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

. (page 69 of 96)
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 69 of 96)
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tended to lower prices when freely produced. Since 1905 the aver-
age price of 30 stocks, 21 rails, and 9 industrials has fallen 21 points.
Since 1902 Pennsylvania Kailroad stock has fallen from 160 to 122,
or 38 points, and this in face of the fact the expansion has been prac-
tically stopped. Mr. Hill affirms, and I think truly, that five billions
of credit is now needed by the railroads of the country alone for
legitimate expansion.

With a condition set up in which the banks have their reserves re-
duced to the minimum legal and physical limit, and no possible
way is open to them by which they can convert any portion of their
enormous surplus of assets into reserve money, a " corner " or " mo-
nopoly " in credit is created, for which no man or set of men can be
held responsible. Discrimination in granting to favored interests
and denying to possible competitors such meager credit as the natural
increase of money from the coinage of gold makes possible is as cer-
tain to follow as day follows night. The interest rate will also be
arbitrary and higher than normal.

This condition is not chargeable to the banks or banlcers, large or
small. The comptroller's report, to which I have referred (pp. 39
and 40), shows that the banks have an unimpaired capital and sur-
plus of four billions, and liquid ( ? ) assets in the shape of stocks
and bonds amounting to five billions ; but when this chronic condi-
tion of depleted reserves which has existed in the banks, collectively,
for the last 10 years is set up, these so-called liquid assets are not
liquid at all. If they are forced to sell the price recedes, and when
sold at any price the general situation is not and can not be helped
at all. If one bank or city secures additional reserves by this means,
another must lose it, and the general situation remains unchanged.

But this discrimination is not the only evil result of this condi-
tion. The work of the profesional stock gambler is made more safe
and certain than marked cards or loaded dice can make the ordinary
gambler safe from risk.

I refer to gambling in the low and offensive sense in which we use
the term, and not as synonymous with speculation. Some confound
these terms. I think they are widely different. In most of our com-
mercial and productive activities the element of speculation is neces-
sarily and harmlessly present. I exchange my money for a horse
because I think the horse will be more valuable to me than the money.
The owner of the horse exchanges with me for exactly the same rea-
son. Either of us may be mistaken, but both of us may be and
generally are right. We may both profit by the exchange, but since
the unknown future is involved, we are necessarily "speculating"
or taking a chance. It is an honest chance, however, in which the
success of one party does not depend upon the failure of the other.
Eightly understood, I believe that all the material progress of the
race is due to the fact that inventors, theorists, and business men
have speculated or taken chances on the future.

Gambling may be easily differentiated. If I bet on a horse race or
anything else my success depends upon the failure of my competitor.
A certain degree of honesty and decency may inhere in a fair horse
race, but the introduction of tricks and deception reduces it to the
low level of ordinary larceny.



BANKING AND CURRENCY REFORM. 531

With the bank reserves at the lowest legal level, a coterie of men
or even one man, may draw checks for, sav. ten millions on the Xew'
York banks and put the money in safe-deposit vaults at 2 o'clock
Ihis will make it necessary for the banks to call fortv millions of
credit the next morning. The borrowers must furnish the monev at
once by forcing the sale of stocks. The market goes down at once
not because tlie earning power of the stocks, the true source of value
IS impaired, but solely for the reason of forced sales. The con-
spirators buy them, the ten millions are let loose and reach the banks
again in due course, the credit is greatly expanded, and stock prices
recover. The conspirators sell at the advanced rates and are readv
to work the trick again.

. This is no fancy sketch. Once in a while we catch a record of such
a transaction, but they frequently occur and escape public notice

In the week ending December i), 1911, the stock market in New
Yorkwas "oflf" several points, and on December T, 1911, the follow-
ing significant paragraph appeared in the financial column of the
Philadelphia Evening Bulletin :

I.nst week there was some $12,000,000 unaccounted for iu the bank figures;
that is to say, the cash ]oss was that much hi excess of the visible movement'.
Just how such a wide discrepancy could arise, with truM company figures also
available, is not easy of solution, for there are but three directions in which
money could go— through the subtreasury, interior moveineuts, and exports or
imports.

Twelve million dollars had disappeared by the invisible route.
The conspirators had drawn it and placed it in safe-deposit vaults.
Reserves were thus depleted, loans were called, sales forced, and the
market depressed. In the following week the bank statement came
around all right. The depressed stocks had been purchased with the
hoarded money. The money again came into the banks, loans were
expanded, and the market gained several points.

With reserves abundant, and a way open for the banks to increase
them ad libitum, at the expense of their bond holdings, outside of
the regular market, this manipulation would be impossible, and the
occupation of the low gambler would be gone.

But these are both minor evils as compared to the condition of
iioneraployment incident to the cessation of business in the panics
that are sure to result from the stoppage of credit expansion, or
from the prior restraints that are enforced to prevent panic.

That any man should want work and not be able to find it is
the crime of civilization, and I make the statement, without fear of
successful contradiction, that no such case exists that is not traceable
ultimately to this cause.

We are seeking a remedy for the evil, and I am trying to direct
attention to the cause of it, in order that the true remedy may be
fjpplied.

The lack of legal reserves is the basic cause of the trouble, and
tlie remedy lies in one of only two possible directions. AA^e must
either remove the legal restraints by reducing the required per cent
of reserves or provide a means whereby the banks can liquefy at will
certain of their assets outside of the regular market, and thus main-
tain the required reserve while they extend ciedit iu sufficient xolume
10 meet the demand.



532 BANKING AND CUEEENCY EEFOEM.

The question is simply one of method, and the method we employ
should, first, be safe and involve no contravention of the principles of
sound finance.

Second. It should be easily adapted to the existing machinery of
banking. It should involve as little change as is possible, consistent
with absolute effectiveness.

Third. It should look toward the restoration and maintenance of
competition among independent bankers and the prevention of mo-
nopoly in credit, rather than in the opposite direction.

I will propose a remedy that I think will be found to meet all of
these requirements. We have now a banking system composed of
25,195 independent banks. They are located in every part of the
Nation. They have correspondents and clearing-house relations es-
tablished on a universal scale. The system has grown up naturally
in response to the development of the country, and so far as ma-
chinery goes is capable of supplying the country with all the credit
it needs.

The banks collectively have four billions of unimpaired capital
and surplus and easily convertible assets (stocks and bonds) amount-
ing to five billions, so that no possible question of solvency or lack of
capital can be raised.

The banks collectively hold, however, only $1,572,900,000 of actual
cash, including the bank-note redemption fund; $108,000,000 of this
is in bank notes, leaving $1,464,900,000 of legal tender or reserve
money against $17,791,000,000 of obligations, or 8.2 per cent. This
is the weak spot in the system, for with all the provisions in the law
by which the reserve cash is made to do double or triple duty, the
banks have always been compelled to restrict the expansion of credit
before it reached this point. They are at this moment in that situa-
tion. From June, 1911, to June, 1912, the banks increased their ob-
ligations by $1,150,000,000, and in the same period were only able
to increase their cash holdings by $18,800,000, or 1.63 per cent of the
new credit. This reduced the total reserve from 9.3 per cent to 8.2
per cent, which was about the breaking point in 1907. They are now
compelled to refuse credit, and panic is threatened.

The national banks are now permitted to hypothecate their Gov-
ernment bonds and receive, practically free of interest, their equiva-
lent in bank notes. All but one of the national banks have done this
to a greater or less extent, some of them reluctantly and under
pressure from the Treasury Department, but all but one has com-
plied, so that a well-beaten path from each bank directly to the
Treasury Department alrea,dy exists.

The bank note, however, is a credit instrument and not money in
the legal sense and can not stand in reserves as a basis of credit. Nor
can it ever be justly empoAvered to do so as long as it remains a credit
instrument.

These notes are put into circulation by the banks, and to the
extent that they can be kept out of the banks and in the hands of
the people they serve their purpose well; but they come into the
banks as deposits, against wliich legal tender money must be held,
and to secure the legal tender thev are sent in for redemption. Out
of $739,940,000 of them in circulation in 1912, $649,954,000 was sent
in for redemption during the year, or 87.8 per cent. So great was
the flow for redemption that the 5 per cent fund held for the purpose



BANKING AND OUREENCY EEFOEM. 533

by the Treasury was entirely inadequate. This fund was overdrawn
during the entire year and at times to the extent of over $26,000,000.
Eight per cent instead of 5 per cent would ha^e been necessary to
cover this rate of redemption.

The bank note as a means of answering the demand for credit is a
• failure. It is a convenient and mobile instrument, and, being payable
at any bank to any bearer, one would think that a very small reserve
would a,nswer for its redemption. These notes are manifestly over-
issued, i. e., they are issued in excess of demand, as proven by the
fact that a larger cash reserve is necessary to maintain them than is
required to float the ordinary checks of many banks. This has been
notably true in in the past five years.

It has been assumed by some, and it would seem that the Treasury
Department has entertained the idea that our currency problem could
be solved by increasing the issue of these notes, and 1 am giving spe-
cial attention to them for this reason.

Credit notes of any kind are useless beyond the point of absorption
in the hands of the people. To this extent they displace the legal
tender and allow it to flow into the banks, but like all other credit
instruments they require a legal-tender reserve, which becomes \ery
large when they are overissued.

We have seen that the difficulty lies in the lack of reserve cash in
the banks. We have also seen that the mining and minting of gold
is the only way we can increase our reserve cash.

We also have seen that the gold supply from both mining and
importation is insufficient, and I think that most of the practical men
who have studied the problem have concluded that a supplement of
legal-tender paper is the only safe remedy. At least, I have not
heard the other alternative, i. e., to reduce the percentage of reserves
required, seriously proposed. Convincing reasons may be given why
reserves should be increased instead of diminished.

The Aldrich plan proposes as a remedy a central reserve associa-
tion where the cash reserves may be concentrated. The efficiency of
this arrangement was illustrated to me by a gentleman from New
York. He traced an analogy likening the present system to the old-
fashioned well or cistern at each house, and the Aldrich bill to a city
with a central reservoir in its water system, with pipes leading to
each house. In case of fire in any locality, the "reservoir" was

I thought the point ill taken, for the reason that our trouble does
not arise from lack of machinery (reservoir and pipe lines) ; we
already have them in profusion and to perfection. As we have seen
from the comptroller's report, our reserves are already concen-
trated," and I think the gentlemen who are managing the reservoir
are past masters in the reservoir and pipe-line game; but reservoirs,
pipe lihes, and past masters to manage them are no good without

"^ Our banking system is all right now, but our supply of money is
barely sufficient to fill the pipes, and there is none m tj^e feservoir
that can be spared. If we open a spigot to put out a fire, or e^ en to
wash down a payment in an outlying district, a conflagation . starts
hi the r^rvoir (Wall Street). There is not sufficient water m the
whole system to upply the ordinary daily needs of the people, and



534 BAXKING AND CUBEBNCY EEFORM.

the extra drain on wash day creates a famine, to say nothing of a
fire. I fail to see how a larger " reservoir " would help the situa-
tion. More money is what we want, and I think that the promoters
of the Aldrich plan are aware of it, though they do not frankly
confess it.

The bank note that is to issue from the new "reservoir" is the
significant thing in the Aldrich plan. The vast and complicated
machinery proposed is entirely unnecessary and immaterial. It only
serves to befog the real question.

If these notes are given legal-tender powers and thus made com-
petent to stand in bank reserves, they will serve the, purpose and
provide a remedy for our trouble. If they are not, they will be as
useless as our present bank note. The Aldrich bill proposes to give
them this power, and this is really the crucial point of the whole
question.

I shall oppose any and every plan that proposes to confer legal-
tender power upon a credit note that issues from or directly benefits
any private citizen or corporation. The public credit, in which
cveiy citizen participates, is alone competent to carry such a power.

The right of Government to issue notes in response to an equivalent
sacrifice to the community and give them legal-tender powers can
not be seriously questioned. It is universally conceded and has been
practiced throughout the world in all ages.

The right of Government to confer the legal-tender power upon
a credit note issued by private citizens without the sacrifice of an
equivalent can not be conceded by any stretch of the imagination.

If the legal-tender notes of the Bank of England are of this
character, their existence does not prove the practice to be either wise
or expedient. The Bank of England is empowered to issue legal-
tender notes up to 100 per cent of the Government bonds it holds,
and also to issue notes equal to the amount of gold coin and buUion
held in its vaults. The bank is also permitted to issue $36,000,000 of
notes against "other securities " in place of two-thirds of the notes
formerly circulated by other banks which have surrendered the privi-
lege, so that $36,000,000 out of $259,000,000 (report of 1908), or about
15 per cent, of its notes are ".credit notes" in the meaning of our
definition, i. e., their issue has involved no sacrifice of an equivalent,
for the securities held against them still draw interest either for the
bank or the note holder.

The $53,000,000 of notes issued by the bank against the Govern-
ment bonds it holds are of similar character, but the bank pays to the
Government $1,000,000 per year (4 per cent) for its monopoly of the
note-issuing privilege in a radius of 65 miles about London. In
addition it must pay to the Government all the net profit upon the
issue of notes against securities other than Government bonds or
gold, making a total payment (in 1908) of about $2,000i000 on
$90,000,000 of notes, or about 2 per cent.

The balance of the circulation does involve the surrender of an
equivalent of gold to disuse, the note being similar to our gold
certificates.

From all this we gather that the interests of the people are some-
what conserved by Avhat is practically a 2 per cent tax on the credit
circulation, but to the extent of the difference between 2 per cent
and the total net earnings of the credit circulation, they are de-



BANKING AND CUKEENCY EEFOEM. 535

frauded, and the principle is just as vicious as though the AThole
benefit went to the bank.

The credit of the national should alone circulate as legal tender,
and the Xation should be the sole beneficiary. The legal-tender
notes should emanate directly from the Govermiient in exchange for
the bonds, and such other credit notes as are circulated should not be
legal tender and therefore capable of use in a further expansion of
seven or eight times their volume of bank credit.

]\Ioney is a community instrument, and should be created by and
for the use of the community in such a vay as to automatically
respond to the demands of business, and at the same time guarantee
its imrity with the average of other forms of vealth, and its just
relation to the debts it is empowered to cancel.

Circidating credit is a private instrument created by and for the
convenience of private citizens, and should rest entirely upon the
solvency of those who create and use it.

But waiving, for a moment, this basic objection, I affirm that the
present bank note is as eligible to receive this power as any credit
note can be, and that the extension of legal tender or reserve power
to these notes will accomplish all that can be accomplished by the
other form, and involves no new machinery whatever or a particle
of change in the existing machinery. One billion of new legal ten-
der money would be instantly possible by this process, and from three
hundred to five hundred millions of it would appear in the banks,
upon which from two to four billions of new credit would be ex-
panded, the demands for business met, and the monopoly of credit
broken up.

These notes (the present bank notes) are absolutely secure, as
secure as is the Government upon the credit of which they rest.
Xot one of them was ever presented for redemption because of dis-
trust, but solely because of mutilation or to secure legal tender for
reserves. If we are to have a legal-tender credit note issued by pri-
vate citizens, our present bank-note circulation is the ideal for that
purpose. It can be instantly applied in every part of the country
at a minimimi cost (almost nothing) and with maximum efficiency
in every part of a competing system. .

But such a course would be in contravention of every principle
of sound finance, in that it provides for the creation of money with-
out demanding an equivalent sacrifice, and would make possible the
creation of 10 to 12 volumes of new credit upon 1 volume of exist-
ing credit. For this reason, and the further reason that private
interests would reap an unearned benefit from it, I would oppose it.

The essential difference between money and circulating credi..
should be clearly in mind. Money, either metallic or paper is a^
concrete embodiment of government decree, which, when tendered
by a debtor to his creditor, cancels the debt. Such money can only
come into existence justly through the surrender of an equivalent

^The^^aw presumes that the mining of gold involves a sacrifice of
time and labor in its production equivalent m va ue to the money
into which it may be logically coined, and when the gold is coinen
iSo money it can not bl used for any other purpose. The gold is
saSiS to the money use. It may now be used to cancel debt or



536 BANKING AND CUEEENCY EEFOEM.

other exchange purpose, but in no case can the miner get more for
it from society than he sacrifices to society.

If he elects to have his gold made into a watch chain, or an orna-
ment, he can not have it made into money at the same time. He can,
however, float a credit upon it. He may give a mortgage or other
lien upon it to a bank, and receive a " credit " that will circulate as
checks, and secure goods for him in exchange, while he still has the
use of the watch or ornament.

This is the essential difference between money and circulating
credit. Money is a means of paying debt ; and circulating credit, in
the form of checks, drafts, or bank notes, etc., is in itself a debt or
promise to pay money. Money comes into existence in response to
the sacrifice of an equivalent; a credit instrument comes into ex-
istence without the sacrifice of an equivalent, and while it answers
the purposes of currency, it must be considered as the exact opposite
of money, so far as its origin is concerned.

A national bank hypothecates its bond with the Government, but
still owns and draws interest upon it, or has the use of it. The bank
receives a credit in the form of a note, which it uses in exchange.
This transaction as between the bank and the Government is exactly
similar to the transactions between the bank and its customer. The
bank takes the security of the borrower (expressed or implied) and
gives him credit upon its books. This credit circulates as checks, etc.,
and secures the exchanges wanted, but the customer still has the use
of his asset. No sacrifice has been made in either case, except the
interest charge.

With an equivalent sacrifice involved in its issue, a guarantee
against overissue is to be presumed; but with no sacrifice involved,
an overissue may easily occur.

The banks of the Nation are perfectly solvent ; they have assets in
ftbundance to cover all their liabilities. They reported in 1912 a sur-
plus of $2,166,000,000 over all liabilities, including their stock—
$2,010,000,000. The one thing they do not have is legal-tender
money with which to safely carry credit in sufficient volume to main-
tain business at full activity, nor is it possible for them, collectively,
to secure it. Moving it from one bank or from one country to an-
other does not avail.

The banks are safe; they can and do call in their loans in an
emergency, and refuse to extend credit at will. But business is not
safe. The calling of loans and the refusal to extend credit — on good
security — is disastrous to business; and, confronted with the con-
stant menace of contracting credit, which will compel forced sales
and destructive slaughter of prices, business men have sought and
found the only possible remedy, to wit, trusts and combines that can
and do limit the volume of business to the credit available, restrain
production, sustain prices, and avoid disaster. By this means busi-
ness, especially big business, can be and is made safe, while the final
burden of reduced activity, partial or complete idleness is forced
upon the workmen of the Nation and is without remedy.

I know, of course, that the workmen of the Nation have sought, by
the organization of unions and federations to relieve themselves of
the direful consequences of restricted industry, but when the terrible



BANKING AND CUBRENCY EEFOEM. 537

cost IS counted, and we remember that nothing more tlmn •i.i m
proximate distribution of the effects af idleness has been Jreter
.an be, effected by this means, we can understand the growh^c unrest
and alarming tendency to socialism that is apparent "

thJm,nTnl"*:^"'l?' Y""' 1 *''" Profl"etion of legal tender money to
he inimng of gold alone, by reason of the lack of sufficient cmioo •
tunity to mine gold, prevents the free flow of effort into a field where
a scarcity and consequent tendency to high value exists, and the re
exmnfioTo?SedV'^' tender money prevents a safe and adequate
expansion of credit, and this sets up a continuous tendencv to lower
prices in the permanent forms of wealth when such wealth is freely
produced The gold mines are doing all they c-an; every na uS
opportunity known is being worked to its utmost capacitv. and the
relative scarcity continues. ' '

This tendency to lower prices in response to active production coin-
pels the formation of trusts and combines in order that the produc-
tive activity may be effectively restrained and a disastrous fall in
prices prevented, and when formed as a weapon of defense they are



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 69 of 96)