Fifty years in Wall Street

by Henry Clews

As the taxes collected upon the circulation of national banks from 1864 to the end of June, 1905, amounted to $96,220,997, and the failed banks, during that period, had outstanding only $17,295,748 of notes, and the dividends paid on their claims averaged 77.95 per cent, it follows, at the same ratable proportion of loss, that the deficiency on account of their notes would have been only $3,813,712, or 22.05 per cent of their total circulation. So in the light of this experience I see no great risk in a guaranty fund, consisting of the taxes paid upon circulation, nor do I see why it would not be sufficient to redeem all the notes of failed banks.

I would make the asset currency a first lien upon the assets of the issuing banks, and allow the banks to redeem their notes at appointed redemption places in the large cities. This would save the trouble and delay of sending them to Washington, and by facilitating redemptions when money was easy, give more ebb and flow to the currency and tend to prevent excessive speculation in times when there is a glut of money. Under the Canadian banking system there are several central redemption cities for bank notes; but I would not, as is the case in Canada, limit the right to issue notes to banks of not less capital than $500,000. There is safety in numbers, in regard to banks as well as other matters. Then, too, it would be well to make all the Sub-Treasuries in the country useful as national bank note redemption points, because it would contribute to the elasticity of the currency in the same way that it does in Canada, and doubtless Congress would favor such a measure.

The proposition to establish a new bank in Wall Street with $50,000,000, or even more, capital, or to increase the capital of an existing bank to that extent, to serve the purposes of Stock Exchange borrowers, and regulate rates of interest, after the manner of the Bank of England, is deserving of no consideration whatever. It would merely excite and provoke the jealousy and opposition of other banking institutions, and create a sort of monopoly with special privileges, without securing the end in view. A Bank of Banks is not what we want, nor do we want a revival of the old United States Bank.

Such a bank as the Bank of England, or the Bank of France, could not be created here, either in a day or a generation, for those time-honored institutions are the growth of ages. They are very much older than any of the other banks there; and, under the control of their respective governments, they have grown up with their countries and become practically, although not by ownership, government institutions. Hence their prestige and power, and the impossibility of other banks superseding them.

It may, however, deserve consideration whether the New York Clearing House might not exert power in regulating rates of interest similar to that exercised by the Bank of England, providing the banks belonging to it would unite to give it that power; and is there any reason why they should not? Even without any formal or concentrated action in this direction, outside of the Clearing House Committee, it could appoint a committee to name every week, or oftener when necessary, as the Bank of England does, a minimum rate of interest on call loans and discounts. It could also fix a maximum rate for each. This need not be compulsory; but even only as a recommendation it would have a powerful moral effect, and the Wall Street banks, if they approved of the innovation, would conform to it. The Clearing House could, indeed, after the formal approval of this regulation by its members, enforce its observance under penalties, if deemed necessary. In this alone, in my opinion, a practical remedy would be found for the high rate evil on the Stock Exchange.

But, at the same time, greater elasticity could be given to our national bank currency if Congress would amend the law so as to permit of currency being issued against specified bank assets, subject to the approval of the Comptroller of the Currency. This is a feature of the banking system of other countries, which has always worked very well and to the satisfaction of all interests; and what our currency urgently needs is greater elasticity.

Strictly speaking, according to economic principles, we cannot expect a perfect currency, with all the resiliency and elasticity possible in a currency, so long as bonds instead of gold are used as the basis of our bank circulation. Yet for security the bonds are, under present conditions, just as good as gold; and there would be more elasticity in the bank circulation based upon them if the restrictions imposed upon their redemption by the Act of 1882, which are now unnecessary, were removed. Indeed, the inability to promptly retire bank notes is one of the worst faults of our system, and Congress should repeal the restrictions without delay. If this obstacle in the way of resiliency were removed, and the unlimited retirement of bank notes permitted, we may rest assured that free expansion, when demanded, would quickly follow curtailment, and this ebb and flow of the currency would obviously be an elastic movement.

As it is, there is a great waste of banking power in our treatment of national bank notes and reserves. We have $544,765,959 of national bank notes, and only $337,130,321 of United States legal tender notes, and, setting gold aside, the redemption of the former in the latter is obviously absurd and inconsistent with sound finance and good banking. We see in the present system this $544,765,959 of banking capital absorbed and represented by non-reserve currency. The capital is perfectly safe, but it is locked out of any other use, and rendered inefficient for any other purpose. This calls for a remedy. The percentage of reserves to loans in national banks has decreased from more than 20 per cent in 1898 to less than 15 per cent. Hence the bank reserves require to be increased.

The law relating to the redemption of national bank notes in United States notes, or greenbacks, was passed when the greenbacks very largely exceeded the bank notes in amount, but the reversal of these conditions reminds us that the tail is now wagging the dog. This alone makes it clear that the law should be amended.

But beyond all this we should open our money market more to the rest of the world by establishing a new factor, which would always afford prompt relief in times of stringency, by giving us cable transfers of gold, instead of gold shipments, and of itself prevent abnormally high rates. Through this medium we could, instantly, practically draw gold from Europe whenever wanted, and Europe could do the same from us, when needed there. I refer to the establishment of an International Gold Transfer System, or Clearing House, to supersede and dispense with what I may call the old-fashioned gold see-saw. Gold in circulation is doing good work, but gold see-sawing across the ocean is going to waste. The custom of shipping gold from one country to another, in response to the ups and downs of the market rates for foreign exchange, not only reminds me of the forward-and-back movement in a quadrille, but suggests that, as the precious metal is rendered practically useless while in transit, it should not be used in a dance of that kind across the ocean. The subject may not seem to be very important, but it really is so, for “tall oaks from little acorns grow”; and it is surprising that in the march of modern improvement this method of settling international balances has not been superseded by a shorter, quicker, and cheaper cut to transatlantic adjustments. Bankers, in both hemispheres, are absurdly behind this progressive and electric age, in transporting gold from the New World to the Old, and vice versa, to adjust balances between them, whenever the rates of exchange show a profit in the transaction. That they could profitably dispense with it is obvious, as they could easily establish this transfer system, this international clearing house for gold, at very small expense. Thus the risk, and loss of time, involved in the old-fashioned method would be eliminated, while the new arrangement, being under their own control, would beyond peradventure serve every necessary purpose of the shippers, combined with perfect safety.