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Me. ro.k 1*609 usa r.^ ('16) 482 - 0300 - Phone ^^ (^16) 388 - 5989 - Fo. ■ 4J,7. ABNORMAL, AMERICAN i WALKER __.^ ABNORMAL FEATURES CF AMERICAN BANKING. ADDRESS BY B. E. WALKER, PRESIDENT OF THE CANADIAN BANK OF COMMERCE, Given at the Mertisg op tub American Bankers' Association, Denver, Colorado, 30tii September, 1U()8. Somebody once said to a celebrated English statesman, renowned for his clear perceptions of all economic subjects, "I suppose you understand all about the currency"— to vfhich the reply was, " No, indeed I do not, but I believe there are people who do." Most of us are willing to admit that the currency is a complicated mystery. We may feel sure that we can trace the effect on the general financial situation of this or that particular factor, but we have to confc':, that we cannot balance the effect of all of the factors and state clearly, even after a panic, what has caused tlie disturbance and v,rhat we must guard afainst in future. But when we consider the currency and banking system of the United St'ites, and remember what we have experienced in the panics of 1873, 1890, 1893 and 1907, we need not hesitate to admit that somsthing is radically wrong, whether we can agree either as to the disease or as to the remedy. I have ventured by my title to suggest that there are abnormal features in United States banking, and this presumes that banking can be reduced to norms, and that aberrations therefrom can be demonstrated as such. I am not sure, however, that many clear principles in banking can be set out which are applicable everywhere. As a rule the banking and currency of a country have been inter- cepted in their natural development by the effect of war or by unwise creation of public debt, and, unfortunately, some- times by the mere ignorance of legislators. When the natural trend of the banking o'. any country has been thus thwarted, time usually brings about, either by direct reform or by artificial compromises, such adjustments as are necessary to make the banking system reasonably useful to the country which it is supposed to serve. In naming the prominent causes of deflection I placed ignorance last, but perhaps it should be placed first. As the great English statesman hinted, few understand the currency, and the country which in its constructive period possessed an.ong its citizens a genius who among his other great deeds as soldier and statesman was determined to restore the dis- ordered finances of his country and to set in the right path for the future the great industrial agency of banking, was un- usually fortunate. Such a country was the United States at the close of the eighteenth century, and such a citizen was Alexander Hamilton. He doubtless knew little about cur- rency and banking when he began, and we can almost see his mind turning, in the weltering confusion of the time, from one expedient to another in order to find a course which was sound financially and at the same time suited to the poverty of a country possessing a depreciated currency and no capital with which to create banks. He had about him the two usual types of advisers— those who were willing to try any course of reckless folly in order to escape from the present evils; and those who, while bewailing the evils, were unwilling to depart from the narrow- est course of safety. This second class we have always with us— men only too ready to criticize, to point out dangers they are too timid to face, but never ready themselves to suggest a remedy for the evils to be dealt with. There were happily in those early days a few men of courage, sanity and intelli- gence in finance besides Hamilton, such as Morris, Gallatin and others, but the man of distinctly constructive ability was Hamilton. It does not seem to be material that some of his views regarding finance have been shown by time to be unsound, or that he was trying not so much to discover the abstract principles of banking as to mend the broken fortunes of both state and individual by trying to .'itablish banking and public and private credit on a sounder basis. I'nfortuii- ately— very unfortunately in my opinion— there was a line of political cleavage of vast importance, which influenced pro- foundly the discussion of banking then, and whi.h still re- mains the fundamental dif!icult\ in the path of reform. Hamilton strove with all his mighi r everything which would make a strong central power, h. .teing unable to conceive how a great nation could otherwise be created. The extent to which the thirteen units of government then joining in the United States should retain or give up their powers of government was a matter of compromise, but, I fancy, Hamil- ton would have approved of the plan we adopted in Canada in 1867 — that is, to give the Provinces certain powers and reserve all other phases of sovereignty for the Federal Govern- ment. Among the powers possessed only by t!ie Federal Government in Canada is that relating to banking; but in the nascent United States the thirteen States already pos- sessed many small banks and besides this the fear of the con- centration of power of any kind was widespread. Apart from these obstructions to a sound course, the country did not possess the capital with which to create a great industrial bank. The fear of partial ownership, including the control of the stock, by the state, existed among manv, very rightly I think; and the fear that a great bank of which the control was owned privately might fall under the power of foreigners, perhaps of England, was certainly natural enough at that time. In the midst of such difficulties the first Bank of the United States was founded, hut in a few years, and while, as we can now plainly see, it was doing its allotted work very well indeed, it was strangled by those wt.o favoured the small banks. Almost immediately the second Bank of the United States followed, only to meet a similar fate at the hands of Jackson. Thus for the second time a system of banking which might have made the ountry strong to meet financial emergencies, which tended already to make the va-'ous scattered parts of the country cohere in commercial matters, which was rapidly creating credit in Europe, and which with all the inevitable faults of youth was performing the function! claimed for it remarkably well, was destroyed in favour of an incoherent system of individual state banks. I am a foreigner, but as five of the establishmints included in the bank of which I am President arc situated in cities of the United States, I hope you will not regard me as a foreigner for the moment. There are very tew banks in the whole country who have a larger interest in the soundness of your banking and in your freedom from panics than my own bank. Remembering my peculiar position, I am particularly desirous not to wound the susceptibilities of any of my hearers, but I hope it is safe to say that Alexander Hamilton was clearly the leading intellect in that wonderful group of men who framed the constitution. At a time when few men could withstand the onrush of new ideas, largely visionary and false, which accompanied the French Revolution, Hamilton was unshaken in his clear vision as to the future of his country, and few will deny that where you followed his advice -oii did well, and where you opposed it you did not alwavs act wisely. It miiy be argued that neither of the two Banks of the United States were so admirable in their careers that we need sigh over their removal, but we can only judge them by comparison with the smaller banks of the same period. In your colonial and revolutionary times you had a curiously full and varied experience in banking and currency. Fiat money, depreciated coinage, currency based on land, clamour by debtors for cheaper money with which to pay debts, were all amply experienced. In the following period, contempor- aneously with the first and second Ba.iks of the United States, you passed through a time largely of mania in banking; a time when history was recording for this country such fundamental facts as that banks cannot establish a capital fund merely upon the promissory notes of shareholders; cannot put bank-notes into circulation even by the ex- pedient of sending them far from home before issuing them, without considering how they are to be redeemed; can- not lend money on land, or lock it up in other wavs, and also have it again when the bank's debts, exigible on demand, Wl to be paid. Indeed it was a time when cvirv vagary in unsound banking was being tried. But Hamilton, from some of these experiences and from European history, planned for you a banking system which contained much oi what is good in the successful systems of the worUl. Vou would not, however, have his system, but preferred to repeat in each new district, from east to south and west, wherever debt and ignorance combmed to create banking and currency, the same errors which make such startling history in the early part of the nineteenth century. Is it not time tor us to put aside that silly vanity to which democracies arc inclined -that it is better to try our own experiments and to ignore history? Unfortunately the apparently brand new experiments we are willing to try have usually occurred to others in the past, if we had but patience to discover the fact. I may as well at this point admit that I have nothing new to say. I am merely trying to put facts and arguments made many years ago into a new form. We are dealing with a case where the patient has immediately after e.- i serious illness exclaimed: "What shall I do to be saved has repeatedly been given good advice by the experts ol nis own country, and has never yet in any particular acted in accorrlan^e with such advice. What ->eems to be necessary is not so much d suggest means of reform, as to induce the patient to beli< firmly, once and for all, that if he persistently neglects : remedial measures the next attack may leave him in a state past aM aid. Any purpose I have in reading this paper will be amply served if I can for one brief moment lav emphasis upon the disagreeable fact that whUe reform in the banking and currency systems of the United States is absolutely necessary, there is no probability whatever that any substantial reform will take place at the moment. The profound line of cleavage which made it so difficult to create the first Bank of the United States, and which de- stroyed it and its successor, still exists. It lies between those who favour a system of banking good for the nation as a whole, as opposed to a system of banking whir.i may be right or wrong for the great number of units engaged in the business of banking, but which is clearly not right for the nation as a whole. It is not possible in the short time at my disposal to review all of the features in the banking of the United States in which the obstacle to reform lies mainly or altogether in the existence of numerous small banks, but with your permission 1 shall take up a few of the leading features. RESERVES. Most prominently I would place the so-called fixed re- serves—the attempt by law to fix the minimum percentage of cash to be held by each bank against its liabilities. The real reserve requirements of any particular bank differ from those of other banks in accordance with the nature of its obligations as compared wiih theirs. It is conceivable that the ideal point at which cash reserves should be kept would be different in the case of any ten or twenty banks v^hich you might select for comparison even in the same city or community. The bank which acts mainly as a banker for other banks needs very large reserves indeed. A bank in the same city doing mainly the business of manufacturers, merchants, exporters, etc., will need altogether smaller reserves, and a bank gathering the savings of a quiet country community needs much less again. The law attempts to recognize these facts, but is evidently unable to do so except in a most imperfect manner. Clearly each bank, if it could be trusted to have sufficient intelligence, should be the judge of the reserves it should keep, and it seems safe to say that if you had continued to create large banks with branches, instead of thousands of small banks, the attempt to provide wisdom by law would never have been made. You wou;d doubtless have done as all other nations have done, and not have been an exception to so general a rule. If the wrong done only resulted in causing some banks to keep more reserves than they actually required, little would need to be said ; but, as has been shown, the law can be so worked as to provide reserves quite too small, and experience shows that banks as a rule choose to keep reserves larger than the law requires. The defect in the law, however, is that by arbitrarily fixing the minimum reserves which must be always in hand, it practically forbids the use of the reserves for the very purpose for which they have been created. The law under- takes to supply that wisdom which it presumes the thousands of bankers do not all possess, and to lay by for them against the ramy day the provision which it presumes they would not be prudent enough to make. But who is to supply the wisdom demanded by such authorities as Walter Bagehot, who says that in a panic the sound banker should lend to the bottom of his box? In times of peace the wise prepare for war, but when war comes the army is flung into the field, not still held in reserve. The law, however, having forced the sequestration of so much cash and cash resources against the day of trouble, provides no means by which, either under its own wise and paternal direction or at the discretion of the bankers unaided by the wisdom of the law, the cash thus provided may be used to avert disaster. I do not wish to be understood as claiming that the present law should be repealed and the thousands of individual banks be left to do as they like. I presume it is true that they cannot be trusted, and that because of the folly which de- stroyed a more natural system of banking you have con- demned yourselves to submit to a paternalism which fixes your cash reserves for you. But I urge as one of the great evidences of the unnaturalness of your system of individual banks the fact that they cannot be trusted to take care of their own reserves, and that no law has been devised which will act the part of Providence for them. I do not maintain that where the banks are larger relativelv to the country, as in Canada, they are always wise enough to keep sufficient reserves. It is, as we know, a subject much discussed in many countries, and it would be well indeed if banks could in some way be forced to keep larger reserves, provided there be no interference with the use of these reserves when the hour of danger arrives. Everybody admits the mischief created in the United States from the inability to use legally the reserves for the very purpose for which they are held, and I do not remember that anyone has suggested a better remedy than that which takes place in every panic, viz., the breaking of the law by simply not maintaining the reserves. But through the press the public is kept keenly aware as to the exact point in the New York reserves below which the use of them will be illegal, and thus the panic is increased by the very attempt to get at the cash necessary to allay it, while under any ordinary system the panic could probably be averted altogether by a wise use of the cash in hand, instead of being allowed to reach a stage where it can only be stopped by almost superhuman efforts after it has run part of its course of ruin and disaster. I think that the statement on the opposite page will show that almost every panic since the war could have been pre- vented or arrested early in its course by the natural use of only a reasonable part of the actual cash in hand. CLEARING HOUSE CERTIFICATES AND RE-DISCOUNTS. In order to avert panics, and also in order to avert the failure of an individual bank with sound assets, something more may be necessary than the unrestrained use of the cash and quick assets in hand. The ability to re-discount should exist somewhere within reach. The great banks of a country should manage so as not to require such aid, but small banks in most countries require it from time to time, and not merely at the moment of a panic. Under ordinary conditions a bank in the United States requiring to re-discount some of its paper can do so, but if there is any financial strain all bankers, big and little, begin to button up their pockets and re-discounts soon become nearly impossible. Indeed, instead of the banks in the great financial centres, where alone the power to aid could be expected to exist, being able to help their country friends, some of them are soon unable to get along without aid from other members of their own city clearing-house. But there are almost no banks of suffi- cient national importance to feel the necessity of aiding directly their weaker brethren, whether it is convenient to do 8 to O o s o Ed >] O Ui o 2; S S S ! to S kS 2. * > — ' o r» o S CO C4 ii di •» E tj. ! V £ S J s .S g a K ■a ^ I a s e5 g °>S CM ocfl o « ?^ ■= = » ? = S 0) S u Mi so or not, and thus the clearing-house certificate came into use. It is not only a splendid tribute to the genius of the American people for organization, but so long as its use is between banks alone it is a perfectly natural and a most effective plan for allaying a panic that has once been created. It could also be made an instrument in connection with a proper use of reserves, to largely avert panics, if only some wise autocrat could be entrusted to decide when clearing-house certificates should be issued, but as to the moment of necessity there is never likely to be unanimity of opinion so long as the decision depends on the judgment of several bankers. And therefore the illegal use of the cash reserves and the issue of clearing-house certificates must always come too late to pre- vent the panic. They nay alleviate and cure, but they are not available to prevent. Still they are such a natural and efficient means of making the banks who have abundant reserves help those who have not, that we may expect to see clearing- house certificates or something closely akin to them in other countries where there is no great state bank to whom smaller banks may go with some show of right. Until the latest panic these loan certificates were only issued in the largest money centres, but on this occasion they were issued by fifty-one clearing-houses, and doubtless in the course of future panics they will become practically available to every bank. The wide extension of their use, however, raises a new question. Used in the real m'^ney centres and issued only in large blocks between banks they remain what they were intended to be, mere loan obligations assisting banks to build up their reserves, and also enabling them to make additional loans to customers who but for such aid might fail. But the extension of their use to numerous cities and towns where actual cash supplies are nearly ex- hausted, and the issue of these loan certificates in small de- nominations to the general public as currency, in open defiance of law, while creditable to the ingenuity and audacity of the American people, are new features of an alarming charac„/. There are dangerous expedients we praise ourselves for re- sorting to when heroic action is necessary for the general safety, but which are little better than crimes if thev are repeated. An able banker* has referred to clearing-house certificates as an "emergency circulation," and as an "asset currency" that even he would approve of. I think much mischief will arise if these loan certificates are ever generally regarded as anything other than what they were originally— a species of re-discounts between banks. Currency, to be such, should be available between the banks and the people, and should surely be legal whether it is wisely issued or not. But before leaving the subject of clearing-house certi- ficates let us consider how their use, and volume, and abuse, are affected by the existence of thousands of individual banks instead of a comparatively few large banks with branches. Whether we have one system or the other the actual cash will accumulate largely in the few great monetary centres. In the case of individual country banks the cash not needed at home goes to their reserve agents, while in the branch system the series of branches of any one bank are practically one clearing-house with a settled tendency to accumulate actual cash beyond the mere necessities of the till in the money centres. While .stained in these centres, the cash, except to the extent of the reserves, will be employed in some manner so as to earn interest. Now, the extent of the reserves necessary on the one hand and the extent to which the surplus funds may be lent on the other is a matter of experience in both systems, but the experience is very different indeed. If we take as examples a bank in a reserve city with one hundred banks as correspondents, and a single bank in another country with one hundred branches, we can readily see the difference. In times of strain the one hundred branch managers do not ask for cash from the head office unless it is actually needed; on the contrary, the moment contraction if loans begins they are a source of strength to the head office. The credit affected and the thing to be managed is one organ- ism. Within this organism fear of each other by its compon- ent parts will not enter, and whatever courage its executive p.t.7"''°7 '^1 I'"'"'. "P«fri"g-Houle Ccrlificates •nd the Need (or s Central Bank.' —Annali Am. Atad. Pol. and Six. Scinta, March, 1908 >-eniral possesses wUl actuate every part of the organism. But in the other case there are a hundred organisms and no cohesion, except that, the skies being bright, all will cohere somewhat, not with each other, but with the one bank in the reserve city. And if the skies are overcast we have a hundred utterly selfish organisms all concluding that their balance with the bank in the reserve city would be better in their own vaults; in any event they would sleep better if it were there. And so we have the extraordinary spectacle which accompanies every panic in the United States of each particular one of the thousan<'s of banks trying to stand alone, except to the extent that the clearing-house certificates have made them cohere. Almost every bank wishes to withdraw its balance with other banks, and as this is an absolute impossibility, the panic reaches its crisis, currency payments are suspended, all currency is hoarded and passes to a really large premium, and the ingenious expedients to which we have referred, whether legal or not, are made use of with that general concurrence by the people and the banks which only exists in the face of a great national danger. The great national danger is that the panic may cause national ruin. But what is a panic? A widespread fear without cause. In most countries financial panic is caused by fear on the part of those who are not a part of the national finance— who are not bankers and such. But in the United States, whoever may start the panic, those who accentuate it most are the thousands of individual banks by their distrust of each other. We speak indignantly about the private individual who draws his deposit in currency and hoards it. But in time of panic the most active agency in drawing out currency and hoa: iing it, is the country bank. And it is not the fear of the failure ot banks, but the fear of the disappearauce of currency, which aggravates panics and brings about disaster and terrible reduction in values. To sum it up, it would appear that the same elements which in the United States cause panics of the most ruinous character would not be apt to cause panic at all in better regulated countries. In such other countries, firstly, the reserved cash would be instantly avaUable; secondly, the banks would not be likely to fear one another, but would cohere in meeting any panicky feeling on the part of the public ; thirdly , the power of re-discounting or of issuing clearing-house certificates would need to be used to but a small degree if onlv the demands of the public had to be met and not the demands of thousands of radividual banks; fourthly, with these things assured and a reasonably flexible currency, no stoppage of currency pay- ments would be likely to arise. THE TREASURY SYSTEM. FlexibUity in the use of cash reserves, in obtaining re- discounts, in distributing Treasury balances, and in the issue of bank currency, still seem the main features to be discussed I have little to add to what was said years ago regarding the Treasury. Then it needed some courage to say it, but now even a Comptroller of the Treasury, writing early in 1908, does not hesitate to sum up the whole evil in the following frank statement:* "But look at the situation. The United States Government has collected from its people $245,000,000 surplus, above its necessary expenditures, and in order to restore this money to circulation and repair the damage done to business by its withdrawal, has had to deposit $222,000,000 with the national banks; and when the supply of Governinent Bonds gave out, has had to accept various other bonds as security." And in the same connection he says of Secretaries Gage, Shaw and Cortelyou, that "they are all entitled to the highest praise and commendation for what they have done to make the best of bad situations, with antiquated, complicated and cumbersome faculties, often little better than mere make-shifts." But why not face the fact that the present Treasury system was created because of the destruction of the system of large banks in favor of the system of small banks, and would never have existed otherwise? Under the present system there is no one bank and no scries of banks to whom the United States people, as they are represented by the Federal Government, can entrust their balances without '3 very complicated arrangements, including the deposit of security. Whatever may be the remedy, in the meantime we must add the Treasury system to that list of abnormal features which this country has to bear because of its thousands of individual banks. BANK-NOTE ISSUES. The fourth main element in banking in which flexibility is necessary is bank-note issues. This has become a hack- neyed subject during the last fifteen years or more, but indeed it has never been long out of the arena of discussion regarding banking in this country since early colonial days. The currency, as we have said, is a complicated mystery, and for that reason it has a strong hold upon the imagination of the average man. But in addressing an audience of bankers it might be well to avoid the broader definition of money, and to try and separate the credit instruments usually issued by banks and passing as money, from metallic money, paper money representing metallic money, and paper money based on the debt of a government. The species and quantities of money current in the United States on ist August were approximately as follows:— Gold Coin and Bullion 8811,541,020 Silver Dollars 79'.303!982 Sub.sidiary Silver 147,005,385 Gold Certificates 818.758.869 Sliver Certificates 484.054,000 United States Notes 346,681,016 Treasury Xotes of 1800 4 993 000 National Bank .Votes 692,088!991 $,!,384,336,263 K„lliL'"'/^"i' '^'[f"„"''°r,j° "t ',Tl"^.J *" ^l™"'!'"' amount of gold coin ud bullion and silver dollars held in the U.S. Treasury as a redemption fund for the sold *»ro,'.vi',"Ne',rY"kT °»'"*""""«-''r»^™ '">» ''*• C you have become used to a system which requires practically no redemption, and with so many thousands of banks you do not quite know how, or you are not quite willing to take the trouble to establish the complicated machinery necessary to effect such daily re- demption. ' Tl he issues proposed are credit-notes, while National bank-note, are not. and that they must be subjected to actual daily redemption, while National bank-notes need not, should never be lost siRl.t of for a moment. One of the greatest elements of safety in such issues lies in the fact that having performed the credit service required they will immediately come back for redemption. But some of you will ask how with thousands of banks can you prevent a bank in Kan- sas arranging with a bank in Oregon to circulate each other's notes so that the volume kept out would be increased by the geographical distance on the one hand, while the difficulty and expense of returning for redemption would be made unbearable on the other? Clearlv by organization you could prevent this, but it is rendered so troublesome by the many thousands of banks that you doubtless will not do so. But again it seems that the obstacle to flexibi ity in your currency also lies in your thousands of individual banks. CENTRAL BANK. There are practically only two directions in which those who desire reform are looking for aid. These may be summarized as follows:— (a). Plans differing in detail, but looking to the creation of a credit-note system of bank currency based upon the assets, somewhat similar to that in use in Canada, although much more restricted in the extent of the powers or franchise to be granted. (6). Plans differing in detaU, but looking to the creation of one centra! bank, which alone is to have the franchise of issuing credit-notes. i8 In the most comprehensive form which I nave seen, the pro- posal to form a central bank sets out the following features —• 1. A capital of say 1100,000,000 to be invested in Govern- ment Bonds. 2. The shareholders to be National banks, and possibly also. State banks. '' 3. To issue its notes, say for $300,000,000, in exchange for gold provided by the banks who become shareholders. 4. To be authorized to issue additional notes up to say $600,000,000, provided a gold reserve of at least 33i per cent, of the whole issue is maintained. 5. The central bank to use its powers of lending merely by re-discounting for or lending to the other banks of the country. 6. The shareholders to be represented by a board of directors elected by territorial districts. 7. The Government also to be represented in the direc- torate by officers of the Treasure- Department. Among the merits claimed for such a central bank are the following : — (a). It would remove the nuisance of the Treasury and cause the balances of the Federal Government to be available as lending caj^ital when necessary. (b). It would not, like the two banks of the United States be a rival to other banks, because the latter would be shar holders. This, however, would require that every ' ank created hereafter should have the same right to proportionate shares as those taking shares at the inception. (c). It would probably prevent such a lack of currency at any one time as to cause panic. {d). It would to some extent create that necpssarv co- hesion among banks in time of trouble which is now almost absent. (c). It would steady credit so much as to set the pace of confidence among the smaller banks. 0')- It is alleged that because of the territorial directorate ajid notwithstanding the presence of Government officials oii Pd'STsS'fZ^-.ll^Ci^' '>•-'' »' ' C.n.r.1 B.„k.. >9 -i4ifmj;i Am. Aead. the board, there would be no reason to fear that politics might control the working of the bank. Among the defects of such a system which have been or might be urged are the following: — (o). The possible customers of the central bank would consist of eight or ten thousand banks,* who would also be the shareholders. It would be necessary to satisfy these custom- ers that the favours of the central bank were distributed fairly, and especially fairly as to geographical sections of the country. This would make it necessary for the central bank to know the credit status of each bank and of each customer of each bank, or at least of those customers whose paper might be offered for re-discount or who might require a loan. It is quite true that the number of banks out of the eight or ten thousand requiring re-discounts or loans might be very small relatively, but that does not alter the quantity of knowledge necessary, as it would be impossible to tell in advance who might at any moment apply for such accommodation. And if for the soundest reason a re-discount or loan were refused, discontent would be apt to result. No central bank elsewhere in the world is called upon to perform such a task, and I fear it is impossible of satisfactory performance. (6). It would also be absolutely necessary to keep the customers permanently convinced that no political influence could be used to favour one customer as compared with another, or one district as compared with another. Now, it might be quite possible to keep political influence out of the management of the bank, although surely no one can feel certain as to this, but can we believe that in a country where party strife is so keen, the customers of the bank and the people will remain continuously convinced of this fact? (c). An argument against such a central bank, which perhaps will appeal more strongly to a Canadian than to an American banker, is that as the central bank may not have any customers except banks, it can do nothing to change the state of affairs now existing because of which a large borrower •The total number of banks is larger than the fifrures here mentioned; there are probably fifteen or sixteen thousand banks including all classes. may have either to keep a discount account with a great number of banks, or to sell his paper to sometimes as many as fifty or sixty banks, or even more, through the medium of a note-broker. This clumsy manner of borrowing not only prevents that close intimacy between a sound borrower and his banker which, lasting over a series of years, tends so much to create firmly cemented credit relations, but it undeniably has often caused perfectly solvent American merchants or manufacturers to fail — a thing which in other countries would be regarded as reflecting on the banks of such countries. (d). Another argument which would appeal to Canadian banks and to all other bankers engaged in financing the export and import business of the United States, is that the central bank, having no customers except the banks of the United States, could do little to build up the foreign exchange busi- ness, which is still done mainly by bankers other than the National and State banks. Now that you own the Philip- pines and the Hawaiian Islands, now that your foreign trade is increasing so rapidly and, should your tariff be lowered, will increase much more on the import side, surely the need of great banks in the United States capable of establishing large banking connections with other countries, and capable of doing a large international business themselves, is obvious. (e). When all this is said, however, there is little doubt but that a central bank, if wisely administered, would be an improvement upon the present conditions, but if the temper of your people will permit such a departure from your present system, there are surely better plans for the permanent reform of your banking. A recent writer, who is strongly opposed to centralization of power as opposed to "states rights," puts his main objection to a central bank in the following significant words ;* " In my judgment our currency, like our other evils, is to be remedied by greater freedom and greater distribution of choice and discretion, rather than by a greater centralization or unequal distribution of power. It is a fair question to ask, therefore, whether conceding, as I do, that there is not •GeoraeH Earle.Jr.: ■ A Central Bank as a Menace to Liberty."— 4nna/> Am. Aead. Pol. and Sx. Scur^, March. 1908. sufficient elasticity of the currency, I can suggest no remedy, but would prefer present evils to those resulting from the creation of too centralized a power; and the answer, to my mind, is obvious. The true remedy must be found, not in placing our dependence upon the discretion of any one, but of every one, — that is, again, upon liberty, rather than upon power and restraint." Without regard to whether this is in the abstract a wise view or not, I think we must admit that it is distinctly the American view and those who have care- fully read the history of early American banking will recognize that each attempt to depart from it has aroused most passion- ate opposition. So far as my own opinion is concerned, J (!o not find that it has changed materially since I had the honour of addressing the New York State Bankers' Association in 1895. I felt doubtful then as to the probability of the necessary reform being acceptable to the existing bankers, and I am not much more hopeful now. But if the people are willing to create a central bank, with the monopoly of banking which would be involved, they should be much more willing to create a series of large banks which could perform every good feature of centralized banking, and still preserve that chief safeguard of the people in industrial matters, viz., competition. And even if the people and the bankers are not willing, I need not, I suppose, on that account hesitate to state what I happen to regard as a more reasonable solution than can be found in any other direction. In order that reform may be permanent and effective the new species of bank should be able to create : (1) A sound credit currency with effective daily redemption. (2) A distribution of capital available for lending, so that it shall not be idle and congested in one locality and scarce or non-existent and proportionately dear in another. (3) A condition where the gold and other cash reserves of the country may be made more effective and doubtless be minimized in quantity. (4) Where in time of trouble the capital of the country may be mobile and capable of being centralized when necessary. (5) Where there may be banks capable of doing the entire lending business of your merchants and manufacturers, except where these are unusually large, when they could be divided by arrangement between two or three banks. (6) Where a great international banking business may be created and you may do justice to your over-sea possessions, to the great ports of export and import, to your mercantile marine, and to your position among the great nations of the earth. This state of things can, I think, only be brought about by your permitting the creation of banks in the United States similar to the banks of other countries. As I have tried to show, the m e creation of one central bank will not change the defective character of the eight or ten thousand other banks. The suggestion I ventured to make in 1895*, and which I give below unaltered, was based upon the National Banking System and the ten per cent, tax on State bank issues being allowed to remain as they are, and the new powers to be added to those enjoyed by a National bank or to be enjoyed by banks under State or Federal charters as indicated below: "Any bank with a paid-up capital of 81,000,000 or over, to be allowed to issue notes, say to the extent of 75 per cent, of the paid-up capital, secured only by being a prior lien on the assets of the bank, including the double liabilif,. of stockholders, and by an insurance fund of say five per cent., and to be free from the ten per cent. tax. Such banks to be allowed to establish branches within the State in which the head office is situated. If the franchise is granted by a State the Federal Government to approve of the regulations securing the note issues, and to hold the insurance fund. I do not enter upon the question of what the minimum paid-up capital should be in the case of banks desiring to avail of such bank issues but not to open branches. I hope, however, it might be practic- able to make it as high as $500,000."t •B. E. Walker. Addreaa New York State Bankers' Association. 1895. t In saying that I hope it may be as high as $500,000 I do not wish to be misunder- stood. Provided a scheme is established which will enforce actual daily redemption, there is no reason why banks with a smaller capital than (500.000 should not be allowed to avail themselves of the privilege of issuing asset currency. a3 " Any bank with a capital of say $5,000,000 or over, to have the same privileges as to note issues and to be allowed to establish branches throughout the United States limited, if thought necessary, to cities of national and not local im- portance. Such a franchise would, I suppose, be granted by the Federal Government. In view of all that has happened since the war, I presume it would not be too great a stretch of Federal power to grant Juch a franchise." In the light of later experience I should think that banks having power to establish branches throughout the whole of the United States and its over-sea possessions should have a larger minimum capital than $5,000,000. This, of course, proposes asset-currency, and I am aware ol the arguments which have been made against it. But no effective argument has been made other than the difficulty of applying it to thousands of relatively small banks, and effecting that daily redemption which is indispensable. That it can safely be applied to all individual banks with a capital of $500,000 and over, and to all banks with branches with a capital of $1 ,000.000 and over, I have no doubt whatever. That it is extremely desirable in this country if it can be made safe, I am quite certain. But quite as important as the asset-currency, to my mind, is the branch system. If you make your laws so that it is merely permissive, surely the branch system will not come into being in an important degree unless it is right in principle. If it is right in principle, should the particular interests of ten thousand or more individual banks stand in the way of a great public good ? However frank 1 may have been I have not dared to strike such a high note of criticism as many of your own bankers, remembering that I am a foreiijiier, but if what I have said offends I beg you to forgive, and to believe that I have no ends to serve, and have spoken out of a full heart that which 'o me seems to be tlie thing I hope we are all seeking — th-- truth. I thank you most heartily for your patience in listening to my rather lengthy paper. =4