Fifty years in Wall Street

by Henry Clews

So far as this tendency is the result of natural changes in conditions, it is inevitable and must be permanent, if, indeed, it be not destined to gain in force and extent. But so far as the change is due to artificial obstructions to banking operations, it is susceptible of modification.

And here I may be permitted to venture certain suggestions which may quite possibly encounter objections from men more than my peers in banking experience and wisdom. It has long been my conviction that the banking arrangements existing at New York are far from satisfying the requirements of a city that not only aspires to be, but also possesses many adaptations for occupying the position of the great financial centre, not only for domestic settlements, but also for international exchanges.

The bulk of our banking transactions are done by banks incorporated under either national or State laws. Admirably as the national banking system, taken as a whole, is constructed, yet it includes some important positive disqualifications for its institutions performing an important class of operations essential to a great centre of exchanges. It was, perhaps, not to be expected that a system designed mainly for provincial cities and for rural populations should adequately provide for these broader wants. Nor could any uniform and homogeneous system be expected to be very perfect and satisfy at the same time both classes of requirements. Interior banks, whose management must be expected to be more or less lacking in experience and competency, may need to be placed under legal restraints, which, in the case of a thoroughly conducted metropolitan bank, would be not only needless, but positively injurious. Unfortunately, this discrimination has received little recognition in our national bank legislation; on the contrary, that larger discretion which should have been conceded to the higher training and more select ability that administer the metropolitan banks, has been ignored, and heavier restrictions have been placed upon the New York national banks than upon those of any other part of the national system.

The “reserve” laws are oppressive to no better purpose than that of positive injury. All other banks than those of New York are permitted to count in their reserves any funds resting with their “redemption agents;” and this item usually constitutes, in the case of banks of the “other reserve cities,” 41 per cent. of the total reserves held, and in the case of all other banks about 60 per cent. The New York banks, on the contrary are compelled to hold their entire reserve (25 per cent. of their deposits) in the form of lawful money. Nor is this the heaviest embargo. The reserves are not permitted to be used when the occasion arises for which a bank reserve is always presumed to be provided. The moment a bank allows its reserve to fall below the required 25 per cent. it becomes the duty of the Comptroller of the Currency to close its doors and put it into liquidation if the deficiency be not immediately made good. If panic occurs, and depositors want their money, there is nowhere any power to relax the crushing force of this law, and the banks are therefore compelled to suspend payment to depositors and in order to avert general ruin at such times they have to resort to the expedient of making their cash assets available in common, thereby saving themselves and their customers outside of and in spite of the destructive tendency of the law. Of course, the danger of running into such a crisis as this creates a feverish dread in all times of special stringency in the money market. All eyes are at such times fixed upon the reserve “dead line;” and, as that limit is approached, loans are artificially contracted, depositors draw their money, and the very reserve that should be used for elasticity and to relieve periods of special tension become the certain cause of panic and ruin. A banking centre whose banks are periodically exposed to dangers of this serious character, and where the law unites with adverse circumstances to foster panics, is hampered with the worst possible disqualification for performing those higher and broader functions of banking which demand freedom of discretion and elasticity of resource.

This evil appears all the greater when it is considered that the amount required to be set apart as so much idle reserve ordinarily exceeds the entire capital of the banks. It might be supposed to be serious enough that such a large proportion of the resources of the bank should be held perpetually idle and earning no interest; but when this sacrifice of earning capacity is made for a purpose that brings no advantages, but rather a very serious danger, the effect can be nothing less than an unwholesome and very injurious restriction upon banking operations, and it is not surprising, therefore, that the national banks of New York city exhibit decadence instead of progress.

What is needed to enable this metropolis to reach the financial status to which it is entitled is a class of banking institutions possessing facilities and functions much broader and freer than those conferred by the national charters. It is out of the question to hope that these facilities may be provided through modifications of the national bank system. The banks, and especially those of New York, have to encounter so much prejudice and ignorant demagogism from Congress, in seeking any modification of the national system, that they would sooner endure almost any wrong than demand changes in the law. Their only redress is in reorganizing under the State laws, which many of them have already done, whilst new institutions almost uniformly prefer the State system. To meet the wants here contemplated, it would probably be necessary to get from the State Legislature special authorization for forms and functions of banking not now distinctly provided for under either Federal or State laws.

The special business to be done by such a class of banks scarcely needs enumeration, much of it being so self-evident. In the present stage of our national development, it is becoming a grave reflection upon our men of capital that we should remain almost entirely dependent on foreign bankers for the facilities for transacting our immense external commerce. The necessity that formerly existed for this dependence can no longer be urged as an excuse. All the capital and the banking experience necessary to found and to administer large credit and exchange institutions are ready to hand. A business of $1,200,000,000 per annum connected with our imports and exports would be available for this form of enterprise. Our export trade is crippled in many branches of business simply because it is found impossible to get the liberal credits necessary to facilitate consignments to distant markets. Manchester defeats us on cotton goods, not so much on the ground of prices or superiority of fabrics, but because her merchants can get any time or amount of credit required, whilst we have to market our goods on restricted credits and through Manchester agents, who at the same time are selling English products in competition with ours. The English exporter has the advantage of being able to get his credits from the bank with which he keeps his account, while the American has to go to a foreign banker, who has no inducement to consider his convenience or to moderate his charges. The natural place for an export merchant to keep his account is with the bank that grants him his credits; and this fact suggests the facility with which banks of the kind here suggested could build up a large business.

Every year we find it necessary to largely pledge our cotton crop in advance to provide the means for gathering and marketing it. Why should this money have to be drawn from England, especially as the crop is thereby subjected to the control of the foreign buyers, and we are unable to protect our own products? These advances afford an illustration of another class of important operations in which the existing banks cannot directly participate, but which ought properly to be undertaken by domestic banks.

With respect to our importations, what sufficient reason can be urged why the importer should have to get his credit from the agent of a London banker, instead of receiving it from an American bank through which he chose to transact his entire business, and which, therefore, would be the fittest source for procuring his credits? It cannot be to the advantage of the importer to be exposed to the vicissitudes of the European money markets, nor can the London banker grant credits to merchants 3,000 miles distant, whose position he imperfectly knows, without compensation for the extra risk. The business is, therefore, done at a disadvantage to both parties. The credit should be issued directly from the point where the importer does his business; and this would soon become the fact were banks to be provided possessing special adaptations for doing such a business.

Other functions proper to institutions of the character here suggested would be the negotiation of corporate loans, temporary advances to corporations, the receiving of corporate accounts, and the facilitation of corporate reconstruction. Banking for the larger corporations presents many possibilities of advantage to both banks and companies of which our existing banks cannot, as at present restricted, avail themselves.