I am quite willing to admit that in some of its details the Federal Reserve Act[296] has taken leaves from the experience of banking institutions of this and other countries, but in its essentials, in its anatomy, in its bony structure as it has been called, it is an animal absolutely unknown to the natural history of finance. Let me briefly call attention to the following novelties in banking:
First. It provides for a system of twelve competing banking institutions which shall control the currency supply of this country, and over which there shall be no controlling body with power sufficient to compel them to regard the national welfare in the issue of currency and in the extension of their credit. It is taken for granted that the financial welfare of the people will be safe provided that these competing regional banks are required to hold gold or lawful money reserves of 35 per cent. against deposits and 40 per cent. gold (free from tax) against notes, and are not permitted to issue notes except upon deposit of good commercial paper.[297]
Second. The act provides that the Federal Reserve Banks shall have the right to deal only with banks, nay more, they may deal only with such banks as have contributed to their capital stock. This again is a novelty in the banking world. If these banks are to be in touch with all American business and industry and be powerful agents for the prevention and alleviation of panic, why should they be thus restricted in their operations?
Third. The capital of these regional banks is not a matter of voluntary subscription. It is not founded on business principles. The framers of the measure seemed to fear lest the banks they were planning might not prove profitable investments, hence, they have provided that our national banks must subscribe the necessary capital or forfeit their charters. No country on this green and prosperous earth has ever found it necessary to resort to such undemocratic compulsion in order to persuade people to go into the profitable business of banking.
Fourth. The bank notes issued by these Federal Reserve Banks are called government obligations and must be redeemed on demand by the United States Treasury. In no country will you find that any such bank note has ever been issued or even proposed, and I submit that in the United States, whose people for half a century have confessedly been subject to periods of anxiety and distress and panic because of the Government's liability for the daily redemption of paper money, this provision of the Federal Reserve Act is amazing, inexplicable, and indefensible. The United States Treasury is not a bank and is not made one by this act. It cannot control the issue of the notes, nor the credit operations of the banks who do issue them. Why then should the treasury be compelled to redeem these notes?
Fifth. The Federal Reserve Act provides for an arbitrary shifting of bank reserves such as has never been attempted before. Nobody can foretell what the result will be, but we know nothing of the sort has ever been attempted before and we also know that many banks will be obliged to reduce their loans and discounts, and that their customers, the business men of the country, may suffer serious losses in consequence.
The United States has tried many financial experiments—indeed, our present national banking system was an experiment in finance and has been found wanting—but the Federal Reserve Act, if it could be put on exhibition in a world's financial museum, would, I feel sure, be voted the newest and most spectacular thing we have yet constructed.
The Federal Reserve Act and Democracy in Banking
[298]Beneath his skin every American citizen of every station and avocation, and whatever party name he may wear, is a Democrat in all the essentials and fundamentals. That is, he is attached passionately to the principles of local self-government, of the widest individual liberty compatible with the general weal and order of society. This new currency measure is democratic essentially. It looks to decentralisation of direct financial control, to financial local self-government, so far as is consistent with stability and the general safety; to a currency which will be worth its face value everywhere, which will be based on the actual values it purports to represent, as well as the faith and credit of the General Government, and which yet will be elastic, expanding to meet needs where and when they develop, receding when not needed; a system fitted to meet any emergency, moving smoothly and noiselessly for the ordinary uses of business in tranquil times.