United States. Congress. House. Committee on Banki.

Banking and currency reform. Hearings before the subcommittee of the Committee on banking and currency, House of representatives, charged with investigating plans of banking and currency reform and reporting constructive legislation thereon ... online

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your State?

Mr. Frame. What is it?

Mr. Korbly. Yes ; the real nature of it. Let us deal with the real
nature of things, and see if we can understand each other.

Mr. Frame. I think I understand the point that the gentleman
raises there. Of course it is not paid in cash ; it is paid in a check
upon the bank. But if they want the cash, they can have it.

Mr. Korbly. Suppose Congress should pass a law that would
prohibit a bank from issuing a promise to pay a dollar on any other



BANKING AND CURRENCY REFORM. 433

condition than that it had a. doUar in its bank A^ault with which to
meet that promise ; would you think that would be a wise law ?

Mr. Frame. Do you mean that they should keep cash on hand?

Mr. KoRBLY. Yes.

Mr. Frame. That would be a warehouse.

Mr. KoRBLY. Then you do not understand that a bank is a ware-
house ?

Mr. Frame. No, sir.

Mr. KoEBLY. Then you do understand that a bank does issue
promises to pay, or I O U's, which are used in the exchanges of the
United States?

Mr. Frame. I do not think it is necessary for a bank to issue cur-
rency to do it.

Mr. KoEBLY. No ; but they do issue an I O U ?

Mr. Frame. All secured by Government bonds, now.

Mr. KoRBLY. Are your deposits in the banks secured by Govern-
ment bonds ?

Mr. Frame. No, sir ; they are secured by the credit of the bank and
the stability of it.

Mr. KoRBLY. Your depositors have from you a promise that you
will pay them a given number of dollars on demand?

Mr. Frame. Yes.

Mr. KoRBLY. That is an I O U issued by them to you, is it not ?

Mr. Frame. That is not an I O U in the sense in which I have been
speaking of an I O U.

Mr. KoRBLY. That is the sense in which I have been trying to get
at it all the time. Now, I would like to have you point out the dif-
ference between the I O U's you have given your depositors, and the
I O U that you might issue to them if you issued to them a note
saying that the Frame Bank would pay to the bearer $10. What is
the difference in the nature of those two things, in substance and in
essence ?

Mr. Frame. If you bring it a deposit to the Waukesha National
Bank of $1,000, 1 have the stuff you have deposited with me.

Mr. KoRBLY. Suppose it consists of a note; a note of $1,000 that
Mr. Glass has indorsed. I have not deposited $1,000 in the bank.

Mr. Frame. Then, I 'have loaned you that amount of money.

Mr. KoRBLY. And you are willing to pay me that $1,000 in the
future ?

Mr. Frame. And you might draw your check for it very soon.

Mr. KoRBLY. I might not.

Mr. Frame. You Tnight not ?

Mr. KoRBLY. Yes; I might not. Suppose I should ask you to
issue to me, in exchange for my note for $1,000, indorsed by Mr.
Carter Glass, 1,000 certificates of deposit for $1 each, payable to
bearer.

Mr. Frame. Yes.

Mr. KoRBLY. Would there be any substantial or essential difference
between that and taking the credit in a book known as a bank book ?

Mr. Frame. Yes; I think there would.

Mr. KoRBLT. What is it?

Mr. Frame. You would be swapping credits, then. You would
give me your note and I would give you mine. You would give me
a big note and I would give you a lot of little ones.



434 BANKING AND CUEEENCY EEFOEM.

Mr. KoEBLY. Are we not doing that when you put a credit on my
bank book?

Mr. Feajie. No, sir; I think not. It is different, entirely. I
will tell yon why I am not in favor of the payment of that note of
issue in small quantities, as you suggest. If I have not got the
actual stuff on hand, actual cash or capital, I have no business to.
That is swapping credit with you.

Mr. KoEBLY. You just now admitted that Avhen I come in with my
note for $1,000, payable to you in 90 days, with Mr. Glass as an
indorser, and you give me a book entry in my bank book promising
to pay me $1,000, less the discount, on demand, that is, in fact, a
swapping of credit or a swapping of promises.

Mr. FsAJtE. That is giving you the opportunity of drawing upon
that account, and in ninety-nine cases out of one hundred a man who
borrows money from a bank and pays interest on it does not borrow
it and let it lie there idle.

Mr. KiNDKER. Is there not a difference, then, in the relationship
between you and the bank as debtor and creditor?

Mr. KoEBLY. Not at all.

Mr. KiNDEED. And as between 1,000 other persons ^vho might be
asked to bear the same relationship, if you circulated around those
1,000 I O U's for a dollar each? A thousand other people might
have the same relationship that ought to be restricted between you
and the bank; do you agree to that, Mr. Frame?

Mr. Feame. The trouble about that is that I expect that if I credit
it to his account he is going to draw against it.

Mr. KoEBLY. If I drew my check for $1,000 and gave it to you, I
would transfer you, as the creditor, to the bank. What I want to
get at is the substantial and essential difference between the bank
note and the credit in the bank book to the depositor.

Mr. Feame. I think they are vastly different. I would not credit
it to your account unless I had the stuff to loan it to you — ^had the
capital in hand to loan to you.

Mr. KoRBLY'. How much currency is there in the United States ?

Mr. Feame. $3,500,000,000 ; that is, gold and all.

Mr. KoRBLY. How much deposits are there in the banks of the
United States, excluding savings?

Mr. Frame. $17,000,000,000.

Mr. KoEBLY. How can you have $17,000,000,000 in the banks, if
there are only $3,500,000,000 in existence, if I am not right in saying
that it is a promise to pay?

Mr. Frame. Certainly it is a promise to pay ; but if you are going
to issue a sufficient quantity of currency every time a man comes in
and wants to borrow some currency you will have a vast quantity of
asset currency outstanding which would not represent anything ex-
cept merely a promise to pay.

Mr. KoRBLY. It would represent exactly what is represented by this
$17,000,000,000, would it not?

Mr. Frame. If you were going to draw this all out at once you
would have a cyclone in the United States that would make all of
us sit up and take notice.

Mr. KoRBLY. The fact that there is $17,000,000,000 of currency in
the United States, and that a large part of it is rejected by the
people and put back in the banks, is pretty conclusive proof to my



BANKING AND CURRENCY REFORM. 435

mind that they would not hold ont the quantity of these notes that
you suggest.

Mr. Frame. When you get into a proposition of that kind, it is
rather abstruse, although I think I can clearly understand it. It
may be difficult to explain. But so far as the liquidation of $17,000,-
000,000 of deposits is concerned, by the banks to the customers

Mr. KoEBLY. You would not pay it by giving them another
note?

Mr. Frame. We would either give them the cash or give them a
good note against some other fellow; or give them some other
security, if we were going to liquidate entirely.

Mr. KoRBLY. I would like to bring you back to the point where I
started; namely, in the event that your reserves were declining, and
good two-name paper came in for discount, you said that you would
have to replenish your cash.

Mr. Frame. If it was low.

Mr. KoRBLT. And I ask if that meant that you were going to buy
gold. You said then you would buy gold or some other currency.
That was the point where I interrupted you. I may be very earnest,
but I do not want to be rude, and I want to get you back to the point
that I took you away from, so that you can proceed in an orderly way
with your argument.

Mr. Kindred. Mr. Frame, I unfortunately missed the first part of
your statement. Have you yet come to the question of the mechanism
for some coordination ? Are you in favor of the zone system ?

Mr. Frame. The zone system of relief?

Mr. Kindred. Well, of organization.

Mr. Frame. I do not object to that. I do not object to even doing
it through the clearing houses.

Mr. Kindred. Would you have each zone have its own regional
clearing house or reserve association ?

Mr. Frame. There is a clearing house in Milwaukee, for instance.
If any trouble ensues in Milwaukee and they wish to issue clearing-
house certificates and there is some reservoir from which money can
be obtained on those clearing-house certificates

Mr. Kindred. Then, you would not object to have each region
have its own clearing house?

Mr. Frame. I do not think there is any particular objection to it.

Mr. Kindred. Have you thought out anything that you would
kindly enlighten me about as to some mechanism that would co-
ordinate and equalize these different regional organizations?

Mr. Frame. That is, clear throughout the country?

Mr. Kindred. As regards the whole country ; yes.

Mr. Frame. As regards the equalization of rates of interest, so tar
as that is concerned . .

Mr. Kindred. I mean as regards reserves; as regards supervision
and as regards note issue; whatever you may want to have m the way

of note issue. , , , • uj. «

Mr. Frame. That is rather a difficult problem to answer right ofl-
hand, but so far as the issue of the certificates of the clearing houses
is concerned, as we did in 1907 and two or three times previous, it
they could take those clearing-house certificates to Washington and
even get some of that $500,000,000 that is now lying idle there as a
reserve fund— I say if the banks of Milwaukee could get the cash on



436 BANKING AND CUBRENCY REFOKM.

their clearing-house certificates, then if I wanted money on our bal-
ances, they could give it to us. As a farmer put it in 1907 when they
handed him some of these clearing-house certificates, ''This is a
milk ticket ; I want the milk/' Cash for clearing-house certificates
would be the same as a national-bank note, which is accepted by
everyone without question.

Mr. Kindred. Do you suggest legislation that would direct the
Secretary of the Treasury to loan out a certain proportion of this
surplus?

Mr. Frame. Only for emergencies.

Mr. Kindred. Deposits in the bank, I mean.

Mr. Frame. Of deposits in the banks only in extraordinary times.
It costs nothing but the printing, and should be held for emergencies.

Mr. Kindred. It would be hard to formulate some mandatory leg-
islation to make him do it.

Mr. Frame. It would be necessary to expand the present facilities,
especially if you are going to give the State banks the same privi-
lege. We all know now that only the national banks have that privi-
lege. They have ample bonds on which to get quite a quantity of
currency in troublous times. These now hold about two hundred or
three hundred millions, and that will keep the wheels of commerce
moving.

Mr. Kindred. Do you mean to have these facilities through the
local clearing houses ?

Mr. Frame. I would not object to that.

Mr. Kindred. You mean that the State banks have these facilities
now through the clearing house?

Mr. Frame. Yes; but I would not give the privilege to a city of
less than 100,000 population, because when you go into the small
interior districts you must remember that panics are not bom in
interior cities; they are born in the great, big cities where colossal
promotions flourish.

Mr. Kindred. Have you thought out a scheme to take in the whole
country ?

Mr. Frame. I have made something of a suggestion in this propo-
sition here.

The Chairman. I had necessarily to absent myself from the com-
mittee meeting, and I would simply like to ask you if you have fin-
ished your general statement?

Mr. Frame. Practically.

The Chairman. If you have not, we would be glad to have you
do so.

Mr. Frame. I think it would be taking up too much of your time,
as I see you have other gentlemen present. Here is Mr. Farwell,
and I certainly do not want to take up so much of your time.

The Chairman. Have you indicated in your general remarks just
exactly what you would like to see the committee do?

Mr. Frame. This short statement here will cover it, as you sug-
gested to me that I should make something of a brief. This covers
practically the thoughts I have in mind.

Mr. Taylor. You desire that that be published along with your
oral testimony this morning?

Mr. Frame. Yes ; if you will. These are the points which I wished
to make more particularly.



BANKING AND CUEEENCY EEFOEM. 437

The brief referred to will be found at the conclusion of Mr.
Frame's statement.

Mr. Frame. The thing that strikes me as the most serious proposi-
tion about the Monetary Commission bill is the privilege of giving
banks the opportunity for accepting customers' drafts on them, and
allowing the customers to go out and sell those drafts wherever they
see fit. I know that there ai-e more or less very able men that arc
advocating that proposition. They think it will create a discount
market. Now, as shown by the comptroller's report, there are
about $4,500,000,000 of live commercial paper, or on bills of lading.
If there is any more of this that is made by actual transactions, it is
cared for promptly now, because there is a large amount of money
that is loaned by the banks on other securities that is not quick, and
we are always hunting for quick paper. Therefore, when you talk
about enlarging our quick commercial paper by acceptances, I think
you are pyramiding credit on credit, and it is entirely unnecessary,
and to my mind it is one of the most unfortunate things that could
possibly occur to the United States. I gave an address diagnosing
the National Monetary Commission's bill before the bankers and
business men at Memphis, Little Rock, Ark., San Antonio, Tex.,
and Milwaukee. I brought out that point as carefully as I could,
and after talking with bankers all over the country, with few excep-
tions they declare it a dangerous proposition.

Mr. Tatloe. You say that there are between four and five billions
of dollars worth of what? What did you call them?

Mr. Frame. Quick, live paper.

Mr. Taylor. What proportion of that is real estate ?

Mr. Frame. None of it.

Mr. Taylor. It is mortgages on real estate ?

Mr. Frame. $3,500,000,000 besides that. That is in addition. The
total amount of all bank loans in the United States, including bonds,
is $18,500,000,000. There is about one-quarter of that that is live
commercial paper.

Mr. Taylor. $18,500,000,000?

Mr. Frame. Yes.

Mr. Taylor. That is eighteen billions and a half?

Mr. Frame. Yes.

Mr. Taylor. And about one-quarter of that is quick, live paper?

Mr. Frame. Yes; I assert all the quick, live paper in the United
States is cared for now. Therefore, when you talk about manu-
facturing acceptances by allowing 7,400 national banks to accept their
customers' drafts, I think it is a dangerous proposition.

Mr. Taylor. Do you or do you not think that loans on land can
be made liquid?

Mr. Frame. Real estate?

Mr. Taylor. Yes.

Mr. Frame. Well, the history of banking I think shows that that
should not be done except for savings banks or trust companies, or
something of that kind, and savings banks require 60 or 90 days to
pay depositors. . , _ . , , ,

Mr. Taylor. I have read considerable about it, and I simply wanted
to get your individual opinion, and because there have been gentle-
men here of considerable experience, one in particular, who said his



438 BANKING AND CURRENCY REFORM.

experience was that you could make just as liquid on real estate
as anything else. .

Mr. Frame. That is according to the location in which you are
situated. I have half a million of mortgages now, and I think it
would take but a very short time to sell them right in Waukesha or
in Milwaukee. , , , ■ j

Mr. Taylor. Can you tell me what amount or real estate is owned

by your bank? , . ^ , .u n

Mr. Frame. We do not loan money on real estate, because the (jov-

ernment will not let us. ■ ■, , .

Mr. Taylor. I did not ask you about your loaning on real estate.
I asked you what amount of real estate is owned by your bank?

Mr. Frame. None, except the bank building.

Mr. Taylor. What is the value of that ?

Mr. Frame. It is on our books at $45,0{)0.

Mr. Taylor. And your capital stock is what ?

Mr. Frame. $150,000.

Mr. Taylor. Then, one-third of it is in real estate ?

Mr. Frame. Our surplus is $150,000 also. So really our capital
and surplus amount to $300,000.

Mr. Taylor. $45,000 worth of real estate would be what propor-
tion?

Mr. Frame. Less than one-sixth of it would be real estate.

Mr. Kindred. May I ask right there? You spoke of accepted
drafts. Do you make any distinction between what we call ordinary
acceptances and what you are talking about now ?

Mr. Frame. Yes ; a live acceptance, with a bill of lading attached
for export abroad, is a perfectly legitimate loan, and I say it is taken
care of now. Therefore, when you come to the question of saying
that you can manufacture a lot of acceptances to create a discount
market, I say it is practically impossible to do it.

Mr. Kindred. That would be outside of the legitimate field?

Mr. Frame. Yes ; and the legitimate field is cared for now. There-
fore, how can you manufacture more of it? It is only by building
credit on credit, that is all.

The Chairman. How do you account for the statement of Mr.
Warburg and other large bankers of the country, and also textbook
writers on the subject, that we have no open money market in this
country ?

Mr. Frame. We have no open money market in this country?

The Chairman. I mean, as compared with what is known as the
European money market.

Mr. Frame. I think I can understand that. As I stated a little
while ago, I think, perhaps, when you [the chairman] were out,
the total foreign trade of Great Britain, France, and Germany is
about $900,000,000 a month. That brings about $900,000,000 of paid
paper every month. That kind of paper is held by the banks. That
is liquid paper, and paid when it is due. It has a market not only in
Great Britain, but France and Germany, and the nation that raises
its rate of interest drives all new undertakings to the others having
lower interest rates. Thus current debts are paid in cash and gold
flows into the country where the interest is raised. Our bill-of-
lading paper has a market over there, too. We imported and ex-
ported last year $4,000,000,000 worth of commodities.



BANKING AND CURRENCY REFORM. 439

Mr. Kindred. This paper is practically underwritten bv the in-
dorsement of some party that these European bankers know*

Mr PRAME Sometimes, but not to the extent that you are led to
except by reading the authorities on the subject, in my uidoment

Mr Kindred. Would not the European banks be^4r?unwise to
take It without some such underwriting?

Mr. Frame. No; it is underwritten by acceptance or discount houses
making It their busmess, and these bills of lading, of course, secure
the draft. Now, because of the rate of interest in the United States
being a little higher than it is in Europe, practically all of the drafts
that are -drawn with bill of lading attached for exports to Europe
go to Europe and are discounted over there, because of lower interest
rates there. I do not believe that Mr. Schiff or anybody else in the
United States can make a discount market for that uiitil we have
accumulated sufficient surplus capital so that the rate of interest in
the United States is a little bit less than it is over there.

If you have a piece of paper to sell you will sell it in Europe,
if you can, for 1 per cent lower rate than here. You all know, on
account of the activities of the United States and its wonderful de-
velopment, we have not come to the point like unto the old Euro-
pean nations, with hundreds of years of development and accumu-
lated surplus capital. We are making rapid strides as evidenced
by my illustration, when talking about Waukesha County. We have
been lowering the rate of interest, and the United States has been
doing the same thing. As we increase surplus capital in the United
States, so that interest rates here are as low or lower than those of
European banks, then we can have a similar discount system but not
before.

-The Chairman. One question. You say jrou have talked with
hundreds of western bankers and they agree with you on this propo-
sition.

Mr. Frame. On the question of acceptances?
The Chairman. Yes.

Mr. Frame. There are not over three out of a hundred who said
they would loan their credit to their customers — that is, they would
not accept a draft.

The Chairman. Why didn't they make themselves heard when
the American Bankers' Association gave its unqualified and, as we
are assured, unanimous indorsement of the scheme as proposed by
the Monetary Commission.

Mr. Frame. I am glad you called my attention to that. When the
last monetary bill was given to the country it was but a few days
previous to the meeting of the American Bankers' Association in
New Orleans in 1911. There was not one banker out of a hundred
that had read that bill.

The Chairman. It is, then, somewhat like Mr. Ingalls said of
Paradise Lost, which he described as that " great epic poem that
everybody praises and nobody reads."
Mr. Frame. They had 12 addresses in favor of that bill.
G«n. Hamby, of Austin, Tex., told me he wrote a letter to Mr.
Watts, who was president of the American Bankers' Association, and
asked for a hearing against that bill. He did not get a very courte-
ous answer, and I do not believe I had better repeat what he said.
They knew also that there were others. I would like very much to



440 BANKING AND CUKEENCY EEFOEM.

have been heard, but because of the steam-roller process of forcing^
that bill through without giving the bankers of the United States an
opportunity to be heard, I refused to vote, and I know there were a
great many other bankers who did likewise. I said to myself then,
" If they are not willing to have this matter thrashed out and let
the concensus of opinion be drawn, which I am perfectly willing to
accept after it is thoroughly thrashed out, then there is an open press
in the United States, and we can get a hearing there. They will
hear from me in the future."

Mr. Btjlkley. Do you mean to say that at the New Orleans meet-
ing no member of that association could be heard in opposition to
the bill ?

Mr. Frame. Practically. They practically thiottled all argument-
Mr. KiNDKED. But the report went out that it was practically
unanimous.

Mr. Frame. And when the question came as to whether the bill
should be indorsed or not, nobody having read it, and there having^
been 12 addresses in favor of it — and as you know, we are all anxious
for relief in time of trouble, because we do not want to see the wheels
of commerce stop; we do not want manufactures to close, and we
do not want merchants to fail, but do want some relief — therefore,
those who did vote for it, or the great bulk of them, did so without
reading that bill.

Mr. Kindred. How long did you say it was that that meeting was
held if New Orleans before or after the publication of the bill ?

Mr. Frame. I think about two days before.

Mr. Taylor. Are those dates clear in your mind?

Mr. Frame. It was very close to it. The bill had already been
prepared by Senator Aldrich and presented to the executive council
of the American Bankers' Association in the May previous, in 1911.
As I was a member of the executive council of the American Bank-
ers' Association, I received a copy of that bill just the day before'
they acted upon it.

Then when the amended bill came in at New Orleans it was just a
few days before the committee met, so that the bankers of the United
States had not read it.

Mr. Taylor. It was impossible for them to have read it?

Mr. Frame. Yes, sir.

Mr. Kindred. And it was not freely discussed by those who op-
posed it?

Mr. Frame. It was not discussed at all, practically. No oppor-
tunity was given for it.

Mr. Kindred. Do you mean to say, or do we gather from what you
say, which is very clear, that the presiding officer there simply ruled
out those who wanted to discuss it negatively or were not in favor
of it?

Mr. Frame. Gen. Hanby took up the question before the meeting,
but they evidently would not allow anyone on the program who
was against the bill. Therefore, I say, they put those on that were
in favor of the bill and barred others. Few care to ask to be put
upon a program for the purpose of fighting something that they arc
attempting to pass. I say the American Bankers' Association should
be an open forum.



BANKING AND CURRENCY REFORM. 441

The Chairman. Is there any significance to be attached to the fact
that at the annual meeting of the Anierican Bankers' Association
subsequently held at Detroit the association did not reiterate its
indorsement of the plan of the Monetary Commission, known as the



Online LibraryUnited States. Congress. House. Committee on BankiBanking and currency reform. Hearings before the subcommittee of the Committee on banking and currency, House of representatives, charged with investigating plans of banking and currency reform and reporting constructive legislation thereon ... → online text (page 57 of 96)