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 3½ 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.