§ 7. #Periodical local congestion of funds#. In times of general confidence each bank finds it profitable, and is tempted, to extend its credit to the extreme limit permitted by the law governing the proportion of reserves to deposits. Of the 15 per cent reserves required in most banks, three-fifths (9 per cent) might be kept in banks in reserve cities, and of the 25 per cent in reserve city banks, 12-1/2 per cent might be kept in central reserve cities, where it counted as part of the depositing banks' legal reserves, was a fund upon which domestic exchanges could be drawn, and usually earned a small rate of interest (usually 2 per cent). Very large reserves were kept in New York city where they could be loaned "on call," and the largest use for call loans was in stock-exchange speculation. Thus every period of prosperity encouraged an unhealthy distribution of reserves, gave an unhealthy stimulus to rising prices, and "promoted dangerous speculation."
§ 8. #Unequal territorial distribution of banking facilities.# Another aspect of this concentration of surplus money and available funds in the larger cities was the comparatively ample provision of banking facilities in the cities and in the manufacturing sections, and imperfect provision in the agricultural districts. The whole financial system seemed designed to induce the poorer country districts to lend funds at low rates of interest to be used speculatively in cities, instead of enabling the richer districts, the cities, to lend to the rural districts for productive enterprise. The rates of bank discount in different sections of our country have long been most unequal—lowest in the largest cities, and highest in the rural South and West—whereas in all parts of Canada, with a different system of banking, the rates have long been much more approximately uniform.
Indeed, our national banking development has been predominantly urban and commercial to the neglect of rural and agricultural interests. National banks were (until 1913) forbidden to make loans on real estate, and this greatly "restricted their power to serve farmers and other borrowers in rural communities." There was "no effective agency to meet the ordinary or unusual demands for credit or currency necessary for moving crops or for other legitimate purposes." The lack of uniform standards of regulation, examination, and publication of reports in the different sections prevented the free extension of credit where most needed. Finally, the methods and agencies for making domestic exchange of funds were, compared with other countries, imperfect and uneconomical even in normal times and could not "prevent disastrous disruption of all such exchanges in times of serious trouble."
§ 9. #Lack of provision for foreign financial operations.# Not without its influence on public opinion was the consideration that we had "no American banking institutions in foreign countries." Many bankers and business men felt, as did the commission, that the time had come when the organization of such banks was "necessary for the development of our foreign trade." Foreign banks in South America and the Orient, handling American trade, were believed to favor their own countrymen rather than the interests of American merchants. In contrast with the European nations with their centralized control of banking, we had "no instrumentality that" could "deal effectively with the broad questions which, from an international standpoint, affect the credit and status of the United States as one of the great financial powers of the world. In times of threatened trouble or of actual panic these questions, which involve the course of foreign exchange and the international movements of gold, are even more important to us from a national than from an international standpoint."
§ 10. #The "Aldrich plan."# The National Monetary Commission submitted with its report a plan which was known by the name of the commission's chairman, Senator Aldrich. This plan was embodied in a bill for a National Reserve Association, a bank for banks which bore some likeness to the great central banks of Europe. In the many details of the plan an effort has been made to remedy every one of the difficulties above described and to supply all the needs indicated. The plan was favored pretty generally by bankers, but called forth many adverse opinions. In the year of a presidential election, however, Congress took no action in the matter. All parties were pledged to some kind of banking reform, but particular proposals were not discussed in the campaign.
[Footnote 1: Whichever was the smaller. In 1900 this was changed so that notes could be issued to the full amount of the denomination of the bonds.]
[Footnote 2: In recent years this has been one half of 1 per cent when 2 per cent bonds, and 1 per cent when bonds bearing a higher interest, were deposited.]
[Footnote 3: In reserve cities 25 per cent and in other cities 15 per cent. The details of the regulations in the old law (given in part below, sec. 7) were ll altered by the legislation of 1913.]
[Footnote 4: The expressions within quotation marks in the following sections are taken from this report.]
[Footnote 5: See further on this in sec. 7 on periodical congestion of funds.]