Fifty years in Wall Street

by Henry Clews

Turning to the United States bonds pledged with the Treasury to secure the national bank notes, we all know that they are as good as gold, if not better, but still they are evidences of debt, and it is a false economic principle to issue currency on such a basis. Moreover, it is costly for the Government, for it practically and permanently prevents it, in the interest of the national banks, from redeeming the bonds deposited to secure national bank notes, out of its surplus income. Still it has great merit in giving us a safe and sound bank currency. Ultimately this system, born of the civil war, will be superseded by a better one, but this will doubtless be done in a manner which will not interfere with or impair vested interests.

Owing to the short time now left of this session of Congress, nothing more than the “Aldrich” bill can possibly be enacted at this time. Its simplicity is a recommendation to Congress. But, nevertheless, Congress should later pass a permanent currency bill, a bill which will settle every question as to the finances of the nation, at once and for a century to come. Such a bill is possible, and in fact it would be the simplest kind of measure for the Government to adopt—one to provide for just the kind of currency, and the amount of currency the business of the nation, the banks, and the people should have; one to provide for a perfectly elastic currency without creating the slightest depreciation of money or danger of loss to banks or Government. It should provide a perfect way of obtaining money to move the crops, and furnish an all-sufficient means of preventing or breaking panics. It should make the money of the United States still more current and acceptable in all parts of the world. This would make the nation greater in the eyes of other nations, and give the United States Treasury a proper command of the commerce and finances of the world, within ten years after being put into operation.

All the Government need do to effect such change in the finances of the country, and to acquire all such advantages for the Government and the people, in my opinion, is to wipe out the whole system of National Bank Currency, and give such banks, or any banks, Government currency direct, upon the same securities and such other kinds of securities as the Government is willing to accept, and permit the banks to increase or diminish the amount it obtains whenever the business of the banks requires it; every bank to do no more than give sufficient security for the money. The Government need do no more than to take the security and hand the bank the money. The Government should be paid for the use of the money a low rate of interest, say one per cent. No bank should be required to pay more.

The credit of the Government will be all sufficient for the credit of the currency, and every dollar of it would be perfectly secured by the security given the Government for it by the banks. The issuing of the money by the Government under this system would not injure the credit of the Government in the slightest degree. Banks should be allowed to increase or diminish the amount of money they obtain in amounts which can be decided by the law. Such a system would be satisfactory to all the people, except the national banks. These banks have been given the privilege of having their names on the money they issue long enough. The money of the banks has ever been Government money. The Government has promised to pay it if the banks did not, and has had the means of paying. Let the Government do as it should: issue all the money. Let it be circulated by banks which give proper security for it. Enlarge the means of securing the Government, by accepting State and Municipal bonds, or even Railroad bonds, to the extent of say 50 per cent, and Government bonds for the other 50 per cent.

The amount of additional business this change in the finances of the country would make the Government, would be no greater than any other change would make, and would be much less than what will be necessary if the present bill before the Senate is passed. All the great work and expense of settling up the affairs of broken national banks and paying off their notes will be stopped.

There would be no such things then for the Government to settle. The Treasury can be required by the law to keep all the currency issued for the purpose, that may be taken up, distinct and separate from all Treasury receipts from other sources.

The severity of the panic ordeal of 1907 that the New York banks passed through was reflected in the issue to them by the New York Clearing House, on and after October 22d, of, in all, a hundred millions of loan certificates, although the largest amount of these outstanding at any one time was eighty-four millions. This form of banking relief is purely American and has never been adopted in Europe. The maximum issue of Clearing House loan certificates in the panic of 1893 was $41,690,000, and in the panic of 1873 $26,565,000. But in 1893 New York bank deposits were only $400,000,000; in 1907 they were $1,050,000,000, exclusive of Trust Companies. The maximum of certificates in 1907 was reached in the third week of November, but the Clearing House banks showed their largest deficit in reserve—$54,100,000—in the first week in November. Simultaneously the loan certificates issued by the Boston Clearing House reached their largest aggregate, $11,995,000. It is noteworthy also that three powerful New York banks then held one-third of all the loan certificates issued by the New York Clearing House. One of these held $13,500,000; another $10,000,000; and the third $7,500,000. The obvious object of this was to enable the strong banks to loan a part of their cash reserves to weak associates.

The Clearing House Committee and the New York banks individually and collectively did splendid work in mitigating as far as possible the effects of the panic, while the Secretary of the Treasury, Mr. Cortelyou, rendered very valuable service by co-operating with the national banks to reduce the monetary stringency through large Treasury deposits and facilitating the importation of gold.

Mr. Morgan and several other private bankers also rendered praiseworthy service during the panic, and my firm did its part by loaning to the members of the Stock Exchange, at the most critical period, three million dollars at moderate rates of interest.

The New York Clearing House is a non-incorporated association, but its reserve is the foundation for an enormous amount of the country’s commercial credit. Of course, the banks and others holding practically unsalable collateral for loans, that the borrowers were unable to repay, were forced to help the borrowers and save themselves from loss by continuing to hold them through the crisis for a better market. There were many cases of this kind, particularly among the Trust Companies, and there has been much slow and careful after-panic liquidation of such collateral, and much of it has still to be done. It is, however, being facilitated by the decided improvement that has taken place in the market for first-class bonds.