Fifty years in Wall Street

by Henry Clews

The money that usually returns to the money centers is thus widely scattered and too busily employed to return. So we have to deal with a period of prosperity and industrial activity that is something more than normal. But—without referring to the heavy drain of cash for the relief of San Francisco, which was offset by gold imports—although money was scarce in New York, owing to this enormous activity and general prosperity that kept it moving from hand to hand, it was not scarce enough to justify the excessively high rates we often witness on the Stock Exchange. These were serious and hurtful, and to guard against such vicissitudes in our money market every member of the Stock Exchange and every banker and bank officer should use his influence.

How far the Chamber of Commerce Committee on the Reform of the Currency will succeed in providing remedies for the monetary situation remains to be seen. But from the twenty-seven questions it has sent to bankers and others it is apparent that it contemplates no fundamental change in our currency system. Inferentially, it will not interfere with United States legal tender notes, nor with United States bonds as a basis for the circulation of the national banks. Yet both bases are indefensible on sound economic principles. The issue of greenbacks was merely a war measure, and intended to serve only a temporary purpose; instead of which we have made it permanent, so keeping the Government in the banking business with its war currency system.

There can be no question as to the false bottom on which the national bank currency rests; for paper, that is, paper money, should not be secured by, or redeemed in paper, even when that paper is as indisputably good as United States bonds. All our paper money ought to be based on readily convertible assets and redeemable in gold. Bonds, even United States bonds, by which national bank notes are now secured, are only evidences of debt, and the time will come when these will be liquidated, and the sooner the better.

The committee probably thinks that the existing order of things, notwithstanding its fundamental errors, is too deeply rooted and strongly fortified to be materially changed without danger of the remedy proving worse than the disease. It consequently favors more national bank currency on the present basis. Branch banks and rediscounting for small banks by large banks are also favored. The committee’s questions indicate, however, that it favors the abolition of the Sub-Treasury system, and to that result it should resolutely bend its energies. At present the Sub-Treasuries are practically banks, like the old United States Bank at Philadelphia, with the important difference against them that all the money they take in remains locked up in their vaults till paid out on Treasury drafts. The evil effect on the money market, and particularly on Wall Street, of thus withholding money from circulation in periods of stringency has been too often felt. It was more than usually conspicuous and severe during the late tight money ordeal, owing to the Treasury receipts very largely exceeding its disbursements. This greatly aggravated the scarcity of money in New York, due to other causes, and resulted, in Wall Street, in the rates for call loans ranging at times, within the last six months, with rapid and eccentric fluctuations, from 15 to 30 per cent, and on one occasion touching 125 per cent. We have here a phenomenon entirely distinct from ordinary monetary conditions.

These extremely high and highly fluctuating rates are, it is true, peculiar to the New York Stock Exchange, but they are none the less a great evil, and they acquire national and even international importance from the fact that New York is the financial center of the country and the New York Stock Exchange the barometer of financial values for the whole United States.

However much our commanding position may in other respects fit New York to be the world’s financial center, it cannot aspire to and secure that position of power so long as it is the scene of these violent fluctuations in the rates of interest for call loans on the Stock Exchange. Measures should therefore be taken not only to prevent them, but to make their recurrence impossible; and how this can be best and most efficiently accomplished is a matter for very serious consideration.

That it can be accomplished is evident from the entire absence of any such violent rate oscillations in the money markets of Europe. There the rates of interest fluctuate slowly within a reasonably narrow range, generally between 3 and 5 per cent, the extremes being 1 or 2 above, or below, these figures. Such unreasonable eruptions in the money market as we have sometimes seen in the loan crowd of the New York Stock Exchange were never seen, and would be impossible, in London, Paris, Berlin, or any other European capital. Why, then, should they ever occur, or be possible here?

In response to questions propounded by the Chamber of Commerce Committee I would say that, as the Sub-Treasury system is a disturbing factor in the money market, provision should be made by Congress for the regular deposit in national banks of surplus Government money above its regular working balance of fifty millions, the banks to pay interest at 2 per cent per annum thereon.

Bank notes, in my opinion, are a form of bank obligation the same in principle as bank deposits, payable on demand, and these notes, as the most convenient form of credit, should be released as much as possible from restrictions not necessary to secure their safety, acceptability, and redemption in gold, or United States legal tender notes, for so long as the latter may be kept outstanding.

In seeking increased flexibility for our currency I would not suggest anything that would impair the value of United States bonds as a basis of circulation; but it deserves consideration whether new currency might not be issued by moderately increasing, above the par of the bonds but not above their average market value, the amount of notes to be secured by them. Then, too, why should not national banks be authorized to issue a fixed proportion of circulating notes upon their general resources, these to be secured by a guaranty fund? To induce the retirement of these notes when not needed, owing to money being superabundant at low rates, this asset circulation could be made liable to a graduated tax. The proportion of notes to capital that should be allowed, and the amount of the tax, are matters upon which bankers differ, but I favor strict moderation in both. This asset currency, under moderate restrictions, for use under ordinary conditions, would be far preferable to any emergency circulation, ISSUED UNDER A HIGH TAX, although Secretary Shaw recommended it in his report for 1905.