"In the course of time it will have a million of deposits, largely in the shape of loans based upon this million of notes; so that the original $1,000,000 which stood guard over $5,000,000 of debts now is called upon to protect $12,000,000 of debts, or only about an 8 per cent reserve as against 20.
"The X National Bank owes $5,000,000 of deposits against $1,000,000 deposited with the association. The association owes the X National Bank the $1,000,000 deposited with it and $1,000,000 of notes outstanding which it issued to the Y National Bank. The Y National Bank has liabilities outstanding of $5,000,000 with the notes as reserves, or a net expansion and inflation of $7,000,000.
"It has been assumed or claimed by some advocates of the scheme that probably $1,000,000,000 of gold would be deposited with the association, in which event there would be an expansion and inflation of $7,000,000,000, or a total liability of $12,000,000,000 where now there are only $5,000,000,000.
"While this expansion and this inflation have been going on the notes have been going into the banks as reserves, and a corresponding amount of gold has been driven out of the banks and out of the country.
"Now, mark you, I have not pursued this expansion, this inflation, beyond the 50 per cent gold reserve for all the liabilities of the reserve association. When you turn your imagination to all the possibilities remaining in rediscounts, borrowing direct, acceptances and falling in your reserves, and the credits which grow out of credits directly and indirectly, the prospect becomes bewildering. The expansion and inflation becomes a matter of planetary distances and astronomical figures. The proposal leads into the nebulous somewhere, into the bottomless nowhere.
"Every student recognizes that the weakest point in our national bank system is the superimposed credit resulting from the deposits with our reserve cities and then with our central reserve cities. But in the very face of that fact here is a proposal that accentuates that fault one hundred fold.
"The strangest thing about this whole proposal is that it is based upon the fact that we have not sufficient capacity for expansion and inflation of credit. Will any one say that what we wanted during the years of 1913-4-5-6-7 was more inflation? Does not every intelligent student of banking economics know that what we should have had was some way of checking the delirium instead of increasing the mad speculation?
"To determine now what we want we must first ascertain with some degree of accuracy just what happened.
"Until we come to realize that there are two distinct kinds of capital involved in our banking business, and learn to treat them according to their peculiarities, we shall continue to have the same kind of trouble, to a greater or less degree, that we have had in the past.