Hon. David Lubin, of California, -represented this government. The President<span class="pagenum"><a name="Page_249" id="Page_249">[Pg 249]</a></span> of the United States became -intensely interested and with the help of our foreign representatives, -particularly Hon. Myron T. Herrick, Ambassador to France, a vast amount -of most valuable information has been gathered, studied, digested and -classified. I think that we are now ready to take the matter up and -legislate upon it. Our interest ought to be greater and more intense -than that of any other nation on account of the number of our people -engaged in agriculture and the staggering interest rates they are -paying. Think of it.</p> - -<p>The 12,000,000 farmers of the United States are adding over -$8,400,000,000 to the national wealth each year. They are doing this -on a borrowed capital of $6,040,000,000, on which $510,000,000 of -interest is annually paid. Counting commissions and renewal charges, -the rate averages at 8½ per cent for this country as against 3½ -or 4½ per cent for Germany. If the American farmers had a thoroughly -organized system of coöperative associations they would not only -save this difference of $200,000,000 or $250,000,000 to themselves -individually, but in the course of time the entire debt would be -transferred to the societies, the interest paid to them, an economic -waste stopped, and this stupendous sum restored to agriculture. The -assertion is neither fanciful nor extravagant. It is below the actual -ratio obtained by a comparison with the German figures.</p> - -<p>There is practically no limit to the amount of capital that could be -advantageously employed for rehabilitating worn-out and abandoned -farms, opening up new areas, and introducing modern methods of -cultivation; and it is of vital importance that this capital be -obtainable at once in sufficient volume and on easy terms. The -world-wide problem caused by the pressure of population upon the -means of subsistence now confronts the United States in the very face -of its matchless natural resources and vast acreage of arable lands -still remaining untouched by the plow. The $385,000,000 of foodstuffs -exported<span class="pagenum"><a name="Page_250" id="Page_250">[Pg 250]</a></span> last year barely equaled 76 per cent of the annual interest -charges on the debts the farmers owe.</p> - -<p>The cause of the trouble is the lack of capital, and the remedy lies -in financing the farmer and the landowner. This is the indisputable -conclusion logically reached from examination into the actual -conditions and from comparisons furnished by recent European history. -The solution of the problem concerns the general welfare as much -as does the currency and monetary reform, and it is gratifying to -note that it seems destined to go side by side along with this -undertaking. For as soon as the alarm was sounded the best talent of -the nation became enlisted, and now bankers, merchants, professional -men, legislators, and private individuals in town and country, many -impelled purely by patriotic and disinterested motives, have combined -their efforts to better the situation before it pass to the acute and -critical stage.</p> - -<p>The only instrument by which land-mortgage banks can finance -themselves, draw money from the public for investment in loans, are the -debenture bonds, but these bonds will not circulate freely nor far from -the place of issue unless they are known to have the same underlying -values and give the same rights to the holder, regardless of whether -they be secured by mortgages in Texas, Massachusetts, or in any other -State. But possessed of these characteristics as guaranties of law, -there is no reason why debentures of large mortgage banks should not be -listed in stock markets and sold, negotiated, and exchanged as readily -as railway and municipal securities, and thus equalize and reduce -interest rates for farmers throughout the country.</p> - -<p>For our guidance that we may escape all cost of experience that has -been paid for by others, I am going to give you the benefit of my study -of the Government report upon this important subject and quote it -extensively as the best authority we have.</p> - -<p>You must all realize that this almost complete organization of land -and rural credit in advanced European<span class="pagenum"><a name="Page_251" id="Page_251">[Pg 251]</a></span> nations was not a haphazard -and spontaneous growth. It was brought about by the insistence of -public and private individuals, philanthropists, scholars, bankers, -legislators, agricultural societies, government commissions, and -national assemblies, all studying and working in a common cause. The -history of their efforts in the middle of the past century reads much -like an account of the agitation which has been started in the United -States by the American Bankers' Association, the Southern Commercial -Congress, the Federal authorities at Washington, and other bodies -and individuals, for financing the farmer, improving agricultural -conditions, and encouraging the movement back to the soil. In Europe -the agricultural banks and credit facilities were created before -agricultural or even general education was attempted. The United -States began at the opposite end. The American colleges and systems -for teaching agriculture are among the oldest and best in the world, -and millions of dollars have been appropriated by the Federal and -State Legislatures since the passage of the Morrill Act in Lincoln's -administration to aid this science in one way or another. Incalculable -good has come therefrom, but the results would have been far greater -if financial education had gone hand in hand with this work. It would -have led to the study and introduction of the rural banking methods of -Europe generations ago, and so familiarized the American farmers with -the uses of credit that the lack of capital and excessive interest -rates would not now be interfering with the agricultural development of -the country.</p> - -<p>The development and history of Land Credit banks in Germany is most -interesting and is as follows:</p> - -<p>The land-mortgage banks are either joint-stock corporations or -societies of borrowers. These latter are typified by the well-known -German Landschaften, and are the originals of all land banks. Before -them the private money lender reigned supreme. The organization of land -credit, in fact, began with them. They undoubtedly<span class="pagenum"><a name="Page_252" id="Page_252">[Pg 252]</a></span> also suggested the -coöperative idea to Herr Schulze, because five, with nearly $60,000,000 -of mortgage loans, were in existence in 1848, when he was trying -to start his personal-credit society at Delitzsche. These peculiar -institutions are associations of landowners, and have no shares and -pay no dividends, the profits, if any, going to reduce the loans; and -since they and their borrowers are identical, and managerial services -gratuitous, they have been able to lend money at lower rates than any -other kind of companies.</p> - -<p>The establishment of the old Landschaften was the outcome of the -indebtedness and distress of the nobility, and their membership in -Germany is still composed mainly of that class and large landed -proprietors. After the Seven Years' War the nobles, who owned nearly -all the land, lacked the working capital necessary to repair and -cultivate their damaged estates, and so were unable to pay their -creditors. Frederick the Great ordered the suspension of interest on -all estate debts for three years. The period was subsequently extended. -The result was the withdrawal of the money lenders from agriculture, -the rise of interest to ruinous rates, and a financial stringency that -involved the public welfare. In order to relieve the situation this -autocratic King decided to adopt plans that had been submitted by -Herr Bühring, a Berlin business man. Accordingly, in 1769, by a royal -fiat, he forced the nobles of Silesia to join an association whether -they wished to borrow or not, and their lands were made jointly liable -without limit for all loans granted by the association. Loans were -granted only upon the consent of the directorate elected by the members -themselves. Great care was naturally exercised, so no losses occurred, -while immense credit came to the association.</p> - -<p>This was the first Landschaft. Others were formed in the same fashion. -Nine more were formed by the Provinces and one voluntarily. Then two -companies were organized on the coöperative principle, so that there -are now twenty-five Landschaften. The mortgages held<span class="pagenum"><a name="Page_253" id="Page_253">[Pg 253]</a></span> by them, all on -farm lands, exceed $500,000,000, and the interest rate runs as low as -4 per cent and 3.5 per cent per annum. The bonds by which the money -for these loans were obtained are secured by the mass of underlying -mortgages and general assets of the issuing association, and ultimately -by the unlimited liability of all its members. The collective guaranty -and the fact that loans are made only to members constitute the -characterizing features of a true Landschaft; but there is a growing -tendency to limit this liability and substitute reserves in place of it.</p> - -<p>Originally a Landschaft did not give cash to a member in exchange for -his mortgage. It gave him a bond which simply contained a promise to -pay in the event the interest and principal could not be collected from -the debtor. The bond was of the exact size of the mortgage, primarily -secured by it, and made payable to bearer on a few months' notice. In -case of default the holder had to resort to foreclosure proceedings, -so the bonds had only a limited circulation, and were often sold below -par. This was but a slight advance on private money lending. Later the -associations undertook to collect the interest and principal. Finally -they assumed direct responsibility, and began to give cash to members -for their mortgages, raising funds for this purpose by issuing and -selling bonds of even denominations for large and small amounts. The -practice of requiring mortgages to be paid in lump was abolished, and -in place thereof the loans were made repayable by annual installments -running through a long period of years, and the installments were -set aside for redeeming the bonds. These steps brought about a -complete revolution in land credit and marked the beginning of the -land-mortgage business as it is known today. The whole theory of the -organization of land credit is based upon this debenture bond and -system of amortization and sinking funds devised and introduced by the -Landschaften. One without the other two is useless. The three must be -combined, and also<span class="pagenum"><a name="Page_254" id="Page_254">[Pg 254]</a></span> coupled with strong management under wise laws -in order to attract a steady flow of cheap money to agriculture. It -is remarkable that this truth has never been realized nor applied in -the United States to farm-mortgage loans. In spite of the example of -practically every nation in Europe for generations, the lending of -money on mortgage in America still remains largely a mere brokerage -business unrestricted by proper governing laws, either by individuals -or corporations, while mortgages continue to be drawn up for three or -five years, when experience shows that the average life of a loan is -far in excess of that period and needs to be renewed time and again, -with added expense to the debtor and trouble for the creditor. Had -the European amortization system been employed the companies dealing -in western farm mortgages between 1890 and 1894 probably would have -escaped the misfortunes that brought them down to ruin.</p> - -<p>Amortization is simply a method of paying off a loan by returning a -little of the capital each year. These payments are called annuities -and are composed of the interest and contributions to the sinking -fund and the cost of conducting business. They are calculated for -periods of ten to seventy-five years, and at the end of the period the -mortgaged debt becomes extinguished and the property returns to the -owner free and clear of all encumbrances. The prevailing interest rate -on amortizable mortgages in France at present is 4.3 per cent. But by -adding a little over 3.2 per cent to this, and paying 7.5 per cent a -year, a French farmer can extinguish his debt within twenty years and -obtain a satisfaction piece in full from his creditor. Thus, suppose he -borrowed $10,000. He pays $750 annually twenty times for the interest, -sinking fund and expenses. This makes a total of $15,000, interest -included, and his debt is paid off. A farmer in the Southwestern States -would pay this much for interest alone, and his debt would still be -unsatisfied. Amortization has a two-fold value. It lessens the debtor's -burden year by year and increases in an equal ratio the<span class="pagenum"><a name="Page_255" id="Page_255">[Pg 255]</a></span> security -of the lender, provided, of course, the sinking fund created by the -accumulated annuities be properly and honestly kept for the redemption -of the debentures. The Landschaften were very particular in this -respect. Hence, their debentures obtained the confidence of the public, -and through their means they were able to draw capital from all parts -of the country for distribution among their members at the lowest rates -on record. If a holder of a bond wished his money back he had merely -to sell his bond in the open market. In this way fluidity was given -to real estate securities for the first time in history and the dream -of "mobilizing the soil" accomplished at last. For these reasons the -Landschaften hold the most prominent place in the literature on land -credit, and everybody who studies that subject must begin with them.</p> - -<p>The old Landschaften, however, have many characteristics peculiar -to their own localities and dates of their foundation. They are in -fact governmental institutions, and their head officers are public -functionaries clothed with summary executive and judiciary powers over -the property, and, to some extent, over the actions of their associate -members. These powers were simply an enlargement of the feudal and -manorial rights possessed by princes in early times, and so, in many -respects, are contrary to modern ideas. But the new Landschaften, which -have adopted the best principles, present points worthy of careful -study. A description of these latter institutions is taken from the -excellent report of Sir F.A. Nicholson to the Madras Presidency in -India.</p> - -<p>These new institutions are of different patterns. Several are annexes -to the older societies, but most are independent and resemble ordinary -mortgage banks, except in the essential point that they have no share -capital, earning dividends. They are, as the old societies, simply -syndicates of borrowers formed to supply proprietors with capital on -the lowest possible terms and repayable in the easiest manner. They -are gratuitous<span class="pagenum"><a name="Page_256" id="Page_256">[Pg 256]</a></span> intermediaries between the outside capitalists and the -borrowers, and while performing services of the highest importance -in testing the security offered by the borrowers and in guaranteeing -to the public the safety of the capital lent by them, they charge -absolutely nothing for their services beyond a small commission, -perhaps one-fourth of 1 per cent, or even one-tenth of 1 per cent, -to cover actual expenses. It is usual for each association to be -restricted to a particular area of operations within which every -proprietor, whether noble or peasant, may obtain a loan if he can offer -sufficient security. There is always a minimum limit either to loans -or to the value of property on which loans will be given. This is -usually low. In the new Brandenburg Landschaft, affiliated to the old -Kur-und-Neumark Landschaft, loans may be granted on property having a -net income of only $25. The minimum limit is seldom even approached.</p> - -<p>Members are those who borrow from the bank. They are generally -responsible in all their property, not merely for their own borrowings, -but for the debts of the society to the outside public. But in some -cases only the property pledged to the society is responsible; in -others they are bound, in case of need, to pay a sum proportionate to -the amount of their own borrowing. There are no shares to be paid up -except in two societies. These two resemble coöperative societies, for -the shares are personal and nontransferable, are of unlimited number, -varying with the number of members, and their value is claimable by a -withdrawing member. The share seems to be demanded simply to provide -a first working capital and the nucleus of a reserve. The amount of -the share is frequently a certain percentage of the amount of the loan -required. Some societies demand an entrance fee of a few cents, which -goes to the reserve. This reserve will be dealt with below.</p> - -<p>The societies in general, having no share capital, do not lend their -own funds. The candidate for a loan asks that debentures may be issued -against a mortgage of his<span class="pagenum"><a name="Page_257" id="Page_257">[Pg 257]</a></span> property. This is then examined. If the -security is approved the candidate executes a mortgage deed to the -society, which thereupon issues debentures which are placed on the -market and, being sold, provide the funds for the loan. In the old -banks the debentures are simply handed to the borrower, who sells them -for himself. In the new land banks either this is done or the bank -sells them and pays the borrower the value if below par, or if they -sell above par then the face value, the surplus going to the reserve; -or they simply issue debentures on the market and pay the borrower the -amount of the loan as settled. It will be seen, then, that the banks -have no capital and no need for it.</p> - -<p>The debentures are for the usual class, secured not by the particular -mortgage on which they are issued, but by the whole mass of mortgages -held by the bank and by all its proper forms of security, viz., the -property of the members, the reserve or guaranty fund, and even the -sinking funds. In some banks a debenture holder has the right (never -needed, however) of requiring a court to assign a particular mortgage -against his debenture as a specific security in case the bank should -fail to pay him his interest or capital due. A debenture holder cannot -demand payment of his debenture, except when it is drawn for payment. -But the bank can call in any at six months' notice, besides withdrawing -them by lot in the usual way. These debentures enjoy an excellent -position, the 4 per cents selling usually at or above par. Since -cheapness of loans is the sole object of the bank, it is customary to -call in debentures selling at a premium and issue a fresh series at a -lower rate.</p> - -<p>Loans are usually applied for to the district committee which each -bank has, with a statement of the property, the amount required, and -all documents necessary to prove title and freedom from encumbrance. -Properties may be valued by a special valuation, or a multiple of the -net income as assessed to the land tax may be taken. In both cases, -however, an inspection of the property is<span class="pagenum"><a name="Page_258" id="Page_258">[Pg 258]</a></span> necessary unless under a -special rule. Half to two-thirds of the estimated value is allowable -as a loan. The interest paid by the borrower on the loans is that paid -by the bank on the debentures, the bank being merely an intermediary -between the borrower and the actual lending public. But where the -bank pays the loan in cash it charges such interest as it thinks -proper, in order to make up any loss should the debentures sell below -par. Loans are repayable almost entirely by amortization, usually -in about fifty-three years. Some short-term loans are granted, with -corresponding debentures. The bank cannot demand repayment of a loan -except in case of waste, deterioration, or the like. On the other hand, -the borrower is at liberty to repay in whole or in part whenever he -pleases, but must pay the entire interest for the half year in which he -repays. The loan is repaid by an annuity consisting of the interest, -sinking fund (usually beginning at one-half of 1 per cent), with a -contribution to the reserve or guaranty fund, and another for the -expenses of administration. The annuities have totaled 6 per cent, but -they now average around 4 per cent or lower; e.g., interest being 3 per -cent, sinking fund one-half of 1 per cent, guaranty fund one-fourth of -1 per cent, and expenses one-fourth of 1 per cent. Some of the banks -also require a lump payment on the grant of the loan of 1 or 2 per -cent, to be credited either to the working or to the guaranty fund. The -working fund is formed by the contribution made for the expenses of -management and any special sources.</p> - -<p>Hungary is the only nation outside of Germany that has a true -Landschaft of the original type. But modified forms exist in Russia, -Austria, Switzerland, Denmark and Roumania, where they have been -useful in supplying agriculture with cheap capital. There is no older -principle in land credit than the Landschaften idea. It has been tested -and proved by over one hundred and thirty years of success, and could -undoubtedly be employed to advantage by water users' associations in -the<span class="pagenum"><a name="Page_259" id="Page_259">[Pg 259]</a></span> irrigated regions of the West and in other parts of the United -States where landowners might unite to raise funds for drainage -or other improvements for their common good. Some of the banks of -Switzerland and the credit associations of Denmark, with the laws -governing them, perhaps furnish the best models, as appears from the -reports of the American ministers to those countries that have been -forwarded to the Secretary of State.</p> - -<p>The most noticeable fact revealed by the investigation of the European -land-credit institution is the all-pervading presence of the state -in every nation. Most of the older joint-stock corporations have a -public character equal to that of the German Landschaften. Every one -that dates back to 1850 or 1860 was directly organized by the state or -brought into existence by a Government fiat or favoring legislation, -subsidized in some way or other and granted special privileges. The -supervision now exercised over them all is most stringent, going into -the minutest details and varying from direct control to surveillance by -state officials, usually by special laws that impose heavy penalties -for malfeasance or even neglect of regulations. Continental Europe -is accustomed to state intervention. Commercial credit was organized -by means of central banks connected with the Government, and so this -régime was naturally followed in organizing the land credit. For this -reason the results obtained, at least in some instances, cannot be used -by way of comparison to illustrate the possibilities of organization -along the lines of private and independent endeavor.</p> - -<p>But whatever may be the opinion entertained for the State intervention -in the land-credit system of the Continent, there can be no doubt -that the working principles and business methods of the European -land-mortgage banks are the best ever devised, and that they will -have to be introduced into the United States if it be hoped to make -the farm mortgage a fluid and popular form of investment and direct a -flow of capital in sufficient<span class="pagenum"><a name="Page_260" id="Page_260">[Pg 260]</a></span> volume to agriculture to enable it to -keep pace with the progress of the Nation. The main features of this -system are the limitation of the interest rate that can be charged, -the amortization of the debt, and wise and equitable regulations and -restrictions relative to loans and the issuance of debentures which -protect the farmer from extortion and thriftless borrowing, and at the -same time bring safety and a feeling of confidence to the investing -public. These features, with modifications and additions, appear in -all European land banks, whether they be semipublic, as they are in -France, Spain and Russia, or of a private character, as with some cases -in Germany, or of the mixed type of Switzerland and Italy, but are best -exemplified in the great Crédit Foncier of France—the largest and most -successful land bank in the world.</p> - -<p>But Germany has progressed very decidedly beyond the so-called -Landschaften as exemplified by her great mortgage banks which, -though of comparatively recent operation, largely exceed in business -that of the Landschaften type, and it is here that we find many -vital suggestions for our guidance. Germany has general laws under -which these mortgage banks operate, but the rules of operation -and supervision are of the strictest kind. The mortgage banks of -Europe may be classified generally as public or semipublic, and as -strictly private institutions. The first have just been described. -The latter are all those which, whether they consist of lenders or -only of borrowers, operate under general laws and have absolutely -no privileges. The State, however, does not leave these companies -entirely to their own devices. They are limited in the conduct of -their business by strict rules and regulations, and are subject to the -most scrutinous supervision. The best law of this kind is that enacted -in Germany in 1899. It is the last word in legislation for private -joint-stock mortgage banks, and with slight modifications could be -easily adapted to the United States, as it was framed to overcome the -troubles occa<span class="pagenum"><a name="Page_261" id="Page_261">[Pg 261]</a></span>sioned by the conflict of authority between the sovereign -Provinces of which the Empire is composed. Remarkable as it may seem, -these companies in Germany have outstripped the old established and -specially privileged public banks. They now have $2,618,000,000 loaned -out on mortgage, or over five times more than the Landschaften. The -capital is $170,563,000, the smallest being $238,000 and the largest -$14,000,000. The bonds in circulation amount to $2,548,009,000, with -interest at 3½ or 4 per cent per annum, while the average returns -on mortgage loans are 4.22 to 4.33 per cent per annum. As 6 per cent -and even 14 per cent dividends are yearly declared, the figures again -furnish a favorable comparison with the Landschaften and Crédit -Foncier. The provincial head, however, selects the president of one -of these newer German banks, while the Imperial Government watches -over them all. The supervision is carried out by royal commissioners -and extends to the minutest detail. These inspecting officials have -the right to verify the securities and cash on hand, and demand -information regarding every separate transaction. They may also send a -representative to general meetings of stockholders and to sittings of -boards of directors and take all measures that may seem fit to enforce -the proper conduct of business. They also approve the appointment of -the auditor and assistant auditor, who are charged in each bank with -the duty of seeing that debentures are issued only upon the conditions -and within the limits legally prescribed.</p> - -<p>It will be observed that the mortgage business in Germany, as carried -on today, is an evolution. The same fact is evident in the changes that -have taken place in the Crédit Foncier, the greatest mortgage bank in -the world. The history of this great institution is as follows:</p> - -<p>It was formed in 1852 under the law enacted that year for organizing -land credit and improving agricultural credit facilities. It was -immediately placed under Government control, given a subsidy, and -granted a monopoly for twenty-five years. The monopoly was not<span class="pagenum"><a name="Page_262" id="Page_262">[Pg 262]</a></span> -renewed, but all its original special privileges remain, which perhaps -accounts for its being the only land bank in France. Its relation with -the State is very close, and many of its most important features were -taken bodily from the Landschaften. Inasmuch as the institution has -been the model for all Europe and is now being widely discussed in the -American press, I will describe it at length.</p> - -<p>The governor and two subgovernors of the Crédit Foncier are appointed -for life by the President of the Republic. It is subject to the -surveillance of the Treasury Department of the Government, and three -of its directors must be high officers of the department. It may use -the Government treasuries for the receipt of its dues and the deposit -of its surplus funds and enjoys a reduction in stamp and registration -duties.</p> - -<p>Its debentures are registered or payable to bearer, and the claim of a -third party to them cannot be made in court except in case of theft or -loss. Trust and public funds may be invested in them. Its mortgages are -exempt from the decennial registration and consequent charges required -of other mortgages. It has a cheap and speedy method of "purging" the -title of real estate in case of disputes. In the event of default the -courts cannot grant the debtor any delay and payments due it upon loans -cannot be garnished or attached. It is allowed summary proceedings for -attaching mortgage property in case of violation of contracts. If dues -are not paid or if the property deteriorates it may attach and sell -the property simply upon notice and publication. During attachment -proceedings it has a right to all returns from the estate. The sale may -be by auction in a civil court or at a notary public's office, if the -court permits, and no adverse claim to the proceeds of the sale can be -allowed until its claims are fully satisfied.</p> - -<p>The regulations under which the Crédit Foncier transacts its business -are very strict. The mortgage loans must be first liens. The property -must have a clear and<span class="pagenum"><a name="Page_263" id="Page_263">[Pg 263]</a></span> unencumbered title and yield a certain and -durable income. Loans and theaters, mines, and quarries are not -accepted. The amount loaned on any property must not exceed half its -value, or one-third the value for vine-yards, woods, orchards, and -plantations. Factory buildings are estimated without regard to their -value for particular purposes. A borrower cannot bind himself to -pay a greater annuity than the total annual income of the property -mortgaged, while on the other hand the society is not allowed to charge -borrowers 0.6 per cent over the rate at which it obtains money on its -debentures issued at the time of the loans. An excess of only 0.45 per -cent is allowed on loans to municipalities. The outstanding loans and -debentures issued must exactly correspond in amounts.</p> - -<p>After paying a 5 per cent dividend the Crédit Foncier must set aside -between 5 and 20 per cent of the balance of the profits each year for -the obligatory reserve, and continue to do so as long as the same -does not equal one-half of the capital stock. The investment of this -reserve is left to the board of directors. The capital stock of the -society must be always maintained at the ratio of one-twentieth or -more of the debentures in circulation and is the primary guaranty of -its obligations, especially the debentures. The capital at present is -$40,000,000, divided into 400,000 shares of $100 each; but authority -has been obtained to increase the same to $50,000,000, represented by -500,000 shares, which will be done before the debentures in circulation -pass the legal limit. One-fourth of the capital must be invested in -French rentes or other treasury bonds; one-fourth in office buildings -of the society, or by loans to French colonies, or in securities -deposited with the Bank of France as a guaranty for advances. Shares -cannot be issued at a price below par. They are nonassessable. The -surplus may be loaned on mortgages or to municipalities or may be used -in other mortgage business allowed by the statutes; and for buying its -own debentures, making advances to bor<span class="pagenum"><a name="Page_264" id="Page_264">[Pg 264]</a></span>rowers in arrears, or purchasing -mortgaged property in foreclosure; and for acquiring commercial paper -acceptable by the Bank of France or securities to be deposited with -that bank.</p> - -<p>The governor of the Crédit Foncier most be the owner of at least two -hundred shares of stock of the society. He receives a salary of $8,000. -The subgovernors must hold one hundred shares each. Their salaries -are $4,000. They perform such functions as are delegated to them by -the governor, and in order of their nomination fulfill his duties -during his absence on account of illness or other causes. The governor -appoints and dismisses all agents of the society and superintends the -organization of the service in Paris and elsewhere. He countersigns the -debentures and signs the share certificates and all other papers and -documents and must strive to promote the interests of the society in -every way. The governor is the head of the board of directors, which -is composed of himself, the two subgovernors, the auditors, and twenty -to twenty-three directors. This body possesses the administrative -powers of the society and is beholden only to the laws and the general -assembly of the stockholders for the proper exercise of the same. The -three auditors are the guardians of the society. Their duties are to -watch, investigate, and make reports. The only power they have is to -call extraordinary general meetings of the shareholders.</p> - -<p>The general assembly of the stockholders meets regularly once a year. -It consists only of the two hundred largest stockholders, of whom forty -make a quorum if they hold one-tenth of the stock of the society. Each -member has one vote for every forty shares of stock held, but cannot -cast more than five votes in his own name, nor more than ten in his own -name or by proxy. He has, however, a right to one vote even though his -shares be less than forty in number. The general assembly receives the -report of the governor, and also of the auditors, if any. It elects the -directors and auditors and de<span class="pagenum"><a name="Page_265" id="Page_265">[Pg 265]</a></span>cides on all resolutions or proposals for -the increase of capital, the amendment of the by-laws and constitution, -and generally on all matters not otherwise specifically provided for.</p> - -<p>The only places outside of France where the Crédit Foncier can do -business are Algiers and Tunis. Under a clause in its charter which -allows it, with the sanction of the Government, to enter into projects -for improving the soil, developing agriculture, and to extinguish -existing debts on real estate, etc., the society has been authorized -to finance drainage projects and to advance money on the paper of -the Sous-Comptoir des Entrepreneurs, an incorporated association of -builders. It may also receive deposits up to $20,000,000, one-fourth of -which must be kept in the Government treasury and the balance invested -in Government paper, treasury bonds, or high-class bankable commercial -notes and securities. In connection with its banking house it has large -deposit vaults.</p> - -<p>The Crédit Foncier is permitted to take short-term mortgages and does -a big business in that line. But the true purpose of its existence -and the greatest part of its operations are the granting of long -time loans. These are made on mortgages to individuals and without -mortgage to municipalities and public establishments. The periods run -from ten to seventy-five years. The annuities required to be paid -for amortizing the loan for the average period used are so small as -to appear insignificant. The success achieved by the Crédit Foncier -in popularizing the amortization principle for real estate loans is -the chief cause of its great renown. At present its interest rate for -mortgage loans is 4.3 per cent per annum, for public establishments -4.1 per cent, and 3.85 per cent for municipalities. The total annuity, -including both interest and amortization sum, for a twenty-five year -mortgage loan is a little over 6.5 per cent. With this small annual -payment the debt is gradually wiped out, and nothing is left to be -paid at the end of the term. The longer the term the smaller the -annuity, and vice<span class="pagenum"><a name="Page_266" id="Page_266">[Pg 266]</a></span> versa. The loans now exceed $870,000,000. Here is an -amortization table of the Crédit Foncier:</p> - - -<p class="center"><i>Annuity of a capital of $100, interest at 4.3 per cent, payable -semiannually.</i></p> - -<table summary="annuities" width="35%"> -<tr><td align="right">Duration.</td> <td align="right">Annuities.</td></tr> -<tr><td align="right">5 years</td> <td align="right">$22.440405</td></tr> -<tr><td align="right">10 years</td> <td align="right">12.409111</td></tr> -<tr><td align="right">15 years</td> <td align="right">9.115217</td></tr> -<tr><td align="right">20 years</td> <td align="right">7.504843</td></tr> -<tr><td align="right">25 years</td> <td align="right">6.566976</td></tr> -<tr><td align="right">30 years</td> <td align="right">5.964436</td></tr> -<tr><td align="right">35 years</td> <td align="right">5.552593</td></tr> -<tr><td align="right">40 years</td> <td align="right">5.259040</td></tr> -<tr><td align="right">45 years</td> <td align="right">5.043495</td></tr> -<tr><td align="right">50 years</td> <td align="right">4.881753</td></tr> -<tr><td align="right">55 years</td> <td align="right">4.758395</td></tr> -<tr><td align="right">60 years</td> <td align="right">4.663140</td></tr> -<tr><td align="right">65 years</td> <td align="right">4.588881</td></tr> -<tr><td align="right">70 years</td> <td align="right">4.530558</td></tr> -<tr><td align="right">75 years</td> <td align="right">4.484483</td></tr> -</table> - -<p>The Crédit Foncier is obliged to keep the interest and amortization -payments in separate accounts, the latter going to create a sinking -fund for the retirement of outstanding debentures. As stated above, -the amounts of the loans and debentures must balance each other; -consequently, as loans are paid up debentures must be paid off. -Borrowers have the right to pay in advance, which they frequently -exercise, so the proper adjustment of the balance is beyond the control -of the society. It is for this reason that the debentures, although -calculated to be redeemed synchronously with the loans they represent, -have no fixed time for maturity and are recallable at option. In each -issue a certain number are repayable by lots, with prizes for the -lucky holders. A bond last year drew a prize of $40,000. The right to -give prizes at<span class="pagenum"><a name="Page_267" id="Page_267">[Pg 267]</a></span> the lottery drawings is one of the special privileges -of the society. The debentures are of two kinds—those representing -the mortgages are called "foncières" and those representing the loans -to municipalities and public establishments are called "communales." -They are issued in series. The smallest denomination is $20. They may -be bought by installments and are the most popular form of investment -in France, being held largely by farmers and poor people in the -cities. The issue of 1912 for $100,000,000 at 3 per cent, payable -within seventy years, was oversubscribed eighteen times. The total -land mortgages and municipal indebtedness in France is figured at -$2,800,000,000. Nearly one-third of this is represented by the loans of -the society.</p> - -<p>Such is the Crédit Foncier of France. The control exercised over it by -the State through the appointment of its head officers, the simplified -foreclosure proceedings, and the other judicial, administrative, and -fiscal privileges accorded to it are common practices in continental -Europe. As mentioned above, all the older banks are specially -privileged, and consequently have a practical monopoly of the -mortgage-bond business in some of the nations.</p> - -<p>Now, gentlemen, I have gone into these details not to be slavishly -copied, because I think we would make a very great mistake to load down -our legislation with so much detail. It will be far better to allow -the managers to work out a system of operation that will he suited to -our conditions. In this way we will not be handicapped by red tape -that is ill adapted to our situation. The same penal laws that are -in force with respect to our national banks with any additions that -the peculiarities of this business call for ought, it seems to me, to -suffice.</p> - -<p>My suggestion would be a comparatively simple organization with broad -powers to the board of directors. In this way we will soon have an -American system of Land Credit Banks superior to any in the world, -even<span class="pagenum"><a name="Page_268" id="Page_268">[Pg 268]</a></span> though we do start after all others have begun. Indeed, if we are -wise, this is the very reason why we should surpass all others.</p> - -<p>Now, if you will recall with me the points of change and progress made, -you will find that the tendency is away from unlimited liability, as -originally provided, and now toward a dependence upon capital and -reserves solely for protection to the debenture holders.</p> - -<p>In my judgment we should adopt the following as the basis of our Land -Credit Bank:</p> - -<p><i>First</i>: We should confine the business to loans upon improved -agricultural lands.</p> - -<p><i>Second</i>: We should make the institution strictly coöperative, but with -a limited liability to the amount of the paid-up capital.</p> - -<p><i>Third</i>: Every local association, or primary unit, should be an -association of men within a restricted locality and the business should -also be confined to the immediate vicinity of the association.</p> - -<p><i>Fourth</i>: I do not believe that the membership of a primary unit should -be less than twenty-five, nor more than fifty.</p> - -<p><i>Fifth</i>: I think that the capital of a primary unit should not exceed -$25,000, and that the shares should be $100 each. No person should own -more than two hundred and fifty shares, or 10 per cent of the capital.</p> - -<p><i>Sixth</i>: All loans made should be recommended by the local association. -In case of a loss by the sale of property taken over, one-quarter of -such loss should be borne by the primary unit, of local association, -making or recommending the loan upon which the loss was made.</p> - -<p><i>Seventh</i>: All expenses connected with the examination and -recommendation of a loan shall be paid by the primary unit, or local -association.</p> - -<p><i>Eighth</i>: The application for a loan should then go to a state -organization, which should be created by a union of all the local -associations. I suggest a central organization in each state for the -purpose of lessening the<span class="pagenum"><a name="Page_269" id="Page_269">[Pg 269]</a></span> expenses over the entire state, as the laws -affecting real estate in the several states have some peculiarities to -those states.</p> - -<p><i>Ninth</i>: Each state organization should have charge of all the business -done in that particular state; the examination and final approval of -the security; the examination and approval of the title; the collection -of all interest; the payment of all taxes and insurance, and the final -repayment of the loan.</p> - -<p><i>Tenth</i>: The state organization should be a union of all the local -associations in any particular state, and should hold one-quarter of -the capital of all the local associations as its own for the purpose of -carrying on the business of that state.</p> - -<p><i>Eleventh</i>: All property upon which loans are made should be conveyed -absolutely to the state institution where located with a waiver of all -rights of foreclosure; but, providing for the advertisement and sale of -the property, as if a judgment had been rendered. This is essential to -save the cost of foreclosure.</p> - -<p><i>Twelfth</i>: In case of a loss, as the result of the sale of any real -estate taken over, one-quarter of it shall be borne by the state -organization.</p> - -<p>I make this provision because no local association could carry all -its losses, and yet it should be responsible for a sufficient amount -of loss to impose a serious obligation upon the local association -recommending the loan, and also a serious obligation upon the state -institution for having finally approved and completed the loan.</p> - -<p><i>Thirteenth</i>: All the expenses of the state institution incurred by way -of caring for the business of all the local associations should be paid -by a percentage charge on all the business done in the state. This is -desirable so that the mortgages shall go to the national organization, -free and clear from any charges and obligations whatever.</p> - -<p><i>Fourteenth</i>: I would have a national organization which should fix the -rate of interest to be paid by the<span class="pagenum"><a name="Page_270" id="Page_270">[Pg 270]</a></span> borrowers, and the rate of interest -of all the bonds and debentures sold. All bonds and debentures should -be sold by the national organization, which should be under national -supervision for the purpose of giving to the debentures the highest -possible credit wherever they may be offered for sale.</p> - -<p><i>Fifteenth</i>: I think that one-half of all the capital of all the local -associations in the United States should be transferred to the national -organization, and be held and treated by it as if it were its own -capital. And such capital shall be holden to the debenture holders as a -guarantee, and for the purpose of securing the best possible credit for -the national organization.</p> - -<p><i>Sixteenth</i>: The national organization, and all state associations, and -all local associations, shall be under the supervision, and be examined -by an auditor appointed by the President of the United States.</p> - -<p><i>Seventeenth</i>: To secure unqualified success for a Land Credit Bank -in the United States, no business should be attempted until the -capital paid in shall amount to at least $25,000,000; that is, until -the national organization shall have a cash capital of its own of -$12,500,000 in order that its debentures may bear the lowest possible -rate of interest that a large capital with a national organization -under national supervision will insure.</p> - -<p><i>Eighteenth</i>: The debentures of a national organization should be free -of all taxes, local or national.</p> - -<p>In general these are my recommendations, which I hope will be -incorporated in the measure we are to prepare.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Farmer, I notice that you propose to confine -the loans to agricultural land. Don't you think that a good and equally -helpful business could be carried on by loaning money on city and urban -property?</p> - -<p><span class="smcap">Mr. Farmer</span>: Possibly that is so, but I do not think so, and in -any event, I never would combine these two classes of loans. If we are -to have national Land Credit Banks doing a country and city or urban -business, let them be kept entirely separate. The general business -permitted<span class="pagenum"><a name="Page_271" id="Page_271">[Pg 271]</a></span> and carried on by the Crédit Foncier is a just ground for -severe criticism. It is permitted to take deposits. An American Land -Credit Bank should have no such power. It should be confined, in my -judgment, with extreme strictness to loaning money upon improved -agricultural land. Mind you, I do not say that there should be no other -Land Credit Bank to do some other kind of business. That is a matter -for future and separate consideration.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Mr. Farmer, in all that you have said you -have not once even mentioned Credit Unions or Mutual Credit societies. -I had been betting on you to help me out in my fight for a recognition -of the principle of coöperation, but it looks as if you had deserted me.</p> - -<p><span class="smcap">Mr. Farmer</span>: No, Mr. Laboringman, on the contrary, I will do -anything in my power to help you or anyone work out the great saving -principle of coöperation; but since I have been attending these talks -two or three things have stuck in my crop and I could not get them out -even if I tried, and one thing in particular applies especially to the -agricultural societies, called credit unions.</p> - -<p><i>Mutual credit societies or credit unions are organized to furnish -capital for production; that is, it is commercial capital, or credit -for commercial purposes, not for investment purposes at all. Not -a single dollar of a credit union should ever be loaned upon real -estate. Not a single dollar! Not a single cent!!</i> Such a practice would -literally destroy the principle upon which they are founded; mutual -aid to assist in production, not investment. Don't you remember how -Mr. Banker pounded that into us; and convinced us all, too? But more -convincing than anything else as to this great economic truth, that -not one single dollar of credit union money should ever be loaned -upon land, is the history of them. We must not forget that they were -organized to secure personal credit and to depart from that practice<span class="pagenum"><a name="Page_272" id="Page_272">[Pg 272]</a></span> -is a perversion of their purpose and just to that extent must result in -failure.</p> - -<p>The coöperative idea for personal credit was originated in Germany by -Francis Frederick Schulze, a little before the middle of the nineteenth -century. It passed over into Austria and Hungary in 1851, into Italy -in 1860, into Belgium in 1864, into France in 1883, into Scotland in -1889, and into Ireland in 1894. These dates are given to show the order -of advance and the recentness of the movement in some parts of Europe. -The first German association was formed in 1849 by Frederick William -Raiffeisen. Herr Schulze did not get his started until the following -year.</p> - -<p>Herr Raiffeisen was poorly educated but deeply imbued with religious -feelings. He lived among peasants in a sparsely settled and -impoverished locality, and his object was to help the lowest classes. -The associations which grew up under his guiding hand were mutual -societies confined to small farming districts. The thought of profit -was discarded and they were managed by the gratuitous services of their -members. Herr Schulze was a talented writer and speaker, and when he -took up his life work was holding a judicial post in his native town of -Delitzsche. His philanthropy, although intense, leaned to the practical -side. He believed in paid services and fair returns for money. The -associations formed under his leadership were located mainly in towns. -They were managed by salaried officers, and membership was dependent -upon the purchase of shares on which dividends were allowed. But both -kinds were founded upon the fundamental principle of combining persons -together and using the credit created by their united guaranty for -providing funds for members who might wish to borrow.</p> - -<p>In the early days the mutual credit associations were formed simply -by articles of agreement in the nature of a partnership contract, -and members were jointly and severally liable without limit for all -the loans that were<span class="pagenum"><a name="Page_273" id="Page_273">[Pg 273]</a></span> made. In course of time, when the Government -began to take official recognition of the associations, some of the -followers of Schulze favored a limit to this liability. Hence the -mark of distinction became clearly defined between "Raiffeisenism" -and the "Schulze-Delitzsche" propaganda. The German law, as it now -stands, requires mutual banks to have share capital, but allows them -to be organized upon the limited or unlimited liability plan. All true -Raiffeisen banks, in order to preserve their character, have shares of -only a nominal value and devote dividends to educational or charitable -purposes. In Germany these local banks are grouped under central banks, -which in turn are linked together by two general central banks, and -their funds are made to move freely for agriculture throughout the -Empire. The centralization of the system has also been inaugurated in -France.</p> - -<p>Personal credit in agricultural Europe is obtained usually by means of -the coöperative credit associations. They are also used by artisans -and small tradespeople in the towns and cities. These associations are -in fact the only banks which the farmers will patronize for short-time -loans in the nations where they abound in the greatest numbers. With -their aid poverty and usury have been banished, sterile fields have -been made fertile, production has been increased, and agriculture and -agricultural science raised to the highest point. Their educational -influence is no less marked. They have taught the farmers the uses -of credit as well as of cash, given them a commercial instinct and -business knowledge, and stimulated them to associated action. They have -encouraged thrift and saving, created a feeling of independence and -self-reliance, and even elevated their moral tone.</p> - -<p>The picture can hardly be overdrawn. Every traveler who visits the -places where these little associations exist speaks in glowing phrases -of the prosperity and contentment that prevail. They are organized -on such simple lines that their management requires only ordinary -in<span class="pagenum"><a name="Page_274" id="Page_274">[Pg 274]</a></span>telligence. Failures have rarely occurred. In France and other -countries they hold a record of having never lost a cent. The working -capital and number of members of individual associations are so small -as to be insignificant, yet they do one-third of the banking business -of Italy; while the combined amount of their operations in Germany -equal that of the commercial banks. But the mutual banks, both in town -and country, are looked upon with favor in the financial world because -they keep millions of dollars of petty sums in circulation which, -except for them, would be idle and hoarded. They are, in fact, feeders -for the commercial banking system.</p> - -<p>In 1909 in Belgium 458 banks, with a membership of 25,762, had -outstanding (roughly calculated) $4,000,000 of loans; in France -ninety-six regional banks did upward of $25,000,000 of business on a -capital of $2,983,646, while the 2,983 local banks, with a membership -of 133,382 farmers, had $2,622,241 of capital and a record of over -$20,500,000 of operations. There were nearly 6,000 banks in Austria. -The membership was over 725,666, and the loans ran over $86,500,000. -In Italy 690 banks that furnished reports had a working capital of -over $170,091,946. In Germany there is one bank for every 1,600 of the -population, and the total business done was over $4,888,000,000. In -one Province there is a bank for every 3,000 acres of land; and so on -for all other nations that have coöperative credit institutions. The -rate of interest charged was one or two points lower than in commercial -circles, yet these banks, with a few exceptions, made a fair profit on -the turnover of their capital. In some instances it ran as high as 5 -per cent and 7 per cent.</p> - -<p>With this striking array of figures to show its stability and -usefulness, it is remarkable that the farmers of the United States -have been so slow to adopt this system of banking for temporary loans -on personal security. It has existed in Canada for twenty-two years. -In the Province of Quebec there are a number of mutual banks that<span class="pagenum"><a name="Page_275" id="Page_275">[Pg 275]</a></span> -have loaned hundreds of thousands of dollars. But Massachusetts is -the only State in our country that has made an attempt to encourage -its introduction. It already has a law allowing the incorporation of -credit unions. It was passed in 1909 after a careful study of European -legislation, and furnishes an excellent example for the other States. -The first concern to start under this law was the Myrick Credit Union -at Springfield. In twelve months it had one hundred and five members, -a capital of $3,000 and $10,000 of outstanding loans. Interest rates -have been low, yet it paid over 6 per cent dividends on its capital. -Thirteen new unions were formed in 1911 and have $25,000 of capital. A -pamphlet issued by the State bank commissioner gives a comprehensive -description of the fundamental principles that a mutual association for -personal credit must adhere to. I cannot do better than to quote from -it. They are as follows:</p> - -<p><i>First</i>: The association shall be organized on coöperative lines. -As the members may be either borrowers or lenders, according to -circumstances, its affairs must be conducted in such a way as to give -fair and equitable treatment to both classes.</p> - -<p><i>Second</i>: The association shall be one of persons and not of shares. To -this end each shareholder has one vote, irrespective of the number of -shares he holds. Furthermore, a limit is set to the number of shares or -the amount of deposit which a member may have in the association, in -order that no one person may have a too dominating influence or be able -to damage the association by suddenly withdrawing large sums.</p> - -<p><i>Third</i>: Loans shall be made only for the purposes which promise to -result in a saving or a profit to the borrower. Each applicant for a -loan must state the object for which he desires to borrow, in order -that the credit committee, which passes on all loans, may rigidly -exclude thriftless and improvident borrowing.</p> - -<p><i>Fourth</i>: As loans are made only to members and as<span class="pagenum"><a name="Page_276" id="Page_276">[Pg 276]</a></span> any member may -become a borrower, care must be taken to admit to membership only men -and women of honesty and industry.</p> - -<p><i>Fifth</i>: As personal knowledge of the character of the members is -essential, the membership in an association must be restricted to -citizens of a small community, or of a small subdivision of a large -city, or to a small group or organization of individuals.</p> - -<p><i>Sixth</i>: Every provision must be made to bring the association within -the reach of the humblest citizen. The par value of the shares should -be small (it averages about $5), and they should be payable in very -small installments. Loans of very small amounts should be made and -should be repayable by installments if desired.</p> - -<p><i>Seventh</i>: In making loans it should be recognized that character and -industry are the basis of credit, and a loan may be made to a member -who has not adequate security to pledge for it, provided he can obtain -the guaranty of one or more other members, but no member is obliged to -guarantee the loan of another member unless he desires to do so.</p> - -<p><i>Eighth</i>: Borrowers must carry out to the letter the conditions -of repayment and agreed upon at the time their loans are made. -Prompt payment of obligations is a fundamental requirement of these -associations.</p> - -<p>It should not be inferred from the great success and good accomplished -that the coöperative credit associations could be taken as models in -their entirety or that the establishment of such societies would act -as an immediate panacea for all the troubles that beset agriculture -in America. They seem to be adapted only for localities where the -population is fixed and settled and welded together in close relation -by community of interests.</p> - -<p>Let me call your attention to what the Government report says in -support of this position. The Germans have had their sad experiences -and it would be the height of folly for us to travel over the same -road again, only<span class="pagenum"><a name="Page_277" id="Page_277">[Pg 277]</a></span> to learn by our own experience what we can now know -without paying for it.</p> - -<p>Too much emphasis cannot be laid on the fact that these small credit -societies are not organized for making loans on real estate. The -deposits and funds received by them are withdrawable on short notice. -This privilege must be allowed in order to attract the capital -needed. But as loans to members yield interest considerably under the -ordinary market rate, the only way they have of paying for the use -of this capital is by making quick and numerous turnovers with it. -In Germany they have taken long-time mortgages, but the practice is -strongly denounced by all students who have investigated into the cause -of the remarkable success of the Raiffeisen and Schulze-Delitzsche -systems as contrary to the theory on which they are founded. Credit is -indispensable to every business. It is the means whereby $1 is made -to do the work of $50, as the saying goes, but its classifications -and limitations cannot be ignored without danger. A loan to acquire -something merely for consumption is not tolerated, no matter what may -be the security offered. The loan must be strictly for a creative -purpose. This is the first cardinal principle, and so rigorously is it -adhered to in Europe that the credit societies invite to their circle -only those who are producers of wealth.</p> - -<p><i>Another principle is that personal and real credit are inherently and -irreconcilably separate and distinct, and each must have specially -adapted institutions for carrying on its operations. This is only a -reaffirmation of what we have already decided over and over again.</i></p> - -<p>The recognition and observance of these principles have done much -to prevent thriftless debt among farmers, and are undoubtedly the -reasons why the land credit is so thoroughly organized on the European -Continent. A loan on chattel or character security should naturally -be for a short time and for temporary purposes, for such security is -perishable and subject to loss or<span class="pagenum"><a name="Page_278" id="Page_278">[Pg 278]</a></span> change. The long-time loan requires -an unchanging and permanent security, and the only thing possessing -this quality is mother earth herself. But when capital is once sunk -in land it becomes fixed and can never be recovered except from the -income created thereby or the amortization sums paid in representation -of that income. A debtor should not be called upon to pay back the loan -in a lump or in advance of his receipts from the land. To do so leads -only to further borrowing, usually on more burdensome terms, when the -mortgage expires. On the other hand, a private individual cannot be -expected to take his money back in driblets or wait long years for its -complete return. So private lending on real estate is a theoretical -and also a practical wrong. The proof of this lies in vast numbers of -foreclosures and the excessive interest rates of farm mortgages in -western United States, where they are largely held by persons. The -smallness of the annual payments and the length of an ordinary loan in -Europe are shown in the tables of the Crédit Foncier, which have been -given already. A glance at them makes it apparent that amortization, -the basic principle of a land loan, can be brought into full play -only by the aid of large corporations or associations with charters -perpetual or lasting a long time.</p> - -<p><span class="smcap">Mr. Banker</span>: It does not seem to me, under the circumstances, -as though we could treat the Mutual Credit Associations or Credit -Unions wisely. Indeed, I am of the opinion that legislation by us would -interfere with and retard the progress of such associations.</p> - -<p><span class="smcap">Uncle Sam</span>: Mr. Laboringman has waited patiently to have his -say about coöperation.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Yes, I have been biding my time, for I have -something to say that ought to interest all of you, as a possibility at -least, and if it is reasonable to do so, I hope that you will include -some sympathetic laws by way of encouragement.</p> - -<p>England was the birthplace of modern industrialism, as you all know. -There, too, was started the great move<span class="pagenum"><a name="Page_279" id="Page_279">[Pg 279]</a></span>ment of modern coöperation. -Small and insignificant was the beginning. In 1844 the Rochdale -pioneers put all their little savings into the pot, and they amounted -to only $140. With this they started a store. By 1845 they had -seventy-four members and $900 of capital, and did $3,500 worth of -business, by keeping their little business open only two evenings a -week. They were an object of derision and all sorts of jibes.</p> - -<p>S.P. Orth describes the situation as follows: Last year the British -Government made a careful and complete report on coöperation in -England, and found more than three million persons in the membership -of the various societies, and over three times that number under the -immediate sphere of coöperative influence. That means that one person -in every five in the United Kingdom is now interested or influenced by -this vast association of producers and consumers. During the past ten -years, the increase of membership has been 55 per cent and the trade 75 -per cent.</p> - -<p>The productive and distributive business alone amounts to $640,000,000. -The retail societies have $200,000,000 of capital. "Last year the sales -of these retail societies totaled more than $352,000,000, or about -$142.50 per member." It is most significant that the societies, in -their own mills and factories, produced nearly 50 per cent of these -goods themselves; that is, production and distribution are going hand -in hand. They began by making boots and butter; now they make cloth, -iron and all sorts of things.</p> - -<p>The average profits for the last ten years have been nearly 15 per cent -and there is now a serious discussion whether the cost of articles to -the customer should not be lowered.</p> - -<p>In some of the districts, notably some of the mining districts, the -coöperative stores have a virtual monopoly, and their system of banking -or keeping the surplus credits for the customer is a great boon. But -in other very poor districts, keeping up the prices has worked some<span class="pagenum"><a name="Page_280" id="Page_280">[Pg 280]</a></span> -hardship. It is now proposed by some of the stronger societies to open -special stores in the poorer districts and cut the prices.</p> - -<p>All business, until a few years ago, was done on a strictly cash basis, -but recently the insidious credit system has crept in, and it may lead -to serious consequences.</p> - -<p>Last year, out of its surplus, the Union of Coöperative Societies, a -federation of all English coöperativists, voted $230,000 to charity, -$450,000 to education, i.e., libraries, lectures, and concerts, and -$50,000 to propaganda.</p> - -<p>The early retail societies found it hard to get good terms from -wholesale houses, owing to the enmity of the private merchants. The -law did not allow them to amalgamate and start a wholesale business of -their own. But in 1862 the law was changed, and at once two coöperative -wholesale societies were organized, the English and the Scotch. They -are the models for the world. The two societies are virtually one, -although maintaining different officers, rules, and stockholders. In -fact, the wholesale societies are the federation of the retail and -productive societies of England and Scotland. The English society -requires the constituent societies to hold one $25 share for every five -of its membership; the Scotch society one $5 share for every one of -its members: i. e., an English coöperative shoe factory of two hundred -members wishing to join the English Wholesale Society would take forty -$25 shares, or two hundred $5 shares in the Scotch Society.</p> - -<p>These Wholesale Societies are the grand Clearing House of nearly all -the coöperative shops and factories of the kingdom, and the suppliers -of all the coöperative retail stores.</p> - -<p>And they are monumental institutions. In 1907 they had a membership of -more than 2,615,000, a capital of more than $169,000,000, a surplus of -$85,000,000. Their annual sales amount to more than $600,000,000, and -their profits more than $60,000,000.</p> - -<p>The English Society is the larger. It is a corporation<span class="pagenum"><a name="Page_281" id="Page_281">[Pg 281]</a></span> that not only -engages in wholesale trade but is a manufacturer, banker, importer; -it packs meat, cures bacon, refines lard, binds books, grows tea, -blends coffee, founders iron; it manufactures flour, butter, biscuit, -sugar, pickles, cocoa, tobacco, candles, glycerine, starch, saddlery, -furniture, clothing, corsets, underwear, brushes, crockery, tinplate, -woolens, carpets and almost everything else that an average British -home may need. It deals in coal, apricots, and wheat; has offices -in New York, Toronto, Rouen, France; Denia, Spain; Copenhagen and -Guthenberg, Sweden; has twenty-seven creameries in Ireland, tallow -and oil works in Sydney, Australia; a "bacon factory" in Denmark, a -tea plantation in Ceylon, and fruit farms in Shropshire and Hereford. -Besides, it owns four steamers for the trade between Rouen and -Manchester.</p> - -<p>Its main offices on Balloon Street, Manchester, are enormous and -palatial. Together with warehouses and stores, they cover a number -of city blocks. Their offices in London compare favorably with any -private establishment, and for efficiency they are second to none. -Nearly 20,000 men are employed by this society. Some of its factories -are large, e, g., the Leicester Shoe Works employ 1,446 men; the Irlam -Soap Works, 702 men; Long Sight Printing Works, 941 men; the Middleton -Pickle Works, 564, etc.</p> - -<p>The chief offices of the Scotch Society are on Morrison Street, -Glasgow. They manufacture umbrellas, tweeds, paislies, oatmeal, -Aberdeen finnan-haddie, and other characteristic Scotch merchandise. -Its capital is about $17,000,000.</p> - -<p>Germany and Belgium, too, are furnishing successful coöperative -associations. Mr. Orth describes them so well that I want to read what -he says.</p> - -<p>There are about two thousand of the coöperative supply societies among -the farmers, with nearly one hundred and fifty thousand members. There -are also about three thousand coöperative dairies, with two hundred -and<span class="pagenum"><a name="Page_282" id="Page_282">[Pg 282]</a></span> thirty thousand members, and one hundred and sixty coöperative -wine cellars and two hundred and fifty-five coöperative warehouses and -grain elevators.</p> - -<p>It was natural that retail stores should be established next, on a -coöperative basis. For some reason they did not thrive until about ten -years ago. At that time a split occurred in the coöperative ranks, due -to politics, and two federations or unions of Coöperative Societies -were organized; the General Union or Liberal Union, and the Central -Union or Socialist Union. The former is remaining stationary, the -latter growing by leaps and bounds.</p> - -<p>In every large city the coöperative retail society has a central plant. -It usually includes a warehouse and bakery. The one located at Berlin -is a good type. It is situated at Lichtenberg, a suburb. Here you see -splendid buildings, in good architectural style, fitted up in the most -modern manner; telephones to all departments, electricity, central -heating plant, a uniform clock system for keeping time, etc. The whole -plant cost $1,750,000. The great warehouse is full of groceries.</p> - -<p>Although only a year in the buildings, they are already overtaxed and -additions are planned. This central supply house looks after the sixty -coöperative grocery stores in Berlin. It has a string of fine delivery -autos. Any one can become a member by paying fifty pfennigs (12-1/2c.) -admission, and forty marks ($10) a year. This, however, is taken out of -his dividends.</p> - -<p>The society also owns a fine row of apartment houses, which are leased -to members at a low rental. The goods used are bought in the open -market, or are supplied by the German Coöperative Wholesale Society of -Hamburg. There is very little productive coöperation in Germany. There -are 2,311 retail societies, more than two million members, and more -than $5,000,000 in their reserve fund.</p> - -<p>The Wholesale Society had a hard time of it until the spurt in favor of -coöperation began a decade ago. Now it thrives, doing about $12,000,000 -business a year.</p> - -<p><span class="pagenum"><a name="Page_283" id="Page_283">[Pg 283]</a></span></p> - -<p>There are a great many local coöperative building societies, with two -hundred thousand members, and many other evidences that the spirit of -coöperation is abroad in the land. In 1908 there were 4,105,594 persons -actively interested in one form or another of German coöperation. In -1911 the number had increased to nearly five million.</p> - -<p>In the little land of Belgium coöperation is at its best; not at -its greatest showiness, nor maximum figures. But here, in this land -of congested population, of illiteracy, of low wages and depressing -conditions, the abject workingmen have taken hold of their own -problems, asking neither sympathy nor favor, and have worked out a -scheme of industrial coöperation that is a genuine achievement.</p> - -<p>In 1873 bread was very dear in Ghent. Times were very hard. So high was -the price of flour that many workingmen went hungry. A few of these -workers united to do what they could to supply loaves at cheaper rates. -They had $17 capital. They found an old cellar with an old oven in it, -hired an old baker, and peddled the bread in baskets. Today there is -a fine workingmen's clubhouse in Ghent, called "Vooruit." Across the -façade stands the motto, "The Brotherhood of Workingmen Means Peace on -Earth." This is the outgrowth of the cellar bakeshop. "Vooruit" stands -for everything that is superb in coöperation. Here is not only a large -lecture hall and café and offices of the unions; here is the studio of -Van Biesbroeck, the workman-sculptor; here is a library, and in the -neighborhood are stores, ware-rooms and shops. A few years ago it was -found that many women were ruining their health by the long hours of -service at the looms. "Vooruit" started a coöperative weaving shed, -where the women work eight and three-quarter hours a day.</p> - -<p>The bakery now does almost $1,000,000 worth of business a year; it -makes 110,000 loaves a week. The eight thousand members of "Vooruit" -have six drug stores,<span class="pagenum"><a name="Page_284" id="Page_284">[Pg 284]</a></span> coal yards, many grocery stores and meat shops, -a dry goods store, and other industries. All done by workmen in thirty -years, workmen who were never highly paid and who trained themselves to -do these things.</p> - -<p>They meet every year, the eight thousand members, and vote on the price -of bread. Sometimes it is one cent higher than the commercial rate, but -their dividends more than cover this.</p> - -<p>In Brussels is the famous "Maison du Peuple," the House of the People. -It, too, began with a small bakery, employing two men and turning out -five hundred and fifty-two loaves the first week. Today the "Maison" -has twenty-five thousand members, two great bakeries, six warehouses, -four butcher shops, twenty-five grocery stores, and numerous shops -where various articles are made.</p> - -<p>This "House," standing on Rue Joseph Stephen, cost $375,000 and was -paid for by the Brussels workingmen out of their coöperative funds. -The café, seating eight hundred people, is an animated place; every -one seems content. The office of the savings bank is doing a rushing -business, women and children bringing in the savings of the family for -the week; the committee rooms are full of workmen planning some new -enterprise. In the evening the lecture hall or theatre is crowded, the -two thousand five hundred seats all taken, to see a play produced by an -amateur company, all members of the "Maison."</p> - -<p>All this, and more, in the form of coöperation. In 1907-8 the "Maison" -made a profit of $134,000; of this about three-quarters was distributed -as personal dividends to shareholders. The rest was spent on social -benefits and a reserve fund.</p> - -<p>In Belgium, then, you find all the coöperative activities united in -each city under one general management. It includes groceries and -clothing, medical aid, insurance, savings bank, clubhouse privileges, -lectures, libraries, entertainments.</p> - -<p><span class="pagenum"><a name="Page_285" id="Page_285">[Pg 285]</a></span></p> - -<p>There are one hundred, and sixty-one distributive societies with -119,581 members; sixteen productive societies with 1,583 members. The -Productive Societies include weaving, printing, cabinetmaking, tobacco -and cigars, hardware and bakery. The total coöperative business is -$6,800,000 a year, a large amount when you consider the diminutive size -of the country and the poverty of the people.</p> - -<p>The fact that in all of these countries coöperation is growing at a -rate of increase of 20 per cent to 40 per cent proves that a need for -it exists.</p> - -<p>Now, Uncle Sam, we are starting these coöperative stores here, and -the question with us and the one we are constantly asking, is what -protection are we going to have from the trusts and monopolies which -can, if permitted to do so, destroy us with low prices at any point, -while they rob the people at some other point, to make up the losses, -while ruining us. What we must have is legislation, to protect us, and -if we can get it into this bill, I want it.</p> - -<p><span class="smcap">Uncle Sam</span>: I do not see how any phase of what you have -said can be governed by a financial and banking bill. It is true, -that incidentally you may do a banking business in your coöperative -societies. So far as you do, you ought to conform your practices with -whatever we may decide upon in the way of banking laws. So far as -you buy and sell, or manufacture, you are engaged in production and -commerce, and not in the banking business. Under the circumstances, you -are entitled to an answer, although a little aside from the subject -in hand. Let me tell you, however, right here, and you may set it -down as settled. That, if you start any coöperative associations for -the production or distribution of goods of any kind, you shall have a -square deal. I have been waiting patiently, but getting ready all the -while, to put some of the managers of these monopolies in jail. You can -take my word for it. You are going to have equal opportunities under -the operation of just laws, if there<span class="pagenum"><a name="Page_286" id="Page_286">[Pg 286]</a></span> is any way of giving them to you. -And if your Uncle Samuel understands the situation, I think there is. -Unfair chances, special privileges and monopolies cannot naturally and -properly have any place in a country where all men are born free and -equal under the law. The fact is, the law is sufficient now, but there -is not a public sentiment strong enough to compel the courts to put men -in jail for robbing their fellows through the forms of law; even if it -is known that the laws by which they rob their fellows or are permitted -or enabled to rob their fellows were passed expressly for that purpose. -That is the fault of the times through which we have just passed. The -time is now at hand when all this is to be reversed. The people have -come to realize and appreciate the fact that it is ethically, morally, -and justly speaking, as wrong to rob a man through the forms of law, -as for the bully to fell a man in the streets and pick his pockets. -The people are forming new ideals, and the judges are getting new -ideas. These new ideals, and these new ideas, will soon handcuff and -incarcerate the business culprits, the business bullies, just as the -ancient ideals of the people, and the old ideas of the judges have, in -the past, put the physical bully and the material thief in the dark, -dank dungeon. I have altogether too many men, who are always inquiring -how near they can go to the jail door and not get in. You mark my word, -I am going to push some of them in very soon now. What I want is a -nation of men who are imbued with a sense of justice and fair play in -business; and who will regard business relations as moral obligations, -and paramount to the technical letter of the law. When that day comes, -one banker will not want his fellow-bankers to carry his reserves for -him. The principle is the same, whatever the relation of men may be; -therefore, you can take my word for it, that all those who want to -coöperate to secure a greater degree of the profits of their labor, a -greater degree of justice among their fellows, will find Uncle Samuel -coöperating with them, in<span class="pagenum"><a name="Page_287" id="Page_287">[Pg 287]</a></span> the preparation and execution of those laws -which will make for a juster Government. Since this Government springs -from the people, and belongs to the people, no part of the people, -certainly no small part of the people, should be able to take unfair -advantages and undue profits, by any legalized special privileges, or -by the power of monopoly. I say to you now, that these should be, and -will be destroyed, and that all men shall be equal before and under the -law. This is the predestined purpose of this Government, and it will -never come into its fulfillment until you learn, my boys, that you are -your brother's keepers.</p> - -<p><span class="smcap">Mr. Merchant</span>: Uncle Sam, that's pretty good preaching; but how -are you going to apply it to this banking question?</p> - -<p><span class="smcap">Uncle Sam</span>: Did not Mr. Laboringman just appeal to me to find -out whether coöperative societies were going to have a fair show? I -have just told him "Yes," and I intend they shall have it, and I know -of no better place to begin than here and now. I am going to construct -two or three pieces of machinery—a guillotine for the monopolies, -and an electric chair for special privileges, and concoct a barrel of -anesthetics for stealthy, statutory stealing.</p> - -<p><span class="smcap">Mr. Lawyer</span>: But all this kind of legislation must come under -the sphere of the Sherman Anti-Trust Law. I think no one will contend -that any aspect of coöperation, as represented by Mr. Laboringman, -should be incorporated in our banking bill.</p> - -<p><span class="smcap">Mr. Banker</span>: I agree with both Mr. Farmer and Mr. Lawyer, that -we cannot make any provision for it at this stage of its development -in this country; but who shall prophesy about a movement that has -spread over the world, as this has, and is now growing at such a rapid -rate? It is estimated that at least ten million in Great Britain are -interested in it; more than five million in Germany, and that the -outstanding coöperative investments in Continental Europe must exceed -$5,000,000,000<span class="pagenum"><a name="Page_288" id="Page_288">[Pg 288]</a></span> by this time. Of course, these figures mean some -banking sooner or later, in this country, when the movement once gets -under way.</p> - -<p><span class="smcap">Mr. Farmer</span>: Yes, I agree to that, but any attempt on our part -at this time to legislate in advance, would do more harm than good.</p> - -<p><span class="smcap">Mr. Laboringman</span>: That is probably true, as it might interfere, -as you say, with the movement. All I ask then, is that we have a fair -field, so that we can develop along natural lines, and be protected in -the exercise of our mutual coöperative rights. I thank you, gentlemen, -for giving me, and my particular cause, so much of your time.</p> - -<p><span class="smcap">Uncle Sam</span>: Mr. Laboringman, your cause is their cause. Your -cause is my cause. Your cause is our cause. Your cause is the cause of -humanity. The principles upon which your cause rests, pushed to their -logical conclusion, will secure social and industrial justice. There -are many who have taken millions, yes, hundreds of millions, through -the forms of law, but without any ethical right whatever. From them -these millions will be taken away in time, through the forms of law; -through the power of taxation by progressive income and inheritance -taxes, and the injustice of today will be righted by the justice of -tomorrow.</p> - -<p><span class="smcap">Mr. Banker</span>: Uncle Sam, you have suggested a programme outside -of banking legislation; but I must confess incidental to the cause -presented by Mr. Laboringman.</p> - -<p><span class="smcap">Mr. Farmer</span>: Gentlemen, we have stayed longer tonight than on -any previous night, and I must go now. So, good night.</p> - -<p><span class="smcap">Uncle Sam</span>: Mr. Farmer has forced an adjournment.</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_289" id="Page_289">[Pg 289]</a></span></p> - - - - -<p class="ph2"><a name="THIRTEENTH_NIGHT" id="THIRTEENTH_NIGHT">THIRTEENTH NIGHT</a></p> - -<p class="center">THE CLEARING HOUSE</p> - - -<p><span class="smcap">Uncle Sam</span>: We are on the very last lap tonight, as I -understand the situation. We have had the Standard of Value, Money, -Currency, Exchange, Value, Price, Property, Wealth, Credit, Reserves, -the Bank; and now comes the settlement of the claims against the bank -in the shape of checks, drafts and bills of exchange.</p> - -<p>When we finish this conversation we can, I hope, begin to put things -together, that is, make use of our material.</p> - -<p><span class="smcap">Mr. Banker</span>: Uncle Sam is right, we shall be ready to do some -constructing when we have disposed of the Clearing House, which is -destined to play a gigantic part in the future of American banking. -This is true because the Clearing House is bound to become the -machinery by which all American banks are to coöperate and protect -themselves through their combined strength; and it will be a splendid -exhibition of what true coöperation can accomplish.</p> - -<p>The character and origin then of the Clearing House, its present -and prospective function, must be carefully studied by us, if this -assumption is correct.</p> - -<p><span class="smcap">Mr. Merchant</span>: The character of the Clearing House, or -the principle upon which it works, is simple enough; although its -operations are vast, and its achievements in times of financial stress -have been most striking, even though not always satisfactory.</p> - -<p>The principle of clearing is, as I have just said, simple indeed. If -I have a claim against Mr. Manufacturer, and he has an equal claim -against me, we clear them by exchanging our claims with each other. If -one of you gentlemen should sue another for one hundred dollars, and -the other should make a defense by pleading an offset of one hundred -dollars, and the court should allow<span class="pagenum"><a name="Page_290" id="Page_290">[Pg 290]</a></span> both claims, you would clear them -through the court, the one offsetting the other; that is all there is -of the principal involved.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Merchant, you have put this matter more simply -than any book has ever done. Indeed, I had not reduced the transaction -to such simple terms. To put it in the form of a definition, as you -stated, it would read this way: "To offset one claim against another, -and pay the balance, if any, is clearing them."</p> - -<p>I had thought that it would be my particular task to explain this -transaction of clearing, and after a good deal of meditation I -had worked out a thought which I am sure is next best, after your -definition; and it will take us one step nearer to the Clearing House, -without getting into any of its complexities. My illustration is this: -if there were but one bank in a town, and all the people did their -business through this single bank, by depositing their money and -checks, and then paid all their bills, with checks on the bank, apart -from any outside business, every debt in the town would be paid by -check, and there would be no need of any money at all as the claims and -debts would be exactly equal, and would always cancel each other to a -cent.</p> - -<p><span class="smcap">Mr. Lawyer</span>: What you have said about one bank in a town is -equally true of two, three or four, or any number of banks, if you -assume that every person in town does his entire business through the -banks, providing, of course, that the banks get together, and offset -all the checks and drafts they receive during the day. There might be -something to pay from day to day for the time being, but all would be -adjusted in the end, without any variation or difference.</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so, but when you get those bankers -together, for the purpose of trading checks, you have created a -Clearing House.</p> - -<p>Stephen Colwell says: "Clearing is beyond all question, the simplest, -the most economical, and when ap<span class="pagenum"><a name="Page_291" id="Page_291">[Pg 291]</a></span>plicable, the most efficient of all -modes of paying debts; it is precisely analogous to balancing accounts."</p> - -<p>James G. Cannon, author of the leading work upon the history of -American Clearing Houses, describes a Clearing House "as an office, -established by the banks of a city, where their representatives meet -daily to exchange drafts and checks, and adjust balances." Again, "as a -device to simplify and facilitate the daily exchanges of items, checks, -drafts and bills of exchange, and the settlement of balances among the -banks, and a medium for muted action upon all questions affecting their -mutual welfare."</p> - -<p>You would think that the Clearing House was such a simple matter, and -such a great advantage that a Clearing House would have been thought -of, and put into operation as soon as banks got under way, but not so. -Their development and establishment, as we know them today, has been -slow indeed, and the early history of their origin most interesting.</p> - -<p>Jevons says: "About the year 1775, a few of the London bankers hired -a room where their clerks could meet to exchange notes and bills, and -settle their mutual debts. The society was of the nature of a strictly -private club; the public knowing nothing about it, and the transactions -being conducted in perfect secrecy. Mr. Gilbart tells us that even in -this form it was regarded as a questionable innovation, and some of the -principal bankers refused to have anything to do with it. By degrees, -however, the convenience of the arrangement made itself apparent, more -bankers were admitted to the Society, and a distinct committee and -set of rules were formed for its management. Although it remains to -the present day a private and voluntary association, unchartered, and -in fact unknown to the law, the Clearing House has steadily grown in -importance, and in the publicity of its proceedings.</p> - -<p>"Several important extensions of the clearing work have been made in -the last twenty-five years. After the<span class="pagenum"><a name="Page_292" id="Page_292">[Pg 292]</a></span> rise of the London joint stock -banks, subsequent to 1833, they were for a long time refused admittance -to the Clearing House; but in June, 1854, they were at last allowed -to join the Association. The Bank of England long remained entirely -outside of the confederation, but more recently, it has become a -member." (Written in 1875.)</p> - -<p>The establishment of Clearing Houses in English cities, outside of -London, did not take place until a century, almost, after that in -London went into operation, or as late as 1872, which was just five -years short of a century later.</p> - -<p>As early as 1831 Albert Gallatin presented a plan for a Clearing House -in New York, and so perfectly outlined the scheme, finally adopted, -that I want to read it to you. And I want to impress upon you the fact -that Gallatin was one of the very ablest economists that we have ever -produced.</p> - -<p>"There is a measure which though belonging to the administration of -banks, rather than to legal enactment, is suggested on account of its -great importance. Few regulations would be more useful in preventing -dangerous expansion of discounts and issues on the part of the city -banks, than a regular exchange of notes and checks, and an actual -daily or semi-weekly payment of the balances. It must be recollected -that it is by this process alone that a bank of the United States has -ever acted or been supposed to act as a regulator of the currency. Its -action would not in that respect be wanted in any city, the banks of -which would, by adopting the process, regulate themselves. It is one -of the principal ingredients of the system of the banks of Scotland. -The bankers of London, by the daily exchange of drafts at the Clearing -House, reduce the ultimate balance to a very small sum; and that -balance is immediately paid in notes of the Bank of England. The -want of a similar arrangement among the banks of this city produces -relaxation, favors improper expansion, and is attended with serious<span class="pagenum"><a name="Page_293" id="Page_293">[Pg 293]</a></span> -inconvenience. The principal difficulty in the way of an arrangement -for that purpose is the want of a common medium other than specie for -effecting the payment of balances. Those are daily fluctuating; and a -perpetual drawing and redrawing of specie from and into the banks is -unpopular and inconvenient.</p> - -<p>"In order to remedy this it has been suggested that a general cash -office might be established, in which each bank should place a sum in -specie, proportionate to its capital, which would be carried to its -credit in the books of the office. Each bank would be daily debited, -or credited, in those books for the balance of its account with all -the other banks. Each bank might, at any time, draw for specie on the -office for the excess of its credit, beyond its quota; and each bank -should be obliged to replenish its quota whenever it was diminished one -half, or in any other proportion agreed on. It may be that some similar -arrangement might be made in every other county, or larger convenient -district of the State. It would not be necessary to establish then a -general cash office. Each of the banks of Scotland has an agent at -Edinburgh, and the balances are there settled twice a week, and paid -generally by drafts on London. In the same manner the balances due by -the banks in each district might be paid by draft on New York, or any -other place agreed on."</p> - -<p>James C. Hallock, the highest authority in this country upon Clearing -House operations, has so succinctly stated how the checks were disposed -of, before the Clearing House was established, that I am going to read -that to you, and show you two diagrams, which we will keep on file for -future reference. "In 1853, the Banks of New York City organized a -Clearing House, the first in America; until then they had done business -without one. The method had been laborious.</p> - -<p>"Each of the fifty-two banks had daily received over its counter, or by -mail, checks on every other bank in town. To collect them the banks had -opened deposit ac<span class="pagenum"><a name="Page_294" id="Page_294">[Pg 294]</a></span>counts with one another. Each had become a depositor -in fifty-one city banks. Each also had had the others as depositors and -kept fifty-one accounts with them. The pass books used had been of the -ordinary form as 'Merchants' Bank, in account with Chatham Bank.'</p> - -<p>"According to the common usage of depositors, each bank would have sent -messengers to fifty-one banks daily, and each would have had fifty-one -messengers come to its own counter from the other banks. They had -done a little better than that. The Chatham Bank, for instance, would -have checks on the Merchants' Bank. It would list them on a deposit -slip, charge the Merchants' Bank with the amount in its pass book, and -place the checks in the book which the messenger would now carry to -the Merchants' Bank, and deliver to its Receiving Teller. The latter -would remove the checks, and having some on the Chatham Bank with -list attached, he would credit his bank with the amount in the pass -book, place the package in it and hand it back, thus refilled to the -messenger.</p> - -<p>"This exchange of checks by two banks at the counter of one was a -rudimentary clearing which, like all bank clearings, saved labor, time -and trouble. To deposit these checks in the customary manner would -have required two messengers and two pass books. By this clearing -arrangement one messenger and one pass book sufficed. Perceiving the -sensibleness of this saving, the New York banks had for many years -tacitly agreed that each should send messengers to one-half of the -banks for six months, and the other half for the next six months. They -had thus reduced the number of banks to be visited daily by each from -fifty-one to twenty-six banks, and accordingly reduced the number of -pass books in use by each.</p> - -<p>"The accompanying diagram representing the banks arranged in a circle, -with two of them sending messages to twenty-six each, indicates how -toilsome the exchange of checks still was, up to the formation of the -New York<span class="pagenum"><a name="Page_295" id="Page_295">[Pg 295]</a></span> Clearing House, which commenced operations on Oct. 11, 1853; -though only two banks are represented as sending, in fact, all were -really sending, or being sent to; for every bank sent to all others -that did not send to it.</p> - -<p class="center"> -<img src="images/illus04.jpg" alt="pic" /> -</p> -<p class="caption"> <span class="smcap">Without a Clearing House in New York.</span><br /> - -<i>Diagram showing a Bank Messenger's 26 Trips to Exchange Checks with -other Banks.</i></p> - -<p>"When two banks exchanged checks the amounts were almost always -unequal, leaving a balance for one to pay and the other to receive. -Every day every bank, if they had settled daily, would have had -fifty-one balances to pay, or receive. They were payable in coin. -Instead of attempting the daily adjustment of accounts, which<span class="pagenum"><a name="Page_296" id="Page_296">[Pg 296]</a></span> would -have consumed hours, and caused much annoyance, it had become a tacit -agreement that a weekly settlement of balances should be made after -the exchange of Friday morning. On settlement day, the cashier of -each bank would draw checks for every debt due to him by other banks, -and send out the messengers to collect them. Over fifty porters were -out all at once, wrote a bank officer of the time, with an aggregate -of several hundred bank drafts in their pockets, balking each other, -drawing specie at some places, and depositing it in others, and the -whole process was one of confusion, disputes and unavoidable blunders -of which no description could give an exact impression.</p> - -<p>"The second diagram, representing the fifty-two banks in a circle -around the Clearing House, indicates how completely all this -misdirection and waste of energy stopped upon the installation of that -marvelous method which affects such amazing economy. Every bank now -sends straight to a common point. Every bank sends there all the checks -it has on all the city banks, and charges the whole amount against an -imaginary debtor—the Clearing House. Every bank receives there all the -checks all the other city banks have on it, and admits its indebtedness -for the whole amount to an imaginary creditor—the Clearing House. The -balance can now be struck. If the bank loses, it pays the Clearing -House the difference. If the bank gains, the Clearing House pays the -bank; and there is the end of it, reached by the shortest path with the -greatest ease and quickness.</p> - -<p>"The principal results may be summarized:</p> - -<p>"The Clearing House saved every bank in New York City on the average -twenty-six trips daily to exchange checks with other banks. It -abolished sending to other banks for this purpose. It substituted one -trip to the Clearing House—an economy of 96½ per cent.</p> - -<p>"The Clearing House saved every bank in New York the payment or -receipt, mostly in coin, of fifty balances on settlement day (Friday). -It abolished settling at the<span class="pagenum"><a name="Page_297" id="Page_297">[Pg 297]</a></span> counter of banks, except for checks, -sent through the clearing and returned 'not good.' It substituted one -payment, or receipt, of a net balance to or from the Clearing House, an -economy of 98 per cent.</p> - -<p class="center"> -<img src="images/illus05.jpg" alt="pic" /> -</p> -<p class="caption"> <span class="smcap">With a Clearing House in New York.</span><br /> - -<i>Diagram showing Single Trips to Exchange Checks with all other Banks -in the City.</i></p> - -<p>"The Clearing House saved the banks of New York all the drudgery, -irritation and anxiety which had made daily settlements impracticable. -It abolished the weekly settlement; it substituted daily settlements to -the Clearing House—an economy of considerable importance.</p> - -<p>"The Clearing House saved all the banks of New York<span class="pagenum"><a name="Page_298" id="Page_298">[Pg 298]</a></span> the trouble of -keeping accounts with one another. It abolished accounts of city banks -with city banks—closed 2,652 accounts. It substituted one account for -each bank with the Clearing House—an economy of 98 per cent.</p> - -<p>"These savings, not to mention others, proved beyond dispute, that -clearing checks economizes."</p> - -<p>It was twenty-two years before Gallatin's suggestion was adopted, -and a Clearing House was established, which, as stated, was in 1853. -The first clearing was effected on Oct. 11, 1853, and amounted to -$22,648,109.87. The balances amounted to $1,290,522.28.</p> - -<p>Boston followed in the footsteps of New York, and established a -Clearing House in 1856, and Philadelphia in 1858.</p> - -<p>The next step in the line of progress, in the matter of bank clearings, -came, as Hallock says, as a result of cheap postage and the railroads -in England, and included country checks.</p> - -<p>He says: "Somewhat less than half a century ago London recognized the -fact that the out-of-town check was an indispensable instrument of -civilized man, at least in Great Britain. He would use it, contrary to -custom, and despite the remonstrances of city bankers, who thought only -London drafts should be sent to London.</p> - -<p>"A product of modern times and method, country checks came to London -with the railroads. Few at first, when the average postage on a letter -consisting of a single sheet, was nine pence, and another sheet, or -any enclosure, however small, doubled the rate, making the postage -on a letter enclosing a check thirty-six cents, on the average. With -penny postage established in 1840, regulating the rate on a letter by -its weight (one penny per half ounce), without regard to the number of -sheets, or enclosures, country checks began to stream into London.</p> - -<p>"In 1858 the city bankers, perceiving their inability to suppress, or -exclude them, decided to adopt the sugges<span class="pagenum"><a name="Page_299" id="Page_299">[Pg 299]</a></span>tion of some country bankers, -and collect English and Welsh checks through the Clearing House.</p> - -<p>"The idea originated in the spring of 1858 with a young country banker, -William Gillett, the son and grandson of country bankers. He visited -the provincial banks, and interested them in the project. When prepared -to carry it out the country bankers met in London on Sept. 29th of that -year, and communicated the plan to the London clearing banks to obtain -their support. The Londoners opposed it; they suggested doubt as to the -utility and feasibility of any change in existing systems. However, -their coöperation being solicited, the London bankers held a meeting at -the Clearing House on Oct. 12th, to take the matter into consideration, -and appointed a special committee to confer with the country bankers.</p> - -<p>"Then, on reflection, it appeared to another young man, the son and -grandson of clearing bankers, that the organization of a large and -entirely new establishment, which the country bankers proposed, was -unnecessary, as the London bankers could give them all the facilities -they required, without any great additional labor, or expense. This -junior officer in the private bank of which his father was the head, -has since gained world-wide celebrity in science and literature as Sir -John Lubbock (now Lord Avebury). Even with the aid of such talent and -opportunities as his, it required unflinching resolution to establish -country clearing in London. After devising a method that conformed as -closely as practicable to actual usage in clearing city banks, young -Lubbock had to call at every London bank, at most of them several -times, and explain fully the exact manner in which he proposed to -carry out the system. It was very difficult for him to convince his -brother bankers. Finally the special committee requested him to meet -the principal clerks of the different banks. These clerks unanimously -recommended the adoption of his plan.</p> - -<p>"The London bankers then adopted it, and on Nov.<span class="pagenum"><a name="Page_300" id="Page_300">[Pg 300]</a></span> 16th submitted it -to their country correspondents. The plan for an independent country -Clearing House was abandoned by the country Bankers' Committee on Nov. -19th, and the clearing of country checks commenced in London on Nov. -23, 1858. In less than eight weeks, after the idea was broached in -London, it was put in practice there."</p> - -<p>This system covers 60,000 square miles.</p> - -<p>Mr. Hallock says, "Sedalia bankers unconsciously imitated the -London plan, but modified it, as had been done abroad elsewhere; -for out-of-town checks are cleared, not only in London, but also -in other English cities, as Manchester, Liverpool, Birmingham, -Newcastle-on-Tyne, Leeds, Sheffield and Bradford, in some eight Scotch -towns and Dublin."</p> - -<p>The next advance, which is undoubtedly destined to revolutionize -clearing in the United States, was started in Boston in 1899 by making -New England a free check zone.</p> - -<p>Hallock says: "The clearing of out-of-town checks, though opposed for -years by a small minority of Boston banks, was successfully established -at Boston in 1899. The system includes checks on all points in New -England, and maintains a free zone of nearly equal extent.</p> - -<p>"Proposed in 1877 and 1883, the Boston movement at first resulted in -a deadlock, based on the supposed importance of having certain city -banks, who declined to come in, participate. After twenty-two years -through another movement started among the Connecticut banks, the -deadlock was broken by substituting the manager of the Boston Clearing -House for any abstaining members, and giving him checks on their -correspondents to collect. The association finally decided that all -checks passed through the out-of-town clearing should be collected by -him.</p> - -<p>"The only opposition exhibited by country banks has been in the refusal -of a few to pay the Clearing House in full for their checks, deducting -so-called exchange.<span class="pagenum"><a name="Page_301" id="Page_301">[Pg 301]</a></span> Boston checks passed through the Clearing House -are paid in full, or not at all. New England checks should be. This -can be effected, either as in London, by Boston banks returning -checks, drawn on such banks, as not collectible through the Boston -Clearing House, or by the manager, charging to collect checks, bearing -indorsement of the non-par banks, which would cut them off from the use -of the New England free list, now enjoyed by them, without reciprocity; -that is, without being themselves on the free list."</p> - -<p>Mr. Charles A. Ruggles, manager of the Boston Clearing House, says: "In -the thirteen years that we have made collections in this way, we have -collected over eight thousand million dollars ($8,000,000,000).</p> - -<p>"Our cost now is, and has been for ten years, seven cents for a -thousand dollars. That includes the clerk hire of fifteen men, postage -and stationery, and we collect seven or eight hundred million dollars -a year; furthermore, 90 per cent of the banks in New England remit at -par. We collect 95 per cent of it in twenty-eight hours."</p> - -<p>It is an interesting and important historical fact that the country -banks of England and Wales forced the clearing of country checks at -London; so, too, the banks of Connecticut, thirty of them in number, -by combining under the advice and leadership of Mr. James C. Hallock, -succeeded in having the plan adopted by the Boston Clearing House. As -a result New England became a free check zone. I think we should note -in this connection that the father of Mr. James C. Hallock was the -organizer, if not, indeed, the originator of the New York Clearing -House in 1853.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Mr. Lawyer, you talk and talk and talk, when -you could say what you really have to say, in one-tenth of the time, -and in about as many words. We have spent a whole hour in the history -of the origin of the Clearing House, and have just learned what I could -repeat in about two minutes.</p> - -<p><span class="pagenum"><a name="Page_302" id="Page_302">[Pg 302]</a></span></p> - -<p><i>First</i>: London, in a kind of a sneaking way, began to clear checks -in 1775, and kept a Clearing House in a blind alley. Nothing more was -done in England by way of advance until 1858, when the country banks -of England and Wales, covering a territory of 60,000 square miles, by -threatening to start their own Clearing House in London, compelled the -London banks to clear their checks. Not till 1872, nearly one hundred -years later, did any other city adopt it. But today many cities in -Great Britain are clearing country checks.</p> - -<p><i>Second</i>: Gallatin proposed a Clearing House for New York in 1831. -Hallock established it in 1853. Boston and Philadelphia followed in -three and five years, respectively. In 1899, New England became a free -check zone, all checks being received at par at Boston. Since then -several other cities have followed suit. Atlanta, Macon, Nashville, -Sedalia and Kansas City. Now, I have said everything you said. Next!</p> - -<p><span class="smcap">Uncle Sam</span>: Mr. Laboringman always gets a "B" line on things.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is true in substance, but the very fact that -Mr. Laboringman has stated the case so well is the greatest compliment -he could pay us. It is only by iteration and reiteration, word upon -word, and precept upon precept, that has made this whole subject so -plain to all of us. We have made haste by going slowly, and we don't -want to get into a hurry now.</p> - -<p><span class="smcap">Mr. Banker</span>: I agree with you, Mr. Lawyer, patience has been -our best and truest friend in all these talks, and we should not desert -her now.</p> - -<p><span class="smcap">Mr. Laboringman</span>: That's all right, but let us get down, right -down to business. Just where are we at now? And where are we going to -in the Clearing House matter?</p> - -<p><span class="smcap">Mr. Banker</span>: We are now going to discuss the Clearing House -from five points of view.</p> - -<p><i>First</i>: The Clearing House, from its original standpoint—New York -was the pioneer, and is probably our<span class="pagenum"><a name="Page_303" id="Page_303">[Pg 303]</a></span> highest type. Its clearings are -certainly by far the largest in the world.</p> - -<p><i>Second</i>: The clearing of country checks, of which Boston was the -pioneer in a large way, although preceded in point of time by Sedalia, -Mo., a country city of only 15,231 people in 1900.</p> - -<p><i>Third</i>: The examination of all banks clearing through the Clearing -House, of which Chicago was the pioneer, starting June 1, 1906—and -probably the best type, although there are today about twenty cities -following in her footsteps, including the following: Minneapolis, Feb. -1, 1907; St. Paul, May 1, 1908; St. Louis, Oct. 11, 1907; Los Angeles -and San Francisco following upon the heels of St. Louis; Kansas City, -March 1, 1908; St. Joseph, the early part of 1909; Philadelphia, April -5, 1909; New York, 1912, with others, not mentioned, making twenty in -all.</p> - -<p><i>Fourth</i>: The centralization of the reserves of the banks at the -Clearing Houses, as a matter of convenience in settling balances, and -carrying on their common business generally, but subsequently for the -purpose of facilitating the issuance of Clearing House certificates.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Let me repeat to you, gentlemen, what may have -been stated before, that there is no law providing for the existence of -the London Clearing House, nor is there a single law in a single state -in any way authorizing or affecting a single Clearing House in the -United States. Therefore, all that they have done has been without any -authority of law. They are a law unto themselves; and it is not at all -certain that that has not been wise. Indeed, I am of the opinion that -it has been most fortunate for the business interests of the country. -What do you think, Mr. Banker?</p> - -<p><span class="smcap">Mr. Banker</span>: I am of the same opinion; in confirmation let us -return to the consideration of the points suggested.</p> - -<p><i>First</i>: The New York Clearing House, as stated, had its first clearing -Oct. 11, 1853. Mr. Cannon says that<span class="pagenum"><a name="Page_304" id="Page_304">[Pg 304]</a></span> not until August, 1854, did the -New York Clearing House have a constitution. This instrument, with -the subsequent changes, is in force today, and constitutes as perfect -an illustration of the evolution of law by practice, as can be found -anywhere.</p> - -<p>This institution had various homes until it took up its present -quarters in one of the most beautiful buildings in the whole -country—worthy in every way of its use and purpose. It has cost -$1,130,000 and is owned by the Clearing House Banks of New York, under -the name of the Clearing House Building Company.</p> - -<p>Mr. Cannon says: "The administration of the Clearing House is vested in -a President, Secretary, Manager, Assistant Manager, and five standing -committees.... The manager under the control of the Clearing House -committee, has full charge of all business at the Clearing House, -but before entering upon his duties, he is required to give bond, in -the sum of $10,000.... Although the Constitution provides for the -appointment of a manager, annually, it is the custom to retain the same -one in office, year after year. As a matter of fact, there have been -only three managers in the whole history of the association.... The -Clearing House committee is clothed with almost absolute power, being -second in authority only to the association itself. The ablest and -most experienced bank officers, therefore, are usually chosen to serve -on it. The committee is elected annually. The association at present, -1912, consists of sixty-three members and twenty-two non-members, and -the United States Sub-Treasury, located at New York. The latter makes -its exchanges only at the Clearing House, its balances being settled at -its own counter. It has no voice in the government of the association, -and pays a nominal sum for actual expenses. The privilege which the -Sub-Treasury enjoys of making its exchanges through the Clearing House -is a matter of great accommodation, both to the Sub-Treasury and to the -banks. The New York post office clears through one of the members, but<span class="pagenum"><a name="Page_305" id="Page_305">[Pg 305]</a></span> -renders no compensation to the association for the privilege.</p> - -<p>"The membership of the association, since its organization, has been -constantly changing, owing to the admission and expulsion of members -and voluntary withdrawals, as provided by the constitution.... A bank, -the capital of which does not exceed $5,000,000, must pay $5,000; a -bank, the capital of which exceeds $5,000,000, must pay $7,500. Any -member increasing its capital is required to pay in accordance with -those rates."</p> - -<p>In 1899, the large number of trust companies that had come into -existence attracted the attention of the Clearing House and the -Clearing House Committee adopted a rule that no trust company could -clear that had not been in existence for at least one year, and that -every trust company clearing through a member shall furnish a weekly -statement of its condition to the manager of the association.</p> - -<p>The New York State law did not then provide that any trust company -should carry cash reserves, although state banks were required to -have 15 per cent cash in their vaults. It was tacitly understood that -all banks clearing, should have 25 per cent reserve. Of course the -trust companies could ride the banks, and they took advantage of their -opportunity. This caused great dissatisfaction, and rightly so. On Feb. -11, 1903, the association passed a resolution requiring that every -institution (not a bank required to maintain specified reserves) "shall -after June 1, 1903, keep in its vaults a cash reserve, equal to 5 per -cent; after Feb. 1, 1904, 7½ per cent; after June 1, 1904, not less -than 10 per cent, nor more than 15 per cent, as the association might -determine."</p> - -<p>The trust companies kicked and protested, and almost, without -exception, withdrew from the Clearing House; but, after the panic of -1907, the New York legislature passed a law requiring them to carry 15 -per cent cash reserves.</p> - -<p>On June 13, 1908, the association passed a resolution<span class="pagenum"><a name="Page_306" id="Page_306">[Pg 306]</a></span> compelling all -trust companies, who were members, to carry a cash reserve of 25 per -cent, and on Jan. 16, 1908, the association for the first time in its -history made a rule compelling all its members to keep a cash reserve -of 25 per cent.</p> - -<p>Every member of the New York Clearing House is required to furnish -to the manager, weekly, for publication, a statement showing its -condition, showing the average amount of loans, and discounts, specie, -legal tender, notes in circulation and deposits. The capital and net -profits are also given, this being the only association which gives the -latter item.</p> - -<p>Along the same line of legislation controlling the action or conduct -of its members, the Clearing House committee, having plenary power to -do so, passed a rule—determining just what every member and bank, -clearing through members, should charge for collections.</p> - -<p>The rule made some cities free, that is, there were no charges for -collection made compulsory. Some cities were under a fixed charge -of one-tenth of one per cent, and others under a fixed charge of -one-quarter of one per cent. Upon April 3, 1899, this rule became -obligatory, and if any member violated it, the penalty was $5,000 for -the first offense; for the second offense it might be expelled from the -association.<a name="FNanchor_1_1" id="FNanchor_1_1"></a><a href="#Footnote_1_1" class="fnanchor">[1]</a></p> - -<p><span class="smcap">Mr. Laboringman</span>: That is precisely the same rule we have in -our Union, only our limit is not so high. We fine a member $5.00 for -his first offense, and for the second offense we take away his card. By -Jove, that is a hot proposition. And these are the very fellows who are -always cussing us because of our Union rules.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I want to tell you something else, gentlemen, that -combination among the banks is clearly in restraint of trade and in -violation of the Sherman Anti-Trust Law. Anybody who wants to can bring -those banks to time.</p> - -<p><span class="pagenum"><a name="Page_307" id="Page_307">[Pg 307]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: Now, gentlemen, don't you perceive that this -institution, step by step, has evolved its own laws, or rules of -action, slowly developing its present system, and regulating and -controlling the conduct of those outside institutions which enjoy its -privileges? The story of this Clearing House is the record of all of -them in principle. They are, each and every one of them, self-centered, -self-contained, and a law unto themselves.</p> - -<p>The operation of the New York Clearing House is practically that of all -the others. Its room is sixty feet square. Four rows of desks occupy -the floor. Each member has its own numbered desk separated from its -neighbors' by a wire net work.</p> - -<p>At one minute to ten o'clock the manager sounds the gong and all are -instantly ready for the exchange which begins promptly at ten o'clock.</p> - -<p>At the expiration of forty-five minutes usually, but sometimes in -thirty-seven minutes, and even in thirty-five minutes, every member of -the association has in its possession all the paper drawn upon itself, -which the other members have credited on their books, and has delivered -all the paper drawn upon all the other members of the association in -exchange which it has credited upon its books.</p> - -<p>Mr. Cannon states that the amount delivered by any member has never -been exactly equal to the amount received but has come within one -cent upon a single occasion. To complete the clearing transaction, it -is necessary, of course, for those who owe anything to pay it to the -Clearing House, and for the Clearing House in turn to distribute what -is paid to it among those who are entitled to receive it.</p> - -<p>As a matter of convenience for the purpose of settling the balances, -the members of the Clearing House deposit with the Clearing House gold -coin, gold certificates, silver certificates and legal tender notes, -and receive clearing house certificates, therefor, in denominations of -$1,000, $2,000, $3,000, $4,000, $5,000, $10,000, $20,000, $50,<span class="pagenum"><a name="Page_308" id="Page_308">[Pg 308]</a></span>000 and -$100,000 each. All notes of a smaller denomination than $5.00 should, -according to practice, be put up in packages of not more than $5,000. -All packages are sealed and marked with the name of the institution -depositing them with the amount, date and kind of money they contain.</p> - -<p>The banks, also, deposit at the Sub-Treasury in New York gold coin, for -which certificates are issued by the Assistant United States Treasurer. -These certificates are in two denominations, $5,000 and $10,000 each; -the holders of these certificates are the absolute owners of them.</p> - -<p><i>It is stated upon high authority that the amount of such money now -deposited at the various Clearing Houses throughout the United States -exceeds the sum of $200,000,000. In other words, that we have today in -the United States centralized our reserves to that extent for certain -purposes.</i></p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, your history of the development -of the Clearing House and your description of its operations have -certainly been very clear, and most interesting. The second point -you mention, the clearing of country checks, will appeal to all the -business men of the country as it has to me for a long time; especially -since I have a great deal of business up in New England, where this -practice has been in force since 1899. I was up there the other day, -and my partner took me to see Mr. Charles A. Ruggles, the manager -of the Boston Clearing House. After he had described the system of -clearing country checks, he handed me a little pamphlet giving the -history of its development in Boston and setting forth its reasons and -advantages so graphically, that I am going to quote from it in telling -you gentlemen about it.</p> - -<p>Let me say to you that I am confident that when this principle is -fully understood, and carried out, as it soon will be, to its logical -conclusion, checks, precisely like our bank notes, will be par -everywhere in the United<span class="pagenum"><a name="Page_309" id="Page_309">[Pg 309]</a></span> States. I am fully aware that you are greatly -surprised at this statement; but take my word for it and remember that -what I have prophesied is going to happen. <i>Free zones are going to -increase until every check will be free within its own zone, and almost -immediately as a consequence, the zone centers will settle with each -other daily; that is all checks will not only be free in their own -zones, but will be free between all zones, that is all checks will be -par everywhere.</i></p> - -<p>However, let me tell you how it developed in New England. Ruggles -describes it in these words:</p> - -<p>"That the use of checks has increased rapidly in the past ten years -is an undisputed fact, and the question of how to handle them to -advantage, or without loss, is a problem that has caused much -discussion. All large cities have had the same experience, and have -dealt with the question in various ways. Rather than ask his bank -to draw exchange, the country merchant sent his check to Boston in -payment of his account, and in this way, he was encouraged by the city -merchants who deposited the check in his bank, where it was received at -par. This continued until the volume handled reached such proportions -as to make the item of exchange quite prominent in the expense account, -which the city bankers sought to reduce by various methods. In many -cases checks were not sent directly to the banks upon which they were -drawn, some other route being selected to avoid exchange charges; as, -for example, a check on Stonington, Conn., deposited in Westerly, R.I., -only six miles distant, after many days, during which it traveled one -thousand miles, perhaps, passed through Providence, Boston, Newport, -then New Haven and New London and reached its destination bearing the -endorsement of nine banks. Mr. Cannon in his work on Clearing Houses -cites a remarkable case of zigzagging to avoid collection charges; -a check on Sag Harbor, N.Y., paid to a Hoboken firm was eleven days -reaching its destination. Had it been collected through the New York -Clearing House ten days'<span class="pagenum"><a name="Page_310" id="Page_310">[Pg 310]</a></span> time, fifteen hundred miles of travel and a -vast amount of clerical work might have been saved."</p> - -<p>Here are two diagrams showing the route and the indorsements of the -check to which Mr. Cannon referred, taken from Mr. Cannon's work on -Clearing Houses.</p> - -<p>Mr. Ruggles further says: "The subject of the collection of the country -check in a more expeditious and economical method than that then in -force in Boston, was first agitated in 1877, when a committee of five -was appointed to consider the question. A majority reported that the -annual cost to the banks of Boston was two hundred and twenty-nine -thousand dollars for collecting New England checks and recommended -that the business be consolidated, which would very materially reduce -labor and expense. This report was received and placed on file. A -minority report was also submitted in opposition to any change, on the -ground that it would sever the social and business relations which then -existed, and the clerical force required to handle the entire business -would incur so heavy an expense that the cost of collecting would be -as much, if not more, than was the case by the method then existing. -No further action was taken until 1883, when another committee was -appointed to consider the same question. They reported that returns -from all the banks showed that double the business reported by the -former committee was then being transacted and that the probable cost -was four hundred thousand dollars; they suggested that an agency -similar to the Clearing House be established for the purpose of making -the collections. The banks failed to endorse this proposition and the -matter was dropped until 1898, when a committee was appointed by the -Bank Presidents' Association to again consider this important question; -in their report it was recommended that the Clearing House Association -act on the matter and undertake to make the collections. A committee -was appointed by that body, who endorsed the previous report. Their -report was accepted and the Clearing House Association author<span class="pagenum"><a name="Page_311" id="Page_311">[Pg 311]</a><br /><a name="Page_312" id="Page_312">[Pg 312]</a></span>ized -the Clearing House committee to put in operation the present system, -and the banks of Massachusetts were first addressed on the subject on -April 14, 1899, the result being a conference between the Massachusetts -Bank Cashiers' Association and the Clearing House committee. This -conference revealed a decided difference of opinion at first, but -both sides were brought to a clear understanding of the situation -eventually. The position taken by the Clearing House was that it did -not propose to dictate to the country banker how he should transact his -business or coerce him into acting in conjunction with the Clearing -House; nevertheless, the Boston banks claimed the right to use their -own methods in making collections, and should the country banker decide -to charge exchange, checks on his bank would not be accepted at par -in Boston, and might be collected by express or such other means as -was thought advisable. Comparatively few of the banks in Massachusetts -appeared in opposition when the subject had been fully discussed. At -a second conference the Cashiers' Association asked the privilege of -making payments in New York Exchange if more convenient for them, and -this request was readily complied with. They also asked that they might -ship currency when necessary, at the expense of the Boston banks; this -request was also granted, and in a few months all were remitting at par -and checks from all the Boston banks were being collected through the -Clearing House. On Sept. 21st, Maine was added to the list, followed by -Rhode Island and Connecticut on Nov. 9th, and New Hampshire and Vermont -in January, 1900.</p> - -<p class="center"> -<img src="images/illus06.jpg" alt="pic" /> -</p> - - - - -<p class="caption"><span class="smcap">Fac-simile of the Back of the Check, Showing the Numerous -Indorsements it Bore on Finally Reaching the Bank on which it was -Drawn.</span><br /> - -<i>From James G. Cannon's Work on Clearing Houses.</i></p> - -<p>"The first year the amount collected was $541,000,000 at a cost of ten -cents per thousand dollars; the second year $565,000,000 at a cost of -eight cents; the third year $607,000,000 with cost reduced to seven -cents. Since the opening of the Foreign Department, as we term it, the -average yearly business has been six hundred million dollars, and the -average cost seven cents. The expenses are met by an assessment levied -on the banks based<span class="pagenum"><a name="Page_314" id="Page_314">[Pg 314]</a></span> on their daily average business. There are at -present in New England six hundred and thirty-seven banks and trust -companies to whom checks are sent daily, and the number of packages -handled will average five thousand."</p> - -<p class="center"> -<img src="images/illus07.jpg" alt="pic" /> -</p> -<p class="caption"> <span class="smcap">Map Showing the Check's Itinerary.</span><br /> - -<i>From James G. Cannon's Work on Clearing Houses.</i></p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Merchant, I am very much surprised that you -have made such a thorough study of this feature of the banking problem, -but I am also equally gratified. You have certainly explained the -question so clearly and fully that no one can fail to be impressed with -the future possibilities of this plan of clearing country checks, and -I am convinced that you are absolutely right that the time is not far -distant when every check in the United States will be par everywhere -precisely as our bank notes are today; and why should they not be so, -since both are identically the same thing in principle.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I can see what a tremendous advantage that would -be to our commerce, indeed, incalculable, and I can see that there is -no substantial difference between a check on a bank and a bank note, -which is a check of the bank on itself; both are mere credits, and -as you say, when fully comprehended and rightly understood, will be -treated in precisely the same way in the exchanges of the country. But -it does seem to me as though we shall have to have a better knowledge -of our banks, and the business houses of the country, too, if this -great reform is to be brought about.</p> - -<p><span class="smcap">Mr. Banker</span>: That is true, but the bankers of the country -have realized for a long time that their greatest peril came from the -unsound practices and reckless methods of some of their own number and -have already taken steps to protect themselves against such practices.</p> - -<p>You, gentlemen, will all of you, no doubt, remember the Walsh failure -at Chicago in 1906. You will also remember that Walsh had control -of three different banks with approximately $30,000,000 resources; -one was a National Bank, under national supervision; one a Trust -Company and one a Savings Bank; both of the latter being under State -supervision. This enabled Walsh to flim-flam the<span class="pagenum"><a name="Page_315" id="Page_315">[Pg 315]</a></span> examiners, one -examiner being national and the other state, by juggling the assets -and then finally diverting practically all of the deposits into his -own enterprises; certainly the best part of them was used in promoting -his business schemes. It took this kind of an earthquake to wake up -Chicago and bring into the banking fraternity, or business world, one -of the greatest reforms of the commercial life of the country. I say -commercial world advisedly because about the same time Chicago had an -experience with a fish house that was really the biggest fish story -that was ever told. The sad thing about this fish story was that it was -true and cost the fishermen, the Chicago banks, and the fishermen and -bankers elsewhere, about $3,000,000.</p> - -<p>These two experiences capped the climax and illustrated perfectly the -need of just what followed in the Clearing House at Chicago.</p> - -<p>This brings me naturally to the third point that I mentioned as -important and vital in the evolution of the American Clearing House.</p> - -<p>On June 1, 1906, the Clearing House Association of Chicago, Illinois, -acting upon a resolution introduced by Mr. Fenton, Vice-President of -one of its banks, established an independent system of Clearing House -bank examinations. Only recently the chairman of the Clearing House -used this language:</p> - -<p>"The result of our experience in Chicago is most satisfactory and -gratifying. The banks have almost unanimously adopted every suggestion -made by the Clearing House Committee for their betterment and strength. -In several instances the Committee, from its wider knowledge of -the financial situation, has been able to save some of the smaller -institutions from loss by enabling them to take hold of conditions in -time. I cannot properly go into such details as would illustrate the -effectiveness of Clearing House examinations as we have experienced -it, and can only say in a general way that<span class="pagenum"><a name="Page_316" id="Page_316">[Pg 316]</a></span> it has been even more -satisfactory than I anticipated it would be before it was undertaken."</p> - -<p><span class="smcap">Mr. Lawyer</span>: Right on this point I want to read to you a letter -I have just received from the Clearing House examiner of Los Angeles, -California.</p> - -<blockquote> - -<p> - -<span class="smcap">Dear Sir</span>:<br /> -</p> - -<p>Replying to your inquiry of December 9th, will say that Clearing House -examinations were begun in Los Angeles on May 1, 1908. Since the -inauguration of the system there have been no bank failures, because -the Executive Committee of the Clearing House Association will not -permit banks to reach the danger point.</p> - -<p>We have had one instance where, after watching a bank for three years, -giving it a chance to correct its bad methods and put itself in good -condition, the Clearing House finally compelled it to assign all of -its assets to a trustee, and the public was notified that all claims -would be paid on demand....</p> - -<p>National and State examinations have improved greatly during the last -ten years, but they will always lack the strongest element—the calm, -clear judgment of the local executive committee, whose demands are -founded on knowledge of the situation, and whose mind is not warped by -political strings.</p> - -<p> -<span style="margin-left: 35%;">Yours very truly,</span><br /> -<span style="margin-left: 37%;">(Signed) <span class="smcap">John W. Wilson</span>,</span><br /> -<span style="margin-left: 39%;"><i>Examiner, Los Angeles</i></span><br /> -<span style="margin-left: 40%;"><i>Clearing House Assn.</i></span><br /> -</p></blockquote> - -<p>Mr. Cannon in his admirable work on Clearing Houses, says:</p> - -<p>In substantially his own words the Chicago examiners operate under the -following conditions: The examinations extend to all the associated -banks in Chicago, and to all non-member institutions. The work is -conducted with the aid of five regular assistants, each fitted by -experience to thoroughly do that part of the work assigned<span class="pagenum"><a name="Page_317" id="Page_317">[Pg 317]</a></span> to him. -The examinations include, besides the verification of the assets and -liabilities of each bank, so far as is possible, an investigation -of the workings of every department, and are made as thorough as is -practicable. After each examination the examiner prepares a detailed -report in duplicate, describing the bank's loans, bonds, investments -and other assets, mentioning specially all those, either direct, or -indirect, to officers, directors, or employees, or to corporations in -which they may be interested. The report also contains a description -of conditions found in every department. One of these reports is filed -in the vaults of the Clearing House in the custody of the examiner, -and the other is handed to the examined banks' president for the use -of its directors. The individual directors are then notified that the -examination has been made, and that a copy of the examiners' report has -been handed to the presidents for their use. In this way every director -is given an opportunity to see the report, and the examiner, in every -instance, insists upon receiving acknowledgment of the receipt of these -notices.</p> - -<p>The detailed report, retained by the examiner, is not submitted to the -Clearing House committee, under whose direct supervision he operates, -unless the discovery of unusual conditions make it necessary. A -special report in brief form is prepared in every case, and read to -the Clearing House committee at meetings called for that purpose. The -report is made in letter form, and describes in general terms the -character of the examined banks' assets, points out all loans, direct -or indirect, to officers, directors, or employees, or to corporations -in which they may have an interest. It further describes all excessive -and important loans, calls attention to any unwarranted conditions, -gross irregularities, or dangerous tendencies, should any such exist, -and expresses in a general way the examiner's opinion of each bank as -he finds it.</p> - -<p>The circumstances under which the first Clearing<span class="pagenum"><a name="Page_318" id="Page_318">[Pg 318]</a></span> House bank examiner -was appointed and the result are well set forth by James B. Forgan, -President First National Bank of Chicago.</p> - -<p>"Chicago was the pioneer in Clearing House bank examinations.</p> - -<p>"They were inaugurated there in 1906 after the failure of a National -bank and two State banks. These institutions were under the direct -management of one man who was president of the three. The condition of -their affairs when disclosed surprised and appalled the other Chicago -bankers. The liabilities of the private ventures of the president had -gradually accumulated in the three banks until they had absorbed the -entire capital and surplus of all three, amounting to $3,500,000, and -44 per cent of their aggregate deposits of $27,000,000, one-third of -which was public funds.</p> - -<p>"The condition in the National bank had developed through a period -of years during which the Comptroller of the Currency, through the -semi-annual reports of his examiners, had been kept fully advised of -what was going on. Among the assets were found nineteen fictitious -loans for $90,000 each represented by so-called memorandum notes. -Each memorandum note purported to be secured by $100,000 of second -mortgage bonds of the Wisconsin & Michigan Railway Co. This road was -controlled by the bank president, and the bonds proved worthless. The -first mortgage bonds of the same road, $952,000 of which (being almost -the entire issue) were also among the assets of the banks, were finally -disposed of at about 23 cents on the dollar. These memorandum notes -did not, on the face of them, even pretend to be the obligations of -bona fide borrowers. The ostensible signatures on them, although in -different names, were all in the handwriting of the clerk who filled -them out and who wrote plainly in red ink across the face of each the -words 'Memorandum Note.' They could not deceive anyone who saw them and -they did not deceive the na<span class="pagenum"><a name="Page_319" id="Page_319">[Pg 319]</a></span>tional bank examiners who reported to the -Comptroller the facts in connection with them.</p> - -<p>"Although cognizant of these irregularities and of the accumulating -obligations in the bank of the president's private enterprises, the -Comptroller apparently could not or at all events did not take measures -to stop them by other means than those of expostulation and reproof -until matters became so bad that they simply could not be permitted to -go further.</p> - -<p>"When at last drastic measures were decided upon the Comptroller and -the State Auditor, acting together on a Saturday afternoon after the -vaults of the three banks had been closed with time locks set for -Monday morning, notified our Clearing House committee that unless -provision were made for payment in full of the deposits none of the -banks would be permitted to open for business on Monday morning and -they would be put in the hands of receivers.</p> - -<p>"Business conditions were strained and the time was therefore -particularly unfavorable for permitting the failure of three prominent -banks. The effects of such a calamity it was feared would have extended -far beyond the confines of Chicago.</p> - -<p>"The situation was thus protected from a general disturbance of public -confidence, but it was done at the cost of a very heavy loss, foreseen -at the time and since realized by the participating banks.</p> - -<p>"The statements of the National bank made five times a year to the -Comptroller's department, copies of which were rendered to the Clearing -House committee and on which it had implicitly relied, failed to -disclose these conditions.</p> - -<p>"I have given you these details of this unfortunate affair because they -show so clearly the limitations of governmental supervision of banks -under our National banking law as it has been interpreted by the courts -and by the legal advisers of the Comptroller's department.</p> - -<p>"Let me draw your attention to a few of the legal re<span class="pagenum"><a name="Page_320" id="Page_320">[Pg 320]</a></span>strictions which -limit the Comptroller's power to act in such cases.</p> - -<p>"1. Under the National Bank Act no obligation due a bank is considered -bad until interest is past due six months and not then if it is secured -or in process of collection.</p> - -<p>"2. The Comptroller may appoint a receiver when he concludes that a -bank is insolvent. But here again he has been hampered by the legal -definition of insolvency, which is 'inability to pay current debts as -they mature.'</p> - -<p>"3. The making of a National bank report to the Comptroller so long as -it is in accordance with the bank's books, however erroneous it may -be as to actual values, which alone disclose a bank's true condition, -cannot be construed as a misdemeanor.</p> - -<p>"These legal restrictions are presumably the reason why some banks -have been permitted to persistently publish to the public the figures -of their statements as rendered to the Comptroller of the Currency -after they are known to have met with heavy losses and have failed to -provide for them by charging them to profit and loss. That this has -been permitted in some cases is notorious. The case of the Chicago -National Bank and a recent one in a large central city [$6,000,000 of -$8,000,000 surplus was charged off] are conspicuous examples because of -their size. Undoubtedly as a rule the published statements of the banks -are reliable, but there are a few exceptions, with which, in view of -the legal restrictions which govern his action, the Comptroller finds -himself unable to cope. These exceptions, however, frequently result in -failures and catastrophes. The Comptroller cannot legally take drastic -measures with such banks until they perform some act of insolvency or -when he believes their capitals to be impaired, which, being a matter -of judgment in regard to the realizable value of their assets, is -frequently difficult to prove.</p> - -<p>"These disclosures in connection with the failures of these three banks -showed the associated banks of Chicago<span class="pagenum"><a name="Page_321" id="Page_321">[Pg 321]</a></span> that statements so rendered, -which up to that time had been all the Clearing House Committee had to -rely upon and which, as published, form the basis of the standing and -credit of banks with the public, could not be implicitly relied upon. -It was therefore unanimously resolved to adopt a system of supervision, -under which there would be some assurance that such conditions -could never again develop in any bank connected with the Chicago -Clearing House Association. There was therefore organized a bureau of -examination in connection with the Clearing House.</p> - -<hr class="tb" /> - -<p>"As to the practical working of Clearing House examinations in Chicago -during the six years of their existence I can only say that it has -proved in every way most satisfactory and successful. There has been -neither friction nor unpleasantness. Bank directors realize the great -benefits derived and are unstinted in their praise of them. They are -greatly assisted by these reports in keeping themselves informed on -the condition of their banks and they readily coöperate with the -Clearing House committee in the correction or elimination of anything -open to criticism. Our experience has been that the banks have almost -unanimously adopted every suggestion made by the committee. I cannot, -of course, discuss such details as would show its efficacy. I can only -say that the results have been most satisfactory to all concerned and -that much good has been accomplished for the Chicago banks individually -and collectively.</p> - -<p>"The organization, being entirely voluntary, partakes somewhat of the -nature of a gentlemen's agreement, under which each bank binds itself -to conduct its business under proper methods. The effectiveness of -the method lies in the fact that they are all measured by the same -standard, viz.: that their statements as rendered to the Clearing House -Association must be satisfactory to the committee, in view of the -examiner's reports upon them,<span class="pagenum"><a name="Page_322" id="Page_322">[Pg 322]</a></span> otherwise they cannot continue to enjoy -Clearing House privileges."</p> - -<p><span class="smcap">Mr. Banker</span>: From Mr. Wilson's statement about Los Angeles and -Mr. Forgan's statement about Chicago, it must be perfectly clear to -all of you, as it now is to me, that if we had in this country, say -thirty or forty commercial zones, or free check zones, like New England -now has, that is thirty or forty financial centres, covering all the -territory naturally tributary to them, and so compassing, or covering -the entire country, and these zones, all organized precisely as the -Chicago Clearing House Association is organized for the examination of -all the banks of the United States, bank failures would become a thing -of the past.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Well, let me see now, how you would insure that -result, that is that bank failures would cease. The banks fail very -often, possibly generally, because the officers of the banks have used -the bank's assets in their own schemes, or those in which they are -interested. But bank failures are very often due to fish paper, such as -you described a few moments ago. How would you detect, check and stop -that sort of thing? That is, how would you prevent too much paper from -some one merchant, or manufacturer, getting into the banks?</p> - -<p><span class="smcap">Mr. Banker</span>: Don't you see, Mr. Lawyer, that if your -examination covered all the banks in a commercial zone, your examiners -would always know, or could very easily find out, just how much paper -any business house had in the banks of that particular zone, couldn't -they? Don't you see that if they observed that a large amount of paper -of some business house had been placed in the banks of that zone, -that is, loans made, or paper sold, they would at once be placed upon -their guard and inquiry, and would proceed to find out just how much -paper that particular business house ought to have, or was entitled -to have out, considering its capital, and the general character of -its business? Don't you see that these bank<span class="pagenum"><a name="Page_323" id="Page_323">[Pg 323]</a></span> examiners could insist -on knowing all about the financial condition of any business house in -their particular zone, just as well as the banks themselves could and -do insist upon knowing? If a business house should refuse the bank -examiner the fullest possible information about its affairs, its days -would be numbered as a borrower at the banks of that zone, would they -not?</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is just the point. A business that is over -expanding its credit by borrowing, or by selling its paper, will -probably be working some other zone, or several of them at the same -time.</p> - -<p><span class="smcap">Mr. Banker</span>: You might naturally think so until you reflected -upon the situation for a moment. Don't you see that if you had, as I -have just said, thirty or forty such commercial zones, all organized, -and all united into one system, as perfectly as if they were one single -institution, that they could within twenty-four hours know to almost -a dollar how much any business house in the whole United States had -outstanding so far at least as the banks were concerned in all of -them—simply by telephoning or telegraphing to each other?</p> - -<p><i>You must see that every one of these commercial zones would soon -become the most comprehensive and the most perfect credit bureau in the -entire world, and that taking them altogether, they could and would, by -the most exhaustive methods, not even now fully appreciated, be able -to check the whole commercial situation in the United States in an -incomprehensibly short space of time. Nothing is so essential today as -to know the facts about the situation because of the enormous increase -of trade, and consequent expansion of credit.</i></p> - -<p><span class="smcap">Mr. Lawyer</span>: It does seem to me, after all, now that you have -finished the details of your plan, that you have in it a perfect check -upon the whole business of the banking world. Humanly speaking, I see -no loophole nor escape whatever.</p> - -<p><span class="smcap">Mr. Laboringman</span>: That looks to me like an all-round scheme. It -will certainly work like the colored man's<span class="pagenum"><a name="Page_324" id="Page_324">[Pg 324]</a></span> fish trap, it will catch -'em, both "agoin' and acomin'," and would give this country the only -practical scheme I've ever heard of for insuring bank deposits; for it -does not seem possible to me for a bank to get into a position where -it ought to fail. Now, gentlemen, if there is one reform in this whole -business that ought to be accomplished it is such an administration of -these banks, as will practically prevent failures. Don't you think so -yourselves? This question is always coming home to the working people, -because a bank failure is a tragedy in their lives.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Yes, Mr. Laboringman, I certainly do agree -with you, and I believe that this plan of having all the banks of the -entire country examined by bankers just as they are now being examined -by the clearing houses instead of politicians, and finding out, as such -clearing house examiners will, not only the condition of the banks, -but the financial condition of every business house as well, will -accomplish what you want. The laboring people are entitled to better -protection than what has yet been given them. This goes to the very -root of things.</p> - -<p><span class="smcap">Mr. Merchant</span>: Gentlemen, I have been listening with the -greatest possible interest to the story of the growth of the American -Clearing House and the most marvelous thing about this matter to me -is that this vast system which has not yet been correlated is the -product of experience, and that there is not a single practice of this -huge machine from the Atlantic to the Pacific as it is carried on, or -operated, that is based upon a single statute. Think of the Clearing -House Associations in those twenty cities, actually examining, not only -their own members, but every other bank that clears its checks through -one of their members. Why, gentlemen, today these bank examiners could -cut off my credit at my bank without my knowing it by simply saying to -the banks that my credit was too much extended, and that I ought to cut -it down, and get into a safer position.</p> - -<p><span class="pagenum"><a name="Page_325" id="Page_325">[Pg 325]</a></span></p> - -<p><span class="smcap">Mr. Farmer</span>: Well, do you know, I am of the opinion that there -is nothing so important in these days as to have someone going around -and compelling these fellows to pull in their horns. They will never -interfere with anyone as long as he keeps in sight of the shore. It's -a good thing and will do more than anything I know of to keep our -business ship on an even keel.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: When Mr. Farmer talked about pulling in -their horns, I thought he was perfectly at home, and talked about -something that he was familiar with; but when he gets to talking about -a ship and keeping close to shore, it strikes me that he's getting out -to sea. However, this proposed supervision and checking scheme strikes -me just as it does him, as the most desirable, wholesome and healthy -process by which we can go on in the future far more steadily, and in -the end far more rapidly than we do now, with our ups and downs, and I -am heartily in favor of it.</p> - -<p>But, Mr. Banker, it occurs to me that if these thirty or forty zones -you speak of are going to work so closely together, as you think, and -have outlined, there will be sooner or later a tremendous business -going on between them.</p> - -<p><span class="smcap">Mr. Banker</span>: Of course there will; and that suggestion brings -me naturally to the fourth point I raised in connection with the -development of our American Clearing Houses which was a combination of -a part of their reserves for their own convenience.</p> - -<p>You will remember that I called your attention to the fact that it was -estimated by high authority that the banks belonging to the Clearing -House Associations were now carrying upwards of two hundred million -dollars of their reserves at the various Clearing Houses. It does not -seem to me as though it was taxing the imagination very much to see -how very easy it would be to apply the same principle to the thirty -or forty financial centers that is now being applied to all the banks -included in the Clearing Houses. Of course I realize that the reserves -will<span class="pagenum"><a name="Page_326" id="Page_326">[Pg 326]</a></span> have to be upon a correspondingly increased scale, ranging from -one billion to one billion and a half, as things now stand, and that -they will all have to be actually combined, and perfectly mobilized, -precisely as the reserves are, when a Clearing House Association -fortifies itself, to protect all of its banks, and the commercial -interests of any community in times of danger and panic.</p> - -<p><span class="smcap">Mr. Laboringman</span>: What do you mean by Clearing House -certificates? I have seen these things mentioned time and time again -in the papers, and I must say I could not get on to them. I supposed -it was just some huggery-muggery of Mr. Banker, over there, for the -purpose of getting the best of the dear people.</p> - -<p><span class="smcap">Mr. Banker</span>: On the contrary, just the reverse is true. -Clearing House certificates, commonly so called, are issued only to -protect the people's interest. They are issued for the common good, -and are thoroughly appreciated by all those who understand their use, -and the circumstances under which they are issued. Mr. Laboringman, -you have just asked what a Clearing House certificate is. We all know -what a gold certificate is. It certifies that there are deposited in -the Treasury of the United States as many gold dollars as its face -calls for, and the holder can go and get the gold dollars by presenting -the certificate. In the early part of this evening, we learned that -a Clearing House certificate was issued by a Clearing House whenever -some bank deposited with it gold coin, gold certificates, silver -certificates, or United States Notes; that is, such a Clearing House -certificate is for such a deposit as is made, and entitles the holder -to what it calls for, as was then stated. Now, the popular name, -Clearing House certificate, is applied to something quite different -from the exact, or technical, definition above given.</p> - -<p>When we say that a Clearing House has issued Clearing House -certificates, in ordinary, or popular, language we mean "Clearing -House Loan Certificates," because the public never have any occasion -for discussing the<span class="pagenum"><a name="Page_327" id="Page_327">[Pg 327]</a></span> usual Clearing House certificates. The Clearing -House loan certificates are issued by a Clearing House upon commercial -paper, bonds, stocks or any satisfactory security. In 1907, collateral -security amounting to $453,000,000 passed through the hands of the New -York Clearing House Committee, of which $330,000,000, or 72.92 per -cent, was commercial paper and $123,000,000, or 27.08 per cent, was -bonds, stocks and short-time railroad paper.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Banker, if you will allow me, I think that Mr. -Cannon has stated this phase of the question so well that I should like -to read it right here. He says:</p> - -<p>"Clearing House certificates are of two kinds, those issued upon the -deposit of gold coin (and in New York City and Boston on gold and -silver certificates and legal tender notes) and those issued upon the -deposit of collateral securities. The former are employed in ordinary -times solely as a method of economizing time and labor and reducing -risk in handling large sums of money. The latter are employed in times -of financial disturbance or panic, and although both are intended for -use solely in the settlement of balances at the Clearing House, the -circumstances that call them forth, the results effected by their use, -and the part they play in banking economy have little or nothing in -common. The certificates issued upon the deposit of gold, etc., are -termed 'Clearing House Certificates,' and those issued upon the deposit -of collateral security are very properly termed 'Clearing House Loan -Certificates,' with which latter only are we here concerned.</p> - -<p>"Clearing House Loan Certificates may be defined as temporary loans -made by the banks associated together as a Clearing House Association, -to the members thereof, for the purpose of settling Clearing House -balances. Such certificates are negotiable, as a rule, only among the -members of the association, and are not in any sense to be regarded as -currency. They are not even seen by the business community, and do not -pass from<span class="pagenum"><a name="Page_328" id="Page_328">[Pg 328]</a></span> bank to bank except in payment of Clearing House balances.</p> - -<p>"To obtain an intelligent understanding of the real character and -purpose of such certificates it will be well to treat somewhat of the -circumstances under which they are issued. In the course of the present -century the United States has undergone periodical derangements of -business affairs, when confidence was displaced by mistrust, when the -payment of debts became difficult, when property values declined, and -business houses failed; when industry and trade were paralyzed, and -general stagnation ensued in all lines of enterprise. In such times -depositors in banks, stricken with fear and sometimes pressed by need, -draw out their deposits, in many cases to such an extent as to render -it difficult or even impossible for the banks to contract their loans -sufficiently to meet the demands thus made upon them. Under our present -currency system no adequate method is provided for expanding the money -volume as occasion demands, whereby the banks can continue their -usual loans and discounts, and thus prevent a panic with all its evil -consequences. Hence it is left in a large measure to the financiers -of each community to work out their own remedy, supplemented by such -mutual assistance as a courteous regard for each other may dictate or -as business relations may demand.</p> - -<p>"Quick to see the defects in our currency system, and the desirability -of in some way supplying it, the bankers of New York, nearly fifty -years ago, devised the scheme of issuing Clearing House Loan -Certificates as a method of relief from temporary stringencies. -Subsequently, nearly all the Clearing Houses in the great centers -adopted the same device, and by their heroic resort to the measure -they have at different times relieved the business community of untold -disaster, for which invaluable service they have justly received the -grateful recognition of the entire country.</p> - -<p>"The great value of Clearing House loan certificates<span class="pagenum"><a name="Page_329" id="Page_329">[Pg 329]</a></span> lies in the fact -that they take the place of money in settlements at the Clearing House, -and hence save the use of so much actual cash, leaving the amount to be -used by the banks in making loans and discounts, and in meeting other -obligations. The volume of currency, to all intents and purposes, is -expanded by this means to the full amount of the certificates issued."</p> - -<p>In the history of the past the denominations have varied from 25 cents -to $100,000 in the different associations and in proportions varying -from $50 to $100 of certificates to $100 of collateral deposited.</p> - -<p>The total amount of its balances is not always paid in Clearing House -loan certificates by a bank to which such certificates have been -issued. Thus, for example, the debit balance of a given bank may be -$500,000, which in ordinary times would be paid in money or gold -certificates. In a time of panic a part of this sum—say $300,000—is -paid in Clearing House loan certificates and the remaining $200,000 -in currency. Another, with the same balance, might pay the whole in -Clearing House certificates, while still another would pay the full -amount without the use of any certificates whatsoever.</p> - -<p>The first issue of Clearing House certificates occurred in 1860. In -the autumn of that year there was a rapid shrinkage in bank deposits -and a corresponding contraction in loans and discounts. The situation -grew more and more serious as the end of the year approached. The -presidential election was a disturbing factor of more than ordinary -significance. Immediately succeeding the election of Abraham Lincoln -to the presidency the situation began to assume a critical aspect. -Distrust and uncertainty were universally felt.</p> - -<p>In accordance with the authority thus given, the first issue of -certificates was made Nov. 23, 1860, and the beneficial effect was -immediately felt. The banks rapidly extended their loans, deposits -increased, and commercial paper, which formerly could not be sold for -20 per cent, was now freely marketed at 7 per cent and 8 per cent.<span class="pagenum"><a name="Page_330" id="Page_330">[Pg 330]</a></span> As -a result of the pressure the association passed a resolution in the -following September, authorizing another issue of loan certificates, -and on Sept. 19, 1861, the first issue was made.</p> - -<p>In 1863 the association issued certificates for the third time. The -first bore the date of November 6th, and the largest amount outstanding -at any one time was $9,608,000.</p> - -<p>Owing to the prolongation of the war, with the consequent unrest in -business circles, the issue of certificates for the fourth time began -March 7, 1864, and reached its maximum, $16,418,000, on April 20th of -the same year.</p> - -<p>No more loan certificates were issued until the year 1873, when for -the first time the Clearing House associations of other cities, -seeing their great practical utility, began to avail themselves of -their use. In the year mentioned the association at New York followed -the precedent established in 1860, and the same course was taken by -the Clearing House Associations at Boston, Philadelphia, Baltimore, -Cincinnati, St. Louis and New Orleans. The panic which called forth -such united action was one of unusual severity. It reached its climax -in September, and so severe were its ravages that the New York Stock -Exchange closed its doors on the 20th of the same month, for an -indefinite period, but reopened them ten days thereafter.</p> - -<p>The usual resolutions were passed by the Clearing House Association, -authorizing the issue of certificates, and on September 22d the first -issue was made. The amount was fixed at the outset at $10,000,000, -which, with the announcement that the Government would purchase the -same amount of bonds, caused an immediate subsidence of the panic, and -in less than three days its most acute stages were over. During the -two months referred to, certificates to the amount of $26,565,000 were -issued.</p> - -<p>New Orleans alone issued certificates in 1879, the<span class="pagenum"><a name="Page_331" id="Page_331">[Pg 331]</a></span> amount being -$54,000. New York alone issued certificates in 1884, the amount being -$24,915,000.</p> - -<p>The next certificates were issued Nov. 12, 1890, and the issue ceased -December 22d, amounting in the aggregate to $16,645,000; the largest -amount outstanding at any one time was $15,205,000, on December 12th; -and the last certificates were retired February 7, 1891, less than -three months from the date of the first issue. Boston and Philadelphia -followed. Then came one of the memorable panics, 1893.</p> - -<p>The issue was commenced June 21, 1893, and ceased September 6th of -the same year, the total issue having been $41,490,000. The largest -amount outstanding at one time ($38,280,000) was attained August 20th, -which amount remained unaltered until September 6th. Then followed -Philadelphia, Baltimore, New Orleans, Cincinnati, Buffalo, Atlanta and -Birmingham. Birmingham to protect its cash issued denominations all the -way from twenty-five and fifty cents up to $1, $2, $5, $10, and all the -larger amounts.</p> - -<p>Besides the loan certificates issued in 1893, there was a considerable -amount of emergency circulation taken out by the banks in the -Southeast, under the title of "Clearing House certificates," in cities -where no Clearing Houses existed. In adopting the name of Clearing -House certificates, it was not the purpose of the banks to practice -deception on the people, but to indicate what was really true and -what the term would seem to imply, namely, that such certificates -were temporary loans made by the banks associated together, and that -the banks were pledged for their redemption. The denominations in -the cities referred to were: Albany, Ga., $10, $5, and $1; Chester, -S.C., $10, $5, and $1; Columbia, S.C., $50, $20, $10, $5, $2 and $1; -Danville, Va., $100, $50, $20, $10, $5, $2, and $1; Newman, Ga., $10, -$5 and $1; and Rock Hill, S.C., $5, $2 and $1. There is no doubt that -the relief afforded in this manner was of great public assistance in -the several communities where it was given, ef<span class="pagenum"><a name="Page_332" id="Page_332">[Pg 332]</a></span>fecting results similar -to those accomplished by the actual Clearing House loan certificates in -the great centres. Business houses and corporations came to the relief -of the situation and among them was the New Bedford Mfg. Co., Social -Mfg. Co., Hartford, Conn., Eagle and Phœnix Mfg. Co., Columbus, Ga., -Swift Mfg. Co., Columbus, Ga., Arnold Print Works, North Adams, Mass., -Richmond Locomotive Works, Richmond, Va., Minneapolis and Northern -Elevator Co., City of Tacoma, City of Richmond, City of Johnstown, Pa., -Loomis and Hart Mfg. Co., Chattanooga, Tenn.</p> - -<p>So much for panics up to our last. Then came the panic of 1907. Of -this a prominent banker and economist has said: "The truth is that -responsibilities for the panic of 1907 lie at the door of our currency -system. No other adequate cause can be found. We do business by the -modern system of bank credits, but we have failed to supplement this -machinery with the means for readily converting bank credits into cash."</p> - -<p>On Oct. 26, 1907, New York issued Clearing House loan certificates. On -Oct. 26, 1907, Chicago also issued Clearing House loan certificates. -On Nov. 6th, Chicago issued Clearing House checks for $1, $2, $5, $10, -amounting to $7,500,000. These checks were secured by Clearing House -loan certificates.</p> - -<p>On November 16th, Philadelphia issued Clearing House certificates and -the business houses issued pay checks for wages which were cleared -through the Clearing House.</p> - -<p>During the fall many cities issued Clearing House checks in small -denominations which were used for currency. Canton issued pay checks -for $1, $2, $5 and $10, amounting to $200,000, which had no security -back of them.</p> - -<p>In November pay checks in denominations of $2, $5, $10, $20 were issued -to the fourteen banks of the Clearing House of Cincinnati.</p> - -<p><span class="pagenum"><a name="Page_333" id="Page_333">[Pg 333]</a></span></p> - -<p>Cleveland followed Chicago in denominations of $1, $2, $5, $10.</p> - -<p>Fargo, Dakota, issued $5, $10, $20, $100 and $500.</p> - -<p>Los Angeles issued October 30th "Clearing House certificates or scrip," -designed as a circulating medium for the general use of the public.</p> - -<p>Mr. Cannon records the action taken by the associated banks of Group -No. 2 of the Ohio Bankers' Association, which includes twelve counties, -and is worthy of comment since it offers the first concrete example of -the possibilities of the banks of any particular section of any state, -uniting in an effort to overcome the disastrous consequences resulting -at times from false rumors in panic periods.</p> - -<p><span class="smcap">Mr. Merchant</span>: <i>Now, gentlemen, why all this frightful agony, -this terrific straining, this ever-recurring tragedy and universal -ruin, simply because we persist in being utterly ignorant of the -simplest economic truths which our own actions on every such occasion -have demonstrated—that there is absolutely no difference between a -bank book credit and a bank note credit, except that the people want -something that passes current in greatly increased quantities, when -loaning stops or credit is checked. You have only to go to Scotland, -and note the fact that there has been in operation there two hundred -and seventeen years the vital principle involved, the conversion of -bank book credits into bank note credits, and the current redemption of -all bank credits in gold coin, whenever called for.</i></p> - -<p>Why, gentlemen, if the man who wants to find the cure would only shake -the moss from off his back, and take time to read what I am going to -submit to you now, or pull the cobwebs out of his eyes and go up to -Montreal, or Toronto, or any Canadian city, and see the bank notes come -into the Clearing Houses, with the checks and drafts, he would wonder -why he had been such a complete idiot all his life, when our nearest -neighbor was enjoying perfect immunity from our troubles.</p> - -<p><span class="pagenum"><a name="Page_334" id="Page_334">[Pg 334]</a></span></p> - -<p>L. Carroll Root, an American economist and historical student of the -first rank, after a most thorough and exhaustive investigation of banks -and banking in New England before the war, concludes his comment as -follows:</p> - -<p>"When the National Banking System appeared upon the scene it found the -channels of circulation in New England filled by a State bank currency -of well recognized soundness.</p> - -<p>"In general, it was a currency based upon the 'banking principle.' It -was issued against general assets—not against the deposit of bonds. -It was secured in addition, in most of the states, by the further -liability of officers and stockholders, or by a first lien upon all the -assets of the bank, or both. It was limited—rather loosely, we would -now say—to one hundred and twenty-five or one hundred per cent of -the capital. But though issued under the legislation of six different -states, it was in reality a single currency system—made so through the -agency of a commercial enterprise, established and carried on without -the aid of law. The bills of banks in any one part of New England -passed at par in every other part; and for years the notes of New -England banks had been enjoying an extended circulation in the west, -where its reputation found for it ready acceptance. At home, too, its -valuable points were appreciated and its forced transference to the -national system a matter of regret.</p> - -<p>"The history of New England bank currency, thus closed, is significant -for two developments which characterize it:</p> - -<p>"First, the steady growth, under the teachings of experience, of the -system as to the issue and regulation of bank currency, which has since -then become generally approved among the English-speaking peoples of -the New World. In one direction after another special opportunities for -fraud or exploitation of a confiding public by rash banking developed -their legitimate disasters and prompted the invention of remedies -'to fit the crime.'<span class="pagenum"><a name="Page_335" id="Page_335">[Pg 335]</a></span> Conditions were so nearly alike throughout the -New England states that each was prompt to suffer from any financial -disease affecting any other, and equally prompt to adopt, with such -improvements as its own enterprise might suggest, the remedies which -had been found effectual elsewhere. As a result, the complete system, -at the time of its practical suppression by the National Bank Act, -was utilizing nearly every expedient to secure safe and conservative -banking that were then or have since been incorporated in our own -National Banking system, or in that of Canada—the two great plans -which have since been matured.</p> - -<p>"A second feature was the development of redemption facilities and -methods. Starting with absolute chaos, assisted by no law, progressing -tentatively as each necessity prompted the invention of new means to -meet it, the result was a carefully buttressed and easily working -system, under which, to an extent never approached in its efficiency -by any plan elsewhere created by law, the bank note currency of New -England was made elastic, safe and ideally convenient and inexpensive -in use.</p> - -<p>"For a full generation before the war, the amount of ultimate loss to -noteholders was too small to be reckoned as an appreciable percentage -on the amount of currency outstanding, while the delays and minor -inconvenience in the prompt cashing of the bills of broken banks -were the result rather of the imperfect communication and exchange -facilities of those days than of material defects in the banking system -itself; indeed, so satisfactory had been the workings of what is known -as the 'Suffolk Bank Redemption Plan'—that the need even of the most -modest guarantee fund for instant redemption of broken bank bills was -not felt until after the panic of 1857; and even then the total loss -was petty when compared with the total circulation, and such as the -most moderate plan of subsidiary guarantee would have forever obviated."</p> - -<p><span class="smcap">Mr. Manufacturer</span>: That is most astonishing, actually -astounding; they went through identically the same<span class="pagenum"><a name="Page_336" id="Page_336">[Pg 336]</a></span> experiences during -the first fifty years of this country that we have been going through -during the last fifty, and they perfected a banking system which we -killed by the 10 per cent tax on bank notes. Now we are gradually, -whenever necessary, even in defiance of law coming back to the same -principle of credit currency, for certainly, whatever may be said of -the Clearing House loan certificates, generally speaking, all those $1, -$2, $5, $10, $20, $50 and $100 Clearing House checks were nothing but -a pure credit currency, and we do not seem to have sense enough to see -it, and adopt that principle.</p> - -<p>New England redeemed all her currency at the Suffolk Bank at Boston, -the financial centre of that commercial zone. New England did before -the war, precisely in the redemption of her bank currency what she has -been doing since 1899, in redeeming New England checks at Boston. We -must take our hats off to New England. All we want to do is to adopt -the currency system which she worked out, and her free zone system for -check redemptions.</p> - -<p>Canada obtained her original banking law by copying the statutes of -Massachusetts before the war. She has improved upon them in detail, but -the great underlying principle is the same.</p> - -<p><span class="smcap">Mr. Merchant</span>: The total amount of certificates in one form or -other, cash checks, etc., issued in 1907, was stated by the Comptroller -of the Currency to be $248,279,700. It is a most interesting fact -to note that just prior to the panic Hon. Charles N. Fowler, then -Chairman of the Committee on Banking and Currency, of the House of -Representatives, introduced a bill for the purpose of allowing the -banks to issue $250,000,000 of bank notes of the pure credit currency -character, and urged its adoption, as a measure of relief for the -impending crisis. You will note the amount was only one million and -three quarters in excess of the amount actually issued, or an estimate -within three-fifths of one per cent of the amount actually used.</p> - -<p><span class="pagenum"><a name="Page_337" id="Page_337">[Pg 337]</a></span></p> - -<p>Never before in the history of the country was such license taken -by the banks of the country as in 1907 in using bank credits in the -form of cash checks indiscriminately; but they demonstrated this -great economic truth that the nearer they approached to a pure credit -currency, the nearer right they were. And they demonstrated this fact -also to the satisfaction of every intelligent man on this question; -that, if this country had been blessed with a credit currency redeemed -through the Clearing Houses every day, precisely as these Clearing -House certificates and pay checks were, the panic of 1907 would never -have marred the commercial history of this country.</p> - -<p>With all of our own experience before us, from the establishment of the -banks of Virginia in 1803, is our stupidity to continue. And are we -now to do something possibly more than stupid when we are naturally, -even in defiance of law, as we have seen, finding our way out? If left -alone, we shall soon adopt these same principles, now in practice in -Scotland, Ireland and Canada? Principles which, without statutory laws, -gave New England, before the war, the most perfect banking system that -has ever existed anywhere in this world, all things considered.</p> - -<p><span class="smcap">Mr. Farmer</span>: Then why in thunder don't we adopt it now? I -suppose we are through with the Clearing House now, aren't we? I hope -so, for I am due at the farm. They are waiting for me.</p> - -<p><span class="smcap">Uncle Sam</span>: Just hold on a minute. If I understand the facts, -you are all wrong about one thing, and this includes both Mr. Cannon -and Mr. Hallock. The first Clearing House on this continent was not -at New York at all, but it was established at Boston, where I held my -first Tea Party, and it was started in 1818, thirty-five years before -New York got to going. It only took two clerks to do the business for -the first six years. By 1855, just two years after New York started, it -took seventy clerks to do the business, and the redemptions amounted to -four hundred million dollars per year. Transactions in<span class="pagenum"><a name="Page_338" id="Page_338">[Pg 338]</a></span> New England in -those days were comparatively very small, and the business was carried -on as it is in France today, very largely with bank notes instead of -checks. You remember, we learned one night that the Bank of France owed -$1,000,000,000 (one billion) in notes, and only one-tenth as much, or -only $100,000,000 subject to check; and that if a bank could issue -notes, as freely as take deposits, the habits of the people would -always determine whether the amount of bank notes was greater than the -deposits.</p> - -<p>From 1840 to 1860 the note issue of the 510 banks in New England ranged -from $30,000,000 to $57,000,000, and averaged $43,000,000, while the -deposits ranged from $15,000,000 to $47,000,000, and averaged only -$31,000,000, or the note issue was nearly 50 per cent greater than -the deposits. The note issue then was the main feature of the banking -business, precisely as it is at the Bank of France, and they started a -Clearing House to clear the bank notes and it was called "The Suffolk -Bank," where all the New England bank notes were cleared, precisely -as New England checks and drafts are cleared today. New England was -a free bank note zone before the war precisely as it is a free check -zone today. All notes were par at Boston, as all checks are par today, -and the Suffolk Bank, where the bank notes were cleared, was just -as much a Clearing House as the one they have in Boston today, for -clearing the checks and drafts. There is not the slightest difference -between the two, and the fact that no one of you men recognized it as a -Clearing House, convinces me that you do not yet fully comprehend and -appreciate the fact that there is not the slightest difference between -deposits subject to check, and a true credit currency, or a bank note -issue. This is the great fundamental, economic truth, and unless you -understand and recognize it, you might as well quit now.</p> - -<p><span class="smcap">Mr. Banker</span>: I thoroughly appreciate what you say, Uncle Sam, -and I think we all do, but you have driven this matter home, so that -I don't think we will ever<span class="pagenum"><a name="Page_339" id="Page_339">[Pg 339]</a></span> forget it, or fail to apply it under such -circumstances again, will we, boys?</p> - -<p><span class="smcap">Mr. Laboringman</span>: No, never. That discovery of Uncle Sam's was -a centre shot, a real bull's eye.</p> - -<p><span class="smcap">Uncle Sam</span>: The result of this evening's talk is then, as I -recall it:</p> - -<p><i>First</i>: There is no statutory authority for any Clearing House, either -in England or the United States.</p> - -<p><i>Second</i>: The first Clearing House started in London in 1775. The -second Clearing House started in Boston in 1818 under the Suffolk Bank. -The third started in New York in 1853.</p> - -<p><i>Third</i>: Clearing country checks was established in London in 1857. New -England became a free zone for country checks in 1899.</p> - -<p><i>Fourth</i>: Clearing Houses without any authority of law have adopted -the following functions: (<i>a</i>) They have fixed charges for services; -(<i>b</i>) they have provided reserves for their convenience; (<i>c</i>) they -have forced all those banks, which are members, and all those clearing -through them to submit to examinations; (<i>d</i>) they have not only issued -Clearing House certificates for use in settling balances, but for -circulation as currency in denominations of $1, $2, $5, $10, $20, $50, -$100, to meet the demands of trade.</p> - -<p>If you'll give them fifty years more, and will not interfere with them, -they will in actual defiance of law reëstablish the currency system of -New England before the war and now in operation in Canada.</p> - -<p>It's too late to detain you a minute longer. You may go now, but -remember that it took your Uncle Samuel to discover the important -historical fact that the first Clearing House established in this -country was the Suffolk Bank at Boston.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - - - -<div class="footnotes"><p class="ph3">FOOTNOTES:</p> - -<div class="footnote"> - -<p><a name="Footnote_1_1" id="Footnote_1_1"></a><a href="#FNanchor_1_1"><span class="label">[1]</span></a> Since the above was written New York City has become a -free check zone for a large territory tributary to it.</p></div></div> - - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_340" id="Page_340">[Pg 340]</a></span></p> - -<p class="ph2"><a name="FOURTEENTH_NIGHT" id="FOURTEENTH_NIGHT">FOURTEENTH NIGHT</a></p> - -<p class="center">BANKING IN 1860</p> - - -<p><span class="smcap">Uncle Sam</span>: This is the fourteenth night, boys, since we began -to meet, and discuss what in a way concerns me far more than any other -question except the morals of the people. The tariff you can change, -any time, any day, and, as I think should be changed schedule by -schedule, so that there would not be any disturbance of business. Nor -could corrupt trades between the various interests be made, if that -policy were pursued. When we take up our money plan we must be sure we -are right, before we adopt it. I mean absolutely right; for there is no -hope apparently of changing our monetary laws when once they get upon -the statute books.</p> - -<p><span class="smcap">Mr. Lawyer</span>: That is certainly true, Uncle Sam, for we've not -made a single substantial change in our National Bank Act since it was -passed Feb. 23, 1863, almost fifty years ago. Of course, we dotted an -"i" here and crossed a "t" there, but that is all.</p> - -<p><span class="smcap">Mr. Banker</span>: I never thought of that before, but it is -literally true. The only change ever made, worth mentioning, in the -National Bank Act was that made in connection with the funding of the -National Debt in the Act of March 14, 1900. Then Congress adopted word -for word a provision contained in Congressman Fowler's first general -Financial and Banking bill of March, 1897. This provision provided: -That the new bonds should be payable in gold coin and bear interest -at the rate of 2 per cent per annum and that the banks could issue -circulation up to par of the bonds, and that the tax of 1 per cent -should be reduced to one-half of 1 per cent. Not another change has -been made, and this was incidental, rather than the direct purpose of -the Act.</p> - -<p><span class="smcap">Mr. Lawyer</span>: This indifference, or non-interference<span class="pagenum"><a name="Page_341" id="Page_341">[Pg 341]</a></span> with -monetary laws, is not peculiar to ourselves, however. You find the -same is true in England. There has been no change in the English Bank -Act since it was adopted in 1844, although practically all the English -banking economists during the past fifty years have agreed that it is -most faulty in some respects, particularly in its currency provisions. -The same is true of the Bank of France which was established in 1803 -by Napoleon, who proved to be as great an economist as he was a -general. The same was true during the first fifty years of our banking -legislation. The same will always be true in every country, for nothing -is ever done, affecting a financial system, until the situation becomes -intolerable as it is in this country today, and as it is fast becoming -in Germany. Of course, the reason is not far to seek; it arises out of -the fact that there is a general fear that any change in the banking -practices, or system of any country, will disturb the existing business -conditions, or arrangements. Hence nothing is ever done, as long as the -people will put up with it. It takes the terrors and wastes of business -misfortune to bring any change however obviously needed; therefore, -we must be very patient, and most thorough in our work of preparing a -measure for the reformation of our present banking practices which have -been correctly described as "archaic," "barbaric" and "the worst in the -world."</p> - -<p><span class="smcap">Mr. Merchant</span>: That is right, we must be both patient and -thorough; and to be thorough I think we ought to know what the -situation was in this country in 1860, at the breaking out of the war; -because if there is one fact that has impressed me more than any other, -it is this, that all the real progress we have made during the past -fifty years or since the war, has been either without any law, or in -actual defiance of law. Under these circumstances I think it is of the -utmost importance that we find out if we can what progress, if any, -this country had made up to 1860, which was certainly a breaking up -point in banking, as well as in all other lines.</p> - -<p><span class="pagenum"><a name="Page_342" id="Page_342">[Pg 342]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: I agree with Mr. Merchant, and ever since we -began these discussions I have taken every opportunity to go back and -investigate the banking situation, before 1860, hoping and expecting -that our experience then would help us now. I have been literally -amazed at what I have discovered in the way of sound banking in many -of the states, and I have been profoundly impressed with the fact that -then, too, as well as now, all that they had secured that was good was -the outgrowth of experience.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I was so greatly impressed with the complete -and, as it seemed to me, practically perfect system that had grown up -under the Suffolk Clearing House, which started at Boston in 1818, -that I have been wondering whether there were not other instances like -that which would help us; for, gentlemen, whatever we may think, or -want, personally, one thing is certain, and that is this, that we must -take things largely as we find them, and legislate as far as possible -in harmony with them, bringing the inefficient, the laggard and the -"sucker" up to the approved standards of our banking experience and -compelling every individual bank to do its part in providing its own -insurance by carrying equal and adequate reserves and by carrying -on its business in accordance with the highest standards of banking -practices today. Then we must bring all of the banks of the country -under the reign of economic law, and into one harmonious whole for the -benefit of all the people. We must protect our gold reserves against -the demands of the rest of the commercial world.</p> - -<p>Now, if any one of you has any information about banking conditions -before the war that can possibly be helpful, I hope he will give it to -us for our consideration.</p> - -<p><span class="smcap">Mr. Banker</span>: I have no hesitation whatever in saying that -there were better banking institutions in the United States in 1860 -than there are today, so far as the principles are concerned upon -which they were operated. But, of course, we must note two things in -this connec<span class="pagenum"><a name="Page_343" id="Page_343">[Pg 343]</a></span>tion: First, banking generally was not nearly as good upon -the average as it is today; nor could you expect it to be. Second, -banks generally were small, and only in a very few states was banking -any more under governmental direction and control than the grocery -business, stock buying or horse trading. The result was that sharpers -all over the country were using the word "bank" or "banker" to swindle -the unwary people and defraud the public generally. Third, in some -states the legislators were so ignorant of economic law that the laws -passed by them only facilitated the schemes of the swindlers in their -diabolical work.</p> - -<p>It was the reaction against the disastrous and disgusting experiences -in one state after another because of the rotten conditions prevailing -that some of the states finally passed laws for the establishment of -banking systems, which for soundness and efficiency had never been -surpassed, nor even equalled for the territory covered and services -rendered.</p> - -<p>Let me cite you a few instances; I will take first Louisiana.</p> - -<p>The State of Louisiana passed a Bank Act which, though erring in one -or two particulars, was nevertheless almost ideal; and under it, the -state in 1860 stood fourth in banking capital, and held more specie -than any other state except one. No limit was placed upon the amount of -credit notes the banks could issue, nor the deposits they could receive -and no security was pledged for their redemption. The virtue and real -substance of the Act was in requiring a coin reserve of 33-1/3 per cent -of all liabilities, deposits as well as notes, and confining the loans -outside of capital to paper running for ninety days, or less.</p> - -<p>Not a single bank organized under this law suspended specie payments -during the panic of 1857, and all were conforming to the requirements -of redemption when General Butler marched down the streets of New -Orleans. The capital of the banks in 1860 amounted to $24,496,000,<span class="pagenum"><a name="Page_344" id="Page_344">[Pg 344]</a></span> the -$12,115,000, the circulation $11,579,000 and the deposits $19,777,000.</p> - -<p>On Feb. 24, 1845, the Legislature of Ohio passed a Bank Act under which -the Ohio State Bank was organized, with the right to establish branches -and to issue credit bank notes. Each bank was required to deposit 10 -per cent of the amount of its circulation to create a safety fund to -redeem the notes of any branch that might fail. In 1846 there were -seventeen branches; in 1848 twenty-five branches; in 1849 thirty-eight -branches and in 1850 thirty-nine branches.</p> - -<p>The note issues were of a purely credit character, and were -proportioned to the capital as follows: For the first $100,000 of -capital, there might be $200,000 of notes; for the second $100,000 of -capital, $150,000 of notes; for the third $100,000 of capital, $125,000 -of notes; for the fourth $100,000 of capital, $100,000 of notes, and -for each additional $100,000 of capital, $75,000 of notes.</p> - -<p>The evident purpose of the Act was to give the people a uniform and -sound currency, and the plan succeeded admirably. The State Bank of -Ohio was regarded as one of the soundest in the country.</p> - -<p>The essence of the Act was in the requirement that the notes issued -by the respective branches should be redeemed in gold or silver coin, -the lawful currency of the United States, and in the insurance given -of this result by a reserve equal to 30 per cent, of which at least -one-half should be gold or silver and the balance equivalent to gold or -silver coin.</p> - -<p>John Jay Knox says: "The banks authorized under the laws of 1845 and -1851 were uniformly successful and furnished a currency for the people, -not one dollar of which was ever lost by the holder thereof."</p> - -<p>The capital in 1863 was $5,674,000, specie $3,033,000, circulation -$9,057,000 and deposits $11,697,000.</p> - -<p><span class="smcap">Mr. Merchant</span>: I have often heard my father speak of the State -Bank of Indiana. Can you give us the history of that system?</p> - -<p><span class="pagenum"><a name="Page_345" id="Page_345">[Pg 345]</a></span></p> - -<p><span class="smcap">Mr. Banker</span>: Indiana presents the anomaly of having organized -the most admirable system of banking of any state in the Union, and -also of having had a banking system or banking practices at one time -so vicious that under it the banks bankrupted nearly the whole people. -The State Bank of Indiana and its successor, the Bank of the State -of Indiana, stood all the tests of financial panic from 1834 until -the banks were all absorbed by the National Banking System, without -closing their doors for a minute, or losing a dollar to bill holders, -depositors or stockholders. It is a proud distinction for Indiana that -its State Bank was long the model bank of the country. So well were -its affairs managed that in a period of twenty-two years of actual -business, the profit to the state on its $800,000 of stock amounted to -three and a half millions of dollars.</p> - -<p>The Bank of Indiana, which became a model, was chartered in 1834, with -a capital of $1,600,000, and the state was divided into ten districts, -afterwards increased to seventeen, there being a branch of the bank in -each.</p> - -<p>Under its charter the bank could receive deposits, buy and sell gold, -silver, bullion and foreign coins, discount commercial paper, and issue -bills payable to bearer—a true credit note. A forfeiture of 12½ per -cent was imposed upon all notes not redeemed in coin.</p> - -<p>The institution was hardly under way when the panic of 1837 broke upon -the country. The New York banks suspending, compelled the Indiana Bank -to follow in order that it could protect itself. John J. Knox says: "No -bank in the country stood higher than did the State Bank of Indiana -during the panic. In all the western and southern states its notes -commanded a premium, and in the east were taken at a small discount.... -Its loans were made in small amounts and scattered all over the entire -state, thus affording the greatest possible measure of relief."</p> - -<p>Great as was the success of this splendid institution, the Jacksonian -democrats, coming into power, at once<span class="pagenum"><a name="Page_346" id="Page_346">[Pg 346]</a></span> began an assault upon it, -precisely as their leader had laid the axe to the roots of the United -States Bank.</p> - -<p>The Indiana democrats failed to destroy the Bank of Indiana, but -succeeded in passing a general banking law permitting banks to be -established upon filing with the auditor of the state the bonds, or -other evidences of debt, of the Federal Government, or of any of the -states, as security for the notes to be issued.</p> - -<p>The State of Indiana itself went into the business of issuing notes, -and even plank-road companies issued them. The Indiana state notes -could be had for sixty cents on the dollar and were called "Red Dog." -The plank-road notes and others of similar value were called "Blue Pup."</p> - -<p>The Bank of the State of Indiana organized in 1855 with twenty branches -to take the place of the Indiana State Bank, maintained the same high -standard as its predecessor, going through the panic of 1857 without -suspension, although every private bank in the state, except two at -Indianapolis and one at Fort Wayne, went down.</p> - -<p>Like its predecessor, the Bank of the State of Indiana fell on evil -times soon after its organization. The panic of 1837 came two years -after the organization of the State Bank; and in 1857, before the Bank -of the State had been in operation quite two years, a great financial -panic swept over the country, precipitated by the failure of the Ohio -Life Insurance & Trust Co. Every bank in the east, except the Chemical -Bank of New York, suspended specie payment, and all in the west, except -the Bank of the State of Indiana and the Bank of Kentucky. The Indiana -Bank weathered the storm, and redeemed all its obligations in gold, -as fast as they were presented. Many of the branches of the Bank of -Kentucky were at remote points from the railroads, and could not be -easily reached by the brokers and other bill holders, but those of the -Bank of the State of Indiana were within easy reach and holders rushed -for the specie.</p> - -<p><span class="pagenum"><a name="Page_347" id="Page_347">[Pg 347]</a></span></p> - -<p>In 1860 the capital was $3,323,000, specie $1,917,000, circulation -$5,753,000, deposits $1,186,000.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I can tell you all about the Kentucky banks -myself—and I want to tell you there were no better then and there are -no better anywhere today.</p> - -<p>The Legislature of Kentucky in the session of 1833-4 granted a charter -to the Bank of Kentucky with $5,000,000 of capital and the privilege -of six branches. Charters were also granted to the Northern Bank of -Kentucky, with a capital of $3,000,000, and the Bank of Louisville, -with a capital of $5,000,000, each institution having the power or -right to issue credit notes to double the amount of their capital.</p> - -<p>While the Northern Bank of Kentucky liquidated in 1898 and the Bank -of Louisville was merged into the Southern Bank in 1899, the Bank of -Kentucky had in the latter year a capital of $1,645,000 and a surplus -of $1,103,000, giving indubitable proof that no one had ever suffered -because of its power of note issue. And there the Bank of Kentucky -stands today, occupying the building it purchased from the United -States Bank, a monument to the sound principles upon which it was -founded.</p> - -<p>It may be most fittingly observed before passing, that when in May, -1837, the blighting wave of suspension swept from New York across -the country, these three banks of Kentucky held $1,900,000 in specie -against $3,300,000 of notes in circulation—an object lesson for those -who may possibly fear that the banks cannot obtain sufficient gold -today to protect the notes they are permitted to issue.</p> - -<p>The panic of 1857, which was severe in many parts of the country, and -which caused great alarm in Kentucky, produced no ill effects on the -banks, all of them continuing to pay in specie, even after the New York -banks had suspended.</p> - -<p>In 1860 the capital of these banks was $12,660,000 and the circulation -was $13,520,000.</p> - -<p><span class="smcap">Mr. Banker</span>: The record made by the Kentucky banks<span class="pagenum"><a name="Page_348" id="Page_348">[Pg 348]</a></span> was -excellent, but for organization the State Bank of Iowa, like that -of the State of Indiana, has had no superior anywhere in the world, -and humanly speaking, the administration and working of both was -practically perfect. Iowa in the morning of her statehood was opposed -to banking as a business; her first constitution provided that "the -general assembly shall provide for the organization of all other -corporations except with banking privileges, the creation of which is -prohibited."</p> - -<p>The Constitution also provided, that "the general Assembly shall -prohibit any person or persons, association, company, or corporation -from exercising the privilege of banking or creating paper to circulate -as money," the penalty for each offense being one year in the county -jail and a fine.</p> - -<p>During the intervening years down to 1857, when the new Constitution -was framed, Iowa had suffered so severely from the <i>bond-secured -circulation</i> of Illinois in particular, known as "Wild Cat," "Red Dog" -and "Yellow Dog" money that a provision was incorporated permitting -the legislature to create corporations with banking power, subject, -however, to a vote of the people, and also to establish a State Bank -with branches founded on actual specie basis.</p> - -<p>I want to call the attention of you fellows to the fact that they had a -referendum, a state referendum, in Iowa in those days.</p> - -<p>It was provided that the branches should be mutually responsible for -each other's notes; that the stockholders should be liable for an -additional amount equal to their stock; that the bank could issue <i>pure -credit notes for double the amount of the paid-up capital</i>; that in -case of insolvency the bill holders should have a prior lien over other -creditors and that specie redemption must be maintained.</p> - -<p>To secure this solvency beyond peradventure, each branch was required -to deposit with the State Bank either coin, United States stocks or -interest-bearing state<span class="pagenum"><a name="Page_349" id="Page_349">[Pg 349]</a></span> stocks at their market value in New York, but -in no case above par. This deposit was equal to 12½ per cent of the -note issue, and was known as "the Safety Fund" to redeem the notes of -the branches in case any of them failed to do so. In addition each -branch must have on hand an amount of coin, equal to 25 per cent of its -notes outstanding and deposits held. Here is a replica of the banking -system of the Bank of the State of Indiana, and it contains all of the -prerequisites of a well-nigh perfect banking system; and the result -proved the soundness of the plan.</p> - -<p>This bank was prohibited from paying interest upon deposits. The parent -bank was not a bank of issue or of deposit. It transacted no business, -except with and for the branches.</p> - -<p>Certainly there is no bank in the United States today with so good a -charter as that of the State Bank of Iowa.</p> - -<p>By an act approved in February, 1862, County Treasurers and the State -Treasurer were authorized to accept the notes of these branches in -payment of taxes, and by an Act approved March 10, 1864, payment of -taxes and the interest and principal on the school fund might be paid -in United States Treasury Notes, National Bank Notes, or <i>Notes of the -State Bank of Iowa</i>, thus showing the unquestionable value of the State -Bank Circulating Notes.</p> - -<p>When the National Banking System was established in 1865, and the 10 -per cent tax on circulation was imposed, the life was choked out of -one of the most perfect banking systems that had ever existed; and -every note of the $1,439,000 outstanding on Jan. 2, 1865, was redeemed -without the loss of a single cent to the holders.</p> - -<p>The capital was $1,048,000; specie, $389,800; circulation, $1,439,000; -deposits, $2,851,000.</p> - -<p><span class="smcap">Mr. Lawyer</span>: In 1898 I heard an attorney from Richmond speak -upon the State Banks of Virginia so boastfully, that out of pure -suspicion I investigated them, not believing anything he said at the -time.</p> - -<p><span class="pagenum"><a name="Page_350" id="Page_350">[Pg 350]</a></span></p> - -<p>About 1800 there sprung into life in Virginia a system of state banks -based on the old Scotch system under which a half dozen banks of issue -were authorized, with numerous branch banks in every part of the state. -The charter provisions of these banks were the basis of the few laws -that have been enacted in relation to banking since that day.</p> - -<p>The first of the banks to be established under state control was the -Bank of Virginia, incorporated by the General Assembly, Jan. 13, 1804, -with a capital stock of $1,500,000 in shares of $100 apportioned; three -thousand seven hundred and fifty shares to Richmond, three thousand to -Norfolk, two thousand two hundred and fifty to Petersburg, one thousand -to Fredericksburg, five hundred and twenty-five to Winchester, four -hundred and fifty to Staunton and five hundred and twenty-five to -Lynchburg.</p> - -<p>The Charter provided that the banks should hold real estate and other -effects to the value of $3,500,000, including the capital stock. -The cashier was required to give bond for $50,000; the total amount -of notes to be put into circulation by the banks, together with the -debts, were restricted to $4,500,000, over and above the money actually -deposited in the bank; that is, the issue could be three for one on its -cash capital, and this was the established rate for this class of banks.</p> - -<p>The bank was well managed and was highly successful. Its notes, all -payable in gold, had a wide circulation and were at only one-fourth of -1 per cent discount in New York.</p> - -<p>Five other banks were established with the power of establishing -branches. These mother banks, six in number, were great institutions, -and held the complete confidence of the people. The law did not require -that they should keep any reserves and they kept none, except the -specie held in their vaults to redeem their notes.</p> - -<p>The law provided that the total amount of paper circulation of these -banks should <i>never exceed five times the<span class="pagenum"><a name="Page_351" id="Page_351">[Pg 351]</a></span> amount of the coin in -possession and actually the property of the bank</i>. If the coin of the -bank was reduced below one-fifth of its circulation, it was required to -stop all discounts until the ratio was restored. As a matter of fact -some of the banks issued as high as 8 to 1.</p> - -<p>The banks at such times kept their coin reserve up by keeping the -discounts down.</p> - -<p>The banks of Virginia from 1827 to 1860 had a prosperous period, -keeping on an average $10,000,000 of notes in circulation without loss.</p> - -<p>It is reported that occasionally drafts drawn on New York were placed -in the safe to make up a balance, and called "coin." Be that as it may, -there is no case on record where a bank of circulation and deposit -failed, and it is claimed by those acquainted with the banking of that -day that no one ever lost a dollar by a Virginia bank note previous to -the war of 1861, and they were at a discount of only one-quarter of one -per cent in New York.</p> - -<p>On Jan. 31, 1860, the capital was $16,000,000, specie was $2,943,000, -circulation was $9,812,000, deposits $7,729,000.</p> - -<p>The Bank of the State of Missouri was started in 1837, with authority -to issue notes at the ratio of three to one for the specie in its -vaults, and with a branch at each of five considerable towns in -different sections of the state; Lexington, Fayette, Palmyra, Cape -Girardeau and Springfield. Its capital was $3,450,000.</p> - -<p>In 1856, when the population of Missouri was eight hundred and forty -thousand and that of St. Louis one hundred and twenty-five thousand, -and the indications of substantial prosperity were to be seen in every -department of business, the bank circulation was only $2,200,000, -although its stock of $1,400,000 specie warranted notes to the -amount of $4,200,000, and a considerable part of its circulation was -doing duty in California, Oregon and New Mexico, whither it had been -carried by emigrants and traders. It is no wonder that under<span class="pagenum"><a name="Page_352" id="Page_352">[Pg 352]</a></span> these -circumstances Missouri offered an inviting field for the "Wild Cat" -money issued so profusely by banks in other western states and that -its people became victims of an inconvertible and unreliably currency, -which the bank note reporter quoted at a discount all the way from 5 to -25 per cent.</p> - -<p>So valuable were the notes of the banks of the State of Missouri in -California in the '50's that a gang of counterfeiters took advantage of -their popularity, and struck off imitations of them in large quantities.</p> - -<p>It was a remedy for this evil, which had become unendurable, and -in response to the persistent demands of the important commercial -interests of the chief city of the state that the legislature, in 1857, -chartered seven banks of issue, with branches conveniently located for -the accommodation of business.</p> - -<p>These banks were promptly organized in the spring of 1857, immediately -after the Act authorizing them was passed; for the state was -prosperous, and offered a fair field for legitimate investment. The -monetary crisis which was impending but not discerned fell upon the -country shortly after they had opened for business; but they stood -the strain well; two of them, the Mechanics and the Exchange of St. -Louis, refused to suspend specie payment, and continued to redeem in -coin through the panic; and when the Civil War broke upon the country -four years later, these two banks again refused to join in the general -suspension, and maintained coin payment under all conditions that -followed.</p> - -<p>The system of banks organized under the Act of 1857 rendered the -important service of partially displacing the uncertain and variable -currency issued by the banks of other states and territories which had -found so easy a field in Missouri. The legislature had also authorized -the old banks in the state to establish additional branches and to -issue notes for $5.00, and in a short time every considerable town in -the state had a bank, and the notes of Missouri banks, issued at the -rate of $3.00 to every<span class="pagenum"><a name="Page_353" id="Page_353">[Pg 353]</a></span> dollar of specie on hand, afforded a local -currency better than that brought in from the outside, which had for -years almost monopolized the field. The "Wild Cat" money nevertheless -made a stubborn contest, and the last of it did not disappear until the -National Bank Act went into operation.</p> - -<p>In the wild, reckless period, when almost anything in the shape and -appearance of an engraved bill, with the name of a bank on it, was -good enough to buy public land with, and good enough, therefore, -for all other purposes—and in the latter period when other western -states <i>authorized banks to issue notes based on various kinds of -bonds</i> with the place of redemption out of the way and difficult -of access—sometimes in a forest or in a swamp—the legislature of -Missouri refused to charter institutions to multiply such currency -within the limits of the state.</p> - -<p>The notes of the Bank of the State of Missouri were preferred to -specie in New Mexico, Utah and on the Pacific coast, and the same high -character marked the issues of the system of banks authorized by the -general law of 1857.</p> - -<p>The capital in 1863 was $11,247,000; specie, $3,666,000; circulation, -$4,037,000; deposits, $3,434,000.</p> - -<p>Everything I have just said I have taken from John Jay Knox's "History -of Banking."</p> - -<p>During all this varied experience in the west and south, there -was a most conspicuous illustration of a complete banking system -demonstrating and proving every economic principle that is involved -in constructing a financial and banking system for the United States. -It was the Suffolk System of New England. Here were six states, the -laws varying in each. Portions of these states were far more remote -from Boston in those days than any part of the United States is from -any other part today, so far as business relations and convenience are -concerned.</p> - -<p>There were no railroads, nor telegraph lines, nor long<span class="pagenum"><a name="Page_354" id="Page_354">[Pg 354]</a></span> distance -telephones. Indeed, almost every essential to anything like a sound -banking system as conceived and observed from the standpoint of today -was wanting. There was no law requiring a uniform reserve. There was -no law requiring coin redemption. There was no law requiring bona fide -capital. There was no check upon the amount of notes that might be -issued if a bank was dishonestly inclined.</p> - -<p>There were, in 1848, three hundred and six banks, deriving their -authority from six states, and one hundred and fifty-nine of them did -not possess an average capital of $100,000; nor was the average capital -outside of Boston more than $160,000, and including that city, it was -not more than $206,000.</p> - -<p>By 1860 there were five hundred and four banks. There are only seven -hundred and forty banks today in the same states. Can any fair-minded, -impartial man deny that the conditions today are vastly in favor of -better results than they were then? One law for all; a bona fide -capital; a required reserve; a system of redemption established by law; -notes furnished by the United States Government; a common national -supervision. These all unite to compel the admission that any system -that could prove its adequacy under such adverse conditions as existed -from 1840 to 1860 would certainly approximate perfection today.</p> - -<p>Nowhere in the whole range of banking experience have so many things, -which the student of this subject wants to know, been demonstrated -beyond cavil.</p> - -<p>To all intents and purposes the possible issues were without limit. The -actual circulation in 1840 was only 23 per cent of that permitted. The -circulation of 1850 was only 40 per cent of that permitted; and the -circulation in 1860 was only 36 per cent of that permitted.</p> - -<p>During every year from 1840 to 1860, except one, the note issues were -greater (and usually nearly double) than the deposits, illustrating -with what certainty and perfect nicety such a system adapted itself to -the ever<span class="pagenum"><a name="Page_355" id="Page_355">[Pg 355]</a></span> varying needs of the people who were fortunate enough to have -it, and how it invariably, with peculiar fitness, met the needs of the -rural districts where currency and not checks was especially required.</p> - -<p>The States of New Hampshire and Vermont had bank capital amounting to -$8,150,000 in 1850, and notes outstanding amounting to $7,300,000, -while Boston with $33,200,000 of capital had only $7,500,000 of notes -outstanding.</p> - -<p><i>A marvelous exhibition of this interplay and interchange of bank book -credits and bank note credits occurred in the six New England States as -a result of the panic of 1857. The authorized note issue of the five -hundred and ten banks constituting the Suffolk System with capital -ranging all the way from $25,000 to $500,000 each was $131,000,000. -In 1856, the year before the panic, the note issue amounted to -$50,000,000, and the deposits amounted to $32,000,000. In 1857, as -the result of the panic, the note issue rose to $55,000,000 and the -deposits dropped to $25,000,000; in 1858, one year after the panic, the -note issue had fallen to $36,000,000, and the deposits had risen to -$47,000,000, or there had been a conversion of $20,000,000 of bank note -debts into deposit debts. The exigency for cash had disappeared and the -depression had come.</i></p> - -<p>Do not fail to observe three important facts in this connection:</p> - -<p><i>First</i>: That although the banks were authorized to issue $131,000,000, -they never exceeded $57,000,000, which was the highest point of -circulation, and that was reached as the result of the panic of 1857, -and that they averaged $43,000,000 from 1840 to 1860.</p> - -<p><i>Second</i>: That there was a perfect adaptation of the deposits and note -issues to the peculiar and ever changing demands of the people during -the panic, and during the depression in trade that followed the panic.</p> - -<p><i>Third</i>: That the number of banks in New England in 1856, the year -before the panic, was four hundred and<span class="pagenum"><a name="Page_356" id="Page_356">[Pg 356]</a></span> ninety-five, and in the year -1858, the year after the panic, there were four hundred and ninety-nine -banks, or four more banks the year after the panic than there were the -year preceding the panic, an unquestionable tribute to the principle of -current coin redemption.</p> - -<p>Now, mark this, that the very heart and the very soul of the Suffolk -System was in the fact that the notes were redeemed in Boston in coin. -So good were these notes considered to be throughout the entire west, -that at Buffalo, Chicago, Milwaukee and all commercial points in the -then far west, they were always taken at a premium of from 1 to 5 per -cent. It was not the size of the bank of issue that made them good and -desirable, but the fact that they were redeemed in coin in Boston.</p> - -<p>When the soundness of this system is tested by a comparison with that -of the national banks, the result more than justifies the assertion -that the Suffolk Bank System of New England was incomparably better -than the National Bank System; for, when the conditions during the -twenty years from 1840 to 1860 are compared with those of the past -thirty years, all must admit that argument is futile and the conclusion -is inevitable.</p> - -<p>Mark this, that while a tax of one-eighth of 1 per cent of all the -notes in circulation would have paid all the notes of the banks that -failed under the Suffolk System from 1840 to 1860, it would have taken -a tax of one-fifth of 1 per cent on all the notes outstanding issued by -the national banks to pay the notes of the failed national banks.</p> - -<p>In confirmation of what I have said in praise of the Suffolk System let -the bank commissioners of Connecticut, Vermont, Maine, Massachusetts -and the <i>New York Courier and Enquirer</i> testify.</p> - -<p>"The currency of this state is of the first order and can not be -improved, being equal to gold and silver. This is strong language, we -admit, yet perfectly true, for every bill holder can on demand convert -his bills<span class="pagenum"><a name="Page_357" id="Page_357">[Pg 357]</a></span> into coin." (Connecticut Bank Commissioners' Report, 1841.)</p> - -<p>"The bills of any country bank, redeemed at par in any commercial city, -will always be current throughout the extent of region whose business -channels flow to that city. Hence, New England money is worth more in -the cities of New York and Philadelphia than the bills of their own -country banks. Vermont bills have uniformly borne a premium in the -eastern cities without loss, while bills of their own states are at a -heavy discount." (Vermont Bank Commission's Report, 1852.)</p> - -<p>"The 'Suffolk System,' though not recognized in our banking law, has -proved to be the great safeguard to the public. Whatever objections may -exist to this 'system' in theory, its practical operation is to keep -the circulation of our banks within the bounds of safety. No sound bank -can have any well-founded reason for refusing to redeem its bills in -Boston, and a bank that is not sound can not long do business under -that system and ceases to be in good credit when it is 'thrown out at -the Suffolk.'" (Maine Commissioners' Report, Dec. 31, 1857.)</p> - -<p>"If there was no check upon circulation there might be some danger, -but the frequent redemptions at the Suffolk Bank and the rapid -communications between different parts of the country will prevent any -greater circulation than the natural business wants of the country -will sustain.... Indeed, this system of par redemption seems to be -a most perfect regulator upon all the New England banks. It would -seem somewhat surprising that something has not been adopted in other -parts of the country that should produce the same beneficial results." -(Connecticut Bank Commissioners' Report, 1848.)</p> - -<p>"The charters of the banks have been renewed. If the laws by which -they are constituted the agents of the people to provide a currency, -and by which their faithfulness in the discharge of such agency is -secured, re<span class="pagenum"><a name="Page_358" id="Page_358">[Pg 358]</a></span>main unchanged, there is every reason to believe that the -currency of Massachusetts will be for the next twenty years what it -has been for the twenty years past—as perfect as any in existence, as -perfect as in the nature of things it can be. No reasonable man, no -practical man, no man who is not bound hand and foot in the fetters of -mere theory, can desire for the people a currency better adapted to -meet all the circumstances of a business community than that which has -been furnished by the banks of Massachusetts for the last quarter of a -century." (James B. Congdon, cashier Merchants' Bank, New Bedford, in -memorial to Governor of Massachusetts, 1851.)</p> - -<p>"We said that the Massachusetts currency was apparently unsecured. In -reality their bank paper is well secured. The experience of the last -fifteen years has demonstrated that the losses from bank issues in the -State of New York are four or five times greater than in Massachusetts. -The system of the latter is better than our own." (<i>New York Courier -and Enquirer</i>, 1854.)</p> - -<p>"It is by no means wonderful that a system which has stood the test -of time and struck its roots so deep as to have become incorporated -with and formed a part of our banking system should be abandoned -with hesitation for one which is new and untried." (Maine Bank -Commissioners' Report, 1865.)</p> - -<p>"The State parts with these objects of her care and solicitude with -many regrets, but with a just pride in their career, inspired by the -belief that their capital has been highly instrumental in promoting the -prosperity of the state, and that they have furnished as good a paper -currency, based on individual credit, as any part of the country has -ever enjoyed." (Massachusetts Banking Report, 1865.)</p> - -<p><span class="smcap">Mr. Lawyer</span>: <i>If, as we have gradually come to understand and -firmly believe, the true service of a bank is to furnish credit to its -customers, as they want it, and<span class="pagenum"><a name="Page_359" id="Page_359">[Pg 359]</a></span> in such form as they need it, then -these institutions which you have been describing were certainly far -better suited to the purposes of their day than any banks we now have -in existence.</i></p> - -<p>Two things seem to have been present in all of these various -institutions: ample coin reserves, which ranged from 20 to 33 per -cent, to meet any demand for credit redemption and perfect freedom -in changing bank credits from the form of book credit to the form of -note credit, and the form of note credit to the form of book credit, -according to the desires and needs of the customers of those banks.</p> - -<p>As a result of interchangeability of book and note credits, a bank -could always protect its coin reserve, for if the customer was just -as well satisfied to take the bank's notes, instead of coin, or its -reserves, it must be apparent to all of you that the cost to the bank -would only be from one-sixth to one-fourth as great, and that the bank -would have several times as much credit to loan, and at the same time -be in a much stronger position.</p> - -<p>Let me illustrate what I mean by calling your attention to what happens -over in New York every fall. Let us suppose that the New York banks owe -the country banks, say $500,000,000 and that the country banks call -for it from July to January for the purpose of moving the crops. The -banks of New York with the right kind of a currency system would not -need to disturb the situation in New York at all because they could -send their correspondents their credit notes, or cashier's checks, for -$500,000,000. You see the New York banks would simply convert a deposit -credit subject to check or draft into a note credit. The amount of the -debt would remain the same, the amount of the reserves would remain -exactly the same; but, instead of the country banks continuing to keep -the deposits subject to check at the banks, they would take the notes -which would serve their purpose, because they could in turn send the -notes into the corn and cotton fields, to help harvest and gather the<span class="pagenum"><a name="Page_360" id="Page_360">[Pg 360]</a></span> -crop; and, just as soon as the notes had served their purpose, they -would be returned to the country banks and by them in turn sent on to -the New York banks, and would have been reconverted into book credits. -Not a single dollar of actual money would have been used in the whole -transaction, and yet the country would have been served just as well, -as though every bank note sent out had been a gold certificate.</p> - -<p>On the other hand, if the New York banks should continue to be as they -are today compelled to ship the $500,000,000, they would have to call -loans and shift conditions until they could scrape up $500,000,000 -with as little injury as possible to their customers and send it west; -nearly every dollar so sent out is reserve money of some form, gold -certificates, silver certificates and United States notes. Now mark -this, the credit notes cost the bank only the interest on the reserves -behind the notes; but when the banks ship out their reserves, the cost -must necessarily be four or five times as much, to say nothing of the -injury they have done to the business conditions in New York. And so -this same principle runs on throughout all of our banking business -today from one end of the country to the other.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, Mr. Lawyer, your entire argument goes to -demonstrate with mathematical certainty that the country banks would -never have any occasion whatever to send to New York for currency, as -they would create their own currency by converting bank book credits -into bank note credits to meet all ordinary demands, a fact that not -only accentuates, but proves more conclusively what you are saying, and -reinforces your argument.</p> - -<p>Should we be fortunate enough to secure a right kind of banking -system in this respect, we could almost double our bank reserves, -that is, make them twice as large, and yet make two or three times -as much profit on that part of the banking business, growing out of -the substitution of credit notes for reserves, and at the same time -be<span class="pagenum"><a name="Page_361" id="Page_361">[Pg 361]</a></span> vastly better able to protect the balance of our business from -disturbance due to the fact that we are compelled to use reserve money -for currency purposes. This now seems to me a very simple matter when -you once have grasped it.</p> - -<p><span class="smcap">Mr. Banker</span>: In this connection I want to call your attention -to this fact, and I want to note that it is a very important fact which -was so obvious in connection with every single statement of capital, -specie, circulation and deposit, that has been given, when referring -to the banking systems before the war, and that's this: that the note -issues did not begin to average one-half the authorized amounts, -proving conclusively that the currency of these banks invariably -adapted itself to the exact needs of the people.</p> - -<table summary="issue" width="85%"> -<tr> -<td>Notes Outstanding. -</td> -<td>Possible Issue was. -</td> -<td>Per Cent of Possible Issue. -</td> -<td>Specie Held. -</td> -<td>Deposits. -</td> -</tr> -<tr> -<td>Louisiana -</td> -<td > -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$11,579,000 -</td> -<td colspan="2">No limit except 33% Coin Reserve -</td> -<td align="right">$12,115,000 -</td> -<td align="right">$19,777,000 -</td> -</tr> -<tr> -<td>Ohio -</td> -<td> -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$9,057,000 -</td> -<td>$10,000,000 -</td> -<td>About Par -</td> -<td align="right">$9,057,000 -</td> -<td align="right">$11,697,000 -</td> -</tr> -<tr> -<td>Indiana -</td> -<td> -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$5,753,000 -</td> -<td colspan="2">No limit but 12½% penalty for failure to redeem in coin -</td> -<td align="right">$1,917,000 -</td> -<td align="right">$1,186,000 -</td> -</tr> -<tr> -<td>Iowa -</td> -<td> -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$1,439,000 -</td> -<td>$2,096,000 -</td> -<td>70% -</td> -<td align="right">$389,800 -</td> -<td align="right">$2,851,000 -</td> -</tr> -<tr> -<td>Virginia -</td> -<td> -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$9,821,000 -</td> -<td>$14,725,000 -</td> -<td>70% -</td> -<td align="right">$2,943,000 -</td> -<td align="right">$7,729,000 -</td> -</tr> -<tr> -<td>Missouri -</td> -<td> -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$4,037,000 -</td> -<td>$10,998,000 -</td> -<td>38% -</td> -<td align="right">$3,666,000 -</td> -<td align="right">$3,434,000 -</td> -</tr> -<tr> -<td>Suffolk System -</td> -<td> -</td> -<td> -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td>$44,000,000 -</td> -<td>$131,000,000 -</td> -<td>30% -</td> -<td align="right">$10,058,995 -</td> -<td align="right">$41,208,000 -</td> -</tr> -</table> - - - - - - - -<p><span class="pagenum"><a name="Page_362" id="Page_362">[Pg 362]</a></span></p> - -<p><i>Can anyone doubt, after noting these figures, that the note issues of -the various banking systems kept as perfect pace with the requirements -of trade, as checks and drafts do? Certainly it is perfectly evident -that the bank notes came and went precisely as all bank credit should.</i></p> - -<p><span class="smcap">Mr. Lawyer</span>: While all these splendid banking systems were -snuffed out by the 10 per cent tax upon circulation, the sound -principles upon which they were all founded are still most successfully -exemplified by the Canadian Banking System which you will remember took -its charter from the statutes of Massachusetts.</p> - -<p>There are today 27 banks in Canada, with 2,000 branches. The general -principle of the Canadian Banking System is identical with that of the -Virginia, Kentucky, Louisiana, Indiana, Ohio, Iowa and Missouri banks. -It is true there are some differences in matters of detail. The amount -of notes that can be issued regularly is that of the capital of the -bank. The notes are a first lien upon the assets of the bank, including -a double liability of the stockholders; the bank notes are also secured -by a guarantee fund of 5 per cent, which is contributed by the banks -issuing the notes; there is a provision that the notes shall bear -interest at the rate of 5 per cent until notification of redemption. -No holder of a Canadian bank note has ever lost a cent since these -provisions have been in force.</p> - -<p>You remember that we have a chart which shows very graphically with -what marvelous accuracy, year in and year out, month in and month out, -day in and day out, the Canadian Bank note currency meets the actual -requirements of trade; no more, no less, but always just adequate.</p> - -<p>The precision with which the currency rises and falls with the demands -of trade is the result of the daily redemption of all bank notes, -concurrently with the checks and drafts, through the Clearing Houses, -or over the counters of the banks, or at the points fixed by law<span class="pagenum"><a name="Page_363" id="Page_363">[Pg 363]</a></span> for -note redemption for the purpose of keeping the notes at par, all over -Canada.</p> - -<p>We want to keep this diagram here on file, because it speaks louder -than words possibly can.</p> - -<p><span class="smcap">Mr. Banker</span>: One striking characteristic of the Bank of the -State of Indiana and the State Bank of Iowa was that the parent, or -home institution, did no business at all, except for the branches, and -examined and supervised them. Hugh McCulloch, the president of the Bank -of the State of Indiana, said, "that the soundness of the bank was due -to the frequent examinations."</p> - -<p>Another feature to be found in both these systems, and so far as I know -peculiar to them, was this: that all the branches were responsible -for the failure of any one of them; but the branches did not share in -each other's profits. The result of this law was to make every branch -the watch dog of every other branch; there was only one instance in -which the home, or parent institution, took charge of a branch in -either state, and that was in 1860. The executive committee of the -State Bank of Iowa having heard that one of the branches had made -some unsafe investments, "promptly took charge of its affairs, and -authorized a reorganization, calling upon other branches for such aid -as was required, which was given so that the branch, with no delay, and -without loss of a cent to its customers, or note holders, or suspension -even of its legal business, was again put on a firm and solvent basis."</p> - -<p>Undoubtedly this plan of supervision by the parent, or home -institution, which did no business, was a wise precaution. Mark this, -it is precisely the same principle put into operation that is now being -followed by twenty of our Clearing Houses, and was then, and as I -believe it will prove now, a practical guarantee of all the liabilities -of all the banks that are subject to such examinations and supervision.</p> - -<p>The most significant fact, and the one to be noted particularly, is -that the parent, or home institution, like the<span class="pagenum"><a name="Page_364" id="Page_364">[Pg 364]</a></span> Clearing House, only -acted for the branches, precisely as the Clearing House acts for its -members, and examined and supervised them. Economically this principle -is absolutely sound. Historically, it is of essential importance -because here history is repeating itself, after a lapse of fifty years, -and in both instances this protective principle and practice has grown -out of precisely the same conditions—the unsound and dangerous methods -of certain members of the banking fraternity itself.</p> - -<p><span class="smcap">Mr. Merchant</span>: Gentlemen, the astounding thing to me is that -when this country had once learned and practiced so sound, complete and -perfect a banking system, it should have lost it.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I don't think that that is at all strange -when you remember that it only existed in a few states and consider -just how we lost it. You will remember that the Virginia banks which -were founded upon the old Scotch system started in 1804, and worked -perfectly until the war broke out. The other banks, or systems of -banks, were established from time to time, some of them as late as -1857, and as Mr. Banker remarked several nights ago, modeled very -largely after the two United States banks, the charter of the last of -which expired only in 1837.</p> - -<p>From a close study one can discover both of these two systems combined -in some instances. In this way we were gradually working out a national -system precisely as we are today under new and vastly more varied -conditions, but the war coming on, destroyed all that had been done.</p> - -<p>You will remember that Secretary Chase, desiring to sell Government -bonds for the purpose of carrying on the war, secured legislation -which put a tax of 10 per cent upon all bank note issues and compelled -banks desiring to issue currency to buy Government bonds as a basis -of their circulation. As a result, he produced a currency of uniform -appearance that was of equal value every<span class="pagenum"><a name="Page_365" id="Page_365">[Pg 365]</a></span>where and a great blessing -to the country. This condition was a very great and most agreeable -change in the currency experience of the country, because there had -been practically no legislation except in a few states that in any way -controlled banking practices, or currency issues. The result was that -we had "Blue Pup Money," "Red Dog Money," "Wild Cat Money," "Yellow Dog -Money" and every other kind of "Dog Gone Money," that could be gotten -up with paint and paper to fool and defraud the people. On top of this -situation there arose a terrific political prejudice engendered through -political controversy toward a Central Bank. The conditions brought -about by the legislation, secured by Chase, have kept up the present -régime until it has become so utterly intolerable, because utterly -unsound economically, and so disturbing to the general welfare as to -compel immediate consideration and reconstruction.</p> - -<p>It is really the first time since the Civil War that the finances and -banking of the country have become a serious question outside of the -acute phases presented in the Government issues, or the Greenback craze -of 1875 and the silver hallucination of 1896. Today, the question is -not a specific one, or a mere detail, but one of fundamental principles -and of a most comprehensive character. It involves the whole subject -of governmental finance and banking and it is well that it should; for -our business is so vast now, almost 50 per cent of the banking power -of the world being within our borders. Our annual productions are -approximately thirty-five billions. Our annual clearings will pass the -fabulous mark of $170,000,000,000 (one hundred and seventy billions). -So that every recurring financial disaster will be worse, if possible, -than the one going before it.</p> - -<p><span class="smcap">Mr. Banker</span>: Right you are, Mr. Manufacturer, and this is true -because the principles involved are as fundamental and immutable as -the law of gravitation; and if we persist in our folly, when dealing -with these enormous<span class="pagenum"><a name="Page_366" id="Page_366">[Pg 366]</a></span> volumes of credit, the destruction that is sure to -follow will be on a scale with that of worlds in collision.</p> - -<p><span class="smcap">Mr. Merchant</span>: That seems to describe the situation somewhat -graphically and impressively, but I must say truthfully. We are -undoubtedly "up against it" as the boys say. Only the other day I was -talking with a president of one of the largest national banks in the -country, and he told me that unless something was done very soon, he -would get out of the business, because he could not stand the strain; -but the bankers' troubles are no worse than those of every business -man, and it seems to me as though we were on a perpetual strain, and -living in a sort of terror of what may happen at almost any time. The -business atmosphere is unnatural. Certainly this cannot be necessary.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, I don't see anything very strange -or unnatural about this thing, if it is as you have already stated -that there have been no changes in your banking laws worth speaking -of, since 1863. Look at your railroad development. Fifty years -ago the locomotive that weighed thirty-five tons was a whopper, -but now they turn them out weighing one hundred and thirty-five -tons. We used to have thirty-five and fifty-pound rails, and our -ties forty inches apart. Now we have a hundred-pound rail, yes, -one-hundred-and-fifteen-pound rail, with the ties twenty-five inches -apart. The other day, I counted one hundred cars with one hundred -thousand pounds capacity each, every one loaded full in a single train. -Now, what would you think of running a hundred-ton engine, and that -kind of a train of cars over a railroad built fifty years ago? Ties -only eight inches thick and forty inches apart, on a corresponding -road-bed. Why, men, I can tell you we don't want a single-track -railroad of that character now, with a switch out every ten miles -to let trains pass; but we want a four-track road, with twelve to -fifteen-inch ties, only twenty-five inches apart, and equipped with -signal and block<span class="pagenum"><a name="Page_367" id="Page_367">[Pg 367]</a></span> systems of the latest type, and most perfect -automatic operation.</p> - -<p><span class="smcap">Uncle Sam</span>: Gentlemen, when it comes to getting down to -brass tacks, and hitting the thing plump square between the eyes, -Mr. Laboringman gets away with all of you. Now, can you beat that -as an illustration of our financial and banking needs? If you will -construct a banking system up-to-date, and just add to these domestic -requirements the necessary provisions growing out of the fact that I -am now a world power, I should have said, I am the world power, and -prepare an international financial and banking system, we shall meet -the demands of this new century; but otherwise I shall find myself -wholly incapable of protecting the very foundation of commercial -credit, my gold reserves, when the test comes.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Laboringman and Uncle Sam have laid down -the right kind of a program in telling terms, if not explicit. It is -clearly up to us to work out a plan as comprehensive and perfectly -adapted to our needs today, as were the banking systems of Louisiana, -Ohio, Indiana, Kentucky, Virginia, Iowa, Missouri and the Suffolk -Banking System of New England was to the needs of those various -sections of the United States at that time; for they were practically -perfect from the standpoint of economic principles and the needs of -those times. The principles upon which they were founded are eternal -and are just as applicable today as they were then. The principles have -not changed, although the conditions have, and that most amazingly.</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_368" id="Page_368">[Pg 368]</a></span></p> - - - - -<p class="ph2"><a name="FIFTEENTH_NIGHT" id="FIFTEENTH_NIGHT">FIFTEENTH NIGHT</a></p> - -<p class="center">OUTLINE OF BILL</p> - - -<p><span class="smcap">Uncle Sam</span>: For nearly four months, for this is our fifteenth -night, we have been studying the principles of economics and the -practices of banking, and we have gone over with the greatest care the -experiences of American banking institutions from the beginning.</p> - -<p>No body of men could have been more faithful in attendance, nor -more sincere in their desire to know the facts, and understand the -fundamental principles as they are; nor more determined to get to -the bottom of things; nor more ready to yield, and renounce even -hoary-headed fallacies when it was demonstrated that you were wrong, -than you have been.</p> - -<p>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?</p> - -<p><span class="smcap">Mr. Merchant</span>: 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 sin<span class="pagenum"><a name="Page_369" id="Page_369">[Pg 369]</a></span>cere 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: That is a true prophecy; if the people of -this country remain indifferent, and allow another<span class="pagenum"><a name="Page_370" id="Page_370">[Pg 370]</a></span> 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.</p> - -<p><span class="smcap">Mr. Farmer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>Another matter of importance about which I am sure we all agree is -this: that there were in several of the<span class="pagenum"><a name="Page_371" id="Page_371">[Pg 371]</a></span> 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?</p> - -<p><span class="smcap">Mr. Merchant</span>: I do not see how it could be otherwise, when you -recall some of the facts brought to our attention during these talks.</p> - -<p>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<span class="pagenum"><a name="Page_372" id="Page_372">[Pg 372]</a></span> 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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>Mulhall, the English statistician, stated that the banking resources of -the entire world in 1890, including the<span class="pagenum"><a name="Page_373" id="Page_373">[Pg 373]</a></span> 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.</p> - -<p>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.</p> - -<p>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).</p> - -<p>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.</p> - -<p>Since we have just passed a more or less critical stage, it may be -well to call attention to the fact that<span class="pagenum"><a name="Page_374" id="Page_374">[Pg 374]</a></span> 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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>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<span class="pagenum"><a name="Page_375" id="Page_375">[Pg 375]</a></span> 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p style="margin-left: 30%;"> -<span style="margin-left: 0.5em;">A COMMERCIAL BUSINESS</span><br /> -<span style="margin-left: 0.5em;">A SAVINGS BUSINESS</span><br /> -<span style="margin-left: 0.5em;">A TRUST BUSINESS</span><br /> -<span style="margin-left: 0.5em;">A NOTE ISSUE BUSINESS</span><br /> -</p> - -<p><i>First</i>: 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.</p> - -<p><i>Second</i>: 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.</p> - -<p><i>Third</i>: 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 rep<span class="pagenum"><a name="Page_376" id="Page_376">[Pg 376]</a></span>resentation 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.</p> - -<p><i>Fourth</i>: 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.</p> - -<p><i>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.</i></p> - -<p>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.</p> - -<p>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.</p> - -<p><i>A bank makes less profit in issuing bank notes than it does in taking -deposits and loaning them out.</i> Now,<span class="pagenum"><a name="Page_377" id="Page_377">[Pg 377]</a></span> 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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<span class="pagenum"><a name="Page_378" id="Page_378">[Pg 378]</a></span> a bank makes less upon that form of bank credits than -upon a corresponding amount of deposits. <i>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.</i> 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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="pagenum"><a name="Page_379" id="Page_379">[Pg 379]</a></span></p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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:</p> - -<p><i>First</i>: To continue to do a commercial business.</p> - -<p><i>Second</i>: To do a savings business.</p> - -<p><i>Third</i>: To do a trust company business.</p> - -<p><i>Fourth</i>: To do a note issue business.</p> - -<p>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<span class="pagenum"><a name="Page_380" id="Page_380">[Pg 380]</a></span> 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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>It may be objected by some self-satisfied, selfish, ignorant and -unpatriotic banker, who is doing all of these things now in some -way with ample or even more than satisfactory profits, that the -combination of these different forms of the banking business is -theoretically wrong. But let it be distinctly understood and observed, -and remembered, that we are not dealing with a theory now. Nor are we -organizing something new. We are dealing with an actual, serious and -most dangerous fact, and that is, that the banks of the country are now -doing all these things in a conglomerate way, largely unsupervised and -uncontrolled.</p> - -<p>Our unit of banking, the individual, independent bank, should have -its parts coördinated, unified and brought<span class="pagenum"><a name="Page_381" id="Page_381">[Pg 381]</a></span> into a system, and under -one common supervision and control. That supervision should not be -political, but should be a supervision of the banks by the banks in the -interest of the people and the banks themselves.</p> - -<p><i>Now we are also dealing with another most dangerous fact. It is this: -First, the national banks are carrying cash reserves amounting to 17 -per cent. The reserves of all the other banks amount to only 5 per -cent; and, excluding the mutual savings banks, the reserves of all the -remaining banks amount to only 7 per cent. The cash reserves of the -banks of the United States should under no circumstances fall below 15 -per cent, and under some circumstances they should amount to at least -30 per cent. Second, the reserves, such as they are, are all broken up -into small fragments, and scattered broadcast over the land.</i></p> - -<p>The result is that our reserves lack the element of true reserves, -and are robbed of their efficiency, which is essential to commercial -safety. The highest degree of efficiency and utility of reserves can -only be secured by a centralization of 50 or 60 per cent of our cash -reserves, or say 10 per cent of our individual deposits, and 5 per -cent of our time deposits or savings accounts. In this way, we shall -centralize and mobilize about $1,250,000,000 of our gold, which now -exceeds $1,850,000,000.</p> - -<p>It will be observed that the reform here proposed is in perfect accord -with the evolution of all our Anglo-Saxon law. It is merely putting -into statutory form the present universal practices of the country -which have grown up as a result of those new conditions which are -peculiar to ourselves, and compelling conformity with those great -economic laws that cannot be violated or disregarded without suffering -the consequent penalty. Again, it is the only way that each bank can be -compelled to carry its share of the burden of our commerce, and furnish -its share of insurance to the business interests of the country, so far -as sufficient and uniform reserves will do it.</p> - -<p>The second great reform, then, that is essential is also<span class="pagenum"><a name="Page_382" id="Page_382">[Pg 382]</a></span> in perfect -harmony and accord with the most approved practices of the banking -world.</p> - -<p>It will be noticed that here, too, a method or system from approved -practices has grown up, not only without the sanction of law, but in -part actually in defiance of law. I refer to the fact:</p> - -<p><i>First</i>: That there is no law in any state authorizing the organization -of the Clearing House, and yet there are over two hundred and fifty of -them in the United States.</p> - -<p><i>Second</i>: That there is no law authorizing any Clearing House Committee -to examine the banks composing it. But in twenty cities at least the -Clearing Houses are not only examining their own members, but go even -further than that and insist that no bank shall clear through any -Clearing House bank which does not submit to an examination by the -examiner appointed by the Clearing House. This has been found essential -to the safety of the banking situation in these cities, but is no more -essential in these twenty cities than in five hundred or one thousand -other cities; in fact, essential throughout, and all over every state -of the Union. This has come to be an established practice, and is being -taken up rapidly, all over the United States, and yet there is no law -whatever that authorizes it, suggests it, or by implication justifies -it.</p> - -<p><i>Third</i>: With the consent and approval of public officials, both State -and national, but without authority of law, the banks of many of -our Clearing Houses are carrying at all times a large part of their -reserves at their Clearing Houses for their convenience and as an aid -to commerce. Undoubtedly they are doing just what they should do. It -is stated upon high authority that the amount of reserves that are now -centralized and mobilized at the Clearing Houses today will exceed -$200,000,000. This practice is the result of experience, not only in -the times of panic, such as 1893 and 1907, but also for the daily needs -of their gigantic transactions.</p> - -<p><i>Fourth</i>: In like manner, not only without law, but ac<span class="pagenum"><a name="Page_383" id="Page_383">[Pg 383]</a></span>tually in -defiance of law, these self-contained, self-centred, self-governing -Clearing Houses, whenever necessity calls for it, very wisely and -properly issue a true credit currency, in principle, at least in the -form of Clearing House certificates which serve all the purposes -of legal currency itself. They are issued in $1 certificates, $2 -certificates, $5 certificates, $10 certificates, $20 certificates, $50 -certificates and in denominations of $100, $1,000, $10,000, and on up -to as many or more millions. All this is done not only without the -authority of law, but in the latter case in actual defiance of law.</p> - -<p>Here then again we have purely as a result of evolution in modern -American banking the second naturally developed unit, the Clearing -House, by combining, coördinating and unifying all the banks, or -simple units, coming within its jurisdiction. They exist without law -and operate without law, and in one respect, as I have just said, in -defiance of law.</p> - -<p>This Clearing House unit consists of the following elements:</p> - -<p class="center"> -<span style="margin-left: 0.5em;">FINANCIAL CENTRE</span><br /> -(with one hundred banks),<br /> -<br /> -<span style="margin-left: 0.5em;">CLEARING HOUSE COMMITTEE</span><br /> -(without law),<br /> -<br /> -<span style="margin-left: 0.5em;">CLEARING HOUSE BANK EXAMINER</span><br /> -(without law), -<br /> - -<span style="margin-left: 0.5em;">CLEARING HOUSE RESERVES</span><br /> -(without law),<br /> -<br /> -<span style="margin-left: 0.5em;">CLEARING HOUSE CERTIFICATES</span><br /> -(in defiance of law).<br /> -</p> - -<p>If this system has been the means of purging the banks coming within -its influence and jurisdiction and strengthening the situation, -wherever adopted, and if no city where it has been in practice, of -which there are now more than twenty, would not give it up, let any -man<span class="pagenum"><a name="Page_384" id="Page_384">[Pg 384]</a></span> say why this safe principle should not now be extended until every -bank in the United States is brought within its beneficial influence. -However, this result can only be attained by having a uniform and truly -national banking system.</p> - -<p>As was pointed out only a moment ago, that if the national banking -powers mentioned are granted to the national banks, no bank can afford -to remain outside of the system, because the advantages gained by going -into it are so great.</p> - -<p>However, if there are bankers, who by running double-headed or -triple-headed institutions believe that they cannot then do some things -that they are now doing, and which they, therefore, probably should -not do, should undertake to argue that banking cannot be brought under -national supervision and control, let them consider the following facts:</p> - -<p><i>First</i>: That the United States Government put a tax of 10 per cent -upon all State bank notes and that they died a natural death. Of -course, it is true they were suffocated. But would any one go back to -the days when they had to pay exchange upon a bank note every time they -crossed a State line? Would anybody take a step that would substitute -a local currency for a national currency of uniform character and -quality? Let every antagonist mark this, and remember it well that the -same power that put a tax of 10 per cent upon bank note issues can -also put a tax of 10 per cent upon deposits for any one of a number of -good reasons; for example, it could and should impose such a tax, if -necessary, to compel all the banks of the country to carry their part -of the commercial burden in the shape of equal and adequate reserve.</p> - -<p><i>Second</i>: Can any one give a single reason, valid reason, why the -postal savings bank was made a national institution that would not -apply with equal, if not greater, force to the $17,000,000,000 -individual deposits of which $6,480,000,000 are savings?</p> - -<p><span class="pagenum"><a name="Page_385" id="Page_385">[Pg 385]</a></span></p> - -<p><i>Third</i>: Can any one deny that it is interstate commerce for note -brokers to ship millions, yes billions upon billions, of promissory -notes, or so-called commercial paper, from one State to another by -express, mail or freight? Will any one deny that promissory notes are -property? Will any one assert that shipping promissory notes differs -in the slightest degree from shipping eggs, apples, potatoes, cotton, -grain or live stock on the ground that promissory notes are not -property, but that eggs, apples, potatoes, cotton, grain and live stock -are property?</p> - -<p>Will any one deny that the same power that passed the "food and drugs -act," giving the Government power to stop the use of poisons in -medicines and food; the "insecticide act," giving the Government power -to prescribe the character of poison to be used to kill bad bugs; -the "plant quarantine act," giving the Government the right to stop -lice from traveling across a State line; the "meat inspection act," -giving the Government power to insist upon decent meat; the "live -stock quarantine act," giving the Government the right to prevent a -man from driving his cattle under certain conditions over a State -line; the "twenty-eight hour law," requiring shippers to treat cattle -humanely; the "employers' liability act," the "safety appliance act," -the "white slave act," the "hours of service act," the act regulating -the transportation of explosives; will any one deny, I say, that the -same power that passed all these acts cannot be exercised to protect -forty-seven States in the Union against such bank practices in the -forty-eighth State, as will at any moment throw the entire country into -a panic and destroy all public confidence in our banks and bring in its -wake the destruction of credit and consequently the destruction of vast -property values?</p> - -<p>Certainly no one will deny that any State has the power, and that it -is its duty to compel every person, firm or corporation using the word -"banker" or "bank" to submit themselves to jurisdiction, supervision -and control of that State. Every State has the power to protect<span class="pagenum"><a name="Page_386" id="Page_386">[Pg 386]</a></span> any of -its citizens against the wrongdoings of other citizens, and one bank or -banker against the evil practices of other banks or bankers.</p> - -<p>In eighteen States no bank reserves are now required by law, and -in many States there is no supervision whatever of State banking -institutions by the State. Is it possible that the National Government -has no power to act in the light of these facts when the banking -business of the country is essentially not only one kind of a business, -but, indeed, one single business, each one being a wheel in the great -credit machine?</p> - -<p><i>It is so interlaced, and so interwoven that one rotten spot map prove -as dangerous to the whole fabric of credit as a box of dynamite under -one's chair. Is it possible, I say, in the light of all these facts, -that there is no redress, no protection to our vast commerce, and to -labor through the National Government? Is it possible that we could be -compelled to continue for a thousand years in the midst of our present -terrors from bad supervision and want of adequate reserves?</i></p> - -<p>The manufacturers, the merchants, the farmers, the laboring men, and -business interests of every kind have a right to demand and undoubtedly -will demand protection, and demand it now. Unless I misunderstand the -present temper of the American people, they will now demand that their -interests be safeguarded, and that they be protected against the always -impending dangers growing out of the present conglomerate condition of -the banking business.</p> - -<p>I assert that this end can only be achieved by extending the same -organization which many of the larger cities have already adopted to -all the natural, financial centres of the country and include with them -all the territory naturally tributary to such centres; in other words, -that we should now extend the same organization to every commercial -zone of the country of which these natural financial centres are the -dominating commercial cities.<span class="pagenum"><a name="Page_387" id="Page_387">[Pg 387]</a></span> This diagram will indicate more forcibly -just what I mean than words can convey.</p> - -<p class="center"> -<img src="images/illus08.jpg" alt="pic" /> -</p> -<p class="caption"> <span class="smcap">Diagram Illustrating District System of Bank -Organization to Give Stability in Commercial Zones.</span></p> - -<p>The straight lines are drawn from some centre in a city arbitrarily, -and purposely so, in order to eliminate all political machinations and -gerrymandering in forming the districts for any reason that may arise -from time to time. They are so drawn as to divide the whole number of -banks in the entire commercial zone into seven equal districts. That -is, if there should be seven hundred banks in the commercial zone there -would be one hundred banks in each district.</p> - -<p><span class="pagenum"><a name="Page_388" id="Page_388">[Pg 388]</a></span></p> - -<p>The one hundred banks in each district organize in precisely the same -way, and as follows:</p> - -<p><i>First</i>: Upon coming together the one hundred banks of District No. 1 -proceed to organize formally by electing a president and secretary. -Then they select and elect their portion of the "bankers' council" -of the whole zone, which corresponds exactly to the Clearing House -Committee of the financial centre.</p> - -<p>The one hundred bankers of each district elect one banker and one -business man from the respective districts, or seven bankers and seven -business men, or fourteen in all, and the fourteen so selected then -proceed to select and elect their president, who shall not be one of -the fourteen so selected by the bankers of the several districts.</p> - -<p>These fifteen men so selected constitute the "bankers' council," and -bear identically the same relation to the whole commercial zone as -the Clearing House Committee bears to the banks which constitute the -Clearing House.</p> - -<p><i>Second</i>: The one hundred bankers of each district then proceed to -select and elect a banker as a member of the board of control, or seven -in all, whose duty will be, among other things, to examine the banks of -the entire zone precisely as the Clearing House bank examiner examines -the banks of the Clearing House of the financial centre; provided, -however, that the district from which the bankers' council have -selected their president shall accept such president as their member of -the board of control.</p> - -<p>Will any one say that with such supervision as this board of control -will give to the banks of the commercial zone, each bank having been -compelled to qualify in the outset—will any one say, I repeat, that -such supervision will not absolutely prevent bank failures?</p> - -<p>This is not only important to the depositors of the country but also to -the general business of the country as well.</p> - -<p>Thereupon all banks of the zone will transfer to the<span class="pagenum"><a name="Page_389" id="Page_389">[Pg 389]</a></span> board of control -a part of their required reserves; that is, 7 per cent of their -deposits and 7 per cent of their note issues will be deposited with the -board of control. Later this should be increased to 10 per cent.</p> - -<p>Let us assume that this 7 per cent of their deposits and 7 per cent of -the notes issued amount to $100,000,000, which will be the central or -economic reserve of the commercial zone and be under the control and -management of the board of control.</p> - -<p>You will recall that the bankers' council, which bears the same -relation to the commercial zone that the Clearing House Committee bears -to the financial centre of the zone, was composed of seven business -men and seven bankers, who selected their own president. These fifteen -men will select a representative from their respective zones. So -that we shall have a board of directors representing the thirty or -forty commercial zones directly and not indirectly. Each zone will be -represented alternately by a business man and a banker, so that the -board at Washington would always consist of fifteen or more business -men and fifteen or more bankers; the business interests and banking -interests equally, the inside and outside of the bank counter; the -depositors and the banks or the trustees of the depositors.</p> - -<p>The next logical and necessary step is a national central gold reserve -if we hope to prevent our gold leaving us at the will of foreigners, -and also if we hope to serve the whole nation, just as the Clearing -House is serving its members today, and as the commercial zone will -be able to serve all of its members, when it has been once organized. -Therefore, as a sequel to the organization of the commercial zones, say -thirty or forty of them in the United States, they in turn will all -unite their gold in one great central gold reserve, which will amount -to approximately $1,250,000,000 (one billion two hundred and fifty -million dollars). We should then have the "American Reserve Bank." The -amount of gold held by this institution would be twice that held by -any other in<span class="pagenum"><a name="Page_390" id="Page_390">[Pg 390]</a></span> the world, and would be under the control of a board of -directors which I have just hastily described; I have used and suggest -the name "American Reserve Bank," because we are known the world over -as "The Americans," and, therefore, I think it peculiarly fit to use -the name "American Reserve Bank."</p> - -<p>This institution, with the specific powers granted to the individual -banks as outlined, will be able not only to protect each individual -bank, but to protect the reserves of all the banks; that is, the -reserves of the United States against the drafts of the world, -precisely as the Bank of England protects her gold, or adds to it by a -rate of discount; that is, by fixing a price for the use of gold.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: By the way, before I forget it, I want to -make one suggestion right here, because it seems to me as though this -was the right place to bring it in, and that is this: I am firmly -convinced that a bank like yours, and all commercial banks, should be -allowed to write their acceptance across the face of notes or drafts, -and so develop what is called a discount market in the United States, -such as they have in other countries.</p> - -<p><span class="smcap">Mr. Banker</span>: Mr. Manufacturer, I am glad that you have spoken -of that matter, and here is just the place to discuss it. A great many -people are deluding themselves about the matter of acceptances. It -must be remembered that the banks are not going to increase their own -capital by increasing their liabilities through acceptances. Indeed, -this practice would only add fuel to a conflagration of their credits, -unless the banks should confine themselves to accepting only such paper -as had grown out of actual transactions in which the goods had been -sold and delivered, or were actually in transit. Moreover, by way of -assurance, every piece of such paper so accepted by a bank should state -upon its face that the goods for which it was given had been sold and -delivered, or were in transit.</p> - -<p><i>Such acceptances are absolute agreements to pay a specific sum of -money upon a specific day, and there<span class="pagenum"><a name="Page_391" id="Page_391">[Pg 391]</a></span>fore are just as much a liability -as a deposit subject to check, with this disadvantage, that the -property is not within the control of the bank, as the deposits are, -against which a check is drawn, and therefore every bank should carry -precisely the same reserve against its acceptances that it carries -against its deposits.</i></p> - -<p>Acceptances of the approved sort will not necessarily, if at all, -greatly increase production; but they will create a new form of -investment, that is, a guaranteed commercial paper of which billions of -the single name sort are being sold today. Of course, two-name paper -with the acceptance of a bank of high standing will soon bring into -being here, just as it has in London and other financial centres of -Europe, new capital. That is, capital will be attracted to the business -of buying and selling such high-class paper. It will be a profitable -investment for the idle funds of merchants and manufacturers at those -seasons of the year when all of their capital is not occupied in -their business, and also for the banks of the country at those times -of the year when the local demands are not equal to their supply of -funds. It is undoubtedly true that such paper would also soon find a -market abroad, as well as at home, and to that extent would facilitate -American manufacture and commerce. But we must not deceive ourselves -about the fact that the banks will just to that extent increase their -liabilities while they have not increased their actual capital to the -extent of a single cent.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: I must confess that I have misapprehended -the effect of an acceptance, but you are certainly right with regard to -it, and unless we should keep the business of the country in a sound -condition, the acceptance business might prove a two-edged sword, and -this emphasizes the fact that we must keep a close watch upon what our -commercial fund is all the time, and prevent it from being transferred -and absorbed in fixed investments, which is always a bane to the -commerce of a country.</p> - -<p><span class="pagenum"><a name="Page_392" id="Page_392">[Pg 392]</a></span></p> - -<p>We must not forget these three important factors which are always -present here in the United States: first, the vast, undeveloped -resources of our country, and the ever-inviting opportunities; second, -the intelligence, the ambition, the impulsiveness and the optimism of -our people; third, the peculiar, local relations of our twenty-five -thousand, individual, independent banks, which are always in close -sympathy with and affected by the growth and development of their -locality and the varied interests, and the enthusiasm of the people. -The vision of our local banker is largely confined to his immediate -vicinity.</p> - -<p><span class="smcap">Mr. Farmer</span>: How absolutely true that is, and therefore how -great must be our caution in opening up the flood gates of credit, -before we know that we have guarded the situation at every point. I -notice that those banks before the war were all so sound and successful -because they had to get the coin to make redemption with. Here is -something I read in a book yesterday, and it strikes me that it is -right in point now: "Redemption is the breath of life to all credit." -You bet I have found it's death to a fellow who's got to, and can't pay.</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, and when you realize that credit is the very -soul of trade and commerce, as it is carried on today, how absolutely -essential it becomes that credit be kept within the limits of certain -coin redemption, if we are to have sound business conditions.</p> - -<p><span class="smcap">Mr. Merchant</span>: Well, Mr. Banker, how do you propose to keep -credit within safe boundaries, and so insure sound business conditions -all the time?</p> - -<p><span class="smcap">Mr. Banker</span>: In just two ways:</p> - -<p><i>First</i>: By having the reserves of gold on hand in the various banks, -sufficient at all times to prove all commercial credits, say from -5 to 20 per cent, according to the peculiar business and varying -responsibility of the banks to their banking obligations; and in -addition, such a central gold reserve as will to all intents and -purposes be unlimited, so far as any possible demands<span class="pagenum"><a name="Page_393" id="Page_393">[Pg 393]</a></span> may be made upon -it—say 10 per cent ultimately of all individual deposits and 5 per -cent of savings deposits. This would give us at the present time about -one billion dollars ($1,000,000,000) of cash reserve, and about one -billion two hundred and fifty million dollars ($1,250,000,000) of gold -in a central reserve to meet the emergencies of commerce.</p> - -<p><i>Second</i>: Such a supervision of the banks by the banks themselves as -will keep their assets in liquid form, at least to the extent that -their assets are commercial assets and are liable for individual -deposits on demand.</p> - -<p>In this connection I want to call your attention to the fact that not -a single bank has yet failed which has been under the supervision of a -clearing house. You will remember that this principle was adopted in -Chicago in 1906, and that today the banks in at least twenty of our -leading cities are under clearing house supervision.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Laboringman</span>: 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<span class="pagenum"><a name="Page_394" id="Page_394">[Pg 394]</a></span> 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?</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p>I have been so deeply impressed with the points that Mr. Laboringman -has just made, that to me his arguments are unanswerable.</p> - -<p><span class="smcap">Mr. Banker</span>: I am ready to answer right now and ready to admit -that his arguments are unanswerable.</p> - -<p><span class="smcap">Mr. Farmer</span>: 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.</p> - -<p>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.</p> - -<p><span class="pagenum"><a name="Page_395" id="Page_395">[Pg 395]</a></span></p> - -<p><span class="smcap">Mr. Laboringman</span>: 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. <i>It is an infinitesimal nothing. Think of it: -It is only 3½ 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.</i></p> - -<p><span class="smcap">Mr. Farmer</span>: I want to read the letter of the Comptroller to -you men.</p> - -<blockquote> - -<p> - -<span style="margin-left: 45%;"><span class="smcap">Treasury Department,</span></span><br /> -<span style="margin-left: 45%;"><span class="smcap">Washington</span>, January 25, 1913.</span><br /> -<br /> -<span class="smcap">Mr. Joshua Farmer</span>,<br /> - -<span style="margin-left: 10%;">Loraine, New York.</span><br /> -</p> - -<p><span class="smcap">Dear Sir</span>: 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:</p> - -<p>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.</p> - -<p>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.</p> - -<table summary="banks" width="85%"> -<tr><td>The liabilities of 478 insolvent National banks -the affairs of which have been finally closed<br /> -amounted to</td> <td align="right">$219,357,100</td></tr> -<tr><td>Creditors received in dividends, offsets, etc.</td> <td align="right">181,215,826</td></tr> -<tr><td></td><td align="right">——————</td></tr> -<tr><td>Loss to creditors</td> <td align="right">$38,141,274</td></tr> -</table> - -<p>Creditors, therefore, received an average of 82.50 per cent, the loss -averaging 17.41 per cent.</p> - -<p><span class="pagenum"><a name="Page_396" id="Page_396">[Pg 396]</a></span></p> - -<table summary="banks" width="85%"> -<tr><td>There are now (September 30, 1912) 47 insolvent<br /> -banks in process of liquidation by -receivers, with liabilities of</td> <td align="right"> $34,314,633</td></tr> -<tr><td>Creditors have received (September 30, 1912)</td> <td align="right">26,750,925</td></tr> -<tr><td></td><td align="right">—————</td></tr> -<tr><td>Balance due creditors</td> <td align="right">$7,563,708</td></tr> -</table> - -<p>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.</p> - -<p>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.</p> - -<p> -<span style="margin-left: 35%;">Yours very truly,</span><br /> -<span style="margin-left: 40%;"><span class="smcap">W.J. Fowler</span>,</span><br /> -<span style="margin-left: 42%;"><i>Deputy Comptroller</i>.</span><br /> -</p></blockquote> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="pagenum"><a name="Page_397" id="Page_397">[Pg 397]</a></span></p> - -<p><span class="smcap">Mr. Laboringman</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, while the problem has its difficulties, I -really think it is up to us to work it out in some way.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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<span class="pagenum"><a name="Page_398" id="Page_398">[Pg 398]</a></span> may have against which it does not hold the -reserves prescribed by the National laws.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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?</p> - -<p><span class="smcap">Mr. Banker</span>: I certainly do not. They are not only unfit for -bank reserves, but are teaching economic lies every day that they -remain out.</p> - -<p>You are aware, I have no doubt, that the banks of this country, -generally, are paying interest upon their<span class="pagenum"><a name="Page_399" id="Page_399">[Pg 399]</a></span> 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.</p> - -<p>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:</p> - -<p><i>First</i>: To pay the expenses of the several commercial zones and the -American Reserve Bank.</p> - -<p><i>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.</i></p> - -<p><i>Third</i>: Whatever cash I had left I would use to convert the United -States notes into gold certificates.</p> - -<p>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.</p> - -<p>No one will deny that this would be a most desirable thing to -accomplish.</p> - -<p><span class="smcap">Mr. Farmer</span>: 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.</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: I am glad you asked that question. You see that -if the banks now outside the National sys<span class="pagenum"><a name="Page_400" id="Page_400">[Pg 400]</a></span>tem 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.</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p>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?</p> - -<p><span class="smcap">Mr. Banker</span>: You are absolutely correct. Our varia<span class="pagenum"><a name="Page_401" id="Page_401">[Pg 401]</a></span>tion 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.</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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?</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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,<span class="pagenum"><a name="Page_402" id="Page_402">[Pg 402]</a></span> and make up its average reserves when the demand -was slight.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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).</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Farmer</span>: 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,<span class="pagenum"><a name="Page_403" id="Page_403">[Pg 403]</a></span> 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.</p> - -<p><span class="smcap">Mr. Banker</span>: That is precisely the result this coöperative -reserve fund of one billion two hundred and fifty million dollars -($1,250,000,000) would produce.</p> - -<p><span class="smcap">Mr. Lawyer</span>: <i>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.</i></p> - -<p><span class="smcap">Mr. Banker</span>: Now, gentlemen, let me call your attention to five -important results we have achieved in the development of this outline -of our proposed structure.</p> - -<p><i>First</i>: 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.</p> - -<p><i>Second</i>: 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<span class="pagenum"><a name="Page_404" id="Page_404">[Pg 404]</a></span> institution, did -no business whatever, except for the branches, which it examined and -supervised.</p> - -<p><i>Third</i>: 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.</p> - -<p><i>Fourth</i>: 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.</p> - -<p><i>Fifth</i>: 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.</p> - -<p>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.</p> - -<p>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<span class="pagenum"><a name="Page_405" id="Page_405">[Pg 405]</a></span> -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 <i>gold and gold alone</i>.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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:</p> - -<p>"A relief measure reforming the banking and currency system must -include, among its necessary features, provisions for never-failing -reserves and never-failing currency, and for the perfect elasticity -and flexibility of both; for the permanent organization and organized -coöperation of the banks, which are now suffering and causing the -nation to suffer by reason of their unorganized state; for a central -agency, to represent and act for the organized and coöperative -banks—this agency to be securely free from political or trust control, -but with the Government having adequate and intimate supervi<span class="pagenum"><a name="Page_406" id="Page_406">[Pg 406]</a></span>sion -of it; for independent banking units—so independent that no one -bank can be owned, controlled, or shared in in any degree, directly -or indirectly, by any other bank; for the equality of all banks, -National or State, both as to standards and as to functions—so that -every requirement made of a National bank must be complied with -equally by a State bank, and every function or privilege enjoyed by a -State bank shall be enjoyed by a National bank; for the utilization -and the fluidity of bank assets; for the scientific development of -exchanges—domestic and foreign; for foreign banking as an adjunct of -our foreign commerce, and for taking the Treasury Department out of the -banking business."</p> - -<p><span class="smcap">Mr. Farmer</span>: Well, you have forgotten the thing that interests -me more, generally speaking, than all else, and that is the Land Credit -Bank, which we went into last Wednesday night. Of course you intend to -include this when you prepare your bill.</p> - -<p><span class="smcap">Uncle Sam</span>: You bet they will, for I think it's about time that -the corn raiser, cotton planter and grain producer and all the rest of -the toilers of the turf, should be getting their money at as low rates -as anybody else on first-class security for a long period of time, and -I am determined to give the farmers of the country the benefit of my -good name to aid them in this matter.</p> - -<p><span class="smcap">Mr. Banker</span>: Of course we had all agreed to that, and shall -include it in the draft of the bill.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Uncle Sam, I move that Mr. Banker, Mr. -Lawyer, and Mr. Farmer be a committee of three to prepare a bill to be -submitted to us next Wednesday evening.</p> - -<p><span class="smcap">Mr. Merchant</span>: I second the motion.</p> - -<p><span class="smcap">Uncle Sam</span>: It's a go.</p> - -<p> -<span style="margin-left: 30%;">Good Night.</span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_407" id="Page_407">[Pg 407]</a></span></p> - - - - -<p class="ph2"><a name="SIXTEENTH_NIGHT" id="SIXTEENTH_NIGHT">SIXTEENTH NIGHT</a></p> - -<p class="center">DRAFT OF BILL</p> - - -<p><span class="smcap">Uncle Sam</span>: Well, boys, here we are ready for the report of the -committee on legislation, I suppose you would call it. Are you ready to -report now?</p> - -<p><span class="smcap">Mr. Farmer</span>: Yes, Mr. Lawyer will make our report and speak for -the committee.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Uncle Sam, your committee has been deeply -impressed with the duty you have imposed upon it.</p> - -<p>That the solution and settlement of our financial and banking problem -is the most important economic question that has ever confronted the -civilized world must be admitted by all who will take the trouble to -investigate it and institute a comparison between our conditions and -those of any other country at the time when it adopted its financial -and banking system.</p> - -<p>In 1803, when the Bank of France was established, the financial -resources of France were without official record, but comparatively -nominal.</p> - -<p>In 1844, when the bank act under which the Bank of England is conducted -was enacted, the banking resources of that country were probably in -the neighborhood of $500,000,000. The total note issue of England, -Scotland, and Ireland was less than $200,000,000; the public and -private deposits in the Bank of England were less than $75,000,000; and -the gold in the Bank of England was less than $75,000,000.</p> - -<p>In 1873, when the Imperial Bank of Germany took its present form, -industrial Germany was still slumbering; and the bank resources -probably did not exceed $1,000,000,000. The capital of the incorporated -banks was about $425,000,000, the notes were about $325,000,000, and -the reserves held about $30,000,000.</p> - -<p>The banking resources of the United States are today<span class="pagenum"><a name="Page_408" id="Page_408">[Pg 408]</a></span> more than -($25,000,000,000) twenty-five thousand million dollars and our foreign -trade more than ($4,000,000,000) four thousand million dollars. -The question we are dealing with, therefore, is not only the most -stupendous of its kind, but it must be considered both from a domestic -and foreign point of view. It is from both these points of view that we -have approached the preparation of this measure.</p> - -<p>As I proceed to read the bill I shall make some comment by way of -explanation in order that our purpose may be understood.</p> - -<p>A bill to establish a complete Financial and Banking system for the -United States of America.</p> - -<p><span class="smcap">Section 1.</span> <i>Be it enacted by the Senate and House of -Representatives of the United States of America in Congress assembled</i>, -That a complete financial and banking system for the United States of -America shall be, and is hereby, created, organized, and established as -follows:</p> - -<blockquote> -<p> -<span style="margin-left: 0.5em;"><i>First</i>: The commercial zone.</span><br /> -<span style="margin-left: 0.5em;"><i>Second</i>: The bankers' council.</span><br /> -<span style="margin-left: 0.5em;"><i>Third</i>: The board of control.</span><br /> -<span style="margin-left: 0.5em;"><i>Fourth</i>: The American Reserve Bank.</span><br /> -</p> -</blockquote> -<p><span class="smcap">Section 2.</span> That upon the passage of this Act the President of -the United States shall appoint three persons, who, with the Secretary -of the Treasury and the Comptroller of the Currency, shall proceed -immediately to designate such cities in the United States, not less -than twenty-eight in number and not to exceed forty-two in number, -for the location of the financial centres of the commercial zones, -numbering them consecutively as shall best accommodate and serve the -business and banking interests of the United States.</p> - -<p><span class="smcap">Section 3.</span> That within ninety days after the designation of -the cities for the location of the financial centres of the commercial -zones every national bank, with the approval of the five persons -designated in section two of this Act, shall select one of the centres -so designated as<span class="pagenum"><a name="Page_409" id="Page_409">[Pg 409]</a></span> the place for its clearing house, and thereupon the -Comptroller of the Currency shall notify all the national banks to -meet at their respective financial centres on a given day and at a -designated place for the purpose of organizing the several commercial -zones, of which there shall not be less than twenty-eight nor more than -forty-two in number.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Referring to sections two and three I would urge -upon your attention these points:</p> - - -<p class="center"><i>Geographical Considerations</i></p> - -<p>Great Britain has only 120,000 square miles of territory. France -has 204,000 and Germany 208,000 square miles. All Europe, outside -of Russia, is only about half the size of the United States. It -has 1,600,000 square miles, while we have 3,026,000 square miles. -Including Russia, all Europe has only 3,600,000 square miles.</p> - -<p>Extended as our territory is, our products are far more varied and -more universally important to the human race than those of any other -nation. They exceed in value $35,000,000,000 a year.</p> - - -<p class="center"><i>Local Interests</i></p> - -<p>New England is essentially a manufacturing center of dry goods, -wearing apparel, and metal wares. Pennsylvania is known the world over -for its coal, iron, and oil industries. New Orleans is the market for -cotton, sugar, and rice. Kansas City is the emporium for live stock -and grain. Chicago, the greatest food market on earth, is fast coming -to be one of the greatest manufacturing points in almost every line -of industry. St. Paul and Minneapolis supply us with wheat and flour. -The cities of the Rocky Mountains are growing in importance year by -year, each one entitled to distinction for some particular industry. -The development of the Pacific coast, from San Diego to Seattle, is -challenging universal attention.</p> - -<p>It is the opinion of your committee that it is highly important, -indeed, absolutely essential, for the best interests of the people, -industrially, commercially, socially, and politically, that each -geographical zone of common business interests should have independent -self-government in matters of banking, precisely as the several States -have control of their local affairs.</p> - -<p>At the same time, these commercial zones should be so harmonized -and federated as to give to each the financial strength and power -of all combined, precisely as every State is as strong and powerful -politically as the Federal Government itself.</p> - -<p>All the governments of Europe are traditionally monarchical and -imperialistic. Their banking institutions not only all bear the -insignia of their political origin, but also characteristically mark -the times and conditions that gave them birth.</p> - -<p>In England alone self-government found true expression in the -selection of the board of directors of the Bank of England. The -British Government <span class="pagenum"><a name="Page_410" id="Page_410">[Pg 410]</a></span>has no relation to the management, either directly -or indirectly. It neither appoints a single representative on the -board, nor has any voice whatever in his selection.</p> - -<p>Again, it is to be noted that the Englishman, ever tenaciously jealous -of his rights, excluded from the board of directors all bankers. No -banker has ever sat upon the board of directors of the Bank of England.</p> - -<p>The French Empire of 1803 and the German Empire of 1873 are each -reflected in the organization of the Bank of France and the Imperial -Bank of Germany.</p> - -<p>This Government was organized as a protest against royal rule and -imperial power. It has been fighting the evils of centralization for -more than a hundred years; and of nothing has it shown such persistent -jealousy as the possible centralization of financial interests and the -control of commercial credits.</p> - -<p>Will it be said by some one who thinks only in the terms of the -special interests that, notwithstanding this watchfulness and constant -anxiety, great aggregations of capital in the business world have come -practically to control the business situation; that our commerce is -practically centralized now, and that our banking should be so, to -make it the counterpart of the existing state of things?</p> - -<p>Let us not assume that the problems of coördinated power and wealth -have all been solved. Let us believe that the study of this modern -mystery has just begun. Let us hope that if it is possible for us so -to solve the financial and banking problem as to recognize the best -traditions of the Republic and the highest aspirations of the American -people, keeping steadily in view every economic law involved, we shall -then save our beloved country from the tragic consequence of political -controversies directly affecting our commercial credit and indirectly -affecting every day's labor and every dollar of capital until the -question is settled right.</p> - -<p>We must not forget that every conceivable phase of the so-called -"money question" has been the football of American politics from the -organization of the First and the Second United States banks, down -through the greenback madness, the silver craze and the gold standard -fight. Not a single subject has aroused such intense bitterness as -this one, excepting slavery alone.</p> - -<p>Whoever, then, tries to solve this problem must recognize at every -turn the origin of our political institutions, the genius of our -people, and the peculiar characteristics of the American citizen or he -will fail utterly in his undertaking.</p></blockquote> - -<p><span class="smcap">Section 4.</span> That each bank shall be entitled to one vote, which -shall be cast by an officer of the bank who has been duly authorized -by a vote of the board of directors thereof, such authorization to be -evidenced in writing and under the seal of the bank. Each bank shall be -identified in its zone by a number.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—It is our judgment that every bank should have -equal power in organizing and consequently in controlling the -respective zones; <span class="pagenum"><a name="Page_411" id="Page_411">[Pg 411]</a></span>because we believe the business interests of the -country will be better conserved thereby.</p></blockquote> - -<p><span class="smcap">Section 5.</span> That the association of all national banks clearing -or redeeming their notes at each of the cities so designated shall be -known as "The —— Commercial Zone."</p> - -<p><span class="smcap">Section 6.</span> That all the national banks of each of the -commercial zones so constituted and established shall organize -themselves into "The —— Commercial Zone" by electing a chairman, a -secretary, and a treasurer, who shall all hold office until the first -Monday of the following May, and by proceeding in the following manner:</p> - -<p><span class="smcap">Section 7.</span> That they shall take some point in the financial -centre of their respective commercial zones, from which they shall draw -seven radial lines, so cutting the territory as to divide the whole -number of banks, as nearly as possible, into seven district groups, -each district containing approximately the same number of banks, and -may from time to time thereafter shift said radial line for the purpose -of maintaining such equal subdivision of the banks.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—It is a matter of great importance that these -districts shall be automatically and arbitrarily constituted, if -possible; and this plan will accomplish it. By this method every part -of every commercial zone will be represented by business men as well -as bankers. Neither particular sections nor particular banks can have -any direct advantage.</p></blockquote> - -<p><span class="smcap">Section 8.</span> That each subdivision of the commercial zone so -created shall be known as a district, and they shall bear numbers -respectively from one to seven, inclusive.</p> - -<p><span class="smcap">Section 9.</span> That the board of the bankers' council shall be -constituted as follows:</p> - -<p><i>First</i>: The bankers of each district of the respective zones, voting -as prescribed in section four of this Act, shall elect a banker and a -business man as members of said board.</p> - -<p><i>Second</i>: The term of office shall be seven years; but<span class="pagenum"><a name="Page_412" id="Page_412">[Pg 412]</a></span> the terms of -the members of the first board shall be for one, two, three, four, -five, six and seven years, respectively; that is, the board shall -arrange itself into seven groups, each being composed of one banker and -one business man, and thereupon the seven groups shall determine by lot -how long each group shall serve.</p> - -<p><i>Third</i>: The fourteen members of the board of the bankers' council of -the respective zones shall then elect their president, who shall not -be one of the fourteen so selected, but shall be a resident of one of -the districts in their own zone. The term of service of the president -of said board shall be left to the respective boards of the bankers' -council in the several zones.</p> - -<p><span class="smcap">Section 10.</span> That the services to be rendered by the bankers' -council shall be advisory to the board of control whenever the board -of control may call them in consultation, or an appeal is made to them -from the action of the board of control by some citizen or citizens of -their particular zone.</p> - -<p><span class="smcap">Section 11.</span> That the members of the bankers' council shall -receive no salary, but all expenses incurred by them severally -incidental to such consultation and services shall be paid.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The relation of the Bankers' Council is the same -to the zone as the Clearing House Committee is to the Clearing House. -It will be the supreme court of the zone. It has the last word upon -all business questions growing out of banking in the zone, in case of -appeal.</p></blockquote> - -<p><span class="smcap">Section 12.</span> That the president of the bankers' council shall -be chairman of the board of control.</p> - -<p><span class="smcap">Section 13.</span> That the president of the bankers' council shall -be a deputy United States comptroller.</p> - -<p><span class="smcap">Section 14.</span> That each of the deputy comptrollers of the -currency shall from time to time furnish such information and make such -reports to the Comptroller of the Currency as the board of directors of -the American Reserve Bank shall prescribe: <i>Provided, however</i>, That -the Comptroller of the Currency may ask for reports as now provided by -law.</p> - -<p><span class="pagenum"><a name="Page_413" id="Page_413">[Pg 413]</a></span></p> - -<p><span class="smcap">Section 15.</span> That the board of control shall be constituted as -follows:</p> - -<p><i>First</i>: The bankers of each district, excepting the district in which -the chairman resides, voting as prescribed in section four of this Act, -shall elect a banker who resides in their district as a member of the -board of control.</p> - -<p><i>Second</i>: The term of office shall be seven years, but the terms of the -members of the first board shall be for two, three, four, five, six -and seven years, respectively, and the six members so elected shall -determine by lot how long each shall serve.</p> - -<p><span class="smcap">Section 16.</span> That before any member of a board of control -enters upon the performance of his duties he shall sever all connection -as officer or stockholder with every bank in his commercial zone, and -he shall be ineligible to any position in any bank in his zone during -the time for which he shall have been elected to serve.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The Board of Control will be composed of a body -of men who are younger than the Bankers' Council; but of the same -high order. They will be men who have the undoubted confidence of -the banking fraternity; men who are to win the prizes in the banking -world. This position will be a sure stepping stone to the best -positions; but it must not be used for that purpose, at least until -each man has served out his time.</p></blockquote> - -<p><span class="smcap">Section 17.</span> That compensation of the members of the board of -control shall be five thousand dollars per annum, payable monthly, -including the chairman, except that the chairman may receive any salary -in addition thereto that the bankers of his zone may determine to pay -him: <i>Provided</i>, That such additional salary shall be assessed upon the -capital and surplus of all the national banks in that zone.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The President of the Bankers' Council, Chairman of -the Board of Control, and Deputy United States Comptroller should all -be represented by the same individual for these reasons:</p> - -<p><i>First</i>—The relation between the two bodies of men should be easy and -constant for the best interests of the people. There should be no slow -machinery to put into operation in case of necessity. Quickness and -harmony will always be essential.</p> - -<p><span class="pagenum"><a name="Page_414" id="Page_414">[Pg 414]</a></span></p> - -<p><i>Second</i>—The power of the United States Government should always be -present to enforce orders.</p> - -<p><i>Third</i>—A man of the greatest ability obtainable should be secured to -occupy this place; therefore his salary and length of service should -be left open for arrangement with the Bankers' Council. This man ought -to be the leading man in banking in his zone in point of character and -wisdom.</p></blockquote> - -<p><span class="smcap">Section 18.</span> That the services to be rendered by the board of -control shall be as follows:</p> - -<p><i>First</i>: Each board of control shall have supervision of all the -national banks located in its zone.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The expense and annoyance of bank examinations as -they are carried on today would be reduced one-half and they would be -worth ten times as much as they are today with the exception of those -made by clearing house examiners.</p></blockquote> - -<p><i>Second</i>: The boards of control shall have power to employ all the -examiners and such other assistants as may be necessary to properly and -efficiently supervise the banks under them, and such examiners, as far -as possible, shall be paid stated salaries.</p> - -<p><i>Third</i>: Each board of control shall have power to purchase commercial -paper or bills of exchange from the banks in its zone whenever they -desire to build up their reserves by obtaining additional gold or for -the purpose of crop moving or any special or extraordinary demand of -trade: <i>Provided, however</i>, That all the paper so purchased by them -shall bear the unqualified indorsement of some bank in their respective -zone.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—<span class="smcap">Mr. Merchant</span>: Now it seems to me as though -that organization is as simple, direct and complete as it can possibly -be. It makes every zone an absolutely independent banking democracy. -No outside influence is permitted to interfere with the zone. It is -certainly local self-government from top to bottom. The fact that -anyone in the zone may appeal to the Bankers' Council for redress and -that every district has two representatives upon that board, will -insure fair consideration at the hands of the Board of Control.</p></blockquote> - -<p><span class="smcap">Section 19.</span> That in case of a bank failure in any commercial -zone one of the members of the board of control in that zone shall be -appointed the receiver thereof and<span class="pagenum"><a name="Page_415" id="Page_415">[Pg 415]</a></span> shall not receive any additional -compensation for the services rendered as such receiver.</p> - -<p><span class="smcap">Section 20.</span> That the board of directors of the American -Reserve Bank shall be constituted as follows:</p> - -<p><i>First</i>: The bankers' council of each commercial zone shall elect a -member to the board of the American Reserve Bank. The commercial zones -bearing the odd numbers shall elect bankers and the commercial zones -bearing the even numbers shall elect business men, and every seven -years thereafter the bankers' council of the respective zones shall -alternately elect a banker or a business man, so that the elective -members of the board of directors of the American Reserve Bank shall -always be composed of an equal number of bankers and business men.</p> - -<p><i>Second</i>: The term of service shall be seven years; but the terms of -service of the first elected board shall be for one, two, three, four, -five, six, and seven years, respectively; that is, the board shall -arrange itself into seven groups, each composed of two or more bankers -and two or more business men, and thereupon the seven groups shall -determine by lot how long each group shall serve.</p> - -<p><span class="smcap">Section 21.</span> That it shall be the duty of the board of the -American Reserve Bank, and it shall have the power, to fix the rate -of interest or discount at which all the commercial paper or bills of -exchange shall be purchased or discounted by all the boards of control.</p> - -<p><span class="smcap">Section 22.</span> That it shall be the duty of the board of -directors of the American Reserve Bank to issue a bulletin the latter -part of each week, giving a statement showing a balance sheet of -the American Reserve Bank and making such suggestions and comment -and giving such advice as their wisdom may determine; and it shall -make such arrangements as to insure the presence of this bulletin at -practically every national bank in the United States every Monday -morning.</p> - -<p><span class="smcap">Section 23.</span> That the place of business of the Ameri<span class="pagenum"><a name="Page_416" id="Page_416">[Pg 416]</a></span>can -Reserve Bank shall be Washington, District of Columbia.</p> - -<p><span class="smcap">Section 24.</span> That the members of the board of the American -Reserve Bank shall reside in Washington, District of Columbia, and -shall give their time and personal attention to the business of the -bank.</p> - -<p><span class="smcap">Section 25.</span> That the members of the board of the American -Reserve Bank shall receive as compensation ten thousand dollars per -annum each, payable in monthly installments.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Each independent zone will send its own man to -represent it in the board of the American Reserve Bank—so that every -financial centre will have a spokesman to present its claims on the -one hand and to give full and reliable information on the other; also -to guide the whole board in its policy. The board shall give weekly -advice to all the banks in the United States upon the condition of -business at home and abroad. The American Reserve Bank, as we shall -see, will hold all central reserves of the United States for the -benefit and protection of each and all of the zones precisely as the -zones must protect all the individual banks within their borders.</p> - -<p>Since our gold reserves are now a part of the common reserves of the -whole commercial world, the price for the use of gold must be under -the control of the Board of Directors of the American Reserve Bank. In -this capacity they are acting for every individual bank in the United -States whose agent they are.</p></blockquote> - -<p><span class="smcap">Section 26.</span> That the board of directors of the American -Reserve Bank shall elect as the president of the American Reserve Bank -some one who is not a member of the board so constituted. They shall -also elect a vice-president of said American Reserve Bank and such -other officers as they may decide from time to time to be necessary to -the best conduct of the business of said bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Since the board of directors are the direct -representatives of the respective zones, and since the American -Reserve Bank is only the servant of the combined zones working -in coöperation, it is clear, that the board should elect its own -president and vice-president.</p> - -<p>If there is one thing, more than any other, that should be kept out -of this coöperative organization, it is politics. If the appointment -should be the perquisite of the President of the United States it -might be used as a bribe or a reward; such a thing should not be -thought of. The policy of such an institution should be beyond the -reach or influence of party politics.</p></blockquote> - -<p><span class="pagenum"><a name="Page_417" id="Page_417">[Pg 417]</a></span></p> - -<p><span class="smcap">Section 27.</span> That the term of service of the president and -vice-president of the American Reserve Bank shall be three years, and -the salary of the president shall be twenty-five thousand dollars -per annum, payable in monthly installments, and the salary of the -vice-president shall be eighteen thousand dollars per annum, payable -in monthly installments. The salaries of all the other officers or -employees of said bank shall be fixed by the board of directors of said -bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The term of service should not be too long, for it -would follow that a good officer would be retained, while a mistake -could be corrected within a reasonable time. The salary should be -sufficient to secure the ablest men that the country affords.</p></blockquote> - -<p><span class="smcap">Section 28.</span> That the Comptroller of the Currency shall ex -officio be a member of the board of directors of the American Reserve -Bank.</p> - -<p><span class="smcap">Section 29.</span> That the Secretary of the Treasury of the United -States shall ex officio be a member of the board of directors of the -American Reserve Bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Since the United States Government would carry its -balances with the American Reserve Bank, the Government should be -recognized by making the Secretary of the Treasury and the Comptroller -of the Currency ex-officio members of the board.</p></blockquote> - -<p><span class="smcap">Section 30.</span> That the President of the United States, with the -approval of the United States Senate, shall appoint three directors -of the American Reserve Bank, who, for their first term, shall serve -five, six, and seven years, respectively, and thereafter seven years, -and each such director shall receive a salary of ten thousand dollars, -payable in monthly installments.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—While it is true that the matter of management -should be kept out of politics, it may be granted that it might be -wise to have a small number of directors, appointed by the President -of the United States, who would have only their respective votes in -the deliberations of the board—but no official place. They might -serve some good purpose at times; while they certainly could do no -harm. The policy of the institution should not and would not be -involved in these appointments.</p></blockquote> - -<p><span class="pagenum"><a name="Page_418" id="Page_418">[Pg 418]</a></span></p> - -<p><span class="smcap">Section 31.</span> That vacancies in any one of the three boards as -organized in this Act may occur by death, resignation, or expulsion, -and shall occur whenever a member of any of the boards shall be a -director or officer of a suspended, insolvent, or failed bank. All such -vacancies shall be filled by the respective boards in which they occur -until the first Monday in the month of May following, except those -appointed by the President of the United States.</p> - -<p><span class="smcap">Section 32.</span> That the term of office of each member of the -three boards herein described shall begin at the time elected, but -shall continue from the first Monday in the following May as if that -day were the beginning of the time for which they were severally -elected.</p> - -<p><span class="smcap">Section 33.</span> That on the first Monday in May each year after -one full year of service has expired the bankers of each commercial -zone shall meet at the city in which the financial centre is located -to fill any vacancies that may have occurred in any one of the boards -described in this Act, and also to elect any members to said boards -where terms of members have expired.</p> - -<p><span class="smcap">Section 34.</span> That each commercial zone shall have all the -attributes and powers of a body corporate and may sue and be sued in -the United States courts having jurisdiction of the action brought; it -may receive deposits from banks and act in every capacity of a bank for -other banks, but shall not allow or pay any interest on such deposits; -it shall have power to receive, collect, and forward bank notes; it -shall have power to buy and sell commercial paper and bills of exchange -from and to the banks which are members of such zone; it shall have -power to act as the agent or attorney in fact of the banks which are -members of any of the commercial zones, so far as it may be necessary -to do so to carry into effect the purposes of this organization; it -shall have the power to do and perform any and all acts that may be -necessary for the proper performance of its duties in the supervision<span class="pagenum"><a name="Page_419" id="Page_419">[Pg 419]</a></span> -of all banks under it, and in the conduct and operation of the -commercial zone.</p> - -<p><span class="smcap">Section 35.</span> That each commercial zone shall maintain and keep -in operation at its financial centre a clearing house where all the -bank notes, checks, drafts, bills of exchange, and other instruments of -credit, drawn upon any bank located in the zone, may be cleared, and -for any other purpose that may come within the purview of this Act; -and all such instruments of credit shall be accepted and settled for -at par at such clearing house, under and in accordance with such rules -and regulations as may be established from time to time by the board of -directors of the American Reserve Bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—<span class="smcap">Mr. Manufacturer</span>: You have now completed -the functions of the zone, it seems to me; and everything that you -have proposed is based upon the approved practices of the American -Clearing House.</p> - -<p>The free check zone, provided for in this last section, is identical -with that at Boston, where, ever since 1899, every New England bank -check has been at par at the centre.</p> - -<p>Atlanta, Nashville, Kansas City and several other cities are working -out the same plan. This plan is also identical with the plan that New -England worked out before the war, with respect to the redemption of -bank notes, when bank notes were the chief form of bank credit then -used.</p> - -<p>From 1818 to 1865, you will remember, the Suffolk Bank acted as a -clearing house for all New England bank notes which were par at -Boston, precisely as checks are today.</p> - -<p>Here we are getting back to the simple fundamental principle of -current redemption of bank credit without charge to commerce in -whatever form the people may choose to use it.</p> - -<p>It is bank notes and checks in France, Scotland, Ireland and all over -Canada. Why should it not be bank notes and checks all over the United -States just as well, in order that the people may have bank credit in -the most convenient and cheapest form possible?</p> - -<p>Then, you have extended to every commercial zone the same organization -for supervision and administration that the most advanced clearing -houses have; the Board of Control to examine them and the Bankers' -Council as a court of appeal to settle all difficulties that may arise.</p> - -<p><span class="smcap">Mr. Merchant</span>: Is it practical to have the zones conform to -State lines?</p> - -<p><span class="smcap">Mr. Banker</span>: Such a thing should not be thought of. Economic -laws do not follow State lines. There is not a single State in the -Union that is a natural economic zone. Some States should have several -financial centres; some none. To attempt to make a commercial zone -conform to State lines would be absurd. Bank credit flows to centres -as<span class="pagenum"><a name="Page_420" id="Page_420">[Pg 420]</a></span> water rushes to the ocean, and we should not violate a great -economic law to the irreparable injury of commerce. Sense and not -sentiment should control our action.</p> - -<p>St. Louis and Kansas City are natural financial centres, but Jefferson -City is not. St. Louis draws its bank credits from eastern Missouri, -southeastern Iowa, northeastern Arkansas and southern Illinois.</p> - -<p>Kansas City draws its bank credits from western Missouri, southwestern -Iowa, southeastern Nebraska, all of Kansas and some of Oklahoma. These -cities illustrate the principle that must not be violated or we may do -more harm than good.</p> - -<p>Vermont has no economic centre, and it would do violence to trade and -commerce to make one arbitrarily.</p> - -<p>Tennessee has three such centres. Indiana and several other States -have but one.</p></blockquote> - -<p><span class="smcap">Section 36.</span> That the American Reserve Bank shall have all the -attributes and powers of a body corporate and may sue and be sued in -any United States court having jurisdiction of the action brought. It -shall have power to buy and sell gold bullion and gold coin; to buy and -sell United States Government securities; to loan money to the United -States Government, and to act as banker, fiscal agent, representative -and attorney in fact for the United States Government; to buy and -sell bills of exchange, domestic and foreign; to act as fiscal agent, -attorney in fact, for all members of the respective commercial zones, -and shall have full power to carry into effect the object for which -this organization is created; it may receive deposits from banks and -act in every capacity of a bank for other banks, but shall not allow -nor pay interest upon any deposits that may be made with it.</p> - -<p><span class="smcap">Section 37.</span> That the board of directors of the American -Reserve Bank shall define from time to time the nature and character of -the promissory notes, checks, drafts, and bills of exchange that may be -purchased by the respective zones and the length of time they may have -to run: <i>Provided, however</i>, That every piece of paper purchased by any -commercial zone shall bear the unqualified indorsement of some national -bank in its zone.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—It would be unwise to fix now arbitrarily by -statute just what kind of paper the banks of every zone should buy. -This ought to be<span class="pagenum"><a name="Page_421" id="Page_421">[Pg 421]</a></span> left to the board of the American Reserve Bank. They -will meet it wisely as it arises.</p></blockquote> - -<p><span class="smcap">Section 38.</span> That the United States Government is hereby -authorized and empowered to prepare, upon the passage of this Act, -bank notes for the respective banks applying for them without the -following superscription upon them: "This note is secured by bonds -of the United States or other securities," but in all other respects -like the bond-secured bank notes now in use: <i>Provided, however</i>, That -the notes delivered to any bank for issue and circulation shall have -in bold type, first, and to the left of the centre, the number of its -zone, and, second, to the right of the centre, the number of the bank -by which it is identified in its zone.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—This section provides a true bank note by erasing -that barbaric superscription that makes our present bank notes a bond -speculation; and by bold numbers identifies every bank note with a -zone and with the bank issuing it, thereby greatly facilitating the -quick redemption of the notes.</p> - -<p><span class="smcap">Mr. Merchant</span>: How much more economical would this currency -be than a currency furnished by the Government or purchased from some -central bank or other central institution?</p> - -<p><span class="smcap">Mr. Banker</span>: It would cost just one-fifth as much, or the -difference between <i>par</i> that would have to be paid for the currency -purchased and the average reserve carried; or about 20 per cent. The -average per cent of gain to the banks would be about 5 per cent upon -the amount of notes outstanding (approximately $1,250,000,000) or -$60,000,000. Of course, this gain would come to the people, sooner -or later; in the end, the expense of the bank is borne by commerce. -The present enormous cost of shipping currency to and fro across the -country would be saved also, and this amounts to several million -dollars a year, to say nothing of the added trouble of shipping -commercial paper with which to pay for it.</p></blockquote> - -<p><span class="smcap">Section 39.</span> That upon the completion of the organization of -the several commercial zones as hereinbefore provided any national bank -may retire all or any part of its present bond-secured note circulation -by depositing with the United States Treasurer an amount of the present -bond-secured notes or lawful money, or both, which shall be equal to -the amount of its circulation so retired, and may thereupon, with the -approval of the Comptroller of the Currency, take out for issue and -circulation an<span class="pagenum"><a name="Page_422" id="Page_422">[Pg 422]</a></span> amount of bank notes, which shall be known as "national -bank notes," that does not exceed in amount its paid-up and unimpaired -capital without depositing United States bonds or any other securities -to secure the payment thereof as now provided by law: <i>Provided, -however</i>, That before any national bank shall have the right to retire -its present bond-secured circulation and take out national bank notes -for circulation as in this section prescribed, it shall first, unless -located in its financial centre, make arrangements with a national bank -which is located in its financial centre for the redemption of its bank -notes in gold coin or other lawful money: <i>And provided further</i>, That -it shall first deposit in gold coin or gold coin certificates with -the American Reserve Bank an amount of money equal to 7 per centum of -its average deposits during the preceding calendar six months, and in -addition thereto an amount equal to 7 per centum of the national bank -notes it proposes to take out for issue and circulation.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The amount of notes is limited to the amount of -capital as a matter of convenience only. Some banks will not be able -to keep out 25 per cent of their circulation, because their customers -use checks; other banks will need at certain times of the year in some -sections of the United States an amount of circulation largely in -excess of the amount of their capital. The habits of the people will -always determine what the amount of currency in use is, if permitted -to choose between checks and notes; but crop-moving times will greatly -increase the normal demand, as we have seen in the case of Canada.</p></blockquote> - -<p><span class="smcap">Section 40.</span> That thereafter every national bank shall have -upon deposit upon the tenth days of January and July of each year -with the American Reserve Bank an amount of gold coin equal to 7 per -centum of its average deposits during the preceding calendar six months -and 7 per centum of its national bank notes taken out for issue and -circulation: <i>Provided, however</i>, That this reserve shall be increased -at the rate of 1 per centum each year for a period of three years -thereafter; and that thereupon and thereafter every national bank shall -have upon deposit upon the tenth days of January and July of<span class="pagenum"><a name="Page_423" id="Page_423">[Pg 423]</a></span> each year -with the American Reserve Bank an amount of gold coin equal to 10 per -centum of its average deposits during the preceding calendar six months -and 10 per centum of its national bank notes taken out for issue and -circulation.</p> - -<p><span class="smcap">Section 41.</span> That every national bank shall carry a cash -reserve of 6 per centum of all of its individual deposits subject to -check up to six million dollars and one-half of 1 per centum additional -for each five hundred thousand dollars up to ten million dollars, and -upon this and all additional individual deposits a reserve of 10 per -centum in cash.</p> - -<p><span class="smcap">Section 42.</span> That every national bank shall carry a cash -reserve of 20 per centum of its deposits from banks, or upon its bank -balances.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—There is no doubt whatever that banks should carry -larger cash reserves against bank balances than against those of -individuals. The banks of Europe which carry such balances carry all -the way from 33 per cent up to 50 per cent.</p></blockquote> - -<p><span class="smcap">Section 43.</span> That any national bank may at any time fall 75 per -centum below its required cash reserve: <i>Provided, however</i>, That its -average cash reserve from January 1st to December 31st shall be equal -to its required cash reserve.</p> - -<p><span class="smcap">Section 44.</span> That the amount that any national bank located -outside of a financial centre shall be required to carry with a -national bank located in a financial centre for the purpose of -redeeming its notes may be counted as a part of its required cash -reserve.</p> - -<p><span class="smcap">Section 45.</span> That any national bank desiring to build up its -reserve may rediscount or sell any of the commercial paper or bills -of exchange owned by it by applying to the board of control of the -commercial zone in which it is located.</p> - -<p><span class="smcap">Section 46.</span> That if any national bank shall not maintain its -required average cash reserve, as prescribed by this Act, it shall pay -at the end of the year as a penalty therefor, 10 per centum upon all -loans in excess of such<span class="pagenum"><a name="Page_424" id="Page_424">[Pg 424]</a></span> required cash reserve; and such penalty so -paid shall be paid without any reference to any rediscounts made with -the board of control for gold: <i>Provided, however</i>, That the board of -directors of the American Reserve Bank may at any time suspend the -whole or any part of said 10 per centum penalty that may result from a -demand for gold during a panic, crop-moving period, or any unusual or -extraordinary condition.</p> - -<p><span class="smcap">Section 47.</span> That any national bank desiring to take out for -issue and circulation an amount of national bank notes in excess of its -paid-up and unimpaired capital, without depositing United States bonds -or any other securities to secure the payment thereof, may do so to -an amount not to exceed 100 per centum of its paid-up and unimpaired -capital stock, provided the board of control of the commercial zone to -which such bank belongs first gives its approval thereto.</p> - -<p><span class="smcap">Section 48.</span> That the United States Government shall print and -place in the hands of the respective boards of control an amount of -national bank notes for each national bank in its zone equal to the -paid-up capital thereof in addition to the bank notes taken out in -accordance with Section 30.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—You will observe, gentlemen, that by Section 43 a -bank is allowed to fall 75 per cent below its average cash reserve; -that by Section 45 it can buy gold from the Board of Control with its -commercial paper and build up the reserve; also that by Section 47 it -can take out an additional amount of currency to meet any emergency -that may arise. Now, when you appreciate the fact that the Board of -Control is going to make every bank qualify in the outset, as sound -and then is virtually responsible for its condition, with the power to -aid it in case of necessity, it is difficult to even imagine a case -where a bank would fail.</p> - -<p><span class="smcap">Mr. Merchant</span>: That is so; every bank ought to be kept in -liquid shape by the Board of Control; then its means of defense, as -you have just pointed out, are unlimited. Of course it would then have -all its present resources by way of rediscounting paper with its city -correspondent; and on top of that the provisions of your bill. You -could not possibly bust a bank.</p></blockquote> - -<p><span class="smcap">Section 49.</span> That national bank notes shall be a first lien -upon all the assets of the bank issuing them, includ<span class="pagenum"><a name="Page_425" id="Page_425">[Pg 425]</a></span>ing the double -liability of the stockholders, and any person or bank holding any of -the national bank notes of a failed bank shall be entitled to recoup -the amount thereof out of the first moneys received on account of the -failed bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—These credit notes should be a first lien precisely -as our present bank notes are; as the Scotch notes are and as the -Canadian notes are. Bank notes should be made a first lien, because -they are a public convenience and because the holder is morally and -practically compelled to take them in the ordinary course of business.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: He could refuse if he chose and demand -legal tender, could he not?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Certainly, but public policy should put the -goodness of bank notes beyond question under all circumstances.</p></blockquote> - -<p><span class="smcap">Section 50.</span> That the expense of transmitting national bank -notes by a bank to its financial centre, except its own bank notes, -shall be paid by the board of control of the commercial zone in which -such financial centre is located.</p> - -<p><span class="smcap">Section 51.</span> That the expense of transmitting national bank -notes from a financial centre outside of the zone to which they belong -to the financial centre to which they belong shall be paid by the bank -issuing the national bank notes so returned.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—It will not cost bankers anything to forward notes -for redemption, as the expense of transportation will be paid by the -commercial zones. This fact will insure the immediate return of all -notes for redemption.</p></blockquote> - -<p><span class="smcap">Section 52.</span> That the national bank notes issued in accordance -with the provisions of this Act shall be received at par in all parts -of the United States in payment of taxes, excises, public lands, and -all other dues to the United States, including duties on imports, and -also for all salaries and other debts and demands owing by the United -States to individuals, corporations, and associations within the -United States, except interest on the public debt and in redemption -of the national currency. Said notes shall be received upon deposit -and for all pur<span class="pagenum"><a name="Page_426" id="Page_426">[Pg 426]</a></span>poses of debt and liability by every national banking -association at par and without charge of whatsoever kind.</p> - -<p><span class="smcap">Section 53.</span> That from and after the passage of this Act no -bank shall receive or have on hand deposits exceeding in amount ten -times the amount of its paid-up and unimpaired capital.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Capital is a sort of insurance fund precisely -as reserves are, and there should always be a reasonable relation -sustained between capital and deposits.</p></blockquote> - -<p><span class="smcap">Section 54.</span> That any national bank may, with the approval of -the board of control, establish a branch bank in any town, village, or -locality within its own zone and within a radius of twenty miles, where -there is no national bank; but such branch bank shall be discontinued -as soon as an incorporated bank is established at that point with a -capital of at least ten thousand dollars.</p> - -<p><span class="smcap">Section 55.</span> That whenever any body of men desire to establish -a national bank, or to nationalize a private bank, State bank, or trust -company, they must first secure the approval of the board of control of -the commercial zone in which the proposed bank is to be located; and if -such application shall not be approved by the board of control for any -reason, the applicant or applicants may then appeal to the board of the -bankers' council for approval.</p> - -<p><span class="smcap">Section 56.</span> That the decision of the board of the bankers' -council upon all appeals by applicants for the privilege of starting a -national bank shall be final, and their decision shall also be final -in all other matters in which appeals may be made from the board of -control.</p> - -<p><span class="smcap">Section 57.</span> That all the rules and regulations under which -branches are carried on shall be fixed and established by the board of -directors of the American Reserve Bank.</p> - -<p><span class="smcap">Section 58.</span> That any national bank which has taken out -national bank notes for issue and circulation in accordance with this -Act shall pay the American Reserve<span class="pagenum"><a name="Page_427" id="Page_427">[Pg 427]</a></span> Bank on the tenth days of January -and July of each year 1 per centum upon the average amount of notes in -actual circulation during the preceding six months.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—The tax is placed at 2 per cent per annum because -that is the usual rate of interest now allowed on good balances -all over the United States, and the notes are only another form of -deposits made by the public who carry or use the notes.</p></blockquote> - -<p><span class="smcap">Section 59.</span> That the tax so paid by the banks upon the -national bank notes, as provided in Section 58 of this Act, shall be -appropriated for the following uses and purposes:</p> - -<p><i>First</i>: To pay all the expenses of whatsoever kind growing out of the -administration of the four organizations established by this Act.</p> - -<p><i>Second</i>: To pay 1 per centum per annum upon all the United States 2 -per centum bonds or consuls until their maturity in nineteen hundred -and thirty.</p> - -<p><i>Third</i>: To establish and maintain in the American Reserve Bank a bank -note redemption fund equal to 5 per centum of the average amount of the -notes outstanding each six months preceding the first days of January -and July of each year for the purpose of redeeming the notes of failed -banks.</p> - -<p><i>Fourth</i>: The balance remaining, if any, shall, on the tenth day of -January in each year, be paid into the division of the reserve fund of -the United States Treasury in gold coin for the purpose of converting -the United States notes into gold certificates.</p> - -<p><span class="smcap">Section 60.</span> That to any national bank which has complied with -section thirty-nine of this Act the United States Government shall -return the 5 per centum fund deposited with it for the purpose of -redeeming its bond-secured bank notes.</p> - -<p><span class="smcap">Section 61.</span> That any national bank desiring to wind up its -affairs and go out of business shall be entitled to receive back all -its advances made upon its deposits and note issue to the American -Reserve Bank: <i>Provided, however</i>, That all the liabilities of such -bank have been paid<span class="pagenum"><a name="Page_428" id="Page_428">[Pg 428]</a></span> in full and satisfied, or any amount of lawful -money equal thereto has been paid into the American Reserve Bank -for that purpose, and the Comptroller of the Currency approves the -repayment of said sum.</p> - -<p><span class="smcap">Section 62.</span> That from and after the first day of January, -nineteen hundred and fourteen, no national bank shall pay out over its -counter any bond-secured bank note, but shall send the same to its -financial centre, and the financial centre shall forward it to the -United States Treasurer for redemption, cancelation and destruction.</p> - -<p><span class="smcap">Section 63.</span> That any national bank that shall count any -national bank note or notes as a part of its reserve shall pay into the -American Reserve Bank a penalty of 10 per centum per diem on the amount -so counted, and any national bank that shall, after January first, -nineteen hundred and fourteen, count any bond-secured bank note as a -part of its reserve shall pay into the American Reserve Bank a penalty -of 10 per centum per diem upon the amount so counted.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—If there is one evil that should be crushed out -in this country more than any other it is the practice of carrying -debts as reserves. No bank should be allowed to carry any other bank's -notes, any more than any other check or draft which it thinks is good. -It has been this abuse of bank credit that has led to more trouble -than almost any other single thing. It was the requirement of coin -reserves and current coin redemption that made the banks of Virginia, -Louisiana, Kentucky, Ohio, Indiana, Iowa, Missouri and the Suffolk -System such perfect successes.</p> - -<p>Here is the crux. The very soul of sound banking is current coin -redemption. So let us not fool ourselves by putting wind and water -into our reserves.</p></blockquote> - -<p><span class="smcap">Section 64.</span> That any national bank may and is hereby -authorized to accept any note, check, draft, or bill of exchange, with -not more than four months to run, for any one of its regular customers: -<i>Provided, however</i>, That the instrument of credit so accepted shall -be for goods or merchandise sold and actually delivered or in transit -to the buyer: <i>And provided also</i>, That the instrument of credit -states this fact upon its face: <i>And provided further</i>, That the bank -so accepting any such<span class="pagenum"><a name="Page_429" id="Page_429">[Pg 429]</a></span> instrument of credit shall keep and maintain -against such acceptance identically the same reserve as it is required -to keep and maintain against a deposit subject to check, and it shall -be subject to the same penalty as provided in section forty-six of this -Act.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Let us not fool ourselves by supposing that -by creating liabilities we are actually creating new capital. By -acceptances a class of paper will undoubtedly be created that will in -turn create a market for itself. The object therefore of acceptances -should be to facilitate the handling of commodities in transit.</p></blockquote> - -<p><span class="smcap">Section 65.</span> That any national bank having a paid-up capital -and surplus of at least two million dollars may establish a branch -in any foreign country with the consent and approval of the board of -directors of the American Reserve Bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—If we hope for our share of profit upon our foreign -trade and if we hope to secure for the American merchant an equal -opportunity in securing that foreign trade, we must prepare here two -aids: one is banking facilities and the other is shipping facilities. -Is it not perfectly clear that a foreign banker would do anything in -his power to divert all the traffic he could over the shipping lines -of his country? We shall find in the end then that our foreign trade -will be aided not by our foreign bank alone but by American shipping -as well.</p></blockquote> - -<p><span class="smcap">Section 66.</span> That any national bank that has a paid-up capital -of at least fifty thousand dollars, and the surplus required by law, -may act as a guardian, administrator, executor, or trustee and in such -capacity in any State, by whatever name known, in accordance with the -laws of the State or Territory where situated or located, and the -reserves required against trust funds shall be as follows:</p> - -<p><i>First</i>: Seven per centum thereof shall be deposited with the American -Reserve Bank.</p> - -<p><i>Second</i>: Six per centum cash shall be carried against all trust -funds up to six million dollars and one-half of 1 per centum for each -additional five hundred thousand dollars up to ten million dollars, -and upon this amount and all additional amounts, 10 per centum in cash -shall be carried, but any national bank accepting trust accounts shall -keep the same separate and apart from all other<span class="pagenum"><a name="Page_430" id="Page_430">[Pg 430]</a></span> accounts in said bank, -and shall establish a trust account department; and all such deposits -shall be invested in such securities as are prescribed by the laws of -the State where such bank is located.</p> - -<p><span class="smcap">Section 67.</span> That if the laws of the State where any national -bank accepting trust accounts is located do not prescribe how trust -funds shall be invested, then the board of the American Reserve Bank -shall fix rules and regulations for the investment of such funds.</p> - -<p><span class="smcap">Section 68.</span> That any national bank may accept savings -accounts, as distinguished from commercial accounts, but any national -bank accepting savings accounts shall keep the same separate and apart -from all other accounts in said bank, and shall establish a savings -account department; and all such savings deposits shall be invested in -such securities as are prescribed by the laws of the State where such -bank is located.</p> - -<p><span class="smcap">Section 69.</span> That if the laws of the State where any national -bank accepting savings accounts is located do not prescribe how savings -funds shall be invested, then the board of the American Reserve Bank -shall fix laws and regulations for the investment of such funds.</p> - -<p><span class="smcap">Section 70.</span> That all investments made for the benefit of -the savings depositors of any national bank shall be held primarily -and exclusively for the benefit of the depositors in the savings -department; and in case of a bank failure, if the investments made for -the benefit of the depositors in the savings department do not satisfy -their claims in full, then the depositors of the savings bank shall be -entitled to such a part of the capital, surplus, and capital liability -as the savings deposits bear to all other deposits up to and until the -savings accounts are paid in full.</p> - -<p><span class="smcap">Section 71.</span> That any national bank accepting savings accounts -shall, on the tenth days of January and July of each year, have with -the American Reserve Bank an amount in gold coin equal to 5 per centum -of the average deposit in such department during the preceding six<span class="pagenum"><a name="Page_431" id="Page_431">[Pg 431]</a></span> -months, and such national bank shall be required to carry cash reserves -amounting to 5 per centum against such savings account.</p> - -<p><span class="smcap">Section 72.</span> That the said 5 per centum so paid by the national -banks to the American Reserve Bank as reserves against their savings -deposits shall be invested in United States Government bonds or -securities for the exclusive benefit of the savings depositors in the -national banks as a savings bank fund, and the full interest earned -upon said bonds shall be credited to the savings bank fund in the -American Reserve Bank, and no part thereof shall be deducted for any -other purpose whatsoever than the protection of savings bank depositors.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—This trust fund would absorb about $350,000,000 of -the present bonds held by the national banks for circulation, as the -total savings now approximate seven billion dollars ($7,000,000,000).</p></blockquote> - -<p><span class="smcap">Section 73.</span> That any national bank accepting a savings bank -account may at any time demand the right to have thirty days' notice of -an intention to withdraw the same, and may also reserve the right to -pay all savings accounts in two installments—50 per centum thereof in -three months, 50 per centum in six months.</p> - -<p><span class="smcap">Section 74.</span> That from and after the first day of January, -nineteen hundred and fourteen, every person, firm, partnership, or -corporation using the word banker or bank, and every State bank and -trust company in the United States receiving deposits subject to check, -or saving accounts in the usual way, or trust funds shall keep and -maintain identically the same reserves against these respective funds -as is provided for by the provisions of this Act; and any person, firm, -partnership, or corporation using the word banker or bank, and every -State bank and trust company, except mutual savings banks, that fails -to comply with the provisions of this Act shall pay a tax of 10 per -centum to the United States Government on the tenth day of January -in each year upon all the de<span class="pagenum"><a name="Page_432" id="Page_432">[Pg 432]</a></span>posits or trust funds against which the -foregoing prescribed reserves have not been kept and maintained.</p> - -<p><span class="smcap">Section 75.</span> That any person, firm, or corporation using the -word banker or bank, and every State bank or trust company that shall, -after January first, nineteen hundred and fourteen, hold as a part -of its required reserves, as prescribed in section sixty-three, any -national bank note, check, draft, or other instrument of credit, shall -pay a tax thereon to the United States of 10 per centum per diem on -the amount so held; and every person, firm, or corporation using the -word banker or bank, and every State bank or trust company accepting -deposits or trust funds as described in section sixty-three shall, upon -the first day of January in each year, make a sworn statement to the -United States Government showing exactly the amount and the character -of reserves held during the preceding year against all of its deposits, -and upon failure to do so shall pay a fine of one thousand dollars per -day until such report is made.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—These Sections, 74 and 75, provide that every -person or corporation in the United States shall not only carry its -proper share of reserves, as we have all agreed they should, but the -right kind of reserves as well. Quantity and quality must both be made -obligatory if we are to have a banking system that amounts to anything.</p></blockquote> - -<p><span class="smcap">Section 76.</span> That as soon as the amount of money deposited -by the national banks with the American Reserve Bank, as aforesaid, -shall reach the sum of five hundred million dollars all the bonds -now deposited by national banks to secure Government deposits shall -be returned to the respective banks to which they belong; and from -and after that date any national bank holding a Government deposit -shall pay interest thereon to the Treasurer of the United States at -the rate of 2 per centum per annum, and the said interest so received -shall be paid into the division of reserve fund in the Treasury, and -United States notes of an equal amount shall be retired, canceled, and -destroyed and gold certificates issued therefor. The said interest -shall be payable as follows:<span class="pagenum"><a name="Page_433" id="Page_433">[Pg 433]</a></span> 1 per centum on the tenth days of January -and July of each year on the average balance during the preceding six -months.</p> - -<p><span class="smcap">Section 77.</span> That all the profits growing out of the operations -of the several commercial zones and the American Reserve Bank combined -may be distributed between the United States Government and all the -national banks pro rata, according to the amount they have respectively -deposited with the American Reserve Bank, whenever in the judgment of -the board of the American Reserve Bank it is advisable to do so, having -made such provision for a reserve as is deemed necessary: <i>Provided, -however</i>, That the distribution of profits shall not exceed 2 per -centum per annum until practically all of the United States notes have -been converted into gold certificates; and for that purpose all the -profits in excess of 2 per centum shall be paid into the reserve fund -of the United States Treasury in gold coin.</p> - -<p><span class="smcap">Section 78.</span> That subject to the disposition made and provided -for in this Act of all the various sums of money to be paid to the -American Reserve Bank all such sums of money shall be combined and held -in one common fund and be known as the American Reserve Bank Fund, and -this fund shall guarantee the repayment of all Government deposits made -with the American Reserve Bank and the redemption of the national bank -notes of any failed bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—In paragraph three, under Section 59, provision -was made for a 5 per cent guarantee fund to redeem the bank notes of -any bank which has failed. This fund is held by the American Reserve -Bank, which under Section 78 will be used to redeem the notes of all -failed banks immediately and the amount of the notes so redeemed shall -be recouped from the assets of the bank that issued the notes; if, by -chance, one should fail after it has become a part of the proposed -system, which I, for one, do not believe is possible.</p></blockquote> - -<p><span class="smcap">Section 79.</span> That the American Reserve Bank shall, on the -first days of January and July of each year during the life of the 2 -per centum United States consols up<span class="pagenum"><a name="Page_434" id="Page_434">[Pg 434]</a></span> to nineteen hundred and thirty, -pay into the Treasury of the United States an amount of cash in equal -payments which shall be equal to 1 per centum per annum of all the -United States 2 per centum bonds or consols now aggregating about seven -hundred and thirty million dollars.</p> - -<p><span class="smcap">Section 80.</span> That when the American Reserve Bank shall have -paid into the United States Treasury the first half of 1 per centum in -accordance with the preceding section, the United States Government -shall thereupon refund all of the 2 per centum bonds or consols into 3 -per centum bonds or agree to pay 3 per centum thereon; and thereafter -the Government shall pay 3 per centum interest upon all of said 2 per -centum consols.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—By this section all the 2 per cent bonds will be -converted into 3 per cent bonds and they will then be returned to the -banks to which they belong. They can then be sold by them, bringing -into the commercial fund of the country $730,000,000.</p> - -<p>This change ought to enable the banks to loan money more cheaply to -the people; we must remember that the more expensive we make banking -in this country the higher the rates of interest will be; for, in the -end, the people bear every added burden.</p></blockquote> - -<p><span class="smcap">Section 81.</span> That when the United States Government shall have -made provision for refunding the 2 per centum bonds or consols into 3 -per centum bonds and the American Reserve Bank Fund shall amount to -the sum of five hundred million dollars, the United States Treasury -shall transfer to and keep with the American Reserve Bank a sufficient -balance—upward of fifty million dollars—to meet all of its checks and -drafts; and thereupon the American Reserve Bank shall become the fiscal -agent of the United States Government for all purposes, except for the -collection and current daily deposits of its revenues, which shall not -be deposited thereafter in the United States Treasury or Sub-treasuries.</p> - -<p><span class="smcap">Section 82.</span> That from and after the date that said American -Reserve Bank Fund shall amount to the sum of one thousand million -dollars the Secretary of the Treasury of the United States shall -deposit from day<span class="pagenum"><a name="Page_435" id="Page_435">[Pg 435]</a></span> to day all Government receipts from whatsoever source -received in the American Reserve Bank.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—According to these two Sections, 81 and 82, the -United States Treasury will cease to be a disturbing factor in the -commerce of the country; and it will do its business, precisely, as -any municipality, by check and draft upon the American Reserve Bank, -where its money will be deposited, from day to day, currently, as -received.</p></blockquote> - -<p><span class="smcap">Section 83.</span> That beginning on the first day of January after -the "American Reserve Bank Fund" shall amount to one thousand million -dollars, every National bank shall pay to the American Reserve Bank a -tax of one-fifth of 1 per cent upon all of its deposits held upon said -first day of January, and upon the first day of January thereafter for -two successive years a tax of one-fifth of 1 per cent upon the amount -of deposits held.</p> - -<p><span class="smcap">Section 84.</span> Every National bank shall thereafter contribute a -sufficient amount on the first day of January in each year to make the -total amount that it has contributed equal to three-fifths of 1 per -cent of its deposits.</p> - -<p><span class="smcap">Section 85.</span> The fund so created by the payment of the -said three-fifths of 1 per cent to the American Reserve Bank shall -constitute and be known as "The Depositors' Insurance Fund."</p> - -<p><span class="smcap">Section 86.</span> Any bank that shall come into the National banking -system at any time after the passage of this act shall immediately -proceed to make its contribution to "The Depositors' Insurance Fund" as -prescribed in sections eighty-three and eighty-four of this Act.</p> - -<p><span class="smcap">Section 87.</span> If any National bank shall fail after three years -from the time that the first tax upon deposits was paid, all depositors -shall be paid in full, as hereinafter provided, as soon as the amount -due them respectively has been ascertained.</p> - -<p><span class="smcap">Section 88.</span> The Board of Control of the commercial zone where -the failed bank is located shall issue in the name of its commercial -zone perpetual securities subject to call equal in amount to the amount -of the deposits held by the failed bank. The securities so issued shall -be in<span class="pagenum"><a name="Page_436" id="Page_436">[Pg 436]</a></span> the denomination of five hundred dollars and multiples thereof, -and be known as Bank Bonds of —— Commercial Zone, and shall bear -interest at the rate of 6 per cent per annum, payable annually.</p> - -<p><span class="smcap">Section 89.</span> The Board of Control issuing Bank Bonds as in the -foregoing section prescribed, may deposit an amount thereof with the -American Reserve Bank equal to all deposits less than five hundred -dollars and all fractions of deposits less than five hundred dollars, -and receive in exchange therefor, an equal amount of money.</p> - -<p><span class="smcap">Section 90.</span> The Board of Control may at its option sell the -Bank Bonds so issued, and pay the depositors in cash in full or may pay -the depositors in cash in part and in Bank Bonds in part.</p> - -<p><span class="smcap">Section 91.</span> From time to time as cash is realized from -the assets of the failed bank the Board of Control shall retire -a corresponding amount of Bank Bonds, the bonds so retired to be -determined by lot.</p> - -<p><span class="smcap">Section 92.</span> As soon as the loss resulting from the failure of -the bank is determined, the Board of Control shall proceed to assess -a tax at the rate of one-fifth of 1 per cent per annum upon all the -deposits of all the National banks in the commercial zone where the -failed bank was located until one-half of such loss has been collected -from such banks. The remaining one-half shall be borne by "The -Depositors' Insurance Fund."</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Since the commercial zone where the failed bank is -located is directly responsible for the failure because its board of -control could have prevented it, that particular zone should bear at -least half the loss. This is essential to impress upon all the bankers -of the zone the importance of selecting the very best men upon the -board of control.</p></blockquote> - -<p><span class="smcap">Section 93.</span> The board of directors of the American Reserve -Bank may invest such part of "The Depositors' Insurance Fund" in United -States Government securities as they may deem wise.</p> - -<p><span class="smcap">Section 94.</span> If at any time in the future the board of -directors of the American Reserve Bank shall find it necessary to -reimpose upon all the deposits of the Na<span class="pagenum"><a name="Page_437" id="Page_437">[Pg 437]</a></span>tional banks the tax of -one-fifth of 1 per cent to carry this act into effect, they are hereby -authorized and empowered to do so.</p> - -<p><span class="smcap">Section 95.</span> If the board of directors of the American -Reserve Bank shall at any time deem "The Depositors' Insurance Fund" -unnecessarily large, it may distribute a portion of the same among the -banks as their interests may appear.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—<span class="smcap">Mr. Lawyer</span>: Gentlemen, by Sections 83 -to 95 we have provided for the insurance of depositors, as you will -perceive. We have accomplished this by financing, as it were, the -assets of the failed banks so that all depositors can have their money -immediately. We believe that the result of this plan will be not -only to absolutely protect all depositors and give them their money -immediately; but, to save the depositors from a world of worry; to -protect the banks from panics and runs; to stop hoarding; to protect -storekeepers, merchants, manufacturers and all business interests -from the consequences of the inability of the people to meet their -obligations because their money or cash resources are tied up in -bank failures as heretofore. Our problem was to meet the condition -confronting a community when a bank closed its doors, and I think we -have solved it.</p> - -<p><span class="smcap">Mr. Banker</span>: There can be no possible question but what -this plan, which will put into the American Reserve Bank at least -$35,000,000 before it becomes operative, will accomplish the purpose -sought, since the total loss to all depositors in the National banks -in forty-nine years have been only $38,000,000, and the estimated loss -where the failed banks have not been closed out is only $6,000,000, or -a total loss for the whole time of only $44,000,000.</p> - -<p><span class="smcap">Mr. Merchant</span>: You have undoubtedly solved every difficulty -connected with this great and most benevolent purpose.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Gentlemen, I want to thank you from the -bottom of my heart for what you have just done. I want to thank you -in the name of the millions of toilers. If I have had any influence -in bringing this great reform about, I feel that I have been repaid a -thousandfold for the time I have spent with you.</p> - -<p><span class="smcap">Mr. Lawyer</span>: To you, Mr. Laboringman, more than to all the -rest of us, is due the insurance of depositors in our National banks; -for you may rest assured now that it will come about sooner or later. -Of course, that letter to Mr. Farmer from the Comptroller of the -Currency paralyzed all opposition, and to you two men belongs the -glory of this victory; to you two men will be due the gratitude of all -depositors.</p></blockquote> - -<p><span class="smcap">Section 96.</span> That whenever the accumulations from the tax upon -the national bank notes shall reach an amount equal to 5 per centum of -the national bank notes<span class="pagenum"><a name="Page_438" id="Page_438">[Pg 438]</a></span> outstanding during the preceding six months -after paying all the expenses growing out of the administration of the -four organizations established by this Act—the commercial zone, the -bankers' council, the boards of control, the American Reserve Bank—and -the 1 per centum per annum upon all the 2 per centum bonds or consols -is being currently paid, the excess from whatever source remaining -over, allowing for such a reserve as is deemed necessary, shall, on -each succeeding tenth days of January and July in each year, be paid -into the division of the Reserve Fund of the United States Treasury in -gold coin; and as soon as the Secretary of the Treasury shall receive -and cancel an amount of United States notes equal to the gold so paid -in, he shall issue gold certificates therefor.</p> - -<p><span class="smcap">Section 97.</span> That when the Secretary of the Treasury of the -United States shall have received from the interest paid by the banks -upon the Government deposits, and from all other sources, the sum -of one hundred and ninety-six million six hundred and eighty-one -thousand and sixteen dollars in gold coin for the purpose of redeeming -and converting a like amount of the United States notes into gold -certificates, and he shall have received, canceled and destroyed -substantially all of the remaining United States notes outstanding, -making due allowance for the United States notes estimated to be -lost or destroyed, he shall then transfer all the gold coin and gold -bullion in the Reserve Fund, amounting to one hundred and fifty million -dollars, with all the accumulations, to the division of redemption of -the trust fund; and thereafter no national bank shall hold a United -States note as a part of its reserve, nor shall there be paid out of -the United States Treasury any United States notes; but the same when -received shall be canceled and destroyed, and gold certificates shall -be issued therefor.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—You will have noted in Sections 77 and 96, also -in Section 97, that provision has been made for paying gold into -the Reserve Fund, which is the fund behind the Greenbacks or United -States notes, and that<span class="pagenum"><a name="Page_439" id="Page_439">[Pg 439]</a></span> a corresponding amount of greenbacks are to be -canceled and the same amount of gold certificates are to be issued in -their place.</p> - -<p>The amount of greenbacks is $346,681,016. The present amount of the -Reserve Fund is $150,000,000. Now after we have paid into this fund -$196,681,016, the greenbacks will be converted into gold certificates. -We estimate that this will take twelve to fifteen years.</p> - -<p>Then all our bank reserves will, practically, be in gold coin or gold -certificates, because the silver certificates will be cut up into one -and two dollar pieces and will be token money, in the pockets of the -people, the tills of the stores and will constitute small cash for the -banks.</p> - -<p><span class="smcap">Uncle Sam</span>: Glory Halleluiah! That will be the day I long have -sought and mourned because I found it not! Boys, your work will be a -great relief to me.</p></blockquote> - -<p><span class="smcap">Section 98.</span> That when substantially all the United States -notes shall have been converted into gold certificates, as in this Act -provided; when practically all of the bank notes secured by Government -bonds have been returned to the United States Treasury and canceled; -and when practically all the silver certificates of the larger -denominations have been cut up into one and two dollar certificates -or coined into subsidiary coins; and when the American Reserve Bank -shall be acting as the fiscal agent of the United States Government, -it shall thereupon assume the maintenance of the parity of the silver -certificates and silver coins with gold coin.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—Uncle Sam may well rejoice because this section, -you will observe, provides that the American Reserve Bank shall then -maintain the parity of all his silver with his gold.</p> - -<p><span class="smcap">Mr. Merchant</span>: Gentlemen, have you estimated how much gold -your plan would bring into the American Reserve Bank?</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, sir; we should have approximately one -thousand two hundred and fifty million dollars ($1,250,000,000).</p> - -<p><span class="smcap">Mr. Merchant</span>: Where would this gold come from?</p> - -<p><span class="smcap">Mr. Banker</span>: Partly from what the banks now hold, and partly -from the channels of trade. There is about $900,000,000 now in the -banks and $978,000,000 in the channels of trade, or $1,878,000,000 in -the United States. The present <i>dead reserves, I mean dead reserves -held by the banks under a legal prohibition against their use</i>, and -the gold floating around in the cotton fields, corn and wheat fields, -in the mining camps, in the stores, and in the pockets of the people -generally, would at once be brought to their proper use, vitalized, -and mobilized into a common defense of the bank credit of the country; -all of it, ready all the time, to meet the demands of commerce, and to -protect every bank in a liberal and wise use of its credit.</p> - -<p><span class="pagenum"><a name="Page_440" id="Page_440">[Pg 440]</a></span></p> - -<p><span class="smcap">Mr. Manufacturer</span>: I presume that you have been deeply -impressed, as I have, with the importance of protecting our gold -reserves from the standpoint of a nation among the great commercial -nations of the world. We have learned that there are many forces now -acting upon gold, because it is the universal reserve of the world.</p> - -<p><span class="smcap">Mr. Banker</span>: Precisely so, and this fact necessitates this -centralization of gold, and that a power be lodged somewhere to -protect it from those influences, which, if set in motion, and -unobstructed, will rob us of it almost in the twinkling of an eye. -Only a year ago we saw these influences at work in Germany. It was -stated that at least $350,000,000 was withdrawn in about sixty days. -Tomorrow, these same influences may be drawing away our foundations of -credit in a similar manner, and we would suffer an irreparable injury, -because we are without any means of defense. There are those who seem -to think that if we have a balance of trade in our favor, we are safe; -but this is only one factor; nor are we certain of this, for any -length of time. We are today, literally, living in a fool's paradise, -that may disappear while we contemplate it in serenity. History has -already taught the world many lessons upon this point, and if we are -wise, we will heed them.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, just what are the influences that -affect the movement of gold to or from the country?</p> - -<p><span class="smcap">Mr. Banker</span>: In our case, the causes that may influence the -movement of gold to or from us, may be summed up as follows:</p> - -<p><i>First</i>: The balance of trade.</p> - -<p><i>Second</i>: The state of foreign exchange throughout the world.</p> - -<p><i>Third</i>: The state of our currency, that is, the use of substitutes -for real reserves; such as United States notes, silver, and bank -notes, in place of gold. The present plight of Germany is due to her -use of bank notes as reserves. It is a vivid illustration. History -has furnished hundreds of illustrations; but the most forcible in -our recent history was the issue of the United States notes in the -Sixties, and the effect of the silver purchase act of 1890. Gresham's -law put into operation will overcome all opposing forces.</p> - -<p><i>Fourth</i>: Foreign financing.</p> - -<p><i>Fifth</i>: Political disturbances.</p> - -<p><i>Sixth</i>: The state of the money market in foreign financial centres.</p> - -<p><i>Seventh</i>: Demands for capital in periods of speculative development -in foreign countries.</p> - -<p><i>Eighth</i>: Changes in our tariff laws.</p> - -<p>It is easy to imagine how complicated and powerful these forces might -become, and how essential it is that we should be ready to combat -them, when the tide turns against us. We must be in a position to -buy and sell gold bullion, and to buy and sell domestic and foreign -exchange, and to loan a large sum of money, gold, I mean, quickly, -through a board of control to stop a panic in some financial centre, -and last—and above all, we must hold the chief key to the situation. -That key lies, mainly, in the power to fix and enforce a price for the -use of gold, in what is popularly called a discount rate for gold, and -make it universal throughout the United States.</p> - -<p><span class="pagenum"><a name="Page_441" id="Page_441">[Pg 441]</a></span></p> - -<p>All these objects will be attained by the centralization of about -one-half of our reserves in the American Reserve Bank, and by having -them under the direction of a board of men, who come directly from -each of the commercial zones, and who are, therefore, responsible to -the people of their respective zones.</p> - -<p><span class="smcap">Mr. Merchant</span>: Now, gentlemen, you seem to have completed your -report so far as the commercial bank is concerned, and I must say your -plan looks good to me; but, I want to ask you something before we -leave this question, and that is, why did the English Bank Act of 1844 -provide that only the Bank of England should issue bank notes, and why -did Germany follow in her footsteps in 1874, by giving to the Imperial -Bank the sole right of note issue?</p> - -<p><span class="smcap">Mr. Banker</span>: I am very glad that you have asked that question, -because it is often a stumbling block to those beginning the study of -this subject. One naturally says to himself, if this plan of a Central -Bank of issue is good enough for England and Germany, why should we -not adopt it here? In the first place, the two banks act upon entirely -different principles, and in both cases their theories, so far as -their note issues are concerned, have broken down.</p> - -<p>In 1797 the Bank of England suspended specie payments, and during the -Napoleonic wars issued an unwarranted amount of paper or notes, which -led to wild speculation. At the same time, the country banks joined in -the frenzy, and issued large quantities of notes also. All the paper -became greatly depreciated, causing such a derangement of commerce -as to call for a public investigation. The Bullion Report of 1810, -the most profound economic and important statement ever made in the -history of banking, followed. This declared that the mere numerical -amount of notes in circulation at any time was no criterion whatever -of their being excessive. The Bullion Report declared <i>that the only -sure criterion was to be found in the price of gold bullion and the -state of the exchanges</i>.</p> - -<p>Ricardo says:</p> - -<p>"The issuers of paper money should regulate their issues solely by -the price of bullion and never by the quantity of their paper in -circulation. The quantity can never be too great or too little, while -it preserves the same value as the standard."</p> - -<p>If Ricardo had used the words <i>bank credit</i>, instead of <i>paper money</i>, -it would have been technically more correct.</p> - -<p>This statement of Ricardo, and that contained in the Bullion Report, -constitute the very soul of this subject, so far as bank credit in any -form (bank notes or bank deposits, which are identical) and gold are -concerned.</p> - -<p>Reserves in gold, in sufficient quantity to redeem all bank credit, -deposits as well as notes, are essential. Do not forget that. Of -course, gold will be seldom called for, but it must be forthcoming if -demanded. No better illustration of the Ricardo principle can be found -anywhere in the history of banking than in the banks of Virginia, -Louisiana, Kentucky, Ohio, Indiana, Iowa, and Missouri before the war.</p> - -<p>This principle, announced in the Bullion Report was rejected by the -House of Commons, and was not recognized by the Bank of England, or<span class="pagenum"><a name="Page_442" id="Page_442">[Pg 442]</a></span> -English bankers generally. From 1800 to 1844 bank notes were thought -good enough for reserves, that is, the basis of other credit. There -were constantly recurring business disturbances and banking troubles -up to 1821, when the Bank of England resumed specie payments.</p> - -<p>In 1824 gold began to leave England again, and continued to go -throughout 1825, when the crisis came.</p> - -<p>In 1827 the Bank seemed to be convinced that the principles of the -Bullion Report were correct, and it tried to apply them in part.</p> - -<p>In 1836 and 1837 there was more financial trouble, and again at the -end of 1838 another serious period arrived. By the end of 1839 the -specie had dropped from $50,000,000 to $14,000,000. All these adverse -experiences convinced the public that something was radically wrong.</p> - -<p>There then appeared upon the scene Lord Overstone, Mr. Norman, Col. -Torrens and other influential writers, who maintained that the amount -of bank notes should not exceed the amount of bullion, and that it was -the excess of bank notes over the amount of bullion or gold that sent -the gold out of the country. They carried the day, and even converted -Peel to their way of thinking.</p> - -<p>The Bank Charter expired in 1844. They thought that they had now -found a panacea for all their ills; it was the so-called <i>Currency -Principle</i>; that is, that bank notes should not exceed the amount of -specie. In adjusting the matter, they did issue bank notes against -$72,000,000 of Government securities, which was in direct violation -of their own contention. They did not have to wait long to see how -completely they were mistaken. Their contention was, that if the bank -only issued notes against specie, the people would have to bring -the notes to get specie. The bank kept right on taking deposits and -making loans, apparently with no knowledge of the fact that it made no -difference what kind of debt the bank incurred, whether in the form of -a deposit or in the form of a note, it would have to be paid in specie -if the check holder wanted the specie, just as much as the note holder -wanted the specie.</p> - -<p>Many business disasters occurred in 1846. The new scheme was to be put -to the test within two years after the English Bank Act was passed.</p> - -<p>On Aug. 29, 1846, the amount of bullion in the bank was $81,000,000. -The bank notes outstanding were $102,000,000. By Jan. 9, 1847, the -bullion was down to $71,000,000. The bank notes outstanding were -$104,000,000. By April 10, 1847, the bullion was down to $48,000,000. -The bank notes outstanding were $101,000,000.</p> - -<p><i>It was demonstrated beyond question, you see, that you could get -gold with a check just as easily as with a bank note; for, while -$30,000,000 of bullion had disappeared, the amount of the bank notes -outstanding remained the same. In other words, the bank notes were not -retired as the gold was withdrawn, which was the whole theory upon -which the Bank Act of 1844 was based.</i></p> - -<p>The Bank Act had failed completely and utterly to accomplish what it -was designed to do. There could have been no more abject failure.</p> - -<p>It was upon this occasion that the bank employed, for the first -time, either by accident or with intention, the principle that was -subsequently, in 1856, expounded by MacLeod. He states the principle -thus, "That<span class="pagenum"><a name="Page_443" id="Page_443">[Pg 443]</a></span> when the rate of discount between two places differs by -more than sufficient to pay the cost of transmitting bullion from one -place to another, bullion will flow from where discount is lower to -where it is higher."</p> - -<p>While the Bank of England seemed to have employed this principle in -1847, it acted too slowly and very feebly. It lost a large part of its -gold before it raised its rate of discount, and then it raised it only -to 3½ per cent, then to 4 per cent, and finally to 5 per cent.</p> - -<p>The world has since learned the power of this weapon; but it is -not all-powerful against any odds, as we have seen in watching the -withdrawal of gold from Germany during the time when there was a -possibility of war with France.</p> - -<p>When I started to answer your question, I said that both the English -and German banks had failed to accomplish the particular things which -they had set out to do.</p> - -<p>I think you will admit that I have demonstrated my contention with -regard to the Bank of England. Now, the plight of Germany is this: -She had supposed that she could create true bank reserves out of -bank credits, but that scheme has completely broken down. Her own -commission appointed to revise the bank act during the past year -has just recommended that the individual banks carry their own coin -reserve.</p> - -<p>Now, gentlemen, there is no point in common between England, Germany, -and France, so far as note issues go. The Bank Act of 1844 took away -from the Bank of England the power of note issue, and reduced the -bank to identically the same position that the United States Treasury -is in, with regard to the gold certificates; that is, the Bank Act -reduced the bank to a mere warehouse, with the power to issue gold -certificates in the form of bank notes. The Bank of England has no -more authority to issue bank currency than the New York Clearing House -has; not a bit.</p> - -<p>The Imperial Bank of Germany issues notes against 33 per cent of coin -and other collateral.</p> - -<p>The Bank of France issues notes without reference to any particular -amount of coin, but carries an enormous gold reserve, averaging about -65 per cent of its note issue.</p> - -<p>The Bank of England usually carries about $150,000,000 in gold, and -has outstanding about $250,000,000 bank notes; the difference between -the gold and this amount being covered by Government securities. Her -deposits are $250,000,000. The Imperial Bank of Germany carries about -$200,000,000 of gold, and has outstanding about $700,000,000 bank -notes. Her deposits are about $250,000,000. The Bank of France holds -about $650,000,000 of gold, and has outstanding about one billion -dollars of notes ($1,000,000,000). Her deposits are usually about -$100,000,000.</p> - -<p><span class="smcap">Mr. Merchant</span>: It is true that there does not seem to be any -great similarity in the condition of these three institutions. The -points of contrast are as great as the points of likeness.</p> - -<p>England is a great check using country; hence, there are few notes. -France is a great note using country; hence, comparatively few -deposits are kept, while Germany seems to occupy a middle ground -between the two.</p> - -<p>The Bank of France has been operated upon the principle laid down<span class="pagenum"><a name="Page_444" id="Page_444">[Pg 444]</a></span> -in the Ricardo axiom, and also in accordance with the principles -enunciated in the Bullion Report. But France is handicapped by the -load of silver she is carrying, which amounts to about $200,000,000; -and Germany is greatly handicapped by the fact that her use of bank -notes as reserves has prevented her, as she now discovers, from -accumulating a proper amount of gold to adequately protect her bank -credits. The result is, that neither Germany nor France are open -markets for gold; both throwing trammels and obstacles in the way, if -you desire to get gold in either country.</p> - -<p>The entire commercial world is conscious of the difficulties you are -under when trying to take gold away from Paris or Berlin.</p> - -<p>Bills of Exchange drawn in pounds, shillings, and pence are preferable -the world over to any other; because the Bank of England is an open -market for gold at the current price.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Mr. Banker, since you cannot institute a -comparison between these three banks in the matter of note issues, in -what respect do they have a common purpose?</p> - -<p><span class="smcap">Mr. Banker</span>: In only one single respect is there a common -factor in all of them, and that is, that each of them carries the -final reserves of its country. This is the one common fact, the -all important fact, because without this massing of their reserves -two essential results could not be achieved. First, a panic of any -proportion could not be quickly and successfully met. Second, no one -of them would have any means whatever of protecting its gold against -the drafts that the rest of the commercial world is likely to make -upon it at any time, nor any power of adding to its gold in case of -some great necessity growing out of a crisis.</p> - -<p><span class="smcap">Mr. Merchant</span>: Recently we have heard repeatedly that, while -we were having our ever-recurring spasms or panics in business, the -countries with central banks were not suffering in the same way. Is -it not a fact that Canada has been just as free from these spasms and -panics as any country in the world, and yet Canada has no central bank?</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, that is true. It never occurred to me -before, but I should say that Canada was, if anything, much freer from -these convulsions and panics, as you call them, than any other country.</p> - -<p><span class="smcap">Mr. Lawyer</span>: I agree with you. There has not been the -suggestion of such a thing, as far back as I can remember—thirty or -forty years. Now, since Canada has not a central bank but twenty-seven -banks, the protection against these disturbances or panics must lie -deeper and more fundamental. What is it? It cannot be the central -bank idea, because Germany has been having a vast amount of trouble -for more than a year, and at the present time seems to have plenty in -store for her.</p> - -<p><span class="smcap">Mr. Banker</span>: Yes, it does lie deeper than your mere form -of organization; I think I can explain it so that every man here -can understand and appreciate it. The reasons are fundamental and -economic: <i>First</i>, There must be ample <i>gold reserves and elasticity -in those reserves</i>. Without any law with regard to the amount of -reserves to be carried the banks of Canada carry about 14 per cent, -and since no specified reserves are required there is perfect -elasticity in their reserves.</p> - -<p><i>Second</i>: There must be convertibility, if necessity requires it and -pre<span class="pagenum"><a name="Page_445" id="Page_445">[Pg 445]</a></span>cisely to the extent required, of bank book credits into bank note -credits. Bank credit currency in Canada amounts at its maximum to $16 -per capita and the variation averages now about $4 per capita. The -same ratio would give us an expansion and contraction every fall of -about $400,000,000 without changing our reserves to the extent of a -single cent.</p> - -<p><span class="smcap">Mr. Farmer</span>: I catch on to that. Two principles are involved -and it doesn't make any difference how you apply them, only so that -they are in operation. <i>The first is the principle of ample coin -reserves and their elastic adjustment to current commercial needs. The -second principle is the interchangeability of bank book credits and -bank note credits and their current convertibility into coin.</i></p> - -<p><span class="smcap">Mr. Banker</span>: That is the whole thing in a nut-shell, outside -of the principle of a central gold reserve, and it doesn't make -any difference whether you apply those principles to one bank or -to twenty-seven banks, as in Canada at present, or to five hundred -banks, as in the Suffolk System before the war, or to our twenty-five -thousand banks today.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: As I understand the bill you have prepared, -our American Reserve Bank will have no liabilities whatever, and yet -it will have more gold than all of these three countries combined.</p> - -<p><span class="smcap">Mr. Banker</span>: That is correct. You see, there are just three -reasons for the existence of the American Reserve Bank:</p> - -<p><i>First</i>: By it, all the banking power of the United States stands -ready to help every individual bank move the crops; and, in case a -panic breaks out, to protect every individual bank.</p> - -<p><i>Second</i>: By it, we shall always be in a position to control and -direct the movement of gold to and from the United States.</p> - -<p><i>Third</i>: By it, we have completely decentralized bank credit; because -each zone can rely absolutely upon the centralization of the gold -reserves to assist it whenever necessary; so also can every individual -bank.</p></blockquote> - - -<p class="center">NATIONAL LAND CREDIT BANK</p> - -<p><span class="smcap">Section 99.</span> That the National Land Credit Bank is hereby -created and established upon the organization of the following -institutions as prescribed:</p> - -<p><i>First</i>: The Local Land Credit Association.</p> - -<p><i>Second</i>: The State Land Credit Association.</p> - -<p><i>Third</i>: The National Land Credit Bank.</p> - -<p><span class="smcap">Section 100.</span> That no more than fifty persons and no less than -twenty-five persons may associate themselves together in any State of -the United States under the name of —— Land Credit Association, and -be known as a local association.</p> - -<p><span class="smcap">Section 101.</span> That the capital stock of each local association -shall be twenty-five thousand dollars, no more,<span class="pagenum"><a name="Page_446" id="Page_446">[Pg 446]</a></span> no less; and it -shall be paid up in full in cash. The par value of the stock of such -association shall be one hundred dollars.</p> - -<p><span class="smcap">Section 102.</span> That any person may become a member of a local -association by owning one or more shares of the stock, but no member of -an association shall own more than twenty-five shares thereof.</p> - -<p><span class="smcap">Section 103.</span> That every local association, each member voting -the number of shares owned by him, shall elect an executive committee -composed of five members and a secretary and treasurer of said local -association. The committee shall choose its own chairman.</p> - -<p><span class="smcap">Section 104.</span> That the term of service of the members of the -committee shall be one year.</p> - -<p><span class="smcap">Section 105.</span> That no member of a local association shall -transfer his stock to any other person without the unanimous approval -of the executive committee, evidenced by the signatures of such -committee upon the records of the association and by the signature of -the chairman of said committee upon the certificate of stock, which -shall be transferable only by such signature: <i>Provided, however</i>, That -any person desiring to sell his stock may appeal from the decision of -the executive committee to the members of such local association.</p> - -<p><span class="smcap">Section 106.</span> That the total amount of loans that any local -association can make is twenty times the amount of its capital stock, -or five hundred thousand dollars.</p> - -<p><span class="smcap">Section 107.</span> That the executive committee may take -applications for loans and recommend the same for favorable -consideration to the board of managers of the State association, but no -loans shall be made except upon improved productive agricultural lands, -and then only for 50 per centum of a fair valuation thereof.</p> - -<p><span class="smcap">Section 108.</span> That all compensation, if any, to the executive -committee and the secretary and the treasurer and all expense of the -local association of every kind whatsoever shall be derived from -charges made for services rendered in connection with the various -applications<span class="pagenum"><a name="Page_447" id="Page_447">[Pg 447]</a></span> made to them and for services rendered in connection -with loans already made. Each association shall fix its own scale of -charges, if any are made.</p> - -<p><span class="smcap">Section 109.</span> That no loan shall be considered or consummated -in any State until there are organized in such State at least twenty -local associations in accordance with sections two, three, four and -five of this Act and until at least five hundred thousand dollars have -been paid up in cash.</p> - -<p><span class="smcap">Section 110.</span> That when at least twenty such local associations -have been organized in any one State the governor of such State, upon -being informed of this fact, shall name a time and place for meeting, -and the members of the several associations shall meet in person, or by -legal proxy duly representing their respective shares, for the purpose -of organizing a State Land Credit Association.</p> - -<p><span class="smcap">Section 111.</span> That the State Land Credit Association shall be -organized under the name of (here insert name of State where located) -Land Credit Association and be known as a State Association.</p> - -<p><span class="smcap">Section 112.</span> That every State association shall have a board -of managers, which shall consist of seven members, who shall be elected -by the shareholders of the several local associations in the State -present or duly represented by legal proxies.</p> - -<p><span class="smcap">Section 113.</span> That the members of the board of managers shall -hold office for the period of seven years: <i>Provided, however</i>, That -the seven first elected shall hold office for one, two, three, four, -five, six, and seven years, respectively, and they shall determine by -lot how long each member shall serve.</p> - -<p><span class="smcap">Section 114.</span> That the officers of each State association shall -consist of a president, vice-president, secretary, treasurer, and -attorney. The said officers shall be members of the board of managers, -except the secretary and treasurer, who may or may not be members.</p> - -<p><span class="smcap">Section 115.</span> That the officers named in the preceding<span class="pagenum"><a name="Page_448" id="Page_448">[Pg 448]</a></span> -section shall be appointed by the shareholders of the several local -associations present or duly represented by legal proxies.</p> - -<p><span class="smcap">Section 116.</span> That the salaries to be paid the officers of each -State association shall be fixed by the shareholders of the several -local associations of such State present or duly represented by legal -proxy. All such salaries and all the expenses of whatsoever kind -incurred in carrying on the business of the State associations shall be -paid out of fees or charges made upon the business done in that State.</p> - -<p><span class="smcap">Section 117.</span> That the place of business of the State -association shall be fixed by the shareholders of the local -associations of the respective States present or duly represented by -legal proxy.</p> - -<p><span class="smcap">Section 118.</span> That all applications for loans made to any local -association and duly recommended by the executive committee thereof -after a personal examination of the property and a full report in -accordance with such rules, regulations, and forms as the board of -managers of the State association may prescribe shall be examined and -considered by said board of managers.</p> - -<p><span class="smcap">Section 119.</span> That no loan shall be made by any State -association unless the same has been approved in writing by at least -five members of the board of managers in a record of loans kept -especially for that purpose by the State association; nor until such -approval shall also be signed by the attorney of the State association -stating that he has examined the title to the property and that it is -free and clear and that the loan is a first lien upon the property -described in the conveyance.</p> - -<p><span class="smcap">Section 120.</span> That no loans shall be made upon any property -unless an absolute conveyance of the same shall be made by the owner -thereof to the State association of the State where the land is -located, in such form and manner as the attorney of such association -shall prescribe; and the owner shall lawfully waive any claim or -right of defense that he might otherwise have in case of<span class="pagenum"><a name="Page_449" id="Page_449">[Pg 449]</a></span> foreclosure -proceedings under the laws of the State in which the real estate is -located. And, further, the owner of said real estate shall, in such -manner and form as the attorney of the association shall prescribe, -appoint the local association through which the loan was negotiated as -a trustee for the benefit of the State association to take possession -of the property in case of default in payment of interest, taxes, or -insurance, or in case of waste of any kind, and shall give such local -association full authority and power to manage the property, or sell -the same whenever, in the judgment of the executive committee of such -local association, it is advisable to do so: <i>Provided, however</i>, -That such sales shall be made only after the property has been duly -advertised in accordance with the law made and provided for sale of -real estate in the State where located after foreclosure proceedings -have been had and judgment entered.</p> - -<p><span class="smcap">Section 121.</span> That all money loaned shall be furnished through -the several State associations, and shall be paid by check or draft, -and full records shall be kept by the several State associations -of all loans made in their respective States of every transaction -connected with such loans. The State association shall have full and -entire charge of all loans made and outstanding in their respective -States, the collection of interest, the payment of taxes, the care of -insurance, and the repayment of the loan by the borrower, which shall -always be to the State association of the State where the real estate -is situated.</p> - -<p><span class="smcap">Section 122.</span> That no loans shall be made by any State -association until—</p> - -<p><i>First</i>: There have been organized in the United States at least one -thousand local associations, in accordance with sections ninety-nine, -one hundred, one hundred and one, and one hundred and two of this Act.</p> - -<p><i>Second</i>: Until at least twenty State associations have been organized -in accordance with sections one hundred<span class="pagenum"><a name="Page_450" id="Page_450">[Pg 450]</a></span> and ten, one hundred and -eleven, and one hundred and twelve of this Act.</p> - -<p><i>Third</i>: Until there has been paid up in cash the sum of twenty-five -million dollars.</p> - -<p><i>Fourth</i>: Until there has been organized, as hereinafter provided, the -National Land Credit Bank.</p> - -<p><span class="smcap">Section 123.</span> That as soon as there have been organized at -least one thousand local associations and at least twenty State -associations, as herein provided, the President of the United States -shall be notified of these facts, and he shall thereupon name a time -and place in the city of Washington, District of Columbia, for the -organization of the National Land Credit Bank, and he shall advise all -the local associations whose names and addresses have been furnished -him of such time and place of meeting and the purpose therefor.</p> - -<p><span class="smcap">Section 124.</span> That, pursuant to the notice of the President -of the United States provided in the preceding section, each local -association of the several States where State associations shall -have been organized shall send one representative to Washington -for the purpose of organizing the National Land Credit Bank. Each -representative of a local association shall have one vote, but any -association may be represented by a proxy in such legal form as is -prescribed by the laws of the State where such local association is -situated.</p> - -<p><span class="smcap">Section 125.</span> That the board of directors of the National Land -Credit Bank shall consist of seventeen members, as follows:</p> - -<p><i>First</i>: Fifteen members of such board of directors shall be elected by -the representatives of the local association present in person or by -proxy.</p> - -<p><i>Second</i>: The Secretary of Agriculture of the United States shall ex -officio be a member of said board.</p> - -<p><i>Third</i>: The President shall appoint a United States auditor, with the -consent and approval of at least two-thirds of the members of the board -elected by the representatives of the association. The term of service -of<span class="pagenum"><a name="Page_451" id="Page_451">[Pg 451]</a></span> the auditor shall be five years, and he shall be a member of the -board of directors of said National Land Credit Bank.</p> - -<p><span class="smcap">Section 126.</span> That the members of the board of directors of the -National Land Credit Bank who have been elected by the representatives -of the local associations shall serve for a period of five years: -<i>Provided, however</i>, That those first elected shall serve for one, -two, three, four, and five years, respectively, and they shall divide -themselves into five groups, and thereupon determine by lot how long -each group shall serve.</p> - -<p><span class="smcap">Section 127.</span> That the officers of the National Land Credit -Bank shall consist of a president, vice-president, secretary, -treasurer, and auditor.</p> - -<p><span class="smcap">Section 128.</span> That the officers of the National Land Credit -Bank, except the auditor, shall be appointed by the board of directors -of said National Land Credit Bank, and they shall receive such salaries -as the board of directors may determine: <i>Provided, however</i>, That the -president shall receive eighteen thousand dollars per annum and that -the auditor shall receive six thousand dollars per annum.</p> - -<p><span class="smcap">Section 129.</span> That the city or place where the National Land -Credit Bank shall conduct its business shall be selected and determined -by the representatives of the local associations present in person or -by proxy.</p> - -<p><span class="smcap">Section 130.</span> That the annual meetings of the local -associations shall be held on the first Monday of April in each year. -The annual meeting of the State association shall be held on the first -Monday of May in each year. The annual meeting of the National Land -Credit Bank shall be held in the first Monday of June in each year.</p> - -<p><span class="smcap">Section 131.</span> That upon the completion of the organization -of the National Land Credit Bank, as herein provided, each local -association shall transfer and pay over to the National Land Credit -Bank 50 per centum or one-half of their cash paid-up capital amounting -in the aggregate to at least twelve million five hundred thousand<span class="pagenum"><a name="Page_452" id="Page_452">[Pg 452]</a></span> -dollars, and they shall also transfer and pay over to their respective -State associations 25 per centum or one-quarter of their cash paid-up -capital amounting in the aggregate to at least six million two hundred -and fifty thousand dollars.</p> - -<p><span class="smcap">Section 132.</span> That the cash capital so paid over to the -National Land Credit Bank and the cash capital so paid over to the -several State associations, as provided in the preceding section, shall -become the absolute property of the National Land Credit Bank, and of -such State associations, as completely and absolutely as if the same -amount had been paid directly to them for stock issued. For the amount -of money so received by the National Land Credit Bank and the amount -so received by the State association from the local associations the -said National Land Credit Bank and the several State associations shall -issue their several receipts in such legal form as to entitle them to a -pro rata share of the assets of the said National Land Credit Bank and -the several State associations upon the distribution thereof, subject, -however, to the claims of all holders of the obligations of whatsoever -kind issued and outstanding of the National Land Credit Bank.</p> - -<p><span class="smcap">Section 133.</span> That every local association, every State -association, and the National Land Credit Bank shall each of them be, -and they are hereby, made legally constituted bodies corporate that may -sue and be sued in any United States court which may have jurisdiction -of the subject matter of the action brought.</p> - -<p><span class="smcap">Section 134.</span> That the said National Land Credit Bank, the -several State associations, and the several local associations may -severally invest their capital and surplus in mortgages token as herein -prescribed, or in the obligations of the National Land Credit Bank, or -in United States Government securities. They may severally borrow money -in the regular course of their business either upon their credit or by -pledging any of the securities they may own.</p> - -<p><span class="smcap">Section 135.</span> That neither any local association nor any<span class="pagenum"><a name="Page_453" id="Page_453">[Pg 453]</a></span> -State association nor the National Land Credit Bank shall take -deposits in any form, either subject to check or upon time, except for -investment in the obligation of the National Land Credit Bank; and -any one of these institutions that shall take a deposit of any kind, -except as herein provided, shall pay to the United States Government -a tax thereon of 10 per centum per annum, nor shall any one of these -institutions loan money in any other manner or form than as herein -provided. Upon any loan made by any one of them upon personal security, -or in any other manner or form than as herein provided, shall pay a tax -thereon to the United States Government of 10 per centum per annum.</p> - -<p><span class="smcap">Section 136.</span> That the National Land Credit Bank shall have -power, and is hereby authorized, to issue and sell or dispose of its -own obligations in the form of bonds, debentures, or under any other -name, and bearing such rates of interest, and in such manner and form, -and upon such terms and conditions as to time to run, and manner and -method of payment as the board of directors may determine from time to -time.</p> - -<p><span class="smcap">Section 137.</span> That the mortgages held by any local association, -or by any State association, or by the National Land Credit Bank, -such mortgages having been taken in accordance with the provisions -of this Act, and all the obligations, bonds, or debentures issued by -the National Land Credit Bank under the authority granted by this -Act, shall be exempt from all taxes or duties of the United States -Government, as well as from taxation in any form by or under any State, -municipality or local authority.</p> - -<p><span class="smcap">Section 138.</span> That all advances of money upon loans made by the -several local associations shall be under the control and under the -direction of the board of directors of the National Land Credit Bank, -and the rate of interest to be charged on all such loans made shall be -fixed from time to time by said board of directors.</p> - -<p><span class="smcap">Section 139.</span> That at the end of each year the United States -auditor shall make a full report of all the institu<span class="pagenum"><a name="Page_454" id="Page_454">[Pg 454]</a></span>tions organized -under this Act, and such reports shall show what the profits are of the -National Land Credit Bank, and of the several State associations, and -of each of the local associations, respectively. Thereupon the board of -directors of the National Land Credit Bank shall set apart one-half of -the net profits so certified to by the United States auditor as a part -of its surplus account, and may carry the balance as undivided profits, -or may declare such a dividend out of its undivided profits as in their -judgment seems wise.</p> - -<p><span class="smcap">Section 140.</span> That the amount paid out in dividends by the -National Land Credit Bank shall always be divided equally between the -State associations and the local associations in proportion to the -capital held by them and the local associations.</p> - -<p><span class="smcap">Section 141.</span> That the board of managers of the several State -associations shall thereupon set apart one-half of the net profits so -certified to by the United States auditor as a part of its surplus -account and may carry the balance as undivided profits and may declare -and pay such a dividend out of the undivided profits as in their -judgment seems wise.</p> - -<p>The executive committee of the several local associations shall set -apart one-half of the net profits so certified to by the United States -auditor as a part of its surplus account and may carry the balance as -undivided profits, or may declare and pay such a dividend out of the -undivided profits as in their judgment seems wise.</p> - -<p><span class="smcap">Section 142.</span> That when the surplus account of the National -Land Credit Bank shall be equal to 50 per centum of the capital money -so paid over to it by the several associations, the board of directors -may declare such additional dividend as in their judgment may seem -wise: <i>Provided, however</i>, That no such increase, or extra dividend, -shall ever reduce the surplus below said 50 per centum of the capital -so held by it. The same rule herein laid down for the payment of -dividends by the National Land Credit Bank shall apply to the several<span class="pagenum"><a name="Page_455" id="Page_455">[Pg 455]</a></span> -State associations and each and all of the local associations.</p> - -<p><span class="smcap">Section 143.</span> That if it shall become necessary at any time -for a local association to take possession of real estate upon which a -loan has been made and sell the same, the profit or loss thereon shall -be shared by the several institutions in the same proportion as the -capital is held by them; that is, the National Land Credit Bank shall -share one-half of the profit or loss, the State institution making -the loan shall share one-quarter of the profit or loss, and the local -association recommending the loan shall share one-quarter of the profit -or loss.</p> - -<blockquote> - -<p><span class="smcap">Comment</span>:—<i>First</i>: Sufficient responsibility should be -imposed upon each local association to compel it to look after all -delinquents diligently.</p> - -<p><i>Second</i>: Sufficient responsibility should be imposed upon each State -association to compel it to look after every loan in the State with -promptness and persistency.</p></blockquote> - -<p><span class="smcap">Section 144.</span> That if any local association shall be formed -at any time after the organization of the National Land Credit Bank, -before it goes into actual operation such local association desiring -to become a member of a State association shall first be compelled to -obtain the unanimous consent of the board of managers of the State -association in which the proposed local association is situated and -shall pay for its shares such a price as may be fixed from time to time -by the board of directors of the National Land Credit Bank for the -admission of new associations.</p> - -<p><span class="smcap">Section 145.</span> That all the expenses of whatsoever kind growing -out of the management of the National Land Credit Bank shall be paid -out of the earnings thereof.</p> - -<p><span class="smcap">Section 146.</span> That the entire surplus of the National Land -Credit Bank and the surplus of the State associations and the surplus -of the local associations shall be held as a working balance, and also -as a fund which may be withdrawn for investment in bonds or other -securities of the United States. The President of the United States -may direct that the whole of said surplus be invested<span class="pagenum"><a name="Page_456" id="Page_456">[Pg 456]</a></span> in the bonds or -other securities of the United States if, in his judgment, the general -welfare and the interests of the United States require.</p> - -<p><span class="smcap">Section 147.</span> That for the purpose of creating and establishing -the organization provided for in this Act and putting the same into -operation there is hereby appropriated the sum of three hundred -thousand dollars, or so much thereof as may be necessary, as a loan to -the National Land Credit Bank, at the rate of 3 per centum per annum -until paid: <i>Provided, however</i>, That this loan shall not extend beyond -the period of ten years.</p> - -<p><span class="smcap">Section 148.</span> That to accomplish the purpose of this Act -the governor of each State is hereby authorized and empowered to -appoint some citizen of his State to organize at least twenty local -associations in his State in accordance with the provisions of this -Act, and such appointee is hereby authorized to expend not to exceed -six thousand dollars in such undertaking. Upon the completion of -the organization of at least twenty local associations under and in -accordance with the provisions of this Act the amount of money so -expended not to exceed six thousand dollars will be repaid to such -appointee of any governor upon the presentation of vouchers for the -money so actually expended duly signed by the governor of the State to -the Treasurer of the United States.</p> - -<p><span class="smcap">Section 149.</span> That the governor of the State in which at -least twenty of such local associations have been organized as in -this Act provided shall thereupon report in detail to the President -of the United States, giving him the names and addresses of the local -associations so organized, the names of the chairmen of the respective -executive committees and their post-office addresses, and the names -of the banks and their respective post-office addresses in which the -several local associations have deposited the paid-up capital of -twenty-five thousand dollars each, together with duplicate letters of -receipt of the money from said bank.</p> - -<p><span class="pagenum"><a name="Page_457" id="Page_457">[Pg 457]</a></span></p> - -<p><span class="smcap">Section 150.</span> That if any governor of any State shall fail to -make a report within nine months after the passage of this Act that -at least twenty local associations have been organized as in this Act -provided, then and in that event the allotment of the six thousand -dollars to pay the expenses for the organization of at least twenty -local associations in his State may be used proportionately to pay the -expenses, if any, of organizing local associations in any other State -or States in excess of the required number necessary to establish a -State association—that is, the amount remaining unearned by any of -the States shall be apportioned to the several States reporting more -than twenty local associations directly in proportion to the number in -excess thereof, preference, however, always being given to the States -whose average expenses are lowest for the organization of their several -associations.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Gentlemen, this concludes the results of our labor -and I want to express the solicitude of your committee in proposing -this bill and the hope that it may in a large measure meet your -expectations.</p> - -<p><span class="smcap">Uncle Sam</span>: Well, boys, speaking for the crowd, I want to say -that I did not believe that the committee would be able to make its -report for a month. Upon my soul, I did not expect that they would -ever make so satisfactory a report. They seem to have thoroughly -comprehended all the subjects we have discussed and to have produced -a Financial and Banking Bill that will meet every question that can -possibly arise; one that will protect every individual bank in its -independence; one that will protect every commercial zone in its -independence; and one that will protect my reserves against the demands -of all the rest of the world.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Those are precisely the things we have striven to -accomplish, Uncle Sam.</p> - -<p><span class="smcap">Mr. Merchant</span>: During the past week I ran into a friend of mine -who is in the banking business and considering that we were practically -through with our work,<span class="pagenum"><a name="Page_458" id="Page_458">[Pg 458]</a></span> I told him what I had been doing the past four -months without giving him your names. "Well," he said, "I want to give -you a pointer. If you are following along the trail of the Aldrich -scheme you had better drop it; you had better save your time, because -the people are on to that deal and they won't stand for it. You will -have to make it clear that you are working from an entirely different -point of view."</p> - -<p>This remark of his opened my eyes and I am going to suggest that we -spend one night demonstrating the striking, the fundamental points of -difference between our bill and that Aldrich scheme.</p> - -<p><span class="smcap">Mr. Merchant</span>: I am convinced that we should do that very thing -and I propose and move that we meet next Wednesday night for that -purpose.</p> - -<p><span class="smcap">Mr. Banker</span>: To make a clean job of our work, I believe that is -essential; because hundreds and hundreds of thousands of dollars have -been expended in promoting that scheme, therefore, I second that motion.</p> - -<p><span class="smcap">Uncle Sam</span>: The motion is carried and now good night, all.</p> - -<hr class="tb" /> - -<p>To you, UNCLE SAM, we, the representatives of the FARMERS, BANKERS, -LAWYERS, LABORING-MEN, MERCHANTS and MANUFACTURERS, dedicate the result -of our endeavor, our future services, indeed, our lives; and we pledge -our callings, every one of them, to continue the work here begun with -that degree of vigilance and patriotism of which this great cause is -worthy, confident that the result of our efforts will be to safeguard -your honor and establish you upon the solid foundations of a sound -Financial and Banking System.</p> - -<p class="center"> -<img src="images/illus09.jpg" alt="pic" /> -</p> - - -<p class="caption"> -<span style="margin-left: 0.5em;">WONT YOU WALK INTO MY PARLOR</span><br /> -<span style="margin-left: 0.5em;">SAID THE SPIDER</span><br /> -<span style="margin-left: 0.5em;">TO THE</span><br /> -<span style="margin-left: 0.5em;">FLY</span><br /> - - -THE ALDRICH PLAN AND PLOT EXPOSED</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_459" id="Page_459">[Pg 459]</a></span></p> - - - - -<p class="ph2"><a name="SEVENTEENTH_NIGHT" id="SEVENTEENTH_NIGHT">SEVENTEENTH NIGHT</a></p> - -<p class="center">ALDRICH PLAN AND PLOT EXPOSED</p> - - -<p><span class="smcap">Uncle Sam</span>: From what you boys intimated the other night, I got -the impression that the so-called Aldrich scheme demonstrated almost -everything that we should not do in working out a financial and banking -system. It must have been more or less of a warning to you, then, when -you started out.</p> - -<p><span class="smcap">Mr. Lawyer</span>: To tell the truth, I had become so convinced of -its ulterior purposes from the standpoint of management, that I never -studied it seriously from an economic point of view, until this last -week.</p> - -<p><span class="smcap">Mr. Banker</span>: My position was just the reverse of that of Mr. -Lawyer, for while I had studied it from an economic point of view and -that of a practical banker, and had become so convinced of its utter -unsoundness on the one hand, and unfitness for use to ninety-nine out -of every hundred of American banks, I never dug into the soul of its -management, until the past week. So we compared notes, and found the -situation particularly interesting.</p> - -<p><span class="smcap">Mr. Merchant</span>: Before you go any further, I want to read -something from a speech, delivered in Congress March 29, 1910, two -years before the Aldrich plan was born. You are all doubtless aware -that the Aldrich scheme was nothing more nor less than an attempt to -transfer to this country the German scheme of note issue and banking -generally.</p> - -<p><span class="smcap">Mr. Laboringman</span>: I heard the other day, that the Aldrich bill -was deader than a door-nail. Why do we want to spend any time on that? -Or, are you fellows like the Irishman, who said that he was kicking a -dead dog to teach him that there was such a thing as punishment after -death?</p> - -<p><span class="pagenum"><a name="Page_460" id="Page_460">[Pg 460]</a></span></p> - -<p><span class="smcap">Mr. Merchant</span>: You must remember, Mr. Laboringman, that error -is always repeating itself, and that sin and iniquity never die; so, -the economic blunders of the Aldrich Bill and its administrative -purposes should be exposed and held up as a lesson and an illustration -to guide us in the future.</p> - -<p>What I wanted to read, was a part of Congressman Fowler's speech, -delivered in the House of Representatives. Referring to the German -banking situation, he said:</p> - -<p>"The position of both England and France, under present conditions, -would seem sound and impregnable from a governmental as well as a -banking point of view. Each has planted itself upon the gold standard, -with certain precautions peculiar to its circumstances. Germany, on the -other hand, has not pursued the course of England, with its limited -gold reserve, forcing the public into the deposit and check system to -meet the current demands of trade. This would have been impossible -without a long-continued ruinous revolution, considering that there -is a quarterly settlement in Germany that calls for an expansion in -currency amounting to $125,000,000. Nor has Germany pursued the course -of France, which has a gold reserve large enough to meet any test or -burden that either the Government or the commerce of Germany might have -imposed upon it, but has adopted a middle course which has not the -strength of the position of either England or France, nor the credit -facility of France.</p> - -<p>"Its gold reserve is of the halfway sort, and its bank note issue is -also of the halfway sort. The result is that the financial and banking -situation of Germany must necessarily prove weak upon the first great -test when the bank notes of the Imperial Bank of Germany must be made a -legal tender.</p> - -<p>"Indeed, upon the declaration of war by Germany or against Germany, the -first step taken in a financial way would be for her to declare her -bank notes a legal tender.<span class="pagenum"><a name="Page_461" id="Page_461">[Pg 461]</a></span> It is hardly problematical what would soon -happen, with the wide divergence between her gold fund and the amount -of her note issue."</p> - -<p>Gentlemen, within eighteen months after he made that statement, when -war seemed probable with France, Germany made her bank notes a legal -tender.</p> - -<p>Further along in the same speech, commenting upon the unsoundness of -the German plan, he said:</p> - -<p>"Imagine for a moment a central bank in the United States, like the -Imperial Bank of Germany, issuing all our bank note currency and these -notes going into the reserves of our myriad of banks as the basis of -loans which, under our system, in turn become our deposits.</p> - -<p>"The natural, first, and immediate effect would be an expansion of -credit, an inflation to just the extent to which the notes were used -for reserves.</p> - -<p>"As soon as the situation became obviously dangerous, a halt would be -called and a contraction in loans would follow. But a contraction of -loans calls for liquidation, and liquidation produces an exigent demand -for currency. We all learned that lesson only so short a time ago as -1907.</p> - -<p>"But in the very face of the increased demand for more currency the -currency would be contracting, because the loans would be reduced by -calling in bank notes which were being used for reserves; or, in other -words, the loans called would be paid in bank notes.</p> - -<p>"For every $100,000 of notes so called in the loans might be reduced to -an average of $500,000, and yet this very process of liquidation would -be concurrently destroying the only instruments of credit that would -adequately meet the demand created by forced contraction. It would -clearly lead to self-destruction, to commercial suicide.</p> - -<p>"The best thought of England recognizes this subtle but obviously -destructive contradiction in the use of credit, and therefore opposes -the use of credit notes by the Bank of England."</p> - -<p><span class="pagenum"><a name="Page_462" id="Page_462">[Pg 462]</a></span></p> - -<p><i>Gentlemen, the fact that we can force our banks to carry a specified -amount of reserves and of a specified quality, by the power of -taxation, will preclude the use of bank notes as reserves in the United -States.</i></p> - -<p>Mr. Fowler then concludes as follows:</p> - -<p>"There are then, in addition to all of the objections to the Bank of -France, three other unanswerable objections to the establishment in -this country of any central organization approaching in character the -Imperial Bank of Germany:</p> - -<p>"<i>First</i>: It would give us a financial and banking structure so weak -that it could not stand any great strain such as necessarily comes with -a great war, if, indeed, it were not so weak as to lead to a suspension -of gold payments even in time of peace.</p> - -<p>"<i>Second</i>: No thought whatever should be given to any suggestion that -makes it possible for one bank credit to be used in the reserves of -another bank and so substitute any form of credit for gold in our bank -reserves.</p> - -<p>"Unless gold alone is ultimately recognized as fit for bank reserves, -we shall continue to pay dearly for our mistake until it is corrected.</p> - -<p>"<i>Third</i>: No proposal whatever should be entertained by us that -involves the possibility of the suspension of gold payments, for no -country can become the clearing house of the world that is not a free -market for gold. The United States and not England ought to be the -clearing house of the world."</p> - -<p>These words, as I have said, were spoken about two years before Mr. -Aldrich attempted to import the German Bank into this country.</p> - -<p><span class="smcap">Mr. Banker</span>: That is very interesting and prophetic, but not -more so than his speech at the Republican Club of New York, January 20, -1912. Let me read that to you, gentlemen, by way of an exposition of -the economic faults of the so-called Aldrich scheme. He said:</p> - -<p>"I wish to speak purely from an economic point of view and to cover -only one single phase of the proposal;<span class="pagenum"><a name="Page_463" id="Page_463">[Pg 463]</a></span> its dangerous expansion, -unbounded inflation and certain expulsion of gold from the country.</p> - -<p>"'<i>First</i>: Nothing should ever go into the reserves of the banks of a -country except what is coined out of its standard of value.</p> - -<p>"'<i>Second</i>: The poorer money always drives out the better.'</p> - -<p>"Every single note of the so-called Reserve Association used in the -reserves of our banks will displace just that much gold and drive it -out of the country.</p> - -<p>"Judged, therefore, from a purely economic point of view, I assert that -the Reserve Association plan is the most unsound, the most dangerous; -indeed, it is absolutely the worst proposal that has been brought -forward for serious consideration by any respectable body of men since -the adoption of the Constitution, with the two following exceptions: -First, the issue of legal tender money by the Government such as -greenbacks; second, the free and unlimited coinage of silver at the -ratio of 16 to 1.</p> - -<p>"An officer of one of the largest banks of the United States recently -used this language: 'Mr. Fowler, it is incredible that we should be -called upon to consider such a proposition.'</p> - -<p>"If this is really true, how does it happen, that so many business men -and so many bankers approve it, is a most natural inquiry. The cause is -not difficult to perceive.</p> - -<p>"There is not a business man nor hardly a banker who is not even now -still living in a state of fright from the terror of 1907. One thought -alone seems to have taken possession of the country to the exclusion of -everything else, and that thought is this: That we must hereafter be -able to convert our commercial credits into bank or current credits. -There seems to be something approaching madness; indeed, there seems -to be an insane haste lest they be caught again, possibly tomorrow, -certainly next fall. But they need not worry, for danger is not -imminent; 1907 will not come again right away.</p> - -<p>"During the past two years up to the present time the<span class="pagenum"><a name="Page_464" id="Page_464">[Pg 464]</a></span> entire thought -of the country has been directed to a mere mechanism to achieve this -result, without any reference to or consideration whatever of those -fundamental, eternal principles of banking economics that demand -recognition and obedience if we are to escape the frightful penalties -which their violation always inflicts.</p> - -<p>"In the outset I want to lay down two fundamental laws that I wish were -burned into the minds of every banker and every business man within the -borders of this republic. They are these:</p> - -<p>"One—Nothing should ever be counted as a reserve which is not coined -out of the standard of value. Our standard of value is gold, therefore -nothing should go into the reserves of our banks except gold.</p> - -<p>"Two—The poorer money always drives out the better.</p> - -<p>"I hope that whoever hears these words will commit these two laws to -memory, for they are as fundamental and eternal in their operation as -the law of gravitation.</p> - -<p>"I assert that the plan of the so-called reserve association is in -direct violation of the first of these laws, and will put the second -law into operation to a dangerous and destructive degree.</p> - -<p>"Every intelligent student knows that the plan proposes to transport -to this country the German system of banking, which I assert has -completely broken down at home during the past six months. Now, if -this system has broken down in Germany, where there are a few great -banks with hundreds of millions of assets and not more than 500 banks -all told, what can you expect it to do here with more than 25,000 -individual, independent banks, directly responsible to their depositors?</p> - -<p>"The following letter was given to me by an officer of one of our -largest banks, accompanied with these words:</p> - -<p>"'I realize that in giving you this letter I am, in a way, betraying a -business confidence, but I regard it as my patriotic duty to give it to -you, to use in any way<span class="pagenum"><a name="Page_465" id="Page_465">[Pg 465]</a></span> you may see fit. For what would happen to this -bank if we should send out such a letter to our depositors? Our doors -would be closed inside of twenty-four hours.'"</p> - -<p>The letter referred to was written by the Deutsche Bank of Berlin, -which has assets approximating $500,000,000, and is as follows:</p> - -<p>"'In consequence of the restrictions recently made by the Imperial -Bank, with regard to the supply of money at the end of every quarter -of the year, we are, to our regret, compelled to ask you, when drawing -against your account with us upon our head office and our branches -by mail, kindly to advise us by cable of such drafts on them as are -likely to come forward for payment during the last three working days -of the quarter and the following two working days, so as to enable us -to provide from here especially the necessary funds at the office drawn -upon.</p> - -<p>"'As to cable transfers which, during the five days in question, you -may have to order on our head office or branches, to the debit of your -account with us, we shall feel obliged by your ordering them only if -you can advise us by cable one day before, the amounts to be placed by -us to your debit on receipt of such advice, or ordering upon us for -mail transfer from here.</p> - -<p>"'The foregoing, of course, does not apply to small amounts.'</p> - -<p>"As a further proof that the system has broken down at home, let us see -what has been going on in Germany during the past six months to further -demonstrate the weakness of their system.</p> - -<p>"The great banks of Germany have been scouring the markets of the -world, going into every nook and corner, hunting for gold. At what -price? Was it at 5 per cent, 6 per cent, 7 per cent, 8 per cent, 9 -per cent, 10 per cent? No. The New York <i>Evening Post</i>, in its annual -review, says it was from 12 per cent to 20 per cent. I have been -credibly informed that the great banks of Germany, with hundreds of -millions of assets, were borrowing money in<span class="pagenum"><a name="Page_466" id="Page_466">[Pg 466]</a></span> our own markets at 7½ -per cent and 1½ per cent for three months, or upwards of 13 per cent.</p> - -<p>"I was told of one loan to one of the largest banks in Berlin, running -for a whole year at 7 per cent.</p> - -<p>"Think of it! What would the condition in our country have to be before -The National City, The Bank of Commerce and the First National of New -York, and the First National and Continental Commercial of Chicago, -were scouring all quarters of the globe for gold and paying from 15 to -20 per cent for the loans?</p> - -<p>"The Imperial Bank of Germany could not save the few great banks of -Germany. What would the same kind of an institution in the United -States do for 25,000 independent banks under the same circumstances, -all pulling at the skirts of this proposed financial balloon? The -Imperial Bank could not make real money out of paper credit when the -crisis came.</p> - -<p>"Let me ask the 25,000 individual independent banks of America, what -they would do when the day of contraction and refusal came? Where would -you go for gold with your comparatively small capital and limited -credit?</p> - -<p>"The financial situation in Germany is by far the weakest of all the -great nations of Europe and the cause is not far to find nor difficult -to detect.</p> - -<p>"Their notes, which are based upon only 33 per cent of gold and 66 -per cent of commercial credits, are used as reserves and made the -basis of additional credits. Economically speaking, whenever a bank -puts anything into its reserves it makes that thing a legal tender -and exactly to that extent displaces that much gold, if gold is the -standard of value.</p> - -<p>"During the ten years from 1900 to 1910 the gold accumulated by Russia -amounted to upward of $200,000,000; that accumulated by France, upward -of $300,000,000; that accumulated by England, where nothing but gold -is treated as reserves and where there has been comparatively little -growth in business, $32,000,000.<span class="pagenum"><a name="Page_467" id="Page_467">[Pg 467]</a></span> The United States accumulated -$1,100,000,000, while Germany, with all her development of trade during -the last ten years, accumulated only $40,000,000 of gold when it ought -to have been ten times as much, all things considered, or $400,000,000. -If she had done this she would not have been compelled to send her -great financial institutions all over the globe in search of gold and -been compelled to pay 15 per cent and 20 per cent for it."</p> - -<p>Gentlemen, within sixty days after those words were uttered, this -conversation was reported to have taken place. The German Emperor asked -Herr Havenstein, the President of the Imperial Bank of Germany, whether -Germany was prepared, financially, to carry on a war with a first-class -power. Herr Havenstein said: "No." To this the German Emperor replied, -"I do not want that answer to that question when I ask it again."</p> - -<p>Herr Havenstein immediately called the managers of the thirty great -banks together, and told them that they must collect at least a -15 per cent reserve. To this they protested, saying that it meant -the accumulation of at least $250,000,000 in gold; but Havenstein -persisted and insisted upon his demand. Now, gentlemen, if you add the -$40,000,000 they had accumulated, to what Havenstein insisted that they -should accumulate, or $250,000,000, you have $300,000,000 as a minimum. -It is altogether probable that $400,000,000 was nearer what they should -have accumulated.</p> - -<p>It should be noted in this very connection, that Germany recently -appointed a commission to investigate her banking system, and that -this commission reported that the individual banks of Germany should -carry their own reserves, precisely as Congressman Fowler has always -contended, declaring that it is especially important in the case of our -individual, independent banking system. From what has been said, it has -been demonstrated that every criticism that he has made of the German -system, has been confirmed by their own subsequent action.</p> - -<p>The rest of his speech was as follows:</p> - -<p><span class="pagenum"><a name="Page_468" id="Page_468">[Pg 468]</a></span></p> - -<p>"Mark this: If we did not have the $346,000,000 United States notes or -greenbacks, the $650,000,000 of legal tender silver and a part of the -$750,000,000 national bank notes in the reserves of our banks, we would -now have in the United States $2,500,000,000 of gold instead of only -$1,850,000,000. Does all this prove nothing to us?</p> - -<p>"Every intelligent student of economics knows that after Alexander -Hamilton, with the acquiescence and approval of Jefferson, had fixed -the ratio of the gold and silver dollar in 1792, a differential of -only one-half to one per cent drove all the gold out of the country by -1832, and that from 1834 to 1860 the changed ratio drove every dollar -of silver out of circulation. Who does not know that from 1861 to 1865 -the issue of fiat Government paper drove every dollar of gold out of -the country; that for seventeen years we were off the gold standard, -resuming specie payments in 1879?</p> - -<p>"Has any banker over fifty years of age forgotten the silver struggle -from 1879 to 1894, when, because of the silver purchase act by which we -only added $50,000,000 a year to our reserve money, we came to the very -precipice of repudiation and national dishonor?</p> - -<p>"These four great and significant lessons have been taught us—since -the establishment of this Government—the poorer money invariably -drives out the better, and yet we are confronted by such stuff as the -following falling from the lips of the reputed author of the so-called -Reserve Association:</p> - -<p>"'The banks will be able to replenish their reserves indefinitely.' The -counterpart of this proposition is that the banks will be able to make -loans indefinitely. Think of such a proposition! And again, he says it -was deemed necessary 'to provide such effective regulation of discounts -and note issues as would enable the organization to respond promptly at -all times to normal or unusual demands for credit or currency without -danger of undue expansion or inflation.' If this proposition survives -at all it will be as the curiosity of the century. I submit<span class="pagenum"><a name="Page_469" id="Page_469">[Pg 469]</a></span> that -neither of these propositions could have emanated from a mind capable -of thinking in the terms of economics.</p> - -<p>"I assert that if we adopt a sound financial system in the near future -we shall have in the course of ten years upward of $3,000,000,000, -possibly $3,500,000,000, of gold in the United States. I assert further -that if we adopt the proposed so-called reserve association scheme we -shall have at the end of five years thereafter in the neighborhood of -only $1,250,000,000, allowing for a differential of $250,000,000 either -way as a possibility. In other words, we would have as a result not -more than 40 per cent and possibly not more than 30 per cent of the -gold that we shall have if we pursue a wise economic policy.</p> - -<p>"The scheme provides that any deposits with the association may count -as reserves; also that any of its notes may be held as reserves.</p> - -<p>"Since the average reserve of all national banks is and has been for -many years about 20 per cent, let us assume, first, that a national -bank called 'X' has $5,000,000 of deposits and holds a 20 per cent -reserve, or $1,000,000 of gold; second, that X National Bank deposits -this million of gold with the reserve association; third, that a -national bank called the 'Y National Bank' exchanges $1,000,000 -of commercial paper for $1,000,000 of the notes of the reserve -association, which it puts into its reserves.</p> - -<p>"In the course of time it will have a million of deposits, largely -in the shape of loans based upon this million of notes; so that the -original $1,000,000 which stood guard over $5,000,000 of debts now is -called upon to protect $12,000,000 of debts, or only about an 8 per -cent reserve as against 20.</p> - -<p>"The X National Bank owes $5,000,000 of deposits against $1,000,000 -deposited with the association. The association owes the X National -Bank the $1,000,000 deposited with it and $1,000,000 of notes -outstanding which<span class="pagenum"><a name="Page_470" id="Page_470">[Pg 470]</a></span> it issued to the Y National Bank. The Y National -Bank has liabilities outstanding of $5,000,000 with the notes as -reserves, or a net expansion and inflation of $7,000,000.</p> - -<p>"It has been assumed or claimed by some advocates of the scheme -that probably $1,000,000,000 of gold would be deposited with the -association, in which event there would be an expansion and inflation -of $7,000,000,000, or a total liability of $12,000,000,000 where now -there are only $5,000,000,000.</p> - -<p>"While this expansion and this inflation have been going on the notes -have been going into the banks as reserves, and a corresponding amount -of gold has been driven out of the banks and out of the country.</p> - -<p>"Now, mark you, I have not pursued this expansion, this inflation, -beyond the 50 per cent gold reserve for all the liabilities of the -reserve association. When you turn your imagination to all the -possibilities remaining in rediscounts, borrowing direct, acceptances -and falling in your reserves, and the credits which grow out of -credits directly and indirectly, the prospect becomes bewildering. The -expansion and inflation becomes a matter of planetary distances and -astronomical figures. The proposal leads into the nebulous somewhere, -into the bottomless nowhere.</p> - -<p>"Every student recognizes that the weakest point in our national bank -system is the superimposed credit resulting from the deposits with our -reserve cities and then with our central reserve cities. But in the -very face of that fact here is a proposal that accentuates that fault -one hundred fold.</p> - -<p>"The strangest thing about this whole proposal is that it is based -upon the fact that we have not sufficient capacity for expansion and -inflation of credit. Will any one say that what we wanted during the -years of 1913-4-5-6-7 was more inflation? Does not every intelligent -student of banking economics know that what we should have had was some -way of checking the delirium instead of increasing the mad speculation?</p> - -<p><span class="pagenum"><a name="Page_471" id="Page_471">[Pg 471]</a></span></p> - -<p>"To determine now what we want we must first ascertain with some degree -of accuracy just what happened.</p> - -<p>"Until we come to realize that there are two distinct kinds of capital -involved in our banking business, and learn to treat them according -to their peculiarities, we shall continue to have the same kind of -trouble, to a greater or less degree, that we have had in the past.</p> - -<p>"There is the trust fund or the savings of the people and money -belonging to estates or the investment fund. Then there is the -commercial fund or that capital engaged in production and trade. The -law should compel the segregation or separation of these two funds, so -that we know with some degree of certainty whether the investment fund -has all been exhausted and our commercial funds or capital are being -encroached upon and absorbed in fixed investments. This is precisely -what happened by 1907.</p> - -<p>"To illustrate this thought, let us assume that a railroad needs one -hundred flatcars to carry its peculiar freight and needs one hundred -passenger cars for the accommodation of the people. It is self-evident -that if the road uses all the flatcars and half the passenger cars to -carry its freight, the balance of the passengers will have to make some -other provision for transportation or walk. This is just what occurred -in 1907, and a great many people are still walking as a result of -that misadventure. Liquidation is still going on, with a probability -that we shall be well into 1913 before normal or really good business -conditions will prevail all round.</p> - -<p>"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:</p> - -<p>"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<span class="pagenum"><a name="Page_472" id="Page_472">[Pg 472]</a></span> 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.</p> - -<p>"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."</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, do you believe that to be a correct -statement?</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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.</p> - -<p>Let me call your attention to what my position will be, under the bill -we have prepared.</p> - -<p><i>First</i>: I shall be able to furnish all the currency I<span class="pagenum"><a name="Page_473" id="Page_473">[Pg 473]</a></span> 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: Have you any doubt about the people taking your -bank notes, as you suggest?</p> - -<p><span class="smcap">Mr. Banker</span>: 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:</p> - -<p><i>First</i>: That they were a first lien upon all my assets.</p> - -<p><i>Second</i>: 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.</p> - -<p><i>Third</i>: That the American Reserve Bank with $1,250,000,000 would -redeem the notes in case my bank failed.</p> - -<p><span class="smcap">Mr. Laboringman</span>: 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.</p> - -<p><span class="smcap">Uncle Sam</span>: There, can you beat that as a precaution against -accidents? Mr. Laboringman never will get left, if you will give him -half a chance.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Under those circumstances, of course, the -question of goodness of the notes would never<span class="pagenum"><a name="Page_474" id="Page_474">[Pg 474]</a></span> arise. The people would -soon think only of the great central gold reserve, which would always -be before their eyes.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p>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?</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: Yes, and I see more than the liberation<span class="pagenum"><a name="Page_475" id="Page_475">[Pg 475]</a></span> 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.</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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?</p> - -<p><span class="smcap">Mr. Banker</span>: I am glad that you have asked for a comparison of -our plan with the Aldrich scheme, under the same conditions.</p> - -<p>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.</p> - -<p>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<span class="pagenum"><a name="Page_476" id="Page_476">[Pg 476]</a></span> 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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>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.</p> - -<p><span class="pagenum"><a name="Page_477" id="Page_477">[Pg 477]</a></span></p> - -<p><span class="smcap">Mr. Merchant</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: Most certainly, and you may depend upon it, that -all the extra expense that we incur will come out of our borrowers.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: Your opinion is confirmed by one of our most -prominent country bankers, who said, "This proposition is impractical, -unparalleled, and useless."</p> - -<p><span class="smcap">Mr. Merchant</span>: 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?</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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?</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Banker, you spoke of belonging to a local -association if you should go into the Aldrich<span class="pagenum"><a name="Page_478" id="Page_478">[Pg 478]</a></span> scheme. How many of -those associations would there be in the United States?</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Merchant</span>: 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?</p> - -<p><span class="smcap">Mr. Banker</span>: I certainly do think so. Bankers above all things -do not want to expose their business to their immediate neighbors in -the banking business.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Laboringman</span>: 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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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<span class="pagenum"><a name="Page_479" id="Page_479">[Pg 479]</a></span> and evenly distributed representation of -all parts of every zone.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Oh, I see, you would only have at most -forty-two organizations in the United States that would have any actual -business to do.</p> - -<p><span class="smcap">Mr. Banker</span>: That is correct. Every zone would be so organized -as to absolutely protect the confidences of the business world and the -banking fraternity.</p> - -<p>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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: I agree with you absolutely. It is precisely as -President-elect Wilson said: "Publicity, pitiless publicity, is the -only sure protection to the people."</p> - -<p><span class="smcap">Mr. Manufacturer</span>: 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 -organiza<span class="pagenum"><a name="Page_480" id="Page_480">[Pg 480]</a></span>tion 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.</p> - -<p><span class="smcap">Mr. Farmer</span>: 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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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<span class="pagenum"><a name="Page_481" id="Page_481">[Pg 481]</a></span> -words, it is really a run of the banks upon the banks. It is "Everyone -for himself, and the devil take the hind-most."</p> - -<p>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.</p> - -<p>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.</p> - -<p>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.</p> - -<p>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<span class="pagenum"><a name="Page_482" id="Page_482">[Pg 482]</a></span> zone should get together, than that all the zones should -get together for a <i>common defense</i> 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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Farmer</span>: 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<span class="pagenum"><a name="Page_483" id="Page_483">[Pg 483]</a></span> and Navy -and the National Government is absolutely unanswerable. What do you -think, Mr. Merchant?</p> - -<p><span class="smcap">Mr. Merchant</span>: I have never had any doubt about that question -at all.</p> - -<p><span class="smcap">Mr. Laboringman</span>: 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.</p> - -<p>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.</p> - -<p><span class="smcap">Uncle Sam</span>: If you ever want a "B" line on anything, go to Mr. -Laboringman every time.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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 de<span class="pagenum"><a name="Page_484" id="Page_484">[Pg 484]</a></span>tail -of organization that staggered even an old political stager as I am.</p> - -<p>You will remember that when Aldrich made his first announcement -about his plan, he said that we must have a <i>Central Bank</i> and that -immediately President Taft declared at Boston, "Senator Aldrich desires -to round out his career with a financial system for the United States, -and says that we should have a <i>Central Bank</i>." I never will forget -what an eminent citizen of this state said when he read that statement. -It was this: "Well, God help the American people if Nelson W. Aldrich -ever rounds out <i>his career</i> with a financial system for the United -States."</p> - -<p>You will all of you remember, I am sure, what a cold reception the idea -of a "Central Bank" at the hands of Aldrich received. Does anyone of -common intelligence believe that Aldrich ever changed his scheme below -its throat? It is true he put a mask on its head; but that is all. He -hunted around for an all-concealing name to hide the thing under—"The -National Reserve Association." <i>I assert that his proposal would mean -the greatest and most centralized Central Bank in the world.</i></p> - -<p>Note these figures and draw your own conclusion:</p> - -<table summary="note" width="85%"> -<tr><td>Nat. Reserve<br />Assn.</td> - - <td>Bank of<br />France</td> - - <td>Bank of<br />England</td> - - <td>Bank of<br />Germany</td></tr> - -<tr><td>Capital</td><td></td><td></td><td></td></tr> -<tr><td>$400,000,000</td> <td>$36,500,000</td> <td>$72,000,000</td> <td>$45,000,000</td></tr> - -<tr><td>Deposit</td><td></td><td></td><td></td></tr> -<tr><td>1,500,000,000</td> <td>100,000,000</td> <td>250,000,000</td> <td>200,000,000</td></tr> - -<tr><td>Note Issue</td><td></td><td></td><td></td></tr> -<tr><td>2,400,000,000</td> <td>1,000,000,000</td> <td>(See Note.)</td> <td>400,000,000</td></tr> - -<tr><td>Possible Note Issue</td><td></td><td></td><td></td></tr> -<tr><td>4,500,000,000</td><td> </td><td></td> - <td> Possible large issue - with tax.</td></tr> -</table> - -<p><span class="pagenum"><a name="Page_485" id="Page_485">[Pg 485]</a></span></p> - -<p><span class="smcap">Note.</span>—<i>The Bank of England is not in any sense a bank of -issue, because the amount of notes it issues is limited to the amount -of gold coin in the issue department. The notes are gold certificates. -There is an exception to the law, to the extent of the arbitrary amount -of notes issued against the Government debt and securities, held in the -issue department, amounting to $90,000,000.</i></p> - -<p>Now, gentlemen, here you have a proposal to organize in this country -an institution with a capital greater than the combined capital of the -Central Banks of England, France and Germany, because the capital of -all of our banks now exceeds $2,000,000,000, and the subscription to -the National Reserve Association must be 20 per cent of this amount, -to entitle them to participate. Certainly the idea must have been that -they all would participate in so beneficent an institution. "It was to -be a bank of banks for all the banks."</p> - -<p>It was the declared purpose of the author of the scheme that the banks -should surrender all their real money, now carried as reserves, to this -central institution in exchange for its notes; or that the banks would -deposit more than $1,500,000,000 with the National Reserve Association. -This would be a deposit nearly three times as great as all the deposits -of the Central Banks of England, France and Germany combined.</p> - -<p>The bill provides, Section 51, that the National Reserve Association -can issue $900,000,000 of its notes, <i>and as many more</i> as are covered -"by an equal amount of lawful money" (United States notes, silver, or -silver certificates, and gold in some form), without paying any tax. -But if the banks turned over their present reserves, amounting to -$1,500,000,000, as contemplated by the author of the National Reserve -Association, it could issue $2,400,000,000 before beginning to pay any -tax on circulation. By paying a tax of 1½ per cent per annum, it -could put out $300,000,000 more notes, not covered by lawful money, -or $2,700,000,000; then, by paying a tax<span class="pagenum"><a name="Page_486" id="Page_486">[Pg 486]</a></span> of 5 per cent, it could go -any limit until its lawful money reserve was reduced to 33 per cent. -This makes a possible issue of $4,500,000,000, or a possible note -issue today two or three times as great as all the note issues at any -time outstanding of the Central Banks of England, France and Germany -combined. <i>Every dollar of this vast amount is only the credit of the -so-called National Reserve Association, and yet is a lawful reserve for -over twenty-five thousand banks to hold.</i></p> - -<p><span class="smcap">Mr. Merchant</span>: By the way, Mr. Banker, I would like to ask you -what you think of a tax upon bank notes to be paid by the Central Bank -of Issue as it is practiced in Germany where they got this idea.</p> - -<p><span class="smcap">Mr. Banker</span>: Economically speaking, a tax paid under such -circumstances is of no more use than your appendix.</p> - -<p><span class="smcap">Mr. Merchant</span>: My appendix! I have had my appendix removed.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, that makes no difference. I still insist -that a tax paid upon bank notes under such circumstances is of no more -use, economically speaking, than your appendix, whether it has been -removed or not.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Section 23 provides, "The National Reserve -Association shall be the principal fiscal agent of the United States. -The Government of the United States shall, upon the organization of -the National Reserve Association, deposit its general funds with said -association and its <i>branches</i>, and thereafter all receipts of the -Government, exclusive of trust funds, shall be deposited with said -association and its <i>branches</i>, and all disbursements by the Government -shall be made through said association and its <i>branches</i>."</p> - -<p>The Central Bank of any country may be defined to be the bank at which -the other banks carry their reserves, and at which the Government -carries its balance.</p> - -<p>But will some advocate say "it is only the bank of all the other -banks"? This is the very quintessence of a Central Bank.</p> - -<p>Upon this evidence will any candid man say that the<span class="pagenum"><a name="Page_487" id="Page_487">[Pg 487]</a></span> so-called -National Reserve Association is not a Central Bank? It was to have -fifteen branches. The Bank of England has none. The Bank of Germany -has nineteen main branches. The Bank of France has one hundred and -twenty-seven main branches.</p> - -<p>"<span class="smcap">Section 34.</span>—The National Reserve Association shall have -power both at home and <i>abroad</i> to deal in certain things."</p> - -<p><span class="smcap">Section 36.</span>—"The National Reserve Association shall have -power to open and maintain banking accounts in foreign countries, and -to <i>establish agencies in foreign countries</i> for certain purposes."</p> - -<p>Have the Central Banks of England, France or Germany any power to -maintain accounts and establish agencies in foreign countries? With -"A baby stare," and under cover of "Sunday-school pretences," we are -told that this all-comprehending scheme is just a simple coöperative -enterprise for the exclusive benefit of the individual American banks. -Indeed, that it is the only truly altruistic banking institution that -was ever conceived.</p> - -<p>Now, as the chief argument for the adoption of this scheme, its main -promoters and sponsors have persistently declared that the country -was now being dominated and controlled by certain great banking -interests, and, therefore, that the people should liberate themselves -from these sinister and dangerous banking powers by running into the -warm and enticing embrace of the National Reserve Association. Upon -investigation, we find this anomaly, this surprising, this astounding -fact: that the promoters and advocates of this gigantic machine are -these self-same sinister banking influences who have the country by the -throat today.</p> - -<p>Hon. Leslie M. Shaw has pertinently inquired, "Is it not strange that -Nelson W. Aldrich and his affiliations are tired of their great power -and vast opportunities, and are now trying to divest themselves of -them," through the innocent-looking National Reserve Association? -It<span class="pagenum"><a name="Page_488" id="Page_488">[Pg 488]</a></span> will be well remembered by all of you, that at the time that the -Aldrich scheme made its first bow to the dear people, the public -discovered that the National City Bank owned bank stock to the amount -of $10,000,000 in other National Banks located throughout the United -States. Possibly the same interests owned several times that amount. I -was informed about that time that they controlled at least one hundred -banks in the leading cities of the United States. Now, let us assume -that to be true, and let us meditate upon what such an organization -could accomplish if they wanted to elect every officer in every local -association, and every officer in charge of every branch, and the board -of directors of the National Reserve Association, and so name the -"<i>Governor</i>" and the rest of the executive committee of nine which is -to control this great Central Bank.</p> - -<p>To appreciate the power of such an organization, you must keep in -mind the fact that practically every bank in the United States would -be carrying a balance with some one of these banks immediately under -their control. There is your machine. It is a perfect duplicate of the -political machine in this state. The state "Boss," whom you know stands -in precisely the same position as the National City Bank would stand.</p> - -<p>As you are fully aware, I am the "Boss" of this county; and I am in -identically the same position that one of these hundred banks would be -that are controlled by the National City Bank. When I get my orders, -I immediately communicate with every so-called local leader in every -township. This political machine works three hundred and sixty-five -days and three hundred and sixty-five nights in the year. In the -sense of an organization, we are working all the time, and it is the -organization work that does the business. All the rest of the people -are unorganized. So it would be with the banks. The men who belong to -the organization or machine "<i>like it and fear it</i>"; because as things -have stood, no one could get anywhere without being a part of the -machine. This<span class="pagenum"><a name="Page_489" id="Page_489">[Pg 489]</a></span> fact forces acquiescence. It has been, as you know, a -perfect feudalism from top to bottom. We have had a machine government -in this state as perfect as the Manchu Government in China.</p> - -<p>Can you imagine anything easier than for the National City Bank with -this complete banking organization all over the United States to name -every man practically that went into this organization from top to -bottom? This would not be done by holding a majority of the stock in -all the twenty-five thousand banks; they don't care about that; because -it is a matter of no consequence to them, and if they attempted to do -anything so crude, it would spoil their whole game. They attain their -ends in more subtle but no less certain and powerful ways. They get -influences to work. They put forces into operation. Their interests are -not limited to the banking business. They have affiliations with great -transportation companies and manufacturing interests, and therefore -control large bank deposits everywhere that the banks want and are -always working to get. Then there are favors to be granted; commissions -to be paid; "melons to be cut." Opportunities are suggested. In one -respect at least they are like the Lord, they "work in a mysterious way -their wonders to perform."</p> - -<p>They had established their ramifications throughout the United States -by making the National City Bank a holding company of bank stocks, -and the culmination of their power was to be realized through the -devious methods of organizing the National Reserve Association. The -same money and the same power that filled the columns of the newspapers -of the country with the unqualified praise of the Aldrich scheme for -two years—the same power that rushed resolutions of one uniform -stereotyped kind through twenty or thirty state bank associations, and -steam rollered the same unconsidered declarations through two annual -conventions of the American Bankers' Association, would have made this -so-called <i>altruistic, benevolent, coöperative association</i> the most<span class="pagenum"><a name="Page_490" id="Page_490">[Pg 490]</a></span> -powerful machine ever organized; because, it would have absolutely -dominated all the bank credit in the United States, or 45 per cent of -the banking power of the world. You must remember that these interests -are by far the greatest speculators in the United States. Yes, the -greatest in the world.</p> - -<p><span class="smcap">Mr. Banker</span>: But don't you remember that the bill provided in -Section 26 that the paper rediscounted by it must "be issued or drawn -for agricultural, industrial, or commercial purposes," and not "for the -purpose of carrying stocks, bonds, or other investment securities"?</p> - -<p><span class="smcap">Mr. Lawyer</span>: Yes, but that is all folderol. It is the purest -kind of poppycock. If a bank wanted to take on a speculative deal, it -could sell its commercial paper, could it not, and use the money for -speculation just the same? That is on precisely the same level with its -declaration that the institution was not a Central Bank. It is such -subterfuges that disgust every candid man.</p> - -<p>Listen to Mr. Aldrich in his report upon the bill upon the selection of -the "Governor" of the National Reserve Association by the President of -the United States. He says, "Further restraint upon the administration -of the association upon narrow or selfish lines, is imposed by the -provision that four of the highest officials of the Government are made -ex officio members of the controlling board, <i>and by the requirement -that the governor shall be selected by the President of the United -States</i>. The fear has been expressed that the <i>selection of the -governor by the President</i>, and the provisions making the Secretary of -the Treasury, the Secretary of Agriculture, the Secretary of Commerce -and Labor, and the Comptroller of the currency, ex officio members of -the board of directors of the reserve association, <i>might lead to an -attempt to control the organization for political purposes</i>."</p> - -<p>Please note the sham, fraud and false pretense covered by this comment. -The bill provides that the "Governor" of the association, as they -call him, shall be selected by the President of the United States -<i>from a list<span class="pagenum"><a name="Page_491" id="Page_491">[Pg 491]</a></span> of at least three names, furnished by the directors</i>. -Will any honest man say that the President of the United States would -have had any more to do with the selection of the "Governor" of the -so-called National Reserve Association than the King of Siam? Again -note this cheap, false pretense, "Fear has been expressed that the -selection of the governor by the President," and the four ex officio -members of the board of directors, "might lead to an attempt to control -the organization for political purposes." These four ex officio -members have just four votes upon a board of forty-six which proceeds -immediately to eliminate all of the ex officio members forever, by -selecting an executive committee consisting of nine members to manage -its affairs, from which all of them are excluded except the Comptroller -of the currency. Can any intelligent man doubt the purpose of all these -sham declarations and false pretenses? If so, let him spend a day or -two trying to find out how the members of the boards of the local -associations are to be chosen; try to unravel the process by which the -members of the boards of the branches are to be evolved; and, having -grown tired and dizzy with his task, let him undertake to prove how -the board of directors of the National Reserve Association are to be -manufactured through the machinations born of ulterior purposes.</p> - -<p>I have studied puzzles before, but for complications, wheels within -wheels, evident designs upon evident designs, occult purposes under -occult purposes, and a combination of powerful forces, born of sinister -influences, this project will forever stand alone as an illustration of -what the human mind can do to conceal its real object.</p> - -<p>There is not one man in a hundred, indeed I do not believe that there -is one man in a thousand, taking the business men, farmers, working -men, and bankers all together, who can solve the riddle, and tell -how it is done. Such a mystery could not have just happened. It must -necessarily have been the product of a purpose.</p> - -<p><i>Simplicity, publicity and direct methods are the guar<span class="pagenum"><a name="Page_492" id="Page_492">[Pg 492]</a></span>anties of common -honesty. Intricacy, secrecy and indirect methods are invariably used -to hide uncommon dishonesty. I do not mean petty larceny, taking a -few pennies, or a loaf of bread; but the absorption of hundreds of -millions, without returning anything to the world in exchange for them.</i></p> - -<p>Should the United States have been so unfortunate as to have been -bound hand and foot for fifty years, the life of the proposed charter, -by the trammels and intricacies of the National Reserve Association -under control of an executive committee, consisting of only nine men -who had been the evolutionary product of a preconceived purpose and -well-defined plan, can anyone doubt what the result would have been? -Can anyone doubt that all of their banks and all of their business -interests would have gotten all the money they wanted all the time?</p> - -<p>The advanced information from week to week and, at times, possibly, a -month ahead, of what the discount rate would be—a very natural way for -some member of that executive committee to show his or their proper -appreciation of his or their promotion to their positions—would have -been worth more every year, during the fifty-year grant, than all the -wealth that the American people could produce during any twelve months; -for this advanced information about the discount rate would have made -profits a mathematical certainty upon the billions and billions of -stocks and bonds that are quoted upon the Stock Exchange, the fertile -field of the man who knows that he has a sure thing.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: Mr. Lawyer, that smells pretty bad.</p> - -<p><span class="smcap">Mr. Lawyer</span>: Yes, I admit it; but does it smell any worse than -oil has been smelling for more than twenty years? Than certain United -States senators have been made to smell? Than robbing rebates smell? Is -it not the natural sequel to this train of abuses to which the country -has been treated?</p> - -<p>This whole situation was so graphically depicted, pre<span class="pagenum"><a name="Page_493" id="Page_493">[Pg 493]</a></span>cisely as it has -developed, two years before Mr. Aldrich gave birth to this conception, -that I want to read it to you:</p> - -<p>"A central bank could easily be so organized as to sap the commercial -blood of this country at every turn and direct the silent and unseen -currents of advantage into the channels of favored institutions, and -all these favored institutions might turn out, upon investigation, to -be, in the end, one institution.</p> - -<p>"And if, unfortunately, the subterranean connection could not be -detected, and even if detected, could not be broken, what a power for -evil and injustice such an organization would prove in the life of this -Nation.</p> - -<p>"This is not only regarded as possible, but as probable; indeed, it is -charged that it is the preconceived, cunning design of the advocates of -a central bank to accomplish this purpose.</p> - -<p>"Under these circumstances, with what suspicion and jealousy will every -act of the central bank be watched! Localities will become envious -of localities. Cities will bitterly attack their neighboring cities. -Nine-tenths, if, indeed, not ninety-nine out of every hundred, of the -banks will imagine spears in needlecases, and, right or wrong, fling -their accusations upon the wings of the wind; and we will be living in -a commercial world of unrest and constant controversy surpassing in -suspicion, envy, jealousy and bitterness anything this Republic has -ever witnessed. The consequences no man can prophesy; no imagination -can paint."</p> - -<p>These words were spoken by Hon. Charles N. Fowler, March 29, 1908, -just two years before Mr. Aldrich made his report to Congress upon his -National Reserve Association.</p> - -<p><span class="smcap">Mr. Laboringman</span>: You know I said that I had heard that the -Aldrich Bill was dead; for one, I hope so. If the people ever get a -lick at it they will finish it for certain.</p> - -<p><span class="smcap">Mr. Farmer</span>: You are right, and you bet that if they ever get -a chance to discuss this banking bill question,<span class="pagenum"><a name="Page_494" id="Page_494">[Pg 494]</a></span> they will come mighty -near settling upon the right proposition in the end.</p> - -<p><span class="smcap">Mr. Banker</span>: I agree with you, and furthermore I am thoroughly -convinced that we shall never reach a satisfactory conclusion until we -have had just the same kind of a hand-to-hand fight over this question -that we had over the gold standard.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: It looks so to me. That gold-standard -fight taught me that you could trust the American people to make a -wise decision, if you would only have a country store, schoolhouse, -cornfield debate, in which every man in the country got into the -game—preacher, lawyer, teacher, farmer, merchant, manufacturer, -laboringman, townfolks and country folks, all alike.</p> - -<p><span class="smcap">Mr. Merchant</span>: Nothing more true has been said since we have -been talking about this question than that remark about the importance -of a public discussion of this whole matter. I know any number of men -who when this Aldrich scheme came out were ready to swallow it, but -who now realize what a fatal blunder it would have been. The reason -was, that they knew absolutely nothing about the question and they were -living in such a state of terror on account of the panic, that they -were ready to take anything that would shield them from experiences -such as they had just passed through. The Aldrich scheme was the only -thing in sight, because hundreds of thousands of dollars had been spent -in promoting it. They are just beginning to study and think about the -subject. Our hope of wise action by Congress rests upon a red-hot -debate among the people, exactly as you said.</p> - -<p><span class="smcap">Mr. Banker</span>: Well, it will be easy enough to show them what the -real reforms demanded are.</p> - -<p><i>The reforms we demand are these</i>:</p> - - - -<p><i>First: Holding companies in the banking business must be completely -wiped out.</i></p> - -<p><i>Second: Every National Bank should be authorized to do</i></p> - -<p><span class="pagenum"><a name="Page_495" id="Page_495">[Pg 495]</a></span></p> -<blockquote> -<p><i>(1) A commercial banking business.</i></p> - -<p><i>(2) A Savings bank business.</i></p> - -<p><i>(3) A Trust company business.</i></p> - -<p><i>(4) A note issue business, precisely as the Canadian banks do.</i></p></blockquote> - -<p><i>Third: All the various accounts—commercial, savings, trust and note -issues—should be segregated.</i></p> - -<p><i>Fourth: Every bank in the United States should be compelled to carry -the same amount of bank reserves.</i></p> - -<p><i>Fifth: All bank reserves should consist of gold or gold certificates, -as soon as the United States notes can be converted into gold -certificates.</i></p> - -<p><i>Sixth: Every bank in the United States should be brought under -national control, because banking is essentially Interstate Commerce.</i></p> - -<p><i>Seventh: Every natural financial centre in the United States should -become the clearing centre for all the checks, drafts and bank notes -that are payable in the territory that is economically and naturally -tributary to that Financial centre; such territory should constitute a -commercial zone.</i></p> - -<p><i>Eighth: There should be organized at each of these financial centres a -Clearing House at which all the checks, drafts and bank notes payable -within the commercial zone shall be at par.</i></p> - -<p><i>Ninth: The banks of each commercial zone should elect a board of -control to examine, supervise and control all the banks within such -commercial zone, precisely as the Clearing Home bank examiners are -examining and supervising all banks clearing through them today.</i></p> - -<p><i>Tenth: The banks of each commercial zone should also elect a court of -appeals, or a banker's council, composed of an equal number of business -men and bankers, to settle all banking and business questions that -would properly come before them.</i></p> - -<p><i>Eleventh: The Board of Control in each commercial zone should be -presided over by a deputy United States<span class="pagenum"><a name="Page_496" id="Page_496">[Pg 496]</a></span> Comptroller, for the purpose -of securing immediate and efficient action.</i></p> - -<p><i>Twelfth: The banks of the United States should all contribute a -percentage of their deposits to a Central Reserve, which should be -composed of gold, and gold alone. The percentage of deposit should be -7 per cent at the outset, and be gradually increased to 10 per cent, -which would amount, at the present time, to a central gold reserve of -upwards of $1,250,000,000. This reserve would correspond to the reserve -held today by the Clearing Houses for their banks.</i></p> - -<p><i>Thirteenth: This central gold reserve should be held in trust by a -body of men composed of one man from each commercial zone, for the -benefit of all the commercial zones.</i></p> - -<p><i>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.</i></p> - -<p><i>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.</i></p> - -<p><i>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.</i></p> - -<p><i>Seventeenth: The purpose of a national centralization of gold to so -large an extent is two-fold:</i></p> - -<blockquote> - -<p><i>(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.</i></p> - -<p><span class="pagenum"><a name="Page_497" id="Page_497">[Pg 497]</a></span></p> - -<p><i>(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.</i></p></blockquote> - -<p><i>These reforms are based upon three distinct propositions:</i></p> - -<p><i>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.</i></p> - -<p><i>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.</i></p> - -<p><i>Third: They extend to every economic or natural commercial zone the -established and approved practices of the American Clearing Houses, -that is:</i></p> - -<blockquote> - -<p><i>(1) Bank supervision and control over all members.</i></p> - -<p><i>(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.</i></p> - -<p><i>(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.</i></p> -</blockquote> -<p><i>The result of these reforms would be:</i></p> -<blockquote> -<p><i>(1) To make each individual bank absolutely independent, because it -has an unlimited resource in the coöperative gold reserve.</i></p> - -<p><i>(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.</i></p> - -<p><i>(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 <span class="pagenum"><a name="Page_498" id="Page_498">[Pg 498]</a></span>to close the door of our markets against -the demands for gold from abroad.</i></p> - -<p><i>(4) To insure all depositors in National banks against loss.</i></p> - -<p><i>(5) To liquefy and therefore develop a general market for commercial -paper.</i></p> - -<p><i>(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.</i> #/</p></blockquote> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p>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.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Banker</span>: 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.</p> - -<p><span class="smcap">Mr. Lawyer</span>: 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.</p> - -<p>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.</p> - -<p><span class="pagenum"><a name="Page_499" id="Page_499">[Pg 499]</a></span></p> - -<p>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.</p> - -<p>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 "<i>Two per cent United States bonds</i>" into "<i>Three per -cent United States bonds</i>," a fact that impressed the National banks -favorably.</p> - -<p>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."</p> - -<p>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.</p> - -<p>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 "<i>Central -Bank</i>" with fifteen branches over which a "<i>Governor</i>," a name wholly -foreign to American banking institutions, and his seven associates were -to rule, the<span class="pagenum"><a name="Page_500" id="Page_500">[Pg 500]</a></span> "<i>Governor</i>" appointing his assistant managers over the -fifteen branches as if it were a Manchu dynasty and not a democracy at -all.</p> - -<p>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.</p> - -<p><span class="smcap">Mr. Merchant</span>: Mr. Lawyer has certainly succeeded in pointing -out very clearly the things that <i>must be excluded</i> from our bill.</p> - -<p><span class="smcap">Mr. Manufacturer</span>: And Mr. Banker has certainly succeeded in -pointing out very clearly the things that <i>must be included</i> in our -bill.</p> - -<p><span class="smcap">Mr. Laboringman</span>: Well, then, if we are all sure that we are -right, let us go ahead.</p> - -<p><span class="smcap">Mr. Farmer</span>: We will; and as our forefathers fought for the -birth of this nation we will fight for its life.</p> - -<p><span class="smcap">Uncle Sam</span>: 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.</p> - -<p> -<span style="margin-left: 30%;"><span class="smcap">Farewell.</span></span><br /> -</p> - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_501" id="Page_501">[Pg 501]</a></span></p> - - - - -<p class="ph2">APPENDIX A</p> - -<p class="center">UNITED STATES CIRCULATION STATEMENT—<span class="smcap">January 2, 1913</span>.</p> -<table summary="circulation" width="95%"> -<tr> -<td> -</td> -<td><span class="smcap">General Stock<br /> of Money in the<br /> United States.</span> -</td> -<td><span class="smcap">Held in Treasury,<br /> as Assets of the<br /> Government.</span> -</td> -<td><span class="smcap">Money in<br />Circulation.</span> -</td> -</tr> -<tr> -<td> -</td> -<td>January 2, 1913. -</td> -<td>January 2, 1913. -</td> -<td>January 2, 1913. -</td> -</tr> -<tr> -<td>Gold coin (including bullion in Treasury) -</td> -<td align="right">$1,878,577,122 -</td> -<td align="right">$170,983,732 -</td> -<td align="right">$623,159,221 -</td> -</tr> -<tr> -<td>Gold Certificates<a name="FNanchor_2_2" id="FNanchor_2_2"></a><a href="#Footnote_2_2" class="fnanchor">[2]</a> -</td> -<td align="right">— -</td> -<td align="right">128,747,197 -</td> -<td align="right">955,686,972 -</td> -</tr> -<tr> -<td>Standard Silver Dollars -</td> -<td align="right">565,481,020 -</td> -<td align="right">165,022 -</td> -<td align="right">74,528,998 -</td> -</tr> -<tr> -<td>Silver Certificates<a href="#Footnote_2_2" class="fnanchor">[2]</a> -</td> -<td align="right">— -</td> -<td align="right">12,814,458 -</td> -<td align="right">477,972,542 -</td> -</tr> -<tr> -<td>Subsidiary Silver -</td> -<td align="right">174,538,163 -</td> -<td align="right">17,814,855 -</td> -<td align="right">156,723,308 -</td> -</tr> -<tr> -<td>Treasury Notes of 1890 -</td> -<td align="right">2,797,000 -</td> -<td align="right">10,115 -</td> -<td align="right">2,786,885 -</td> -</tr> -<tr> -<td>United States Notes -</td> -<td align="right">346,681,01 -</td> -<td align="right">6,995,837 -</td> -<td align="right">339,685,179 -</td> -</tr> -<tr> -<td>National Bank Notes -</td> -<td align="right">750,972,246 -</td> -<td align="right">30,787,771 -</td> -<td align="right"> 720,184,475 -</td> -</tr> -<tr> -<td> -</td> -<td align="right">—————— -</td> -<td align="right">—————— -</td> -<td align="right">—————— -</td> -</tr> -<tr> -<td> Total -</td> -<td align="right">$3,719,046,567 -</td> -<td align="right">$368,318,987 -</td> -<td align="right">$3,350,727,580 -</td> -</tr> -</table> - - - - - - -<p>Population of continental United States January 2, 1913, estimated at -96,496,000; circulation per capita, $34.72.</p> - - - -<div class="footnotes"><p class="ph3">FOOTNOTES:</p> - -<div class="footnote"> - -<p><a name="Footnote_2_2" id="Footnote_2_2"></a><a href="#FNanchor_2_2"><span class="label">[2]</span></a> 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.</p></div></div> - - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_502" id="Page_502">[Pg 502]</a></span></p> - -<p class="ph2">APPENDIX B</p> - -<p class="center">CLASSIFICATION OF CASH IN BANKS—<span class="smcap">June 14, 1912</span>.</p> - -<table summary="cash" width="95%"> -<tr> -<td><span class="smcap">Classification.</span> -</td> -<td align="right"><span class="smcap">National Banks.</span> -</td> -<td align="right"><span class="smcap">All Other Banks.</span> -</td> -<td align="right"><span class="smcap">All Reporting Banks.</span> -</td> -</tr> -<tr> -<td>Gold Coin -</td> -<td align="right">$149,294,417 -</td> -<td align="right">88,210,552 -</td> -<td align="right">237,504,970 -</td> -</tr> -<tr> -<td>Gold Certificates -</td> -<td align="right">437,081,380 -</td> -<td align="right">204,494,410 -</td> -<td align="right">641,575,790 -</td> -</tr> -<tr> -<td>Silver Dollars -</td> -<td align="right">12,637,221 -</td> -<td align="right">10,230,733 -</td> -<td align="right">22,867,954 -</td> -</tr> -<tr> -<td>Silver Certificates -</td> -<td align="right">138,569,628 -</td> -<td align="right">55,248,220 -</td> -<td align="right">193,817,848 -</td> -</tr> -<tr> -<td>Subsidiary and Minor Coins -</td> -<td align="right">22,555,692 -</td> -<td align="right">15,026,738 -</td> -<td align="right">37,582,430 -</td> -</tr> -<tr> -<td>Legal-tender Notes -</td> -<td align="right">188,440,207 -</td> -<td align="right">63,576,675 -</td> -<td align="right">252,016,882 -</td> -</tr> -<tr> -<td>National Bank Notes -</td> -<td align="right">{ 47,564,277} -</td> -<td align="right">58,037,130 -</td> -<td align="right">105,601,407 -</td> -</tr> -<tr> -<td>Cash not Classified -</td> -<td align="right">{of other banks} -</td> -<td align="right">82,302,986 -</td> -<td align="right">82,302,986 -</td> -</tr> -<tr> -<td>—————————— -</td> -<td align="right">————— -</td> -<td align="right">————— -</td> -<td align="right">————— -</td> -</tr> -<tr> -<td> Total -</td> -<td align="right">$996,142,823 -</td> -<td align="right">$577,127,445 -</td> -<td align="right">$1,573,270,268 -</td> -</tr> -</table> - - -<table summary="cash" width="65%"> -<tr> -<td>Amount of money held by United States Treasury, -</td> -<td align="right">$368,318,987. -</td> -</tr> -<tr> -<td>Amount of money held by all banks, -</td> -<td align="right">$1,573,270,268. -</td> -</tr> -<tr> -<td>Amount of money held by the people, -</td> -<td align="right">$1,777,457,312. -</td> -</tr> -<tr> -<td>Total amount of money in the United States, -</td> -<td align="right">$3,719,046,567. -</td> -</tr> -</table> - - - - -<hr class="chap" /> - -<p><span class="pagenum"><a name="Page_503" id="Page_503">[Pg 503]</a></span></p> - - - - -<p class="ph2">APPENDIX C</p> - - -<p>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:</p> - -<table summary="cash" width="65%"> -<tr><td>Individual deposits, commercial</td> <td align="right">$11,000,000,000</td></tr> -<tr><td>Due to banks</td> <td align="right">1,000,000,000</td></tr> -<tr><td>Band credit currency, notes</td> <td align="right">1,250,000,000</td></tr> -<tr><td></td><td>———————</td></tr> -<tr><td><i>Total demand liabilities</i></td> <td align="right">$13,250,000,000</td></tr> - -<tr><td>Central reserves against this amount at 10%</td> <td align="right">$1,325,000,000</td></tr> -<tr><td>Cash reserves on this amount at an average -of 8%</td> <td align="right">1,060,000,000</td></tr> -<tr><td>Cash reserves against savings held amounting -to $3,000,000,000 at 5%</td> <td class="tdr">150,000,000</td></tr> -<tr><td></td><td align="right">———————</td></tr> -<tr><td><i>Total reserves required under our plan</i></td> <td align="right">$2,535,000,000</td></tr> - -<tr><td colspan="2"><i>Amount of circulation in the United States -that may be used as reserves</i>:</td></tr> - -<tr><td>Gold coin in the United States</td> <td align="right">$1,900,000,000</td></tr> -<tr><td>Standard silver dollars</td> <td align="right">565,000,000</td></tr> -<tr><td>Subsidiary coin</td> <td align="right">175,000,000</td></tr> -<tr><td>Treasury notes, 1890</td> <td align="right">2,797,000</td></tr> -<tr><td>United States notes</td> <td align="right">346,681,000</td></tr> -<tr><td></td><td align="right">———————</td></tr> -<tr><td></td><td align="right">$2,989,478,000</td></tr> -<tr><td>Less gold held in the U.S. Treasury as a -Reserve Fund </td> <td align="right">150,000,000</td></tr> -<tr><td></td><td align="right">———————</td></tr> -<tr><td><i>Total possible reserves</i></td> <td align="right">$2,839,478,000</td></tr> - -<tr><td>Amount of reserves required by our plan</td> <td align="right">$2,535,000,000</td></tr> -<tr><td></td><td>———————</td></tr> -<tr><td>Leaving a net amount of lawful reserves -<span class="pagenum"><a name="Page_504" id="Page_504">[Pg 504]</a></span>for circulation among the people of</td> <td class="tdr">$304,478,000</td></tr> -<tr><td>Amount of subsidiary coin</td> <td align="right">$175,000,000</td></tr> -<tr><td>Amount of silver dollars out</td> <td align="right">75,000,000</td></tr> -<tr><td>Amount of $1 and $2 bills out</td> <td align="right">225,000,000</td></tr> -<tr><td></td><td align="right">——————</td></tr> -<tr><td></td><td align="right">$475,000,000</td></tr> -</table> - -<p>This amount is probably about equally divided between the banks and the -people.</p> - -<table summary="cash" width="75%"> -<tr><td>Amount of circulation now outside of the -U.S. Treasury and the banks and, therefore, -in the hands of the people</td> <td class="tdr">$1,780,000,000</td></tr> - -<tr><td>If we deduct the amount of lawful reserves -left for circulation among the people</td> <td class="tdr">$304,478,000</td></tr> -<tr><td></td><td class="tdr">———————</td></tr> - -<tr><td><i>We have the total amount of bank note -circulation</i></td> <td class="tdr"> $1,475,522,000</td></tr> - -<tr><td>Amount of circulation provided for</td> <td class="tdr">1,250,000,000</td></tr> -<tr><td></td><td class="tdr">———————</td></tr> - -<tr><td>Additional amount of bank credit currency -to be provided</td> <td class="tdr">$225,522,000</td></tr> -</table> - -<p><i>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.</i></p> - -<p><i>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.</i></p> - - - - -<p class="ph2">INDEX</p> - - -<p> -<span style="margin-left: 0.5em;">Appendix A, United States circulation, <a href="#Page_501">501</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Appendix B, amount of money held by banks, <a href="#Page_502">502</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Appendix C, reserves required under proposed plan, <a href="#Page_503">503</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Acceptance, what is an, <a href="#Page_87">87</a></span><br /> -<span style="margin-left: 1.5em;">desirability of, <a href="#Page_90">90</a></span><br /> -<span style="margin-left: 1.5em;">liability of, same as deposit, <a href="#Page_93">93</a>, <a href="#Page_390">390</a></span><br /> -<span style="margin-left: 1.5em;">reserves against, should be same as against deposits, <a href="#Page_96">96</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Acceptance should be allowed only on goods in transit, <a href="#Page_96">96</a></span><br /> -<span style="margin-left: 1.5em;">would develop a general market for commercial paper, <a href="#Page_91">91</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Acceptances, <a href="#Page_428">428</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Agriculture produced its money, <a href="#Page_9">9</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Aldrich, Nelson W, <a href="#Page_60">60</a>, <a href="#Page_369">369</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Aldrich, Wilbur, <a href="#Page_30">30</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">American Reserve Bank, formation of, <a href="#Page_389">389</a></span><br /> -<span style="margin-left: 1.5em;">duties of board of, <a href="#Page_415">415</a></span><br /> -<span style="margin-left: 1.5em;">fund of, <a href="#Page_433">433</a></span><br /> -<span style="margin-left: 1.5em;">how reserve is created, <a href="#Page_422">422</a></span><br /> -<span style="margin-left: 1.5em;">government balance carried with, <a href="#Page_434">434</a>, <a href="#Page_435">435</a></span><br /> -<span style="margin-left: 1.5em;">shall maintain parity of silver and gold, <a href="#Page_439">439</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Aldrich Plan and Plot, exposed, <a href="#Page_459">459</a>, <a href="#Page_484">484</a></span><br /> -<span style="margin-left: 1.5em;">cost of currency of, <a href="#Page_476">476</a></span><br /> -<span style="margin-left: 1.5em;">branches and foreign agencies, <a href="#Page_487">487</a></span><br /> -<span style="margin-left: 1.5em;">economic objections to, <a href="#Page_462">462</a></span><br /> -<span style="margin-left: 1.5em;">expansion and inflation of, <a href="#Page_469">469</a></span><br /> -<span style="margin-left: 1.5em;">inconvenience and uselessness of, <a href="#Page_475">475</a></span><br /> -<span style="margin-left: 1.5em;">loss of gold by, <a href="#Page_469">469</a></span><br /> -<span style="margin-left: 1.5em;">800 associations possible, <a href="#Page_478">478</a></span><br /> -<span style="margin-left: 1.5em;">was central bank, <a href="#Page_484">484</a></span><br /> -<span style="margin-left: 1.5em;">possible capital and issue, <a href="#Page_485">485</a></span><br /> -<span style="margin-left: 1.5em;">why public favored at first, <a href="#Page_494">494</a>, <a href="#Page_499">499</a></span><br /> -<span style="margin-left: 1.5em;">would not effect reforms demanded, <a href="#Page_498">498</a></span><br /> -<span style="margin-left: 1.5em;">reasons for its rejection, <a href="#Page_500">500</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Aristotle, <a href="#Page_29">29</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Bagehot, <a href="#Page_202">202</a>, <a href="#Page_226">226</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bank, what is a, <a href="#Page_225">225</a></span><br /> -<span style="margin-left: 1.5em;">credits of equivalent to gold, <a href="#Page_234">234</a></span><br /> -<span style="margin-left: 1.5em;">failures of, <a href="#Page_198">198</a></span><br /> -<span style="margin-left: 1.5em;">deposit, system of, <a href="#Page_228">228</a></span><br /> -<span style="margin-left: 1.5em;">holding companies in, <a href="#Page_237">237</a></span><br /> -<span style="margin-left: 1.5em;">at Hamburg, <a href="#Page_226">226</a></span><br /> -<span style="margin-left: 1.5em;">number of, in United States, <a href="#Page_235">235</a>, <a href="#Page_236">236</a></span><br /> -<span style="margin-left: 1.5em;">number and resources of, <a href="#Page_374">374</a></span><br /> -<span style="margin-left: 1.5em;">independence of individual, <a href="#Page_474">474</a></span><br /> -<span style="margin-left: 1.5em;">penalty for not carrying reserves, <a href="#Page_431">431</a></span><br /> -<span style="margin-left: 1.5em;">repression in development of, <a href="#Page_238">238</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bank, description of, by MacLeod, <a href="#Page_226">226</a></span><br /> -<span style="margin-left: 2.5em;">by Bagehot, <a href="#Page_226">226</a></span><br /> -<span style="margin-left: 1.5em;">United States, <a href="#Page_71">71</a></span><br /> -<span style="margin-left: 1.5em;">at Venice, <a href="#Page_226">226</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Banks, no change in National, <a href="#Page_239">239</a></span><br /> -<span style="margin-left: 1.5em;">increase in business of, <a href="#Page_239">239</a></span><br /> -<span style="margin-left: 1.5em;">various kinds and business of, <a href="#Page_375">375</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Banker, is what, <a href="#Page_224">224</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Banking is Interstate Commerce, <a href="#Page_216">216</a></span><br /> -<span style="margin-left: 1.5em;">is kind of insurance, <a href="#Page_230">230</a></span><br /> -<span style="margin-left: 1.5em;">bank deposits and bank notes identical in, <a href="#Page_231">231</a></span><br /> -<span style="margin-left: 1.5em;">necessary reforms in, <a href="#Page_245">245</a></span><br /> -<span style="margin-left: 1.5em;">resources of, in 1860, <a href="#Page_370">370</a></span><br /> -<span style="margin-left: 2.5em;">amount of, in 1890, <a href="#Page_372">372</a></span><br /> -<span style="margin-left: 2.5em;">amount of, in 1912, <a href="#Page_372">372</a></span><br /> -<span style="margin-left: 2.5em;">amount of, in world in 1890, <a href="#Page_373">373</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bancroft, George, <a href="#Page_165">165</a>, <a href="#Page_166">166</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bank credit currency, definition of, <a href="#Page_67">67</a></span><br /> -<span style="margin-left: 1.5em;">first lien on assets, <a href="#Page_69">69</a></span><br /> -<span style="margin-left: 1.5em;">additional amount permitted, <a href="#Page_424">424</a></span><br /> -<span style="margin-left: 1.5em;">cost of transmission, how paid, <a href="#Page_425">425</a></span><br /> -<span style="margin-left: 1.5em;">facility of supplying currency, <a href="#Page_360">360</a></span><br /> -<span style="margin-left: 1.5em;">identical with check, <a href="#Page_376">376</a></span><br /> -<span style="margin-left: 1.5em;">increase of, <a href="#Page_400">400</a></span><br /> -<span style="margin-left: 1.5em;">how described and issued, <a href="#Page_421">421</a></span><br /> -<span style="margin-left: 1.5em;">less profitable than deposits, <a href="#Page_376">376</a></span><br /> -<span style="margin-left: 1.5em;">not understood, <a href="#Page_378">378</a></span><br /> -<span style="margin-left: 1.5em;">tax on, how used, <a href="#Page_427">427</a></span><br /> -<span style="margin-left: 1.5em;">strength of, <a href="#Page_473">473</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bankers' Council, formation of, <a href="#Page_412">412</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bank notes, bond-secured, <a href="#Page_36">36</a></span><br /> -<span style="margin-left: 1.5em;">are a first lien, <a href="#Page_69">69</a></span><br /> -<span style="margin-left: 1.5em;">are Government credit, in circulation, <a href="#Page_58">58</a></span><br /> -<span style="margin-left: 1.5em;">bear no relation to business, <a href="#Page_58">58</a></span><br /> -<span style="margin-left: 1.5em;">cost of, as currency, <a href="#Page_50">50</a></span><br /> -<span style="margin-left: 1.5em;">not money, <a href="#Page_36">36</a></span><br /> -<span style="margin-left: 1.5em;">origin of, <a href="#Page_57">57</a></span><br /> -<span style="margin-left: 1.5em;">objections to, as currency, <a href="#Page_59">59</a></span><br /> -<span style="margin-left: 1.5em;">penalty for carrying, as reserves, <a href="#Page_428">428</a></span><br /> -<span style="margin-left: 1.5em;">promise of, to pay money, <a href="#Page_36">36</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bayard, James A., <a href="#Page_179">179</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bill, draft of, <a href="#Page_407">407</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Board of Control, compensation of, <a href="#Page_413">413</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Boston, country clearing at, <a href="#Page_300">300</a>, <a href="#Page_310">310</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Bullion report, <a href="#Page_441">441</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">California, first use of gold, <a href="#Page_14">14</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Canada, bank system of, <a href="#Page_79">79</a></span><br /> -<span style="margin-left: 1.5em;">chart showing movement of currency in, <a href="#Page_80">80</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Canada, circulation in 1912, <a href="#Page_81">81</a></span><br /> -<span style="margin-left: 1.5em;">free from panics, <a href="#Page_444">444</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Cannon, James G., <a href="#Page_291">291</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Capital, what is, <a href="#Page_108">108</a>, <a href="#Page_109">109</a></span><br /> -<span style="margin-left: 1.5em;">active, passive and fixed, <a href="#Page_109">109</a>, <a href="#Page_110">110</a></span><br /> -<span style="margin-left: 1.5em;">active, essential to commerce, <a href="#Page_110">110</a></span><br /> -<span style="margin-left: 1.5em;">conversion of commercial, into fixed, <a href="#Page_131">131</a>, <a href="#Page_132">132</a></span><br /> -<span style="margin-left: 1.5em;">real estate mortgages tie up, <a href="#Page_134">134</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Central bank, tax on notes of, <a href="#Page_486">486</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Chase, Salmon P., <a href="#Page_57">57</a>, <a href="#Page_176">176</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Check, what is a, <a href="#Page_86">86</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">City bank, National, bank stock holdings of, <a href="#Page_488">488</a></span><br /> -<span style="margin-left: 1.5em;">Boss system established by, <a href="#Page_493">493</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Chicago Clearing House examinations, <a href="#Page_316">316</a>, <a href="#Page_318">318</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Clearing House, <a href="#Page_289">289</a></span><br /> -<span style="margin-left: 1.5em;">approved practices of, <a href="#Page_379">379</a>, <a href="#Page_383">383</a></span><br /> -<span style="margin-left: 1.5em;">clearings prior to establishment of, <a href="#Page_295">295</a>, <a href="#Page_296">296</a></span><br /> -<span style="margin-left: 1.5em;">country Clearing, established in England, <a href="#Page_299">299</a></span><br /> -<span style="margin-left: 1.5em;">centralizing reserves of, <a href="#Page_308">308</a></span><br /> -<span style="margin-left: 1.5em;">definition of, <a href="#Page_290">290</a>, <a href="#Page_291">291</a></span><br /> -<span style="margin-left: 1.5em;">established in London, <a href="#Page_291">291</a></span><br /> -<span style="margin-left: 1.5em;">first clearing in New York, <a href="#Page_298">298</a></span><br /> -<span style="margin-left: 1.5em;">free zones, <a href="#Page_309">309</a></span><br /> -<span style="margin-left: 1.5em;">functions adopted, <a href="#Page_339">339</a></span><br /> -<span style="margin-left: 1.5em;">for each commercial zone, <a href="#Page_419">419</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Clearing House Certificates, issues of, <a href="#Page_329">329</a>, <a href="#Page_330">330</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Coins, amount of subsidiary, <a href="#Page_43">43</a></span><br /> -<span style="margin-left: 1.5em;">description of subsidiary, <a href="#Page_38">38</a></span><br /> -<span style="margin-left: 1.5em;">parity of value of, <a href="#Page_37">37</a></span><br /> -<span style="margin-left: 1.5em;">total amount of silver, <a href="#Page_43">43</a></span><br /> -<span style="margin-left: 1.5em;">token, <a href="#Page_37">37</a></span><br /> -<span style="margin-left: 1.5em;">value of, <a href="#Page_37">37</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Colonial credit money, <a href="#Page_144">144</a></span><br /> -<span style="margin-left: 1.5em;">depreciation of issues of, <a href="#Page_156">156</a></span><br /> -<span style="margin-left: 1.5em;">effect of issues of, <a href="#Page_155">155</a></span><br /> -<span style="margin-left: 1.5em;">issues by Continental Congress, <a href="#Page_157">157</a></span><br /> -<span style="margin-left: 1.5em;">issue of, in Connecticut, <a href="#Page_149">149</a></span><br /> -<span style="margin-left: 2.5em;">in Massachusetts, <a href="#Page_146">146</a></span><br /> -<span style="margin-left: 2.5em;">in New Hampshire, <a href="#Page_151">151</a></span><br /> -<span style="margin-left: 2.5em;">in New Jersey, <a href="#Page_151">151</a></span><br /> -<span style="margin-left: 2.5em;">in North Carolina, <a href="#Page_153">153</a></span><br /> -<span style="margin-left: 2.5em;">in New York, <a href="#Page_153">153</a></span><br /> -<span style="margin-left: 2.5em;">in Pennsylvania, <a href="#Page_152">152</a></span><br /> -<span style="margin-left: 2.5em;">in Rhode Island, <a href="#Page_151">151</a></span><br /> -<span style="margin-left: 2.5em;">in South Carolina, <a href="#Page_153">153</a></span><br /> -<span style="margin-left: 2.5em;">in Virginia, <a href="#Page_152">152</a></span><br /> -<span style="margin-left: 1.5em;">price of issues fixed, <a href="#Page_158">158</a></span><br /> -<span style="margin-left: 1.5em;">succession of events following issue of, <a href="#Page_173">173</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Colwell, Stephen, <a href="#Page_290">290</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Congress, will legislate only after discussion, <a href="#Page_369">369</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Connecticut, bank commissioners report 1841, <a href="#Page_357">357</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Conklin, Roscoe, <a href="#Page_180">180</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Coöperative societies, conditions in Germany, <a href="#Page_281">281</a></span><br /> -<span style="margin-left: 1.5em;">conditions in Belgium, <a href="#Page_283">283</a></span><br /> -<span style="margin-left: 1.5em;">extent of business, <a href="#Page_279">279</a></span><br /> -<span style="margin-left: 1.5em;">in United States, not a subject of banking legislation, <a href="#Page_285">285</a></span><br /> -<span style="margin-left: 1.5em;">profits of, <a href="#Page_279">279</a></span><br /> -<span style="margin-left: 1.5em;">main offices described, <a href="#Page_281">281</a></span><br /> -<span style="margin-left: 1.5em;">started in Rochdale, <a href="#Page_279">279</a></span><br /> -<span style="margin-left: 1.5em;">success assured in United States, <a href="#Page_286">286</a></span><br /> -<span style="margin-left: 1.5em;">wholesale houses of, <a href="#Page_280">280</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Conant, Charles A. (Scotch currency), <a href="#Page_68">68</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Credit, definition of, <a href="#Page_114">114</a>, <a href="#Page_124">124</a>, <a href="#Page_125">125</a></span><br /> -<span style="margin-left: 1.5em;">ample reserves essential to sound, <a href="#Page_123">123</a></span><br /> -<span style="margin-left: 1.5em;">comparative value of, <a href="#Page_124">124</a></span><br /> -<span style="margin-left: 1.5em;">contraction of, by an instrument of, <a href="#Page_125">125</a></span><br /> -<span style="margin-left: 1.5em;">dangers of, <a href="#Page_115">115</a></span><br /> -<span style="margin-left: 1.5em;">expansion as a result of, <a href="#Page_121">121</a></span><br /> -<span style="margin-left: 1.5em;">Germany's abuse of, <a href="#Page_124">124</a></span><br /> -<span style="margin-left: 1.5em;">importance of, <a href="#Page_113">113</a></span><br /> -<span style="margin-left: 1.5em;">our banks should be ready to prove their, <a href="#Page_124">124</a></span><br /> -<span style="margin-left: 1.5em;">per cent, of business done by, <a href="#Page_112">112</a></span><br /> -<span style="margin-left: 1.5em;">production by use of, <a href="#Page_119">119</a></span><br /> -<span style="margin-left: 1.5em;">proper functions of different forms of, <a href="#Page_141">141</a>, <a href="#Page_142">142</a></span><br /> -<span style="margin-left: 1.5em;">use of, in Lancashire, <a href="#Page_126">126</a></span><br /> -<span style="margin-left: 1.5em;">various forms of, <a href="#Page_117">117</a></span><br /> -<span style="margin-left: 1.5em;">Webster on, <a href="#Page_111">111</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Crédit Foncier, amortization of mortgages, <a href="#Page_266">266</a></span><br /> -<span style="margin-left: 1.5em;">capital of, <a href="#Page_263">263</a></span><br /> -<span style="margin-left: 1.5em;">can take deposits, <a href="#Page_265">265</a></span><br /> -<span style="margin-left: 1.5em;">formed when, <a href="#Page_261">261</a></span><br /> -<span style="margin-left: 1.5em;">how governed, <a href="#Page_262">262</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Currency, definition of, <a href="#Page_46">46</a>, <a href="#Page_441">441</a></span><br /> -<span style="margin-left: 1.5em;">cost of bank credit, <a href="#Page_49">49</a></span><br /> -<span style="margin-left: 1.5em;">definition of bank credit, <a href="#Page_67">67</a></span><br /> -<span style="margin-left: 1.5em;">deposits identical with bank credit, <a href="#Page_64">64</a>, <a href="#Page_65">65</a></span><br /> -<span style="margin-left: 1.5em;">economy of bank credit, <a href="#Page_51">51</a>, <a href="#Page_66">66</a></span><br /> -<span style="margin-left: 1.5em;">consists of, <a href="#Page_47">47</a></span><br /> -<span style="margin-left: 1.5em;">proper system of, <a href="#Page_48">48</a></span><br /> -<span style="margin-left: 1.5em;">right kind of, <a href="#Page_55">55</a></span><br /> -<span style="margin-left: 1.5em;">what it is not, <a href="#Page_47">47</a></span><br /> -<span style="margin-left: 1.5em;">redemption of, <a href="#Page_67">67</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Deposits, guarantee of, <a href="#Page_393">393</a></span><br /> -<span style="margin-left: 1.5em;">no difference between currency and, <a href="#Page_66">66</a></span><br /> -<span style="margin-left: 1.5em;">interchangeability of currency into, <a href="#Page_64">64</a>, <a href="#Page_65">65</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Depositors, insurance of, <a href="#Page_395">395</a>, <a href="#Page_435">435</a>, <a href="#Page_437">437</a></span><br /> -<span style="margin-left: 1.5em;">cost of insurance of, <a href="#Page_395">395</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Depositors, insurance fund, how created, <a href="#Page_435">435</a></span><br /> -<span style="margin-left: 1.5em;">losses of, how paid, <a href="#Page_436">436</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Deutsche Bank, <a href="#Page_465">465</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Diagrams, zone, subdivisions, <a href="#Page_387">387</a></span><br /> -<span style="margin-left: 1.5em;">Canadian currency chart, <a href="#Page_80">80</a></span><br /> -<span style="margin-left: 1.5em;">Clearing House, <a href="#Page_295">295</a>, <a href="#Page_297">297</a></span><br /> -<span style="margin-left: 1.5em;">course of check, <a href="#Page_311">311</a>-313</span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Egypt, absorption of gold by, <a href="#Page_20">20</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Electricity, importance of, <a href="#Page_113">113</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Ellsworth, Oliver, <a href="#Page_168">168</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">England, Bank of, <a href="#Page_206">206</a></span><br /> -<span style="margin-left: 1.5em;">dissimilarity of, with banks of France and Germany, <a href="#Page_443">443</a></span><br /> -<span style="margin-left: 1.5em;">failure of bank act, <a href="#Page_441">441</a></span><br /> -<span style="margin-left: 1.5em;">resources, when established, <a href="#Page_407">407</a></span><br /> -<span style="margin-left: 1.5em;">not bank of issue, <a href="#Page_485">485</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Exchange, what is, <a href="#Page_84">84</a></span><br /> -<span style="margin-left: 1.5em;">Bill of, <a href="#Page_87">87</a></span><br /> -<span style="margin-left: 1.5em;">broad definition of, <a href="#Page_96">96</a></span><br /> -<span style="margin-left: 1.5em;">difference between draft and bill of, <a href="#Page_87">87</a></span><br /> -<span style="margin-left: 1.5em;">is equal to gold in all transactions, <a href="#Page_98">98</a></span><br /> -<span style="margin-left: 1.5em;">Origin, ancient, <a href="#Page_94">94</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Farmers, number of, <a href="#Page_249">249</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Fessenden, William Pitt, <a href="#Page_181">181</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Forgan, James B., <a href="#Page_318">318</a>, <a href="#Page_319">319</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Fowler, Charles N., <a href="#Page_336">336</a>, <a href="#Page_340">340</a>, <a href="#Page_460">460</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Fowler, W.J., Deputy Comptroller, <a href="#Page_395">395</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">France, Bank of, founded by Napoleon, <a href="#Page_71">71</a></span><br /> -<span style="margin-left: 1.5em;">land used as basis of money in, <a href="#Page_137">137</a></span><br /> -<span style="margin-left: 1.5em;">Government credit of France used as basis of money, <a href="#Page_138">138</a></span><br /> -<span style="margin-left: 1.5em;">resources of bank, when established, <a href="#Page_407">407</a></span><br /> -<span style="margin-left: 1.5em;">note issue of, <a href="#Page_484">484</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Gallatin, Albert, <a href="#Page_292">292</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Garfield, James A., <a href="#Page_58">58</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Germany, resources of bank, when established, <a href="#Page_407">407</a></span><br /> -<span style="margin-left: 1.5em;">financial situation of bank, weak, <a href="#Page_467">467</a></span><br /> -<span style="margin-left: 1.5em;">failure of bank act, <a href="#Page_443">443</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Gold, adopted as standard by United States, <a href="#Page_18">18</a></span><br /> -<span style="margin-left: 2.5em;">by England, <a href="#Page_18">18</a></span><br /> -<span style="margin-left: 1.5em;">amount of, <a href="#Page_19">19</a></span><br /> -<span style="margin-left: 1.5em;">amount in United States in 1860 and 1912, <a href="#Page_370">370</a></span><br /> -<span style="margin-left: 1.5em;">certificate, <a href="#Page_28">28</a></span><br /> -<span style="margin-left: 1.5em;">changing value of, <a href="#Page_31">31</a></span><br /> -<span style="margin-left: 1.5em;">monetary use of, <a href="#Page_22">22</a></span><br /> -<span style="margin-left: 1.5em;">outlook for supply of, <a href="#Page_24">24</a></span><br /> -<span style="margin-left: 1.5em;">production of, <a href="#Page_23">23</a></span><br /> -<span style="margin-left: 1.5em;">United States share of, <a href="#Page_22">22</a></span><br /> -<span style="margin-left: 1.5em;">universal standard of value, <a href="#Page_19">19</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Gold, total amount used as reserves, <a href="#Page_32">32</a></span><br /> -<span style="margin-left: 2.5em;">what influences the movement of, <a href="#Page_440">440</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Gold reserves, how created, <a href="#Page_222">222</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Government, demand liability of, <a href="#Page_42">42</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Government issues preceding greenbacks, <a href="#Page_174">174</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Hamilton, Alexander, <a href="#Page_161">161</a>, <a href="#Page_171">171</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Herrick, Myron T., <a href="#Page_249">249</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Hallock, James C., <a href="#Page_293">293</a>, <a href="#Page_300">300</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">India, absorption of gold by, <a href="#Page_20">20</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Indiana, Bank of the State of, <a href="#Page_346">346</a></span><br /> -<span style="margin-left: 1.5em;">State Bank of, <a href="#Page_73">73</a>, <a href="#Page_345">345</a></span><br /> -<span style="margin-left: 1.5em;">statement of bank of, <a href="#Page_361">361</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Interest, rate in United States, <a href="#Page_249">249</a></span><br /> -<span style="margin-left: 1.5em;">France, <a href="#Page_254">254</a></span><br /> -<span style="margin-left: 1.5em;">Germany, <a href="#Page_249">249</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Iowa, State Bank of, <a href="#Page_73">73</a>, <a href="#Page_348">348</a></span><br /> -<span style="margin-left: 1.5em;">statement of Bank of, <a href="#Page_361">361</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Japan, Tried Bond-secured Currency, <a href="#Page_59">59</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Jefferson, Thomas, <a href="#Page_170">170</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Jevons, Stanley, <a href="#Page_203">203</a>, <a href="#Page_291">291</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Kentucky, Bank of, <a href="#Page_73">73</a>, <a href="#Page_347">347</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Land Credit Bank, Directors of, <a href="#Page_450">450</a></span><br /> -<span style="margin-left: 1.5em;">dividends of, <a href="#Page_454">454</a></span><br /> -<span style="margin-left: 1.5em;">losses, how borne, <a href="#Page_455">455</a></span><br /> -<span style="margin-left: 1.5em;">put into operation, how, <a href="#Page_456">456</a></span><br /> -<span style="margin-left: 1.5em;">outline of provisions, <a href="#Page_268">268</a>, <a href="#Page_269">269</a>, <a href="#Page_270">270</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Landschaften, business of modern, <a href="#Page_261">261</a></span><br /> -<span style="margin-left: 1.5em;">modern, <a href="#Page_260">260</a></span><br /> -<span style="margin-left: 1.5em;">origin of, <a href="#Page_252">252</a></span><br /> -<span style="margin-left: 1.5em;">old, <a href="#Page_255">255</a></span><br /> -<span style="margin-left: 1.5em;">spread of, <a href="#Page_258">258</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Law, John, <a href="#Page_137">137</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Lee, Richard Henry, <a href="#Page_162">162</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Legal tender, what is, <a href="#Page_41">41</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Liverpool, Lord, coins of the realm, <a href="#Page_39">39</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Loan Certificates, clearing house, <a href="#Page_328">328</a></span><br /> -<span style="margin-left: 1.5em;">amount of, issued, <a href="#Page_336">336</a></span><br /> -<span style="margin-left: 1.5em;">are bank credit currency, <a href="#Page_336">336</a></span><br /> -<span style="margin-left: 1.5em;">denominations of, <a href="#Page_329">329</a>-333</span><br /> -<span style="margin-left: 1.5em;">lessons of, <a href="#Page_333">333</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">London, clearing started in, <a href="#Page_291">291</a>, <a href="#Page_302">302</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Los Angeles, Clearing House, <a href="#Page_316">316</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Louisiana, bank act of, <a href="#Page_343">343</a></span><br /> -<span style="margin-left: 1.5em;">statement of banks of, <a href="#Page_361">361</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Lubbock, Sir John, <a href="#Page_299">299</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">MacVeagh, Franklin, <a href="#Page_240">240</a>, <a href="#Page_405">405</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Madison, James, <a href="#Page_164">164</a>, <a href="#Page_165">165</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Maine, Report of Bank Commissioner 1857, <a href="#Page_357">357</a></span><br /> -<span style="margin-left: 1.5em;">and 1865, <a href="#Page_358">358</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Marshall, John, <a href="#Page_58">58</a>, <a href="#Page_164">164</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Mason, George, <a href="#Page_163">163</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Massachusetts, Report of Bank Commissioner, <a href="#Page_358">358</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Missouri, Bank of the State of, <a href="#Page_73">73</a>, <a href="#Page_351">351</a></span><br /> -<span style="margin-left: 1.5em;">statement of Bank of, <a href="#Page_361">361</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Money, amount held by banks in United States, Appendix B</span><br /> -<span style="margin-left: 1.5em;">amount of, in United States, Appendix A</span><br /> -<span style="margin-left: 1.5em;">coin and commodity must be of equal value, <a href="#Page_44">44</a></span><br /> -<span style="margin-left: 1.5em;">credit must not be called money, <a href="#Page_33">33</a></span><br /> -<span style="margin-left: 1.5em;">description of, <a href="#Page_29">29</a></span><br /> -<span style="margin-left: 1.5em;">functions of, <a href="#Page_30">30</a></span><br /> -<span style="margin-left: 1.5em;">gold is our, <a href="#Page_26">26</a></span><br /> -<span style="margin-left: 1.5em;">how made, <a href="#Page_26">26</a></span><br /> -<span style="margin-left: 1.5em;">what are the pieces of, <a href="#Page_27">27</a></span><br /> -<span style="margin-left: 1.5em;">"wild cat," "red dog," etc., <a href="#Page_348">348</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Morrill, Justin S., <a href="#Page_17">17</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Mortgages, amount of, <a href="#Page_249">249</a></span><br /> -<span style="margin-left: 1.5em;">rate of interest on, <a href="#Page_249">249</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Mutual Credit Societies, number of, <a href="#Page_274">274</a></span><br /> -<span style="margin-left: 1.5em;">in Massachusetts, <a href="#Page_275">275</a></span><br /> -<span style="margin-left: 1.5em;">resources for short loans, <a href="#Page_277">277</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Ohio, Bank of the state of, <a href="#Page_73">73</a></span><br /> -<span style="margin-left: 1.5em;">bank act of, <a href="#Page_344">344</a></span><br /> -<span style="margin-left: 1.5em;">statement of bank of, <a href="#Page_361">361</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Paper, accommodation, <a href="#Page_128">128</a>, <a href="#Page_131">131</a></span><br /> -<span style="margin-left: 1.5em;">commercial, <a href="#Page_120">120</a></span><br /> -<span style="margin-left: 1.5em;">difference between commercial and accommodation, <a href="#Page_129">129</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Paine, Thomas, <a href="#Page_162">162</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Panic of 1907, <a href="#Page_471">471</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Pinckney, Charles, <a href="#Page_163">163</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Population, shifting of, <a href="#Page_32">32</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Price, what is, <a href="#Page_104">104</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Prices, causes of higher, <a href="#Page_31">31</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Printing, importance of, <a href="#Page_112">112</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Promissory note, what is a, <a href="#Page_86">86</a></span><br /> -<span style="margin-left: 1.5em;">note and draft identical, <a href="#Page_87">87</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Property, what is, <a href="#Page_104">104</a></span><br /> -<span style="margin-left: 1.5em;">difference between property and wealth, <a href="#Page_104">104</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Postal Savings Banks, <a href="#Page_384">384</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Raiffeisen, Friedrich Wilhelm, <a href="#Page_272">272</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Real estate, unfit as basis for currency, <a href="#Page_136">136</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Redemption, in coin essential, <a href="#Page_50">50</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Reforms demanded, <a href="#Page_494">494</a>, <a href="#Page_495">495</a>, <a href="#Page_496">496</a>, <a href="#Page_497">497</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Reserves, amount of, <a href="#Page_200">200</a></span><br /> -<span style="margin-left: 1.5em;">amount held by national and other banks, Appendix B, <a href="#Page_381">381</a></span><br /> -<span style="margin-left: 1.5em;">amount of central, <a href="#Page_222">222</a>, <a href="#Page_381">381</a></span><br /> -<span style="margin-left: 1.5em;">additional, where obtained, <a href="#Page_409">409</a></span><br /> -<span style="margin-left: 1.5em;">Bagehot, <a href="#Page_202">202</a></span><br /> -<span style="margin-left: 1.5em;">bank notes as, <a href="#Page_204">204</a></span><br /> -<span style="margin-left: 1.5em;">circumstances should control amount of, <a href="#Page_200">200</a></span><br /> -<span style="margin-left: 1.5em;">character of, <a href="#Page_201">201</a></span><br /> -<span style="margin-left: 1.5em;">average, in United States, <a href="#Page_208">208</a></span><br /> -<span style="margin-left: 1.5em;">elasticity of, <a href="#Page_208">208</a>, <a href="#Page_219">219</a></span><br /> -<span style="margin-left: 1.5em;">from what points considered, <a href="#Page_199">199</a></span><br /> -<span style="margin-left: 1.5em;">how increased, <a href="#Page_220">220</a>, <a href="#Page_221">221</a></span><br /> -<span style="margin-left: 1.5em;">Jevons on, <a href="#Page_202">202</a></span><br /> -<span style="margin-left: 1.5em;">legal tender quality unnecessary to, <a href="#Page_188">188</a></span><br /> -<span style="margin-left: 1.5em;">national banks, <a href="#Page_207">207</a></span><br /> -<span style="margin-left: 1.5em;">promises to pay as, <a href="#Page_204">204</a></span><br /> -<span style="margin-left: 1.5em;">present, inefficient, <a href="#Page_218">218</a></span><br /> -<span style="margin-left: 1.5em;">penalty for not maintaining, <a href="#Page_423">423</a>, <a href="#Page_431">431</a>, <a href="#Page_432">432</a></span><br /> -<span style="margin-left: 1.5em;">present method of, useless, <a href="#Page_218">218</a></span><br /> -<span style="margin-left: 1.5em;">are measure of value, therefore must be coin, <a href="#Page_205">205</a></span><br /> -<span style="margin-left: 1.5em;">state or city debts as, <a href="#Page_204">204</a></span><br /> -<span style="margin-left: 1.5em;">silver, not used in Bank of England, <a href="#Page_206">206</a></span><br /> -<span style="margin-left: 1.5em;">should be national, <a href="#Page_211">211</a></span><br /> -<span style="margin-left: 1.5em;">superimposed, <a href="#Page_218">218</a></span><br /> -<span style="margin-left: 1.5em;">State bank, <a href="#Page_207">207</a></span><br /> -<span style="margin-left: 1.5em;">taxation to compel equal, <a href="#Page_212">212</a></span><br /> -<span style="margin-left: 1.5em;">unfair to permit unequal, <a href="#Page_209">209</a></span><br /> -<span style="margin-left: 1.5em;">United States notes not actual, <a href="#Page_206">206</a></span><br /> -<span style="margin-left: 1.5em;">what constitutes proper, <a href="#Page_203">203</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Ricardo, <a href="#Page_441">441</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Root, L. Carroll, <a href="#Page_334">334</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Ruggles, Charles A., <a href="#Page_301">301</a>, <a href="#Page_310">310</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Scotland, description of, currency by Conant, <a href="#Page_68">68</a></span><br /> -<span style="margin-left: 2.5em;">currency by White, <a href="#Page_68">68</a></span><br /> -<span style="margin-left: 1.5em;">effect of bank credit in, <a href="#Page_67">67</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Schulze, Francis Frederick, <a href="#Page_272">272</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Shaw, Leslie M., <a href="#Page_487">487</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Shaw, William A., <a href="#Page_17">17</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Sherman, John, <a href="#Page_183">183</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Sherman, Roger, <a href="#Page_150">150</a>, <a href="#Page_166">166</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Silver certificate, a warehouse receipt, <a href="#Page_40">40</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Silver dollars, amount of, Appendix A, <a href="#Page_36">36</a>, <a href="#Page_43">43</a></span><br /> -<span style="margin-left: 1.5em;">a government debt, <a href="#Page_40">40</a></span><br /> -<span style="margin-left: 1.5em;">a subsidiary coin, <a href="#Page_39">39</a></span><br /> -<span style="margin-left: 1.5em;">a demand for gold, <a href="#Page_38">38</a></span><br /> -<span style="margin-left: 1.5em;">not money, <a href="#Page_38">38</a>, <a href="#Page_40">40</a></span><br /> -<span style="margin-left: 1.5em;">weight of, <a href="#Page_36">36</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Spaulding, E.G., <a href="#Page_183">183</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Stevens, Thaddeus, <a href="#Page_183">183</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Steam, importance of, <a href="#Page_113">113</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Standard of value, <a href="#Page_9">9</a></span><br /> -<span style="margin-left: 1.5em;">changes in ratio of gold and silver as, <a href="#Page_17">17</a></span><br /> -<span style="margin-left: 1.5em;">gold, the natural selection of, as the, <a href="#Page_24">24</a></span><br /> -<span style="margin-left: 1.5em;">qualities of gold as, <a href="#Page_17">17</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Sub-Treasury, deposits in, <a href="#Page_243">243</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Suffolk Bank system, <a href="#Page_73">73</a>, <a href="#Page_353">353</a>, <a href="#Page_354">354</a>, <a href="#Page_355">355</a>, <a href="#Page_361">361</a></span><br /> -<span style="margin-left: 1.5em;">achievements of, <a href="#Page_334">334</a>, <a href="#Page_335">335</a></span><br /> -<span style="margin-left: 1.5em;">Bank was first clearing house in United States, <a href="#Page_337">337</a>, <a href="#Page_338">338</a></span><br /> -<span style="margin-left: 1.5em;">commissioner's reports on, <a href="#Page_357">357</a>, <a href="#Page_358">358</a></span><br /> -<span style="margin-left: 1.5em;">description of, <a href="#Page_75">75</a></span><br /> -<span style="margin-left: 1.5em;">destroyed by 10 per cent tax, <a href="#Page_74">74</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Sumner, Charles, <a href="#Page_179">179</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Talbot, Joseph T., <a href="#Page_205">205</a>, <a href="#Page_231">231</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Uap, money of, <a href="#Page_15">15</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">United States, bank clearings of, <a href="#Page_373">373</a></span><br /> -<span style="margin-left: 1.5em;">financial center of world, <a href="#Page_404">404</a></span><br /> -<span style="margin-left: 1.5em;">foreign trade of, <a href="#Page_373">373</a></span><br /> -<span style="margin-left: 1.5em;">important interests of, <a href="#Page_409">409</a></span><br /> -<span style="margin-left: 1.5em;">production of 1912, <a href="#Page_373">373</a></span><br /> -<span style="margin-left: 1.5em;">size of, compared with Europe, <a href="#Page_409">409</a></span><br /> -<span style="margin-left: 1.5em;">total business transactions of, <a href="#Page_373">373</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">United States Government, nature of, <a href="#Page_410">410</a></span><br /> -<span style="margin-left: 1.5em;">taxing power, only resource, <a href="#Page_189">189</a>, <a href="#Page_191">191</a></span><br /> -<span style="margin-left: 1.5em;">time obligations only should be incurred, <a href="#Page_192">192</a>, <a href="#Page_410">410</a></span><br /> -<span style="margin-left: 1.5em;">unfit to meet demand debts, <a href="#Page_189">189</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">United States notes or greenbacks, additional cost of war due to, <a href="#Page_185">185</a></span><br /> -<span style="margin-left: 1.5em;">agreement to pay gold, <a href="#Page_34">34</a></span><br /> -<span style="margin-left: 1.5em;">amount of, Appendix A and <a href="#Page_35">35</a></span><br /> -<span style="margin-left: 1.5em;">bonds issued for, <a href="#Page_52">52</a></span><br /> -<span style="margin-left: 1.5em;">constitutionality of, <a href="#Page_185">185</a>-187</span><br /> -<span style="margin-left: 1.5em;">cost of, as currency, <a href="#Page_50">50</a>, <a href="#Page_56">56</a></span><br /> -<span style="margin-left: 1.5em;">cost of, since 1879, <a href="#Page_53">53</a></span><br /> -<span style="margin-left: 1.5em;">depreciation of, <a href="#Page_184">184</a></span><br /> -<span style="margin-left: 1.5em;">drive gold out, <a href="#Page_206">206</a></span><br /> -<span style="margin-left: 1.5em;">how converted into gold certificates, <a href="#Page_427">427</a>, <a href="#Page_438">438</a></span><br /> -<span style="margin-left: 1.5em;">issues of, <a href="#Page_183">183</a></span><br /> -<span style="margin-left: 1.5em;">lowest value of, <a href="#Page_35">35</a></span><br /> -<span style="margin-left: 1.5em;">not money, <a href="#Page_35">35</a></span><br /> -<span style="margin-left: 1.5em;">price of, a quotation of government credit, <a href="#Page_41">41</a></span><br /> -<span style="margin-left: 1.5em;">resumption of payment of, <a href="#Page_53">53</a></span><br /> -<span style="margin-left: 1.5em;">suspended payment of, <a href="#Page_34">34</a></span><br /> -<span style="margin-left: 1.5em;">unfit for currency, <a href="#Page_55">55</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Walsh, John R., failure of, <a href="#Page_314">314</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">War, Civil, first loan for, <a href="#Page_177">177</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Washington, George, <a href="#Page_162">162</a>, <a href="#Page_165">165</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Wealth, what is, <a href="#Page_104">104</a></span><br /> -<span style="margin-left: 1.5em;">difference between property and, <a href="#Page_107">107</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Webster, Daniel, <a href="#Page_111">111</a>, <a href="#Page_170">170</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">White, Horace, <a href="#Page_30">30</a>, <a href="#Page_155">155</a></span><br /> -<br /> -<span style="margin-left: 0.5em;">Wilson, John W., clearing house examiner, Los Angeles, <a href="#Page_316">316</a></span><br /> -<br /> -<br /> -<span style="margin-left: 0.5em;">Zone, credit bureau of, <a href="#Page_323">323</a></span><br /> -<span style="margin-left: 1.5em;">organization of, <a href="#Page_338">338</a>, <a href="#Page_411">411</a></span><br /> -<span style="margin-left: 1.5em;">organization, repetition of National Government, <a href="#Page_483">483</a></span><br /> -<span style="margin-left: 1.5em;">places of, discount limited to, <a href="#Page_479">479</a></span><br /> -<span style="margin-left: 1.5em;">publicity of organization, <a href="#Page_476">476</a></span><br /> -<span style="margin-left: 1.5em;">should not stand alone, <a href="#Page_480">480</a></span><br /> -<span style="margin-left: 1.5em;">state lines do not conform to economic, <a href="#Page_419">419</a></span><br /> -</p> - - - - - - - - - -<pre> - - - - - -End of the Project Gutenberg EBook of Seventeen Talks on the Banking Question, by -Charles Newell Fowler - -*** END OF THIS PROJECT GUTENBERG EBOOK SEVENTEEN TALKS *** - -***** This file should be named 60029-h.htm or 60029-h.zip ***** -This and all associated files of various formats will be found in: - 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