"There is the trust fund or the savings of the people and money belonging to estates or the investment fund. Then there is the commercial fund or that capital engaged in production and trade. The law should compel the segregation or separation of these two funds, so that we know with some degree of certainty whether the investment fund has all been exhausted and our commercial funds or capital are being encroached upon and absorbed in fixed investments. This is precisely what happened by 1907.
"To illustrate this thought, let us assume that a railroad needs one hundred flatcars to carry its peculiar freight and needs one hundred passenger cars for the accommodation of the people. It is self-evident that if the road uses all the flatcars and half the passenger cars to carry its freight, the balance of the passengers will have to make some other provision for transportation or walk. This is just what occurred in 1907, and a great many people are still walking as a result of that misadventure. Liquidation is still going on, with a probability that we shall be well into 1913 before normal or really good business conditions will prevail all round.
"Now, it is apparent that if this diagnosis is correct, the bankers did not cause the panic, as is so frequently charged. Indirectly, the bankers had a good deal to do with bringing it about, but not in the manner usually supposed. The way they helped it on was this:
"The great syndicates or underwriting bankers adopted the practice of simply notifying rich men and bankers all over the country that to them so much of some issue of bonds had been allotted. Those to whom they had been allotted, influenced, on the one hand by flattery and on the other by fear, lest if they refused to absorb what had been set apart for them they would be ignored in the future, took the allotment at all hazard.
"This forcing process went on until commerce broke down, because it had been robbed of its necessary capital and has not been able to replace it since, out of earnings."
Mr. Merchant: Mr. Banker, do you believe that to be a correct statement?
Mr. Banker: Believe it! I know it. There is no doubt whatever that the banks generally are under a kind of duress. They know that if trouble comes, they must go to the powers that be. When these underwritings are put out, and we bankers are notified that we are expected to take a certain amount, we feel compelled, half compelled at least, to respond, precisely as Mr. Fowler stated, and, as a natural consequence, the commercial fund of the country is sapped and absorbed, and transferred to passive investments, which, when the break occurs, become to all intents and purposes fixed investments because you cannot dispose of them at all.
What we must do, and what I am sure we have accomplished in the bill we have prepared, is to set every individual bank free, absolutely free, from any domination or influence of any kind, direct or indirect. Take my bank as an illustration of what I mean. Today I am living in a kind of terror of the possibility of 1907 coming again, because I have no way of protecting myself, except through my correspondents, and, under present conditions, that is no guarantee, as the banks may all break down again as they did then. This, you will remember, is due to the fact that we have no real economic reserve in the United States today. All the reserves are loaned out all the time.
Let me call your attention to what my position will be, under the bill we have prepared.
First: I shall be able to furnish all the currency I need, by simply converting book debts or deposits into note debts or currency, up to twice the amount of my capital, if necessary. That is, I can regularly issue $100,000, the amount of my capital, and by going to my Board of Control, $100,000 additional. But, if I did this, I would not increase my liabilities a single dollar, but simply change the form of them from deposits to notes.