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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Mr. Beery. Yes ; 20 per cent is the minimum.
Mr. Willis. And that would be the sole basis supporting the cred-
its of the country?
Mr. Beret. Yes.

Mr. Willis. So that an inflation of credits would strain that in a,
corresponding degree?

Mr. Berrt. No; the more loans the bank made, the less strain
would come on that.

Mr. Willis. I do not quite understand that.

Mr. Berry. Simply this. If you pass this book over to me this way
I can pass it back to you very easily, but if we put a 10-pound weight
on it it can not come back so easily. That is what the bank does
when the bank loans money. It never could come back to me. Ex-
cept in the case of decreasing credit, it never would come back.

Mr. Willis. Such loans would give rise to more of this irredeem-
able paper?

Mr. Berrt. No ; not if it was secured, the loans would not. Well,
perhaps concurrently both ways; the loans would give rise to the
paper and the paper would give rise to the loans.

Mr. Willis. The more outstanding loans there were, the more out-
standing paper resting on this 20 per cent of gold ?

Mr. Beret. Yes; but the percentage of gold is manitained against
the total volume; but the proposition is that under this system of
issue the paper would never go out except for use as reserve money,
and once it gets into the bank's reserve it can not get away.

Mr. Willis. The banks have to pay it to their creditors if they
ivant cash?

Mr. Berey. Yes; but that 15 per cent they are holding is working
cash. That maintains their volume.

Mr. Willis. But they haAe to pay it out to their creditors or else
close their doors?
Mr. Beret. Surely. , ^ ■ q t -4-

Mr Kindred. In that connection may I ask one question « Is it,
after all, absolutely correct to say that Mr. J. P. Morgan s action,
his personal action, based on certain agreements— lirobably a cable
to Europe— was not a direct means of bringing gold here during the
crisis of the panic of 1907? i t ;i^ „^+

Mr Berrt. I am not in Mr. Morgan's confidence, and 1 do not
kmn/: but this T do know, that the facts are presented from our
statistical tables showing that the beginning o| the efflux of go d
was four years before Mr. Cleveland was elected, ancl that the gold
reserve was depleted by the time Mr. Cleveland came m.
The Chairman. You mean 1893. . ■ i j.-

Mr Berrt. The necessity of selling bonds to maintain redemption
fofthe then existing paper^urrency which was altogether ^"^^^^^^^^^^^^
hitelv due to the outflow of gold under an unfavoral)le trade balance,
had beeSlnticipa^ed by a predecessor. As soon as the trade balance
changed the flow of gold came the other way, and the trouble was
over.



554 BANKING AND CUEEENCY EEFOEM.

Mr. McCeeaky. Was not Mr. Cleveland criticized not so much
for the issuance of bonds, because they had to be issued to get the
monej', but on account of his mode of doing it, because instead of
making it public and giving everybody a chance to bid on it he
favored, as it was alleged, certain men, and because they made a
large amount of money out of it ?

Mr. Berry. He was subject to a good deal of unfavorable criticism,
but I never criticized him for it. He had to do it, and any other
President would have to do the same tiling with the same situation
confronting him.

Mr. MoCreary. If we had had a popular subscription it would
not have been new money or foreign money, but money from our-
selves, whereas Morgan and the syndicate sent over to their cus-
tomers in Europe and sold those bonds and therefore got the money
back from the old country into this country, and that was prac-
tically new money.

Mr. Berrx. Well, I think that in so far as they exported the
bonds they were doing the oiie thing needful. They were compelled
to stop the outflow of gold, and that is what they did.

Mr. McCreary. And get gold back?

Mr. Berry. Yes.

Mr. McCreary. The balance of trade was against us at that time.

Mr. Berry. Yes. As long as the balance of trade is against us
gold flows out, and when it is with us it comes in?

Mr. KoRBLY. Is it not a fact that nearly every year for the past
r)0 years the balance of trade has been in our favor ?

ilr. Berry. Oh, no ; not the whole balance of trade. The balance
of trade in merchandise is always in our favor, but the balance of
trade, including American securities and our obligations abroad, and
the general balance lias been frequently against us. •

yiv. KoRBiA'. Ha\e we not almost uniformly in the past 50 years
exported more gold than we have imported?

^Ir. Berry. We have, very largely. Have you a copy of the statis-
tical abstract 'f I know for four or &ye years the reverse was true.

^Ir. KoRBr.v. But in the aggregate we have exported more gold
(hail we have imported, in the past 50 years.

Mr. Berry. No; I can tell you those figures exactly. The total
average of the annual export of gold for the last 50 years has been
$8,000,000 a year net, and that included the Avar period.

Mr. KoRBLY, And what are the imports ?

Mr. Berry. That is the net export.

Mr. Korbly. "\'\Tiat are the imports for that period ?

Mr. Berry. I could not tell you either the exports or the imports
so far as the totals are concerned. Yes, I can tell you by reference to
this statistical abstract. I have the figures here.

Mr. KoRBLY. My impression is that we have exported vastly more
than we ha\'e imported of gold, although the balance of trade 'was iii
our favor.

Mr. Berry. Here is a little book I have published, which has that
fact 111 it. It shoMs that in the period of 50 years the result of the
movement of gold has been an average of '$8,000,000 out of the
countiy.

Mr. Korbly. I take my figures from the historical table of exports
and impoi-ts gotten out by the Bureaii of Statistics.



BANKING AND CURRENCY REFORJI. 555

Mr. Berry. That is where I get my figures.

jNIr. KoRBLY. I do not care to press that. I Avanted to ask your
understanding

Mr. Berry. Here it is.

From 1859 to 1878 the net exports of gold were $oOO.OOO,000. That
is the net export in that period.

In the "next period, from 1878 to 1884, the net imports were $193,-
000,000. '

In the next period, from 1884 to 1896, the net export was $286,-
000,000. '

That is where Mr. Cleveland got caught, in that period.

Mr. KoRBLY. May I ask you, where does the gold rest now that is
in the United States ?

Mr. Berry. Mainly in the United States Treasury.

Mr. KoRBLY. By that you do not mean to exclude the gold certifi-
cates ?

Mr. Berry. Yes. The gold certificate redemption fund is the
largest accumulation of gold, I guess, that ever existed.

Mr. KoRBLT. If I had a gold certificate in my pocket, it might be
said that that gold rested in my pocket.

Mr. Berry. Well, it is not.

Mr. KoRBLY. I mean from its personal use.

Mr. Berry. Oh, yes.

Mr. KoRBLY. So, loolring at it that way, where does the gold rest?

Mr. Berry. It rests in the channels of business, in the banks, and
in the pockets of the people.

Mr. KoRBLY. How much in the banks and how much in the pockets
of the people?

Mr. Berry. I could not tell you the exact figures.

Mr. KoRBLY. Approximately, if you can.

Mr. Berry. I can tell you just about how much the Government
holds. The Government has a redemption fund of $150,000,000 and
reports about $60,000,000 of gold in its general fund; a little over
that amount.

Mr. KoRBLY. Do you know how much is in the bank vaults ?

Mr. Berry. About $600,000,000, I think.

Mr. KoRBLY. Then that leaves how much to be accounted for?

Mr. Berry. About that much more.

Mr. KoRBLY. About $600^000,000 more ?

Mr. Berry. Yes.

Mr. KoRBLY. And of that much more that is to be accounted for,
how much did you say was in the Government vaults ?

Mr. Berry. About $200,000,000.

Mr. KoRBLY. That would leave about $400,000,000 among the

people? , . ,

Mr. Berry. Yes. About $398,000,000. I have it here, exactly.

Mr KoRBLY. What I wanted to get at was whether if there was

some system of bank-note currencv by which that $400,000,000 should

get into the bank vaults to be used as reserve money, it would not in

large measure effect a remedy or give us a remedy for the evils you

have spoken of ? , , , , i + /i,-„

:Mr Berry To the extent that a bank note may be made to dis-
place'legal tender in the hands of the people it is u remedial thing

7G112— PT 9 — 13 5



556 BANKING AND OUEKENCY EEFOEM.

and is helpful ; but to the extent the bank note comes into the bank,,
it is a nuisance.

Mr. KoEBLY. But if the bank note comes into a bank and is can-
celled like a check, or lies there, just as a note that you might make
payable to my order would be if you kept it in your own pocket and
did not deliver it to me, would it then have the effect that you speak
of? In other words, a bank note that is issued by a bank, if it is
kept in its own vault, is a nullity, is it not ?

Mr. Bebet. Yes ; and as long as the bank note coming into a bank
is the note of its own issue it must retain it until it can put it out in
its ordinary line of business ; but if it takes the note of another bank,
then it immediately sends it in for redemption.

Mr. KoEBLY. What differentiation do you make between the $17,-
000,000,000 of deposits in the banks of the United States to-day and
a bank note, as to nature and substance ?

Mr. Bebey. Well, there are certain legal privileges given to the
bank note that are denied to the ordinary checks ; but so for as their
purposes in currency are concerned, they are exactly the same.

Mr. KoEBLY. The bank note, then, is equivalent to a cashier's check
on his own bank ?

Mr. Beeby. Yes; but it has certain legal privileges which enable
it to pass in every other bank, which a check does not have.

Mr. KoEBLY. The note of one bank that was put in another bank
for deposit should be sent home for collection, should it not ?

Mr. Bebey. Well, it is. It is practically the same thing in effect.
I can not see any material difference, except that the bank note has
some legal privileges. One would naturally think it would not re-
quire a large reserve to maintain it ; and it would not — it would not
require any — if it was not overissued.

Mr. Koebly. You would not object to the issuance of bank notes
and currency?

Mr. Beeby. No.

Mr. Koebly. In other words, if I had a deposit of $10,000 in the
bank and wanted the bank to issue me $10,000 of notes for that de-
posit, you would see no objection to it?

Mr. Bebey. None at all as long as they did not give them a legal
tender function; but I do not want the Government to give to the
evidence of your debt or the bank's debt a legal- tender power with
me, or with anybody else.

Mr. Koebly. You recognize the bank note as being an expression
of bank credit?

Mr. Beeby. Yes, sir.

Mr. Koebly. Just the same as a deposit?

Mr. Beeby. Exactly.

Mr. Koebly. Do you think, then, that if we had that sort of a
bank note it would not induce this $400,000,000 of gold that is float-
ing around to come in the banks ?

Mr. Beeey. It does now.

Mr. Koebly. We have not bank notes now.

Mr. Bebey. We have $700,000,000 of them.

Mr. Koebly. They are limited to the amount in existence of Gov-
ernment bonds.

Mr. Beeey. Oh, no; they are not.

Mr. Koebly. They are not?



BANKING AND CUEEENCY EEFOEM. 557

Mr. Beery. No. It never has been, and as long as it was limited
to the demand — if you will take that table you will notice that the
increase of redemptions has been very marked of late years.

The Chairman. You do not mean to say that the bank notes could
be issued on anything else but Government bonds ?

Mr. Beret. Well, I am not so sure but what they could

The Chairman. Under existing law ?

Mr. Berry. No; not under existing law.

Mr. KoEBLY. 1 am talking about one system of note issue and you
seem to be talking about another. I am supposing that the banks
should be able to convert the deposits into notes at the option of the
creditors of the bank. You say you see no objection to that?

Mr. Berry. I do not see any objection; no.

Mr. KoRBLY. Therefore people could get as manv bank notes as
they wanted ?

Mr. Berry. Yes.

Mr. KoEBLY. And when they did not want them they would de-
posit them in the bank?

Mr. Beeey. Yes.

Mr. KoEBLY. Would not that supply a currency that the people
are now using as gold certificates?

Mr. Berry. No.

Mr. KoBRLY. Why not?

Mr. Berry. Because it is not money; it is not legal money at all;
it can not be given a legal-tender function. That kind of a note can
not be given a legal-tender function, and no credit note can.; it is not
money at all ; it is a promise to pay money.

Mr. KoRBLY. It would serve the purpose of currency.

Mr. Berry. Yes. I have a bank credit and go out and write checks
against it. I may have a hundred thousand dollars of circulation.
It is the same thing. I have not affected the volume of the currency
at all. What you want is not the privilege of converting that
$100,000 of bank credit into some other kind of credit; what you
want is some means of getting $100,000 of credit on the bank's books,
and the bank can not take the credit.

The Chairman. What you want is to expand credit and not notes.

^Ir. Berry. Surely. I do not care what form they put it in,
whether they are notes or what.

Mr. KoRBLY. That is not the point. What I want to find out is
whether you deduce from all these facts the conclusion that this
$400,000,000 stays in the pockets of the people and the money tills
because of the demand for that much money for legal-tender pur-
Mr' Beery. Well, I do not know what the reason is which forces
the present issue of bank notes back in such volume that a 5 per cent
redemption fund will not take care of it. Why it is I am not exactly
prepared to say, but it is a fact. , , , • u <;

Mr KoEr.Lv' You think that an elastic bank-note issue would not
result in the gold flowing into the hank vaults to be used as reserve?

Air Berry. No.

Mr. KoEBi-v (continuing). In any grciitcr extent than now mani-

Alr. r>i;Kitv. No: I would see no reiison Avhy they should.



558 BANKING AND CUKEENCY EEFOEM.

Mr. KoKBLi'. I do not want you to think that I contend that a bank
note should be given a legal-tender function. I would not have any-
thing a legal tender but the thing itself.

Mr. Willis. I do not want to press this too far, but do I correctly
understand you to say that the 5 per cent redemption fund does not
take care of the redemptions at the present time?

Mr. Berei'. No ; it does not.

Mr. Willis. Why is that? That is a new idea, is it not?

Mr. Beeey. It is simply because the bank note is not a legal tender,
and \vhen it comes into the vaults of the bank

Mr. Willis (interposing). You are speaking of the 5 per cent
redemption fund in the Treasury, are you not?

Mr. Beery. Yes.

Mr. "\^^iLLis. What is the monthly limit of the amount of notes that
can be retired?

Mr. Beery. There is not any limit.

The Chairman. Oh, yes ; there is a limit of $9,000,000.

Mr. Beery. There is no limit at all on that kind of redemption.
You mean the retirement of bank notes?

Mr. Willis. Yes ; the absolute retirement.

Mr. Beeey. I am not talking about that.

Mr. Willis. You mean ordinary current redemption?

Mr. Beeey. Yes.

Mr. Willis. I do not know how you can say that 5 per cent is
not sufficient, when that fund is immediately restored by the banks
upon their being notified of the reduction of the fund, and by the
transmission of the notes presented for redemption to them.

Mr. Beery. Here is the report of the Treasurer for 1912:

Redemptions of national-bank notes during tlie year have constantly been in
excess of this 5 per cent fund required under section 3 of the act of June 20,
1874, to be kept by the banks on deposit in the Treasury of the United States
tor the redemption of their notes. Consequently that fund has been overdrawn
during the whole year, and the Treasury has liad to advance payment for notes
as they were presented out of the general fund. The largest overdraft at one
time was $26,927,389.52 on February 3, 1912.

Mr. Willis. That is merely a temporary proposition.

Mr. Beeey. It is going on all the time, and it has been going on
for the last five years.

Mr. Willis. What I mean to say is that the Treasury has the
power of drawing on the banks for any amount of money necessary
to redeem their notes.

Mr. Beery. And another statement here is that he has notified
them time and again that they were overdrawn and they failed to
respond.

Mr. Willis., That means that they should be closed up, then, per-
haps?

Mr. Beeey. Well, we do not want a panic, and they try to nurse
them along, let them go along, and do the best they can.

Mr. Willis. The 5 per cent simply represents an amount that is
temporarily there on deposit and which is filled up as the demand of
a corresponding amount of offsetting cash is sent to a solvent bank?

Mr. Beeey. Yes.

Mr. Willis. The so-called deficit, then, is due to a failure on the
part of the banks to transmit instantly the amount due ?



BANKING AND CUEEENCY EEFOEM. 559

Mr. Beret. It is a question of physical impossibility, that is all,
for them to get it back in force with sufficient rapidity. They do not
do it, anyway. That is the most charitable construction you can put
on it.

Mr. Willis. Or that the officers of the Government have not ex-
acted it?

Mr. Beeet. Well, they have not taken any legal process, that I
have learned of, to correct it. They have complained about it,
though, in every one of the Treasurer's reports in the last three
years. You will find the same complaint in every one of them.

Mr. Willis. That is merely an administrative complaint. It is
not a complaint of insufficiency of redemption ?

Mr. Beeey. Surely; it is a direct statement fund, in so many words,
of the insufficiency of the redemption, is it not ?

Thereupon the committee adjourned until to-morrow, Wednesday,
January 29, 1913, at 10.30 o'clock a. m.



BANKING AND CURRENCY REFORM
HEARINGS

BEFORE THE

SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY

HOUSE OF EEPRESENTATIVES



CHARGED WITH INVESTIGATING PLANS OF BANKING

AND CURRENCY REFORM AND REPORTING

CONSTRUCTIVE LEGISLATION

THEREON



WEDNESDAY, JANUARY 29, 1913



STATEMENT OF

MR. WILLIAM W. FLANNAGAN



PABT 10



WASHINGTON

(JOVERNMENT PRINTING OFFICE

1918



SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY.

House of Repbesentatives^

sixty-second conqbess, thibd session.

CAETEE GLASS, Virginia, CTiairman.
J. FEED. C. TALBOTT, Maryland. JOHN J. KINDRED, New York.

QEOEGB W. TAYLOE, Alabama. EDWAED B. VEEELAND, New York.

JOHN M. MOOEE, Texas. GEOEGE D. McCEEAEY, Pennsylvania.

CHAELES A. KOEBLY, Indiana. JAMES McKINNEY, Illinois.

EGBERT J. BULKLEY, Ohio.

R. W. Fo.vTBNOT, Clerk.
A. M. McDbemott, Aeaiatant Clerk.
II



BANKING AND CURRENCY EEFOEJil.



Subcommittee or the
Committee on Banking and Currency,

House op Representatives,
Wednesday, Januai^ 29. 1913.
The subcommittee met at 11 o'clock a. m.

Present: Messrs. Glass (chairman), Korbly, Bulkley, :\IcKinney,
Kindred, and McCreary.

STATEMENT OF MR. WILLIAM W. FLANNAGAN.

The Chairman : Mr. Flannagan, you understand that this is a
subcommittee of the Committee on Banking and Currency of the
House of Representatives, charged with the business of making in-
vestigation and getting advice and reporting a measure of currency
reform, and we have invited you here as a practical man of long ex-
perience in the banking business, and would be glad to haAe you pro-
ceed in your own way.

Mr. Flannagan. Mr. Chairman and gentlemen, I suppose you gen-
tlemen in considering the difficult task which has been assigned to
you have been struck, in the discussion which you have heard, with
the importance given to effects — defects they are called — of our bank-
ing and currency system. That these defects exist there can be no
doubt, but I should like to direct your attention rather to the con-
sideration of causes, if they can be discovered, so that your judgment
may be utilized as to the best method of removing the causes without
interfering with the business interests of the country and retarding
the prosperity which has grown up in spite of these defects.

I want to talk from the standpoint of a practical business man and
bank officer of many years' experience, first in the country and after-
wards in the city, so as to direct your attention toward practical
remedies as affecting the mechanism of banking rather than to gen-
eralities or theories in economics as applied to business.

If you will analyze any or all of the defects of our financial sys-
tem, I believe you will find the cause can be traced to unwise legis-
lation in the past. I say unwise from an economic standpoint, for
the legislation may have been, and probably was, a temporary neces-
sity. The cause as evidenced in legislation may thus be stated :

i. The destruction of the bank function of circulation.

2. The assumption that a statute law can make a promise of pay-
ment equivalent to payment or, in other words, make a debt equiv-
alent to coin. , 1 1 i!

The want of elasticity in our currency, the lack ot reserves in
times of panic, the suspension of solvent banks, the absence of normal
' .561



o62 BANKING AND CUEEENCY REFORM.

banking facilities for moving the crops, the undesirable accumula-
tion of idle funds in the business centers, and the speculative excesses
<of Wall Street can all be traced to this cause.

There is much confusion of thought in the public mind concerning
banking and banking terms, and we must be sure that such terms
convey the same thought to our minds if we would apply, our judg-
ment in reaching conclusions. The terms " deposit," " money," and
" credit " are so loosely used that I believe you will find it necessary to
conduct a campaign of education in order that the general public may
understand the reasons of and the benefits to be derived from what-
ever legislation you may determine to be for the general good.

All banking, everywhere, is the dealing principally in debts, the
substitute of a promise of payment for payment itself, and the differ-
ent banking systems of the world are only variations of the methods
whereby " credit instruments " or debts, may be legally substituted
for coin.

Banking is an evolution or growth from the necessities arising out
t)f the interchange of human wants, called trade or commerce. Its
essential functions are known as " discount," " deposit," and " circu-
lation," all being an exchange of debts. These necessities produce a
higher law than legislators can enact, and when the statute law con-
flicts with this higher law, the statute is evaded, or necessity forces
its repeal.

The mechanism of banking may thus be stated. The debt of the
Ijanks is accepted by the people as a substitute for coin. This bank
debt is made available for the purposes of trade by being exchanged
for the debt of the customer, through the function of " discount."
When the debt is evidenced as a " deposit," it is utilized through the
medium of checks. When the debt is evidenced by a "circulating
note," it is utilized by delivery without recourse. But we have so
■restricted its use in the form of a circulating note that we have forced
an abnormal increase of the debt in the form of deposits, so that
when the necessity arises through trade demands to exchange one
form of debt into the other, our machinery fails.
: I have stated as a cause of our financial ills the destruction of the
bank function of circulation or note issue. Such function does not
^xist with us to-day, and has not existed since it was prohibited by
the 10 per cent tax imposed by the national -bank act. The pres-
ent bank-note currency is an issuance of notes to pay for the Govern-
ment bonds it represents ; the bank borrows from the public the
amount of the loan to the Government. It does not come into being
in response to a commercial demand, and hence' can not adjust
itself in vokime to such demand. It is only used as an adjunct
to settle differences in the transfer of deposits, where checks are not
available.

The great mass of the circulating medium of the country is bank
deposits, these being bank debts that circulate as a substitute for coin,
through the instrumentality of checks. This form of bank debt is
ideal as to flexibility or elasticity, above $550,000,000 of these debts
being daily swapped or exchanged among the banks themselves
through their clearing houses. But the other form of " bank-debt-
substitutes-for-coin," the circulating note; which the necessity oi in-



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 72 of 96)