Fifty years in Wall Street

by Henry Clews

For the rates of interest to be leaping wildly up and down, in the loan crowd of the Stock Exchange, and changing violently every few moments, according to the shifting bids and offers of the excited borrowers and lenders, would seem to be absurd and laughable enough for opera bouffe. But in the banking and Stock Exchange business it is a serious evil, involving large results.

Such an abnormal money market is, of course, not very often seen, but it occurs often enough to make it important for us to study its causes and seek a remedy for such monetary excesses. It is indeed a topic so serious as to call for the gravest consideration. Yet neither the stringency nor these minute to minute, or hour to hour, fluctuations were caused by any fluctuation going on in the volume of the currency or any except local influences.

What we have to guard against and prevent is these occasional spasms. Against the slow general rise and fall of interest rates for money of from, say, 2 to 6 per cent per annum and vice versa, there is nothing to be said, for the movement is a legitimate one, a natural result of the varying supply and demand. We see it in the Old World, as well as the New World, but such rocket-like soarings, and such eccentric ups and downs as Wall Street has experienced from time to time, are peculiar to itself. It must, however, outgrow them, and the sooner it does so the better. It is not my purpose in this address to show how the end in view may be best accomplished, but that it can and will be accomplished within no long time is certain. The fault is not so much due to the want of elasticity in our currency system as to our local methods of doing business in stocks and lending and borrowing money to carry them.

The causes of general monetary stringency are always apparent, but the cause of the local scarcity of cash that sends the money rate up 5, 10, 20 or even 50 per cent in an hour or so among a small group of borrowers and lenders in the Stock Exchange, could evidently be avoided, as it is in Europe, and it is the business and duty of both borrowers and lenders here to avoid it.

One thing tending to produce occasional local stringency is that our money market has to contend with the evil effects of the New York Sub-Treasury, or rather the Sub-Treasury system, that locks money up that ought to be kept in circulation. Every Sub-Treasury acts practically as a Government bank, just as the old United States National Bank in Philadelphia did, and takes in all the money it can get, but pays out none, except on Government vouchers. So it does not perform all the functions of a bank, and we should have a more elastic currency if the Sub-Treasury system were abolished, which it doubtless will be in time. Theoretically, we have no United States National Bank, yet practically we have one in every Sub-Treasury. Until Congress amends the Sub-Treasury and National Currency laws, the banks and trust companies could by a united understanding prevent extreme money rates, by agreeing not to charge in excess of 10 per cent interest; or, what would be better still, 7 per cent, on call loans during periodical money strains. While they would lose some immediate profits, they would be abundantly compensated later on by making New York a greater, safer, and stronger financial centre, which would materially increase their business.

In Germany, emergency currency may be issued by the banks in times of stringency. This, in effect, releases them from the limit on reserves, just as, in panics, a Government order in council releases the Bank of England from the limit placed on its note issues, and allows it to issue its notes to an unlimited extent. The consequent inflation of the currency under both the German and English systems, and the revival of confidence produced by it, brings relief in the money market.

But our only way of obtaining similar relief is for the Secretary of the Treasury to order Treasury deposits to be made in National banks on the security of United States bonds, or if he is willing to accept them, first class State or city bonds. Assuming the banks to have the bonds, the Treasury may not always have the money to spare for this purpose beyond its proper working balance, and at the best it is a make-shift expedient.

That we need a more elastic currency is indisputable, and also such changes in our custom of borrowing and lending money on collaterals on the Stock Exchange as will secure stability in rates of interest there, even in times of stringency. The time will come when the circulation of the National banks will be based on gold, instead of United States bonds, and in that way our monetary system will more closely approach that of the principal European nations. But we need not prepare to cross the bridge until we come to it.

With regard to the other matters referred to, it is always well to strike while the iron is hot, and at present the reform movement in legislation affecting life insurance and banking concerns is at white heat, not only in the State of New York, but elsewhere, and it should be pressed forward until all the results aimed at are secured.

In the first place, to accomplish this the life insurance and bank investigations already in progress, or proposed, should be carried out to the fullest extent, and, through the employment of expert and independent book-keepers and accountants, made so thorough as to leave nothing hidden or in doubt. The results in detail should then be promptly published, and in a form that all could understand, so that the public would know the plain, unvarnished truth. In this way rumors and suspicions of underhand doings, bribery and corruption, graft, fraud, deficiencies in accounts, misappropriation of funds, and concealed insolvency, would, if not confirmed, be contradicted and swept away, thus leaving the concerns before under suspicion in all the better credit and standing.