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(ANSI and ISO TEST Cf ART No 2|

|Z8

■ 2^

ISO

III^H

■ 37

■ 4^

ill 2-0

A A PPLIED INA^GE Ir

^K 1653 East Mom StfMt

Sr^ Rochester, New York 1*609 USA

"-i^ '716) 462 - 0300 - Phone

^S ,716) 288 - 5989 - Fox

A RA'^IONAL
BANKING SYSTEM

A COMPREHENSIVE STUDY OF
THE ADVANTAGES OF THE
BRANCH BANK SYSTEM

H. M. P. ECKARDT

ACTHOH or
'MANVAL or CANADIAN BANKING"

HARPER (Sr* BROTHERS PUBLISHERS

NEW YORK AND LONDON

M C M X I

IM THI UNITKO •TATII Of AMtmC*
rUbklSHIJ MARCM, Itll

900828

CONTENTS

I.
II.
III.
IV.

VI.

VII.

VIII.

IX.

XI.

XII.

XIII.

XIV.

XV.

XVI.

XVII.

XVIII.

Intkoduction J

Db/alcations and Frauds .

Tub Cost of SiNOM-OrrtcB Banks jt

Thb Panics

Thb Clbrks and OrpicsRs gg

A Hypothbtical Branch Bank g,

A Hypothbtical Branch Bank (Concluded) . . q,

MOVBUBNT OF PoNDS TO AND PROM NbW YoRK . . lao

Anothbr Hypothbtical Branch Bank . , ,33

Wall Strbbt Domination ,-,

Thb Currbncy Question ,5^

How THB Chanob Might Bb Efpbcted ... 191

Intbrnal and External Examination. . . . 313

A Pixbd Lboal Rxsbrvb ,3,

Thb Savings Bank Business 346

PORBION TrADB and INTERNATIONAL STANDING . 363

The Treasury's Banking Business .... 378

Branch Banks and Bvsinsss Morality ... 394

Conclusion 30^

Index 3,^

A IvATIONAL BANKING SYSTEM

«£S

A RATIONAL
BANKING SYSTEM

INTRODUCTION
Effects op Recent Panics

ON two occasions in the past twenty years the problem
popularly known as the banking question has been
forcefully pressed upon the attention of the American peo-
ple. After the panic of 1893, and again after the panic of
1907, public-spirited men in the different parts of the United
States gave themselves earnestly to the task of devising
methods by which bank creditors might be made more se-
cure and banking panics prevented. The people, in very
considerable numbers, were hit by the financial disorders of
those two years. Some were depositors who suffered
through the stoppage of the banks in which their funds
were placed; some were inconvenienced and injured
through the general suspension of cash payments; some
were borrowers and experienced heavy loss through the
action of panic-stricken bankers in exacting payment of
all advances as they came due; some were crippled and
others ruined by the great depreciation in securities that
occurred on both occasions. Besides those who suffered
material loss there were many in whose eyes the frequent
breakdown of the banking system constituted a national
humiliation. Under these circumstances it was but
natural that the discussion of reforms should centre

A RATIONAL BANKING SYSTEM

chiefly around the problems of how to make depositors
more secure and less liable to panic, and how to introduce
into the banking system some new elements calculated
to enable the banks to stand up and pay cash, as do the
banks in other great countries, through crises and emer-
gencies.

The Banking System's Acknowledged Defects

Then in certain years between the panics the inelasticity
of the currency has inflicted considerable loss upon the
commercial and financial interests of the country, through
the stringency and trouble which it caused during the
fall or crop-moving season. So there has also been much
discussion as to how the currency should be improved or
changed.

These comprise the defects of the banking system of the
United States which are recognized on all sides. It is,
however, commonly believed that the defects may be re-
moved or covered without making radical alterations in
the character of the banks. Neariy all of the suggested
reforms proceed upon the assumption that the system of
local single-office banks is well adapted to the needs of
the country and that it should be tenaciously adhered to.
In the banks and outside of them exists a strong sentiment
in favor of the present system and against branch banks.

Why Branch Banks Are Not Considered

Thus Senator Aldrich in his address at Chicago on the
banking question, in November, 1909, mentioned the
branch idea as something to be eliminated from the dis-
cussion of practicable remedies. His words, as quoted in
the New York Journal of Commerce, are: "Whatever may
be the advantages of a system of branch banking in other
countries, I do not think it is poss )le to adapt it to ex-
isting conditions in the United States. The twenty-five

INTRODUCTION

thousand banks now in existence are largely independent
institutions whose managers are familiar with the wants
and requirements of the communities in which they are
located. The great mass of the people who use banking
facilities, either as depositors or borrowers, would be un-
willing to give up the advantage of that intimate personal
knowledge of the local bank officers and managers which
they believe to be essential to their interests. It would be
difficult, for instance, to convince borrowers and depositors
in a small town in Illinois that a man who had always
lived in the same community would not have a clearer
and more sympathetic appreciation of their needs and
credit than an agent sent from one of the large banks in
New York whose principal ambition might be to earn the
largest possible amount of money for his institution rather
than to develop the prosperity of the community to which
he was assigned. I reaUze, of course, that in the United
States, as in Germany, there is a tendency on the part
of the large banks in the reserve and central reserve cities
to establish a rather close community of interest with
correspondents whose business and organization is more
or less affiliated with the central institution. This ar-
rangement has many of the advantages of branch banks
without being subject to the positive objections which
exist with reference to the latter plan."

While this sentiment, to which Senator Aldrich refers,
retains its present force it is obviously impossible that
there should be any general movement toward the institu-
tion of branch banking. Even if the legislatures were to
authorize branch banks they would not make substantial
headway while neither the bankers nor the people wanted
them.

The Case for Branch Banks

Briefly stated, the object of this book is to gain friend-
ship for the branch-bank idea. With regard to the atti-
tude of the banking interests it is possible to see some

A RATIONAL BANKING SYSTEM

progress toward a favorable opinion. I can remember
how that some fifteen years ago scarcely a voice among
the bankers was heard in favor of the branch system as a
solution of the monetary troubles of the United States.
Now there is a considerable number of bankers in the
large cities who favor the idea and who would actively
institute branches throughout the country if they were
permitted to do so. But the so-called country bankers
are bitterly opposed. I am convinced that if they had a
more accurate notion as to how they, their stockholders,
their employees, their customers, and their country would
benefit from the conversion of their single offices into
branch banks this hostility would tend to lisappear. If
it were materially softened, and if in time the sentiment
of the general public were to become more favorable, the
way would be opened for a satisfactory settlement of the
difficult financial problems now before the nation. I
propose, therefore, to present a comprehensive statement
of the case for branch banks, in the course of which I
shall try to show the advantages that would accrue to
various classes of the people and to the country as a whole
upon their adoption. Also I shall try to answer the va-
rious objections commonly urged in the United States
against the branch system. I think that many of my
readers will be surprised at the number of counts which
can properly be included in the indictment of the single-
office type of banks, and at the variety and number of ad-
vantages to be expected to accompany the institution of
the right type of branch bank.

The Author's Qualifications

For the enlightenment of those who wish to know my
qualifications for undertaking this work I might say that
I entered the service of one of the large Canadian branch
banks as junior at the age of seventeen, and served nine-
teen years. My service covered the various posts from

INTRODUCTION

junior up to branch manager, at a country branch in
Ontario, at a Western financial centre, and at a Manitoba
country town; it was rounded out by a five-year period
at the head office in Montreal. In the five years that have
elapsed since the completion of my banking service I have
lived for the greater part of the time in New Ycrk State
and have devoted myself mainly to the study of banking
and financial matters and to financial writing. My study
of United States banking cor litions has continued for
more than fifteen years.

How THE Argument Will Be Presented

I havr concluded that in dealing with the subject the
first importance should not be given to any ot the matters
which have been so mi i debated: the security of de-
positors, the prevention f panics, and the provision of
elastic currency. Each one of these questions is, to be
sure, of great importance; but, in my opinion, all of them
are subordinate to the main question as to how the banks
under the present system fulfil, day by day and week by
week, the obligations and duties owed by them to the
Commerce and industry of the country. If agriculture
and the great industries and trades do not get from thf»
banks, regularly every day, the measure of support and
encouragement to which they are properly entitled and
which is regularly accorded to them in other countries,
the circumstance constitutes a more serious indictment
of the banking system than to charge it with inflic'-ing
frequent and unnecessary losses on bank depcfitors and
of going down in disgrace before every first-clasc panic.

I have considered that the case against the existing
system of local single-office banks can be presented best
through giving a series of descriptions illustrating how
the various interested parties — ^bank employees - nd
officers, bank customers, borrowers as well as dtpos-
other citizens who now have no relations with banks, . .e

/ RATIONAL BANKING SYSTEM

corporations, the Government of the United States, and
the country itself— fare under the present system, the
benefits they enjoy and the inconveniences they are sub-
jected to; and, along with this, to give a description of
what their condition would be under a proper system of
bianch banks.

Several important banking evils wiil be pointed out
which are seen in no other great country than the United
States; and it will be shown that they are in fact natural
results of the local system, and that they cannot be re-
moved while that sy.stem is retained. Also in dealing
snth the objections to branch banks I shall venture some
suggestions as to how certain evils regarded as being asso-
ciated with them might be eliminated or guarded against.
Finally, the question as to how branch banks might be-
come a practical poss?1 lity will be dealt with and I shall
suggest how they might develop alorg lines which would
not necessitate a great destruction of banking capital,
and which would enable each one of the important sections
of the country to preserve its financi?.! independence; how
each section might, as a matter of fact, be more securely
independent of the dreaded Wall Street money power
than it is to-day under the system of small local banks.

DEFALCATIONS AND FRAUDS

The Recorj op Banking Frauds

NTEARLY everybody understands that a banking

Tr^lT^'T' T '^^*^^^"^' P^°"« to take alarm and

tn cai, «* I, uespatcnes trom Europe have very litt'e

to say of happenings of this nature. In Canada So tt

A RATIONAL BANKING SYSTEM

few thousands at some branch ofBce of more or less im-
portance; and the occurrence hardly operates at all to
lessen the public respect for the banks, o^ *o bring banking
into disrepute. Of course if a quick succes^on of defalca-
tions happened at various branches of one particular
bank, acute observers would suspect that the supervising
and inspecting system of that bank was lax, and perhaps
it would also be suspected that it was below the general
standard in regard to the pay and treatment of its men.
But when they are of small importance and occur sporadi-
cally the defalcations do not a^ect the banking reputation.
There is never any thought, in the public mind, when some
country teller of a leading bank absconds with $3,000 or
$5,000, that its depositors or creditors are in anywise con-
cerned. Even the shareholders of the defrauded insti-
tution take no notice of the loss, as it has no bearing, of
any consequence, upon their dividends.

Unenviable Prominence op the Unitel States

. 1

I H

* !

But in the United States every week has its crop of
bank scandals. There may be two or there may be half-
a-dozen. Sometimes the newspapers for days at a time
record a fresh fraud each day. One time it is a savings-
bank in New England, again a national bank in the
Eastern States, then a state bank in the Northwest, then
three or four in the West or the South, then baci: again to
the East, every section of the country taking its turn. In
a number of cases the loss is heavy enough to cause the
closing of the defrauded bank. Often enough the de-
positors are threatened with loss; always they undergo
some anxiety about the safety of their funds; and in-
variably the stockholders are deeply concerned.

The constant recurrence of these humiliating episodes,
and the faithful blazoning of each case all over the country
by the press, must have a profound effect in lessening the
general estimation of banks in the public mind. A fairly

DEFALCATIONS AND FRAUDS

large number of people must have tl.e idea that about
half of the bankers are rogues, and that it is not safe to
tn«t money with any of them. One need not be an ex-
pert to see tnat the prevalence of such an idea must keen
many nulhons of deposits out of the banks, and thus
reduce the power of the bankers to care for the industrial
and mercantile borrowers.

System op Isolated Small Banks Responsible

Perhaps some persons will argue that there are more
frauds in the Umted States than in Canada because the
Repubhc IS so much more populous than the Dominion

lut th'J^T '*' ^"'*"''' '' ^° "^"^^ "^^^^ important!
But the difference in population and in the magnitude of
business transacted doos not satisfactorily account for the
phenomenon. If the United States be^ompared w^fh
Great Britain or one of the other leading European
countnes the disparity in regard to population and bus"
ness IS not quite so great; yet the disparity in the record

WH1 K°f ^"^' '' P^^^^'y *° ^« ^«^d Refuge can
hardly be taken in an explanation that the people of the
Umted States are more dishonest than Canadians. Eng-
lishmen, or Europeans. Though the citizens of the great
American Republic are sometimes said to be .nore specu-
atively inclined, more disposed to take large chances
than are Englishmen or Canadians, the statement is oS
to question; and it is reasonable enough to conclude that
the classes in the United States from which the banker
are drawn are fully equal in point of morality to the
classes that supply the material for the bankingVaffs in
the other Anglo-Saxon countries. Every day there are
forthcoming evidences that Americans. Z a people hate

"mLTv thtn Tt " ^^r">^ ^^' ^"^ pe'h'ps mor
earnestly than, do the people of other countries: The,

tllT""'^^;'"^^^"^ ^" *^« '^' to hunt the ugly
thmgs down and to destroy them. ^^

A RATIONAL BANKING SYSTIiM

It is not at all necessary to defame the character of the
people or to search far afield for the explanation of the
lower tone of banking in the Republic and of the rela-
tively large number of frauds. It can easily be shown
that the system of isolated small banks lends itself pecul-
iarly to the bringing about of just such a state of affairs.
In fact it could hardly be otherwise than that the worsf;
showing in this regard should be made by the United
States; and, so long as the present banking 83rstem en-
dures, in spite of all that can be done by Federal officials,
state officials, and banking associations, the frauds and
defalcations must necessarily be numerous. Why it is so
will now be explained.

!■

'? 4

The One-Man Control

An examination of the individual cases of banking
fraud shows that in a great many of them it is the president
or the cashier that is guilty of stealing. There are over
twenty-two thousand banks of all kinds in the whole
country. In other words, there are over twenty-two
thousand individuals in control of the active day-to-day
operations of the banking institutions. The active com-
mand of a bank may rest with the president, with the vice-
president, or with the cashier; one or other of the three
conducts the operations in the cases of all of these inde-
pendent banks. This ruling officer is the law unto the
olner officers and clerks. Though he is responsible to
the board of directors, no board of directors could follow
him from transaction to transaction throughout the day,
and from day to day throughout the year. Even a board
that attempts to follow its executive officer closely cannot
do more than hear reports from him frequently and ex-
amine the books occasionally. In almost any bank it is
usually easy to conceal crookedness in the books from the
directors, because they lack the technical knowledje
necessary to detect suspicious circumstances and to follow

DEFALCATIONS AND PKAUDS

Ihem to th. - conclurions. It i, hardly practicble for .

.^cxS to "Z"' "" '^' "'™ - v«l.g«?o mX;
officer ""'^^ °' '""^""e "P "> «»«uti»e

rcr'"^ r ^"'^•""^-- "'eVLs ttt t.T

In every country and under every banking system th^rJ
will be a certain proportion of the men engaged J^^^^^^

traud if they get the chance. Under the UnitpH ^ToT
system they too often find the door inv^ Ilgly^'open. '*'*''

Too Much Opportunity to Defraud

^fJ^J'l^^v^''^'' °^ ^ '"'^^y company, in an address at a
state bankers' association meeting in , goo said -a!
matter of fact, the losses under bfnko 'other employees'

^e oZin ^l '""'"'y ^"'"P--^ are not so S
as on^?I^ ^; *° '*'" '"^""""^ dishonesty of employees
as. on the contrary, to the absence of an effective svi?^'
of accountmg on the part of the bankr !n ottr wo dT

corH.H f», "' *°, '"^ "^""'^ ^'''^^^ °f action beirac.'
corded the employee -too much opportunity a! fll
as possible bankers should make it iiSpossSe fo^thetr
employees to embezzle money. They owe t In It-
employees, because it is op^uniTy ^t ma^^ the^

Now there is not, and could hardly be anv uniform!*,,

theTrnX^"^*'^^ ^"^°"S '"^^ thousands'of bt™S
the United States^ Being independent, each office orders
Its routine and affairs to suit itself. Generally th! honl

' II

A RATIONAL BANKING SYSTEM
Thb Ill-Rboulatbd Opficbs

I concede with pleasure that there are many banking
offices in the United States wherein the most »;fficient
safeguards against fraud by the employees are continually
in force. EspeciiUy in the great banking offices of the
larger cities is the routine ordered so as to make de-
falcation difficult and immediately dangerous. Also many
of the banks in the smaller places conduct their office
work strictly under proper rules and regulations. But
the point is that the system ensures that there will be
all the time hundreds, if not thousands, of banking offices
in which no proper safeguards are provided. In any
part of the country one may without difficulty find offices
in which there is little or no system about the work. The
tellers are not isolated; other clerks have access to the
cash and pay checks and take deposits; the tellers also
are permitted to enter deposits in customers' pass-books.
The one-man-ruler is a veritable czar; the clerks under
him feel that they are as much his servants as servants
of the bank. When he does questionable things there ia
no one to stand up against him; no one wiling lO risk
loss of position for the sake of protecf.ing the bank.
Each one of the employees, being dependent on him for
promotion and increase, is intent upon keeping his good
will If a clerk stumbles upon something sus'":ious,
there is often no safe way of discovering whet he n* not
a fraud is on the way. To say anything to the di. :ctors
would be risky, as they might r:ot attach any importance
to the story; and if they did it might turn out that no
fraud had been committed, and the too zealous clerk
would likely lose his position.

External Examination as a Preventive of Fraud

Some readers will perhaps think it strange that no men-
tion has as yet been made of the examinations of the

DEFALCATIONS AND FRAUDS

banks by the Comptroller's officers as a preventive of
fraud. The truth is that these examinations cannot pre-
vent defalcation. The examiner may discover a fraud
after it is committed; that is about all he can do He
calls at the bank only about twice a year, and his visits
do not last more than a day or two days. A more
thorough examination or inspection than that of tl
regular bank examiners is provided by the clearing-house
associations of some of the principal cities. Regarding
the examinations by the Chicago Clearing House officers.
Mr. James B. Forgan. the .resident of the First National
Bank of Chicago, had this to say, in addressing the Michi-
gan Bankers' Association in July, 1909: "The (regular)
bank examiners go round on an average, I believe of
twice a year. In Chicago, with one examiner with five
assistants, ,t takes fully a year to get around the banks
That shows you how much more thoroughly we go into
the business than the Government does. It takes us the
whole year to get around, but we go in with the key so
far as supervision is concemed-the key to lock the stable
after the horse is gone."

Prevention Must '.ome prom Within

When a thorough system of examination like that of
the Chicago Cleanng House canrot, on the admission of
an expert of Mr Forgan'r. standing, prevent a high ofiicer
of a Chicago bank from absconding • , ,h the bank's money
It « Idle to expect the Goven.ment examinations to pre-
vent defalcations. Every intelligent banker knows that
the preventive force must reside in the bank itself. It
niust be there, m active working order, every day and all

vsTem ofb r" J'^* '^ ^"^^*^y whaZthe"^ branch
system of banks makes possible. If the banking busi-
ness of the United States were in the hands of some two
hundred banks, each of which operated numerous branches
It would come about, in all probability, that every bank-

A RATIONAL BANKING SYSTEM

ing office in the country would be subjected to a scientific
code of regulations, designed to prevent or hinder frauds
by the employees; and the manager or head of every
branch would be subjected to checks which would make
it difficult, if not impossible, for him to rob the bank with-
out being at once detected. The experts in the head
office devise the rules and the routine that shall prevail,
and every branch belonging to the system must order its
affairs in consonance therewith. When the bank's in-
spectors go round one of their important duties is to re-
port on the way in which the rules are observed. An
office in which discipline is not enforced, or regulations
not observed, is looked upon as being specially open to
loss by defalcation.

Checks Upon the Branch Manager

At each branch there is appointed, in addition to the
manager, an officer styled the accountant, who ranks im-
mediately after the manager, and who is responsible con-
jointly w'^1 him for the proper conduct of the office.
Dual custody of all cash and securities is provided for
and enforced. Two locks, each with an individual key,
or two combinations, are provided for the compartment
of the safe used by these officers. Each has a key or a
combination. Nothing may be put in or taken out ex-
cept in the presence of both. All checks, drafts on cor-
respondents, etc., must be signed by both. Thus the
branch managrr has not the same opportunity to steal
the bank's money as the heads of many independent local
banks possess. His accountant and the other men all
feel that they are in the service of the bank, and that their
allegiance is due to it rather than to the manager. All
of them, perhaps, expect that they will be branch man-
agers themselves before very long. In nearly every case
they can be depended on to detect and frustrate attempts
of the manager to defraud the bank.

DEFALCATIONS AND FRAUDS

Checks Upon Minor Officers and Clerks

Then, as regards frauds by minor officers and clerks
an elaborate system of checking, calling off. switching of
men from one post to another, and from one branch to
another, is a necessary part of the operation of everv
large branch bank. Owing to this it is the case that a
given amount of business transacted by a Canadian
branch bank occasions more labor than the same busi-
ness would in a United States bank. But it is reasonably
certain that the relatively greater freedom from frauds
and defalcations, and the consequent higher estimation
in which the pubUc holds the banks, constitute a sufficient
compensation for the larger outlay thus occasioned.

Effects of Internal Inspection

In addition to the interior mechanism of the branch
Itself, designed to stop frauds, there are other potent
factors working in the same direction. One is the system
of inspection which is superior to anything of the kind
that could be devised under the system of isolated single-
office banks. It was remarked that the inspection by
the cleanng-house associations in the United States could
be taken as more thorough than the inspection by the
Government. It can fairly be said that owing to the
existence of the branch system the inspection of the
branch offices, as practised in Canada, is more thorough
again than the inspection practised by the clearing-houses
in the large Umted States cities. It is so because the
Canadian examiners are, like the clearing-house exami-
ners, experts in banking, and because they have a more
intimate knowledge of the affairs of the offices they in-
spect, and a greater power and authority to correct loose
practices. The bank examiner in the United States
whether employed by the Government or by the clearing-
house. IS an outsider; and the officers and clerks of

A RATIONAL BANKING SYSTEM

each bank he examines will be careful to keep many im-
portant details out of his ken. The inspector who over-
hauls the Canadian branch is in the service of the bank,
and is therefore entitled to the most intimate knowledge
of the affairs of the branch. He is in the confidence of
the chief executive, and he comes to the branch well posted
as to the business done and the relations with the larger
customers.

Power op the Bank's Own Inspector

Then, as to recommendations : a Federal or state govern-
ment examiner, or a clearing-house examiner, may make
recommendations that certain things bo done, and if the
matters are regarded as important, he may demand and
perhaps get compliance with his wishes sooner or later;
but as ; ' gards matters of routine, and the minor details
of daily practice, he obviously has not as strong a call or
right to interfere as has the branch-bank inspector.

As a subsequent chapter will deal with the whole ques-
tion of bank inspection or examination, and with the
question of the supervision of the head offices of branch
banks, it is not necessary to enlarge upon those matters
now. Enough has been said to show that the placing of
all the bank offices under uniform sets of rules as to daily
practice, and the enforcement of an efficient internal in-
spection, constitute an important deterrent influence
against fraud by the employees. Under the branch
system this factor would necessarily be developed to a
high degree of efficiency; it never can be so developed
under the present system of single-office banks.

Mutual Guarantee of Fidelity

It has been mentioned that more reliance can generally
be placed upon the employees of a large branch bank to
stop frauds which are attempted by the active heads of
the banking offices because they have a keener sense

DEFALCATIONS AND FRAUDS

of the fact that they are in the service of the bank and
not of an individual. In connection with the Canadian
service there is another thing which tends to make all
ranks of the employees keen and zealous to stop frauds
by their fellows, whether those fellows be superior in
rank or not. Quite a large proportion of the banks have
what IS known as a "mutual guarantee fund" designed
to ensure the fidelity of the men. Whenever a bank in-
stitutes a fund of this kind, all the men are called upon
to join It; and no other bonds or sureties for their fidelity
are required from them. Each man is bonded in the
tund for whatever sum his position calls for, and out of
his monthly salary he pays a rate per cent, as premium
(usually about half the rate a fidelity company would
charge). Then the bank itself pays into the fund an
annual sum, debiting its current profits therefor. A num-
ber of the banks operate their guarantee funds as con-
ditional savings accounts. Thus the men pay in their
monthly assessments, which go to the credit of the in-
dividuals contributing. So long as no defalcations occur
the balance standing at the credit of each employee is
regarded as being conditionally his property. If he con
tnbutes for a specified time, generally about ten years
he may, on retiring from the service, withdraw the whole
of his payments provided no defalcations have taken
place. Suppose an employee steals a certain sum and
no recovery is made. The bank charges the loss up to
the fund, If It does not excee.l >he amount of the bond
earned by the defaulter, and ii is distributed among all
the employees pro rata to the amounts of their respective
bonds. Each man has thus a direct personal interest in
preventing fraud by his fellows or superiors. Each one
knows that a certain share of the loss will come out of
his pocket if one of them succeeds in robbing the bank
and the knowledge tends to sharpen his watchfulness
and to stiflFen his attitude whenever he chances upon
suspicious circumstances.

A RATIONAL BANKING SYSTEM

The Pension Funds

li"' '

Ft il

Then the pension funds constitute another factor mak-
ing for loyalty and efficient service on the part of the
employees. Each man pays his monthly premium into
the bank's pension fund; the bank pays in a yearly
amount out of its profits — its payment being equal to or
exceeding the aggregate of the staff payments during the
year. Out of the fund so accumulated a regularly graded
system of pensions is kept up, under wl 'ch every em-
ployee who has served the stipulated minimum term
(usually fifteen years or twenty years) may claim a pen-
sion upon retiring or upon reaching the age limit. In the
case of the pension fund also an account is kept for each
member of the staff, his payments being credited therein.
If he leaves the bank or is dismissed, providing it is not
because ot a defalcation or shortage, he may withdraw the
whole of his payments with compound interest **^ereon.

There is no doubt that these mutual funds or organiza-
tions, in which all grades of the employees participate,
iTS well as the banks themselves, operate potently to keep
the banking service clean and efficient. They are hardly
practicable or available for a large number of banks
under the single-office system. True, there are some in-
stitutions in the centres with staffs large enough to per-
mit the establishment of mutual systeias of pensions and
of fidelity insurance; but when the whole number of a
bank's employees is le[,s than a score, and that is the ca^^e
with great numbers of banking institutions, it is obvious-
ly impracticable to inaugurate either a pensioning or a
guaranteeing arrangement based upon the mutual idea.

Swindles, Burglaries, and Hold-ups

It is necessary to remember that banks are often the
victims of frauds perpetrated by others than their em-
ployees. Swindlers of all kinds, to say nothing of bur-
glars and hold-up men, are always on the watch for

DEFALCATIONS AND FRAUDS

opportunities of preying upon the banking community.
Though there is a considerable amount of sympathy felt
by the general public for a bank which has been broken
into and robbed by desperadoes, the sympathy of the
public usually contains a measure of contempt when the
unfortunate banker loses his money through being duped
by an artful swindler. It would not be fair to strive to
make an argument for branch banks out of the numerous
burglaries and hold-ups perpetrated upon the banks in
the United States. These occur largely from causes alto-
gether beyond the control of the bankers. When they
are numerous and persistent in any district, it is likely
to be because the civil laws are not enforced there in a
manner to earn the respect of the desperate criminal
classes. At the same time it might be observed, en
passant, that it is quite probable that laxity of the banks
in guarding their treasures is at the bottom of a certain
proportion of the successful burglaries. Among so many
banks it must be that there are always a considerable
number of which the defences are inadequate or carelessly
manned. For example, it is reasonably safe to estinate
that among the twenty -two thousand odd banking
offices are some hundreds with inferior vault and safe
protection. Many of the so-caMed banks, especially
in the West, might with more propriety be sty ed real
estate offices or insurance offices. Even in the East
there are banks which occupy a comer in a store or other
business place, and are separated from the crowds that
frequent the store counters by the flimsiest of railings.
Some have poor vaul* s. and safes that could hardly have
been considered up date twenty years ago. Banks
with such defences ' course easy marks for burglars.

How Branch Ba.n.s Would Defend Themselves

If there were large branch banks opo-ating in the
Union it could be taken for granted that the executive
officer of each one would see to it that every branch of

A RATIONAL BANKING SYSTEM

\l I

his bank was provided with a propei / constructed vault
and a modem or up-to-date safe. In the Canadian ser-
vice the employees are commonly liable for guard duty,
which means that one or perhaps two of them will be
required to sleep on the premises at night, fully armed of
course. Some banks insist upon minute details at prac-
tically all branches in their scheme of defence against
burglars. So it can be said ti at under the branch system
the defences against the burglar-enemy would be kept
up all along the line, and it might be that the newspapers
would have fewer burglaries to report.

Then it is well known that banks in all countries are
obliged to be constantly on guard against swindlers of
various kinds. These swindlers may attempt to defraud
through passing an isolated spurious item, or they may
plan to bring off a more extensive coup. There is swin-
dling of an important kind sometimes in the department
of loans and discounts. Because of their systematized
handling of the loans and discounts, and the universal
practice at all offices of the most modern safeguards
against fra-.ds, the branch banks are less liable on the
whole to be victimized.

Defalcation Often Ruins Small Banks

Every once in a while one hears of a bank iii the United
States being closed because of crippling losses through
frauds or bad loans. Under the branch system there
would not be so much likelihood of the losses being in-
curred; and if they did occur they would not be so apt
to result in the closing or crippling of the bank.

Unnecessary loss of bank funds through the depreda-
tions of burglars and swindlers, and also through lending
to dishonest or incapable customers, plays its certain part
in decreasing the confidence which the public has in the
banks. It does more: It affects the productivity of
capital invested in banking, and influences the rate of
interest which borrowers of all kinds must pay.

THE COST OF SINGLE-OFFICE BANKS
Operating Twenty-two Thousand Organizations

THE next count to be pressed, in the indictment of
the local single-office banks, is their excessive cost.
One need not be a banking expert to see plainly that
twenty-two thousand separate organizations, each with
its cashier, vice-president, president, board of directors,
and full paraphernalia of executive control, must cost
more, in respect of administration and operation, than
would two hundred organizations with an average of one
hundred and ten branches to each. In the latter case, at
every one of the twenty-two thousand branches, one
officer— the branch manager — would perform the func-
tions which under the non-branch system call for the
services of cashier, vice-president, president, and hoard.
If it be supposed that a change were to take place on a
certain fixed date, by Act of Congress, from the independ-
ent system to the branch system, and the twenty-two
thousand independent offices were to become twenty-
two thousand branches of two hundred great banks, it
would mean the abolition of about twenty-two thousand
presidents, twenty-two thousand vice-presidents, and (al-
lowing an average of six directors to a bank) of about
one hundred and thirty thousand directors.

Operating Two Hundred Branch Banks

Allowing to each one of the two hundred branch banks
an average of fifteen directors, the requirements, in the

A RATIONAL BANKING SYSTEM

way of representation for the stock comprising the capital
of the banks, would be three thousand directors, two
hundred vice-presidents, and two hundred presidents.
Can anybody doubt that there would be a substantial
annual saving effected ? There is reason to suppose that
the saving might amount to between $15,000,000 and
$30,000,000 a year. The higher figure would represent
an average net economy of a little over $900 per year for
each banking office; and that does not seem an ex-
travagant estimate. Of course it is to be remembered
that the cost of the two hundred executives required
under the branch system would be an important item.
There would be some executive officers commanding very
high salaries; there would be the cost of inspection of
branches and the cost of the other executive machinery
necessary for operating large branch systems. The
branch system would also necessitate the consumption of
a considerable amount of stationery in the numerous re-
ports and statements which the branches would be con-
tinually obliged to furnish to the head offices; and the
preparation of those statements would necessitate extra
labor at the branches and so increase the item of clerk
hire. If it were not for these items perhaps the annual
saving effected through centralizing the management and
control might be placed well above the average of $900 per
banking office. I venture, here, to suggest that an execu-
tive capable of managing a large branch system could
probably be had at a cost not exceeding very much, if
at all, that now incurred in the administration of any one
of several large and powerful banks in New York and
Chicago which have but the single office.

Practice of Branch Banks Would Be Better

Even if it could be shown that it would cost fully as
much to administer and operate, with branch-bank
machinery, the volume of business now handled by the

1 i

THE COST OF SINGLE-OFFICE BANKS

single-office banks, it might still be argued that the
change would result in a vast economy. For at hundreds
of places the reins would be taken from weak, incapable
hands, and assumed by strong and able men. Nobody
has any idea as to the amount of the anrual losses from
bad loans and from bad banking methods under the
present system. It must be an appalling total. I am
aware that in Canada the best conducted banks, with all
the skill and experience of their officers, are not able to
escape heavy losses from bad debts. Any year a large
Canadian bank might have to write off $100,000, or
double that sum, on account of loans that turned 'out
badly. And in their cases there are no local boards to
msist upon the bank's funds being applied to bolster up
sickly local industries. It would seem that the losses
from this cause in the United States must amount to
many times the Canadian total. Most of the losses so
incurred never find their way into published statistics
They are written off before the annual meetings and
serve to reduce the published profits, in some cases to
wipe them out altogether. It is only when a bank's
losses are so severe as to impair its capital or its safety
and the stockholders are unable or unwilling to repair
the breach, that the public comes to a knowledge of its
misfortunes. It should be clear that when the share-
holders' losses are excessive the fact malevolently affects
both bank borrowers and bank depositors. Bearing this
in mind, we may now proceed to examine the record of the
single-office banks in regard to insolvencies.

The Record op Failed Natio.val Banks

The 1909 Report of the Comptroller of the Currency
states that between 1865 and 1909 five hundred and eight
national banks were placed in the hands of receivers
Twenty-four were restored to solvency and permitted to
liquidate or to resume business. At the date of the report

A RATIONAL BANKING SYSTEM

sixty-eight receiverships were still open. Thus there
were four hundred and sixteen insolvencies of which the
affairs had been finally settled. It is hardly necessary to
go back so far as 1865. A better and fairer illustration
can be had through taking the record of insolvencies since
1890. That will give a period covering the 1893 panic,
the years of depression that followed it, and the succeed-
ing era of prosperity which continued into 1907. Follow-
ing is a table of the insolvencies among the national banks
since 1890 (see page 356 of the Report of the Comptroller
of the Currency, 1909):

Number

Amount of

Y«ar

Claims

Banks

Proved

1891

1 6,780,646

1892

10,860,890

1893

14,434,105

1894

3,771,300

3fl

6.078,734

1896

6,734,197

1897

»9.S76.398

1898

3,635,988
i.5»8,i34

1899

1900

5.579.843

1901

S.774,a74

1903

345.665

1903

3.794.993

1904

5.044.157

190S

10,023,44a

1906

1.111,30a

1907

4.4S3.8as

1908

13.797.606

1909

1.693,473

369 $

133,988,860

An. average,

6,525.7*9

NATIONAL BANKS CLOSBD

A«uti
Estimated
Douotful

♦ 3.578.041

7.>5a.6l7

10,164,830

3,390,690

5.477.277
4.793,160

8,787.653
800,403

875.683
4.733.498
3,810,945

367,718
1.839,073
3.135.538
5,658,029

616,501
3.180,517

13.194.357
852,826

$81,298,556
4.378,766

AaseU

Estirritr'

Worihleae

•3.005,49s

1.938,73s
7.317.41a
1,846,149

3.477.914

3.187,315

8.664,997

1,717,968

704,843

1,740,639

516,811

164,153

935.309

1,711.71a

1,8 i,4'8

811,6.9

453.133
3,646,615

976,271

•43.S38.396
3,391,49s

18 banks were restored to solvency.

7 banks were formerly in voluntary 'iquidation.

4 banks mentioned above failed for the bccond time.

National Bank Depositors Lose $1,155,706 Per Year

This table includes all the national banks closed during
the period under review. The amount of loss ultimately

I *

THE COST OF SINGLE-OPPICE BANKS

inflicted upon depositors cannot be stated exactly be-
cause among the three hundred and sixty-nine bank,
taken into the table are the institutions of which the
assets had not been liquidated at the date of the Comp-
troller s report. But it is possible to estimate roughly
what the result will be when all the receiverships are

^nnr* ,U ^r^??"" ^'''"' °" ^^SO 83 of his ICJOS

report, the results of liquidation of the four hundred and
one banks of which the affairs were finally settled at the
date of the report. The net loss to depositors was 17 71

fhl^T' ''"n*''^ •*"'°""* °^ ^^^''"^ P^^^'^d- Assuminy
that there will ultimately result a loss of 17.71 per cen^

upon the $123 988.860 of claims proved, as shown in the
above table, the loss works out ««.9s8.427. or an average
of $1,155,706 per year. *

^^ The two columns "Assets Estimated Doubtful" and
Assets Estimated Worthless" are given because of the
light they throw upon the matter of the capabilitv and
honesty of the bankers whose institutions were thrown
into msolvency. The assets claimed by the three hun-
dred and sixty-nine banks in the table were classified as
tollows by the receivers on taking charge:

Estimated good,
Estimated doubtful,
Estimated worthless,

•84,831,904 =
81.208,556 =
43. 538.396 =

40 per cent.
39 per cent.
21 per cent.

$209,668,856 = 100 per cent.
It is a well-known fact that the assets of a bank becom-
ing insolvent usually look their best on the day the doors
are closed. Except in the cases of a few special items
they generally deteriorate steadily in value as the liquida-
tion proceeds; and it is necessary to revise in a downward
direction the estimates of what the estate will produce.

Losses Through Bad Loans and Investments
By studying the results of the liquidation of those
faJed banks of which the receiverships are closed, one

A RATIONAL BANKING SYSTEM

may arrive at an estimate of the loss that will result from
the liquidation of the $209,668,856 of assets here referred
to. In his 1908 report the Comptroller gives the result
of liquidation of the four hundred and one receiverships
which had then been ended (see page 383). Their assets
on suspending were thus classified:

Estimated Bood,
Estimated doubtful.
Estimated worthleu,

Ioa,i8o,ai9

8».SaS.637
51,703,319

$336,408,075

After suspension additional assets amounting to $3'»,-
034,761 were received by the liquidators, making altogether
$362,432,836 which came into their hands. The loss on
assets compounded or sold under order of court amounted
to $98,013,857. From the whole mass of assets the re-
ceivers collected $129,047,946, and they allowed $19,899,-
259 in offsets, making total realizations of $148,947,205,
or a trifle over 56^ per cent, of the amount which came
into their hands.

Now, in the cases of the three hundred and sixty-nine
banks that have failed since 1890, the receivers acquired
$32,056,623 of additional assets after suspension. Adding
this amount to the $209,668,856 of assets which were there
when the doors closed, there r^i.iiL he sum of $241,725,-
479 for the receivers to account for. Assuming that 57
per cent, will bo collected (which is a slightly better ratio
than actually occurred in the cases of the terminated re-
ceiverships up to 1908), the realizations would amount to
$137,783,523, and the worthless or nearly worthless
residue would be $103,841,956. Let us put these results
into a shape to be understood by the mai. m the street.
They mean that in the nineteen years en<]ed October,
1909, three hundred and sixty-nine national banks failed.
On closing their doors they had an agRrcgate of $209,668,-
856 of assets representing their loans and investments.

THE COST OP SINOLE-OFPICE BANKS

Thwe loans and investments, after being fortified by the
•ja,os6,6aj of additional assets which the receivers man-
aged to get. presumably from debtors and shareholders
yielded, or mcher will yield on the completion of the re-
ceiverships, only $137,783,533.

Losses of Banks that Did Not Fail

This record was achieved by the three hundred and
sixty-nine banks whose directors and shareholders could
not or would not put up the cash or securities required
to avert failure. If to the sum of their losses, through
bad loans and »- vestments, were added the losses made
by the banks % zh escaped suspension "by the skin of
their teeth, so .0 speak, or in the cases of which the
directors and shareholders were forced to dip deep into
their pockets for fresh capital to replace what was lost
a very formidable total would evolve.

Of these losses the principal part fell to the stock-
holders. As there are no means of calculating or estimat-
ing the annual wastage of capital resulting from bad loans
made by the national banks, or from bad banking on their
part. It is necessary to rest content with setting down the
foregoing figures. So far as the creditors are concerned
the table of failures shows that, judging by the experience
of the nineteew years from 1891 to 1900. the people of
the United States may expect that each year, on the
average, nineteen national banks will be closed- that
there will be Iccke J up for an indefinite period' (any-
where i.om six months to three years^ a sum at least
equal to $6,525,729, and of this sum $1,155,706 will be
ultimately lost.

State and Private Bank Failures

The record of the state and private banks and trust
companies is much worse. The folk -ing table of failures
3 27

A RATIONAL BANKING SYSTEM

of banks other than national is taken from page 58 of the
Comptroller's 1909 report:

Number of
Failures

Liabilities

Nominal
Assets

189Z

$ 6,365,198

$ 7,190,824

189a

3,227,608

2,719,410

1893

a6i

46,766,818

54,828,690

1894

7.218,319

7,958,284

189s

9,010,584

11,276,529

1896

7.513.837

10,240,244

1897

133

34,090,879

17,929,163

1898

7,080,190

4.493.577

1899

10,448,159

7,790,244

1900

3»

1 1,421,028

7.675.792

1901

13,334.629

6,373.372

1903

10,332,666

7-323.737

1903

4,005,643

3,166,853

1904

loa

31. 774.89s

34,296,823

1905

10,273,023

6,970.345

1906

7,187.858

6,591,515

1907

32,165,448

13,037,497

1908

132

209,835,443

177,073,348

1909

60
1,376

25,190,156
$467,242,381

15,760,177

$391,696,423

Annual average

24,591,704

I have not included in the above, seventy failures not
dated, which occurred between 1865 and 1896.

It ^

Results of Liquidations

Statistics of losses to depositors are not available, but
in the report it is stated that in 1896 the then Comp-
troller secured a list of banks which failed in each state
from 1864 to 1896, and investigated the results of the
liquidation. The twelve hundred and thirty-four mak-
ing up this list had at suspension liabilities of $220,629,-
988, and nominal assets of $214,312,190. On claims
proved dividends were paid to the amount of $100,088,-
726, or 45.4 per cent, of the agj,'regate liabilities. There
is one circumstance which would make it unfair to apply
that ratio to the liabilities shown in the foregoing table:
It is well known that the large total shown for 1908 arose

THE COST OF S INGL E -OFFICE BANKS

through the suspension of a number of banks and trust
companies of considerable importance in New York Citv
which closed their doors during the panic, and were after-
ward restored to solvency through the contribution of
fresh capital by their stockholders. It is but right
the- .ore. that any calculation of loss to depositors should
i^ikc c..gn,;'unce of this circumstance. Probably it will
be cnnccdod <;iat an allowance of $100,000,000 will be
an, pie. Assvmmg, then, that $100,000,000 of the liabili-
■ -^ h.-n f-.r 1908 would be redeemed without loss, and
reducing the aggregate by that amount, there remains
the sum of $^567,242,381 to which the ratio of 45 per cent
might apply. Thus $165,259,071 results as the probable
sum of the dividends paid, or to be paid on the claims
proved. In other words, the loss to depositors would
approximate §201,983,310 in the nineteen years ended
1909, providing the ratio of recoveries from the assets
turns out to be the same for the period 1890 to 1900 as it
was for the period 1864 to 1896. If the recoveries during
the period 1896 to 1909 be judged according to the ratio
of nommal assets to total liabilities, the dividends to

^^ffu^^r', •?"''^ ^PP^-'-'^ t" amount to a less percentage
of the liabilities than was paid in the period 1864 to 1806
In the earlier period-1864 to 1896-the liabilities were
$220,629,988, while the nominal assets were $214 712 loo
or 97 per cent, of the liabilities. In the later peri^jd-
1896 to 1909-the liabilities were $387,140,017. and the
asse s wore S297,4«.,442, or only 77 per cent, of the
liabilities. However, I have estimated that the recov-
eries from 1896 to 1909 would be on the same ratio as in
the earlier period.

Depositors Lose $11,786,407 Per Year

Summing up, it is seen, if these calculations are cor-
rcct, that the depositors in and creditors of banks other
than national have to expect in the future, judging by

A RATIONAL BANKING SYSTEM

ii:

■11

past records, that there will be on the average seventy-
two banks becoming insolvent every year, locking up
$24,591,703 of depositors' funds; and that $10,630,701
of the locked-up funds will be ultimately lost. Con-
solidating the two exhibits — that of the national banks
and that of the state-controlled banks — the following
results: The people of the United States may expect
that each year an average of ninety-one banks will close
their doors, locking up $31,117,433 of their depositors'
funds, and that $11,786,407 of the funds so locked up
will be irretrievably lost. When the loss to depositors
is so heavy as this it may safely be assumed that the
loss to stockholders is very large.

Losses of Depositors in Banks Which Were Not

Closed

But there are other items: Account should be taken
of the special losses suffered by depositors in banks which
did not close their doors in 1893 and in 1907, but which
placed an embargo on cash withdrawals. In both those
years, as everybody knows, a considerable number of
banks refused to pay their liabilities in cash as they ac-
crued. In one sense the suspension of cash payments
representnl the lock-up of a vast amount of depositors'
funds. Business men and others who had funds placed
in the banks for certain purposes were in some cases re-
fused possession of their own property or were tendered
payment in a depreciated medium. Many were thus
prevented from carrying on their business advantageously,
others from engaging in profitable enterprises. The loss
which they suffered in this manner is unquestionably
chargeable to the banks which refused to stand up and
honorably discharge their liabilities. The discount or
loss which depositors suffered, through having to use in
their payments depreciated certified checks instead of
the cash to which they were entitled, clearly constitutes

THE COST OF S I N G LE - O F F I C E BANKS

a grievance against the banks. If the banks had faith-
ful y observed the law. if they had performed their part
of the contract between themselves and their depositors
there could have been no premium for cash. If in de'
fence It is argued that the banks could not have con-
tmued paying cash without wholesale insolvencies the
argument damns the banking system. In banking, no
matter where, to suspend cash payments is the unfor-
gettable thmg; the banker who fails to respond, on the
mstant. to the just demand of his creditor, forfeits a
measure of the respect of his fellow-bankers at home and
in foreign countnes, and no amount of arguing or explana-
tion can set him right. ^

Losses op the Borrowing Classes
Ag^n, it is to be observed that bank failures inflict loss

Whrn^\ [Tm^ '^T.^' ^'" ^' "P°" the depositors.
When a bank fails and is liquidated the customers in-
debted to It must pay to the receiver the debts they owe
It. In the cases of some borrowers other banks may be
induced to take up the loans. In times of disturbance
that course is exceedingly difficult; and it always happens
even when conditions are normal, that some are not able
<i this way to finance their liability to the failed institu-
1. and have themselves to be sold out or liquidated
aetimes when they are quite solvent and worthy of
credit. ^ The inconvenience and loss thus suffered by the
borro^^^ng class, of which no estimate or calculation can
be made, is to be added to the score.

Responsibility of the Banking System for These

Losses

It is next in order to discuss the questions: How much
of this annual loss, resulting from bank failures and sus-
pension of cash payments, can fairly be charged against

A RATIONAL BANKING SYSTEM

the system of local single-office banks? Would the loss
have been greater or less had the United States possessed
properly constituted and operated branch banks such
as exist in other important countries? Some idea as
to the answers can be arrived at through taking ac-
count of banking results elsewhere in the Anglo-Saxon
world.

In the British Isles, where the branch system pre-
vails, failures of typical branch banks are rare. It is
many years since a really important bank went down.
The Barings, who stopped in 1890, were acceptors of in-
ternational bills and financiers rather than a branch bank.
So unusual are failures among the representative institu-
tions that depositors using any one of the large branch
banks must have come to regard the risk of loss from that
source as entirely negligible. It is not so in the United
States. Mary depositors there cannot tell with any degree
of assurance whether or not their bankers will be among
the number slated to fall in each average year.

I \

Bank Failures in Canada

Canada's experience is perhaps more in point than is
that of the United Kingdom. The following table com-
prises all the bank failures in the Dominion between 1890
and 1909:

Year Bank

1^93 Commercial, Manitoba,

i8ys Du Peuple,

1899 Ville Marie,

1905 Yarmouth,

1906 Ontario,
1908 De St. Jean,
1908 De St. Hyacinthe,

Liabilities

$1,341,251
6,820,450

1.95'. 346

470.323

15,229,685

556,882

1,182,362

Loss to
Creditors

nil
$1,236,511
1,248,818
nil
nil
♦

• Liquidation not completed; results to depoLiitors not yet known.

If it were not for the bad showing f)f the four French-
Canadian banks the record would show a total clearness
from 1'. jses to creditors. With regard to the loss to de-

THE COST OF S I NGL E -OFFICE BANKS

positors in the Banque de St. Jean it is known that it will
be heavy. I'uttinj,' the loss at 75 per cent, of the liabil-
itics, vve may set the total at $417,000. And if it be as-
sumed that the Banque de St. Hyacinthe depositors lose
2', per cent., that would make another $295,000 Addine
the two items to the loss suffered by depositors in the
Banque du Peuple and the Banque Ville Marie a total
ot $3,197,329 results for the nineteen years, or an annual
average of §168,280. as compared with an annual averaee
of $11,786,487 for the United States.

As regards lock-up of depositors' funds, it is to be ob-
served that m the case of the Ontario Bank none occurred
Un the day the failure was announced the Bank of Mont-
real assumed the Ontario's liabilities, and at all branches
paid all demands as presented. Allowing for the circum-
stance, the total amount locked up in the nineteen years
was $12,331,614, or an annual average of $649032 as
compared with the annual average of $31,117,433 shown
by the United States. Thus the average annual lock-up
in the United States is forty-eight times as great as occurs
in Canada; the annual loss suffered by bank creditors is
seventy times as great as in Canada.

Losses of Bank Stockholders

This comparison applies onlv to the creditors of banks
m the two countries. I should like to present a com-
parison of results to stockholders, but I cannot see how
a fair comparison can be instituted. I am aware that
an eminent Canadian banker, Mr. H. C. McLeod, of the
Bank of Nova Scolia, does compare the losses of bank
stockholders in Canada with the losses of holders of the
stock of national banks in the United States. He presents
his comparison as part of his argument for the institution
of external examination or supervision of the Canadian
banks.

Mr. McLeod makes the losses to national bank stock-

:^3

! 'I

A RATIONAL BANKING SYSTEM

holders in forty-four years to amount to $100,825,239,
his process being as follows:

Aggregate capital of national banks becoming in-
solvent (to 1908) |8' ,737,430

Cash assessments on stockholders a ',074,373

$103,701,793
Less cash dividends returned to stockholders 3,876,554

$100,825,339

Then he applies this loss to the $930,365,275 of national
bank capital stock outstanding in 1909, and makes the
percentage of loss 11. The losses to Canadian bank
stockholders in the same period of forty-four years end-
ing in 1908 he estimates at $44,700,000; and applying
the amount to the amount of capital stock in 1909,
$94,471,415, he gets a loss of 47 per cent. Before com-
menting on these figures I might observe that when the
losses as here given are applied to the average of capital
for the forty-four years the results are 71 per cent, of
average capital for Canada, and for the national banks
17 per cent, of the average capital.

A Prospect of Immunity from Bank Failures

There are several reasons why I consider that these
figures are not suitable as a basis for comparing the
losses inflicted on bank stockholders respectively by the
branch and single-office systems of banks. I concede
that the Canadian losses as stated may be approximately
rorrect, but I hold that losses of national bank stock-
holders are understated. The figure given as represent-
ing their losses does not include the destruction of the
surpluses and the profit and loss balances, and it does
not include the fresh capital contributed by the stock-
holders of banks remaining solvent or restored to solvency.
As everybody knows, the Comptroller is continually re-

THE COST OF S I NO LE -O FF I C E BANKS

quiring banks to call up fresh capital to replace that lost.
Finally. ,t is to be remembered that i., 'his comparison
the cream o the United States system is set against the
whole Canadian system. If the results for all^he tite

to s^v ZTlu ^^'' ''■'■' '""'^ '^^ discovered. I venture
to say that the comDarison would not be unfavorable to
the Domm.on. notwithstanding the fact that the Cana-
dian banks have been free from external supervision
Ihere se -ns to be some grounds for expecting that the
Canadian Da <ks will before long be placed under the super-
vision of an outside authority; and there is fair ground
for agreemg with Mr. McLeod in his contention that the
combination of branch banking, efficient internal in-
spection, external supervision, and care in granting
charters for new banks, would very likely abolish bank
!k rT ,^'r^^^her in Canada, as it appears to have
abolished them in Scotland.

Reduction- in Number op Canadian Banks
A fact in connection with the Canadian failure list to
which attention should be given, is that five of the seven
tailed institutions were small localized banks. Three—
the \armouth. St. Jean, and St. Hyacinthe-were dis-
tinctly of the United States type Judging by th s
Canadian record, with the last ten years abs^^lutely clear
so far as the typical branch banks are concerned the
greater part of the losses shown for the United States so
far as creditors are concerned, can fairly be placed against
tlie system of local independent banks. Also there are
strong grouncls_ for expecting, providing each country
holds to Its existing system, that the Canadian record
^^l get fairer and fairer, while that of the United States
Jill get darker and darker. The record of Canadian
disasters shows that since 1890* nine banks have failed.

in J '^i' v^*" ^^^P*'^"^ Bank, a small .single-office bank in the Prov-
Bank of r"" "™7^^>i.-l-d ^^dy in ,g:o; and the Farmer
Bank of Canada failed disastrously in December, 1910.

> (
I .

A RATIONAL BANKING SYSTEM

Tn addition, twelve were absorbed or went into liquida-
tion, makinfj a jjross reduction f)f twenty-one. In the mean
time only nine new banks have started. Thus a net re-
duction of twelve has been effected. At the present time
the number of banks in active existence is twenty-seven.
The requirements, in the way of capital subscriptions and
cash payments on stock, arc so onerous — being pur])osely
made so by the Dominion Parliament — and the existing
banks cover the country so completely and meet he
needs of the commercial community so fully, that it is
a most difficult matter to start a new bank in Canada.
Thus the situation in British North America is tending
strongly toward further reduction of the number of banks
and toward further increase in the size and strength of
the individual institutions. By-and-by there will be,
very likely, perhaps twenty great banks, each one so
strong and well managed as to reduce very much the
danger of failure.

Rapid Increase in Number op United States Banks

Look next at the tendency prevailing in the United
States, and mark how different it is. Following is the
record for the past five years of the number of banks in
operation, as taken from the Comptroller's reports:

NUMBER OF BANKS IN THE UNITED STATES

Savings,
Private,
State,
National,

lyos

1.237
1,028

7.794

5.8.?.3

1906

1.319

029

8,863

6,199

1907

1,41s
1,141
9,9<>7
6,544

190S

1,453

1,007

1 1,220

6.853

1009

1,703

1,407

I '.3 19

6,893

15,892 17,309 19.067 20,533 21.412

(I have not included loan and trust companies. There
were ton hundred and seventy-nine of them reporting to
the National Monetary Commission in 1900.)

The mill is turning out new banks at the rate of thirteen

Tin- COST OF SINGLIJ-OFFICIi li A N K S

hundred and eighty per year, and as yet there are few in-
dications that its activities will be lessened. Uo fair-
minded person can deny that a large number of the new
banks created every year are in the hands of ir competent
or inexperienced men. Some are in the han Is of down-
right rogues. What hope is there that supervision, ex-
amination, or inspection can stop or reduce the practice
of bad banking, the making of bad loons, when the busi-
ness is kept wide open for all comers ?

Diversion op Bank Resources into Bond Investments

But, though the creation or coming into existence of
such a vast number of new banks, many of which will be
ill managed, is thus certain to result in the yearly recur-
rence of frightful losses, there are no other means of t)ro-
viding facilities for the smaller places. It is hardly to be
expected that a bank which is organized in a little place
of eight hundred or one thousand population will be able
to command the services of ofiicers who understand the
principles that should govern the business. Yet unless it
IS started tl-e locality must go without a bank. The
branch system supplies banking offices for places even
smaller than this and ensures strength and good manage-
ment at all points.

There is another respect in which the single-office banks
of the U ited States are exceedingly costly. In his ad-
dress dc.ivcred in 1908 before the Economic Club of New
York, in which he styled the United States banking sys-
toLi "the worst in the world," Andrew Carnegie quoted
Mr. Fowler, the then chairman of the Finance Committee
of the House of Representatives, v stating that the loss
to the country, through the divet :.>n of banking capital
into Government bonds, amoun ,1 to §150,000,000 an-
nually. Most bankers know that one of the chief reasons
why this costly diversion of capital has continued to this
day is the existence of such a multitude of banks, of aU

A RATIONAL BANKING SYSTEM

degrees of size, soundness, and strength. It is manifestly
impossible, even for experts, to tell which might safely be
trusted. Therefore, it has been considered essential that
for the issues of bank notes to serve as currency, and for
the deposits entrusted to the banks by Government some
specific security should be required; and Government
bonds have seemed best fitted for the purpose. Of course
the evil of the arrangement lies in the fact that the Govern-
ment has appropriated to its own use a huge loan fund
that would, under other circumstances, have been avail-
able for commercial borrowers. The safety with which
the national bank notes have been endowed has been ac-
quired at a considerable cost; for, as the national banks
must buy Government bonds in amount at least equal to
their outstanding note circulation, their note issues do
not permit them to increase their loans to the public by
a single dollar. In Canada, owing to its note-issuing
rights, each bank's power to discount for its customers is
increased practically by the amount of its note circula-
tion, less the cash reserve which experience teaches it to
hold against the notes — not more than 30 per cent. This
means much to the borrowing customers of the Canadian
banks, and consequently to the Dominion's trade.

Classification of Ba.vk Resources

The matter of the diversion of banking capital into
Government and other bonds goes deeper than the note
circulation. Besides furnishing bonds as security for
Federal Government deposits, the banks are obliged to
provide bonds as security for state government deposits,
and in some states, for the deposits of municipalities.
The system of banking itself induces a further and en-
tirely voluntary investment in bonds and stocks in the
following manner: A single-office bank, established in a
place where deposits exceed loans, and there are many
such places in the country, invests a considerable part of

THE COST OP SIXOLH. OFFICE BAXKS

the surplus in bonds, whereas, under the branch vstcni
such surpluses would be utilized to make ac'vMnces tJ
commercml borrowers at other points where the natural
demand for loans exceeded the supply of deposits. The
tendency seems to be in the direction of requirinK and en-
couragmg tN,. banks to buy ever more and more bonds
for one purpose and another, until there promises to be
little left for what should constitute the bulk of their
resources-commercial paper. The following table, com-
piled from the summary of special reports obtained for
and compiled by. the National Monetary Commission!
shows how large a proportion of the assets of the banks is
invested in bonds and stocks, and loans on bonds and

SbOCKS I

TWENTY-TWO THOUr^VD POUR HUNDRED AND NINETY-ONE BANKING
INSTIl.,r:ONS— 28th APRIL, 1909

United States bonds .... to

fearSs'"' """"'"p^' ■^nd-.v.v.-.v.v.-.v.' r;r^f,]:iii
§s^n£'^§"^£.r*^'^-^-^^^°--" ''5SSS

Foreign securities. 059.^73,561

43.706,440

Total bonds and stocks . . t~Z ^

Loans on demand secured by collateiai .' .' .' ." .' * f o,'« 6?!8,',«

Loans on time secured by rollateral ...'.'." 2 o''^ 8

Total resources applied to bonds and stocks tTTZ

Real estate, other than premises * *'.590,43S.S39

Real estate mortgages owned ')5.377.o»4

Loans on real estate mortgages and iiens .' .' .' ! .' ." J.'f ly,' 2^76,405

Grand total applied to bonds, stocks, and real
estate ^

Grand total other loans' and overdrafts,' presumV '"■""-7'^°-583
ably mercantile ' „

Total resources. . . 4.891,246,403

21,095,054,420

Proportion resources applied to bonds and stocks 4 1 per cent

ft«portion resources applied to real estate tj C^J cS^t

Proportion resources applied to mercantile loans '. '. '. J3 ^ c^t

In this table I have assumed that all loans under the
tolloving headings represented mercantile advances— wz.;

A RATIONAL BANKING SYSTEM

"On demand, unsecured by collateral," "On time, with
two or more naiiu-s unsccun-d by collattTal," "Not
classified," "Ovenlrafts, secured and unsecured."

Canadian Banks' Mercantilb Loans Relatively

Larger

The pitiful proportion of banking resources applied to
commercial discounts is seen at once when comparison is
made with Canada. Practically the whole of the banking
business of the Dominion is in the hands of the chartered
banks, now twcnty-soven in number, with sonic twenty-
two hundred branches. On April 30, 1009, the banks then
reporting to Government made the fol.jwing showing:

CANADIAN BANKS ,^OTII APRIL, I909

Dominion and jirovincial Government iK^nds $ 10,419,083

Canadian nninicipal, and British, ForclKn, or Colo-
nial public scturitifs 31 133 306

Railway and other bonds 5 1, 349,556

Total bonds and stocks $ 83,890,844

Call and shi)rt loans on Iwnds and stocks, Can.ila. .. 50,313,960
Call and short loans on lx)nds and stocks, elsewhere. ii4,493!570

S 347,51)8,374

Current loans and discounts Canada (mercantile) $ 524,i()H,;;88

Total resources §1,035,015,613

Proportion resources applied to bonds and sticks 2. -icr cent.

Proijortion rcsfjurces applied to mercantile bans 5 ' per cent!

It will be easier to understand what the diversion of
banking resources into bonds, stocks, real estate loans,
etc., means to the commercial and industrial interests of
the United States when it is explained that if the same
proportion of the banking funds were applied to mer-
cantile discounts as is '•o apj-lied in Canada the United
States banks would hold $10,758,477,754 in commercial
paper instead of $4,891,246,403, as shown in the table.
In other words, the amount would be more than doubled.

It may be objected by some critics that inasmuch as

Till: COST op SINGLE. OFFICi: BANKS

the figures for the United Slates institutions include th"
reports of savings bank and trust companits the holdings
of those institutions in the Dominion should bo taken
into the account. I might explain that practically f.ve-
sixths of the savings bank funds in Canada are held by
the chartered banks, and that the Canadian trust com-
panies, though they hold some deposits, may not trans-
act a banking business. However, it will be interesting
to include the deposits of all these outside institutions
and sc-c how the percentages are affected. The deposit
holdings of the two departments of the Oovernmenl
savings banks, of the two special savings banks in the
Province of Quebec, of the loan and mortgage companies
and of the trust companies would probably have
amounted in April, igoy, to $146,000,000. Now I shall
assume that the whole of this outside fun.l was invested
in bonds, stocks, and real estate, and in loans on them.
On that basis the proportioa of Canadian banking re-
sources ai)pli(-d to bonds, stocks, and real estate becomes
3-1 per cent.; and the proj)ortion ai)plied to mercantile
discounts, 45 per cent.— the latter being still nearly double
the proportion shown by the United States.

EPFliCTS OF THE DIVERSION OF CAPITAL

The diversion of this immense sum has, of course

proved a great convenience for the governnunts and cor-

poratons issuing securities. It has delivered them from

the ne'-essity of applying to Europe for much capital.

Had they been obliged to do so, tlv y would doubtless

have been i„rced to render a stricter account of their

affairs. But it is not difficult to see that the diversion

has jilaced a fearful handicap on the smaller and weaker

members of the mercantile and industrial community.

The rich and powerful corporations can get the banking

accommodation they require. Not so the little traders

and factory owners. If there is a shortage they are the

ones who must do without.

III

THE PANICS
Frequency of Panics ix the United States

BEFORE passing definitely into the consideration of
the relations existing in normal times between the
banks and the general public, it will be advisable to de-
vote a chapter to the subject of the panics, and one to
a discussion of the conditions of banking service. I have
already referred briefly in the introductory chapter to
the panics of 1893 and 1907. On both occasions cash pay-
ments were suspended quit"^ generally throughout the
Union, bank failures were numerous, the banks ceased
for a time to perform their ordinary functions, and
financial conditions were entirely disorganized. Foreign
bankers having funds on deposit with the greatest banks
in the United States were obliged to explain to their
clients who purchased drafts that the drafts would be
paid not in cash but in a depreciated medium. No
patriotic American who understands what really hap-
pened on the two occasions, 1893 and 1907, can think
of either year witho.it shame and humiliation. If it were
possible to point to other great countries in which at any
time during the same period the banking institutions
failed in the strict observance of their legal obligations,
and ceased to extend the customary support to the in-
dustrial and mercantile interests of their country, the
sense of humiliation would be appreciably lessened. But
even this comfort is denied. Not a single one of the other
great countries has had its financial honor tarnished in

THE PANICS

recent years by a general banking suspension. Even
among the lesser states a general suspension is a most
uncommon occurrence. So far as Anglo-Saxon countries
are concerned the only occurrence of that nature in the
last forty years was the Australian breakdown in 1893
For some years prior to that trouble the Australian banks
had been advancing heavily on land security, and had
been actively canvassing for deposits in England and
Scotland to provide the funds. When the disturbance
of 1893 finally reached the Antipodes it caused the stop-
page of all the banks save one. In the subsequent re-
construction depositors in some of the suspended banks
were obliged to convert certain classes of their deposits
temporarily into stock.

Canada's Immunity from Panics

In Canada, notwithstanding that the commercial and
financial interests of the country are always closely in-
volved with the United States, no disturbance whatever
took place either in 1893 or 1907. This is the more re-
markable inasmuch as at the later date, when the panic
struck New York, the Canadian banks had a large part
of their reserve money employed there in the shape of
caU loans and bank balances. The total so employed on
September 30, 1907, was approximately $60,000,000.
Yet m both panics, at every banking office in the Do-
minion, business went on in the regular way. Depositors
drew cash as they wanted it; borrowing customers dis-
counted fresh paper and renewed old paper with the same
freedom as they had three and four months before. The
banks did not even exact the fifteen days' notice on time
deposits to which their contracts entitled them.
_ Not only did they care for th« industrial and mercantile
mterests of the Dominion, and maintain Canada's financial
honor in the eyes of the world, but they rendered valuable
assistance to many trading and manufacturing concerns

4 43

A RATIONAL BANKING SYSTEM

[

J. ■

in the states immediately south of the international
boundary. At such places as Niagara Falls, Detroit,
Buffalo, St. Paul, Spokane, Seattle, the notes of the
Canadian banks proved exceedingly useful during the
time the currency famine prevailed. Also a number of
American concerns in good credit were able to save them-
selves from insolvency or their businesses from disorganiza-
tion through negotiating with the Canadian banks the
loans which their home institutions could not or would
not grant. General suspension of banking payments is
something Canada has not seen since the hard times of
18 j7. For over seventy years the chartered banks have
stood up honorably, meeting their liabilities in cash as
they accrued.

Explaining the Panics

But it is time to consider some of the explanations that
have been offered as to the peculiar susceptibility of the
United States to banking panics, and the peculiar de-
structiveness of the panics that occur. One body of
opinion has it that certain powerful interests in the great
centres were guilty of wilfully engineering the disturb-
ances in order that they themselves might derive personal
gain. It is not my intention to waste any time discussing
so foolish a contention. Any man who advances it,
seriously believing it to be true, brands himself as ignorant
of financial conditions, and any man who advances it,
knowing it to be false, brands himself as a scoundrel.

Another explanation is that the country has suffered
peculiarly in this respect because the people have been
guilty of greater excesses, because they have offended
more seriously against certain important economic laws,
than have the people of other countries. Those who be-
lieve that this explanation covers the matter satisfac-
torily dilate upon the ugly instances of violated trust by
parties in high standing which are made public from time
to time, the contemptuous disregard manifested by the

THE PANICS

same parties for some of the commonest laws of decency
and honor, upon the successive bursts of wild speculation
in which Wall Street indulges, and upon the enormous
extent to which floating capital is converted i.-to fixed
capital whenever prosperity prevails. "So," they con-
clude, "as we are worse offenders than other nations in
these matters it is but right that our punishment should
be greater." They accept the chastisement as in some
measure the hand of God, and in some measure the price
paid for an exceptionally rapid industrial and political
development.

It would be fatuous to dispute the strength of this con-
tention. When the public learns that men with honored
names, who sit at the boards and in the official chairs of
great corporations, have been guilty of plundering the
trusts they were paid to protect, the circumstances must
have a weakening effect upon credit in general.

Single-Office Banks the Real Cause op the Panics

With regard to the undue prevalence of the speculative
spirit it is well to remember that in the United States
values, on the whole, are increasing constantly and
rapidly; and wherever that is the case the speculative
spirit is sure to be strongly in evidence. Also it is well to
bear in mind, in reference to the losses experienced in the
stock markets by ignorant outsiders, that in all the
worid's centres the capitalist-professionals look upon the
amateur speculators as, to some extent, their lawful prey.
There is a body of expert observers, apparently steadily
increasing in numbers, who, while conceding that these
things have an important effect as producers of dis-
turbances, are inclined to regard them as being after all
subordinate causes. They place upon the banking system
of the country the chief blame for the special troubles
which the United States suffers. As the Republic is the
only great country in the world to experience banking

A RATIONAL BANKING SYSTEM

suspension in recent years, so it is the only great country
in which the banking business is in the hands of small,
single-office institutions.

Fifty, seventy-five, and one hundred years ago de-
structive panics were of frequent occurrence in England.
Thus there was the suspension of the Bank of England
during the war with France in the closing years of the
eighteenth century, in which case cash payments were
partially resumed in 1816. There was a great banking
crisis in 1825, during which sixty-three country banks
went down. There was a very considerable pressure in
1836, and in 1847 a panic of the first magnitude was en-
countered. The American breakdown of 1857, coming
upon an unhealthy state of affairs in the United King-
dom, produced another great panic in that year. Still
another came in 1866. Since the beginning of the last
quarter of the nineteenth century there has not been a
single banking pani^ in England in which credit was
broken down.

England's Experience with Small Local Banks

Now let us review banking conditions in England dur-
ing this period of one hundred years. In Macleod's
Theory and Practice of Banking it is stated that at the
close of the eighteenth century a multitude of country
banks started up in all directions. "In the year 1797
they had been reduced to two hundred and seventy; in
1808 they had increased to six hundred; and in 1810,
when the Bullion Committee was appointed, they amount-
ed to seven hundred and twenty-one.

"In 181 1 they were seven hundred and twenty-eight;
in 1 8 13 they had r.^en to nine hundred and forty."

One of the leading English financial papers recently
remarked, in an article on American banking, that the
system now in vogue in the United States is similar, in
some important respects, to that prevailing in England

THE PANICS

one hundred years ago. The description in the Theory
and Practice of Banking shows cleariy where the similarity
hes. Those English banks which were coming into exist-
ence by scores a hundred years ago were httle local banks
of the American type. Though some of them operated
branches, the operations of each were confined, as a rule
to one small district. The Act of Parliament which con-
fined the right of note issue, outside of the Bank of Eng-
land, to partnerships not having more than six members
operated to encourage the creation of small local banks,
just as the virtual prohibition of branches operates in the
same direction at the present day in the United States.

Development op Large Branch Banks Increases
Financial Stability

It is noteworthy that in the last half of the nineteenth
century the number of banks in England and Wales has
been greatly reduced. The process of centralization has
been especially rapid in the last quarter of the nineteenth
century and in the first decade of the twentieth century.
In less than thirty years the number of banks (in Eng-
land and Wales) has been reduced from one hundred to
fifty, chiefly through amalgamations and absorptions.

I do not presume to say that the disappearance of the
hundreds of little local banks, by absorption, failure, and
liquidation, accounts by itself for the comparative im-
munity from serious banking convulsions enjoyed by
Great Britain in the last thirty years; but I do con-
tend that the change in the character of the banks has
played a very important part in making the record
cleaner. At any rate, when the little banks existed in
large numbers there was serious trouble in the banking
worid once in every decade; and since the business has
passed from their hands into those of the strong branch
banks there has been no general banking breakdown.
Look at the Baring crisis in 1890 for example, and im-

I.-

A RATIONAL BANKING SYSTEM

agine what would then have happened in England if the
business of the country, instead of being in the hands of
the great joint stock banks with their numerous branches,
had been in the hands of thousands of small local con-
cerns. It is very easy to see that instead of aiding the
Bank of England at the difficult juncture, the small
banks would have vastly increased its troubles, as a
great many of them would have clamored for advances,
while at the same time clutching all the cash they pos-
sibly could. But, as everybody knows, the support
which the joint stock banks gave the Bank of England
saved the situation.

The Panic op 1907

However, there is no need to go abroad for proofs that
a system composed of single-office banks is peculiarly
liable to destructive panics. All the necessary evidence
is to be found in the history of the 1907 panic in the
United States.

When the difficulties of the Heinze-Morse chain of
banks in New York City became public property, the in-
dividual depositors of the metropolitan banks, as well as
their banking depositors, became somewhat uneasy about
their balances. When the Knickerbocker Trust Com-
pany closed its doers on October 24th their uneasiness
was changed to downright alarm. In New York City the
individual depositors of those particular banks which
were connected in some way with the Heinze-Morse group
of financiers started a run which afterward spread to other
institutions. The brunt of the battle fell upon the Trust
Company of America, and upon the Lincoln Trust Com-
pany. It was recognized in the financial district of the
city that a great deal depended upon the result of the
runs on those two concerns. If they could be saved the
storm would probably subside in a short while; if they
closed, no one knew what might happen.

THE PANICS
Cas.i Withdrawals op the Interior Banks

The individual 'lepositors in New York City of the
great clearing-house banks, and of other banks not in-
volved or entangled with financiers who were under sus-
picion, did not become panic-stricken. Possibly some of
them who remembered 1893 took prompt measures to
withdraw their balances in the shape of cash, in the ex-
pectation that another suspension of payments would
ensue, in the course of which ca-'h would go to a "pre-
mium," as it did fourteen years before. But there were no
runs on those institutions. So far as the disturbance in
the city was concerned the plain duty of the Clearing-
House Association was to lend cash support to the trust
companies and banks that were beleaguered, or to such
of them as were in sound condition. And it did not ap-
pear that that task was beyond their strength. Under a
different system of banking they would, in all probabiHty,
have done this easily; the panic might have been stayed
and the rest of the country saved much of its ill effects.
But the clearing-house banks were not allowed to con-
ce- t -ate their attention and resources upon the spot in
their defences at which the danger originated. Just at
the time when to uphold the honor of the nation it was
absolutely necessary for the banks to stand shoulder to
shoulder, thousands of banks in the interior joined in a
rush for the cash resources of New York, which should
have been left available for fighting the panic in the city.
It happened that the interior bankers, too, remembered
1893. They remembered how in that year the precious
reserve money which they carried on deposit with great
banks in New York was locked up beyond their reach, so
far as cash withdrawals were concerned, through the suspen-
sion of payments. Even before the Knickerbocker failure
they saw that events in New York were tending strongly
toward another ruspension : and in self-defence they proceed-
ed to take the very action that made suspension inevitable.

II t^:

A RATIONAL BANKING SYSTEM
Bankers' Balances in New Yjrk

Now let us look for a moment at the amount of the bal-
ances carried by other banks in the national banks of
New York City on the eve of the 1907 panic. The last
abstract of condition of national banks issued prior to the
panic by the Comptroller of the Currency was that under
date August 22, 1907. On that date the New York City
national banks held, according to their reports to the
Comptroller, deposits of other banks as follows:

Due to other national banks, t2S9,asS,7&a

Due to state and private banks a'^d bankers, 79,072,395
Due to trust companies and savings-banks, 136,985,691

*465.3»3.868

On the same date their holding of specie and legals
amounted to $218,786,132. It is certain that a large
proportion of the $465,313,868 of balances consisted of
reserve money placed by the owners to be available
against an emergency or evil day. It should be remem-
bered that the amount merely represents the balances be-
longing to other banking institutions which the national
banks of New York City held on August 2 2d.

Effects of the viTiTHDRAWALS

Outside of the national banks are some large trust com-
panies, state and private banks, each of which all the
time carries heavy deposits belonging to the interior banks.
But we may confine our attention to the national banks.
It was remarked, a short distance back, that the interior
bankers were manifesting a strong disposition to get their
reserve money out of New York and into their own vaults
at home. It was well known in New York that many of
these banks would withdraw every dollar of their bal-
ances if they were allowed to do so. If, on the whole, the
interior bankers withdrew in cash from the New York City

THE PANICS

national banks only one-third of what they had the rieht
to withdraw ,t would exhaust all the cash holdings 0"^
^7. Y°':^ bankers except some $66,000,000. If ^they set
out to withdraw one-half their balances they would have
exhausted the whole cash holdings before they accom!
phshed their purpose, and would have left nothing at all
in cash for the individual depositors of these same New
York national banks, whose claims amounted on August
? t° *53;.636.6o6. This makes it plain that had the
demands of the interior bankers been complied ^tht
^ull the available cash strength of the city would hav^
been drawn away to the country or to the interior when
. was urgently needed at the centre. In other words
It was as if some human body were desperately resisting
the onset of a terrible disease. At the approach of Sf
crisis, at the very moment when the heart required its
full supply of nourishment, it was attempted to draw the
life blood to the extremities.

The metropolitan bankers declare that the only means
of stopping this huge drain was suspension of cash pav-
ments; whereunder the New York City banks refused to
surrender the property of their banking and individual
customers in the manner demanded, which was the man-
ner required by law. Partly to save New York's face
and partly to prevent other difficulties and trouble the
order to suspend cash payments was sent to all' the

r;ed%heTrd:r. ""*"^- ^ "^''^ "^^^""^^ °^ ^^^

Panic op the Country Bankers

While the panic was in progress many of the country
banks made frantic efforts to increase their reserves of
cash m vault. These efforts were highly successful in
quite a number of cases. Thus a bank in Indianapolis
advertised that it had got its reserve up to about 60 per
cent, of Its liabilities, several in other places were above

A RATIONAL BANKING SYSTEM

SO per cent., and those which got above 30 and 40 per
cent, were quite numerous. The point to be remem-
bered is that at none of the points where these banks
were located was thv.e any run of depositors or alarm of
any consequence. The piling up of cash was purely pre-
cautionary; each banker who undertook the task did so
in order that he might feel safe and be prepared for a
run if one developed.

Another thing to be noted and remembered is that
many of the country bankers, m their haste to build up
llicir cash holdings, v;ere not satisfied merely to withdraw
their balances from the central cities. Their course in
doing that was destructive enough. It is understood that
it forced the suspension of payments. The other meas-
ures they took were scarcely less destructive. They pro-
ceeded in a great number of cases to exact pr.yment of all
discounted paper as it matured, and refused to grant
renewals or new loans. This is the thing that overthrew
industry and trade, that forced worthy and solvent firms
into bankruptcy, threw workingmen by thousands out of
employment, and destroyed millions of dollars of the
hard-earned profits of business men of all kinds.

» •

if:;

Troubles op the Westinghouse Company

Everybody who follows financial happenings in the
United States closely is familiar with ; 3 fate of the pros-
perous Westinghouse Company. 1+ > as doing a good
business at the time of the panic, b it had outstanding
an amount of short-date paper whi>.n was held in small
lots by a considerable number of banks in difTerent parts
of the country. When the panic came these banks in
almost every case demanded instant payment of the
notes as they matured. As it was impossible during so
troubled a time to negotiate new loans to take up the old
notes, the Westinghouse people were thrown into bank-
-uptcy. It is commonly said that their floating debt was

THE PANICS

the cause of their failure. It would be fairer and more
correct to say that they were the victims of an antiquated
and inefficient banking system. It is not at all improper
and in countries other than the United States it is not un'
duly dangerous, for a great manufacturing concern such as
the Westmghouse Company to have a reasonable amount
of floatmg debt. Apparently the Westinghouse floating
debt was not unreasonably large. Had it been all held
by one or two strong branch banks, instead of being held
by dozens of small bankers who had no interest in the
company s well-being except in regard to the lio.ooo or
laS.ooo worth of notes which they held, the company
probably would not have been embarrassed by the New

I°« H.^r;''^"' '^u" ^*"^"" ^°"^^ have recognized it
as a duty to carry them along; and. even if the company
were in fact insolvent, the bankers might very likely have
earned it till the excitement and panic had7ubsided

The Westmghouse case is typical of many others.
Manufacturers large and small, who depended upon
credits got through the note brokers from scores of liule
banks which operated far from the localities in which the
factories were situated, were forced to curtail their opera-
tions, and were considerably embarrassed as a result of
the attitude of the interior bankers who pursued the
policy just referred to. Some of them were. like the
Westinghouse Company, forced into insolvenc;. when if
they had been able to get the banking support to which
their financial position and their worthiness entitled them
and which the banks in other countries accord to the^;
customers in panics as well as in ordinary times, thev
would not have been seriously troubled. ^

iNTERroR Bankers Not Altogether to Blame

mS"of"^ ^^! ^T *''° "'°"*^' °^ ^907, and in the eariy
part of 1908. the mtenor bankers were lectured rather
severely for their hoarding propensities. It waTex'

5.?

A RATIONAL HANKING SYSTEM

plained to them that their conduct was unpatriotic, tnd
thpy were told that it was their duty to put their cash
into circulation rather than to store it in their vaults.
I.'ut when all the circumstances are considered it will be
seen tl at much unmerited blame was then laid upon the
>« i'. •; of the interior. The country banker is not at all
I > be i> amed if he takes instant action to recall his New
V-«-lc h. lance in the shape of cash when he anticipates
'11 ai embargo is about to be laid upon it. It is all
'cry wt.l to talk to him about the duty of the banks to
hit* ,(J =•!. julder to shoulder and to support each other,
!>i , lie '■ .ows 'veil '«nough that when it comes to meeting
.', temand A is ' |.<ositors for cash he will have to stand
f n his ov i; '-■^s. No, the censure for tine hoarding of cash
\ V the rt^Mor banks should not be laid upon the interior
tanker; ! belongs by right to the system of banking.

^;|

•If

Carrying Cash Reserves in New York City

No matter what system of banking exists in the United
States it will always happen that each individual banking
office will be called upon, in the ordinary course of its
business from day to day, to meet a certain proportion
of the withdrawals by its depositors through providing
drafts or orders upon New York, Chicago, St. Louis, or
another centre. It will be required, also, to provide
the proceeds of a large proportion of the loans and dis-
counts, put through for its borrowing customers, in the
shape of drafts upon these same centres. This is so be-
cause the bank's customers, depositing and borro .-ing,
have to make a large share of their payments in ihose
centres. Therefore, as the demands upon the bank's
resources converge largely upon New York, it is more
or less essential that it shall carry a largt- proportion
of its cash reserve in that city. But — and here is the
weakness of the existing banking system in this respect
of reserves — ^it cannot have its reserve in New York C" y

THE PANICS

an.l at the same time retain pos^ssion of the cash itself
In order to enjoy the advanUge of having its^i^rvr.t
the desired strategic point, it must surrender th^^IIh to
other hands, and rest content with an undertaW^ bv

^rn^U '^^,' *" ^^^""^ '''' '""^'' - demanJed^ThiJ
difficulty will never be obviated as long as each bank ha!

du" tl': :^teT .'' ^"""'^' '^'^'^'y "h th'ettt'
duction of the branch system and the esUbUshment bv

Uty. Then the reserve may be kept at the centre where
converge the demands upon it. and it may at the^me

S^'^Ti" *»'\P°---" -f the bank^hat o:.^'
There need be no haste to withdraw it to the country

The'Tor r ?"* i' "° "^" °^ «° ^^t immediaternger

that thel^'Lh"'" ' '"'^- ''? '^^^' "^^^ ^'^'^ ''"°^-'"^ge
th^fr!3K^ "^"''^ *' *" ^^"^ York in the vaults of
their own bank un-'er the charge of their . vn officers

How Branch Banks Would Handle a Panic
To make this picture more complete and the contm t
good branch banks would deal with a panic. Pe hZ I

the brLchCl^l"'" '° ^^"^'^ *^'- -d -'«te £ow
panic '^ ^''*"*"^ '^'^ ^'^ ^t'^ the 1907

oth?/r "^^"^ ^'"'"'"* ^^"^^'■■' '" ^^"^ Y«'-l^. Chicago, and

estly to induce the general body 0; bankers , rougho™
the United States to prepare for a stomi Ow ,. to thSr
advantage, us viewpoint, their exp< n nee. .nd the '
knowledge of banking, thev clearK- ..resaw that a crisis
was on the way. though they cou. i not. of couree know
when It would materialize The acco dingTy ^t the^
own houses in order and did - ha. hev could fo get the r

thit '° .f ''^'^'' ' ^' ^^^- they had^no au-
thority over the thousands of other banker who ^w

A RATIONAL BANKING SYSTEM

nothing but the sun of prosperity and who were intent
upon making the last dollar of profit while the high in-
terest rates continued.

ill

Policy op the Canadian Bankers

Now the experienced professionals who had charge of
the important Canadian banks were not behind the great
bankers of the United States in diagnosing the situation
as dangerous. They, too, saw that exceedingly dirty
weather was ahead. They were, however, situated much
more fortunately for dealing with the matter than were
their brethem in New York and Chicago. The latter
could only make guarded statements and issue guarded
warnings, which, as a matter of fact, were not heeded by
a large number of bankers. But the Canadian bankers
had the power to impose their will upon all the banking
offices in the Dominion. For nearly a year before the
panic developed business men and firms asking for largely
increased credits were told that they must keep their lines
down and go slowly. A great many were thus prevented
from spreading heavy additional sail at a dangerous time.
Then, four full months before the panic broke, a quiet
but effective movement of liquidation of discounts was
instituted. In July, August, and September, notwith-
standing that those months ordinarily witness an im-
portant expansion of domestic loans, the mercantile dis-
counts were cut down. As may be supposed, this policy
of repression and liquidation brought the bankers much
unpopularity. Loud were the complaints and accusa-
tions that were levelled against them. They were told
that they were retarding the development of their own
country. People pointed to the call loans in New York
(part of their reserve moneyj and declared that the
Canadian banks were starving Canadian enterprise in
order to lend money to Wall Street speculators. Before
many months had passed those merchants and others

h li

Advantages op Concentration op Control

executives are abreTL-"?"^ """ ""= P'°fessio„al
attitude o, p"pSl':i°"^ '""""'^ -" '-de into an

aetual %hting Sb„! fh^^ k"^ " brcaks-„hen the

A RATIONAL BANKING SYSTEM

and Winnipeg. Suppose some scores or some himdreds
of the branch managers fell into a panic and wired the
head offices to send thousands or millions of dollars in
cash at once, it would not matter in the least, since the
general managers would not send their cash to points
where it was not needed. The panic-stricken managers
would be told to keep cool and to proceed with their
business as usual. The cash resources under the branch
system can be kept in reserve at the strategic centres, and
they thus preserve their force unimpaired. The general
in command has his forces well in hand ; he also has full
intelligence of and a clear view over the field of war;
and he hurries support wherever it is needed. The United
States position is as if a general had assembled a large
army to meet an adversary of equal or greater strength,
but on the eve of battle he is required to send away half
or two-thirds of his whole force, in a hundred small de-
tachments, for the purpose of garrisoning a hundred
towns not threatened at all by the enemy. It is not to
be wondered at that he meets disaster in every great
struggle.

The Question op Future Panics

Some authorities on finance have been assuring the
public that the panic of 1907 and the events that followed
it eliminated the element of danger from United States
banking. They say that the lesson was taken to heart
by the banking interests, that reforms have been effected,
and remedial legislation passed, and that henceforth the
business will be cleaner and sounder and no more panics
need be feared for many years. It would be well if these
comfortable assu- inces could be relied upon. To govern
one's conduct upon the assumption that they are well
founded might prove exceedingly dangerous. In the
last published abstract of condition of national banks —
that for September i, 19 10— the New York City national

THE PANICS

follows:"' ^"'" "' ^°^^'"^ ^'^''''' °^ °th«^ b«"l^« ««

Other national banks, •,.,

rlfw. ^"^^ ^'^'^ P"^^t« '^anks and bankers ^olUt'f"
Trust companies and savings-banks, ' .It'Mlltly

$618,056,547
Their holding of specie and legals at the same time was
«29x.65a,ss3. Thus there has been, since the pre^Zic
statement of August 22, ,907. an increase of $132 74, 670
m this dangerous liability; and the proportion of Ihe ^sj
holdmg to the total of bankers' deposits is abou ^Ter
cent., as igamst 47 per cent, in August, 1907. There is no

LTthemrdr.^' "'^" "^'^^ ^"'"^'h'"^ happ-s "
^r^ f h 1^ *^^ '"*^"°' ^^""^^'^ ^i" act differently

from the way they acted in 1907. Whenever they^e

control of the bankmg mterests there they will very
paniJ yefr^ ''"^ '^'^"^^^' ^'"^^ '' ^^^^ ^^^^ - P-^o-

Bank-notes as a Medium for Paving Off Depositors
It is but fair to say that since the panic of 1907 Con-
gress has enacted legislation designed to enable th'e bank"
both metropolitan and interior, to cope more advanSge
ous y with the panics of the future. In reciting the sev-
eral advantages enjoyed by the Canadian banks,^in regard

PortantTtem ^h""' "°''"^ "^^ ^'^ ^^^^ -« ^-
portant item. Wherever a panic of depositors occurs

uiV uT"' r'^ °^ ^ "^«^'"'"' f"'- "^^king payments
cr^i t T^' ""^ '"*^^^'y acceptable to the friSd

or legals. Such a medium the Canadian banks possess
in their note issues. The notes of each bank are covered

K'of Ca?ada""r \T'''' ^"^^^"^^^ °^ theSsoX d
clusil?! to ti .! '^'? ^'" ^'^ ^ ^^^P^^"- ^^^°t«d ex-
clusively to the matter of the bank note issues, it will

^ 59

A RATIONAL BANKING SYSTEM

W ■

not be necessary here to dilate upon the features of the
plan further than to say that the important banks con-
sented to go into that scheme, whereby their stock-
holders were made liable for the note issues of all other
chartered banks in the Dominion, because the issue of
each bank was strictly limited to the amount of its paid-
up capital, and because the notes in every case were to
be an absolute first lien en the assets of the bank issuing
them. Afterward the Canadian Bankers' Association ob-
tained the right to inspect the circulation books of each
bank, as a m.easure of protection for the associated in-
stitutions against illegal over - circulation by the several
members. And finally, in 1908, the Dominior Parlia-
ment conferred on the banks the right to issue an excess
circulation during the crop-moving season. Under this
law each chartered bank may, between September 30th
and the 31st of the following January, issue an additional
amount of its own notes equal to 15 per cent, of its com-
bined capital and surplus. The ordinary issue (up to the
paid-up capital) is free of tax and interest; the excess
issue is subject to a rate of interest to be fixed by the
Minister of Finance, which, however, may not exceed
5 per cent, per annum. Finally the Bank Act subjects
the outstanding notes of an insolvent or suspended bank
to interest at 5 per cent, per annum, to nm from the date
of suspension to the date on which the liquidator or re-
ceiver advertises his readiness to redeem them. Owing
to these conditions and provisions, in every case of failure
of a chartered bank in Canada since 1890 the notes of
the insolvent institution have circulated freely at par in
equal credit with the notes of the going banks until the
liquidator has succeeded in effecting their complete redemp-
tion.

The National Currency Associations

Now it will be understood that if there were a run of
depositors upon a Canadian bank, the depositors, or at

THE PANICS

any rate all of them who possessed average intelligence
would be quite willing to acc-pt its notes in lieu of their
deposit claims. So, during the eariy stages of a run it
would have a convenient means of meeting withdrawals.
If, however, its circulation was nearly up to the au-
thorized Umit at the time of the commencement of the
run— and some of the smaller banks are in that condition
through neariy the whole year— it would get hardly any
relief of this kind from its own rights of issue; but other
larger banks possessing an ample margin of issue rights
might lend it assistance in the shape of their notes, and
m that way a run or runs might be met by expansion of
the general note circulation until the issues of the banks
generally were brought close lo the authorized limits

It IS apparent that the object of the Vreeland Bill
passed by Congress immediately after the 1907 panic is
to provide for the national banks of the United States a
medium of this nature, for use in a panic or emergency
which will economize specie and legals and yet give the
alarmed depositors something that u-iU be entirely ac-
ceptable to them. Briefly put, the legislation permits any
number of national banks, not less than ten, located con-
veniently in any city, state, or contiguous territory, to
form a national currency association. To be eligible for
membership therein a bank must have outstanding not
less than 40 per cent, of its capital in United States bond-
secured circulation, and it must have a surplus of not less
than 20 per cent, of its capital. When the association is
fonned, each member may, in an emergency, pledge com-
mercial paper with the association and apply to the board
of the local association for notes. If the securitio are
satisfactory the application is forwarded to the C np-
troller of the Currency, who in turn transmits it to the
Secretary of the Treasury, and if the Secretary considers
that business conditions in that locality demand it and
IS satisfied with the character and value of the securities
deposited, and that the United States has a Uen on the

A RATIONAL BANKING SYSTEM

securities deposited and on the assets of the banks com-
posing the association amply sufficient for protection, he
may direct the issue of the currency to an amount in his
discretion not exceeding 75 per cent, of the cash value of
the securities deposited by the bank with the association.
The amount of currency thus allotted to any bank must
not exceed the margin between its outstanding ordinary
bond-secured circulation and its combined capital and
surplus; that is to say, the ordinary bond-secured circu-
lation plus the emergency circulation may not exceed the
capital plus surplus.

Emergencv Note Issues Against Deposits op Bonds

Or, if it does not wish to join a currency association,
the bank may deposit state, city, town, or county bonds,
and apply for notes up to 90 per cent, of the value of the
bonds, but not more than the par value of the bonds. In
this case the bonds are to be deposited with the Treasurer
or any Assistant Treasurer of the United States, and ap-
plication is to be made to the Comptroller of the Currency.

With the object of ensuring the prompt retirement of
the notes after the emergency has passed it is provided
that the emergency notes are to be taxed at the rate of
5 per cent, per annum for the first month, and afterward
at a rate rising i per cent, each month until the maximum
of 10 per cent, is reached.

It is possible that this measure may furnish the means
whereby the New York bankers will be enabled to meet
successfully a stampede of interior banks for their bal-
ances. Those who designed it expect that it will provide
a satisfactory medium for meeting runs. At the same
time the banks have shown little inclination to form cur-
rency associations in order to have the machinery in readi-
ness for dealing with an emergency. The measure has
been criticised considerably by the banking interests.
One objection is that the method by which the emergency

THE PANICS

notes are to become available is complicated, and that the
applications must pass through several hands before the
party is reached who has the power to act. It is objected
again that the tax is so high as to deprive the issuing banks
of practically all profit upon the notes, thus destroying the
incentive to issue and making it probable that only those
banks which are in desperate circumstances will resort to
the remedy. Until the measure has been tried out in
actual practice it is impossible to estimate what its effects
will be. If it fails to fulfil the expectations of its authors,
and the national banks do not apply for emergency notes,
or if they are slow in doing so, it seems probable that an-
other suspension of payments will be seen the first time
the interior bankers lose their heads.

-.3

How THE Reform Will Work

Suppose the law does what is expected of it, and that
in the next crisis the national banks have recourse to its
provisions in such numbers and to such an extent as to
avert a general suspension. That would mean the crea-
tion of a very considerable volume of the emergency
notes. They can only be created through pledge of the
assets of the banks isstiing them. Suppose $300,000,000
were created. If the security consisted entirely of com-
mercial paper it would mean the sequestration of $400,-
000,000 of assets which formerly were free. If the new
notes should be used to pay off depositors it would mean
that the banks had temporarily parted with $400,000,000
of their assets in order to borrow $300,000,000 with which
to pay off their depositors. The position of the remain-
ing depositors would be weakened to that extent. This
borrowed money must be repaid before the assets can be
regained. The repayment can be effected without dis-
tress only if the individual banks succeed in inducing
their depositors to redeposit practically all of the funds
withdrawn. On the other hand, it might happen that a

MMMl

A RATIONAL BANKING SYSTEM

considerable number of banks would apply for emergency
notes with the object of paying off debts due by them to
other banks; some might do so with the object of getting
funds to make new loans to their customers, or to protect
deals or speculations of their own officers or directors. To
the extent that this was done it would mean that securities
formerly held generally against the deposits and liabili-
ties were placed beyond the reach of the ordinary creditors.
It should be remembered, too, that the assets pledged,
whether bonds or commercial paper, would be, in all prob-
ability, the best in the portfolios.

Payment in the Bank's Own Notes Gives Only
Temporary Relief

It is to be remarked that the same objection applies
to the use by the Canadian banks of an expansion of their
note issues to meet runs of depositors. In Canada's case,
supposing the bank which is run upon goes down after
expanding its issues to the limit, it means that a few of
its depositors who were fortunate enough to convert their
balances into bank notes escape without loss. But their
success makes the remainder of the depositors worse off,
sine 2 it has created a larger amount of preferred claims
which must be liquidated before the ordinary creditors
may participate in the estate. It is also to be borne in
mind that the Canadian bank, which during a run pays
by means of its own notes, does not thereby conserve its
specie and legals except for one or two days; for the de-
positor will at once pay the notes into one or other of
the stronger banks, and the beleaguered institution will
receive them back promptly, along with other of its
obligations, through the clearing-house; and it will be
called upon to redeem them with legals forthwith.

Banks Should Supp .i.t Their Customers in a Panic

Possibly the foregoing descriptions and illustrations

will have served to explain what a vast dif -ence there

THE PANICS

would be in the handling of panics in the United States
if the banking system of the country consisted altogether,
or nearly altogether, of large and strong branch banks!
In the first place, it would be possible to do something
worth while in the way of preparing to meet the panic.
With experienced professionals in charge, and endowed
with the authority requisite for compelling obedience to
their orders, the ship of finance could be gotten into trim
for encountering a tempest some little while before the
vnnd and waves burst upon it. The mercantile and
manufacturing interests which depended on bank loans
for carrying along their operations might be held in re-
straint for a while before the panic developed; and after
it broke they would be supported and carried. The cash
resources would not be sent to lie idly in vaults at Indian-
apolis or Salt Lake City when New York was the place
where they were needed. The country bankers would not
be so apt to lose their heads; for one reason, because they
would be all trained men, and, for another, because the
responsibility of maintaining the solvency of the banking
offices under their charge would lie not upon them but
upon the executives at the head offices. There would be
a more general knowledge among the whole fraternity of
the fact that the surest way for a bank to hold the con-
fidence of its depositors during a panic is for it to con-
tinue making advances to its customers. Wherever bank-
ing is regarded as a science it has long been understood
that a policy of frantically calling in loans, refusing re-
newals of matured paper, and refusing to extend the
customary support to regular borrowers is exactly the
policy calculated to start a run of depositors.

IMHi

THE CLERKS AND OFFICERS
Conditions of Service

IT will be advisable now to refer to the conditions of
service. When the merits and demerits of a par-
ticular system of banking are under discussion it is im-
portant to have a satisfactory knowledge of what it does
for its devotees. How do the men fare ? Those devoting
their lives to the service of the local independent banks of
the United States — are they better or worse off than their
fellows serving under different systems in other countries ?
Are the rewards for faithful and intelligent work large
enough and sure enough to attract the best men into the
business? Or is the banking S' rvice studiously avoided
by intelligent youths able to choose their means of earn-
ing a livelihood and not bound by family or other ties to
certain avocations?

By getting answers to these questions one may learn
a great deal as to whether the usefulness of the banks
could be increased. It will be clear to every intelligent
mind that a system under which the men are hopeful,
keen, and zealous will in its daily working, other things
being equal, forward the country's commerce and industry
immeasurably better than another which provides only a
monotonous and dreary future for the employees to gaze
into.

A Forecast op Branch Banks

Immediately after the panic ot 1907, when the banking
breakdown caused a large number of the experts to in-

THE CLERKS AND OFFICERS

tcrest the- selves in the question of the desirability of in-
stituting branch banks in the United States, an ardent
supporter of the existing system argued that bank em-
ployees should fight tooth and nail against the branch idea
because its adoption would be detrimental to their
interests.

"If the large number of interior banks now working
independently were converted into branches of great in-
stitutions having head offices in New York, Chicago, or
some other centre, and were under the management of
far-away executives intent upon economical administra-
tion and operation," so ran the argument, "thousands of
men would be dismissed in every part of the country;
and so the profits of the stockftolders would be built up
through taking the bread from the mouths of an army
of bank men."

An Economic Revolution

Even if this forecast of what would happen to the em-
ployees were correct, it could yet be made into a powerful
argument not against branch banks but for them. It im-
plies that the banking business at present is wastefully
conducted in that it is supporting a host of unnecessary
officers and men. Waste of this kind constitutes a tax
reaching in some way citizens of almost every class.
Waste in banking tends to increase the rates of discount
which commercial and other borrowers must pay, to re-
strict the amount of credits available for their use,' and to
decrease the interest rate on deposits, while at the same
time making the depositors' position less secure. Though
an economic revolution, wherein a mass of labor is dis-
placed through the introduction of improved machinery,
commonly causes temporary hardship, it is considered
that the benefit accruing to the whole public through the
cheapening of a much-used article outweighs the injury
done to the particular class. In America especially is
this doctrine recognized, and it is commonly understood

A RATIONAL BANKING SYSTEM

that much of the progress of the nineteenth and twentieth
centurits has been achieved in this way. The mistake
made by those wh«) use such an argument against branch
banks is in assuming that the bank stockholders would
get all the benefit of the economics. Experience teaches
that althi)U},'h those o'vners or proprietors who first intro-
duce labor-saving machinery often benefit considerably in
their profits, in the long run competition ensures that a
large share of the gain will g-j to the consuming classes.

Thus it can be seen that if the institution of branch
banks resulted in some thousands of unnecessary bank
employees losing their places, a substantial compensation
would very likely accrue, in the end, to the people in
general as a result of the change. In other words, it
might be expected to represent, according to this theory,
the sacrifice of a certain class, not very strong in numbers,
to the general good.

But what if it should develop that the economies and
benefits of branch banking could be given to the people
of the United States without inflicting any hardships at
all on the bank employee? What if the innovation, in-
stead of injuring him, should result in a decided bettering
of his circumstances? What if it opened for him an at-
tractive prospect of which at present he knows nothing
at all? If it can be shown that branch banks would so
afTcct the rank and file of bank men the illustration should
constitute a potent argument for their introduction. Let
us therefore now inquire into the conditions of service
presently prevailing under the existing system of local
banks.

Service in Wall Street Banks

It is well understood that the best prizes which bank-
ing has to offer lie in the great cities. New York itself,
being the financial heart of the nation, has in its gift the
most valuable of them all. To win the place of president
or vice-president of a great metropolitan bank is a high

THE CLER.S A\fJ OFFICKRS

and enviable achieven it. Son; of the men n-.w lioldinR
those positions worked up to ! tn without extraneous
aid. by sheer abUity . nd industry. Theoretical! v the
achievement may be performed by any person entering
the service. But in practice, under the i,rcst>nt system
a large number of the really goo«l men. perhaps the ma-
jority of them, have no hope wlatever of rising to ihe
high places. Take a large Wall Street bank em ploy mg
two hundn^d or thp-e hundred men. At the top tre per-
haps a d. zen places ca trying very large salaries. The
incumbents of those pf)sitions hold th< rn indefinitely year
after year. Kothinj; jxcept the dc-nh or resignation of
some one higher uj provides the pportuniiy for pro-
motion. Down throuKh the various grades and depart-
ments the sap'e condition prevails t • a j'rcatfr or les.«<
extent. It may be said that iherc is k) ssuisfactory cir-
culation of the wn. Tn •^cnnc hauk^ there is a system
whereby the n , n are s-after! fr,,m on.- post to another as
a guard against fraud, iut .. r-Kntnient of that kin.l is
not at all to be compare 1 vith the rapid, irresistible move-
ment by which the best men in the Cana.lmn branch
banks hnd themselves plared, alter service for a certain
number of years, in high and commanrling positions. In
a great New York bank three nr four, or perhaps half a
dozen, out of ever\ hundred employees may hope to rise
to positions of real importanre. The rest have scarcely
any chance. One way there is in which a moderate! v-
rapid projnotion miK'hi be ensured. The policy nu^du
be followed of casting aside the men who arrive at\jr
pass middle age without rising above the purely clencal
work. However, not many bankers could bring themselves
to employ so hard-hearted a plan of improving the tone of
their offices.

A Dreary Outlook

ThuR it happens that all that the bulk of the employees
can look forward to is steady employment at salaries

A RATIONAL RANKING SYSTEM

which may rise slowly or not at all. Day after day, year
after year, they answer the roll-call, growing old and
gray-headed, always at the same work. As for the few
who do climb high their progress is impeded because of
the places found and promotions fixed for relatives and
prot^gds of the highest officers and the directors. It
must be conceded that such an outlook as this is exceed-
ingly dreary, not at all calculated to inspire enthusiastic
service or to draw the best material into the service of
the banks.

Such are some of the conditions in the largest cities
where the best opportunities are to be met. As may be
supposed, conditions in the smaller places in some re-
spects are worse. Ir them, practically everywhere, there
is a positive block at the teller's post. Beyond it one may
not hope to rise for years and years, except by a lucky
chance. Above the teller are ranked the cashier, vice-
president, and president. Twenty years may pass with-
out a single change occurring in those offices. True, the
business may grow, m'->'-e clerks may be taken on and put
beneath one, so to speak, and the salary may go slowly
up, but the high positions are not thereby brought nearer.
There is sadness as well as humor in the popular saying
that the bank clerk in the country town passes the most
of his life looking out of the same window at the same
town pump.

Conditions of Service in Canada

In the Dominion men are not hired, as a rule, to fill
any post that happens to become vacant. Nearly all
the employees are taken on as juniors, preferably at the
age of seventeen or thereabouts, with salary of two hun-
dred or two hundred and fifty dollars a year. When a
new and responsible positicjn is created, such as by open-
ing a new branch, or when a vacancy occurs in an exist-
ing position, likely as not a whole line of promotions

THE CLERKS AND OFFICERS

affecting even the junior clerks will take place. As for
the junior, the bank does not hire him with the design
merely of developing him into a good clerk; its real ob-
ject IS to make an expert banker out of him, to develop
his judgment and his knowledge of banking principles to
such an extent that he can be trusted to take charge of
the bank's affairs at important branches, and as its
representative to deal with the leading business men and
depositors, to dispense credits and gather them in again,
to act, m short, as responsible agent for administering
a fund which might amount to several millions of dollars
In every junior taken on its staff the bank hopes to find
material that will develop into a servant of this kind.
Its system of training ij shaped with the object of dis-
covering and encouraging every man who has promise or
ability.

Every Man Has His Chance

At the annual salary revisions the young banker may
expect, in regular course, increases of one hundred dol-
lars per year. In addition he may get special increases
for specially good work, or to accompany his promotion
to a higher post. He will proceed after this manner until
he is m the neighborhood of eight hundred or nine hun-
dred a year, when he reaches what may be regarded as
the crisis of his career. It may take seven years or more
to demonstrate whether he is available for the more re-
sponsible posts, or whether he is fit for nothing but
clerical work. Tt great is the pressure for men to fill
positions as managers and account.-'.nts of new branches
that the executives will often give the proved incapables
another chance, in the hope that they will make good;
and It IS with the greatest reluctance that they are aban-
doned to their permanent clerkships. Even when they
are so abandoned they doubtless will get, if their cond-i-t
IS good, increases of fifty dollars, or perhaps a hundred
at uncertain intervals.

A RATIONAL BANKING SYSTEM

Openings for Men with Ability

r,'

But, as regards the young banker of eight or ten years'
service who has demonstrated that he has good average
ability, it may be said that he is just on the threshold of
his real advancement. Before he is thirty he may get an
appointment as manager of a new branch, and then his
future is just what he makes it. A great many of the
new branches are established in small Western towns
where the business grows rapidly. An office may start
with a manager and one clerk and develop in a few years
into an important branch vith six or seven clerks and
half a million in discounts. If the manager accomplished
this without making losses through bad debts he would
get quick increase of salary and the head office would
certainly have him in mind when the post of manager in
a large city next fell vacant. It is not at all unreasonable
for a junior to expect that in fifteen years from the com-
mencement of his service he will become manager of a
good office and be drawing a salary of from $2,000 to
$4,000 a year. As an example of the prospects in the
banking service in Canada the case of one branch in
which 1 myself servetl might be quoted. On my joining
the branch the staff consisted of a manager, an accountant,
and ten clerks. Two of the clerks resigned — one to take
? very good position in an insurance office, the other be-
cause of dissatisfaction at his progress. Within twelve
years the manager had gone on the pension list and
every one of the others had become branch mana-
gers at salaries ranging from $1,200 to $4,000. Two,
who were juniors in 1893, now command the bank's
branches in two of the most progressive of the far West-
ern cities. Not one of these young men considers that
he has reached his limit ; practically all of them be-
lieve, and with reason, that their progress has just be-

THE CLERKS AND OFFICERS
Promotion Free and Unrestricted

So far as the figures of the salaries are concerned it is
of course, to be borne in mind that Canada Ts a Lor

that ground alone one might expect a smaller rate of pay
to prevail north of the international boundary It
would be easy to quote examples in the Dominion of ad-
vancement more rapid than this. The principal cause of
the quick promotion and rapid increase of salary has been
the branch bank extension movement. That did not
attain great velocity until after 1900. Therefore, the
example I have given contains at least seven years in
which conditions were not so favorable as at present.

The point which I wish to make by means of the illus-
tration IS that every member of the branch staff had the

thZTl ' V 1""^ '? " managership; all but two 0I
them actually did so. In the Canadian system there is no
block anywhere, neither at the teller's nor at any other
post. Promotion is free and unrestricted

From these two sketches it is possible to get a fair idea
as to the contrast between the two services-that of he
United States and of Canada. As before n.entioned i is
not demed that extraordinary ability mav win g eat
prizes in the Republic; but it is contendVd that the
general body of bank employees in Ihe United States have
a poor chance as compared with that possessed by In
Canadian bank clerks. In the Dominion no gray-heade
men are found in subordinate positions unlcst from some
fault or shortcoming of their own or from exceptionaUy
hard luck In the path of promotion there is no barricade

manager. ''' ^"""'"'^ "^'^ "^ *" ^''^^ °^ '^^ ^---1

Branch-Bank Service Provides a Better Education

ti^TouLTV" ^' ^"'■"'' '" """•' '^ ^h^t the condi-
tions of the banking service in Canada are such as to give

• p

A RATIONAL BANKING SYSTEM

the employees a better all-round knowledge of banking
than is possessed by the bank employees in the United
States. The Canadian bankers are all trained men, while
many of the American bankers are not. Dr. Joseph
French Johnson, dean of the School of Commerce and
Finance of New York University, in an address to the
Missouri Bankers' Association in May, 1909, on his return
from a visit to Canada, had the following to say regarding
this matter of the qualifications of the bankers: "I dis-
covered in Canada what seemed to me to be the beginning
of a profession for bankers. It ought to be a profession.
It ought to rank with the learned professions. It is as
much a profession as law, medicine, or engineering. We
don't find it so much of a profession in the United States,
I am sorry to say, as I found it in Canada. If I wanted
to be a bank president in the United States, or if I had
made up my mind to be in youth, I would not have studied
the bwaking business, knowing mHiat I do now. I would
nat te«e gone i& as a clerk is order that I might become
paying teller, cashier, and vice-president- I never would
have gone through by that route. No, I would have gone
into btisiness — the manufacturing business, wholesale
business, any kind of a business in which I could make
money and buy some stock and elect myself bank presi-
dent. I do not know that you do that way here in Mis-
souri, but it is done that way a great deal in the United
States. Nothing of the sort do you hnd in Canada."

Iff

Why the Braisch System Is More Attractive

It is hardly posable to ascribe the difterence in condi-
tions existing on the two sides of the boundary line to
anything else than the difference in the two systems of
banking. The service in Canada is more attractive be-
cause the branch system is in vogue thoie. Constant
additions of new branches to the various banking organiza-
tions results in creating numerous opportunities for pro-

THE CLERKS AND OFFICERS

motions. Besides the changes necessary to fill those posi-
tions, the steady increase in the number of bank branches
tends to create, all the time, new positions of importance
in the executive offices. As the branches multiply the
number of officers engaged in supervising and controll-
ing them must be increased, and the positions of the exist-
ing officers constituting the executive force must get more
important.

But a comparison such as the foregoing cannot be taken
as an entirely satisfactory illustration of what American
bank clerks would gain from the institution in the United
States of branch banks of the Canadian type. Every
youth of really good ability who enters the Canadian
service as a junior may feel tolerably sure that his ability
will be discovered, and that he may, provided he attends
earnestly to his duties, governs his conduct properly, and
retains good health, rise to be manager at some such place
as Hamilton, Ottawa, Winnipeg, Vancouver, or Quebec,
or it may be Montreal or Toronto. With the same bank-
ing system in vogue in the United States, every American
youth of real ability entering the banking business and
giving the same attention to his duties and conduct would
have an equal opportunity of rising to the managership of
branches far more important than are to be found in the
Canadian cities.

The Service op a Great American Branch Bank

The dignified, highly paid posts open to him would be
numerous and varied. The service of a great American
bank with branches everywhere in the Union would be
alive with brilliant possibilities for ambitious minds.
Employed on its staff there would be no danger whatever
of being doomed to gaze for a lifetime at the same town
pump; no danger of being kept down because the teller,
the cashier, the president, and vice-president were more
or less permanent fixtures. The work would be vastly

^ 75

A RATIONAL BANKING SYSTEM

more interesting. In twenty or twenty-five years a man
might see service in half a dozen different states. Such
an experience could hardly fail to broaden his mind and
increase his knowledge of his own country.

Another way in which the bank clerk would gain
through the general introduction of the branch system
would be in the improvement of his social status. An
employee of a powerful bank possessing hundreds of
millions in assets, carrying the accounts of great cor-
porations and capitalists, and having branches scattered
widely through the country would be a more important
unit in the social world than the employee of the typical
single-office local bank. The prestige of the institution he
served and the possibility of his rising high in its service
would cause society to rate him better than it now rates
bank clerks in general.

•i

Branch Banks Would Increase the Demand for Men

But it is time to deal with another matter. In the
earlier part of this chapter notice was taken of the argu-
ment that thousands of bank men would lose their places
if branch banks were introduced. Let us see what would
likely happen in this regard. If branch banks are ever
introduced, the introduction wili almost inevitably take
place through the conversion of thousands of independ-
ent interior banks into branches of larger institutions.
Whenever one of these absorptions occurred the staflf of
the acquired bank would be retained, because it would
be in the interest of the consolidation to retain the nicn.
In all probability the cashier would become manager of
the branch. But the presidency, the vice- presidency,
and the local board would be abolished. So far as the
clerks are concerned there is no hardship involved in
that. After the branch movement j?ot well under way
it is very certain, if the Canadian experience goes fur
anything, that an active campaign of opening branches

THE CLERKS AND OFFICERS

in altogether new places would be instituted. Hundreds
of places that now have no banking facilities at all would
be supplied with offices designed to carry on the business
of discount and deposit. That would come about be-
cause a branch with simply a manager and one or two
clerks can be operated at a profit on a less volume of
business than would be necessary for an independent
bank with full paraphernalia of officers and board. For
the new branches managers and accountants would be
wanted. The banks would find it more advantageous in
the long run to promote their own men to the manager-
ships than to take in outsiders about whom they knew
little or nothing. Hence the practice of taking in juniors
and training them would naturally be evolved.

There is, therefore, every reason to expect that the in-
stitution of branch banks in the United States would be
followed in a short while, if tlie banks were of the right
type and were given reasonable privileges and a reason-
able degree of freedom, by a remarkable expansion in the
demand fur men. It would follow necessarily that salaries
would be moved generally above the present level.

How THE Officers Would Fare

Next, let us see how the officers would fare upon the
introduction of branch banks :

It was remarked that on the absorption of an inde-
pendent interior bank into a branch institution the
offices of president, vice-president, and board of the ab-
sorbed bank would be abolished. In actual practice,
when this occurred, the executive of the absorbing in-
stitution would take pains to discover what officer or
officers had conducted the active management of the
absorbed bank while it had an independent existence.
It might have been the president that had had the active
management; it might have been the vice-president; or
it might have been the cashier. Whichever one it was

A RATIONAL BANKING SYSTEM

would be taken into the service. If more than one of the
governing officers could properly lay claim to be con-
sidered a professional banker, the bank would doubtless
desire to retain them. The only officers for whom it
would have little or no use would be those who were
actively engaged in some other business or calling, but
who exercised the right of supervision or control over the
local bank's business in the interests of the stockholders.
Obviously the new system would contain no places for
them. Internal supervision and control, in the case of
a branch bank, are exercised from the head office by a
skilled professional assisted by a corps of expert examiners.

The Cashier's Opportunity Would Be Enlarged

But the position of the cashier, or other officer who has
had in his hands the active management, becomes in some
important respects considerably improved when the bank
is converted into a branch under his management. Under
the system of local banks he has to operate the bank
subject to the supervision and control of the local di-
rectors. In most cases they are men engaged in some
outside business. Usually they are men of substance
and influence. Their attitude toward their cashier may
be one thing or it may be another. One board may leave
its cashier practically untrammelled in his conduct of the
bank's affairs, contenting itself with loosely supervising
the loans and other business. Another board may con-
tain one or more domineering characters, who, without
an}' real understanding of banking, insist upon constantly
interfering in the active management. They may cause
the cashier to take paper of which he disapproves; and
they may "ind fault with certain of his advances, desirable
and right rem the strictly banking point of view, but to
which the/ are averse because of local prejudice or
sectionalism. There must be in the United States many
capable cashiers or managers who feel themselves thwarted

t,. i«

-S'

THE CLERKS AND OFFICERS

at every turn by these meddling incapables. From all
that, absorption into the branch system offers a com-
plete and immediate deliverance. Acting as a local man-
ager of a branch bank the American country banker would
be delivered from the domination of the local magnate
His obedience is claimed instead by an expert who knows
a great deal more than he of the business of banking
This expert knows little or nothing of the petty politics
of the country town. He probably will insist that the
bank be not involved with any of the local parties or
cliques; that applications and requests for credits be
judged solely on their merits as banking propositions.

Increase of Responsibility and of Salary

As a branch manager the country banker will have a
local standing quite as high as. and probably higher than,
his standing as the active head of a single-office bank.
Though the branch manager's power to grant credits is
strictly limited— he having to get the chief executive's
approval for all loans exceeding a certain sum. which
might be anywhere from $i,ooo to $2,000— he yet is the
man through whom all would-be borrowers must negoti-
ate. The general manager will not consider propositions
which do not come to him stamped with the branch
manager's approval. A competent and careful manager
soon gets to know exactly what loans will go through
and what will not. and he can thus say "yes" and "no"
to most of his customers who ask for credits ana demand
an immediate answer. As the highest resident authority
of a great bank, the channel whence its many millions
of resources are placed at the disposal of the local busi-
ness men, he will likely stand higher than as cashier of
a small local bank which, by common repute, did not
have the funds at times to give its customers all the
credits they required and to which their positions and
responsibilities fairly entitled them.

A RATIONAL BANKING SYSTEM

In point of salary the banker might reasonably expect
a larger remuneration on the conversion of his independ-
ent bank into a branch; for, as explained in another
chapter, the business of the bank would be likely to ex-
pand rapidly after the chanjic. With the increase of
business increased pay should, and doubtless would, be
forthcoming.

The ciiangc would deliver the country banker fr ptti a
number of other restrictions and duties. L'ndi i the
present system he has to give a good deal of thought to
the matter of the maintenance and disposition of the
bank's cash reserve; undi r the branch system he need
not worry about the reserve at all, for the general man-
ager himself attends to that. He need not bother himself
either over the investment of the bank's money in bonds,
for the general manager does that also.

\ I

I i-

f" -1

IP.

A HYPOTHETICAL BRANCH BANK

How THE Banks Perform Their Functions in Normal

Times

IT is time now to take up the matter of the every-day
relations between the banks and the other parties in
the community. Panics come only at intervals. Even
in the United States, where they are most frequent, they
have not hitherto appeared oftener than once in a dec-
ade. Though it is a matter of importance in any
country that the banking system be so constructed as to
be able to withstand successfully the shocks resulting
from periodical revulsions of credit, it is a matter of much
greater consequence that it be of a character calculated
to lend in the between whiles an efficient and thorough
encouragement, within certain limits, to all the forms of
industry and trade in which the people of the country
are engaged. So I shall now proceed to point out how
certain great American industries and trades fare at the
hands of the banks in normal times, from day to day and
from year to year. Their circumstances may then be
compared with the circumstances of similar industries
and trades elsewhere under the branch system of bank-
ing. By placing the two pictures side by side any reader
may get a vivid impression us to some of the differences,
in economic effects, of the two kinds of banking.

The Matter op Equality op Loans and Deposits

The true function of the banks in any locality is to
facilitate and assist, within certain limits, the carrving

MICROCOPY RESOLUTION TEST CHART

(ANSI and ISO TEST CHART No. 2)

2.8
3.2

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2.5
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^K '65J East Main Strecl

E^S Rochester, New York 14609 USA

D^S ('16) 482 - OJOO - Phone

^S ("6) 288 - 5989 - Fa,

A RATIONAL BANKING SYSTEM

on of those pursuits to which the people are devoted.
They reach their highest excellence and their greatest
usefulness when they conform flexibly, in the several sec-
tions, to the peculiarities of condition or circumstance
which they meet. This is exactly what a properly con-
stituted system of branch banks does; and, though the
local single-office banks may indeed conform in certain
respects to local peculiarities of occupation or trade,
they are not constituted to cope advantageously with the
matter of inequality of loans and deposits. It is, of
course, absurd to suppose that at all the banking points
in the United States loans and deposits should be exactly
equal; and yet that is, apparently, one of the things on
which the system of single-office banks is predicated.
The experience of the large Canadian banks, with branches
in every part of the Dominion, is that in only a small
number of instances do the branches show equality of
loans and deposits. In the great majority of cases one
will overbalance the other. Usually it is found that the
branches in the farming districts of the eastern provinces
show an excess of deposits, while the branches in the
eastern cities and manufacturing towns, and the general
run of country branches in the western provinces, show
an excess of loans and discounts. This is the result of
encouraging the development of both loans and deposits to
the fullest possible extent at all localities. In other words,
at practically all points both loans and deposits are at the
natural level.

What the Banks Can lend

On the other hand, the merest tyro in banking can
easily see that, at every point, the local single-office bank
must shape its policy, in regard to loans, according to
the amount of deposits it has. In this sense the com-
parison as to the usefulness to the locality of the two
kinds of banks may be made by means of a formula —
thus, each single-office bank has available for lending in

A HYPOTHETICAL BRANCH BANK

its locality its capital and surplus plus deposits minus its
reserve against deposits, while the branch bank may be
said to have a sum equal to the effective natural demand
tor discounts emanating from that locality. The term
effective demand is here taken to mean the demand from
parties financially and otherwise worthy to have recojr
nition. s

Critically minded persons will perhaps object that
there is a limit to the lending power of a branch bank as
well as to that of a local bank, and that there would be
no certainty that on the general institution of branch
banks the efifective demand for credits would be cared for
at each particular point any more than it is under the
present, system. For would not the head office issue
instructions to cease discounting or to restrict discounts
whenever the bank's condition became such as to neces-
sitate that action being taken ?

The answer to the objection is that a properly managed
branch bank, its management having full confidence in
the soundness of general business conditions, would

'I ,, .^'""'P^Tf * *^^ ^^'•'^"g °f those branches at
which the good loans showed a tendency to increase
faster than the deposits by opening a series of branches
in small places where there were no manufacturing or
other businesses that would require large advances. By
this means, and by means of the gradual accumulation of
deposits at Its older branches, ^4th perhaps an occasional
increase o capital stock, it would probably maintain the
proper balance between its loans and deposits, and the
times being normal, it would likely be able to do its proper
share of the vv^rk of supporting the industries and trades
earned on in the districts where its branches were located.

When the Local Bank Has All Its Funds Employed

Now mark this difference in the working of the two
systems: The local single-office bank, on beLg asked f^r

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A RATIONAL BANKING SYSTEM

further advances when its funds are all loaned out, simply
refuses to comply. The local would-be borrowers are
thereby discommoded, and possibly they are prevented
from engaging in business transactions that would have
resulted in sure profits and perhaps in providing employ-
ment for additional workingmen. But the branch bank
extends the accommodation, the security of course being
satisfactory, and the projects of the applicants being
such as the bank might with propriety support. In that
case the local industries and trades get a better support
than they could expect from the single-office banks. But
that is not all. Owing to the demand for discounts
emanating from this point and from others like it, hun-
dreds of little places which can never h<^ne to have a
bank under the present system would be accorded bank-
ing facilities of the highest class. At all branches the
people would be encouraged to develop to the utmost
their natural bent, whether that bent was to borrow or
to deposit; at all points the deposits and loans would
be at the natural level, and a scientific and very effective
distribution of society's deposit fund a'^complished ;
while with the independent banks it is obvious that, ex-
cept in the comparatively few cases where an equality
of loans and deposits comes about through the deposit
fund of the locality balancing naturally with the demand
for discounts, one or other of the two items must be at
an arbitrary or artificial level; and one or other of the
two great sections of the people — would-be borrowers and
would-be depositors — must be to some extent incon-
venienced thereby.

Loans and Deposits by Geographical Divisions

The following table shows the situation in the differ-
ent parts of the United States, so far as the national
banks are concerned:

A HYPOTHETICAL BRANCH BANK

September i, 19 lo
New England,
Eastern,
Southern,
Middle Western,
Western,
Pacific,

NATIONAL BANKS
Loans and Discounts

3,069,013,437
664,413,384

1,543,136,347
356,807,364
356,305,378

*S,465.87S,47i

Deposits •

< 446,034,331

1,984,361,789

552,623,615

1,428,726,621

398,955,370

382,848,900

*S. 193.549.6:6

.'"..'f?^,,'**P°="^*™ included "Individual deposits," "United States de-
posits. Dei»sits of United States disbursing officers." Deposits shown in I'.e
abstract under the headinRS " Due to other national banks," " Due to state and
pnvate banks and bankers," "Due to trust companies and savings-banks"
^gregating $. g.s,87s,47o are not included, because they represent, to a con-
siderable extent, a duplication of figures.

It is safe to say that if a statement of the loans and de-
posits of the Canadian banks covering the several sections
of the Dominion in which the business of each section
was given by itself, could be studied, such a balancing
of the two items would not be seen. The Winnipeg man-
ager of an important institution, which covers nearly the
whole Dominion, informed me that his bank had loaned
lu tV'^stern Canada at least three dollars to every dollar
of Vk^estern deposits. And there is no reason to suppose
that the condition of the other leading institutions is
materially different.

When Loans and Deposits Are at Their Natural

Level

The point is that if the loans and deposits were left
to seek their natural level, as is the case under a proper
system of branch banks, there would surely be in some
of the sections of the United States a wide disparity be-
tween the two items. The fact that they are so nearly
equal m every part of the country points to the con-
clusion that both are kept down to an arbitrary level— in
some districts borrowers do not get the accommodation

A RATIONAL BANKING SYSTEM

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to which they are entitled, and in others poor facilities
are extended to depositors.

So, when conditions in the financial world are normal,
the various offices of a strong branch bank are expected
to do all the good business, deposits and discounts, that
they can get or handle. It does not matter at all, in the
case of a bank with a well-balanced system of branches,
whether deposits or discounts heavily overbalance at
any particular office.

Course op the Loans in Periods op Stringency

It may be conceded, however, that in periods of great
industrial and commercial activity, when speculation is
rife and prices are high, the increase of loans taking place
generally at all branches in response to the increased
natural demand for credits then effects a gradual ab-
sorption of the bank's surplus of liquid balances into its
loans and discounts. Usually, too, during a period of
this kind deposits will show a tendency to remain sta-
tionary, or perhaps to recede. Opportunities for the in-
vestment of capital are so numerous and inviting that
the owners of cash funds are induced to draw down their
deposits in order to take advantage of them. When the
process of loan expansion has gone a certain distance
the bank is forced to move cautiously in the matter of
entering into new conimitments. Unless it does so there
w'll be danger of its cash reserves falling so low as to
make its condition unsafe, and perhaps prevent it from
pursuing a dignified course in meeting its daily balances
at the various clearing-houses. Then it is to be expected
that the branch managers vnW get instructions to put the
curb upon their borrowing customers. The chi«^ : execu-
tive officer sees the condition of his own bank. He per-
haps knows that other representative banks are in much
the same case, and his experience teaches him that the
country may be speeding toward a crisis or revulsion of

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A HYPOTHETICAL BRANCH BANK

some kind Therefore, it may be said that when the con-
dition of a large and well-managed branch bank becomes
such as to cause its executive to withhold accommodation
from good borrowers, the chances are that il is in the
real mterest of the borrowers to have their credits cur-
tailed and their operations depending upon credit reduced
to smaller volume.

The Cases of Jasonville and Thompsontown

This seems to be a suitable place to refer to an editorial
which appeared in the Philadelphia Saturday Evening
Post on February 13, 1909. As it expresses aptly the
opinion held by a large number of people in the United
btates, It is reproduced. The article says- "The Cana-
dian banking system is much admired in this country by
theonsts and by certain metropolitan financiers; but
whenever its adoption is urged some ten thousaa'l country
banks nse up to protest.

"Our country bank is decidedly a local institution-
local men own and operate it with an eye single to local
conditions; it is chock full of the town's spirit. A branch
bank, on the other hand, would belong to New \ork or
Chicago. To its directing mind— regarding Jasonville
impersonally as merely one of several hundred units— it
would be a matter of complete indifference whether the
new canning factory located there or at Thompsontown
ten miles beyond. That our independent country bank
IS, on the whole, the more useful institution seems to us
incontrovertible."

The Branch Bank and Local Development

The whole of this book is devoted to the purpose of
controverting the idea that the small local bank is more
useful than the branch. I hope it ^411 be conceded that
something has already been done along that Hne. With
reference to the editor's statement that the directing

A RATIONAL RANKING SYSTEM

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mind of a great branch . ,wik wotild be completely indif-
ferent about the campaign over the new canning factory,
it can be said that he would not be indifferent any more
than the president of a great railroad system is indiffer-
ent about the establishment of new industries along his
line of railroad. And in any case the manager of the
local branch bank would not be indifferent. If the can-
ning factory comes to Jasonville and he succeeds in getting
the account, it will increase the business and profits of
his branch, and perhaps lead to an increase of his own
salary. Therefore, the branch manager fights stoutly
side by side with the other Jasonville citizens for the
acquisition of the factory. And, further, when the factory
is established he will get for it a credit which will be in-
finitely more valuable to it than any credit the local
bank could give. If there is a reasonable prospect of the
factory proving a success, and if the proprietors are able
and willing to furnish security that will make the bank's
position safe, the branch manager will have little diffi-
culty in obtaining the approval of his executive superior
to the credit for the new account.

But if the thing is clearly doomed to failure, or if the
proprietors of the factory aim to get large loans on in-
adequate security, or on no security at all, the credit will
not go through. And it is as likely as not, if loans are
made to the canning intere^^s on this basis by a purely
local bank, that both the stockholders of the bank and the
citizens who interest themselves in the new industry will suf-
fer loss.

A Branch versus a Local Bank

I shall now undertake to describe in some detail the
relations existing between the banks and some classes
of their customers. In order to make the description
lucid I shall make use of a couple of hypothetical branch
banks, and explain just what the people might expect
from them in the way of facilities and accommodation.

A HYPOTHETICAL BRANcu BAXK

LHJ'mlr'"""^' ^'. "u'"''^'^ *° P''^*"'-'^ conditions in
two or more parts of the country, so as to cover a few

of the great forms of activity in which Americans are
engaged. It has occurred to me that an interestfng
picture might be drawn of a competitive struggle between
a typkal local bank of the present day and a typical
branch bank, for the business of a moderate sized country
town, let us say in Massachusetts, which devotes itself
to some httle extent, to manufacturing.

We may suppose that in the town selected for illustra-
tion there IS but one bank, and it does a thriving business.
It has a capital of $100,000, a surplus of $50,000 and

WdTf 1 ''°^* ^^°°'°°°- '^^^ bank'h;s on hs
board half a dozen of the most substantial business men
in the place, and the stock is scattered among the citizens
SrecSmre""''' °' ''' ''''' manufactured are on the

The Bank op Massachusetts

of i'f n ^ric! '^V^ "lustration assume that the laws

of the Umted States have been broadened and liberaHzed

so as to permit the organization and practical operation

of large branch banks of the Canadian pattern of mer"

cantUe banks-that is to say, employing the bulk of their

e^ources m mercantile loans and advances, and keeping

in cash and at call only enough to enable them to go

''•• - ays with dignity and to meet emergencies without

• Now It happens that the Bank of Massa-

s-.a hypothetical branch bank of this descrip-

M Capital of $10,000,000, surplus of $5,000,000

_ assef^ $150,000,000. and some one hundred and

nn7.nT /!' ^u^''^ ^" *^^ ^^^^^ °^ Massachusetts, but
not confined to that state-wishes to establish a branch
m the hypothetical town to which I have referred. As
if, i" .u ^''" "^"'^^ '^'■R^ly built up. or, rather
first InH ""'^ "^^^""^'"^ '°^^' single-office banks, [t
first endeavors to mduce the local bank which is in sole

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A RATIONAL BANKING SYSTEM

possession of the field to merge with it and become one
of its branches. For the stock of the local bank it offers
a price slightlv higher than the level at which it has
been selling, and invites the stockholders to accept its
own stock in payment at the market rate, as established
by transactions in the Boston Stock Exchange. The
executive officers of the Bank of Massachusetts are abli-
to make this offer, because they know from expenrnce
that, operating this local bank as a branch, they can
make it earn more on its stock than it cams in its in-
dependent condition. However, the local directors and
stockholders do not wish to give up their individuality,
or to lose the identity of their local bank, of which they
are justly proud. Then the Bank of Massachusetts de-
cides to open a branch in opposition and to build up a
business of its own. This gives a good opportunity of
studying the methods that would be resorted to by
branch banks, and also of comparing the usefulness to
the locality of the two kinds ol mstitutions. It is to be
remembered that there is no legal compulsion cither way
upon the inhabitants. Owing to its local o.ganization,
the local stockholding and its established footing, the
bank already on the ground has all the advantage. It
may be supposed that the sympathy and sentiment of the
townspeople and of the people of the surrounding country
would be altogether on its side. If the branch bank suc-
ceeds in building up a profitable business under these
circumstances it must positively be because it extendi
facilities which the local business men cannot afford to
ignore. Assuming that a thoroughly capable man is
appointed as manager of the branch to be established,
let us follow him In his handling of the bank's affairs.

Policy op the Branch Manager

First of all there is the matter of premises. The bank
must be housed in a suitable building in a central loca-

A HYPOTIIKTICAL URANCH BANK

tion. Its premises must be compatible with its dignity
as b powerful institution. It might be necessary to pro-
vide a building of its own. If that were done the plans
therefor wc ^Id take account of the kind of building pos-
sessed by its local competitor. It would be seen too that
the local bank did not outclass it in the matter of a build-
ing. On the building the bank's sign, "Bank of Massa-
chusetts," would appe .• w 'th impressive simplicity. And
in large letters on the window screens would be seen the
legend, "Capital $10,000,000, Surplus $5,000,000, Total
Resources $150,000,000." Possibly the window screens
would also bear the intimation that interest was allowed
on deposits.

One of the earliest arrangements made by the branch
manager would be the engagement of a lawyer or solici-
tor. .\ man would be selected who was not already re-
tained by the local bank— preferably a man in position
to influence business and desirable accounts. To him it
is explained that he will get at regular rates all the law
business of the Bank of Massachusetts and of its branches
emanating from this locality. In return he is expected
to keep his whole account at the branch and ally him-
self with it. If this is more than he wishes to undertake
the appointment of course will go to some other lawyer,
providing one with the requisite ability can be had.

Tr Record of Ratings and Characters

This a. , gained, the next step is to procure reliable in-
formation about all the business men in town, and about
the principal farmers and other residents of the tributary
district. By the aid of mercantile agency reports, of
records in the bank's head office, and of particulars gleaned
from parties in town who can be depended upon to g./e
reliable data, the matter of the financial standing of
everybody who may apply to the banl: for loans is gone
into as thoroughly as possible. It would not be difficult
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A RATIONAL BANKING bYSTI-M

to find confidential adviscii of this sort who could be
depended upon. The information they furnish is checked
up by incjuiry from other sources, and the whole classiticd
and arranRt"'! so as to be rcadil' iccessible. All this need
not necessari'v be taken as accurate; each item has only
its certain stan<lin}^ as So-and-so's estimate. Subsequent
dealings will, in a number of cases, provide the means of
vcrifyinj,' or revising the estimates secured.

It is the bank's intention, while the jjeneral situation
throughout the country is sound and free from alarming
signs, to refuse no request for credit made by a worthy
applicant who offers adequate security and who proposes
to embark the proceeds in something,' tnc ban* may safely
and properly support. \nd it is necessary to direct the
preparations in a careful and scientific manner.

Making Use op Outside Connections

i''or the formal opening a staff must be got ready. A
trained man vriW be drafted from another branch as
second in comtnand. At the outset he probably will fill
a position in which the duties of manager's lieutenant and
teller are consolidated. Then a bright young local fellow
will be enlisted as junior. This staff of three will suffice
for the beginning. Next, the manager will take steps to
ascertain which of the local business men have close re-
lations with the bank's clients in other places. It may
transpire that some large Boston house connected with
the bank, or seme house in another city that is beholden
to it, can influence or control the banking business of one
or mor local concerns. If the local accounts are de-
sirable this outside iriluence may be evoked, perhaps
resulting in the acquifition of a few good accounts.

As the existing local bank has been alone in the field,
it is possible that itr> '■ates of discount have been rather
high in the cases < ' r.jmbcr of accounts. On the ap-
pearance of opposition perhaps these high rates would

A HYPOTHETICAL BRANCH BANK

come down, 'ihe customers thus afTcctcd accept tlie
reduction, but they have, all the same, a kindly feehn«
tor the new-comers whose advent w. the cause of their
better fortune. The branch manager is satisfied to leave
tt at that for the present. He has no intention of in-
auRuratrng a rate-cutting war. He wants business, tu be
sure, but it must be profitable business.

The Chromc Malcontents

Evcr>'body who has had much actual ex rience in the
banking' business must have noticed tha a practically
every town (jr community are to be found a few customers
with whom it is next to impossible to preserve cordial or
amicable relations. No matter how well they are treated
they tre always see' in^i occasion for cjuarrels. Not in-
frequently their bu^;i.ess is of some considerable value
to the bank; but its value is constantly overshadowed
by the unpleasantness of the relations with them. Pos-
sibly a couple of these chi mic malcontents will transfer
their accounts immediately the new l)ank opens, but it
is by no means certain that their business will' be re-
tained for any length of time.

So far nothing very important has been achieved by
the new-comers. The general body of the town business
holds firmly to the local bank. Indeed, no earnest direct
effort has been made to dislodge it. ''owever, t' lank
of Massachusetts had a definite end in view whei -, de-
cided to open this branch. It was becau e of the con-
fidence it had that its end would be attain. ' that it built
its local premises. The aetions .^nd polic\ .: the branch
manager, heretofore described, > merely -fie prelimi-
nary moves in the campaign.

The Manufacturers* Accounts

It has been mentioned that there are a number of
rather extensive manufacturing plants located here The

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A RATIONAL BANKING SYSTEM

accounts of these manufacturers constitute the chief
prize which the Boston executive aimed to secure. Be-
fore, however, making advances of any kind, the branch
manager, with the assistance of his head office, satisfies
himself thoroughly as to the financial responsibility, the
character, and record of each one of the various manu-
facturers, and make? himself familiar with the nature of
their businesses, the markets they ;.ell in, the products
they make, their prospects, etc. Let us assume that there
are five plants, two oi which are extensive, while the others
are of moderate size. The owners of the large plants are
wealthy and Ai risks — one of them is a director of the local
bank. Of the three smaller plants two are owned by parties
whose financial strength is considerable enough ; but it is
suspected that the owner of the fifth plant is laboring a little.
Though these manufacturers— the four of them at any
rate — are well rated, and though all in the neighborhood
consider them wealthy and safe, they require to borrow
every year more than the local bank can give them.
The banking law, of course, strictly limits the direct ad-
vances which a bank may make to any one borrower;
and even if the law did not impose this restriction the
dictates of orudence and common sense would prevent
any banker worthy the name from putting half or two-
thirds of his resources into one loan, no matter how good
it might be. If that were done the rank and file of small
borrowers in town would raise such a disturbance as would
bring opposition at once. So the position of the manu-
facturing interests here, in regard to banking accommoda-
tion, was what it must nearly always be under the system
of local single-office banks — unsatisfactory and tending
to restrict their operations unnecessarily.

The Manufacturer and the Note-Broker

One of the large concerns has required to borrow
$400,000 at a certain season of each year when stocking

A HYPOTHETICAL BRANCH BANK

up with raw materials. At this season it could use
$600,000 quite conveniently, but the unsatisfactory bor-
rowing conditions have deterred it from undertaking
more than $400,000. To raise this sum it has to be
beholden to perhaps a score of banking institutions in
different parts of the United States. These banks hold
the paper in lots of anywhere from $5,000 up to $50,000.
The local bank customarily takes $10,000 directly, and
will perhaps lend $40,000 or $50,000 on trade paper or
in some indirect way so as not to violate the law. All
the paper, except the portion taken by the local bank,
is placed through a note-broker in New York or Boston.
This broker asks for full particulars of the manufacturer's
position. Sometimes he gets them and sometimes not.
When he has all the information possible, he circularizes
his list of clients, composed of banks and private in-
vestors, inviting each to take a part of the notes ofiFered.
Though the operation is pleasantly described as placing
the notes upon the market, it amounts in effect to an
application by the manufacturer (whose business is
strictly a private business) for credit, addressed to all
these parties. Any of them, with or without the in-
clination to purchase, may ask for the details of the
manufacturer's position, his balance sheet, and profits,
if he has furnished all that information. To a high-
spirited borrower this comes as a detestable necessity.
Plenty there are who cannot bring themselves to submit
to it. Sooner than do so they forego the sure profit at-
tendant upon borrowing — preferring to restrict their
operations and to decline orders from would-be customers.
Other considerations than that of preserving their self-re-
spect operate to induce them to follow this policy of re-
straint. Should a financial crisis develop in New York, or
in other parts of the country, they are threatened with the
fate that befell the Westinghouse Company in 1 907 , because
of the diffusion of their indebtedness among so many hold-
ers none of whom has any but a passing interest in them.

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A RATIONAL BANKING SYSTEM
Borrowing from a New York or Boston Bank

There is another way in which a large borrower in the
interior of the United States may get the accommodation
which his local bank is unable to provide. He may get
a line of credit from a large New York or Boston bank,
and dispense with the note-broker altogether. I under-
stand that a considerable business of this kind is done.
It is an awkward attempt at adopting some of the con-
veniences of branch banking. The borrower in this case
looks to a far-away executive for his loans exactly as do
most of the borrowers under the branch system. But
under the branch system the borrower is able to ne-
gotiate with a sympathetic and influential intermediary
living in his own town and acquainted with his business.

What the Branch Bank Offers to the Manufacturer

1^ L

This description of the financial conditions under which
the local manufacturers had been working is sufficient to
give the reader an idea as to the feelings with which they
would welcome what the branch manager li.id to offer
them. To this man, who had been borrowing $400,000
through the agency of the note-brokers, the branch man-
ager proposes that application be made to the Bank of
Massachusetts for a credit of that sum, or of half a
million. The rate of interest would be the same as he
had been paying; the credit would remain open during
the manufacturing season, and the loans would be ex-
pected to run down and off in the natural course of the
manufacturer's business. If the credit be approved the
bank would stand ready, all through the season, to ad-
vance funds in the manner agreed upon and as its cus-
tomer needed them, up to the maximum named; its ex-
tensive system of branches and correspondents w uld be
at his service for making colleclious from his debt' rs, and
for providing him with information regarding them; it

A HYPOTHETICAL BRANCH BANK

would aid him and advise him to the best of its ability
as It would be deeply interested in his success. Within
certam well-defined limits it would back him and support
him in developing his trade, almost as if it were a partner
bhould a pnnic or a crisis develop, being so heavily in-
volved with him, Its interest would lie in enabling him
o meet his outside liabilities. For it to suffer h^m to
fail would endanger the advance, and might have some
effect in provoking a run of depositors. Also, its reputa-
tion and credit would be involved in its seeing its worthy
customeio safe through the disturbance.

The Adv.^.vtages in the Branch Bank's Proposition

Can any one doubt what decision the average Ameri-
can manufacturer would take on having a proposition
of this kind submitted to him by a bank of the tvpe of
the Bank of Massachusetts? Even if the local manu-
facturer here referred to were a director of the local bank
there ,s hardly room for doubt as to his decision. If the
proposed arrangement worked out as the branch man-
ager said, and there was every reason to think it would
it meant freedom from the necessity of publishing his
affairs for the benefit of a large body of individuals for
whom he did not care a button, and who took but the

niofi r Tr' T '"'"• ^^'"^^ ^'^^'^ ^"- it meant more
thol:. f r' ^'"'■'^'^ '"°^thly and pleasantly

the first year, why he might next year apply for a larger
sum and take the orders of the parties he had had to turn
down. After a couple or three years it might be that he
could use eight hundred thousand or a million without
himself "' °^'" ''^ '^'' '^^'■^'^ ""^ over -extending
So he decides to apply for the credit and to transfer
his account. He feels that he cannot ignore the ad
vantages which the branch institution holds out to hfm
For his business the branch bank is incomparably more

^itm

A RATIONAL BANKING SYSTEM

useful. As the Bank of Massachusetts* loans enable him
to make more profits, and with them to enlarge his
capacity and increase his force of workmen, the bank in
this respect benefits local industry to a greater extent
than does the local bank.

I! M

:^l

The Branch on a Paying Basis

As for the new branch bank, the acquisition of this one
large account will probably put it upon a paying basis.
And, as the arguments which were successful in the case
of this first manufacturer will possess an equal force with
his brother manufacturers, there is no reason to suppose
that they will be less ready than he was to take the prof-
fered advantages. Assuming that, in the course of a year
or two, three of the good manufacturing accounts were
obtained, and head-office approval secured for their ap-
plications, it is altogether likely that the branch would
have a discount business of considerably more than a
million dollars, with excellent prospects of further in-
crease. It is Vv'orthy of special notice that although the
new branch is now transacting a larger business in loans
than the earlier established local bank is transacting, it
has taken only a small part from its local competitor.
The bulk has been taken from the note-brokers and from
distant banks which do not notice the defection. And
part of the new loan business is newly called into exist-
ence and represents a distinct addition to the industrial
power of the country.

A HYPOTHETICAL BRANCH BANK {Concluded)
The Bank op Massachusetts" Deposit Branches

AS it will not perhaps be exactly clear to some readers
r^ how this branch bank could, at a point where it had
little or no ueposits, place - million dollars at the disposal
of the local mdnstries, I shall, before proceeding further
with the story of the development of the ranch's busi-
ness, describe the methods and policy by which this
million and many others like it are produced. A brief ref-
erence has already bee i made to the fact that a well-
governed branch bank will complement a branch at which
the loans exceed the deposits by establishing another
branch at a point where deposits will exceed the loans.
Very likely the Bank of Massachusetts will be obliged to
open eight or ten new offices in order to complement or
balance the operations of this branch it has just opened
m the small manufacturing town we haye been dealing
with, and which we may call the town of X. Now let us
see in what kind of places these complementary branches
are planted, and what kind of business it is that they
transact.

There are in the United States thousands of quiet
country villages possessing no manufactures or other
enterprises that call for the extensive use of banking
credits. A few stores, a couple of hotels, a blacksmith
shop or two, one or two agents or dealers handling agri-
cultural implements, may comprise the business estab-
hshments of a place of this kind. Its population may be

. !

A RATIONA'v .NANKING SYSTEM

anywhere from two hundred to thirteen hundred. It has
no bank. A national bank wouKl bi- out of the question,
for there would be no cniphiyment locally for the de-
posits it would got, to say nothing of its capital funds,
which must be uot less than $25,000 according to law.
Neither is there any inducement to stp.rt a state bunk
The place is sleepy, nearly devoid of enterprise. A note-
shark capitalist may, however, be found there, and if so
he probably fleeces the poorer farmers of the neighbor-
hood, and the citizens too, whenever he j;ets the chance.
Neither the farmers nor the townspeople have enough
confidence in him to entrust him with their deposits.
Consequently, while a tow go to the trouble of sending
deposits by mail to banks in distant cities or towns, the
majority of the people govern their financial affairs as
they would if there were not any ban! , in the country.
They keep cash in their houses and stores and on tlicir
persons; their payments are made altogether in cash.

I' I

Relations with the Rural Classes

Into this little place comes the Bank of Massachusetts
with all the prestige of its immense resources. Manifestly
the conditions here are vastly different from those ob-
taining in X. There the bank aimed at the acquisition
of a large discount business. To handle the large manu-
facturing accounts and the other business it was neces-
sary to have a skilled manager and to pay him a good
salary. But here the business will be mostly deposits.
Such loans as are asked for will be small and easily
handled. A highly paid manager is not required. Some
teller or ledger clerk will br ; ssigned to the post at an
increase ovc. his previous salary. He will be given a
junior, suitable premises will be rented or provided, and
the bank is ready to begin business. It is to be expecte i
f'at all the local business men will avail themselves im-
inediately of its facilities. They will be trained to de-

100

A HYPOTHETICAL BRANCH BANK

posit their receipts and to pay by caecks on the bank.
Then there will be a number of farmei s and village house-
holders who will take the Hrst opportunity of placing
their cash at interest in an institution clearly deserving
their confidence, and thus relieve themselves of the
anxieties attendant upon hoarding. From bureau draw-
• rs, from hiding-places and improvised safes, from pocket-
books and wallets, would come a steady stream of deposits.
In a couple of months even a very sm.dil place of this
description in the East might furnish .^,40,000 or $50,000
of deposits, and thereafter the amount should tend +0
mcrease steadily. In a couple of years the bank might
have $140,000 on deposit and perhaps $25,000 under
discount. Though the branch is in mded primarily as
a feeder fo.- other discounting branchoi,, there is no at-
tempt whatever made to keep down the loans. On the
contrary, the local manager trios to dev ^I^p the loans to
the full capacity of the district. He does so because the
more he can increase his go.xl loans Mic more profitable
will his branch become, and the higher will he stand in
the estimation of his general manager. Fur small loans
made to the townspeople or the farmers in this place the
bank -w-ill get a higher rate of interest than it gc s from
the wealthy manufacturers it the other branch. There-
fore, the manager lends a willing ear whenever he is
approached by any customer or resident whom he knows
to be worthy and responsible and who wishes to dis-
count satisfactory paper. Reliable farmers who wish to
pay their hired help, to pay casli at the stores, or purchase
implements, etc., before the} bave received payment for
the season's crops; local buichcrs and live-stock buyers,
contractors and builders, grain buyers and dealers in the
produce of the locality, find in the branch a steady ally
whose assistance can be depended upon In any weather
so long as they themselves keep their credit good; and
the local merchants find that when they convert the book
debts owed them by good fanners and by good citizens

lOI

•I .,

I' r -I

iiit

t ■

A RATIONAL BANKING SYSTEM

into notes the bank will discount them, and that the
proceeds of the discounts permit advantageous buying
of fresh goods for cash, or an enlargement and improve
ment of stocks on hand without a further investment of
capital.

Sending Away the Surplus Deposits

But, in spite of all the efforts of the local manager to
find good borrowing customers, it will likely happen that
the growth of the deposits far exceeds the development
of the loans and discounts, and that the bank has an in-
creasing amount of the local funds available for use in
other places. Here is encountered one of the chief argu-
ments use*, by the champions of the single-office banks
in their assaults upon the branch idea. They brand it as
almost a crime to collect the deposit fund of a locality
through the agency of a branch bank and then to lend
it in a different section of the country. "The inhabi-
tants of a locality served by a bank of this description,"
so they arg^ue, "are deprived of the use of their own
money, which, instead of being used to build up the home
village, is applied to the upbuilding of rUstant towns and
cities." I think, however, that a great many of my
readers who have patiently followed me thus far will
agree with me, on considering the matter, that it is absurd
to say that the village here described is injured through
the operations of the Bank of Massachusetts' branch.
On the contrary, the people of the locality derive a num-
ber of important benefits from the operation of the
branch which they would never have gained if their
country were served exclusively by single-office banks.
But for the branch system the place probably could never
hope to have a bank at all. The capital which the branch
collects and sends away lies sterile. It is kept in iron
safes, in bureau drawers, old stoves, under rag carpets,
and in people's pockets. Surplus funds, or other funds
accumulated for special purposes, which are carried in

I02

A HYPOTHETICAL BRANCH BANK

that fashion arc of little use to anybody or any place
least of all to the place to which they belong. A branch
bank can live there because it operates more economically
than an mdependent bank, and because a very small net
profit on the operations will be satisfactory to its man-
agers. Nay. the branch taken by itself need not give a
profit at all. Its operations are considered in conjunction
with those of others. Thus it may happen that four
branches, each supplying $100,000 for use of other
branches, will be bracketed with another branch which
IS using $400,000 of the funds of other branches The
net result from the combination of the five branches will
perhaps, be an annual profit, after paying all expenses.'
of. perhaps, $2,000 per year, and they not using one cent
of the banks capital. This will, perhaps, show that
branch banks will penetrate into much smaller places
than can the independent banks. The thousands of
places which possess no banking facilities at all or facil-
ities of the most wretched description, would gain facil-
ities of a superior kind in a short time if a proper system
of branch banking, free from unreasonable restrictions
were inaugurated. Think you the people of any of those
little places, when they learned that they were to have
a branch of some great banking institution, would con-
sider that they and their locality were in any way en-
dangered or imperilled thereby? Not at all. Their bie
bank would be their chief boast; and their local paper
If they had a local paper, would never weary of referring
to It as an evidence of the confidence entertained by the
financial powers in the future of the locality. At least
that is how all the little places in Canada take it when
they acquire branches of good banks.

A $5,000,000 Bank in a Village with Population op
One Hundred

I am penning this chapter at a little country place in
the Niagara Peninsula in the Province of Ontario. The

' i

i »-

Ift

1 4

If 1

■

m -i

( . i.

1 !

A RATIONAL BANKING SYSTEM

population is, perhaps, one hundred and fifty souls. It
has no bank. A mile antl a half to the east lies another
village with a population of about five hundred. Here
one of the strong Canadian banks has a branch. Last
year, the third year of its branch establishment, the bank
erected a building to serve for its office and for the resi-
dence of the manager, which must have cost $6,ooo or
$7, coo, and is, apart from the churches, the show place
of the village. Then, two and a half miles west, is another
village with about three hundred and fifty population.
This has a branch of a bank with a capital of over $3,000,-
000. A w days ago whilo driving over the Peninsula
we went through a tiny hamlet which could not have had
more than one hundred population. The only business
places I could see were a hotel, a store, and the ware-
house of an agricultural iniyilement dealer. I knew it
had a bank, but did not at tirst sec the office. " Where is
the bank?" I asked my coniijanion. "There you are,"
he said, pointing with his whip to a very diminutive house
farther along the road. But, mean thouj,'h it looked,
that building was dignifr 1 with the name of one of
Ontario's powerful banks— an institution possessing more
than $50,000,000 of assets. After the bank's name ap-
peared the legend, "Capital $5,000,000, Reserve Fund
$5,000,000. Open Tuesdays and Fridays." This is
what is known in Canada as a sub-agency. One of the
larger branches of that bank in this district sends two
men on Tuesdays and Fri'iays of every week to the sub-
agency. They take a sup]ily of cash with them, and
receive deposits, make loans, and cash checks for the
inhabitants; and then take the discounted notes, the cash,
and cash items back with them to the parent branch. In
this way the branch banks of Canada get close to the
people of .he rural districts, and the rural districts de-
rive nothing but benefit from the connection. The people
living in lonely farm-houses in Canada are not forced to
keep sums of cash in hand because of the lack of con-

104

A HYPOTHETICAL nRANCH BANK

venicnt bankiiiR depositories Within easy distatuc there
IS sure to dc a branch of soni lank in which the farmers
have imphat confidence. .\ii 1 into the branch their
moneys ro at once. The general habit of dcpo.sitinK. and
the general confidence of al! i ! i scs of the public in the
strength of die banks, have a u lulency to lessen burglaries
—for the burglars, as a class, have come to know that
there is but a poor chance of finding any cash even in the
houses of the well-to-do farmers.

Another Field in Which thi; Local Banks Are Weak

To return to the affairs of the Bank of Massachusetts,
I might observe that the hank, in searching for depos-
its to offset the heavy loans of certain of its branches
would perhaps establish some offices in another field
which is but scantily served by the present system of
local banks. Boston itself and the other large United
States cities comprise that fivhl. To illustrate my mean-
ing the following is submitted: Early in rgo8 the
National Shawmut Bank of Boston absorbed the National
Bank of the Republic. Tliat transaction reduced the
number of national banks in Boston to twmty-four In
the year preceding that in v.hidi it was swallowed into
the Shawmut the National Bank of the Republic had it-
self absorbed the Freeman's National. Thus, where there
were three banking offices there is now but one. The
Shawmut has grown larger and stronger, but two banking
offices in Boston have disappeared in bringing it to pass.

Boston's Banking Facilities

There wore in Boston in iSq8 fifty-seven national
banks;_ in Tgo3 the number ha.l fallen to thirty-eight.
Then, in 1908. it had fallen to twenty-four— a net reduc-
tion in ten years of thirty- three, or more than 50 per
cent. During 1909 the number of national banks was

105

A RATIONAL BANKING SYSTEM

■A

if ^ '

further reduced to twenty-three. Two banks wont into
liquidation, and one new institution was formed. The
reduction has occurred as a result of consolidations,
liquidations, and failures. If, instead of taking the
national banks, the member banks of the Boston Clearing-
House are taken, the reduction m banking facilities is
seen to be even more startling — for in 1898 there were
fifty-three, and in iqo8 there were but nineteen.

Economy of operation has been one 01 the chief ob-
jects aimed at in the mergers. It has unquestionably
been attained, since in 1898 the fifty-seven national banks,
on their aggregate capital of $49,650,000, paid an aver-
age dividend of a. 3 per cent., while the twenty-three
national banks in 1909 paid an average dividend of 7.3
per cent, on an aggregate capital of $23,300,000. An
official of one of the oldest banks in Boston, commenting
on these figures, acknowledged that the tendency of the
banks to consolidate had brought inconvenience and
hardship to retail business interests especially. Refer-
ring to one of the recent mergers he said: " I believe th*
effect of the consolidation is bad so far as the mercantile
interests are concerned. The few banks remaining are
larger than formerly, and are less willing to give atten-
tion to the small merchant, who is finding it increasingly
hard to borrow from the banks. There are, of course,
large economies effei id, expenses greatly reduced, and
increased dividends paid to stockholders, but it is hard
sledding for the little fellows. To be sure the trust com-
panies are of late years doing more or less of a banking
business; but in Boston I should say that one-half of
them will not loan to depositors except on collateral."

Conditions in Other Cities

.1!

These same conditions are more or less in evidence in
the other large cities. In Chicago, for example, as the
New York Financier pointed out, there are a great many

106

! •

A HYPOTHETICAL BRANCH BANK

small merchants and business men who are obliged to
trave' from two to six miles in person or by messenger to
make a deposit. The movement to consolidate is alto-
gether a natural one, and the banks cannot in fairness
be blamed, because it results in a steady shrinkage in the
facilities extended by them to the public. Banks are
commercial organizations, and for the managers of the
respective institutions to seek to increase their profits,
their strength, and solidity by lawful means is entirely
right. The fault is with the system of banking which
makes it well-nigh impossible to effect the I'^sired finan-
cial strengthening and increase of earning capacity
through consolidation without closing many banking
offices that had been supplying much - needed facilities
to certain urban districts. I am aware that a few banks
do operate branches in certain cities, but the conditions
under which a branch may be operated, in those states
that permit them to exist, are so onerous as to amount
almost to prohibition. If the conditions were such as to
allow the city bank profitably and conveniently to oper-
ate an absorbed bank as a branch, doubtless it would
gladly do so, and the inhabitants of the cities would
continue to have the benefit of bankiug fa^-'aties they
had enjoyed before the consolidation took place.

How THE Canadian Cities Are Served

Contrast the conditions prevailing in Boston ' ith
those found in the principal Canadian cities. 7n Novem-
ber, 1909, there were in Toronto one hundred and fifteen
branch banks; in Montreal there were eighty-three; in
Win.iipeg forty, and in Vancouver thirty-five. In
Toronto one important bank ha'i no less tlian seventeen
brench offices; another had twelve, and another ten;
while in Montreal one bank had thirteen branches; an-
other eleven, and a third had ton. In all the Canadian
cities the number of banking offices is constantly increas-

H 107

A RATIONAL BANKING SYSTEM

ing, notwithstanding that the number of banks in the
Dominion tends to decrease. Because the establishment
of branches is left free and unrestricted, and is not un-
duly taxed, the resident of every part of a Canadian city
has a good strong bank within a couple of blocks of his
door. In the retail district the branch offices are thickly
scattered, also in the residential districts and in the fac-
tory districts. They extend even into the suburbs. Thus,
through the working of the branch system, nearly every
Canadian city has more banking offices than an American
city twice or three times its size will have; and all the
residents benefit therefrom.

Bank Amalgamations in Canada Do Not Lessen the

Facilities

These urban branches are, of course, like the country
branches, open to discount all the good paper offered
them. But, except those located in the midst of the
factories, they usually have a considerable excess of de-
posits. They are used mo. t extensively by business
men, professional men, by housewives and their daughters
for personal accounts. The owners of the stores and
business establishments also find them a great conven-
ience and a source of considerable profit. Banking
amalgamations and consolidations are as plentiful, rela-
tively, in Canada as in the States, but, because Canada
has the branch system, consolidation there is not at-
tended by a withdrawal of banking facilities from the
public.

A Comparison op Facilities

In order to show the value of the facilities provided
by the Canadian branch banks to the residents of the
cities and larger towns I have compiled a list of the prin-
cipal cities in the United States and Canada, and a com-
parison of the number of inhabitants per banking office.

io8

A HYPOTHETICAL BRANCH BANK

The statistics for the United States cities are taken from
the Rand-McNally Bankers' Directory, 1908, and for the
Canadian cities the number of banking offices from
Houston's Bank Directory for November, 1909, and the
population from Bradstreet's Reference Book for 1909.
The difference in dates is not unfair to the American
cities, inasmuch as in some cities the number of banks
has since decreased through amalgamation or liquida-
tion (Boston is one example), while the population has
increased, and in others any increase in the number of
banking offices would be accompanied by an increase of
population perhaps to such an extent as to leave the num-
ber of inhabitants per banking office at about the same
figure. I would point out, also, that I have favored the
American cities through counting all trust companies as
banks, along with state banks, savings-banks, national
banks, etc., while in the Canadian record I have included
only the chartered banks, and in Montreal the Montreal
City and District Savings-Bank. In the Rand-McNally
Directory, at the end of the list of banks in each large
city, appears a list of brokers, bankers, and investment
concerns. These I have not included.

--I

Banking Offices and Population

UNITED STATES CITIES

Chicago,

Philadelphia,

Boston,

St. Louis,

Baltimore,

Cleveland,

Buffalo,

San Francisco,

Cincinnati,

Pittsburg,

Detroit,

New Orleans,

Carried forward, 7,627,1

* Includes 20 trust companies and 32

Inhabitants

Population

Bank Offices

per Bank

2,300,500

27,400

1,21)3,697

108

12,000

SyS.380

9.100

575.238

10,800

508.957
381,768

g,6oo

8,qoo

376.587

20,900

342,782

6,100

325.900

7,900

321,616

♦()6

3.350

3'7.59i

15.100

287,104

12,000

20 662 143,150

ii savings and trust companies
109

A RATIONAL BANKING SYSTEM

W -

i J 5

-k

. i

UNITED STATES CITIES — Continued

Population Bank Offices

Brought forward, 7,627,130 662

Milwaukee, 285,315 18

Minneapolis, 261,974 34

Washington, 218,196 3 a

Louisville, 204,731 33

St.Paul, i97.oa3 13

Providence, 1 75.597 21

Indianapolis, 169,164 19

Kansas City, 163,75a aa

Denver, i33.8S9 18

Columbus, Ohio, 135,560 a8

Omaha, 103,555 7

Memphis, 102,330 ai

Portland, Ore., 90,436 ao

Atlanta, 89,872 15

Richmond, 85,050 ai

Seattle, 80,671 a6

Des Moines, 62,139 ai

Charleston, 55.^07 14

Savannah, 5^,434 is

Salt Lake City, 53.53 1 13

Spokane, 47,006 14

Dallas, 43,638 II

Montreal,

Toronto,

Winnipeg,

Ottawa,

Vancouver,

guebec,
amilton,
Halifax,
London,
St. John, N. B.,
Victoria,
Calgary,
Edmonton,
Fort William,
Brandon,
Regina,

10,428,730

1.07s

CANADIAN

CITIES

Population

Bank Offices

*40o,ooo

328,911

115

130,000

80,384

80,000

68,840

63,000

50,000

48,000

40,711

35.000

29,365

33,500

18,000

10,409

10,000

Inhabitants
per Bank

143.150
15,800
10,900
6,800
8,900
15,100
8,400
8,900
7,400
7.400
4.500
14,600
4,900
4.500
6,000
4,000
3.100
3.000
4,000
4.500
4,100
3.400
3.900

9,700

Inhabitants
per Bank

4,800
3,800
3.300
a, 700
a,30o
3.100
a, 800
5,000
3,000
3.100
4.400
1,800
1,600
1,800

1,300

1,000

1,413.920 453 3,100

* In Montreal's case I have taken the estimated population of the suburbs as
well as of the city proper, because the 83 banking offices include branches in the
suburbs

:li

' :

A HYPOTHETICAL BRANCH BANK
Better Facilities for City Residents

The foregoing illustration explains what further steps
the Bank of Massachusetts would take in its search for
deposits to supply the capital needed by its discounting
branches. If the laws and other conditions permitted it
to do so it would establish perhaps a score, perhaps two
score, branches in Boston city. At every point where
deposits might be secured, or a loan business done, in the
retail districts, in the factory districts, in the residential
districts, and in the suburbs, its handsome branch build-
ings would be found. Perhaps twenty branches might
supply, on the average, $250,000 or $300,000 each to
the parent office (in Montreal and Toronto some of these
urban branches have very large deposits).

Now, has any reader the hardihood to say that the
establishment of these offices in sections of the city which
had previously no banking facilities would do the locali-
ties an injury ? If the banks were properly constituted
the opening of the branches would be regarded, in many
humble homes and in many humble business places, as
an unmixed blessing.

Small Local Banks Encourage Monopolies

Before resuming the narrative of the operations and
development of the branch in X I wish to draw attention
to a peculiarity of the banking practice and business in
the United States which has important econoi ij effects.
Doubtless it will come as a surprise to many readers to be
toM that the existing system of isolated small banks
tends in any way to encourage the creation of monopolies
and trusts. But it is quite easy to prove that in several
respects the system has tended to bring about a set of
conditions favorable to the creation of combinations
operating with huge capital, and decidedly unfavorable
to the man with moderate capital who desires to embark

A RATIONAL BANKING SYSTEM

independently in manufacturing, or in some line of
mercantile business.

I >.'

The Example op Newfoundland

There is in North America one interesting example of a
people experiencing a change from the local to the branch
banks. It is to be found in the British colony of New-
foundland. From about 1856 the business of that island
was in the hands of two local banks— the Union Bank of
Newfoundland and the Commercial Bank of Newfound-
land. These banks both failed on the same day — De-
cember 10, 1894. For a dark and gloomy period of two
weeks— from the loth to the 24th of December— the
Newfoundlanders had no banking facilities and prac-
tically no circulating medium. They suffered terrible
losses as a result. On the 24th the Bank of Nova Scotia
established a branch at St. John's, and was followed, a
few days afterward, by the Bank of Montreal, and in six
months by the Merchants' Bank of Halifax— now the
Royal Bank of Ci^nada.

A circumstantial account of the affairs leading up to
the failures and the succeeding events has been con-
tributed to the Nova Scotian, March, 1909, by Mr. W. W.
Watson, the manager of the Bank of Nova Scotia, who
opened the St. John's branch, and who took an ac-
tive part, along with the managers of the other two banks,
in rebuilding the shattered finances of the colony. The
bank failures were due to a cause that figures prominently
in the record of failures of banks of the local type — large
loans to enterprises in which the local directors were
interested. Mr. Watson explains, too, that the local
interests controlling the banks kept the benefits jealously
within their own clique or set. Traders and customers
outside of that had little chance of getting accommoda-
tion. When the Canadian banks went into Newfound-
land they reconstructed the colonial finances, provided

112

A HYPOTHETICAL BRANCH BANK

an adequate supply of currency in the form of their own
notes, lent money to the Government, and extended
accommodation to all worthy borrowers withont regard
to whether they belonged to any particular clique or
party. The St. John's Trade Review in December, 1907,
published the following description of the change effected :
"The thirteen years that have elapsed since the bank
crash have wrought many changes in our commercial and
social life, and on the whole we have progressed. Three
factors make up the sum of our material betterment —
namely: bountiful sea harvests, increased labor in mine
and forest, ai 1 the introduction of the Canadian banks.
Prior to the advent of these banks half a dozen men
held the business of the country in the hollow of their
hands, and woe to the unfortunate wight who endeavored
to butt into the ring. But with the new order there was
a fair field opened to every young business man with
small capital and reputable name, and hundreds availed
themselves of the opportunity. This not only led to
keener competition, and consequently lower prices for
the consumer, but it also led to a quickening of the
business pace all round."

The Large CoRPORATio>fs Are Not iNcoNVENiENCED

Possibly the reader will find in this short sketch a
strong hint as to some ways in which local banks en-
courage monopolies. Pursuing the subject to a more
particular and precise definition, here is another v;ay in
which they tend, innocently and ind'rectly, to bring about
the same undesirable result. It hr heen explained that
the manufacturer or merchant ii United States who

wishes to borrow a large amount, . who does not con-
trol a banking institution or a considerable interest in
one, is obliged usually to float his paper through note-
brokers in the principal cities, or to apply to large banks
in those cities.

■BIkiMi

A RATIONAL BANKING SYSTEM

I r> ^

When a great railway company, the operations an
financial position of which are well known to bankers
and investors in every part of the country, wishes,
through its fiscal agents, to place its bond or short-term
note issues on the market while monetary conditions are
normal, it can do so without difficulty or trouble. Simi-
larly, when a large industrial or mercantile ' ^mpany,
possessing a good reputation everywhere for iiaancial
strength, essays to do the same thing, bankers and in-
vestors in all the states have confidence that the obli-
gations are good, and buy them freely when in funds.
As we descend the scale, however, and come eventually
to manufacturers and merchants operating in a smaller
way, and not so well known to the investing classes, it
becomes a more difficult matter for them to get the credits
needed for carrying on business, though they may, in
many instances, be quite as worthy of financial assist-
ance, and quite as sound and safe for their requirements,
as are their larger competitors and fellows. It can be
seen, also, that after a certain point is reached one comes
to a class of merchants and manufacturers, with only a
local name and reputation, who are not big enough to
command the support of this outside credit market.
They are thus confined to their local banks, which, as
already explained, are prevented by law and by regard
for banking principles and their own safety, from ad-
vancing beyond certain small sums.

:ij^

The Smaller Concerns Are Hampered

Now one may see how these conditions tend toward
monopolies. A large, strong concern can easily get all
the money it wants. The smaller, less-known concern
gets credit less easily, and has to content itself with less
than it can profitably use. In other words, the opera-
tions of the large concerns are carried on without diffi-
culty or hindrance; those of the smaller concerns, the

IT4

A HYPOTHETICAL BRANCH BA

requirements of which are beyond the capacity of their
local banks to finance, are hindered at every turn As
already mentioned in the matter of the bankin<r con-
solidations, there is no just ground for complain. - of
the conduct of the individual banks. It is perfectly right
and proper for each particular bank to prefer to buy the
easily marketable paper of a strong corporation rather
than that of a little-known manufacturer operating in
sorne small far-away tovvn. That is correct banking-
and the individual bankers are not to be blamed if the
small borrower fails to get the capital he needs. But it
counts in the indictment of the banking system, for it is
clearly a detect of the system if worthy men with mod-
erate capital cannot comfortably get the accommodation
necessary for carrying on their business.

Branch Banks Support Both Large and Small

Borrowers

I have explained in the preceding chapter what the
branch banks would do for these smaller manufacturers.
Under the branch system the great bank, with abun-
dance of capital and credit to dispense, establishes itself
at the very doors of these factories and mercantile estab-
lishments. It makes it a point to become thoroughly
acquainted with the affairs, resources, reputation, and
history of every borrower of the kind; and its officers are
just as ready to fill the full requirement of a man who
wants and is entitled to $50,000 as they are to meet the
wishes of a borrower who asks for one or two millions

It IS quite possible that the oppressive combinations
which overcharge consumers because of the monopoly
they enjoy (m some part through possession of enormous
cash funds or credit resources) would experience a much
niore vigorous competition if the able men throughout
the country possessing a moderate capital and a good
reputation could rely upon the support of good banks

iflB

iflltt^iAi

; j

A RATIONAL BANKING SYSTEM

free from trust domination. It would be reasonable
enough to hope that from this cause alone the ad-
vent of branch banks would bring back competition in
a number of trades and businesses where it now appears
to be extinct. If they did so the fact would be of great
benefit to the whole country.

The Domestic Bill op Exchange

There is another respect, closely allied to the fore-
going, in which the present system makes it necessary
for a business man engaged in distributing, jobbing, or
manufacturing, to have a larger capital for carrying on
his operations than he would need under the branch
system, and which, therefore, works for the benefit of
the so-called trusts. When I commenced my study of
banking conditions in the United States several years
ago I was struck by one curious fact: From what I can
discover, hardly anywhere in the United States is there
any extensive use, so far as internal trade is concerned,
of the commercial bill of exchange or draft drawn by the
merchant upon his debtor as a means of effecting col-
lections and minimizing the capital requirement for
carrying on business. There appear to be quite a num-
ber of sight drafts, but they are not commonly discounted
or put to credit. The merchant or manufacturer sends
them direct, for collection, to a bank in the drawee's
town, and does not get his funds till the drafts are paid
and the correspondent bank remits. Drafts at thirty
days, sixty days, three and four months, are hardly used
at all. Apparently the well-nigh universal custom,
when a business man sells goods, is for him to wait for
the maturity of the account or debt, and then he ex-
pects to receive a check. If the check is not forthcoming
on the due date, he may then draw a sight draft and en-
deavor to get it paid. In some sections of the country
these drafts are regarded bv the drawees as offensive, as

i'i6

A HYPOTHliTICAL BRANCH BANK

being, in fact, next door to a lawyer's letter. This is a
peculiar state of affairs. In other highly civilized coun-
tries the inland draft or commercial bill of exchange is an
honorable and useful instrument, serving a very valuable
purpose in economizing the use of capital in business.

Discounting Trade Bills

In all probability the drafts have fallen out of use
because the merchants and manufacturers are not carried
each one altogether by his own bank. A wholesale mer-
chant m Montreal who ships goods all over the Dominion
will have a line of credit with a large bank amounting to
perhaps. $500 ooo. When he applies for his credit the
bank says: We want commercial paper or trade bills.
We won t make a direct loan to you. but will discount
trade paper This attitude of the bank is taken because
of the well-known banking principle that bona-fide trade
bills are better security than accommodation paper. Such
an arrangement is better for the merchant too, for, though
he may owe the bank $500,000, his liability is but in-
direct and he has the powerful aid of the system of
branches in effecting collection of his accounts. So when
he ships out his goods he allows time for them to' reach
the consignees, then sends do'w-n to the bank a batch of
drafts drau-ii on his debtors in all parts of the Dominion-

^ i'!u • u "^^ ^"'^ ^'""^^ ^^y^' *hree and four months-
and the bank discounts the whole batch, providing the

^pIc V ' °"-.*'Tu ^'''**''- ^" ^^'' P^°^^^« the merchant
gets his capital back within a few davs after shipment of
goods. He repeats the operation after each shipment.
The prompt return of his funds operates mightily to re-
duce the capital requirement of his business. Under the
United States system this man would probably have
hve or six hundred thousand dollars more or less per-
manently on his books, a large part of it being bevond
ills reach. He may negotiate direct loans of from $200,.

117

ff I

A RATIONAL BANKING SYSTEM

ooo to $300,000, but his bank will force him to carry one-
fifth of the amount at credit of his account; and he must,
therefore, find his o^n capital for carrying the book debts,
perhaps to the extent of $300,000 or more.

Branch Banks Would Revive the Bill op Exchange

Here, again, is seen how a good system of branch banks
devoted to commercial banking would benefit able busi-
ness men with small or moderate capital. It is quite
reasonable to anticipate that once that type of branch
bank became established and began to take the ac-
counts of the merchants and manufacturers the latter
would begin at once to educate their debtors to the use
of the commercial bill of exchange. They would do so
because of the insistence of their bankers that they be
furnished with trade paper rather than accommodation
bills. Instead of going forward merely as a collection bill
and receiving, perhaps, contemptuous treatment at the
hands of the drawee and of the correspondent bank re-
ceiving it, the instrument would be discounted at once
and forwarded to a branch or to a correspondent that
would accord it the respect properly belonging to it. The
more general use of these instruments in the United States
^'ould unquestionably effect a vast economy of capital,
and, as before said, should stimulate indirectly a healthier
competition in many lines of trade and industry.

Education op the Bank's Customers

We may now understand how the manager of the
Bank of Massachusetts* branch in X would begin at once
to educate his manufacturing customers to draw upon
their debtors and discount the drafts instead of simply
sitting down and waiting for their checks. As it would
require something of an economic revolution to bring
about the change in practice, no doubt it would proceed

118

A HYPOTHETICAL BRANCH BANK

but slowly; but when the manufacturing classes got to
understand thoroughly that ample credits were at their
disposal on their providing trade bills, accepted or made
by their debtors, they could probably be depended upon
to bring the debtors into the frame of mind necessary for
the acceptance of drafts.

The work connected with the large lines of credit given
to the X ir- nfacturers would necessitate an addition to
the staff ol .. X branch. Quite probably it would now
need a staff little inferior in point of numbers to that ear-
ned by the local bank. With the success of the branch
taus assured, the manager, if he were wise, would play
a waiting game. Unquestionably a number of citizens
would be deeply impressed by the fact that the branch
bank was carrying the whole accounts of those large
IT .ufactunng establishments, and by the other fact that
it jvas open to <*o all the discounting business that offered
The strength and security thereby suggested would not
be lost upon the depositing classes. Those impressive
figures displayed day after day upon the window screens
wou d have their certain force in attracting deposits.
While perhaps the body of depositors, out of loyalty to
the local institution, would leave their balances with it
the branch would get a share of the new accumulations'
and there would be some clients of the older bank who
w-ould consider that the great size of the Boston bank
offered them better security for their money, and they
would place that consideration before everything else
Of course the savings of the workingmen employed by
the manufacturing industries would have a tendency to
gravitate to the bank at which the factory accounts were
earned.

VII
MOVEMEN'T OF FUNDS TO AND FROM NEW YORK

The Extinction op the Local Ranks

TIL.r the United States will ultimately adopt branch
banking I have every confidence. At present there
are only a few who desire to see it introduced; but as
the people generally get a better idea of the waste and
inefficiency of the present system, the impossibility of
reforming it or of making its units cohere, it is to be ex-
pected that first the sentiment and afterward the laws
will veer to an attitude more favorable to a different
system. The chief ground on which I base this expecta-
tion is concisely expressed in an address given before the
Pennsylvania Bankers' Association, at Bedford Springs,
in September, 1909, by Hon. Edward B. Vreeland. Mr.
Vrceland said; "I believe in this independent system of
banks. I am opposed to the branch-bank system. The
branch-bank system will drive any other system .vith
which it competes out of existence. The establishment
of the branch system in the United States would, in time,
mean the extinction of the small independent bank. This
has invariably been its history wherever put into opera-
tio'' In France there are to-day only three great com-
"uks outside the Bank of France. They cover
ti with their branches. The thousands of local

ban.v 'ormerly existed have largely passed away.

The san.^ ^.^cess is going on in England. With two or
three exceptions London is to-day the home of the large
joint-stock banks of that country. They are rapidly ab-

120

i: 1

i i

MOVEMENT OP FUNDS

sorbing the independent banks throughout England and
establishing their branches in their place. *m branch
system mil drive out every oilier system because it can be
operated more economically. TMs is a consideration from
the banking pent of view, but in my judgment it would

In-I '^rr"f "-■ '^' ''""f^'"' "^ '^"^ United States for the
loss of tio thousan-ls of in.lcpcndent banks whose stock

L^Tr '" ^^"^ community, whose deposits are drawn
from the community, and whose interest is to assist and
develop in every way the business of the community."

The Public Benefits from an Economical System

Here is the reason why bran, banks arc to be ex-
pected in the United States-bcvausc they are more

fror^h' K ^i'- ^"^'""^ ^^y' '""'^ '« ^ consideraTon
from the bankm^^ standpoint, but that it should not

appeal to the general public. But surely it is the pubHc
that will reap much of the bencrtt if the business of bank!
ing IS earned on more economically, more efficiently and
fa tf ';; an.l in a manner to gain for the banks a
far larger share ot the conHdence of the people at home
and of foreign nations. He mentions the fact 'that France
has but three great commercial banks outside the Bank

raoMw''' ^"^ '^^' '?" ^^"'^'"^' ^°"^^"1 i" England is
rapidly pass.HK into the hands of a few great London

St'' . '' ""'u^ '^'' ''""«^ '"^^ h^^ contributed pow"
Zif- ?. '" '^' """^'^^ "^ ^^"'^^ i" F'-^"" and Eng-
land IS the existence of a monopoly of note-issuing. In
France the Bank of Fra, -e has the sole right to issue
bank notes; in England the Bank of England has pra"!
tically a monopoly. It should be observed, in reference

IV. % r T"'' °f l"^"'-^' in London, that the small
area of Great Britain makes it undesirable that more
than one centre shoul.l exist. For example, if Wales

* The italics are the author's.

121

A RATIONAL BANKING SYSTEM

should set up its financial centre, and the northern
counties should set up theirs, it would be much the
same as if each one of half a dozen sections of Massa-
chusetts or Pennsylvania were to set up its financial
centre in opposition to Boston or Philadelphia.

A Central Bank and Monopoly of Note Issue

Judging from recent utterances of its prominent mem-
bers, the National Monetary Commission is not un-
willing to set up in the United States that same ob-
noxious feature of monopoly of note issue which has been
so potent in restricting banking competition in Europe.
Suppose it comes about, in the course of another twenty-
five years, that in the matter of disgraceful failures, and
in that of humiliating behavior during panics, the in-
dependent banks of the United States make such a bad
showing that the people turn generally to branch banking
as a relief. If there is then in existence a great central
bank with a monopoly of note issue the fact is bound
to operate most importantly to reduce the usefulness of
the ordinary banks, to restrict banking competition,
and to prevent the supplying of good banking facilities
to thousands of small places. When the branch banks
begin to replace the independent banks it will be a matter
of great consequence to the borrowing classes and to the
people of the country districts that the branch institu-
tions possess note-issuing rights. If the banks of any
country are strong, and in every way worthy of con-
fidence, they will be most useful to the people when they
are permitted to exercise their functions freely. If a
wide liberty is given to worthy institutions it is the pub-
lic that will derive the greatest benefit. Because of the
smallness and weakness of the independent banks, it has
been necessary, in the public interest, to prevent their
exercising certain functions which, properly performed,
would be of service to an important part of the coni-

122

MOVEMENT OF FUNDS

munity. Take the business of note issue for example.
I am not competent to say whether the power to issue
notes to serve as currency belongs by Divine right to
the Government or to the banks, but I do know that
when generous rights of issue are conferred upon banks
that are worthy of il .nn. +.he public, especially the bor-
rowing public, b^ i.;fits directly t) an enormously greater
extent than it w< nld from a je: lous retention by Govern-
ment of all note i-saing right . This will be explained
in detail in anothe. plaCc. Ir the mean time I shall pro-
ceed to give my views as to how branch banks may be
expected to spread and develop in the United States
when the time comes in which they make their appear-
ance in force.

Each Section Will Have Its Own Banking Power

There is every probability that the development will
take place along sectional lines — that is to say, the
people of each of the different sections of the country
will take steps to ensure that they will be served by banks
identified with their own particular interests. Thus the
Northwestern states will see to it that they possess banks
devoting themselves mainly to financing and encouraging
wheat - growing, flour - milling, lumbering, wholesale dis-
tributing, as well as the retail business and the various
forms of activity in evidence in the country towns. The
people of the other sections— the Pacific, the Southwest,
the South, the East, and the Middle West— will also wish
to have their own banks. Quite possibly there would be
at first a strong tendency toward the creation of banks
operating exclusively in, and belonging altogether to, the
mdividual states. For example, a number of large banks
might develop in California with head offices in San
Francisco and branches throughout the state. In Minne-
sota and the Dakotas others might appear with head
offices in St. Paul or Minneapolis and branches everywhere
9 123

A RATIONAL BANKING SYSTEM

through the wheat liolds. Should the movement get
that far it will be but a short step to branch banks operat-
ing in a whole section. From these again the transition
will be easy to banks of a national character covering the
whole country.

It will be objected that even if the Federal legislators
were brought to permit branch banking, the state legisla-
tures could, by means of hostile acts, prevent its spread-
ing. The answer is that branch banks are now regarded
with hostility because the people have wrong ideas as to
the effects they would produce If these errors were dis-
pelled and the sentiment became more friendly the same
influence that induced Congress to look more kindly upon
them would have its effect upon the attitude of many of
the states.

E.4STERN Br.a.n'ches a.nd Western Branches

In reference to banks serving a single small state,
Canada's experience indicates that while they are in-
variably popular they may not prove so successful or so
useful as others the operations of which are based on
wider territory.

It has been mentioned already that in the purely agri-
cultural districts of eastern Canada deposits have a
general tendency to exceed loans. The only places in
the East where loans habitually or generally exceed de-
posits are the large cities and such of the towns as have
important manufacturing industries, or other special
forms of activity. But in western Canada conditions
are exactly opposite. There it is a regular thing with
all banks doing a large business for loans to exceed de-
posits, at rural branches as well as in the cities. One
reason it is so is that the farmers are extensive borrowers.
From i8q8 to 1900 I had chars^o of a rural branch in the
Province of Manitoba operated by one of the important
Eastern banks. Among the branch's customers were

124

MOVEMENT OF FUNDS

many well-to-do farmers. Almost invariably these men
were borrowers, not depositors. They saw so clearly the
profit in wl at growing, and were so rapidly accumulating
capital, that they re-embarked their profits at once in
fresh purchases of land, equipment, buildings, etc. The
3 per cent, they could get on deposits appeared despicably
small to them when considered against the profit to be
made from buying, breaking, and developing fresh land.
As for the business men of the town, practically all of
them, from the leading merchant down to the blacksmith,
were borrowers at one or other of the banks. If that
banking office had been an independent entity of the
United States type its ability to advance funds to the
farmers and townspeople would have been cut down by
at least $200,000; in other words, it could only have ex-
tended one-fifth of the accommodation which it actually
provided as a branch bank.

Thus the branch banking system has been of the utmost
value ^o western Canadian development. Because of its
existeii..e the enterprising people of that section have had
access to a far larger fund of borrowable capital than they
would have had under a system of local banks. Small
local banks established there would never have had the
credit or standing necessary to draw into their service the
millions of stap" il wealth from the slow Eastern districts.

Advanta

Serving a Wide Territory

It is to be borne in mind that the business of a bank
is less liable to severe depression or disturbance if it
serves a variety of industries and operates in a wide ter-
ritory. If for example a bank was formed and operated
exclusively as a lumbermen's bank, its fortunes would rise
and fall with the fortunes of the lumber industrj'. The
same would apply to a bank involved altogether with the
boot and shoe trade, or with the dry goods trade, or any
other of the great trades and industries. In any of those

125

ifa

Mitti

^•AMi

--'•"

r ■>

A RATIONAL BANKING SYSTEM

cases the eggs \vould all be in one basket. So with a
bank restrictirg its operations to a particular district.
Everybody knows that when depression comes it settles
on some districts or localities with especial severity.
Within certain boundaries, owing to the failure of a crop
or to some other unfortunate circumstance, all is black
and gloomy; outside, conditions are not so bad, and per-
haps a short distance away everything is progressing
satisfactorily. A branch bank, scientifically constituted,
will aim to have its operations cover a wide variety of
territory and a wide variety of interests and activities.
Most of the large Canadian banks cover the Dominion
very completely, and a depression must be general in
character to affect their fortunes appreciably.

Branch Banks and the Wheat Crop

We may now consider the practical working of a system
of branch banks in financing the crops. This is one of
the tasks in the handling of which the isolated local banks
are notoriously deficient. To make the comparison more
effective two descriptions will be given — the first out-
lining the financing of the crops under the present system;
the second outlining the financing as it would be done
under a branch system similar to the Canadian. It will
be most convenient to take the spring wheat crop of the
Northwest as the example, and the operation of handling
it will be taken from the beginning of the harvest to the
close of the season in the following spring.

Under the present system all banks operating in the
wheat fields must prepare during the summer for crop
moving. The officers of each individual institution know
that with the coming of August and September they will
be subjected to heavy extraordinary demands for cur-
rency. Buyers of wheat must have cash to pay the
farmers at all points where wheat is delivered. This cash
they look to the local banks to provide. These demands

126

MOVEMENT OF FUNDS

must be met. The local banks in Minnesota and Dakota
recognize that as soon as the threshing season is in-
augurated they must be ready to supply the demands
of their customers for circulating medium. Part of this
demand comes upon them in the form of a withdrawal
of deposits, part in the form of a demand for loans, and
part in the form of a demand for cash in return for New
York or Chicago exchange. As the season develops, the
proportion represented by the loans tends to get rela-
tively larger. Looking at the matter in its largest sense,
and supposing the Northwest required $50,000,000 of
extra currency during the fall to move its wheat crop,
the banks there must be prepared to hand out that much
of extra money during those three or four months.

Evils of a Rigid Currency

During tha rest of the year, comprising eight or nine
months, no employment for the funds offers itself in their
own district — that is, no suitable employment. If the
Northwestern banks, in January and thereafter, when
they have finished the earlier stages of moving the crops,
followed the course of trying to use m their ordinary
loans and discounts that part of the $50,000,000 of extra
currency which had done its work and was back again
on their hands, their action would produce some serious
evils. They might not be able to find proper invest-
ment for it, but assuming that they were successful in
placing it among their local borrowers, there would re-
main the necessity of recalling it from the parties who
had it as soon as the next crop was ready for harvesting.
Persons familiar with the banking business will under-
stand that this could not be done; for the parties en-
joying the benefit of the loans would not willingly re-
linquish them. To force them to do so would cause great
hardship and dislocation of trade. Therefore that policy
is not followed except perhaps by inexperienced bankers.

127

El '>

■.M

A RATIONAL BANKING SYSTEM

During the off season the fund must be in reserve. There
probably will be opportunity to put out a certain amount
during the spring and summer in loans required to finance
operations to be completed before the harvest begins;
the borrowers in this case would make repayment of their
own accord not later than July or August. But only a
small part of the whole fund could be used in that man-
ner. The bulk of it must either be carried as cash in
vault and lie idle for the greater part of the year, or else
sent away to a market or a centre which wil'l pay some-
thing for the use of it, and be ready and able to relinquish
it on demand or on a date fixed to fall before the harvest
begins. Such a market exists in New York City. Some
of the other cities have risen rapidly in financial impor-
tance, but none of them can offer the advantages which
New York offers. This statement holds good so long as
New York is the financial heart of the country. It may
be supposed by some bankers anxiou? to build up Chicago,
St. Louis, Kansas City, etc., that their reserve money is
just as good in those centres as in New York. It would
be just as good if the reserve agents selected held the
whole of it as cash in vault against the day of withdrawal,
but that they do not do They could not afford to pay
interest on it if they did. To put their funds in use, and
at the same time have them so that they can surely be
recalled at will, is what the bankers require. There is no
place in America at suitable as New York for this pur-
pose. Banks in other cities may be as strong and as
solid as the New York institutions, but there is no place
in America where, speaking generally, call loans on stocks
and bonds are equal to the New York call loans in point
of immediate availability.

Rival Financial Centres

I have seen it argued from time to time that if other
centres, such as Chicago and St. Louis, kept their reserve

128

MOVEMENT OF FUNDS

money at home, and if the citizens of those places would
do their speculating at home instead of buying and sell-
ing in New York, their home stock-markets would be
broader and better, and New York would not over-
shadow them to such an extent as is now the case. But
the fact is that no matter where a man lives, if he has
any intelligence at all, when he undertakes a speculation
or deal in stocks he will always see to it that the cir-
cumstances connected wit i his deal are as favorable to
himself as he can, in honor, m^ke them. One thing every
sensible man will try to do. He will try to buy or sell in
the best market. That is why he goes to New York to
deal in stocks. Dealing in Wall Street, if he wishes to
buy, he knows he will find sellers from his own city like
himself dealing in the best market, sellers from New York
City, sellers from London, Paris, Beriin, and from Europe
in general, sellers from the other parts of the United
States, from Canada, Mexico, and South America. And
if he wishes to sell there will be buyers from the rest of
the world to bargain with. This advantage — of operat-
ing in the best market — he will not forego for all his local
feeling. Patriotism even does not induce him to re-
linquish it. For if there is a certain stock which may be
bought better in London than in New York, the New
Yorker will cable his order to the other side of the Atlantic.
That is one reason why New York is the best centre for
reserve money. Another is that call loans there may be
called when funds are wanted. Ono of the most prom-
inent Chicago bankers recently said, in reference to the
matter of call loans, "We have call loans in Chicago, but
if we w^ere to call them it would make us very unpopular."

New York the Best Centre

So a large part of the 850,000,000 released from service
in the Northwest goes to New York during the spring and
summer. It will probably happen that many banks in

129

^mm

A RATIONAL BANKING SYSTEM

the Northwest
carry their b.
Chicago, and
in turn will
either as bal
to New York

id their shipments of currency to, and

OS in, banks in Minneapolis, St. Paul,

.ouis; but it is certain that these banks

a part of the money on to New York

OS in reserve banks there or as call loans

jck-brokers.

There may not be any work awaiting this currency on
its arrival at the metropolis. It swells the bank sur-
pluse" and its presence is quickly noted by the speculating
cliques. Quite frequently its coming is marked by a
lowering or reduction of interest rates. When this hap-
pens the combination of the two circumstances — abun-
dance of available credits and cheap rates of interest —
may prove too great a temptation for the cliques to resist.
They are induced to inaugurate bull movements with the
idea of unloa ling on the unwary at top prices, sometimes
when conditions do not warrant any advancement of the
price level.

At any rate, the fund goes largely into call loans to
New York Stock Exchange houses. About August the
Northwestern banks begin to prepare for the autumn
demands. They start withdrawing their balances from
New York, and calling in their loans there, asking that
the proceeds be shipped in the form of currency, so much
per day or so much per week, so as to make the movement
conform approximately to their requirements.

I am aware that large banks in Chicago finance some of
the more important grain-buying and flour-milling con-
cerns in the Northwest in the same wa-- as the large
Boston banks finance important cotton mills in the
Southern states. The fact does not materially affect the
argument I am now presenting; and, as remarked before,
the practice is an argument for branch banking, inas-
much as if these Southern cotton n^ills and the North-
western grain and milling concerns must depend on loans
from Boston and Chicago banks it would be better for
both borrowers and lenders if the banks could establish

130

MOVEMENT OF FUNDS

branches at the points where their important borrowers
operated.

Recalling the New York Balances

To resume the narrative — in Minnesota and the Dakotas
the country banks are being asked to relinquish deposits
and to make loans to parties connected directly or in-
directly with the grain trade, or whose business opera-
tions are affected by the movement of wheat to market.
In the wheat dis rict 5, as the currency goes into employ-
ment, the amount in the hands of farmers, grain dealers,
storekeepers, gets larger and larger, while the wheat streams
into the country elevators on its way to the terminals
and ports. By-and-by the interior banks have all their
resources in play, and some of them borrow from the city
banks so as to be able to support their customers. Each
bank's ability to lend to the people in its constituency
depends upon the condition of its resources. If the local
bank has a large proportion of liquid resources— ca.sh,
and call loans and balances in New York— it can lend
extensively at harvest time. But if its resources are
already fully employed when the harvest commences, it
cannot lend further assistance except through borrowing
or rediscounting.

In New York the banks may, at first, respond to the
calls from the interior w hout disturbing their loans on
stock market collateral: but, as their reserves fall nearer
to the legal minimuTn, they usually are obliged to call in
their loans, and, likeiy as not, stringency will develop.

Supply of Currency Not Regulated by Dem .nd

Taking the whole business broadly, it is to be s.en that
this special commercial use for the $50,000,000 currencv
exists only about three and a half months in each year,
bo that if the -,upply of currency in the United States at

131

[•" W:

A RATIONAL BANKING SYSTEM

harvest time is exactly equal to the requirements, then,
after the work is done, there is a surplus of $50,000,000
for which no legitimate work offers. And if it be assumed
that there is in the country an amount of currency exactly
efficient for the requirements during the rest of the
year, then it follov/s that the extra need of the harvest
time will create stringency because the supply is deficient.
Let us next picture the f.nancing of the Northwestern
wheat crops under a system of branch banks. Suppose
that we are watching the operations of a great bank —
which we may designate the Bank of Minnesota— with
head office in Minneapolis and branches scattered every-
where in the wheat fields, as well as in New York, Chicago,
and in smaller places in the East. It will be assumed
also that this hypothetical Bank of Minnesota, in com-
mon with the other branch lianks operating throughout
the country, has note-issuing privileges similar in char-
acter to those possv ssed by the chartered banks of Canada.

VIII

ANOTHER HYPOTHETICAL BRANCH BANK

The Bank op Minnesota

THOUGH the principal aim of this bank is to finance
Western or Northwestern development, it has found
it advisable to acquire large interests in other parts of
the coimtry. Thus it has establishtv. branches in some
depositing districts of the East with the object of getting
money for Western borrowers. How this may be done
without injury to the Eastern localities has already been
explained. Then the close identification of Chicago with
the wheat business, and the concentration there of houses
and institutions dealing directly with the Northwest,
have made it advisable to maintain an important branch
in Chicago. Also, like the other large branch banks, re-
gardless of where their head offices are located, the Bank
of Minnesota maintains a branch in New York City.
Because of the nature of the business done by it, and be-
cause of the magnitude of its operations, this New York
City branch ranks practically equal m importance with
the main branch in Minneapolis, which is directly under
the supervision of the head office executive.

Functions op the New York City Branch

First, the New York City branch acts as New York cor-
respondent for all the branches of the bank. When the
branches acquire New "ork checks, drafts, or exchange,

133

•>.•

i^bmUi

A RATIONAL BANKING SYSTEM

m '

instead of sending them to some great New York City
bank for credit of account, as is done by all the isolated
country banks at present, they send them to their own
New York branch. Also, whenever they issue drafts on
New York, they draw on the branch, not on an outside
institution.

Second, the New York branch acts as custodian of a
large part of the reserve carried in actual cash. It is to
be remembered that there are several other Western or
Northwestern banks operating in the wheat fields; also
that some large banks with head offices in Eastern cities
have branch systems in that section of the country. It
will happen that in Minneapolis and St. Paul are repre
scnted, perhaps, three dozen or more important banks.
Each one has its principal branch for the district in the
heart of the financial part of one or other of the two cities.
From these centres scores of auxiliary branches radiate
through the outlying sections of the cities and through
the whole wheat country. Thus it would happen that
in an interior town of twenty-five thousand inhabitants,
if it were a good centre, there might be a dozen or fifteen
banks represented — both Eastern and Western institu-
tions — and in a smaller place of ten thousand population
there might be eight or ten. In each of the little villages
of three hundred or four hundred people there would
surely be one bank, and if there existed a reasonable
prospect of the place growing satisfactorily very likely
there would be two. The villages and towns with popu-
lations between three hundred and five thousand would
have from two banks to half a dozen, according to the
amount of business they supplied.

Exchanges at the Lesser Branches

At these lesser points, under the branch system which
is being pictured, the banks, of course, would have a
daily exchange of checks and notes. They would not,

134

ANOTHER HYPOTHKTICAL BRANCH DANK

however, settle differences in cash. Settlement would be
by draft on whatever centre the respective parties agreed
upon. Thus, probably, it would be agreed in many in-
stances to settle by draft on Minneapolis or St. Paul; and
in others by draft on Chicago or New York. The settling
centres would be exactly as the various reserve centres
are now. So it would not be necessary to carry large
legals for clearing-house or settlement purposes at any of
the country offices. Each branch might carry a few large
notes for meeting the demands of individual customers,
should it have customers in the habit of demanding them.
Apart from these, practically the whole stock of legals
and most of the specie would be concentrated at the
central branches. Though the country branches through-
out Minnesota and the Dakotas might draw on Minne-
apolis or St. Paul when settling differences with other
banks, the Minneapolis and St. Paul offices, even of the
purely Western banks, would find in actual practice that
it was advantageous for them to carry a large part of
their specie and legals in New York City.

The Reserve Against Deposits

The Bank of Minnesota, for example, would find that
many of its customers on getting loans from it would re-
quire to have the proceeds paid to parties in New York.
Also that the depositors, or many of them, in making
withdrawals would do so through the New York branch.
And all the time there would be trafficking in New York
exchange by the banks in the twin cities. For buying
and selling sterling and foreign exchange New York
would be largely used. Purchases and sales of securities,
too, would take place there. So it would be necessary
to carry a large balance of specie and legals in the me-
tropolis. But the reserve would not. by any means, con-
sist entirely of specie and legals. Specie and legals would
constitute the first line of defence. Behind them would

^35

1'^ )

' t

I i

lit

A RATIONAL BANKING SYSTEM

come the balances in great international banks and the
call loans in the great international markets. While the
Bank of Minnesota need not necessarily carry a large ac-
count or balance with another bank in New York City, it
certainly would carry a balance in London and, perhaps,
also in Paris. The Bank of England or one of the great
British joint-stock banks would be its London bankers.
Perhaps it would, like the Canadian banks, deposit several
million dollars' worth of bonds having an international
market with its London bankers to be used as cover for
drawings.

After the international bank balances would come the
call loans. These, if they formed an integral part of the
reserve against deposits, must necessarily be at New York
or London or Paris. Call loans on stocks and bonds at
other cities in the United States, for the reason explained
in the previous chapter, though they may be safe enough
and sure enough of repayment, cannot equal call loans
at the international centres in the quality of instantane-
ously producing specie and legals on demand.

Lessening of New York's Control

Let us here take note of one significant economic change
that would occur as a result of a change in the character
of the banks. Suppose the Bank of Minnesota has
$12,000,000 at call in Wall Street — the fund forming
part of its reserve against deposits. This money is con-
trolled from Minneapolis — absolutely. It is put out
solely for the convenience and profit of the Bank of Min-
nesota. If the bank's stock of specie and legals accumu-
lates through the increase of deposits or the repayment
of loans in the ordinary course of its business, the branch
in New York will put out some more millions at call.
If, on the other hand, the specie and legals fall, through
the withdrawal of deposits or the making of loans, some
part of the $12,000,000 is called in. There can be no

136

mmm

ANOTHER HYPOTHETICAL BRANCH BANK

suspicion, in this case, of manipulation of the money or
stock markets for the benefit of capitalists or financiers
in New York.

An instructive comparison may be instituted by sup-
posing that the Bank of Minnesota has one hundred and
fifty branches, that the total of its international bank
balances, its specie and legals, and its call loans carried
in New York is $30,000,000; and by supposing secondly
that at present one hundred and fifty isolated banks in
the Northwest and the East, the operations of which
would correspond to those of the hypothetical Bank of
Minnesota and its branches, carry the same amount of
$30,000,000 in the form of call loans and balances in
New York. Under the present system the fund of
$30,000,000 has one hundred and fifty owners. They
send the cash to various great banks in New York City,
which take it on deposit and use it as their own money,
or lend it for the account of their correspondents. A
number of the most important New York depositor^'
banks are understood to be hand and glove with those
powerful market interests of which the rest of the country
professes to be much afraid. These interests thus have,
at present, the practical control of perhaps a third, per-
haps a half, and perhaps two-thirds of the whole fund of
$30,000,000 here referred to; while under the branch
system, if those one hundred and fifty banks comprised
the Bank of Minnesota, they would not control a dollar
of the money. This is one way in which the control of
those metropolitan financiers over the cash resources of
the country might be weakened through the institution
of branch banks.

The Bank of Minxesota in a Panic

Take the change in another way: Suppose a panic is
in progress. Quite probably one hundred out of the one
hundred and fifty isolated banks controlling the $30,-

137

A RATIONAL BANKING SYSTEM

J f *

000,000 of funds in New York would demand the im-
mediate return of perhaps one-half of their balances and
loans, merely as a precaution, when they were not in
any danger at all. New York is thus legally under the
necessity of surrendering these millions at a time in
which it sorely needs every dollar. If the same funds
were controlled by the Bank of Minnesota, how differently
they would be handled. The panic breaks in New York
— probably an important bank suspends and stocks crash
downward. The manager of the New York branch, who
is a thoroughly competent and trustworthy official, keeps
the head office informed hourly as to the situation. He
does not need to explain at the outset that the bank is
not involved in the failure through lock-up of its balance,
for it keeps no balance in New York banks. It may, per-
haps, have $300,000 or $400,000 or more in checks and
exchanges for the failed bank, but the greater part of
this sum can be at once recovered through charging back
the items to the customers from whom they were re-
ceived. So there is no danger of balances being locked
up. The New York specie and legals are safe, because
they lie securely in the Bank of Minnesota's own vaults.
There only remain the call loans. These have been made
to Stock Exchange borrowers of the highest standing
strictly on securities possessing a good market. That is
the kind of loans that are made by the Canadian banks
in New York, and it would be the same with good Ameri-
can branch banks like the Bank of Minnesota. In mak-
ing them the New York manager kept in view the fact
that they must be surely available on demand. He was
not concerned in making a market for any particular stock
or stocks, or in market movements of any kind. Con-
sequently, when the panic developed he could assure his
head office that the call loans were all right, and that
there need be no uneasiness in regard to them. He
would be exceedingly careful to see that every borrower
kept up his margin, and the standing of the borrowers

13S

ANOTHER HYPOTHETICAL BRANCH BANK

being of the best, they would certainly respond at once
to demands for margin. So he could assure the head-
office people that so far as New York was concerned they
might proceed with their business as usual.

A Factor in Preserving Stability

Probably it would happen that the committee or asso-
ciation of bankers and financiers in New York that was
engaged most actively in fighting the panic would find it
necessary at an early stage of the crisis to support one or
more important banking institutions or business houses
that were threatened with insolvency. Should that be
the case the Bank of Minnesota — of course under authc rity
from Minneapolis — would take its part with other banks
in preserving stability. It could, without undue danger
to itself, advance its quota of several millions to the gen-
eral fund for this purpose. The public announcement of
its name as one of the banks lending assistance would
strengthen its own credit and reassure its own depositors.

Out in the Northwest the people would hardly be aware
that there was a panic. The various branches of the
bank —ould have little concern in the matter. So they
proceed with their regular operations very much as
usual. They draw on Minneapolis, St. Paul, Chicago,
New York, in the accustomed manner. Their drafts are
honored, as before, in specie and legals. Great banks like
these, intently concerned in building up a spotless repu-
tation for themselves, will not consent to anything so
dishonorable as a suspension of payments except in the
gravest emergency. That emergency is not so likely to
occur if the country banks refrain from withdrawing cash
from the centres and hoarding it.

The Country Branches Continue Discounting

The country offices of the Bank of Minnesota continue to
give the customary support to their regular borrowers. In
10 139

A RATIONAL BANKING SYSTEM

deference to the panic and to the stringency in money
the executive will have sent round instructions to the
branches requiring the managers to abstain from com-
mitting the bank to advances for new enterprises or new
connections, also to hold their borrowers in check, re-
straining them from going into extensions and from taking
up new ventures. In all probability this policy would be
instituted before the panic developed. With these limita-
tions business goes on as usual. Storekeepers and factory
owners, farmers, dealers, and others, who have been wise
enough to keep their indebtedness well in hand, lodge
their bills and notes with the bank as usual; the bank
discounts them, proceeds are put to credit of the bor-
rowers' accounts, checks are drawn against balances and
are paid in cash without demur.

If a different course were followed, and the bank, falling
into a panic itself, began savagely to call its loans in New
York, and to collect all the specie and legals it could lay
hands upon, and if the executives sent orders to the
branches to stop discounting even for regular customers
and to exact payment of all notes and bills as they came
due, what a different state of affairs would exist. Such
a policy generally followed would precipitate Stock Ex-
change and other failures and the bad effects of the panic
would be intensified.

Security op the Note Issues

The reader will have derived from the foregoing ex-
planation a partial knowledge of the business carried on
by the Bank of Minnesota. Before describing its method
of financing the spring wheat crop of the Northwest it
will be well to describe the note-issuing powers with
which it should be endowed. It may be said that the
note issues of the Canadian chartered banks are believed
by the experts to be absolutely secure. Besides the
priority of claim upon the assets and the practical guar-

140

ANOTHER HYPOTHETICAL BRANCH BANK

anty of the associated banks, the bank notes arc protected
by the Bank Circulation Redemption Fund held by the
Minister of Finance and Receiver General of Canada.
This fund is the property of the banks contributing it,
but liable to be used for paying the notes of a failed bank,
providing the liquidator does not do so within sixty days
from the date of suspension. Each bank must keep in
the fund a balance equal to 5 per cent, of its note circu-
tion as that averages through the year up to the preced-
ing 30th June. The total of the fund, therefore, amounts
roughly to 5 per cent, of the whole average circulation.
Essentially the security behind the notes is not the fund
but the first lien on the assets and the guaranty of the
associated banks. If the fund is depleted the banks may
be called upon to restore the balance — up to the 5 per cent,
required — but not at a greater rate than i per cent, of
their average circulation per year. The first lien provision
and the necessity to provide 5 per cent, for the redemption
fund apply to the extraordinary issues as well as to the
ordinary.

Economy op Cash Capital

We may suppose that the Bank of Minnesota has a
paid-up capital of $12,000,000, and that it has the right
to issue its own notes, uncovered by specific security and
free from tax, up to that amount. We may suppose
further that its circulation runs, during the summer
months preceding the harvest season, at $6,000,000. At
the commencement of the grain deliveries it would, there-
fore, be in position to supply roughly $6,000,000 in cur-
rency for crop moving purposes. But this bank is only
one of a considerable number actively operating in the
Northwest. Taken altogether these banks could prob-
ably supply $125,000,000 or $150,000,000 in new currency
if it were required. However, as the Bank of Minnesota
is one of the local Northwestern banks, with directors,
stockholders, and friends closely identified with the grain

141

'JLL

A RATIONAL BANKING SYSTEM

trade, it is able to find a use for the whole of its $6,000,000
margin. Let us now follow its operations.

To maintain its circulation of $6,000,000 in quiet times,
and of $11,000,000 or so in harvest time, the bank must
possess probably $5,000,000 or $6,000,000 in notes, signed
and ready for issue, over and above the amount actually
in circulation. This is necessary because all the branches
must have a sufficiency of till money. At the smaller
country branches perhaps an average of $15,000 or
$20,000 per branch would be required all the time re-
gardless of the amount outstanding. And the depot
branches, or centrally situated branches, would need to
carry much larger sums. Altogether, probably $40,000
per branch would not be too high an estimate of the
reserve supply of notes required to be carried. If the
branches are taken to number one hundred and fifty this
requirement comes out at $6,000,000.

The Cost of Providing Currency

So, during the summer, the head office would arrange
for a supply of notes sufficient to replace worn notes and
to make the balance of good notes on hand and in circu-
lation up to about $18,000,000. If the amount outstand-
ing was $6,000,000 there would be $12,000,000 on hand
available for issue and for till money. This $12,000,000
in the bank's own notes might consist of $4,000,000 in
fives, $5,000,000 in tens, and $3,000,000 in twenties,
fifties, and hundreds. In other words, the specification
of its own notes held by the bank might read as follows:

800,000

« 5-

$4,000,000

500,000

10.

5,000,000

50,000

30.

1,000,000

20,000

50-

1,000,000

10,000

100.

1,000,000

1,380,000

$13,000,000

142

ANOTHER HYPOTHETICAL BRANCH BANK

Over and above the cost of the plates, if the cost of
each note be set at a J cents, the bank would need to
make an outlay in cash of only $31,050 in order to pro-
vide itself with this potential currency amounting to
$12,000,000, of which $6,000,000 might be issued and
$6,000,000 held as till money. It may also have been
obliged to deposit $450,000 in the general redemption
fund. Thus at the outset the difference in methods of
preparing for the crops is seen. The Bank of Minnesota
has ready to pay out $6,000,000 of currency, and has only
parted with $481,050 of its cash resources to get it. T'' ider
the present system that aggregation of one hundred and
fifty banking offices could not prepare $6,000,000 in cur-
rency without engaging a full $6,000,000 of their re-
sources. To whatever extent they augment their store
of circulating medium in the late summer, they must
draw upon resources that have been employed in some
other TR'ay.

Lending to the Grain Tr.\de

In the summer, sr.ie little while before the first de-
livery of grain \vill eke place, the varioxis grain-buying
and milling firms, and companies that have accounts with
the bank and its branches, would arrange for their lines
of credit. A few of these concerns may transact so large
a business and require such heavy advances that two or
three large banks may unite to carry each account. The
several banks combining to carry an account of this kind
would agree among themselves as to the proportion to be
assumed by each. Accounts requiring credits not greater
than $1,000,000, or $1,500,000, or perhaps in some cases
$2,000,000, would be carried by one bank. It has already
been remarked that the directors, stockholders, and close
connections of the Bank of Minnesota include some men
influential in the Northwestern grain trade. Therefore,
the bank is certain to have its share of good grain and

143

I' '

A RATIONAL BANKING SYSTEM

milling accounts. It will have a number which deal ex-
clusively with it; and it will also participate in carrying
some of the best of the larger divided accounts. Six
weeks or a month before the crop is ready for marketing,
the general manager and the board of directors will have
completed their work of considering and acting upon the
credits asked for by all these customers. At the prin-
cipal branch in Minneapolis (that under the shadow of,
and in the same building as, the executive offices), and
at all the branches throughout the wheat country, the
managers and officers have been informed of the amounts
they are authorized to lend to each important customer,
the rate of interest which the loan shall bear, the security
on which it is to be ba-^ed, and the other terms and con-
ditions on which it is to be made. Also, as we have seen,
the currency is ready for paying out— not a dollar having
been withdrawn from use either in the Northwest or any
other part of the country.

But though it has not been necessary to call loans in
order to provide a sufficiency of the bank note currency,
the bank may have found it advisable to reduce its New
York call loans to a moderate extent in view of the
heavy advances it has agreed to make to Northwestern
interests.

When Wheat Deliveries Commas. ;

The machinery is ready, waiting for the call to work.
The wheels are set in motion by the appearance of new
wheat in the market at some of the small c(juntry towns.
Buyers there for local millers or dealers, and for Minneap-
olis concerns, wire to their principals that deliveries will
commence next day and ask for a supply of cash. Im-
mediately the bank credits are used. Local dealers at
the points in question appear at the local branches of the
bank, put in their credit obligations, and borrow under
the terms of their arrangements. It may be that some
of the dealers are able to take the wheat and give in

144

ANOTHER HYPOTHETICAL BRANCH BANK

exchange orders or checks on the local branch, thus econo-
mizing the use of cash. Whether this is done, or whether
the buyers draw bank notes from the bank and pay them
out for the grain delivered, the effect is the same — the
bank's note circulation is moving out, and at the same
time the aggregate of its grain loans is rising. Either
through paying out the notes themselves to the grain
firms, or through paying them out against checks given
to the farmers by the grain buyers, the notes go out
largely as the proceeds of loans. It may be that the
bank has contra red with the grain trade to advance in
the aggregate $11,000,000 and that grain loans to that
amount are actually current at the time tho note circula-
tion is at the maximum. If it were possible to analyze
these loans, and to discover in what form they had been
made, it would, perhaps, be seen that some $5,000,000 of
the proceeds of loans had been paid over in the form of
the bank's own notes, that $2,000,000 had been paid in
specie and legals, that $2,000,000 had been advanced
through giving credit on the books as new deposits for
account of farmers and others, and that $2,000,000 of
proceeds had been applied voluntarily to the repayment of
existing loans.

The Profit in the Note Circulation

This illustration shows clearly how the people of the
Northwest benefit from the note-issuing powers of the
Bank of Minnesota. There are plenty of people in the
United States who beUeve that a right of issue, such as
that described, is nothing more than a tremendous profit-
making opportunity for the banks. They regard the
right to issue notes to serve as currency as something
belonging naturally to the Government, and they think
the Government is entitled to all the profit therefrom.
As I said before, I do not aspire to settle the question as
to where this right belongs, but it seems to me abun-

145

Ill

llli

A RATIONAL BANKING SYSTEM

dantly clear that when the currency is provided by
strong commercial banks of the character of the hypo-
thetical Bank of Minnesota, the mercantile interests of
the country benefit to a much larger extent than they
could hope to benefit under a system wherein the cur-
rency was supplied by the Government. I concede that
the Bank of Minnesota makes a satisfactory profit through
its ability to pay its own notes into general circulation
up to a maximum of $12,000,000; but it yet remains true
thai the borrowing customers of the bank reap a con-
siderable gain from its exercise of this franchise. What
the bank gains may be summed up as follows:

Assuming that its average circulation for the year is
$9,000,000, that might be disposed in this way:

Five per cent, deposit in the Redemption Fund $ 4 so 000

Twenty per cent, reserve carried in cash i Soo'ooo

Ten per cent, reserve canied as call loans 'ooo'ooo

Five per cent, reserve carried as bank balances Iso'ooo

bixty per cent, carried as mercantile discounts 5,400,000

$9,000,000
The annual revenue derived therefrom might be:

On the balance in Redemption Fund at a per cent S 000

On cash • nil

On call loans at 3} per cent .....'..\'.'.'.'.'.'.'.'.".' aa «oo

On international bank balances ' ' " ' J^^l

On mercantile discounts, 5 per cent ... . . '. '. '. . '. '. '. '. '. " 970,000

$301,500
The annual charges against this gross income might ' ■"

Plates and printing new notes $aeo

Express and other charges pertaining to distribution of
notes, and redemption of other banks' notes received

over the counter ^

Clerk hire and other expenses attributable to tiote circii- '
'*"°° _87.ooo

$159,000

The net gain on the notes in circulation might thus be

$142,500. To it should be added the saving of interest

146

ANOTHER HYPOTHETICAL BRANCH BANK

on that p- Jon of the till money carried in the form of
the bank's own notes. This might amount to another
$80,000, making the gross gain to the bank $223,500, or
a.47 per cent, on its average outstanding issues.

How THE Borrowers Benefit

Next let us sec how the commercial community in the
Northwest benefits from the exercise of note-issuing
functions by the Bank of Minnesota. V\'e have seen that
the bank makes about half of its total advances to the
grain trade in the form of its own notes. So it is quite
plain that if it were shorn of its issue rights its ability
to extend accommodation to its customers during the
grain season would be seriously curtailed. If it is pre-
sumed that its advances of $2,000,000 in specie and legals
represented all that it was prepared to advance in that
form, and that it was not possible to increase the pro-
portion of $4,000,000 advanced through book credits
given to farmers and others, it follows necessarily that at
the beginning of the season the bank could only under-
take to grant credits to the grain trade for $6,000,000
instead of the $11,000,000 which it readily undertakes
when possessing its issue powers.

Possibly it would be quite safe to apply this reasoning
to Canada, and to say that because of their extensive
issue rights the ability of the chartered banks to lend
to the grain trade is practically doubled. What this
means to the trade and to business men generally may be
easily imagined. They get their accommodation with
much less trouble, and they pay less for it. In other
words, they are able to finance a larger business at a
lower expense ratio. There is reason to believe that the
interest rate in Minneapolis would be quite J per cent
lower under a system of this kind. In the smaller
country places throughout the Northwest it ought to be
fully I per cent, or i i per cent, lower. Taking it at i per

147

A RATIONAL BANKING SYSTEM

cent., and npplying tli.it to an aggregate of $100,000,000
of grain loans, runriii ^ or six months, the annual saving
would amount t - $37 :,.^oo in this one item alone, to say
nothing of the extra rolit? to be made by the grain men
and merchants throu^'n . ir ability to get larger credits
without unneeessarv h r. It is to be remembered
that the saving in iii resi 1 ere referred to results merely
from the expansiv^ .-' ul <ti ig power coming into use in
the fall and early \. 1 r. V much larger saving in in-
terest and a largei ;.( orMi; ity for profit-making by the
mercantile public .vcul.' ,11 ;h to the steady use by the
banks of their not -» ' mv*- ig po've;« through the rest
of the year. Unk ■ ] .m ^Itoi.i I't- ^ray in my reason-
ing it certainly Wi i;! 1 !)•• :r. ui >ise proceeuing to give ui
monopoly of note is.^ at to .» (..itral bank, thus blocking
thi- way for giving t- the o 'a v ry banks at some time in
the future -i^hts of '.isup whwn .sould be of inestimable
value to their borrowing customers.

Absorrivc Small Local Banks

It is to be remembeied that the Bank of Minnesota was
formed originally by a combination of banks operating
in the Northwest. Its directors are prominent business
men of the twin cities, and it has followed a policy of
absorbing other banks, and of opening branches in niuny
places that had no banking facilities prior to its coming.
It will be interesting to note some of the principal differ-
ences that would strike the banker of a Northwestern
country town or village on the occasion of the alisorption
of his local bank by the Minneapolis institution. Unless
there was some good reason for dispensing witli his services
he would, of course, be retained as manager of the branch.

On the transformation of his local bank into a branch
of the Hank of Minnesota the country banker in the
Northwest w(.uld first be struck with the fact of the
removal of the hard and fast limit to the gross amount

148

ANOTHER HYPOTHETICAL URANCII HANK

of his loans ami discounts. While (Uiing business in the
imlcpen«knt way he always had to keep an eye on this
limit. To do so will be no longer necessary. All he need
do now is to convince the general manager in Minneapolis
that the loans he proposes to make are sound and de-
sirabU , and when he does that it will not matter if the
balance of his loans and discounts rises to double the
highest liguro ever reached while the bank was operated
as an isolated unit.

Effects ok the Change of Form

Next the banker would find, as I remarked in Chapter
IV, that he was relieved from the whole load of worry
and care about the reserve against liabilities.

Thirdly, he would notice that the bank inspirri! a
greater respect than formerly among the customers and
townspeople.

The town.speople and farmers w )uld alf ) be struck
with some iirijxjitant hanges. So ur as tl." borrowers
were concormd, they \rould find that when they were
able to give the required security they might borrow any-
thing in rcasc: at rates nearly as low as those paid by
the best merchants in the cities. (In my experience I
have known small country towns in Canada where the
leading merchants had a discount rate fully as low as
that p lid by the directors of the bank, and these country
custotrii-rs, though their business was small, ; tually had
better terms, from the bank, in the way of comm.^sioi s
charged by it for its services, than the directors enjoyed.
This peculiar state of affairs results from the keen com-
petition prevailing at bran^-h points)

Local Borrowers and the Head Offici

I concede that in one respect the mctam< rph' -is into
a 'iranch might result, on certain occasion , i incon-
veniencing those 'orrowf ^ who experience a k- en i^ ed
for a bank loan to carry tiirough a transactioi presenting

149

■i

A RATIONAL BANKING SYSTEM

itself unexpectedly to them. Dealing with a purely local
bank a borrower of this kind might present his application
or request and have it acted upon the same day. If it
proved impracticable to convene a meeting of the board
to authorize the advance, one or two of the principal di-
rectors could probably be seen and a tacit authoriza-
tion secured. With the branch bank, on the other hand,
the manager would not have the requisite authority for
granting the credit if the amount exceeded a very mod-
erate sum. It would be necessary to refer the transac-
tion to the head office and possibly several days, perhaps
weeks, might elapse before the credit would be available.
Besides subjecting him to inconvenience this delay might
deprive the customer of the opportunity of undertaking
the transaction and cause him to miss what he considered
was a sure or certain profit.

But, conceding that in this respect the change would be
disliked by a number of people, it can, nevertheless, be
said that in actual practice the passing from the locality
of the credit-granting power would be attended by less
inconvenience and trouble than might be supposed.
There would be, though, a real difference in the position
of those local parties who had been getting, under the old
regime, specially good treatment by reason of their po-
litical, social, or religious connection with the local di-
rectors or officers. Under the branch system their ap-
plications would be passed upon, not sympathetically by
political partisans or brother churchmen, but by cold
financial experts who invariably demanded to be shown
a record of cleanness and square dealing, of reasonable
ability in business, and of a necessary surplus of mer-
chantable assets over floating liabilities before allowing
credits.

Local M.waoer Has Strong Influence

So far as those borrowers are concerned who are accus-
tomed to stand upon their own feet, the change, even in

150

^hU

ANOTHER HYPOTHETICAL BRANCH BANK

the case of unexpected occasional transactions like the
one referred to, need not be awkward nor inconvenient.
True, the branch manager is fettered, in a sense, and he
has not the credit-granting power except for small sums;
but if he is a good man he will have a powerful voice
at the head office, and to get his approval of a loan would
be a long step toward getting it authorized by the head
office. It should be borne in mind, also, that all business
men conducting enterprises of any magnitude would be
encouraged, under the branch system, to arrange at the
beginning of each season or year for a line of credit to
continue in force during the whole season or year. It
would be quite easy for all parties having the requisite
standing and credit to make timely provision, when ar-
ranging these credits, for the handling of such special
deals or transactions as might present themselves un-
expectedly in the course of the season. And of course,
if the deals are provided for in the credits, all that is
necessary when the occasion presents itself is to go to
the branch and hand in the note or notes represent-
ing the sum rf.-quired. This process is more expedi-
tious even than that whic'^ is usually followed under
the present system whereby the local directors are
gathered or seen and their consent to a special loan
gained.

And, even when an experience of the kind suddenly
happens to a borrower in good credit who has not pro-
vided for it in his regular credit, it does not necessarily
mean that he cannot get prompt action when dealing with
the branch bank. The transaction may be arranged in
an hour by means of the telegraph. Or it may happen
that the branch manager is strong enough with the head
office, sure enough of the borrower's position and respon-
sibility, to give him the credit without waiting for the
executive sanction, or in confident knowledge that the
advance will be authorized as a matter of course on its
being presented to the general manager.

ita

A RATIONAL BANKING SYSTEM
Local Interests Would Be Respected

f^^

It is nearly always assumed by the opponents of branch
banks that local borrowers would prefer altogether to
negotiate for their banking accommodation with banks
owned and operated by local people rather than with
banks owned by a body of stockholders mostly living in
other places and managed by officers resident in a distant
centre. In dealing with this assumption I would point
out that in most towns there are a number of local bor-
rowers who would be very glad to have the opportunity of
transacting business with a bank of undoubted strength
which was not at all involved in the local politics. For
example, there might be a number of the small traders
who dislike having their inmost financial affairs passed
upon by local parties some of whom might be hard com-
petitors in a business way. A small retailer would hardly
be disposed to apply for credit at, and place himself in
the power of, a bank on the board of which, perhaps, a
dominating place was occupied by a local departmental
store proprietor whom he believed to be trying to crush
him. People holding these views — and they would be
found chiefly among the smaller tradesmen — would be
more comfortable and more disposed to use the bank's
facilities if their financial business was looked after and
their secrets guarded by a professional owing no allegiance
to, and free from the influence of, all local parties and
interests.

WALL STREET DOMINATION
Other Hypothetical Branch Banks

IT will hardly be necessary to describe at length the
operations of other hypothetical branch banks which,
while being of the same type as the Bank of Massachusetts
and the Bank of Minnesota, would serve different parts
of the country. I might describe the operations of a
Bank of Georgia, devoting a large share of its attention
to the production, marketing, and manufacture of cotton;
of a Southwestern Bank, heartily engaged in aiding the
people of the Southwestern states in the carrying on of
vanous lines of industry and trade prevalent in that
section of the country; of a Bank of Illinois, with head
oftce in Chicago and branches scattered profusely in the
Middle West; of a Bank of Virginia, a Bank of California
and so on. For titles the different states, the great
cities, the various industries and trades, the names of
historic or wealthy individuals and families, would fur-
nish some excellent material. It should be borne in
mind that a so-called Bank of Illinois would have no
monopoly of the business in that great state; it would
be called upon to meet the competition of dozens of other
banks of the same kind as itself. Possibly it would not
be able to count upon having a monopoly of business at
any point or place in Illinois or elsewhere, except in those
very small villages in which it had established itself be-
tore any competitors appeared, and which furnished a
bare subsistence for but one bank.

153

A RATIONAL BANKING SYSTEM

1 ,

Attitude op the State Legislatures

Perhaps it will be argued that the legislators of certain
of the jtatCLS, even if they do ultimately bring themselves
to permit branch banks to operate within the state borders,
will be disposed to prohibit or to interpose obstacles in the
way of the establishment within their state of branches
of banks belonging to other states, or to o^her sections
of the country, with the notion that the interests of the
state will be best served by banks of its own creation
and owned by its own citizens. But a mon:ent's con-
sideration will show that this notion is entirely erroneous.
Should any state follow that policy it would, of course,
benefit the local banks in some ways. They would be
shielded from some strong outside competition, and per-
haps they could maintain their lending rates at a higher
level. However, it is clear that the benefit which the
local banks gained in that way would be largely at the
expense of the business people of their own state. It
would be in the interest of every merchant, manufacturer,
farmer, and every individual or company having use for
bank loans, and in the interest of all who owned funds
available for depositing, that there be in the state as
large a representation of strong banking institutions as
the state -ould attract. The more banks there were
from outside states the keener would the competition be,
the better would be the terms on which the business men
could borrow, and the more completely would the rural
districts be covered with banking offices.

Evolution of Two Canadian Local Banks

There is an interesting feature of the development of
the branch system in Canada which bears directly on
this phase of the subject. Among the large institutions
of the Dominion are two banks which were founded and
originally owned in the Province of Nova Scotia. At an

154

WALL STREET DOMINATION

early stage in their careers both had extended their opera-
tions into the neighboring Province of New Bnmswick.
Until toward the end of the last century, however, their
operations in Canada were mostly confined to the two mar-
itime provinces mentioned. About ten years ago both
broke into Ontario and Quebec through opening branches
in Toronto and Montreal. This move they followed by
establishing branches at other points in those two prov-
inces; and one of them began some time ago to push its
branch system into British Columbia and western
Canada. The entry of the other into western Canada
occurred more recently— though it should be said that
it had a branch in Winnipeg in the early "eighties," but
withdrew from that field as a result of losses suffered in
the collapse of the Manitoba land boom in 1884. These
banks have not confined their attention to Canada.
Both are in Newfoundland and in the West Indies, where
they transact a large and profitable business. Finally
each has its agency in New York City, and one has a
branch in London. After the movement of expansion
had been under way for a time, both banks found HaUfax
unsuitable and inconvenient as a head office. So one
selected Montreal, the other Toronto, as the home for
the executive management.

Institutions op National Importance

Starting as a sectional or provincial concern, each of
these banks has enlarged its scope and its territory, and
now fairly takes rank as a national institution. One has
done this and retained a purely Nova Scotian board of
directors. The other has a board made up of four gentle-
men of Halifax, four of Montreal, and three of Winnipeg
The majority on both boards consists of men devoting
themselves to commercial or industrial business rather
than to finance.

Bearing these circumstances in mind one may easily

lf >

A RATIONAL BANKING SYSTEM

understand that the point of view and the capacity, both
of the executive and of the employees, would broaden as
the banks themselves broadened. Every one connected
with a bank of this type would be apt to think broadly
on financial questions. The executive of such a bank
can usually be counted upon to take patriotic action
whenever the country is threatened with a crisis. Yet it
should not be supposed that these banks, on widening
their scope of action, became cold or forgetful in regard
to the interests of the particular province in which they
originated. The bulk of the stock is still held in the
maritime provinces. The extension abroad and into the
other parts of Canada has the effect of enabling those
Nova Scotia owners to draw a yearly revenue from the
commercial and industrial activity prevailing in the
other provinces and outside the country.

Wide Scope of the Canadian Banks

These two Nova Scotia banks have been mentioned
particularly because their history constitutes a good
example of local banks starting in a small province at
one end of the Dominion and spreading over the whole
land. Most of the important institutions in Ontario and
Quebec have spread east and west. Everybody knows
how worM-wide is the business of the Bank of Montreal,
and how the Canadian Bank of Commerce also covers
every part of Canada, and how it participates in financing
the business of certain parts of the United States as well.
Enough details have been given to show how natural it
would be for branch banks established in one state of
the American Union to spread into other states near by,
and into other parts of the country. But they would
not thereby lose their particular usefulnc^ss for the home
stale or section. Most of the larger banks, no matter
what section of the country they belonged to, would
find it necessary or advantageous to have a branch in

156

WALL STREET DOMINATION

New York City similar to the New York City branch of
the Bank of Minnesota.

Wall Street's Control Over the National
Resources

It is now in order to discuss the probable effect of this
movement on the matter of Wall Street domination or
control over the banking resources of the nation. There
are a great many people in the United States who, when-
ever branch banks are suggested as a remedy for Existing
evils, shiver with apprehension over the prospect of the
branch system being used as a means of extending or
enlarging Wall Street's control over the national resources
of cash. They imagine that as soon as the laws per-
mitted the establishment of branches on satisfactory
terms the various Wall Street cliques, which now control
a number of the large banks in New York City, would
immediately proceed to possess themselves of the bank-
ing resources of other cities, and of the towns and villages;
and that finally they would have an iron grip on the
banking business of the country. One need have no
hesitation in saying that such ideas are unwarranted.
I have already ventured to suggest that the measure of
control over the banking resources of the United States
enjoyed by those Wall Street capitalists would be les-
sened, not increased, by the institution of branch bank-
mg; and I shall now indicate further reasons why it
appears that that will be so.

In the first place let us examine the expansive capac-
ity, in the way of acquiring branches, of the great New
York banks which are so much feared and suspected
throughout the country districts. In what manner
would their branch extension take place? It would be
a mistake to suppose that they would have it in their
power to acquire all the interior banks which now use
them as correspondents or reserve agents. Many country

>57

lli>»i'* ••■

Li ■
I' f

A RATIONAL BANKING SYSTEM

banks carrying balances in the great metropolitan banks
do so solely because of the size and strength of the city
institutions. The country bankers wish to have their
funds in the safest depository available; therefore, many
of them select the largest banks to act as correspondents
and reserve agents. But it does not follow that any par-
ticular interior bank would be favorable to these same
large metropolitan institutions when it came to the
point of deciding the question as to what bank was to
absorb and operate it as a branch. The interior bankers
would be much more likely to give the preference to some
bank or banks in their own neighborhood or section.

Chicago's Strength in Commercial Banking

I confess that my own opinion is that on the institution
of favorable laws regarding branch banking the Chicago
banks would be more active than the New York institu-
tions in extending their branch systems into the country.
My chief reason for so thinking is that it will be commer-
cial business that the branches will be obliged to trans-
act, and the great Chicago banks apparently give a large
share of their attention to carrying commercial accounts.
One hears occasionally of the absorption of some com-
mercial bank in the down-town district of New York by
interests devoting themselves particularly to financial
banking. And in that sense financial banking appears
to be on the increase in New York City, and commercial
banking appears to be on the decrease. A bank that
preferred to devote itself chiefly to financial banking, if
it had liberty to establish branches wherever it pleased,
would hardly go outside the great cities. So it is to be
expected that each one of the great financial banks of
New York would endeavor to acquire a banking institu-
tion in each of the principal cities to act as its branch.
It is well known that some of the New York institutions
already have control, through stock ownership, of local

IS8

WALL STREET DOMINATION

banks in other cities and in other parts of the country;
and doubtless these controlled banks would be operated
as branches as soon as it was legal and expedient to do so.

The Branches op Financial Banks

One can scarcely suppose that the leading banks now
operating in Chicago, Philadelphia, Boston, St. Louis,
San Francisco, Minneapolis, and Kansas City, those at
least which are now really independent, would be dis-
posed to listen favorably to proposals of absorption
formulated to them by the great financial banks of New
York. Those leading local banks would be naturally
inclined to develop branch systems of their own rather
than to become mere branches of New York institutions.
Their directors are men of great prominence in the com-
mercial world, and they are animated by a strong local
sentiment. As every one of the cities named is admirably
situated for a banking head office, it is extremely probable
that every one would become the seat of government for
a number of strong and important branch banks.

So the purely financial banks of New York, in securing
representation for themselves in the other principal cities,
might have to be content with acquiring or absorbing
banks with a secondary standing in point of size; and
in some cities they might find it necessary or desirable
to engage a manager and staff and build up a business
from nothing. But it may be assumed that a branch
maintained by a New York financial bank in an interior
city would be obliged to do considerable commercial dis-
counting whether its executive desired to do so or not.
Unless it did Jo it would find it extremely difficult to get
or keep a fair share of the purely financial business. The
branches of a financial bank would hardly be found in the
smaller cities and towns. If any of them did penetrate
that field they would be obliged to do a full business in
commercial discounting. For a bank of that kind to go

IS9

" i

'■i

■i

A RATIONAL HANKING SYSTEM

into a small place and attempt to do nothing but collect
deposits would be to make itself ridiculous.

The Great Wall Street Banks

It therefore appears likely that the branches of the so-
called Wall Street banks would be found only in the
large centres and that they would there do a broader,
more catholic business than they now do in New York.
Quite probably, with their branches, they would be able
to perform their extremely useful functions in a manner
even more efficiently than they do to-day. It is also
likely that the amount of resources in the possession of
the greatest of them would rise to proportions consider-
ably larger than they presently possess; but their strength
and importance would not enable them to dominate the
important branch banks of the South, the West, and the
East, as they now dominate hundreds, yes thousands,
of little local banks throughout the country.

A New Balance op Power

One way in which the development of the branch sys-
tems in the different parts of the United States might be
expected to lessen Wall Street's domination would be
through raising in each section a number of important
banking powers. Instead of there being a few really
great banks in New York, Chicaj,'o, and one or two other
cities, and no other banks of much importance anywhere
else, there would be important banks in every section.
At present the heads of the leadintj banks, from their high
position, look out upon a multitude of tiny units. Under
the branch system they would look out upon a number of
institutions perhaps as larjje, as powerful, and as well
organized as their own banks.

In dealing with the Bank of Minnesota something was
said as to how that bank carried its New York cash and

ifio

WALL STREET DOMINATION

loans in its own possession If we may imagine, then,
that there were in the United States some two hundred
branch banks with an average of one hundred and twenty
branches to each bank, and each maintaining a branch in
New York City, what a change there would be in regard
to Wall Street's domination over the cash resources of
the country.

Standard Oil and Morgan Banks

It is commonly believed that the so-called Standard CHI
and Morgan interests control or influence the operations
of two groups f)f banks comprising the largest and most
powerful in New York City. As everybody knows, the
banks comprised in these two groups carry the balances
of a very large number of interior banks. They have in
their hands the greater part of the total balances carried
in New York by the interior banks. For these huge sums
received from their correspondent banks they merely give
credit on their books, and then quite properly regard the
funds as their own. Nothing except policy and the
exercise of self-restraint on their part need prevent the
high officers from lending a large part to themselves or
their friends for carrying on stock market campaigns.
Or they might, as their enemies have observed, lend the
funds to the brokers for carrying a public speculation in
stocks, and then call them in again with the object of
making stocks fall, so that they themselves could pur-
chase cheaply.

It is not only the balances carried on deposit by the
country banks that they have in their control, for, as
mentioned before, they also act as agents for interior
bankers in placing loans at call and on time. The coun-
try banks send them the mont > ; they find the borrowers,
and hold the securities. These loans also they might,
if they were not restrained by honor or policy, use to a
certain extent to enrich or benefit themselves or their

t6i

A RATIONAL BANKING SYSTEM

asaociatrs. Thus in the aggregate these two groups of
banks have a strong grip on an enormous amount of
banking rcsoumcs.

' r

i« I «

Intbrior Banks Would Control Their Own New
York Business

Now attend to this description of what might happen
if the banking business of the country were transferred
to a few large branch banks. We have seen that the
Bank of Minnesota established its branch in New York
and that its New York manager and staff assumed charge
of its reserve of specie, legals, and call loans carried in that
city. Thus the balances and call loans of one hundred
and fifty banking offices mostly situated in the Northwest
were taken from the control of large New York banks
and handed to the Bank of Minnesota's branch, which, of
course, is dominated and regulated from Minneapolis.
Similarly, half a dozen or more other large banks owned
in the Northwest, each with its quota of one hundred and
odd branches, would, through establishing New York
offices, take their reserves and their loans into their own
possession. The same result might be expected as re-
gards the great branch banks owned in the South, the
Southwest, the Middle West, and on the Pacific Coast.
Each one of the important institutions would arrange to
have a large part of its leserve in its own possession and
at the same time have it in New York, where it was most
needed. Thus, there is fair reason to suppose that in
this way branch banking would materially lessen the
extent of Wall Street's control over the banking reserves
of the nation, and that they would be carried in a more
scientific manner than at present. Also, as pointed out
before, each section would have a respectable concentra-
tion of banking power to serve as counterpoise to the ag-
gregations of banking capital existmg at New York, Chi-
cago, and Boston which now overshadow the whole land.

162

WALL STREET D O Nf I N \ T I O S

Conversions ok Bank Balancf into C

Practical men may object that such a large con /enion
of bank balances into hard cash as is here described
could not be carried out. On September i. 1910, the
national banks of New \ ork City held deposits of other
banking institutions amounting to $618,056,548, and
there were in addition the banking dcp^»sits held by the
great trust companies and state banks in the metropolis
to consider. The answer s that the intfependent banks
could not be converted into branches in masses, as I have
here assumed. In actual prartice the process of absuq)-
tion of local banks would probably be slow. In the case
of each institution, no matter how small it was, nego-
tiations would be necessary, and in some cases they would
be protracted. Then at first there would, doubtless, be
quite a number of branch bank i electing to do without a
branch in New York City. This niov. they would con-
sider after their branch systems 'luJ reached lertain pro
portions. In the mean time they would jf obably er^ploy
the large financial banks of the metropolt as their corre-
spondents and reserve agents. But it may be assumed,
if the branch system is made permissible, and if, as
Hon. Mr. Vreeland predicts, it crowds out or displaces
the local banks by reason of its more economical working,
that fhe huge aggregate of bank balances carried by the
New \ rk institutions will d^\-indle until it reaches much
smaller proportions. As these balances now constitute
what might be termed a showing 1 < fictitious or false
banking power as well as one of the most dangerous
features of the present system, there should be general
thankfulness at th.,- prospect of their elimination by
purely natural means, through the institution of a kind
of banking which i.^ acknowledged by its enemies to be
economical and efficient.

When the New York State Legislature compelled the
trust comf antes in its jurisdiction to convert a consider-

163

■J s '

I .

A RATIONAL BANKING SYSTEM

able part of their bank balances into cash to be carried in
their own vaults the change was generally recognized as
admirable and salutary. This other change would be of
exactly the same nature. Instead of the trust companies
it would be the interior banks that converted their bal-
ances in banks partly into specie and legals.

How THE Reserve Agents Would Fare

One of the interesting problems connected with this
supposititious wiping out of the unwieldy total of bank
balances is this: How will the great metropolitan bank-
ing institutions adjust themselves to the change-? It
means ultimately the loss of vast sums which they now
hold; and a not inconsiderable part of the withdrawals
would be in specie. In the chapter on the currency ques-
tion I shall indicate one source whence the centres might
make a large acquisition of cash through the working of
the new system. If the branch banks had reasonably
liberal note-issuing rights it would conic about that a
large total of hard cash now carried as till money in the
individual banking offices would be released and sent to
the centres. This item by itself might fumi.sh enough
cash for the branch - bank reserves in New York City ;
and if that were the case, the liquidation of the bank
balances would simply mean the transfer of loans from
the presently existing depository banks to the branches
of the outside institutions.

Of course it is to be remembered that the financial
banks of New York would themselves be acquiring some
independent institutions of more or less importance to
operate as branches. Immediately a New York bank
acquired a bank in the interior that carried a balance
with it the balance would be extinguished, since it would
be owed by the New York bank to its branch, in other
words, to itself. In this way a considerable extinguishing
of the balances might be expected. If the banks are given

164

WALL STREET DOMINATION

a reasonable degree of liberty, along with reasonably gen-
erous note-issuing rights, and the legislatures refrain from
meddling overmuch, there is every likelihood that the
problem would solve itself. The movement would take
place along the lines of least resistance, and it may be
assumed that those great financiers who guide the des-
tinies of the large metropolitan banks, which now hold
the enormous deposits belonging to other banks, will
devise measures calculated to protect the interests of
themselves and of their banks. At any rate, it is certain,
if their public utterances are to be believed, that some of
the most prominent of them are in favor of branch bank-
ing; and it is not to be supposed that, in their considera-
tion of the subject, they have overlooked this feature of
the conversion of the balances into cash. Therefore, it
may be presumed that they are confident of their ability
to liquidate the balances held by them, when the occasion
for doing so presents itself, without undue inconvenience
and without material loss of earning capacity.

These balances of other banks carried in New York
are the source of trouble in other than panicky times.
It has been shown that in the panics they are responsible
to a large extent for the suspensions of payments. In
addition every autumn they arc more or less a source of
trouble. The withdrawal of balances, in the form of
currency, is apt to upset the money market and to send
interest rates to high levels. The commercial and in-
dustrial interests of the country are the chief sufferers
from this circumstance. The ^.killed financiers at the
centres know how to protect themselves; frequently they
are able to extract profit from the disturbances.

Ip Largkr Cash Reserves Were Carried

There is one way in which this movement of currency
to and from Now York niij,'ht take place, under the
system of small local banks, without causing undue dis-

i6s

A RATIONAL BANKING SYSTEM

turbance. But there is scarcely any prospect that it will
be followed. If the depository banks in New York and
other reserve centres ceased altogether to pay interest
on these balances, and if, on receiving funds from in-
terior banks in the habit of withdrawing currency in the
fall, they held 50 or 60 per cent, of the deposits as cash
in vault, instead of putting all but 25 per cent, out
at call, they would be able to meet the autumn drain of
cash to the interior without disturbing the financial situa-
tion. It would, however, involve keeping fifty or sixty
millions, and perhaps more than that, idle for several
months in every year. One reason the plan is imprac-
ticable is that all the different centres could liardly be
induced to cease paying interest. If New York allowed
no interest and other centres continued to allow it a
large part of the funds would be diverted to other cit-
ies which do not possess New York's ability to return
them.

Cause op the Money-Market Disturbances

V ! I

I admit that this periodical disturbance of the money
market by reason of the currency shipments in the fall
is due chiefly to the rigidity of the currency system. And
it is contended by the adherents of the local independent
banks that if they are given the right to issue notes
against their general assets they can provide the currency
required for the crop moving without upsetting the
money market. I concede that if a satisfactory practical
plan of conferring upon the national banks this privilege
of note issue can be worked out, it would, perhaps, do
away with the customary fall stringency; but there are
certain reasons which cause me to think that the exercise
of this note-issuing privilege by a vast number of small
banks, such as the United States possesses, would be at-
tended by results somewhat different from those which
follow the exercise of the same rights by large branch

166

.!^

WALL STREET DOMINATION

banks in other countries. And it is quite possible that
the plan mi^t not fulfil expectations in regard to re-
lieving the money market in the fall season. However,
these considerations will be dealt with more particularly
in the chapter on the currency.

Change in New York Banking CoNoinoNs

It has been suggested that there might be, ultimately,
in the financial part of New York City, some two hundred
banking ofiBces, the branches, or principal offices, of the
two hundred large banks operating in the United States.
On reading this the practical banker will perhaps be dis-
posed to say: "New York is a large and busy city, but I
do not see how any profit is to be made in banking if
two hundred large banks are huddled together in the
financial district competing for all the business that
offers." The explanation is that many of the outside
banks maintaining branches in New York City would not
seek to do a local business. They would confine them-
selves to acting as correspondents for their own branches
and as custodians of their reserve money carried in New
York. There would be a respectable number of the
whole which would not even perform these functions.
They would, perhaps, content themselves with doing
much the same kind of business in New York as the
agencies of the Canadian banks now carry on there. The
Canadian bank agent does not carry specie or legals, nor
does he act as correspondent for his own bank. His
functions consist in buying and selling foreign exchange,
accepting items on Canada for collection or discount,
lending the bank's moneys at call and on time against
collateral, and buying bonds for investment. The two
functions last named are performed strictly under in-
structions from the head office; and the dealings in foreign
exchange are also to a large extent subject to head-office
instructions.

167

A RATIONAL BANKING SYSTEM

it >

,-..

f !

How THE Money Market Would Be Affected

Each Canadian bank carries funds on deposit with one
or more of the large banks in the New York Qearing-
House Association, and at all its branches it draws upon
these balances. Also the branches send the New York
and other United States items which they receive in the
course of their business to the correspondent bank in
New York and not to the bank's agency. The New York
agents have the custody of a large part of the investment
bonds, of the collateral security against the call and
time loans, and they operate a share of the London ac-
count of the bank. If agencies of this description were
operated by some of the United States branch banks they
would not interfere materially with the local New York
banking business.

1.1

THE CURRENCY QUESTION
Three Remedies

THERE is no need at this late day of assailing the ex-
isting bond -secured currency system of the United
States. It has few defenders; on all hands its faults are
recognized. The national bank note issue is one of the
things marked for reform. So, in this chapter it is taken
for granted that no intelligent and unbiased American
wishes to retain the present system; and that all are
willing to see a change as soon as the question as to the
best reform to adopt is properly settled.

I have in mind three ways in which the desired quality
of elasticity might be imparted to the bank note currency:
The national banks as at present constituted might be
permitted to issue notes against their general assets, to
issue asset currency as it is popularly called; second, a
great central bank might be created and to it a monopoly
of the privilege of note issue might be given; and, third,
the existing banks, national and state, might be per-
mitted and encouraged to develop into branch banks, and
the right to issue note= on the security of their general
assets might be g-'ven to all possessing a certain minimum
of paid-up capital not in any case to be less than $3,000,-
000. It will be profitable to discuss the practical working
of these several plans.

The National Banks and Asset Currency
It is very much open to question whether it is possible
to solve the currency question satisfactorily through

169

i i

i \

A RATIONAL BANKING SYSTEM

giving all national banks in the United States, as they
at present are, the right to issue notes against their gen-
eral assets. As soon as that plan is broached there
rises up the question as to how the note-holder shall be
secured. "By a redemption fund and a mutual guar-
anty," I hear some one say. "Yes, but what is to be
behind the fund and guaranty? Remember, the strong
Canadian banks consent to guarantee the notes of all
chartered banks in Canada, the weak as well as the
strong, because the several note issues are strictly limited
as to amount, because the notes are an absolute first lien
on the assets of the banks issuing them, and because the
Canadian Bankers' Association possesses and exercises
the right to examine the circulation records of all the
banks. Without the prior lien, and without other
special security, it is altogether likely that some of the
strongest banks would relinquish the right of issue rather
than join in a general guaranty of all notes issued."

How THE Bank Notes Should Be Secured

There seems to be a strong feeling in the United States
against conferring upon the note issues of the national
banks, in the event of asset currency being inaugurated,
a priority over the other evidences of debt issued by the
banks. It is thought that if it were done the position
of the depositors would be weakened. Judging from the
tenor of schemes previously proposed it seems likely that
the note emissions of national banks would be guaranteed
or protected by means of an annual tax laid upon the
general issue. Thus each bank would pay to Govern-
ment an annual tax of a fraction of i per cent, upon its
circulation, the proceeds of the tax forming the redemp-
tion or guaranty fund to care for the issues of insolvent
banks. Then the notes would rank equally with the
deposits and would share equally with them in dividends
paid to creditors.

170

THE CURRENCY QUESTION

Of course, in principle, an arrangement of this kind is
identical with the vicious schemes of niutual guaranty of
deposits which have been so generally and so justly con-
demned. Honest and able bankers are levied upon to
pay the losses incurred through the operations of the
dishonest and incapable. But as the payments and
liability of each bank would be limited to perhaps \ per
cent, per year on its outstanding note circulation, many
bankers would not object to the scheme.

The Note Issues Must Yield a Profit

If a currency scheme such as this is to be successful
it is essential that the bankers find a proht in issuing
notes. For if note issue involved a loss they would not
create currency, no matter how much the country needed
it. We have seen that the hypothetical Bank of Minne-
sota made a profit of about 2.47 per cent, on its note
issues. This can, perhaps, be taken as about the rate
of profit made by the Canadian banks on their ordinary
note issues. Deduct | per cent, from that and 2.22 per
cent, is left.

The Necessity of Redemption Facilities

Though the Canadian banks may count upon a profit
of over 2 per cent, on their note issues, and though the
hypothetical Bank of Minnesota, after paying the tax of
J per cent., could still, perhaps, show a profit of 2.22 per
cent., it is altogether likely that note issues by non-
branch banks could not show a profit equal to either of
these if adequate provision is made for the prompt re-
tirement and redemption (if currency not needed by the
country's trade and commerce. If the note issues are
to do their work properly, and without damaging or en-
dangering the general financial and business situation,
adequate proviaon of this kind must be made. If that
12 171

A RATIONAL BANKING SYSTEM

is not done, if any bank may put its entire authorized
issue into circulation without having to make daily re-
demption of such notes as arc not needed, grave dangers
would threaten the country. Gold might bt driven out
and the conditions would be favorable to inflation of
prices. The object of any change which is made in the
currency system would be to introduce elasticity. What
is wanted is a system that will automatically create ad-
ditional currency when the country has special need for
it, and then automatically retire the extra portion when
the special need for it expires or passes away. Unless
the new style of currency possessed this quality of elas-
ticity there would be scarcely any reason for making a
change. To ui t elasticity, facilities for redemption must
be provided as wi-il as facilities for issuing. Now let us
see what practical arrangements for redemption are
possible.

I V

An Exact Measure of the Public Requirements

Before discussing them I shall explain how it is that
the Canadian bank note issues possess their quality of
flexibility, how the outstanding bank note circulation
cannot do other than measure exactly the Dominion's
need for circulating medium. It is to be borne in m.ind,
first of all, that the notes of the chartered banks con-
stitute practically the whole currency used by the people
in day-to-day transactions — excepting the subsidiary
coinage, silver and copper, and the Dominion Government
"ones" and "twos" which arc used for small change.

Why Redemption Is Thorouoh in Canada

f ]

It is an .isy matti to explain why each bank in
Canada uses every mean n its power to get its own notes
into circulation. Each bank is interested in inducing its
customers and friends to use its notes in making their

17a

THE CURRENCY QUESTION

payments. Each one strives to Rct as much of its au-
thorized issue as possible into circulation. If a customer,
in transacting business at his bank, shows a parcel of
notes of other banks, of Dominion notes, or of United
States currency, he will most likely be asked to exchange
them for his own bank's notes. Of course in all its pay-
ments the bank pays out its own notes exclusively while
it has an unused margin of authorized issue, except for
the small change, of denominations less than five dollars.
It is eagerly collecting the notes of its competitors and of
other obligants, withdrawing them from circulation in the
hope that a vacancy will thereby be created into which it
may put its own notes. This policy is vigorously pur-
sued all through the year except during the period, if any,
in which the bank's own circulation is up to the authorized
limits. When that happens the bank has nothing to gain
through withdrawing the notes of its competitors from
circulation, and it becomes indifferent about the matter.
There is considerable expense involved in collecting and
forwarding for redemption the notes of other banks.

The Provincial Redemption Agencies

According to the Canadian banking law each chartered
bank is required to provide and maintain a redemption
agency in every important province. This agency in the
case of each province is to be at the recognized financial
centre. Take the case of a bank branch operating in a
small Manitoba town without opposition. In the towns
round about will be branches of competing banks, and
their notes, as well as the notes uf Winnipeg banks sent
out by the large grain firms, will be circulating freely
through the whole district. Every day over the counter
at the branch in question will come a goodly amount of
these notes of other banks, or "sundries," as they are
called. The branch ships them all to its Winnijjcg branch
as they accumulate into Si, coo j)arcels, which in the busy

IT?

A RATION' A L DAN KING SY, TEM

'i .

season will Ix* nearly every lay. They are sent by ex-
[ ress or by registered mail insured. Take a different
town in the same ]>rt)vince where the branch has opposed
to it a brunch of another bank. Here there will be a daily
exchange between the two branch banks of each other's
notes along with the daily exchange «)f (hecks, etc. So
neither has to pay any transportation charges on the
notes of its competitor which are n eived over the
counter. But all others must be shipped to the centre.
If there are three banks represented there will be an
exchange of notes among the three. In the centres no
transportation charges are to be paid en the receipts of
bank note currency, since every note of the Canadian banks
has a branch or redemption agent to redeem it.

Whe\ the Note Circulation Is Near the Llmit

In connection with the circulation of its notes at all
branches other than the centres, each '>ank is constantly
shii)ping out sundries and shipping in its own notes.
The expense thus involved, and the other expenses at-
tendant upf)n the circulation of the notes, are borne or
.icceptod because the note issues yield a satisfactory
profit over and above the expenses. All banking readers
will doubtless see from the foregoing that there cannot
be in circulation at any time a volume of currency greater
than the business of the country calls for. The desire of
each bank to push its own circulation causes it to with-
draw from circulation as many <»f its competitors' notes
as it can. As soon as it gets possession of other banks'
notes it hurries them forward for redemption. This proc-
ess of redemption goes actively on all through the year
except (luring the two or three months in the height of
the grain s(;ason, when the issues of most of the banks
are close to the ordinary limits. Prior to the going into
effect, in 1908, of the amendment to the Bank Act which
authorized the banks to issue excess currency between

174

THE CURRENCY QUESTION

September 30th and the end of the following January
there was a period each year during which most of the
banks in Canada paid out over the counter sundries as
well as their own notes, in the same manner as is done
by the banks in the United States. But as soon as the
need for currency in the wheat fields became less urgent
each bank would find that its customers and the cus-
tomers of other banks were dc|x>siting and paying in
more currency than ihey were drawing out. As each
branch must report regularly to the head office the amount
of the bank's own notes on hand, the effect of this move-
ment is quickly seen by the executive. When it becomes
clear that the tide has turned, all branches are again in-
structed to push the circulation vigorously, so as to get
all possible profit from the note issue.

The Branches Facilitate Issue and Reoemption

Since the 1908 amendment was passed some of the banks
have used the right it gives them to issue excess circula-
tion in the grain season. But it is complained that the
tax of 5 per cent, levied by the Government creates con-
ditions under which the excess currency can only be is-
sued at a loss by banks which are in stronj,' position.
Probably it will be necessary to reduce the tax to induce
the bank to have recourse to the right as generally as
could be wished.

It will doubtless have occurred to the most thoughtful
of my readers, in connection with this matter of the cir-
culation and redemption of the notes, that l)oth are
facilitated and made less expensive because of the exist-
ence of comprehensive systems of branche.s. The follow-
ing is an extreme case illustrating,' how the existence of
the branches conduces to the j)rf)fit on the note issues.
The Bank of Montreal branch in Halifax. Nova Scotia,
may pay out Si, 000 of its own notes to a customer who
sends them or carries them to British Columbia, where

17s

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(ANSI and ISO TEST CHART No 2)

A APPLIED IN/MGE Inc

^^ 1653 East Mam Street

^^S Rochester. New vork '4609 USA

^S ^^'6) *82 - 0300 - Phone

^= (716) 288 - 5989 - Fox

A RATIONAL BANKING SYSTEM

they re put into circulation. Eventually they are re-
deemed by the Vancouver branch of the bank, which
pays cash or gives credit for them and uses them for its
counter payments. It may very likely develop that
through receiving and redeeming these notes the Van-
couver branch is saved the expense of bringing $i,ooo
of its own notes from Winnipeg or Montreal for counter
purposes. It is the same at all branches. Each one ap-
plies all of the bank's own notes redeemed by it to use
for counter payments, and requires to bring in that much
less from the depot branches. A considerable number of
branches are not obliged to import any notes, because
the circulating medium in their districts is so strongly
impregnated with the bank's notes that they get enough
of them in their daily receipts to supply their needs.

Note Issues of Isolated Banks

Let IS now investigate the practical working of the cir-
culation and redemption of the asset currency which would
be emitted by the isolated banks of the United States.
I shall presume that the terms and conditions of issue
are favorable enough to induce each bank to strive earn-
estly to keep its own notes in circulation up to the au-
thorized limit. No matter where one of these banks of
issue was situated there would be opportunities present-
ing themselves continually for the circulr.tion of its notes
in far-away places. Its customers and payees would be
continually drawing cash from it and sending the money
by express or through the mails, or carrying it with them
on their travels to other parts of the United States. By
taking advantage of these opportunities it ought to be
comparatively easy for small banks with authorized
issues of $50,000 or $100,000 to keep the whole amount
outstanding all the time. At each place the body of
the circulation would be obtained through the payments
over the counter for carrying on the business of the town

176

THE CURRENCY QUESTION

or village. A large proportion of the notes so paid out
would come back next day, or in two days; more would
come in three da, s or four days. But, as fresh emissions
of notes are taking place all the time, a good part of the
authorized issue would be in play. The remainder might
easily be put out through the payments or shipments to
far-away points. And it might develop, when crop-
moving came round, that many of the banks had no mar-
gin of authorized issue to use. This would be likely, for
one reason, because of the expense and trouble involved
in redemption.

The Labor of Sorting and Returning

Go back once more to the Canadian practice. In with-
drawing the notes of competitor banks from circulation
and forwarding them for redemption there is involved the
sorting of the notes. At present there are twenty-nine*
going bank,-^ in Canada. In any district outside the cities
there would probably be a dozen or fifteen banks the
notes of which would figure largely in the circulating
medium. As they come in over the counter the receipts
of notes are to be sorted — each bank's issue is to be put
together by itself. So there would be, in the sort, a dozen
or fifteen piles of some importance, and scattered notes
of, perhaps, a dozen other banks which had no circulation
of consequence in that particular district. Even in the
largest cities the sort calls for only twenty-two or twenty-
three piles.

But there would be a vast diflference in this respect in
the United States. Instead of twenty-nine issuing banks
there would be six or seven thousand. A parcel of $i,ooo
in fives made up from the counter receipts anywhere in
the Union would, perhaps, consist of one, or two, or more
notes of one hundred and fifty separate banks. In a

♦ The number has since been reduced to twenty-six.

A RATIONAL BANKING SYSTEM

ffl:

■IJ

L«l',

parcel of $10,000 might be found the issues of eight hun-
dred or nine hundred banks. If redemption is to be
prompt and thorough these receipts of notes must be
sorted daily at all banking points of any importance.
The obligations of each bank must be placed by them-
selves and returned to the issuers. Consider the enormous
trouble and expense connected with this operation. No
branches are at hand conveniently located for redeeming
the issues of other branches and anxious to use the notes
for their own purposes. Each note must go back to the
identical office that issued it, even if it is the emission of
a Maine bank that turns up in San Francisco. I do not
see how this difficulty is to be escaped if redemption is to
be effective and prompt. Some persons might argue that
arrangements can be made whereby the banks may pay
these sundries or other banks' notes in bulk, without
sorting them, into a branch of the United States Treasury
or to a general redemption agency. But that would be
merely shifting the work to other shoulders. The sorting
and shipping must be done in any case, and the expense
and trouble would still remain.

If Redkmption Was Not Thorough

These considerations as to what would arise in actual
practice make it appear that there would not be prompt
or thorough redemption of asset currency issued bj single-
office banks, as the individual banks would not take the
trouble or do the work necessary to effect it. In those
cases where the receiving bank was able easily to keep
its own authorized issue outstanding there would be no
incentive. Perhaps the country banks would ship their
surplus currency to the centres without sorting it and the
work would have to be done there by the reserve agents.
This practice might lead to a rearrangement of the terms
on which the reserve agents received shipments of cur-
rency from country correspondents.

178

THE CURRENCY

STION

So in view (.f this senous difficulty it might happen
that redemption would not be effective, and that the
asset notes issued by the thousands of small banks might
remain at or near the maximum authorized amount
through the year. If this were so when crop moving time
arrived there would be no reserve supply of asset currency
available, and the old expedient of drawing hard cash
from the centres might, perhaps, be necessary. Perhaps
also, there would be less hard cash in the centres to draw
upon, for the bank notes would have a tendency to dis-
place other forms of currency and much gold would
probably have been driven to Europe.

Note Issues a Possible Source of Danger

Several other objections to the conferring of rights of
uncovered note issue upon a system of small isolated
banks occur to the mind, but space does not permit of an
extended discussion of them. There is a probability that
many of the less experienced bankers would find in their
issue power a means of making unwise or bad loans
Then the bankers might be led to think, because they
were able to keep their outstanding issues up to the
authonzed hmits in ordinary or normal times, that there
was no necessity for being always prepared to redeem
them; and when a severe crisis appeared, that had the
effect of dnving the outstanding notes remorselessly
home for redemption, the chances are that the note
issues would be the cause of numerous bank failures

These arguments are based on the assumption that the
national banks would find it profitable to push their
issues to the limits. It is quite possible, if the right of
issue against their general assets is conferred on the
national banks, that the tax and the peculiar expenses
connected with the issue and redemption would deter the
better class of banks from using their powers, because
there was no profit, or a profit so small as not to be at-

179

A RATIONAL BANKING SYSTEM

tractive, connected with the business of note issue. In
thi'.t event the right of issue would be degraded into a
means of raising funds by banks in uncomfortable circum-
stances. And the scheme would hardly be of much value
for providing a good currency.

i i

The Central Bank's Monopoly of Issue

It is time, however, to consider the second alternative
— that of creating a great central bank and endowing it
with a monopoly of the privilege of note issue. Such an
institution, if it is to supply notes to replace the national
bank note issues, would require to have very large powers
of issue; and, to maintain the credit and convertibility
of its notes, it would require to carry a very strong re-
serve. Presumably it would deliver its paper to other
banks as proceeds of loans made to them or as payments
for deposits withdrawn by them. Thus, when the au-
tumnal currency drain set in there would be seen a proc-
ess something like the following: The country banks
would forward instructions to New York, Chicago, etc.,
for the return of their balances in the form of currency.
Either the country banks themselves or their corre-
spondents at the centres would carry balances with the
central institution, and when the balances were with-
drawn the central bank would simply expand its issues.
By merely paying out its own notes and sending them
to the country, the withdrawals of interior balances
might be met, through creating an additional supply of
currency for the special need of harvest time. If the
New York banking institutions which carried heavy
balances belonging to the interior bankers, on being
called upon to ship those balances in the form of cash,
preferred to borrow at the central bank rather than to
liquidate loans made by them to their customers or clients,
they might do so; and if certain of the interior banks
wished to borrow from the central bank, and could

I So

THE CURRENCY QUESTION

furnish collateral of the required character, they could
do so.

Expansion op Issues During the Harvest Season

It would be reasonable enough to expc t that the move-
ment of the crops would cause an expansion of the note
issues of the central bank lu the extent of $100,000,000
Of more, thus effecting an economy in the use of actual
hard cash. There need not be inflation either, since
v/hen the ir .erior banks found that the bank notes which
they had circulated in their district were returning in
volume they would forward them to New York or an-
other centre to be presented to the central institution
for redemption. It would receive them partly as pay-
ment for loans granted by it, partly as deposits by other
banks; and it would be obliged to redeem a certain pro-
portion in specie. By January probably the whole
amount of the extra issues would be cleared away and
the first important stage of the crop-moving would have
been handled without causing disturbances in the money
markets, or depriving the borrowing classes in the great
cities of the accommodation they had been enjoying.

Aiding Small Banks and Regulating the Exchanges

In another way the central bank might be expected to
prove exceedingly useful. During a panic, while the
sys+ei. ^f isolated small banks endures, it might prove
a svi ong bulwark. Institutions in distress, that possessed
acceptohle securities available for use as collateral, might
receive assistance from it. If the central bank itself
maintained a high credit, as it likely would, its notes
would provide the mean^^ of making payments to de-
positors; and a large amount of currency could con-
veniently be sent to various parts of the United States
through an expansion of the bank's note issues. Then,

181

I i

1^'

A RATIONAL BANKING SYSTEM

the central bank would provide a satisfactory medium
whereby the Bank of France or the Bank of England
might extend assistance to America. It was remarked,
during the last panic, that the Bank of France was pre-
vented from coming to the aid of New York by the non-
existence of a medium of this kind.

Finally, it is well known that in Europe the great cen-
tral banks perform a very useful v/ork in regulating the
exchanges and in checking excessive outbursts of specu-
lation. And those parties who advocate the formation
of a great centralized institution in the United States
consider that it might do extremely good work along
those lines. It would also, of course, carry the balances
ot the Government and relieve the United States Treasury
of its banking functions.

Some Objections to a Central Bank

These prospective benefits are, in truth, very substan-
tial, and I have no intention of trying to minimize them.
Holding them in mind, it is now proper to take account
of some of the important objections to the creation of
such a bank. In the first place it might be argued that
to create a central bank would be to add a fresh compli-
cation to a banking system already too much com-
plicated. Nobody quite knows how such an institution
would work in Americ. * * effects it would produce.

It is certain that it wot istitution of great power,

and that there would : ',atronage connected with

it. Whether it could out d politics is not clear.

If it performed any bankmg fu .tions of consequence
it could hardly avoid encroaching in some way upon the
business and profits of the ordinary banks; and it might
quite easily become the centre of much unsettling strife.
Then, in regard to its notes, it is to be remembered that
the ordinary banks would have no object or profit in cir-
culating them. To the other banks these notes would

182

THE CURRENCY QUESTION

he much the same as the treasury notes of to-day, and
like the Bank of England notes are to the joint-stock
banks of England-hatd cash, to be obtained only through
parting with an equal amount of cash assets or by means
of direct borrowing.

Small Places Would Not Obtain Facilities

All these matters occur to the mind when the question
of a central bank is under consideration. In my opinion
there is another formidable objection. Believing as I do
that the United States will find it necessary to discard
the present system of local single-office banks, just as
Prance and England found it necessary to discard it and
that, in the next generation or two, in spite of the present
hostility of the legislatures and of most of the interior
bankers, branch banks will make their way into the mone-
tary system of the country because of their greater useful-
ness and strength and their more economical operation
I consider in the event of that development that the cen-
tral bank with its special privileges would then prove to
be a great stumbling block in the way of the ordinary
banks, just as the Bank of England with its special
privileges was a preat stumbling block to the ordinary
joint-stock ban . f that country. To get its note issues
into general circul. ion the central bank would require to
have either a monopoly of issue or some other decided ad-
vantage over the ordinary banks. If the central institu-
tion and the national banks were on an equality as
regards pnvileges of issue the national banks would cir-
culate their own notes in preference to those of the cen-
tral bank. So without the monopoly of note issue and
without special privileges the central bank could not get
its notes into circulation and its usefulness as a provider
of currency would be practically nil. And a central bank
with a monopoly of issue would be an effective bar to the
estabUshment by the other banks of branches in very

183

II ••

I ^"

A RATIONAL BANKING SYSTEM

small places, and wouM thus .lavc a tendency to prevent
the development of the banking business alony lines cal-
culated to benefit the humblest classes and the smallest
localities.

Issue Rights Promote Branch Extension

It is well known that in Scotland the privilego ot noic
issue as possessed by the commercial banks enables them
to provide excellent banking facilities for the rural dis-
tricts and the smallest villages. It is the same in Canada.
If the chartered banks of the Dominion bad not the right
to issue notes against their general assets they would not
be found in ( very little hamlet as they are to-day. On the
contrary, the branches of the great banks would be found
only in the larger villages and in the towns and cities.
They would be established only where there was a suf-
ficiency of profitable business to be had. If a law were
passed providing that on a certain date the issue rights of
the chartered banks were to lapse, the arrival of that date
would turn, perhaps, one-fifth or one-quarter of the
branches from profitable offices into unprofitable offices,
and they would presumably be closed as soon as possible.
One may imagine what a wail of dist-ess would go up
from the farmers, retailers, and other country people
at the withdrawal of these facilities.

How THE Note Issue Apfe - Branch Profits

Let us examine the position of an individual branch
and note how it is that the cancellation of the right of
issue would turn a small branch that had been profitable
into an unprofitable office. Suppose that at the hypo-
thetical branch in question the deposits are $130,000, the
loans and discounts $100,000. Of the deposits $40,000
are free, and $90,000 are subject to interest at 3 per cent.
The average rate on the discounts is 6 per <^ent. The in-

184

Till-: CUKRENCY gUliSTKJN

come frt)m such a branch might be: Interest on loans,
Sioc.ooc at 6 per cent. =$6,000; exchange, commissions,*
etc., $1,200; gross profits, $7,300. The outgo: Interest
en deposits, $90,000 at 3 per cent. = $2,700; salaries, rents,
taxes, and other expenses, $5,000; total outgo, $7,700.
Thi< not deficit t<. 1)C charged to head office is $500.

Now ill.- branch must carry an average of $5,000
with the bank's New York correspondent for dniwing
purposes, $1,000 in silver coins, aad $4,000 in small notes
of $1 and $2 denominations (I am assuming that the right
to issue is confined to notes of $5 denomination and
multiples thereof). That makes $8,000 cash funds car-
ned. As the deposits exceed the loans by $30,000 the
branch draws that much of a surplus fr(,m the locality. And
as it is using only SS.ooo of this surplus for its own pur-
poses a balance of $22,000 has been ptit at the disposal
of the head office. Finally, owing to the payments of the
bank's own notes at this branch, the note circulation of
the whole bank is greater by an average of $50,000
through the entire year. Allowing for a cash reserve of
$15,000, or 30 per cent., against the branch's circulation,
the parent bank gains the use -f a further sum cf $55,000.'
Thus the bank o!)tains the use of $57,000 from this par-
ticular branch at a cost cu $500 per > >.ir, or less than i per
cent. (.87 per cent, to be exact). Under those circum-
stances the branch is profitable, since it is usually not
very difficult for the head office to invest the funds at
a profit over that ratio of cost.

Loss OF Issue Rights Strikes I

Depositors

Ai. Borrower id

Ne:'.t examine the position of this branch when »^
bank has no issue rights. From the Sico,o:o of dis, ^«
It gets Sf),ooo as before; the same amount, $1,200,
ccived in exchange, commissions, etc. The total ii,
is unchanged at $7,200. The outgo also is the sanu

^8S

rT^

r"i.i

A RATIONAL B A N K I N (i SYSTEM

la, 700 for interest on deposits, and $5000, for expenses,
or 17,700 in all. And the net out){o or deficit remains at
$500. The change occurs in the capital position of the
branch. F'rst, the bank loses the $35,000 net funds of
which it had the use through the note circulation of the
branch. Next, it has to keep on hand at this point in
$5 and $10 Government notes an average of $ao,ooo,
where its own unissued notes had sufficed in the other
case (this is in addition to the $8,000 of small stuff re-
ferred to in the other description). That makes a differ-
ence of $55,000.

Now the relation of the branch with head office is as
follows: Deposits exceed loans by $30,000, but the branch
has to carry $28,000 in cash and balances, leaving a sur-
plus of $3,000 for the use of head offices or other branches.
The cost of this $2,000 is $500 per year, or 2;, /^r cent.
Under these conditions this branch would be unprofitable,
since no bank can take funds costing 25 per cent, per
annum and make anything out Oi' them. So, one of two
things would happen : Either the branch would be cl< »scd
and the people of that locality deprived of banking
facilities (or thrown into the hands of a private banking
note shaver), or the bank would take steps to make the
branch piofitable through raising the rate of discount
and lowering the rate of interest on deposits. With the
average rate of discount at 7 J or 8 per cent, and the de-
posit rate at 2 J the branch might perhaps be profitable,
allowing f'>r a moderate shrinkage of its loans and de-
posits owing to the less satisfactory rates.

Central Bank a Stumbling Block

This serves as another illustration of the benefit de-
rived by the general public from the conferring upon
good commercial banks of the privilege of note issue. It
also shows clearly enough how the existence of a central
bank with a monopoly of note issue would operate to

186

TlirC CURRKNCY goiiSTlON

deprive small places of much-needed binking facilities,
which tliey wniihl certainly Ret from th .' brar-h l)anks
of the future, f the branch b.tnks have r asonahly liberal
rJKhts of issue. Then, if the banks o^ h'- United States
are permitte<l to develop naturall;, inVr e b...nch
systtrn, by which each institution would r . u profit in
catering to the needs of small pl.-ices, a central bank
would become in a large measure superfluous. There is
good reason to believe that the large branch banks of
the type referred to could and would do all that the cen-
tral bank could do, av,^ ,;cry likely they would i)erform
the several servicer , , duties in a manner more satis-
factory to the peo| . , . ;causc they would be much more
closely m touch wit: ..e borrowing and depositing classes.
To get the branch banks all that is necessary is to allow
the existing banks to develop along natural and rational
Imes. They will come into being if the laws are made
permissive. There is no need to create anything or to
ii'troduce new complications. They will supply the cur-
rency that will respond automaticallv to the country's
needs, and they will uphold the country's honor in p nics.
Perhaps, also, they would regulate speculation and the
foreign exchanges as satisfactorily as would any central
bank that is formed in the United States.

'^HP Bo.VD Security for Nationa Bank Notes

' course there is implied in these schemes the retire-
ment of the bond secured national bank notes; and
whenever that question is debated the matter of the hold-
ing of Government bonds by the banks as security for
note issues comes up. It is said that if the Government
bonds owned by the national banks aid pledged ^rith the
United States Treasur>' as security for national bank
notes outstanding were rendered useless for note circu-
ation they woul.l drop in price so much as to inflict a
los. of quite $60,000,000 upon the banks owning them.
13 187

rw"

in u,

A RATIONAL BANKING SYSTEM

Of course I do not know what arrangement would be con-
sidered by Congress to be expedient or practicable as a
measure for changing the status of these bonds. But to
my mind there is no doubt whatever as to the course
which the Government should take. It sold those bonds
to the banks and got a price higher than the market value
on account of the valuable consideration attached to the
bonds. If it is found desirable and in the public interest
to destroy the value of this consideration the Government
is in honor bound to return to the banks the surplus price
it received by reason of the consideration. It seems to
me the occasion should be regarded by the Government
officials as an operation similar to that which takes place
when a worn coinage is replaced on a large scale by sound
full-weight pieces.

Displacing the Government Notes

If the currency of the country were provided by strong
branch banks, of the type of the Bank of Minnesota and
the Bank of Massachusetts, which had the right to issue
notes up to the amount of paid-up capital, these bank
note issues would easily replace the national bank notes;
and they would, naturally and without special legislation,
eflFectually displace the Government notes of $5, $10, $20,
and $50 denominations. These Government issues would
then possess no avenues by which they could get into or
remain in circulation. It is practically certain, if the
banking business of the United States were transferred
to the hands of branch banks of the kind described, that
the gross capital of the banks would be $2,000,000,000 in
a reasonably short time. The aggregate capital of the
national banks on April 28, 10=9, was $933,269,903, and
that of the state banks 8410,717,857. With the absorp-
tion of outside institutions and the extension of the
branches into thousands of new places large capital in-
creases would be necessitated. It is very likely that

188

THE CURRENCY QUESTION

many of these branch banks would operate with capital
largely in excess of the amount of notes they could main-
tain in circulation ; and each one would be very active in
withdrawing the notes of its competitors and in paying
out its own. Not one of them would think of paying
Government "lives," "tens," or "twenties" over their
counters. These they would send in for redemption, and
the Government notes in circulation would speedily come
to consist of large notes — $500, $1,000, $5,000, and
$10,000 — used almost exclusively for clearing-house and
reserve purposes.

Securing the Branch Bank Issues

It would, of course, be possible to make the branch
banks' notes safe and as surely convertible into specie on
demand as are the existing national bank notes. A first
lien on the assets followed by a mutual guaranty and a
redemption fund would appear sufficient to secure that
end, especially if the associated guarantors were given
adequate rights of supervision over the individual issues.
The notes might be made a first lien on the assets without
imperilling the depositors if the right to issue and the
right to extend branches were confined to strong banks
with a large paid-up capital — say, $3,000,000 or $5,000,000
— (Sir Edmund Walker, president of the Canadian Bank of
Commerce, thinks that a branch bank with the privilege
of operating everywhere in the United States should have
a capital of $10,000,000 at least). And the first lien on
assets could be made the basis for a mutual guaranty by
the associated banks of each other's notes. Or, if it were
preferred, a tax of J or ^ per cent, might be levied, and
the accumulation set aside to redeem notes of failed banks.
I consider that the prior lien arrangement is more just and
equitable. The noteholders arc secure in either case.
When there is a tax levied indiscriminately on all banks
for the purpose of securing the notes, it means that the

189

' (;

»^;(;

n ,1

lip

• )i '.i

i i

A RATIONAL BANKING SYSTEM

good banks are levied upon to protect the noteholders
of badly managed concerns. Under a prior lien the note-
holders of a failed bank vould be protected at the expense
of the depositors, who might get $ or lo per cent, less in
dividends because of the preference given the notes.

A Safe and Flexible Currentcv

In either case the whole branch machinery would be
available for the circulation and redemption of notes.
The constant efforts of each bank to keep its own circula-
tion at the maximum would ensure prompt and thorough
redemption, the carrying on of which would not entail
an undue expense in sorting, express charges, etc. Re-
demption being thorough, the incentive to issue being
always present, if the bank notes provided the sole cur-
rency of the country, the amount in circulation would at
all times be in automatic adjustment with the country's
need of circulating medium. Congestion at the centres,
with its attendant invitation for rich manipulators to rig
the markets for stocks and commodities, would not be
so apt to occur except perhaps during the stagnation
that followed an important panic. When crop moving
came round there would be every probability of the
branch banks being in position to easily create the ad-
ditional currency required for the financing thereof.

I think I have made it clear that branch banks of the
right type could supply currency just as well as, if not
better than, a central bank could supply it. And if the
privilege of issue were given to the ordinary banks many
country districts, and city districts as well, would enjoy
valuable banking facilities which they have not to-day,
and which they have no prospect of getting under the
system of single-office banks.

HOW THE CHANGE MIGHT BE EFFECTED

Avoiding Destruction of Property

PERHAPS, at about this stage of the relation, the
reader who is a banker, acquainted with the condi-
tions prevaiUng in the country, will be moved to inter-
rupt. "That is all very fine," he may say; "the picture
you draw of the efficient working of such banks as the
Bank of Massachusetts and the Bank of Minnesota, and
of the benefits they confer on the people, is attractive,
but it is high time for you to describe more minutely some
of the details as to how the transition from the present
style of banks to the branch type can be made. You
doubtless are aware that one reason why branch banks
have not been more fully considered as a remedy for exist-
ing shortcomings is that a practical method of introduc-
ing them without destroying the value of the stock of
the existing local banks is difficult to find. Have you a
method to suggest by which the change from the one
system to the other might be made without inflicting
great damage upon the owners of the small banks and
arousing their bitter hostility?"

In answer to this interpolation I must admit that I
have no positive conviction that branch banks can be
introduced without damaging the value of the stock of
some of the existing banks. The change would be in the
nature of a revolution, and revolutions of this kind quite
frequently are damaging to the owners of the system or
process that is discarded. However, I consider that there

191

'}^

A RATIONAL BANKING SYSTEM

is a possibility of the change being efifected without caus-
ing undue loss; and in this chapter I shall endeavor to
indicate how that might occur. Connected with the
sentiment against branch banks, which has its origin in
the fears of the country bankers that they will be
destroyed, is another fear that it might prove diffi-
cult or impossible to regulate and control large branch
banks, and to prevent gross abuse of the power pos-
sessed by them. This point, too, will be dealt with in
due time.

i i'

• n

MiscPNCEPTioNs Regarding Branch Banks

It is clear that some people are opposed to branch
banking because they have an entirely wrong idea as to
the manner in which the banks that are a''— ^catcd would
be organized and constituted. I asked a banker from
the State of Delaware what he thought of branch banks.
He replied that a branch bank opened in his town in op-
position to the local banks, but it could do no business,
and it had to close. This experience wotild, perhaps, be
repeated in different localities, and the bankers and other
people who witnessed it would not get therefrom a favor-
able idea as to the usefulness or desirability of branch
banks. It is reasonably safe to say, however, that in
most of the cases here referred to the 1 ranch banks were
not of the type advocated in this book. I have no
doubt that in many cases these unsuccessful ventures
were the offshoots of small or unimportant concerns. In
other words, the parent institutions had not the size,
strength, or prestige required for successful or useful
operation. It may have happened sometimes 'hat the
opening of a branch by one of these concerns represented
a forlorn hope, or effort to attract a few deposits, in some
other than the home locality, to bolster up the parent
office or to feed it with additional funds for financing the
needs of its own borrowers.

192

HOW THE CHANGE MIGHT BE EFFECTED

A Fixed Capital for Each Branch

Apparently it was branch banking of this type which
the Superintende.it of Banking in New York State had in
mind when he initiated the recent legislation rt quiring a
parent bank to provide a capital of $100,000 for each
branch established. As a matter of fact, the capital of
the parent bank should be proportioned to the amount
of the gross liabilities rather than to the number of
branches. A.ssuming that its funds are well and profit-
ably invested, a bank is able to make the best earnings
when its deposits and liabilities are many times its capital
and surplus. Thus a bank with capital ;.nd surplus of
$2,000,000 and deposits of $30,000,000 would likely earn
a much higher ratio on its proprietors' funds than would
another with capital and surplu;. of $15,000,000 and de-
posits of $17,000-^00, although both have the same
amount of resources to work with — $32,000,000. But,
though not so fa\orably situated for earning and paying
large dividends, che business of the lattor bank is on a
broader basis of capitalization. Approximately half its
resources are its own property, not subject to withdrawal.
It should be said that many banks do actually carry de-
posits ten or fifteen times as large as capital i:nd surplus.
The high proportion of liabili'^-os to capital and surplus
need not necessarily be dangerous provided the oiBcers
are careful to carry at all times a sufficient proportion of
assets that are immediately available

So that if the capital is to be proportionate to anything
it should be th^ b'abihties. When applied to great mer-
cantile banks, operated as they should be operated, the
requirement of .ji 100,000 capital for each branch would
simply have the effect of preventing the establishment
of branches in many small places. In a locality where
the natural den and discounts exceeded the deposits
by one or ':wo hund- thousand dollars it would not oe
so great ;i hardship to be required to provide $100,000, or

193

ii I

A RATIONAL BANKING SYSTEM

I '4

any other fixed sum, against the particular branch es-
tablished there; but if a deposit locality is taken — a place
where deposits far exceed the loans — it is a different mat-
ter altogether. Since the branch in that locality could
not use a dollar of the new capital required to be pro-
vide for its use, the requirement cannot but operate to
prevent the establishmciu of branches in such places.

" if

Branch B.\.nrs ano Chain Banks

It is quite pro! ible that some of the methods practised
in New York and other cities prior to the 1907 panic
would have an effect in disposing people against branch
banks, because of their confusing with the branch banks
the so-called chain banks as manipulated by the Heinze-
Morse faction and by other factions. I may as well ex-
plain that chain banks of this kind have scarcely any-
thing in common with the branch bank idea. One of the
wot-Gb features of the system of local small banks is that
it tends to bring about personal domination, through the
exercise of stock control by one man or by a clique or
set of men. By the chain system, as practised by Heinze
and Morse, this objectionable feature of personal domina-
tion was extended over a number of institutions ins^ ad
of being confined in each case to one bank. The system
has no connection or similarity with branch banks as they
exist in the great European countries, in Cana H, or
Australia.

In the United States these chains of banks are found
in the country districts as well as in the large cities. A
correspondent of the New York Evening Post at Omaha,
Nebraska, described in the issue of April 25, igo8, how
the bank chains were worked in the West. After pointing
out how towns and villages sprang up on the Dakota
plains with the building of new railway lines he .says:
"Aming the first institutions to be started in every town
is a bank. Frequently it is there before the railroad

194

HOW THE CHANGE MIGHT BE EFFECTED

arrives. The rivalry for the litle 'First' (cither state or
national) bank, is keen, and a half dozen ap^. Hcations are
frequently made. Two or three banks in operation before
the town is a month old is common. Many of these are
practically real estate agencies and loan-broking firms
with the word 'bank' as an ai)pendage for good will.
They handlj farms, make farm loans, and write int,urance
along with receiving deposits.

" The next step in the development of these banks has
been their combination into chains. The farm mortgages
given by the farmers who move on the new lands which
they wish to improve, and borrow money for the purpose,
have to be sold; hence the president goes to a large West-
em city and starts an investment compH,ny which makes
a specialty of selling farm loans. He leaves the bank in
charge of a cashier who is usually a young man anxious
to make a showing. The president establishes other
banks of this sort until he has a string reaching across
several counties. A banker who left for Spokane last
month was president of twenty banks of this sort and
lived in luxury without visiting them oftener than enough
to keep in touch with their management."

-1

Strings op Western Banks

Banks of this kind are scarcely calculated to inspire
respect for the banking business. As a matter of fact,
the mere mention of them is sufficient to bring a smile
to the face of a banker accustomed to the strong, well-
organized branch ba..ks of other countries. Properly
speaking, many of them are not banks at all. The men
operating and controlling them may know very little of
banking principles. Not Jon? ago the American Banker

published the following item: * of the Bank

in Oklahoma City is making arrangements to start a string
of fifteen banks throughout the state, having placed an
order with a prominent su^e concern for safes." The item

195

• I'

<ii

A RATIONAL BANKING SYSTEM

moved the Fiiiainial ['ost, of Toronto, Canada, to remark
that i" would appear that siifes were the most important
factor in startinjj a string of banks in the newer territories
of the United States. The editor then mentions the fact
of the National City Bank of New York having pur-
chased the controlling interest in the Exchange National
Bank of Spokane, and a large block of the stock of the
Traders' National Bank of the same city — the movement
apparently being part of a preparatory plan of the Stand-
ard Oil interests to make large investments on the Pacific
Coast. After mentioning also the Witham chain of
banks in Georgia, the paper concludes: "In these in-
stances we have quoted the branch bank system in a dis-
guised form, and one which involves most of the draw-
backs and few of the merits of the English or Canadian
system. The rooted objection to non-branch banks is
found in individual control. In Great Britain and in
Canada it is not the individual but the institution which
is paramount. In the United States, under the legal
inhibition of the branch system, the individual promoter
must necessarily be the controlling force. His branches
are all separate corporations, and any cohesion they pos-
sess is centred in the one person. This movement for
'strings' of banks is likely to continue. It suggests that
the American bankers may as well face the inevitable;
but instead of having branch banking in its most ob-
jectionable form, they should advocate a system which
long exijericnce in other countries has proved most
desirable."

Attempts to Introduce Cohesion

It might be said, in addition, that a number of other
banking reforms and changes instituted recently, es-
I)ecially since the 1907 ]janic, constitute, like the above-
mentioned, attempts to engraft some good features of
branch banking upon the localized system. As examples,

196

HOW THE CHANGE MIGHT BE EFFECTED

I might mention the provision for the currency associa-
tions passed just before the last Presidential election, and
the scheme more recently devised by the Comptroller of
the Currency, under the terms of which officers of the
clearing-houses are to co-operate with the bank examiners
in trying to prevent reckless banking. Though the main
design to be accomplished by the currency associations
is to provide currency during a panic, it is also hoped that
in this plan co-operative action will be achieved, or a
measure of cohesion between the disunited offices; and
from the second plan it is hoped that a more efficient
inspection or supervision will result. But so long as
the various banks retain their independence it must
be that co-operation among them can never pass a cer-
tain point ; for each independent unit will run its af-
fairs as it pleases and for its own particular good.
There will be few instances of a bank taking a losing
position for the benefit of an association or of the coun-
try.

Another example of the way in which the branch bank
idea is spreading in the United States, in spite of hostile
laws, is found in the 1909 report of the Bank Commissioner
for the State of Wisconsin. He cites the case of a com-
pany with headquarters in Minneapolis, which he said
owned a controlling interest in more than fifty banks
in Wisconsin, Iowa, Minnesota, and the Dakotas. He
also states that two other companies have recently been
organized in Minneapolis for the purpose of acquiring
control of banks now in existence, and of organizing new-
banks.

His objections to this method of combining the banks
are: The president and cashier of the bank are usually
outside men with only a few local directors; the man-
agement is directed bv the holding company; and loans
are, in the majority of cases, made to parties resident
outside the state.

A RATIONAL BANKING SYSTEM
A Southern Combination

A news item in the New York Financier of April a6,
1909, is full of suggestion as to the line along which the
movement for branch banks might with advantage pro-
ceed. It is a despatch from Aiken, South Carolina, and
runs as follows: "The proposition to combine the Bank
of Aiken, the Bank of Graniteville, and the Bank of Bam-
well into one institution, to be known as the Bank of
Western Carolina, has been favorably acted upon by the
stockholders of the Bank of Aiken. The stockholders of
the Bank of Barnwell will act on April a6th, and those of
the Bank of Graniteville at a later date. The merged
institution will have its main office at Aiken, and will give
the three towns one of the strongest banking institutions
in the South. The three banks at present have total
resources of over a million dollars. There is much en-
thusiasm over the prospect."

'^'f

The Right Type op Branch Bank

Without regard to the degree of success that may at-
tend this particular combination it can be said that it
appears as if combinations of this kind open the way for
the acquisition of a type of branch banks that would
naturally evolve into a banking system offering a reason-
able protection for the mercantile and industrial borrowing
interests during a panic or crisis, and providing facilities
for carrying on large enterprises without making it neces-
sary for borrowers to appeal to all and sundry for accom-
modation. The banking system thus evolved might also
be expected to care for and encourt ~e foreign trade better
than is done by the existing system. Finally, the stock-
holdings would be scattered widely over the land, en-
suring a reasonably certai; prospect that due considera-
tion would be given to local or sectional interests. Take
the three banks referred to in the preceding paragraph:

198

HOW THE CHANGE MIGHT BE EFPECTEP

If the combination is really effective and the management
capable and honorable, the stock of each institution
should be more valuable after the consolidation, because
the business can be held at the same or a larKcr volume
under lessened executive expense. The Aiken executive
would be impelled to give every reasonable encourage-
ment to the industrial and commercial development of
the other two places, by the wish to maintain or increase
profits, to say nothing of the fact that the local stock-
holding in the other places would exert its influence upon
them.

Carry the idea further and suppose this Bank of West-
ern Carolina eventually forms part of a bank with branch-
es scattered thickly through several Southern states.
Honestly and wisely administered, would it not bo a
much more powerful factor in building up the South and
in strengthening the financial fabric of the United States
than the aggregation of its several units would be while
retaining their independent character? The stock-
holding of the bank so constituted would be scattered in
every district where there was a branch; and the task of
the Government's supervising officers would be sim-
plified immensely. Instead of one hundred or one hun-
dred and fifty small institutions to be supervised, there
would be only one bank.

Free a.vd Natural Development Desirable

It is not to be desired that this state of affairs should
come about as directed by the laws or through compulsion.
At the Denver Convention of the American Bankers'
Association Sir Edmund Walker suggested that if branch
banking were merely made permissive it could hardly
make its way unless it proved worthy. If the legal re-
strictions and prohibitions were removed and there was
seen a transformation of independent banks into branch
banks, as in the case of the Western Carolina affair, on a

199

tStSi

A RATIONAL BANKING SYSTEM

larpf* scale, it would be fairly good proof that the move-
ineiu was ecoiioinically sound. It would la- a mark or
sign that for the first time in recent generations the
banking development of the United States was pro-
ceeding naturally. If the prohibition against branches
were removed, and the privilege of note issue conferred
u!K)n banks with a respectably large minimum of paid-up
capital, it is practically certain that in all parts of the
country the banks would combine so as to be eligible for
participating in the benefits of note issue aqainst general
assets. Apparently there is a growing disposition on the
part of the Fetlcral and state authorities to conclude that
in the industry and trade of a great country like the
United States it is but natural for the development to be
in the direction of large combinations and corporations.
They are coming more to the belief that it is better to ac-
cept this, to cease trying to prevent or check the tendency,
and to bend their cnerj,'ies toward regulating the combi-
nation? rind preventing them from abusing their power.
They may, in time, comt- to view banking in the same way.

Promoting a Combination

Suppose there began among the country banks a move-
ment to combinf* The task of bringing the banks to-
gether would Ci 1 for the services of a number or pro-
moters. It wou. ". be an attractive proposition which
a promoter could lay before the stockholders of the par-
ticular circle of banks he desired to combine. He would
first select the section of the state or country which he
wished the bank to cover. Then he would choose the
several cities, towns, and villages in which it would be
advisable to be represented and in each place select a
bank to be approached. He would also need to provide
a general manager and an executive staff. If it hap-
pened that the promoter himsel^ was a skilled banker, he
might retain the general management for himself. But,

200

HOW Tllli CJIANGl- MKiHT U li KFFIi.I'IiO

as the qualities required for britiKinK a score or two score
mdependent bunks into a combination suclj us this art-
somewhat different from the qualities ro(,uircd for the
general manaKement of a large branch bank, it is likely
that in many cases the promoters would receive com-
pensation for their service- in cash or in stock which they
might easily convert intc . -sh.

An Attractive Proposition

In laying his proposition before the officers and di-
rectors of a local bank, the promoter would first explain
the method to be followed. The combination would not
be a case of one bank swallowing another. Nothing like
that at all. It would instead be a confederation of banks
for the profit and well-being of each unit as well as for
the good of the state and country. The assets of each
bank agreeing to join the scheme would be valued by an
expert familiar with business conditi.ms in that part of
the country. If the promoter has succeede.l in eniistintr
the support of a number of respectable institutions so
as CO ensure the respectability of the proposed con-
solidation, he would be taken scriouslv enough. There
would be several circumstances which would enable him
to make an attractive offer for the stock of a bank the
adhesion of which he desired. First, there woukl be ♦he
economy of operation possible under the branch system
Ne> the extra profit to be gained from the exercise of
tne right to issue notes. Third, there woukl be the pos-
sibi.ities m the way of expansion of business through
opening in many places not possessing banking facilities.
AH these would have a tendency to increase the profit-
earning capacity of the stock going into the con.^olidation
Another consideration would be that the stock itself would
become more easily marketable. Everybody knows thaf
nowadays as a rule, there is but a narrow market for the
stocks ot banks in small places. If a stockholder wishes

301

lilii f-

A RATIONAL BANKING SYSTEM

to sell his holding the chances are he will have to wait
till a buyer appears. To make an immediate sale it might
be necessary to concede five or ten points from the price
recorded in the last previous sale. But the stock of a
large branch bank would have a recognized market value.
At the particular financial centre where its head office
was located there might be transactions every day, as
both buyers and sellers would be in evidence continually.
So, providing the valuation of the assets did not reveal
rottenness, the promoter could safely offer a higher price
for the stock of the local bank (to be paid in stock of the
consolidated bank) than it was selling for in the local
market, because as a branch it would earn more than as
an independent concern.

The Stockholders— A True Democracy

The strong points about this proposition would be ap-
parent to any intelligent body of local stockholders. A
bank formed in this manner, through the combination of
a number of banks in the several places, would command
the respect and confidence of depositors and business
men. It would be possible to ensure that there would
not be domination of its affairs by any particular institu-
tion or clique, for the stockholding would be distributed
through a wide territory, and the larger places would
hold sufficient stock to count in the election of directors.
The board and the principal officers would necessarily be
men enjoying the confidence of the general body of stock-
holders. Nor can it be asserted that a branch bank so
constituted would be neglectful of or indifferent to the
needs of any of the localities it served, or that it would
draw the funds that were needed in the country districts
away to the centres. Such banks would constitute an
eminently rational solution of the banking problem. An
institution of this type would gradually extend its opera-
tions over the state or section in which it was located.

202

i-S

HOW THE CHANGE MIGHT BE EFFECTED

It might require also an agency at New York, and per-
haps at other centres. At New York it would be neces-
sary to lend at call and to invest in bonds and stocks;
but it is easy to see that its operations there would be
absolutely free from suspicion of control by the powerful
market interests of New York City.

An Absolute Preventive op Clique Control

It will be well at this point to take account of the pos-
sibility of prominent financiers of New York or Chicago
entering into an aggressive campaign for the purchase of
stock control of branch banks in various parts of the
country. A development of that kind is not at all to
be desired. Recent happenings in New York City in
connection with the acquisition of control over several
large trust companies by an interest which already pos-
sessed the control over a very large aggregation of bank-
ing institutions indicate that unless something is done
to prevent it this form of activity may be much in evi-
dence. I cannot see any convincing reason why it is
necessary for those powerful financiers to have absolute
control of the banking institutions that carry through
their various transactions. In many respects it would
conduce to cleaner and sounder banking if the banks
that were to advance the funds for great operations of
this kind were known to be free from the domination of
their borrowers. At any rate a distinguished French-
man has indicated how the High Finance of the cities
can be effectively prevented from extending its domina-
tion over banking institutions in different parts of the
country. In the Annual Financial Review number of
the New York Evening Post, published December ,31,
iqoQ, M. Paul Leroy-Beaulieu gives his view of the
financial situation in America as it then existed. Com-
menting on news just received of a sale of American
company shares placing corporations with a very large
14 203

ft 1' • t

IfLfcl-

-■■}>

A RATIONAL BANKING SYSTEM

aggregate capital under one control, M. Lcroy-Beau-
lieu said: "This evil financial custom of the United
States does not exist in France. If done away with it
might be possible to hold your trusts within bounds.
This would certainly be better than your present con-
tradictory policies, now granting them every liberty and
now trying to suppress them altogether. This despatch
says that Mr. Morgan, having bought the majority of
stock of the Equitable, will consequently control the
finances of that company with all its ramifications.
Now such ownership in France gives no such power or
control. The number of votes allowed to a single share-
holder of a company is strictly limited. The English for-
got this when they bought up the Suez shares held by
the old Khedive ; they expected it would secure them the
majority of the votes sinc\ it gave them the majority
of shares. There was great disappointment when I
pointed to the text of the statutes, which limit to one
hundred votes any one shareholder, no matter how
many shares he may possess. It is not easy to evade
this essential rule by dividing up one's shares among
fictitious holders, for this constitutes a penal offence in
French law. I am sure that something similar, limiting
the voting power of great shareholders, would also limit
the too-great power of your trusts and combines."

Limitation of Voting Power

Here is indicated a sure and safe method by which the
branch banks might be forever delivered from domina-
tion by great metropolitan stockholders. Let it be pro-
vided that in the case of all banks which have the privi-
lege of establishing branches and issuing notes to serve
as currency the stock shall be strictly limited in Vdting
power. A maximum of one hundred votes for any one
shareholding, with a provision that the division of shares
among fictitious holders should constitute a penal offence,

204

HOW THE CHANGE MIGHT BE EFFECTED

wouUl make it entirely useless for restless or ambitious
financial schemers to try to obtain control of the branch
banks in the manner commonly followed at present. To
limit the voting power of the stock need not necessarily
impair its investment value. It is often the case, under
the present system, that a certain interest which has in-
vested heavily in a railway, an industrial concern, or a
financial concern, is obliged to buy the stock control in
order to safeguard its investment. If the parties did not
take that precaution they might some day discover that
outsiders inimical to them had secured a majority of the
stock, and that there was a good prospect of their in-
vestment being destro)''ed or seriously damaged. In
other words, large investors are sometimes compelled in
self defence to acquire the stock control of the prop-
erties in which they are interested. Limitation of
the voting power of the branch banks' stock would
give these large investors the immunity they required,
and would deliver them from the necessity of acquir-
ing 51 per cent, of the stock for themselves or their
friends.

I think that, in the way I have described, the owners
of the sound and prosperous independent banks, on going
into a combination, would receive property more valuable
than that which they surrendered. Quite probably many
of the banks which were in reahty not in very good shape
would be passed off on the consolidations on terms better
than the owners had any right to expect. But there
would be, almost surely, a number of institutions which
were unable, because of their bad condition, to form
themselves into branch banks of the desired respectability.
Neec"'>ss to say, these are the weak spots in the banking
situation as it exists to-day. The owners of their stock
are fated to lose heavily in any case, and if they were put
out of existence through the institution of branch banks
it would hardly be fair to lay the blame altogether upon
the change of system.

205

i M

^■Uh

fci^a uhi ■ ■ ■

A RATIONAL BANKING SYSTEM

The Directorates

;«

The boards of banks having their head offices outside
of New York City would be composed almost altogether
of leading merchants, manufacturers, and business men
devoting themselves to some calling other than finance
(these are the classes of men who would get the votes
if the voting power of the stock was limited). And, even
in the cnjes of those banks which had their head offices
in New York City, probably many of them would have
boards in which commercial interests were in a decided
majority.

These directors would be held strictly responsible for
the proper use of the banks' funds. Their responsibility
would be heavy enough to induce them to take measures
calculated to keep them informed as to the real condition
of their resp; . ive banks. It would be idle to expect
business men of this type to undertake to personally fol-
low the management through the details of every trans-
action, or to personally examine the books and records
so as to make sure that the affairs of the bank were as
they should be, and as the professional general manager
represented them to be. A director of a great institution
could not do that unless he gave a large proportion of
his dme to the study of branch returns, reports, and cor-
respondence, and to trips around the branches, unless, in
other words, he negU :ted his other business in order to
attend to the affairs of the bank. It is not desirable that
this should happen. This director is not an expert bank-
er; he might not become an expert, even if he had a seat
on a bank board for twenty or thirty years. His quali-
fications fit him rather for the conduct of the mercantile
or manufacturing business in which he has been en-
gaged, and in which quite probably he has made his
fortune. It is best that he continue to devote himself
mainly to that business.

ao6

HOW THE CHANGE MIGHT BE EFFECTED

Checks Upon the Management

But a large branch bank receiving deposits through-
out a wide territory must have a board of directors com-
posed of men whom the people of the country know to
be substantial; it is advisable also that these directors
should ha^'e a large responsibility. It is they who must
hire and stipervise the professional manager who has
charge of the bank's operations. They must satisfy
themselves that this manager is capable and trustworthy,
and devise a scheme which will prevent him from com-
mitting the bank to important risks or important opera-
tions outside of their knowledge. This could be done
through appointing a permanent auditor or chief inspector
resident in the head office, having access to all books and
papers, and endowed with the powers necessary for check-
ing up the general manager. This man is, of course, a
servant of the bank, but he derives his power from the
directors rather than the general manager. In the head
office of a great bank with many branches there would
of necessity be several highly paid officers of considerable
consequence, who, though subject to the general man-
ager's authority, would be too powerful for him to over-
ride in an attempt to misuse the bank's funds, and too
well conversant with its affairs to be easily deceived by
him.

Publication of the Statements

Thus a substantial board of truly representative direc-
tors, with reasonably full civil responsibilities, holding
office by virtue of the suffrages of the general body
of stockholders rather than through the ownership of a
dominacing interest in the capital stock, and removable
without difficulty for misconduct, would be one of the
main saf-ryards possessed by the scattered owners of the
bank. The same board of directors, reinforced by the
stockholding body, all subject to a double liability on

207

A RATIONAL BANKING SYSTEM

f i

their stock, should be of some consequence in giving the
bank a high standing and good credit in every part of the
country. Also regular statements of position should be
required from each bank; and the Government might
publish the statements in such manner as to enable the
interested depositor and the student to follow the changes
of position of the individual bank or banks he desires to
watch. A statement only five times a year would be too
infrequent. Monthly statements would best cover the re-
quirement, and the statements should be in a form that
would enable an intelligent and critical body of observers
to subject the affairs of each bank to a searching analysis.
It would be impracticable for a bank with branches scat-
tered far and wide to furnish to the Government bureau
a composite .statement until perhaps two weeks or three
weeks after the date set for the statement day. If the
statement day fell on the end of the month it might be the
loth or the isth of the following month before the head
office of the bank had the returns from all distant branches
in hand. And after that the branch returns would have
to be combined into a general return showing the position
of the whole bank. In Canada it is usually about the
19th or 20th of the following month that the bank state-
ment for the end of each month appears. And it is ex-
pedited through allowing the m.ost distant branches to
treat the 23d or an earlier date as the end of the month
for statement purposes.

Impracticability of a Weekly Statement

It might be possible to publish a weekly statement
which would permit the speculative and business in-
terests to determine the weekly fluctuations in cash and
liquid balances; b"+ it would necessarily be incomplete
and it might not prove entirely satisfactory. The cash
carried at the branches in the several reserve centres by
each bank, the total of call loans on bonds and stocks

208

HOW THE CHANGE MIGHT BE EFFECTED

and of balances in the international banks, might be given
along with some other particulars; but without the fluc-
tuations of the liabilities these particular, would not
. jnvey very valuable information. It would hardly be
practicable for a large branch bank to publish, on the day
following the statement date, a weekly statement of its
aflfairs, as the New York banks now do. Before it could
be done all the branches would have to telegraph their
balances to the head office, and that would make a heavy
bill of costs.

It would be a matter of the first importance to have
these bank statements true and faithful. To wilff'V
misrepresent the position of a bank of this kind woulc be
a heinous oflfence, for which the severest penalties should
be provided. If the duty of prosecuting offenders were
laid upon some body, such as the American Bankers'
Association, and all offenders, without exception, were
rigorously prosecuted, there would be a fair prospect of
the statements of condition being, in most cases, reasonably
correct. It should be a penal offence for the executive of
a bank wilfully to make a material false statement to
Government, and a penal offence also for a branch officer
to make a material false statement to the head office.

Publication op Earnings and Dividends

Finally, it is to be desired that the directors submit to
the stockholders, and publish annually, a full statement of
the earnings and how they were applied. Publicity of
this kind is clearly in the interest of the banks. In Canada
the good banks find the publication of the regular monthly
statements an excellent advertiset'ient. The Department
of Finance at Ottawa publishes the statement of each
bank in the supplement to the official Canida Gazette;
and the leading financial weeklies reprint the whole,
showing the gains or losses made in deposits, loans, cash,
etc., by each bank. Signs of weakness or of over-expan-

209

M 1

JiV

A RATIONAL BANKING SYSTEM

sion are usually apparent to the experts who regularly
analyze the statements. And, as regards the application
of the profits, the banks pay large sums every year to the
newspapers for printing their annual reports, which specify
the amount of earnings, dividends, appropriations, etc.

Safeguards for the Public

Thus the responsibility of the officers, directors, and
shareholders, the publicity given to the affairs of each
bank, restrictions upon the loans and business, and the
degree of control or supervision exercised by the Wash-
ington Treasury in the way of examination (details of
which are supplied in the following chapter) comprise the
chief safeguards fc i the protection of the public. Another
safeguard for the small stockholders and the creditors
would be found in the skilled professional who directed
the bank's daily operations. Necessarily the general
manager would be a trained banker, devoting the whole
of his time and energies to the conduct of the bank. As
he would be the hired servant of the institution he need
not own any of its stock at all. His engagement will be
a matter for negotiation between him and the board. He
will work under a contract which obligates the bank to
pay him a certain salary for a fixed number of years; and
he thereby enjoys a measure of independence of any
dominating clique which may exist in the board. This
officer will be a man A\'ith a national or world-wide repu-
tation, and he will be exceedingly jealous of his good name.
It is but reasonable to expect that he and his subordi-
nates will have the keenest sense of their responsibility to
the bank and to the public. Every hour of every day the
general manager will remember that if the bank experi-
ences disaster while under his charge he probably will get
the principal blame— for dishonesty or recklessness if his
own acts or policies produce the disaster, and for criminal
weakness if he stands by and allows any director or set of

2IO

HOW THE CHANGE MIGHT BE EFFECTED

directors to damage it or pl-ce it in jeopardy. Therefore,
he should be a strong tower of defence against the ma-
chinations of evil-minded directors. The whole conduct
of the bank is his; the directors are merely representatives
of the body of stockholders. So long as they require him
to do what is honest and proper they have the right to
command him. When they pass these bounds and ask
him or order him to break the laws of the country, to
place the bank in danger in order to serve selfish end's of
their own, or to despoil others of the shareholders, a good
general manager is strong enough usually to defeat them.
He has his contract and they cannot throw him out.
Usually there will be on the board a strong minority of
men anxious to do their duty. With the general manager
and the other high-ranked officers on their side, and the
right cleariy with them, they can withstand the others.
Especially if it were impossible for a few directors to buy
up stock control, could the general manager be depended
upon to check wrongdoing on the part of the directors
and to ensure that the funds of the bank were put to
proper uses.

-"•— ^

XII

INTERNAL AND EXTF.UNAL

AM I NATION

The Bank's Own Inspectors

IN the first chapter, while dealing with rlefalcations
and frauds, I intimated that if they are to be stopped
or checked an efficient system of internal exr.niination
must exist. To be really ^borough and eflfective bank
examination requires to e carried on from the inside,
systematically, ceaselessly, day after day, week after week,
by specially trained men. It may be doubted whether
any better system of inspection of bank offices could be
devised than that practised by the leading Canadian
banks. Each bank maintains its corps of skilled men se-
lected for their aptitude and ability. Each branch will
be visited once, twice, or three times in a year by a skilled
banker who has, prior to each visit, informed himself as
to every detail > f its business. The loans and discounts,
the cash, securities, the records of the deposits, the
methods of doing business, are rigorously and painstak-
ingly overhauled by a man who probably stands higher
in the bank's service than does the manager of the branch.
The manager himself, the other officers and clerks, are
passed upon by this competent and critical visitor. He
gives the go.ieral manager his opinion as to the trust-
worthiness, the capaltility a. id promise of each. To satisfy
himself that everything about the branch is right and
true, and that the bank's interests are well looked after, is
the object of his visit. It can be said, assuredly, that
when the inspector of a Canadian bank makes his ap-

212

INTERNAL AND EXTERNAL KXAMINATION

pearance at a branch the employees do not tell their
friends of the occurrence with a wink or a smile. For, if
anything is wrong, there is a good chance that he will dis-
cover it. And. even if there is no defalcation or wrong-
doing to uncover, it is more or less certain that there will
be reprimands for loose practices or breaches of the rules,
and that adverse reports reparding certain members of
the -taff will be forwarded to head office. While they
are not on their rounds the inspectors are at head
office studying the affairs of the branches. They have
access to all correspondence and reports. Also, they con-
fer with the general manager and the superintendents
of the various executive departments regarding branch
matters.

External Supervision Also Required

By means of this inr lection from within the Canadian
branches are closely watched. But the system of in-
spection has a weak point: No external sui)ervision or
control is provided. It is quite possible that the branches
of a Canadian bank might be sound and clean, while con-
ditions at the head office were decidedly bad. That was
the state of affairs revealed when the Ontario Bank failed,
and the same thing has been revealed in other failures!
It was these happenings which Mr. J. T. P. Knight, the sec-
retary of the Canadian Bankers' Association, had in mind
when he said, in an address at New York City in 19:0,
that the Canadian system operated efficiently to check
frauds at the branch offices, but that as at present exist-
mg it sometimes left the way open for fraud on a large
scale at the head offices. An intermittent demand for
Government inspection has existed, but it has not been
inaugurated, partly because of the difficulty of arranging
a practical plan, and partly because the Finance Depart-
ment of the Ottawa government is reluctant to under-
take the responsibility of bank examination.

213

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A RATIONAL BANKING SYSTEM

ill

ail

life

! ■

' i

i. i

Mr. H. C. McLbod's Schbmb of Extbrnal Audit

I have referred to the campaign for external examina^
tion of hanks instituted by Mr. H. C. McLeod.of the
Bank of Nova Scotia. His plan, as submitted to the
Canadian Bankers' Association in November, 1909, pro-
vided for the appointment by the association of a board
of auditors to consist of not less than seven full members
and of not less than seven associate members. To be
eligible for service on this board a candidate must be a
member of "the Canadian Board of Chartered Account-
aiUs, or of the Ontario Board of Chartered Accountants,
or of the Institute of Chartered Accountants for England
and Wales, or the Scottish Chartered Accountants, or of
such other body of auditors or accountants as may be
approved by the association."

Then for each bank the executive of the association
shall appoint, from this board, an auditor or auditors who
shall " for that year, audit the accounts of the bank, partic-
ularly and carefully with reference to the annual state-
ment issued by the bank to its shareholders. The auditors
shall, for that purpose, make an examination of the head
office of the bank, and shall examine any of the branches
if such examination shall seem to them to be desirable."
In their f<.i)ort to tho chairman of the board the audi-
tors shall state

" (a) Whether in their judgment the inspection of the
branches is regularly and efficiently performed
by the bank's regular inspectors.
" (b) Whether the general supervision of the loans and

investments appears to be thorough.
" (c) Whether they have obtained all the information

and explanations they have required.
"(d) Whether in their opinion the balance-sheet re-
ferred to in the report is properly drawn up so
as to exhibit a fair and conservative view of the
state of the bank's affairs."
214

■Of

-3

INTERNAL AND EXTERNAL EXAMINATION

These quotations arc from the appendix to Mr. McLeod's
pamphlet on Bank Inspection, published in Toronto, 1909.

As the Bankers' Association failed to act on his sug-
gestion, he instituted a campaign designed to force the
Ottawa government, through pressure from public opin-
ion, to inaugurate a system of external examination.

United States Banks AccrsTOMED to External
Examination

If branch banks were introduced into the United States
it is not to be expected that the banks would be left free
from external supervision. The people and the banks
are already accustomed to governmental examination.
Moreover, it is good and desirable that the banking execu-
tives should know that there is a power higher than
themselves watching them closely all the time, presum-
ably ready to check and punish abuses. But the ma-
chinery required for the inspection and supervision of
large branch banking systems is so elaborate and special
that it is doubtful if the Government could supply it.
Even if the United States Government, upon the intro-
duction of branch banks, decided to continue its present
practice of examining all the banking offices within its
jurisdiction, it is certain that each one of the great branch
banks would be obliged, nevertheless, to maintain its own
corps of skilled inspectors. It wruld be compelled to do
so in its own interests. The internal examination would
be much more intimate than the external. The bank's
own examiners would cover much ground which Govern-
ment examiners would not touch. They would inquire
minutely into the matters of increasing the profits or de-
creasing the expenses, of extending the facilities and
busmess, and they would devote a more concentrated
attention to particular loans and investments about which
the executive officers were perhaps a little doubtful No
v-^ll-conducted branch bank could do without an in-

a»5

A RATIONAL BANKING SYSTEM

' ?1

spcction system of its ow-n. And if the Government con-
tinued its system as at present, the same ground would
bo twice gone over; a needless duplication of work and
of expense would take place. The observations and
quotations given regarding Mr. H. C. McLeod's : -posed
reform of the Canadian system indicate one v »> in •.\tncri
this duplication of work might be avoided. ,'>,"vtr.'il otlicr
methods of supervising and controlling the !Kir k exccj;;-
tives suggest themselves. There are some .r i. -ois why
it appears likely that the people of the United States
would prefer to have the supervisory powers exercised by
Government officials. Let us then outline a scheme of
internal and external examination that appears as if it
would offer reasonable guaranty of efficient internal regu-
lation and of effective supervision from the outside.

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A Large Demand for Examiners

We may suppose that there are in existence a number
of important branch banks, formed through the combi-
nation of a large number of concerns that were for-
merly independent. These banks would require the
services of many expert examiners for conducting their
internal inspections. It would seem that the persons
best fitted for the task would be the Government ex-
aminers who had been operating in the districts covered
by the branches. As an inspector in the service of
a large branch bank a good examiner would assuredly
command a larger salary than he could expect while in
the Government service. Furthermore, if he demon-
strated that he had executive abiHty, he would, in all
probability, rise to an executive position. Thus the good
men belonging to the existing staffs of national and state
bank examiners might form the nucleus of the inspection
cor[)S of the banks. They would get better positions, and
would understand what was required of them. Acting
under the orders of the banking execulivos, and always

216

INTERNAL AND EXTERNAL EXAMINATION

informed beforehand of the affairs of the branches visited,
these men, when assisted by others employed for the pur-
pose, could conduct a much more efficient and searching
examination than they can at present examining from
the outside. There would be occasion for the employ-
ment of more examiners than now are occupied in the
service of the Federal and state governments. That
seems clear from the fact that the examination of each
banking office would have a wider scope than at present.
It may be assumed, reasonably enough, that an inspec-
tion force so constituted would watch and supervise the
branch offices competently and thoroughly. It may be
assumed also that it \vould do so in such a manner as
eventually to check very perceptibly the constant hap-
penmg of defalcations and frauds by bankers, which now
tend so strongly to lower the banking business in the
eyes of the people. The next question is, in what nia--
ner shall the Government exercise its supervision over
the executive offices.

How Should Govern-ment Exercise Its Supervision?

I acknowledge that there is room for much diversity
of opinion on this matter, and I am not at all sure that
what I suggest will commend itself to the bunkers as a
whole. In the Hrst place, it seems to me that a wc^-kable
plan might be arranged under which a Government officer
po.sscssing a kncnvlcdge of the work of bank examination
and auditmg would be allotted to each great branch bank
or to two or more smaller banks. He should have free
access to all books and reports, and I think he should be
entitled to admission to board meetings. Ho should
have tne right to visit and examine such branches as he
considers reciuire investigation. It would be his duty to
watch all the bank's operations and to see that it observes
the law. Also he might suggest amen.lments to the law
It he discovered abuses which were not covered by statute.

317

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It''

A RATIONAL BANKING SYSTEM

He would be there primarily as representative of the
Government for the protection of he depositors, cred-
itors, and customers. Also in a less degree he would be
a protector of the general body of stockholders against
the managers and directors. I am not sure whether it
would too much exalt this last mentioned function if it
were arranged that half his salary be paid by the Govern-
ment and the other half by the bank. If that were done
probably the objection would be raised that his dual
capacity, as servant of the stockholders and servant of the
customers, would place him in a difficult position when
action was necessary in a case wherein the interests of
the stockholders clashed with those of the customers.
Such cases might arise in connection with the fixing of
the rate of interest on deposits and on loans. I do not
think he should have the right to meddle with the in-
terest rates, unless he saw a great wrong being per-
petrated. Competition would regulate the interest rates
very satisfactorily in my opini i. I consider that with
branch banks of this type the competition for deposits
and for discount accounts would be even keener than it
is at present. If these resident auditors or supervisors
belonged to the right type the system of examination,
internal and external, should prove more efficient and
thorough than the Canadian system ked up with

the measure of civil and criminal respc y^ at present

placed upon the directors and managers, ^^j^ht to ensure
clean and proper operation.

The Audit Comp.wies and the Banks

I am aware that some banks in the United States now
employ firms of accountants or auditors, having an inter-
national reputation, to certify to the correctness and
truthfulness of their statements. Some critics might
suggest that a regular continuing examination by these
audit companies would supply as much external super-

218

INTERNAL AND EXTERNAL EXAMINATION

vision as is required. In this connection I might observe
that two or three of the Canadian branch institutions
employ English or Scottish auditors to certify the cor-
rectness of the balance sheets pubhshed with their annual
reports. Also audits of this kind are provided by prac-
tically all the great branch banks of the United Kingdom
and of Australia. However, it is doubtful if an audit of
this kind would cover the situation as it would exist in
the United States if branch banks were in vogue. Prob-
ably the American public would demand a larger measure
of control over the banking institutions than the audit
companies could practise. Following are some of the
shortcomings of an audit of the accounts of a large branch
bank by a company of this description: In the first
place, the audit company's men do not conduct an exami-
nation of the cash and securities simultaneously at all
the branches. They merely examine the holdings of
several of the principal branches which in the aggregate
hold the bulk of the cash. They examine and certify to
the securities (bonds, stocks, etc.), held in the head office,
and procure certificates from correspondent and other
banks as to the securities and balances held by them for
the bank's account. In this way they are able to certify
that the bulk of the cash claimed by the bank's state-
ment is actually there, that the securities are practically
mtact, and that the balances with correspondents are
correctly stated. They are obliged to mention, however,
that they depended on statements from the branches for
the data on which they affirm the correctness of the whole
balance sheet.

It is, of course, apparent that the only way in which
an outside examining authority can satisfactorily examine
the cash and securities of a bank with one hundred
branches is to have a man appear without notice at the
same hour on the same morning at each one of the one
hundred branches and proceed at once to count the cash
and securities. There is no other way in which an out-
13 219

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A RATIONAL BANKING SYSTEM

side examiner can ascertain with exactness that the
bank's cash and securities are actually there on a given
date. It is easy to see that this would be a costly process,
and in all probability it would prove impracticable.

': --i-

M hi

An Expert Valuation of Commercial Loans

Another objection is that the audit companies are
called in by the bank, which is presumably jjrepared for
the inspection when it comes. There is no surprise about
it. The bank is not taken unawares, as should be the
case. Usually they have their windows dressed for the
occasion.

Also the executive of the bank selects the audit com-
pany and pays the fee. In engaging an audit company it
thus appears in the role of a dispenser of patronage ; and
though there are a number of houses of such high standing
and reputation that a bill of health from them might be
taken as conclusive enough, still the fact remains that
there are other houses anxious to be employed and which
would, perhaps, be not overanxious to offend the power-
ful banking jjarties who employed them and ])aid them.

It might be objected, further, that an audit company
would hardly be qualificfl to pass on the value of the
commercial loans and discounts, at a hundred or more
branches, which would comprise probably the largest part
of the assets claimed by the bank's balance sheet. To
value these loans an intimate knowledge of local condi-
tions at a hundred or more points would be required, and
a knowledge of the circumstances and pmspccts of thou-
sands of borrowing customers, many of whom would not
appear at all in the commercial agency reference books.
Often enough the general manager himself will not know
what value should be placed on a large loan or liability ac-
count which has been carried by the bank for years and
which he has studied most carefully from the beginning.
When this is so it is scarcely to be expected that an out-

220

INTERNAL AND EXTERNAL EXAMINATION

sider can come into the bank and say whether or not its

loans and discounts are worth the figure at which they are

carried on the books. To merely count up the totals of

the discounted notes on hand would be utterly valueless.

In some cases, to have a correct valuation of the loans and

discounts would be more to the point, in judging a

bank's solvency, than to know that its cash and securities

were intact. Under an efficient system of clearing-house

examinations, such as Chicago and other cities recently

instituted, the clearing-house examiner can arrive at a

fairly satisfactory notion as to the value of the loans and

discounts carried by a bank inspected by him; but as

observed m an oariier chapter, there are limitations to his

power, and, while a system of clearing-house examinati^ g

may perform excellent work in the large cities, it is not

easy to see how it could be extended to the countrv

districts.

Examination of the Braxches

In view of these difficulties it seems clear that the re-
sponsibility for inspecting and examining the branches
should be placed upon the banks themselves. If the
directors and management were made responsible for the
truthfulness of the reports issued by the bank they woul "
use their best efforts to inaugurate an efficient system of
internal checking and examination, and to ensure that
the returns from the branches were reliable and truthful.
I have already suggested that governmental supervision
of the head offices would have an important effect in
keeping the executives in order. It is worth while, also,
to discuss the advisability of giving the supervisory power
to the Amer-can Bankers' Association instead of to the
Government. If the number of banks were reduced to
two hundred, or thereabout, each bank having a long list
of branches, the American Bankers' Association would be
a more powerful body than it is to-dav. At present it is
too large and unwieldy. When important questions come

221

A RATIONAL BANKING SYSTEM

I'lM

up affecting the interests of the bankers it is often the
case that there is a great division of opinion as to the
course the association should take; and whatever course
is adopted there may be an influential minority, com-
prising thi representatives of thousands of institutions,
which is strongly against it. Thus the influence of the
association is lessened; its voice is not always the solid
united voice of the banking interests of the countr". But
reduce the number of units to one-fiftieth or one- xtieth
of the present figure, and a different kind of body wi!' be
in evidence. The representatives of two hundred large
branch banks, even if they are animated by a strong sec-
tional feeling, will reach agreement quickly and with
facility while the representatives of several thousand
small banks were, perhaps, arguing interminably.

Supervision bv American Bankers' Association

It would be possible for an associated body of this de-
scription to devise a very thorough and satisfactory
system of supervision of the executives of the various
banks. The association would be more likely than the
Government to appoint capable men for the work. And
there would be another advantage: If the business of
supervising and examining the banks devolved upon the
American Bankers' Association, there would go with it
a measure of responsibility for bank failures. No reason-
able person thinks of holding the Comptroller of the Cur-
rency, or his examiners, responsible for the failure of a
national bank under the present system. But if the
banks were branch banks, and the American Bankers'
Association had the duty of examining them, the people
would expect the association to protect them, and the
representative bankers comprising the association would
feel a stronger obligation to do so. It is probable that
the united banks would care for the depositors and credit-
ors of a crippled institution, in those cases where it could

222

INTERNAL AND EXTERNAL EXAMINATION

be done with reasonable safety, in much the same manner
as the 1 nk of England and the other British joint-
stock banks cared for the Baring creditors in 1890, and
as the associated Canadian banks cared for the Ontario
Bank creditors in 1906, and the Sovereign Bank creditors
in 1908. It should be mentioned that where the branch
system pre /ails the banks are very apt to take that
course for their own protection, even when the associated
bankers have no powers of examination. If the associa-
tions of bankers were given, and were willing to accept,
powers of examination and supervision, it would make
them more ready to protect banking creditors. Of course
it could not be assumed that they would do so in every
case, as it might happen that the crippled bank's affairs
were in such bad shape that nothing could be done for
the creditors.

However, no matter how efficient and satisfactory such
a system of supervision by the association might prom-
ise to be, it is possible that public opinion throughout the
country would be hostile to the idea of conferring this
power upon a centralized association of bankers. It is
also possible that the bankers would not be willing to
accept the responsibility. And if the majority were will-
ing, some of the individual bankers might be strongly
opposed to it for very proper reasons. (They might fear
that their strong competitors would learn too much about
their business and take deposits or valuable discount
accounts from them.) So it is likely that the only way
in which all parties could be satisfied would be through
continuing the Government in its power of supervision.

Visitation of Banks by the Comptroller

Yet another plan suggests itself. It, however, would
not be so thorough as those already outlined. Instead
of appointing resident inspectors or examiners for the
various banks, the Comptroller of the Currency might be

223

A RATIONAL BANKING SYSTEM

'»

: :i|^

given the power to visit (by deputy) the head offices and
branches. Relyinjj upon the responsibiUty placed by
law upon the bank directors and managements the Gov-
ernment miK'ht forego the regular inspection of the banks,
and call for requent regular statements. In this case
it would be understood that complaints against the banks
might be directed to the Treasury Department at Wash-
ington. Whe 1 it appeared that any of the banks were
not properly ])crformin<' their functions, or that they
were outraging decency or the law, the Comptroller might
investigate and punish. Under this pkn the watch kept
by the Government upon the banks would not be as close
as if it maintained examiners or auditors at the head
offices. However, it should be borne in mind that the
other plan — of appointing resident auditors — might prove
impracticable, or it might not work satisfactorily. A
resident examiner might be corrupted; and if he were
his presence at the bank would be worse than useless.
He might be too officious, and interfere seriously with the
proper working of the bank. He might learn all about
the business of one bank and then betray it to a com-
petitor. Other contingencies suggest themselves. In
connection with any and all of these schemes it is to be
remembered that no system of examination should be
taken as positively insuring banks against insolvency
or bank creditors against loss. Mr. J. B. Forgan ex-
pressed this very forcibly in his address at Chir .go, from
which I have already quoted: "The public must not be
deluded into the belief that official cxami itions will re-
lieve them of the fundamental duty of exercising their
own discrimination in the selection of a bank. The en-
tire credit system on which the business of the country
is built up having its very basis in the exercise of such
discrimination, any delusion which jjroposes to relieve
the public of it would, morally and economically, be
most injurious, tending to carelessness and general de-
moralization in business affairs as well as to a lowering

224

;aig

INTERNAL AND EXTERNAL EXAMINATION

of the standard of business sagacity and social effi-
ciency."

Uniformity of Banking Laws

Needless to say, it is advisable that the laws relating
to bank examination and governmontal supervision should
be of uniform character. The institution of branch bank-
ing of the type referred to in this book would be apt to
bring about a transfer of the control over banking from
the states to the Federal authorities. One of the main
factors operating to induce the small independent banks
to change themselves into branches would be the desire
to acquire privileges of note issue. The Federal govern-
ment is the only power authorized to confer that privilege.
So the note-issuing branch banks would require Federal
charters. If it be assumed that in the course of timv'
most of the banks in the country were converted into
branch banks, it would follow that 'the state governments
would eventually find themselves with scarcely any banks
of their own creation to control. In each state the bulk
of the business wou!d be in the hands of banks possessing
Federal charters. Thus it would be possible, in that
way, to bring the laws governing banking into uniformity.
Congress couM then enact a general bank act which would
apply to practically all the banks in the country; and
the state governments would have no more control over
the branch banks than they now have over the national
banks. For a considerable time after the change went
into effect each state might have a number of small
banks of the single-office type, created bv and subject to
the jurisdiction of the state government. Besides con-
' -oiling these the different state governments would,
,ierhaps, have power to tax the branch banks for the
offices maintained in their respective territories. As
they now have no power to examine the national banks,
It IS not to be supposed that they would have power to
exammc branch banks having Federal charters.

225

A RATIONAL BANKING SYSTEM
A LAKv.ii Measure of Freedom

'i \

I.;

m
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■H 1

•4

At the outset, when the branch banks were to be in-
augurated, there would infaUibly be conferences between
the bankers who intended to convert their businesses
into branch banks and the Govemm< I officials reg -d-
ing the extent and nature of the supervisory powers to
be exercised by Government. Naturally the bankers
would wish to have the governmental interference re-
duced to a minimum. And it would be wise policy on the
part of the Government to endeavor to devise a plan that
would ensure a reasonable degree of safety for bank
creditors, while leaving the banks reasonably free from
official interference. It is one of the weighty arguments
against the present banking system that it is necessary
to surround all banks with vexatious and sometimes un-
reasonable restrictions because some of the badly managed
institutions abuse their privileges. When there are too
many legal restrictions of this kind the effect is to di-
minish materially the usefulness of the banks; and the
restrictions do not, in all cases, prevent the abuses.

The happiest state of affairs imaginable would be that
in which the banks, without being supervised or con-
trolled, administered their affairs wisely and beneficently,
extending a judicious support to all worthy forms of in-
dustry, and maintaining undisputed strength and sol-
vency. If a large measure of responsibility were thrown
upon the parties administering the several banks, if they
were given to understand that as a trial the Government
would leave them with a considerable measure of free-
dom, and that re::trictions and provisions for closer
examination would be introduced only on proof being
supplied that the banks, or some of them, were abusing
their privileges and their freedom, the chances are that
the best banks would do all in their power to ensure
^ood and clean practice.

If the banks had to appear before Congr: in a body,

226

INTERNAL AND EXTERNAL EXAMINATION

every ten or tv 've years, fi)r a renewal of their charters,
as is the cas.' in Canada, the fact would operate as a
wholesome restraint upon them in the bctwecnwhilcs.

A Definition op a Bad Debt

Before closing this chapter I wish to refer to certain
rules which govern the work of examination of national
banks as presently conducted. I 1 ive already drawn
freely upon the published utterances of Mr. J. B. Forgan,
the eminent Chicajjo banker, in order to illumine certain
of the points discussed in this book. I now have occasion
to draw again upon the same excellent authority. In his
Chicago address (American Bankers' Association, 1909)
Mr. Forgan mentions that the clause in the National
Baiik Act which stipulates that no obligation due a
bank can be considered bad until interest is past due
six months, and not then if it is secured or in process of
collection, operates to keep insolvent banks afloat —
through enabling them to preserve the appearance of
solvency. Also he points out that the Comptroller i
hampered by the Federal courts' definition of insolvency,
which is "inability to pay current debts as they mature,"
and he could b; enjoined in the District Court for any
abusive exercise of his discretion. Owing to the effects
of these laws it is to be supposed that there are now, and
always, a considerable number of really insolvent banks
masquerading as good institutions and inviting the peo-
ple to entrust them with deposits. Mr. Forgan says that
oven the Chicago Clearing-House Association has a natural
hesitancy to take action that will result in closing a weak
bank. " Conditions must become very bad and expostu-
lation be exhausted before any supervisory authority,
however constituted, will assume the responsibility of
action that will lead to the closing of a bank's doors. If
it were otherwise, and such action were taken simply
because something in the bank was unsatisfactory, such

227

A RATIONAL nANKINO SYSTEM

.'uithorify woul.l U- accused of shutting up a solvent in-
shtutinn, not nurdy hy its stockhf.ldcrs, but by its de-
positors themselves, in whose behalf the action would be
taken."

Weak Banks

Thus it can be seen that there is every probability that
under the existing,' system there will be all the time in busi-
ness, parading with the good banks and not to be dis-
tin^uislied from thcin, many weak and struggling con-
cerns practically insolvent, and nobody or no authority
willing to take the responsibility of closing them.

An(l, with regard t) weak banks, I admit that in one
sense it is laudable to nurse them along slowly and pain-
fully toward .solvency or strength. But I think most of
my readers who have a knowledge of banking will agree
with the Wall Street Journal in its editorial remarks on
that subject, in the issue of July 20, 1909: "A weak bank
in the financial system of any state has no more right to
continue in lousiness than has a weak bridge in a public
highway. The duty of the public authorities and of pub-
lic opinion in the one case is the same as in the other.
Once an element of weakness has developed, the defect
in the structure is to be remedied without delay, so as to
make it canfble of bearing the full weight of its proper
burden, or tti ■ thing should be closed up. The weak bank
takes away 'egitimate business from the bank that is safe,
and docs injury to the business as a whole by spreading
general distrust. It should, therefore, be put out of exist-
ence with no less expedition than we put out a hre or
block up a highway or suspend traffic on a tumbled-down
bridge.

"This is not a case in which sentiment, social standing
of officials, or hesitation to sacrifice an old institution that
has outlived its usefulness can be considered. If a bank
is weak it has either got to strengthen itself or go. The
machinery of the law cannot bt invoked too speedily."

22S

INTERNAL AND EXTKRNAL EXAMINATION

A Scientific Classification op Assets

One of the principal objects to be achieved by the su-
pervisory authorities would be the institution of pro[)er
methods of bookkeeping, of internal inspection and regu-
lation, and of handling the loans and discounts. It is a
matter of grave importance that tlie administrati(jn of
the loans and discounts be of an intellij^ent and scientiiic
character. I have to tliank Mr. Forgan once more for a
description of the manner in which the best banks in
Chicago classify their loans. At Chicago, in advising
bank directors to have a periodical classification, by
others than the executive officers, of their banks' loans,
he explains: " It may be done by a committee of directors
or by a competent auditor, at whose «lisposal must be
placed the statements of customers an<! all the informa-
tion available in the credit department. The assets can
be divided into five classes, and the result will, I think,
disclose to the directors the necessity for u contingent
fund such as I have advocated. The percentage of each
class to the aggregate total should be shown and the
perioilical classifications compared with each other. This
will disclose the progressive condition of the assets,
whether they are growing better or worse, antl from the
result the management may be judged. I suggest the
following classification:

"i. Good, desirable business.

"2. Fair business risks.

"3. Business not desirable as a new proposition, but
which policy makes it necessary to carry along for the
purpose of gradual liquidation.

"4. Loans which should be liquidated, and on which
more or less loss is probable.

''S. Loans so bad that they should be charged of? now.

"The respective percentage of these five categories
forms a very good criterion of the character of a bank's
management. It must be the constant and unremitting

229

A RATIONAL BANKING SYSTEM

aim of its oflBcers to reduce class 3 to its smallest possible
proportion and to eliminate entirely the 4th and 5th
classes."

Now, what a remarkable uplifting of the standard of
banking there would be in the United States if those
highly trained and experienced gentlemen, in Chicago and
other cities, who practise such excellent methods in their
own institutions, might have the authority to impose
those methods upon the thousands of banking offices
throughout the country! They might do so under the
branch system. It is hopeless to expect material progress
in that direction under the system now existing.

I t

XIII

A FIXED LEGAL RESERVE

How THE Reserve Law Works

I HAVE remarked, in foregoing chapters, that the in-
troduction of branch banks would simplify the cur-
rency question through making note issues based on
general banking assets more practicable. Also it has
been explained that the branch banks would abolish
certain serious troubles connected with the cash reserves.
It can be said that the change would have an important
bearing upon the matter of the fixed legal reserve. That
question, too, would be simplified. At present the na-
tional banks in the first-class reserve centres are required
by law to maintain a 25 per cent, reserve of specie and
legal tenders, while the reserve requirement for country
banks, comprised of specie, legals, and balances with ap-
proved reserve agents, is fixed at 15 per cent. Another
Chicago banker, Mr. David R. Forgan, president of the
National City Bank, gave to the New York State Bankers*
Association (January, 1908) a lucid explanation as to the
m inner in which the present reserve law works. He said:
"The way the law regarding reserves works is best under-
stood by an illustration. The law requires a national
bank in Troy, New York, to carry 15 per cent, reserve.
Only 6 per cent., however, need be in its own vault. The
other 9 per cent, may be with its reserve agent in New
York City. If the deposits of the Troy bank are $1,000,-
000 it keeps $60,000 at home and $90,000 in New York.
The $90,000 in New York, however, is not money. It is

231

*■'

>i '

A RATIONAL BANKING SYSTEM

merely a credit on the books of the New York bank against
which a reserve (allowing for le^^'al deductions) of not more
than $20,000 is kept by the New York bank. When the
Troy bank, becoming alarmed, deems it i)rudent to have
a larger proportion of its reserve at home, it telegraphs
the New York correspondent to send it, say, $20,000.
That does not seem like an unreasonable request to the
Troy banker— only $20,000 out of $90,000.

" But when the Troy bank withdraws $20,000 it with-
draws all the reserve there is in the world against its de-
posits, except what is in its own safe, and the New York
bank is left with a credit on its books of $70,000, against
which no reserve now exists. When the transaction is
multiplied by thousands and becomes general, it is simply
an impossibility for the New York banks to stand it."

DiFFEREN'CES IS RESERVE REQUIREMENTS

Though it is recognized everywhere that a bank trans-
acting business on moneys derived from depositors, re-
payable on demand or at short notice, should ahirays have
a reserve fund of cash and surely available assets, it is a
most difficult, if not an impossible, task to prescribe the
percentage of reserve that should be held by the individual
institutions in any country or state. No greater mistake
can be made than to assume that some figure arbitrarily
chosen will fit the circumstances of all the banks. Every
banker of experience knows that the minimum reserve
necessary for different banks will vary greatly. A 25 per
cent, reserve might be ample or too large for one institu-
tion, while 50 per cent, would not be a whit too much for
another differently circumstanced. Practical bankers are
aware, also, that the percentage of reserve that should be
carried by any j)articular bank will vary with the different
seasons of the same year. In one season a small reserve
will be quite safe and proper, while in another it may be
that double the proportion will be necessary.

232

If:

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A FIXED LEGAL RESERVE

At the Denver Convention of the American Bankers'
Association in 1908 Mr. Byron E. Walker, the president
of the Canadian Bank of Commerce (now Sir Edmund
Walker), remarked as follows about this matter of reserves :
"The real reserve requirements of any particular bankdiffer
from those of other banks in accordance with the nature of
its obligations as compared with 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
which you might select for comparison, even in the same
city or community. The bank which acts as banker for
other banks needs very large reserves inderd. A bank in
the same city doing mainly the business of manufac-
turers, merchants, exporters, etc., will need altogether
smaller reserves, and a bank gathering the savings of a
quiet country community needs much less again."

When the Law Fixes No Minimu.m

In order to make it clear how the trained banker handles
his reserves when left free to use his own judgment, I
shall in this chapter resort again to the Canadian practice
for illustration. Th^ law of Canada does not prescribe a
percentage below which the cash reserves of the bank
shall not fall. This is not the result of accident or care-
less omission, but is the outcome of much discussion
and much deliberation on the part of the cabinet ministers
and the leading bankers. There has always been a small
body of opinion holding that a legal minimum of cash
reserve should be fixed for the banks in Canada, as it is
for the banks in the United States. But the Government
has hitherto agreed with the banking theory, that while
the existence of so many small institutions in the United
States necessitated a certain measure of governmental
regulation of cash reserves, the conditions in Canada are
not such as to call for legislation on the point.

The great joint-stock banks in England are not sub-

233

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A RATIONAL BANKING SYSTEM

jected to a minimum reserve law. And if the United
States had branch banks it is altogether likely that Con-
gress would endeavor in another way to ensure sound
and safe banking practice. When the policy is followed
of naming some percentage or proportion of the liabilities
as the legal minimum of reser^'e — to be maintained at all
times — the effect is to lock up or render unavailable just
that much of the banking resources of the country. If
the minimum requirement is fixed low enough so as to do
no damage through lock-up, it will be useless as a device
for ensuring that the banks lend but a safe proportion of
their funds. And if it is fixed high enough to ensure that
no banks shall carry too much sail, it must perforce result
in a woeful and vhoUy unnecessary curtailment of the
power of the banks to aid industry, commerce, and
agriculture.

The Legal Reserve and the Real Reserve

As an example take the case of the New York City
banks, which are compelled by statute to maintain a
minimum reserve of 25 per cent, in specie and legals.
The effect of that stipulation is to make it necessary for
those banks to carry in practice a potential reserve rang-
ing all the way from 25 per cent, to perhaps 60 per cent,
or more. The 25 per cent, of cash is what they may not
use or touch; it must be kept there for show purposes,
supposedly as an advertisement or indication of solidity.
As a matter of fact, every one of those banks is obliged
to maintain a reserve entirely independent of the legal
reserve; every one must at times prepare special funds
which shall be available for meeting some anticipated
withdrawals of deposits, or a series of loans which the
bank is under obligation to make to its customers. A
real reserve must be more than a mere show thing; it
must receive surplus funds and yield them up again. The
real reserve of the New York banks consists of specie and

"34

^ '

A FIXED LEGAL RESERVE

legals only in part. That reported as reserve in the week-
ly statement is only a part of the real reserve. The rest
of it consists of balances in the international banks, bills
of exchange, call loans to stock-brokers, and some high-
class securities. These items are not disclosed, but they
nevertheless comprise a very important part of the real
reserve. The amount so kept will run up and down ac-
cording to the varying circumstances of the banks. Any
one who attempts to judge the strength of '^^he banks
solely by their holding of specie and legals will make a
capital mistake.

Thb Bank op Montreal's Secondary Reserve

In speaking of the reserve of the Bank of Montreal,
Dr. Joseph French Johnson, whom I have already quoted,
told the Missouri Bankers' Convention (1909) that in
specie and legals the bank carried only about 12 J per cent,
of its liabilities. But any one who supposed, from that
circumstance, that the Bank of Montreal was not strong
would be entirely wrong. The specie and legals usually
comprise less than one-third of its real reserve. Call the
specie and legals the primary reserve if you like, but the
secondary reserve is the account which is really depended
upon for emergencies. It is composed of balances in the
international banks, call loans in New York and London,
and first-class securities available for marketing or as a
basis for advances in the world centres. There are one
or two features about the call loans of the Canadian banks
in New York which make them more available and better
reserves than the call loans of the New York banks made
in New York. In the address just referred to Doctor
Johnson is said to have remarked about the secondary
reserve of the Bank of Montreal, which consists chiefly
of call loans in New York and London : " Now, the time
will come when they will find that secondary reserve a
disappointment in my opinion. But at the present time

M 23 s

A RATIONAL BANKING SYSTEM

call loans are a source of more strength to the Canadian
banks than they are to our New York banks. Our New
York banks rely upon them, as you gentlemen know,
unduly, and when the pinch comes they cannot get the
money New York owes them."

The New York Call Loans

One reason the call loans are a source of more strength
to the Canadian banks is that only one object is kept in
view when the funds are put out: It is to have the
money immediately available under practically all cir-
cumstances. The agents and managers, in New York,
of the Canadian banks are not connected, directly or
indirectly, with any of the stock market cliques or parties;
they are merely the hired professional servants of in-
sti utions which have a proud record of fifty years and
motv^ of uninterruptedly meeting in cash all lawful de-
mands, and both they themselves and their superiors in
the executive offices in Canada are governed in making
the loans by the determination to have them unfaiUngly
available at call. Thus they do not let tb ir funds go
freely for the purpose of making a better market for
stocks in which they are interestod; nor do they, in any
other manner, subordinate the interests of the bank to
those of parties or individuals. The consequence is that
the loans are made only to parties who they know will
respond at once to calls, and strictly on securities which
can be sold in almost any kind of a market, a full 20 per
cent, margin being required in every case. The rates of
interest they get are a secondary consideration; the first
is immediate convertibility. It therefore develops in
practice that lists of their borrowers are composcl of
names of the foremost financial hcjuses in America, of
firms and corporations which would make it a point of
honor to respond on the instant to demands made upon
them; and the securities offer a certain means of repay-

336

■ %i

A FIXED LEGAL RESERVE

ment even if the borrowers failed to respond, as they are
solected for their marketability.

Perhaps it will be observed that these are merely good,
old - fashioned banking principles, and that plenty of
United States bankers are governed by them. But it is
well known that some of the important banks in New
York are closely connected with market interests and
transactions. Quite probably in that fact is to be found
the reason why the call loans are a source of more strength
to ',he Canadian banks in Wall Street than to this section
or party of the native institutions.

Native Banks and the Money Market

If there were in operation a number of large branch
banks, representative of the different parts of the country,
with head offices and stockholding in the various sections,
and New York agencies or branches in charge of officers
similar to the Canadian agents, then the call loans made
by them in New York would most probably bj on the
same basis as the Canadian loans, and they would bo
nearly as available in case of a crisis. The word " nearly "
I use designedly, for there is another circumstance which
operates to make call loans in New York owned by foreign
bankers more surely available than call loans owned by
the home bankers. The home bankers are under a strong-
er obligation to maintain financial stability or equilibrium.
Thus a large United States bank might desire to .all in
some of its loans in order to strengthen its store of cash ;
and it might find on proceeding to do so in a time of
crisis that the process caused great disturbance to the
markets and threatened to upset values. From motives
of public policy, because of the obligation to support or
uphold the good name of the city and the nation, under
which it feels itself, it may desist from calling, probably
acting u-ith other banks. The Canadian and other for-
cign bankers are not under the same obligation to main-

2,37

p » :

A RATIONAL BANKING SYSTEM

tn-.i the financial equilibrium in that city. They are, of
course, concerned in the maintenance of stable conditions,
but not to the same extent as tne New York bankers are
concerned. If there were a serious crisis in Montreal, and
the situation there demanded the shipment of much gold
to the Dominion, the Canadian banks would liquidate
their loans and balances in New York as expeditiously is
possible, and they would not be deterred therefrom by the
fact that their action threatened to upset New York quite
seriously. It would be the same if the New York banks
carried a large line of call loans and b lances in London
as an integral part of their real reserve against liabilities.
If that were the case, and a crisis developed in the Ameri-
can metropolis, the New York bankers would not hesi-
tate to call home their funds as quickly as possible, and
they would continue the process even if it upset London
very considerably. In both these cases the responsi-
bility for maintaining financial equilibrium would not
lie with the foreign lenders, and for that reason the call
loans made by them are better reserves than are the
call loans made by the home or native banks.

Controlling the Branch Bank's Reserve

In the head office of each one of the large Canadian
banks the chief executive officer, always the general
manager, will have a daily statement of the reserves
laid before him. This statement will comprise the cash
held by the branches in the diflerent financial centres,
the call loans in New York, London, Montreal, and
Toronto, and the balances carried in other banks home
and foreign. A number of the smaller banking institu-
tions rely to a considerable extent upon their Canadian
call loans as reserves. The larger institutions do not.
For it is well known that the Canadian stock markets are
not broad enough or strong enough to stand heavy realiza-
tion of call loans by banking lenders.

238

A FIXED LEGAL RESERVE

Now, the general manager knows in a broad way to
what the bank stands coKimitted in regard to new loans for
its regular customers. He knows in what season the ad-
vances to the cotton mill customers will be at the maxi-
mum, when the grain buyers will need their heaviest ac-
commodation, when the lumber manufacturing concerns
will lean the heaviest ; and with regard to the shoe manu-
facturers, the farm implement manufacturers, the iron
and steel industries, the jobbers and wholesalers in va-
rious lines of merchandise, railway contractors, retail mer-
chants, farmers, and all the other classes of borrowers, he
knows when their demands upon the credit facilities sup-
plied by the bank will affect its resources the most. He
regards the bank's obligation to support its mercantile
borrowers as a liability, as well as its obligation to pay
its deposits when demanded. So far as t!.e deposits are
concerned he cannot tell what their course will be. As
long as the bank's credit stands high, and as long as con-
ditions arc prosperous, he can count with more or less
confidence upon a steady acquisition of nev/ funds from
the depositors. He aims to make these gains in deposits
provide the wherewithal for taking up a numb " r of new
discount accounts, for increasing the accommodation
given to certain of the bank's old customers, and for add-
ing something to the cash reserves.

Critical Observation of Competing Bankers

All branches have instructions to advise head office at
once of important transactions put through by them. In
the case of large loans the authorization of the executive
must be obtained in advance ; but after the authorization
has been given, the general manager expects to be informed
of the details of the actual carrying out of the transaction.
Thus the manager at head office has before him each
morning the record of cash, call loans, and balances as at
the close of the preceding day. There will also be ad-

239

A RATIONAL BANKING SYSTEM

vices from certain of the brancr.js as to new deposits
gained or old deposits withdrawn, new loans made or old
loans paid off. From the tenor of these advices he can
tell, in a general way, whether the cash is likely to be
augmented or subject to drain in the next few days.
Now, this general managt-r is operating the bank with the
object, primarily, of earning profits for the stockholders.
In carrying out this design one of the essentials is to
maintain a showing of reasonable strength in cash assets
at all times, and of great strength in cash assets on some
special occasions. The law does not prescribe a hard-and-
fast line below which his reserves must not fall ; but the
general manager is acutely conscious of the fact that the
skilled professionals at the head of the various competing
banks are accustomed to sit in critical judgment upon his
monthly statements of position, and he knows what kind
of remarks they will make if he allows his available re-
serves to fall persistently below the standard regularly
maintained by the first-class hanks of the country. If he
does that there is danger, too, that outside financial and
commercial circles will quickly note the fact, and the bank
may lose deposits or other good business in consequence.
To offend grievously in this respect for any length of time
would probably bring a rap from the Finance Department
of the Otta^\a government; and the offending banker
would, perhaps, be requested to curtail his loans. His
. aortification would not be lessened by knowledge that his
'jrothcr bankers in other institutions were aware of what
had happened to him. He knows very well, also, that if
his bank should get into difficulties it might be necessary
for hiia to apply to these brother bankers for aid.

Forty Per Cent, of Available Assets

These are some of the considerations imi>clling him to
keep his reserves strong. On the other hand, he has no
wish to carry a great deal more than is necessary in the

240

^i i

A FIXED LEGAL RESERVE

form of non-revenue-bearing cash. A certain degree of
strength attracts depositors and other customers; but a
too-great strength in cash reduces the bank's profits and
diminishes its usefulness. He will, therefore, carry so
much specie and legals, so much of balances in banks
regarded as well able to continue paying through a crisis,
so much in foreign bills of exchange, so much in foreign
call loans. All these items taken together comprise his
rosi'rve. They will probably amount to 40 per cent, of
his liabilities. Behind them will lie the call loans in
Canada, which, though not so much depended upon,
would yield a certain amount of cash in a crisis; and
amonp, the current loans and discounts would be a number
of items approaching maturity which could be turned
into cash as they came due without throwing the com-
mercial business of the country .nto disorder.

The point is that all these different forms of reserve
money are available for use ; they are not held merely in
fulfilment of the laws, or for display or statement purposes.

Canadian Cash Reserves More Effective

There are two circumstances which make a given
amount of cash reserve carried by the Canadian banks
more effective than the same amount carried by the
United States banks. One is the absence of laws re-
quiring the maintenance of a fixed reserve; the other is
the existence of the privilege of note issue.

Because of the absence of legal compulsion regarding
the amount of reserve that must always be on hand, the
Canadian bank may treat the greater part of its cash as
something which may be used or paid out if the necessity
for doing so arises. Take a national bank in the United
States during a crisis or emergency. In its case there is
no right of issue — at least none worth anything — and
there is a provision for a legal minimum of reserve.
Therefore in paying out the banker keeps in mind that

241

j ■
I ■

A RATIONAL BANKING SYSTEM

ho must f)rt'Sfrve that legal minimum inviolate, and that
he must hav»- tm han<l something for use as counter or
till mniu-y which will meet the demands of his depositors
and other customers for a sli ort while. In other words,
a sum of lus rvsources equal to the legal minimum plus
a certain amount of necessary till money is theoretically
tied up and remains unavailable.

The Canadian banker, on the other hand, may use all
his > .ish without fear of breaking the law, and the bank's
. twn unissued notes provide the bulk of the till money he
needs.

Watched by the Bankers* Association

The only clause in the Canadian Bank Act which deals
with the matter of the cash reserves is that directing that
the banks shall have 40 per cent, of such cash as they
do hold, in the form of Dominion notes. Thi'^ clause was
introduced many years ago, when the financial position
of the Dominion Govern; lent was is )t as strong as it is
to-day, and was obvious' v designed 'o stimulate the cir-
culation of Dominion notes. Thougu not now needed,
it has be'^n retamed :it each renewal of the bank charters.

Though the laws say nothing about the per cent, of
reserves that shall be carried, I have referred to some
circumstances which opcrat. to induce the banks in the
Dominion to carry reserves of proper strength. All the
banks in Canada bel< ng to the Canadian Banking Asso-
ciation. Eve V month, as the bank return appears, the
officers of th( association compile a carefully calculated
statem nt of the reserves of each bank. The i en who
constr\ut this statemi-it and study it are skilled bankers.
They know what are rhe circumstances of the individual
banks, and what is a reasonable and proper reserve for
each rie to carry. They take into account the changes
of condition due to rotation of the scas( ns, f he xpansion
of note issues a of current account balances; they make

242

A FIXED LEGAL RESERVE

due allowances for peculiarities of Uabilities; and they
count the secondary reserve as well as the cash If it
happen that a particular bank is. in their opinion, spread-
ing so much sail as to endanger itself and the banks in
««neral. the Minister of Finance will be officially notified
and a representation from him will probably result in a
recttficaf ion of the position complained about. If it does
not. there remains the extreme disciplinary measure of
expulsion from the clearing-houses. Thus there is avail-
able coercive machinery- of the most drastic kind.

Supervision by Clearing-House Committees

With regard to the conch ums in the United States I
have al-ea-fy referred to the increasing disposition sho^
by the . ieanng-house committees in the ^rious parts of

h^W^ 7 T '^^"^'' t '^"P^'^'^'^" o^^"- the practices of
the indivKiual member banks. In their respective spheres
of junsdiction these committees now » ke an active part
m putting pressure -.pon banks that oaend against good
bat, king pnnaples. The present Comptroller of the Cur-
rency, Hon. Lawren.o O. Murray, has worked effectively
to bring about cu-operative action between the govern-
mental bank examiner, and the clearing-house officials
And. u a result of such co-operation, each of the various
clearm« houses may b. ome informed of obj. tionable or
•iangeruus practices of banks in its constituency- An
tuin.ation at unless these practices are amended the
. Tender w, be expelled from the cleanng-house would
aim., cer. .nly have beneficial effects. P^.^ibilitres o'
m, .roveme.t to the banking practice through the gradual

h^wPv " f'^ '^'' ^°"'y ^'' ^^'■g'^- I* P^°n^«es most
however, for t le cities where clearing-hou-s exist It
can hardly be expected to exert so greaf an influen" upon
the actions and practices of banks situated in the smaller

ZlTeZ:^: ^°""^'^ ''-'''''' '-^ - ^^

243

rs^

m fi-f

U I

'rl

-* 'i\

A RATIONAL BANKING SYSTEM
Abolishing the Legal Minimum

In the foregoing paragraphs I have indicated how the
stipulation as to a fixed minimum reserve might, with
safety and advantage, be removed from the statute book
if the banking busiiicss were in the hands of large branch
institutions. Then all the banking offices, even those in
the small towns and country districts, would be amenable
to clearing-house control. And if the central clearing-
house committees or the American Bankers' Association
were made responsible for keeping the individual banks
up to the mark as regards cash reserves, it is to be ex-
pected that the detail would be efficiently handled. With
great branch banks in the United States the policy of
giving supervisory powers to the association or the
clearing-house might be expected to give better results
than it does in Canada, because there would be the
Government examiners to give the association or clearing-
house officers information whenever any bank began to
de-'elop a dangerous situation. The Canadian associa-
tion is without this information. Its officers arc -bliged
to calcuKte and guess as to a suspected bank's position,
as they have only the published statements to guide
them.

Increased Usefulness op the Banks

Of course, while the banking business of the country is
in the hands of so many thousands of small banks, a large
number of them operated by men who have had no train-
ing in banking and who have no desire to master the
principles of banking, it would scarcely be wise or safe to
allow them a full measure of liberty in regard to their
cash reserves. If that were done there would be plenty
of so-called bankers who would put practically their whole
resources into loans and discounts for the sake of earning
large profits. The law endeavors to restrain them from

244

i^MriM

rffa

riMI

A FIXED LEGAL RESERVE

taking this course — sometimes with but indifferent suc-
cess. On the other side are the thousands of bankers
who are capable enough and wise enough to carry safe
reserves even if the law did not direct them to do so.
There is no way in which the Government can discrimi-
nate. It cannot say to the good and wise banker, " You
may have liberty in this matter of reserves; the restrictive
provisions are intended only to prevent the bad or ig-
norant bankers from endangering their depositors and
the communities in which they operate." The good men,
who are a majority of the whole, must be bound or re-
stricted in order that the inefficients shall be prevented
from doing harm. So that it is right and fair to count
among the advantages which the United States would
derive from the institution of branch banks the fact that
the harmful naming of a legal minimum of cash reserve
might be discontinued, and the banks of the c&uiitry put
upon the same footing in that respect as the joint-stock
banks of Europe, Australia, and Canada.

There is no doubt their usefulness would be vastly in-
creased and it should not be impossible or difficult to
devise means whereby they would carry cash reserves
ample for their safety. The removal of that legal mini-
mum clause, combined with the granting of real rights of
note issue to the banks, should bring into the available
column a huge amount of cash which, though now figuring
as reserve in the statements of the banks, is of no use to
them whatever unless they violate the laws. At the
lowest calculation several hundred millions of show re-
serves would be changed into a mobile asset available for
use in an emergency; and there would not likely be seen
the spectacle of an association of great banks in the
country's financial capital suspending cash payments
while they had $150,000,000 cr $170,000,000 of specie and
legals in their vaults.

XIV

THE SAVINGS BANK BUSINESS

The Eastern Theory Regarding Savings Banks

IN conservative banking circles in the eastern part of
the United States the opinion is strongly held that
the savings bank business should be kept strictly apart
from the ordinary or commercial banking business. The
theory is that as the wage earners and the poorer, more
ignorant classes of the public, who put their funds into
the savings banks, are not well equipped for making a
discriminating selection of depository banks, the state
should give them protection through providing laws
which direct the investments of the savings banks— the
institutions which they are supposed to patronize— into
certain securities regarded as being eminently sound and
safe. Thus the savings banks, when investing in bonds,
are restricted to securities which fulfil certain severe re-
quirements. In the Eastern states there is an honest
effort made to keep the two kinds of banking entirely
apart; and national banks wishing to transact a savings
bank business have often taken the trouble to organize
separate institutions under the form of which they might
take funds for account of savings depositors. In the "West
and Middle West the line of demarcation between the two
kinds of banking is not so sharply drawn; in that part of
the Union commercial banks that operate savings depart-
ments are quite common. Possibly one reason is that the
West could not so well afford to have a large part of its
cash resources forbidden to its commercial borrowers.

246

, {

THE SAVINGS BANK BUSINFSS

Disposition of Savings Bank Resources

In the report compiled by the National Monetary Com-
mission, as at April 28, 1909, the savings banks in the
United States, mutual and stock, are given as seventeen
hundred and three in number, and their total resources
are said to have been $4,072,710,105. Of this total no
less a sum than $3,506,603,927 consisted of individual
deposits. The disposition of the savings bank resources
was as follows: In real-estate loans, $1,620,131,446, or
about 40 per cent, of the whole; in state, county, and
municipal bonds, $710,159,544, or over 17 per cent.; in
railroad bonds, $769,980,509, or about 19 per cent.; in
United States bonds, other bonds, stocks, etc., $233,130,-
863, or about 6 per cent. ; in loans on demand and on time
against collateral, $232,893,153, or about 6 per cent.;
in balances with other banks, premises, furniture, cash
and cash items, and other assets, $326,170,590, or about
8 per cent. Among the items of resources the only head-
ings under which commercial loans and discounts might
be found in bulk, are: "Loans on demand, unsecured by
collateral|" ; " On time, with tvo or more names, unsecured
by collateral"; "On time, single-name paper unsecured
by collateral " ; " Loans not classified," and "Overdrafts."
The total carried under those headings is $180,244,000,
or about 4J per cent, of the whole resources. In Chapter
II, relating to the cost of the existing system of banks, it
was shown that, taking all classes of banks in the United
States, only 23 per cent, of their total resources was ap-
plied to commercial loans and discounts. The figures
now given show how important is the part played by the
savings ban ks in bringing about that state of afifairs . Some
of the economic effects of the policy have already been
discussed.

The Encj ish Opinion

I may now devote some space to a discussion of the
question regarding the necessity or desirability of keep-

247

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ti^

> .

A RATIONAL BANKING SYSTEM

ing commercial banking and savings banking religiously
apart. It is worthy of note that ideas similar to those
held in the eastern part of the United States have long
been held in England. Twenty and twenty-five years
ago the best authorities there were almost unanimously
of the opinion that the two departments of banking
should be kept rigorously apart. It was accepted as
orthodox doctrine that the commercial banks might take
deposits on current account, and that they might take
deposits at interest from the people of their districts,
giving receipts or certificates therefor ; but it was thought
improper and undesirable for them to operate savings
departments and thus secure possession of the precious
cash accumulations of wage earners and others in humble
circumstances. For them the Government provided the
post-office and the trustee savings banks. By means of
these, facilities were plentifully supplied to all districts,
and the depositing classes using these conveniences were
given the strong security of the British Government.

Local Banks Giving Place to Branch Banks

Latterly, if one may judge from developments in the
banking business, English opinion in this matter has
been undergoing a change. The great joint -stock banks
have begun to institute savings departments wherein they
accept small deposits at interest. The critics scarcely ven-
ture to say that humble depositors trusting such institu-
tions as the National Provincial Bank of England,
Lloyd's Bank, or another of the great English banks, are
in peril of losing their funds; but two or three years ago,
when the movement was plainly making headway, they
took the ground that a joint -stock bank transacting a
savings business should keep the funds derived from its
savings department customers strictly apart from its
ordinary banking funds. Why it should do so I cannot
sec. It appears to me that if the bank invests the funds

248

. !. }

i ...

THE SAVINGS BANK BUSINESS

in such manner as to be surely available when demanded
and if It keeps itself generally in such condition that it
can meet all its liabilities of whatever description prompt-
ly m cash as they accrue, that is all that is necessary
English opinion is proverbially conservative. Usually it
takes a long time to bring about a change of opinion on
important matters. But it is quite probable that in due
time even the most conservative critics will recognize
that the change which has been effected in the character
of English banking in the past half century has put an
entirely different complexion upon the question as to
whether the commercial banks should or should not
operate savings departments. While the commercial
banks were numbered in hundreds, while most of them
were small concerns not subject to supervision from out-
side. It would, of course, be dangerous for all parties if
the savings of the poor and ignorant were delivered into
their keeping on a large scale.

Commercial Banks with Savings Departments

When a few large joint-stock banks with hundreds of
branches replaced the small concerns the situation became
different. Among them in recent years failures have
been exceedingly rare, and as the banks continue to de-
crease in number and increase in size and strength, the
chances of failure or of loss to depositors probably grows
less. In these circumstances there is not the same neces-
sity for a hard-and-fast line of demarcation between
savings deposits an<1 commercial deposits. In actual
practice, even whe t is supposed that the two kinds of
'Icposits are kept ..art. it always happens that the
commercial banks get a certain amount of what are
m fact, savings deposits. The character of a deposit is
not altered by issuing a certificate of deposit for it instead
Of a savings bank pass book. So it comes to pass that
the time certificates cover deposits of workingraen and

249

t.h

''I I

iii

A RATIONAL BANKING SYSTEM

small savers, to a certain extent, in all places where com-
mercial banks operate.

Savings Bank Casualties

In the United States it would, perhaps, be possible to
trace a connection between the Eastern conception of the
savings bank business as a thing properly kept apart from
commercial banking and the existence of the thousands
of small local banks. For the same reasons that it was
considered dangerous in England to have the small local
banks act as custodians of a huge mass of savings belong-
ing to the poorer classes, it appeared to be undesirable to
have the thousands of national and state banks act as
custodians of the people's savings. Therefore, in many
states, special institutions were created to take care of
the savings of the poor, special laws were passed to con-
fine the savings bank investments to a few safe channels,
and attempts of the ordinary commercial banks to develop
a savings bank business were frowned upon or discour-
aged.

Now, it is worth noting that the casualties among the
savings banks of the United States are sufficiently nu-
merous, in spite of the careful legislation with which their
business is surrounded. On page 69 of the 1909 Report
of the Comptroller of the Currency is a statement showing
that in the eighteen years 1892 to 1909 (inclusive) one
hundred and fifty -three savings banks failed, with lia-
bilities of $51,786,000 and assets of $47,717,000. It is
but fair to say that sixty-eight of these failures oc-
curred in the Middle States (sixteen in the State of Iowa
alone) .

On the whole, the savings banks in the East have been
made reasonably safe. They fail occasionally and de-
positors lose money. However, apart from the question
of security, it can be argued that the system has a grave
defect. It cannot be made to provide anything but an

250

THE SAVINGS BANK BUSINESS

inadequate service to large numbers of wage earners and
small savers throughout the country. In the localities
where they are established the savings banks provide
good facilities. But there are not enough of them; they
do not penetrate the country districts. They are plenti-
ful enough in certain districts of the cities and larger
towns, but too scarce in the smaller places.

Mutual and Stock Savings Banks

The savings banks are of two kinds — mutual and
stock. The mutual banks are largely of a philanthropic
nature; they have no capital stock and are operated for
the benefit of their depositors. After expenses are paid
the profits belong to the depositors and are either paid to
them as interest or held for their account in the form of a
reserve fund. The stock savings banks are commercial
enterprises in the sense that the profit from their opera-
tion, if there is a profit, belongs to the owners of their
stock. Depositors are merely entitled to interest at a
fixed rate. It is well known that as a field for profits the
purely savings bank business is not inviting. On the
one hand, it is necessary, in order to get deposits, to pay
a high rate of interest ; and, because there are no current
accounts free of interest, the net per cent, cost of deposits
must alwayj be a figure higher than to rate of interest
paid. And, on the other hand, the legal restrictions upon
investments serve to force the savings bank funds into
securities earning a low rate of return.

So in the one case the provision of savings bank facilities
depends upon philanthropic efforts, and in the other upon
an uncertain and unattractive margin of profit. There
will always be thousands of small towns and . illages
wherein the philanthropic spirit is not high enough or
strong enough to provide mutual banks and where there
will never be much of a prospect of stock savings banks
operated at a profit.

17 251

I
♦I

i .

: i

A RATIONAL BANKING SYSTEM
The Post-Oppice Banks

Although it is commonly understood that postal sav-
ings banks were advocated by the Republicans in the
1 908 election as a reply to the scheme of mutual guaranty
of bank deposits, which was put forward by the Demo-
crats, it is quite likely that the postal banks would not
have received such strong support in Congress but for
the deep-seated conviction in the minds of well-informed
people that facilities for saving in the rural districts will
always be deficient while the present banking system
prevails. There is no doubt that postal banks established
in the smaller places throughout the country would prove
decidedly beneficial to the farmers and workingmen.

In England these banks are everywhere, and will ac-
cept small deposits from any one wishing to pay them in.
Because of the existence of the postal banks hardly any
person lives more than two or three miles from a con-
fidence inspiring depository.

In Canada also the post-office banks have serx'ed a use-
ful purpose. All post-offices that are money order offices
are postal savings banks. Until toward the close of the
nineteenth century they were of the greatest benefit to
the people of Canada. Now they are decHning. Their
decline has coincided with the great branch ertension
movement of the chartered banks. Since 1896 the bank-
ing offices in the Dominion have more than trel cd in
number. At the present rate of increase they will have
quadrupled in a short time. The meaning of this is that
in hundreds of places where prior tn 1896 the post-office
was the sole depository there are now chartered bank
offices eagerly competing for the savings of the people.

Charterep Banks versus Postal Banks

A'' hough the post-office banks and the chartered in-
stil jns i)ay the same rate of interest — 3 per cent. —

252

THE SAVINGS BANK BUSINESS

the latter invariably draw deposits from the post-office
wherever the two are in competition. The reason is that
the chartered banks offer superior facilities.

In order to operate the post-office banks economically
it is necessary to centralize the bookkeeping and clerical
work at Ottawa. The hundreds of postmasters who ac-
cept deposits from the people have nothing to do with
the books or the investment of the funds. When a de-
posit is received the postmaster merely enters it in the
customer's passbook and sends the cash to Ottawa.
When he wishes to withdraw part or all of his funds the
depositor goes to his local postmaster and signs a requisi-
tion or withdrawal order for the sum he desires to with-
draw. The postmaster sends it to Ottawa, and in the
course of a few days a Government check on the Ottawa
branch of the Bank of Montreal will be received by the
depositor, who thereupon takes his check to a chartered
bank and gets the money.

If the business were done in another manner — if, for
example, the ledgers and other necessary books were kept
at the post-offices, and cash provided to enable the post-
masters to pay withdrawal checks immediately on pres-
entation — the expense of conducting the banking op-
erations would rise to prohibitive figures, and in all
probability there would be numerous defalcations discov-
ered every year. Thus the enforced delay of two, three,
or more days, when a depositor undertakes to withdraw
his money, is something that cannot well be obviated. Be-
cause of it, and because of the other minor inconveniences
of dealing with a Government bureau, the general body
of depositors prefer to use the chartered bank branch.
Their experience in the oast twenty years has been of a
nature to cause them to consider that when deposited
with one of the large branch banks their savings are
practically as secure as if he'd by the Government. In
consequence there has been seen a steady transfer of
balances from the post-offices to the ordinary banks, in

253

-''-• '■

A RATIONAL BANKING SYSTi:

the course of which the deposits held by the Goverii.nent
have latterly been falling at the rate of about $1,500,000
per year, notwithstanding that the accounts havu been
credited with some $1,700,000 per year for interest.

Decline op the Canadian Postal Banks

People who do not understand the real reason for the
decline in the deposits held by the post-offices speak of
it as an unfavorable development, or as something to be
deplored; but all who understand the true cause of the
movement and its effects regard it with undisguised satis-
faction. It happens because the facilities supplied by the
chartered banks are, in the estimation of the public,
superior to those supplied by Government, and because
there is not a wide or very noticeable difference between
the credit of the larger banks and that of the Government.
When the banks acquire possession of deposit funds
which the Government had been carrying the funds be-
come at once available to the country retailers, farmers,
live stock buyers, and produce buyers, manufacturers
and wholesale merchants, who wish to borrow. While
the funds are held by the Government they are invested,
except the cash reserve of 10 per cent , in public works
and buildings, subsidies to railroads, and the other cus-
tomary governmental expenditures; they are not avail-
able to the commercial classes for borrowing. If all the
balances were transferred from the Government to (he
banks (they amount to a little less than $57,000,000) the
latter institutions would probably carry against them a
reserve of approximately 25 per cent.— about half in
cash and half in call loans, securities, and bank balances.
As they are inactive accounts they require a smaller re-
serve than do the demand deposits or current accounts
of business customers. There would thus be left an
amount, approximately $42,500,000, which would be held
subject to the borrowing demand of the agricultural,

254

.i I

THE SAVINGS BANK BUSINESS

mercantile, and industrial interests of the country; and
the tendency of the change would be either to cheapen
the cost of bank loans in general or to provide a more
generous supply of funds during a stringency. If normal
conditions prevailed in the world's money markets it is
altogether likely that the Government of Canada could
borrow in London the funds required to pay off the de-
positors in the post-office at a less cost than that to
which it is now subject. Of course this is a purely
hypothetical proposition. The Canadian bankers have
no very earnest desire to have the Government hand over
to them its savings bank balances. The wiser ones
among them recognize that the postal banks are not
formidable competitors for the new deposit fund created
each year, and that it is well to have a depository of that
kind in which timid women, old men, and ignorant for-
eigners can take refuge.

Postal Banks in the United States

Any estimate of the probable effects of the institution
of postal banks in the United States requires to take ac-
count of the important differences in the conditions pre-
vailing respectively in the United States and in Canada.
The most important of these differences is that relating
to the establishment of banking offices in the small
places. If post-office banks of the Canadian pattern
are provided they will constitute in thousands of little
villages the sole respectable depository available to the
people, and it is certain that they would be utilized ex-
tensively.

Another important consideration is that owing to the
smallness and lack of prestige of the ordinary banks the
average depositor would not be disposed, as he is in
Canada, to regard the two classes of depositories as
nearly equal in point of security. In other words, the
credit of the post-office banks in the United States would

255

A RATIONAL IJANKING SYSTEM

be distinctly su[)crior to thut of the ordinary banks,
whereas in Canada the difference is not markid.

Owinjj to these two considerations it seems inevitable
that the post-office banks would accumulate a vry large
total of deposits; and no doubt a part of thcMr accumu-
lations would be at the expense of the ordinary hanks.

Two methods of disposing of the funds were con-
sidered: Tht first was for the r...VLmm.nt to redeposit
the funds received at each post-office in banks, n.itiwnnl
and state, operating in that district or locality. In this
way the funds were to be kept in the locality to wh ch
they belonged. The other method wss to give the
Government the right to invest the funds in Government
bonds in time of \\ ar and when the public credit was other-
wise threatened.

■i

i t I i
[t

Postal Bank^ May Promote the Branch Bank Id, <

There are grave uhjecuon to be urged against either
plan. If the ftmds are redei osited in commtrcial banks
in all localities it is certain that many bi.nks will be un-
able to return the deposit^ wfun demanded. And if the
funds are invested in Govern .xnt bonds it means that
a huge additional sum of , ash resources will U- placed
beyond the reach of the com,- —rcial classes. The whole
question of the etTects to he pro uccd bv the postal banks
is doubtful or obscure. It would be much easier to trace
the probable effects if there were branch banks in (jpera-
tion. Indeed it would not be at all surprising if the in-
stitution of postal banks gave an impetus to the move-
ment for branch banks. It may well be that the bankers
of the United States will find that the onlv wav for them
to compete effectively with the Governnunt' for small
savmj's deposits is for them to conv.rt their small single-
office banks into branch banks and thus raise 'heir pres-
tige in the eyes of the people and -t Lhe same lirae push
their offices into the smaller plac ■;.

2i;6

THE SAVINGS BANK BUSINESS
Whbn Savings Funds Are Uskd in Commerciai.

DlSCOt'NTINC.

As an argument for allowing large branch Ixinks. de-
voted to commercial banking, to operate savings defiart-
nicnts, it ran be urK .-d that as a whole the mass of funds
they would accumulate in that way would he pet uliarly
adapted for use us advances to mercantile and industrial
borrowers. As every banker knows, the a;;?rcgate of
-avihgs department balances of a bank "iiojing con-
tii lously g(K)d credit tends to incrtjso steadily from
tn .nth to month and year to year. They possess a degree
of permanence qualifyi-ig them eminently for use in
grar Hng credits to thi- business interests which rctpiire
stca i;' sup[)ort throughout the year. If it be s;ud that
ilic diversion cf a huge nass of the savin^^s bank fund
from bonds into commercial discounts v-ould embarrass
tii'j mui; -ipalities, railroads, etc., which now secure ncces-
siiy funds through the sale of their securities *'■> the
savings bank.s, it can Jje replied that if the banking facil-
ities of the country nere entirely adequate there would
be an economizing in security is.suc's by industrial and
other companies, because they would be able to finance
their requirements more larirely by means of bank ad-
vances. Many corporations \- . issue bonds, paying in-
terest thereon from y^-ii- .t »•• year end, and carrying
a large part of the pi ! . ; '.and, not earning any
revenue for a portion of every ycr.r, where they would, i
they might go to a large bank and ne-^otiate a loan of two
or three million dollars fo-- five or six months, depend
U! 'in bank accommodation and ettect a notable saving in
interest charges. It can bo said also that branch banks
would, as a matter of course, invest a certain proportion
of their deposits in the classes of bonds non- purchased
by the savings banks. Possibly it would be necessary
for issuers of high jrrade bonds to have a larger recourse
to Europe. It should be remembered that under a sy>

*S7

U.'i

♦I

■ t

•i

If ' ?

r, ■ ■
■I

A RATIONAL BANKING SYSTEM

tern of large branch banks it would come about, in all
likelihood, that the bunks had more or less always a formi-
dable "call " upon the gold resources of London, Paris, and
Berlin. They would fmd it conducive to financial stability
in America to carry a respectable part of their available re-
serves in the form of European demand loans, bills, and bal-
ances.

The Credit op the Branch Banks

Possession of the right of uncovered note issue, utiliza-
tion of the surplus or unnecessary cash circulation of the
country, and the massing of reserves at the centres should
enable them to do this without at all injuring American
borrowers. As under the present system Europe is under
the necessity of making large advances at call and at short
date to the New York market, a reversal of position might
set free a considerable amount of European capital which
would be available for investment in American bonds.

I have dealt elsewhere with the matter of the security
or safety of the depositors. There is reason to suppose
that branch banks of the type of the Bank of Massa-
chusetts and the Bank of Minnesota, subject to the con-
ditions and regulations I have detailed, would offer
humble depositors a better security than they now have.
After a few decades of clean and honorable attention to
the financial and commercial interests of the country
their credit should be so neariy equal to that of the Gov-
ernment that they might bo expected to attract prL.-
tically the whole tleposit business wherever they estab-
lished branches. So in this way the branch institutions,
provided they harl the privilege of issuing uncovered'
notes to serve as currency, and the uncjuestioned right
to operate savings departments in connection with their
ordinary business, could be expected to supply facilities,
the most adequate to the less inipoi tant localities.

I wish, however, to emphasize my statement that in
order to give the country people the fullest measure of

258

Iffiti lit

THE SAVINGS BANK BUSINESS

benefit the banks would require both the right of issue
and the right to operate savings departments. Possess-
ing both, they would find profit in placing branches at
small hamlets with only a few business establishments.
At many such places the savings bank business of the
farmers would be almost the sole attraction . I ha ve already
explained how important a factor is the right of issue in in-
ducing the banks to open and maintain branch offices.

An Agreement Regarding the Deposit Rate

A feature of the savings-bank business of the Canadian
banks which I have not yet dealt with may with pro-
priety be discussed here. It is the uniformity of the
rate of interest paid. From the Atlantic to the Pacific
the chartered banks of Canada quote 3 per cent, as the
maximum rate of interest on deposits. The '•ate has not
varied for over ten years. In periods of ease and periods
of stringency it has been the same. Naturally this uni-
formity has led to accusations of monopoly. Parties un-
friendly to the banks say that a great monopoly exists,
and that through the Bankers' Association the people are
held in an iron grip. It is also said that a few bankers in
Montreal and Toronto control the banking business of
the whole country. I admit that the branch system
tends to concentration of banking ^ ower; and where
there is concentration of power the argument of monopoly
is usually raised. For example, the London Economist in
1 recent half-yeariy review of banking statistics, after
nientioning the steady reduction in the number of banks
in England and Wales, points out that a few gentlemen in
London control 80 per cent, of the banking resources of
the country.

Wide Distribution of Stock Ownership

A statement of this kind made in reference to the banks
is apt to convey an erroneous impression unless it is ac-

259

irifa

til

A RATIONAL BANKING SYSTEM

companied by certain explanations. On hearing it an
unlearned reader might suppose that the gentlemen in
question exercised their control by virtue of stock owner-
ship or of some proprietary right resident in themselves;
whereas, in fact, that is not the case. The gentlemen
wielding the power referred to are either the hired ser-
vants or the representatives in trust of democratic bodies
of proprietors. In the cases of the British joint-stock
banks, and of the Canadian chartered banks, the stock-
holding is widely distributed; and the directors do not,
as a rule, hold office because of a preponderating owner-
ship of voting power. The circumstance must always
operate to mellow the effect of the concentration of power.
I have indicated how the same conditions might be en-
sured for branch banks in the United States. Every-
body who has had experience in the banking business in
Canada is aware that the slow reduction in the number
of the banks has not les.sened the banking competition.
Though it may truthfully be said that a few banks (sixteen
or seventeen) control the bulk of the banking resources
of the Dominion, it is also a fact that those few institu-
tions are constantly engaged in the keenest competition
among themselves. They agree to pay a uniform rate
upon deposits; but the man who argued from that that
there was no comjjetition for deposits would be entirely
wrong in his conclusion. There is competition, and it is
of the sharpest kind. Any person having access to the
branch correspondence in the head office of a large bank
would find that from branches in every part of the country
there were bitter and endless complaints about the ac-
tivity of competitors.

C0.MPETITIO.N IN EST.\BLISHINC BRANCHES

Each br;mch manager knows that one certain way to
imi)rove Iiis jHTsonal prospects is through building uj)
the gor)d business of his branch, both deposits and loans.

2()0

THE SAVINGS BANK BUSINESS

He always has a covetous eye for the business of other
banks in his locality, and often enough he goes beyond
the bounds of decency in his efforts to get a good deposit
or a good discount account. He may not offer a higher
rate of interest for the deposit, but he can and does ofifcr
other things which have the same eflfect. He will collect
at par or perform without charge other services for the
customer. Even if the Canadian banks were reduced to
a dozen or fifteen all told, it is strongly probable that they
would be engaged in ceaseless competition at all branch
points. At the present time there is one kind of com-
petition particularly in evidence. It is the competition
to establish branches. Whenever a new town is started
in the West there is a race for the point. Sometimes two
or three banks will open in a very small place. Many of
these branches are operated at a loss for a considerable
time.

Healthy Competition Ensured

To me it seems that there would be a greater likelihood
in the United States than in Canada of branch banks
maintaining an energetic and beneficial competition.
The existence of thirty or forty very jjowerful banks
meeting each other at many difTeront points should ensure
the keenest competition. And instead of thirty or forty
banks there would probably be two hujulred or more.
They could not make excessive profits \' ithont drawing
new banks into the field. The minimum capital for new
hanks with note circulating privileges ini-ht be j)laced
high enough to ensure that only strong institutions would
be chartered, and yet not so high as to make it difficult
to organize new banks in case an excessive rate of profit
accrued to capital invested in banking.

mtm

I i*

fi^

FOREIGN TRADE AND INTERNATIONAL STANDING
Position op the United States

IN his address on "Abnormal Features of American
Banking," delivered at the Denver Convention of the
American Bankers' Association, Sir Edmund Walker,
the well known Canadian banker to whose utterances
I have already referred, discussed the necessity of re-
forms in the banking system of the United States. Tow-
ward the conclusion of his speech he said it was de-
sirable that such species of banking as was introduced
should be able to create, among other things, a condition
under which "a great international banking business
might be created, and you may do justice to your over-
seas possessions, to the great ports of export and import,
to your mercantile marine, and to vour position among
the great nations of the o^rth." While dealing with this
department of the subject, I cannot forbear quoting the
remarks of Mr. 8. D. Scudder, of the International Bank-
ing Qirporation. New York City, before a bankers' associa-
twm meeting a few years ago. Mr, Scudder's address was
oa the subject of " International Banking," and he defined
it as understood in its true commercial sense to be "those
facilities which aid in the financial settlements necessary
for the exporting abroad of local products and the im-
porting of foreign goods."

How London Levies Tribute

In order to illustrate the conditions now prevailing
he gave the following example:

263

FOREIGN TRADE AND INTERNATIONAL STANDING

"I have friends in a foreign port who would gladly pro-
cure there, if they could, some exchange in dollars with
which to pay for goods bought from their Boston house
But that foreign country sells and exports annually so
small a quantity of merchandise to the United States
because of our prohibitive tariff laws, that no such ex-
change IS to be had. and thus it happens that settlements
even for goods imported there from the United States'
must be made through London. My friends settle with
their own house in Boston by purchasing pounds sterling
drafts on London. The Boston people, when thev re-
ceive these drafts, then sell them to a foreign exchange
banker for so many dollars. Thus London gets a tribute
on business which never originated there, on goods which
never went there, and on a settlement which but for our
prohibitive policy would naturally have been made direct.
Is It not clear that we Americans must stand all the loss
on such transactions? Is it not plain that in quoting
competitive prices this tribute abroad must be taken
into consideration?

" You may ask : If an American bank or its branch were
located there, would Europe still collect this tribute? I
reply: Yes, under our present prohibitive trading laws
the larger proportion of all commissions must necessarily
go abroad; because in the absence of sufficient export
trade from such a place to the United States any Ameri-
can bank or branch there would itself be compelled to
settle with its United States her J office through Europe
The inverse argument also holds good in such a case
Wherever such a foreign country is disnosing of, or, we
will say, clearing, most of its foreign goods, there al^ it
will hkcly purchase most of its wants. And so it happens
that London and Paris and Bcriin are to-day capturing
the worid's most profitable trade, and levying their bank-
ing tribute on every portion of it, because of laws permit-
ting their own merchants to trade and barter in the
markets of the worid. Leave the banker entirely out of

263

J J

> i

Imi I:

A RATIONAL BANKING SYSTEM

the deal, and sec how it works with the exporter who is
rich and does not have to borrow. Supposing for the
cotton you take abroad it were permitted to bring back
some goods to be sold here at a reasonable profit, wouldn't
your cotton shipment and the money it represents be
'earning its way back,' so to speak? But our high pro-
tective tariff forbids the importation, and so you are
compelled to ask that gold be sent back, not only at a
great cost and loss to you in dollars and cents, but also
in ultimate loss of trading opportunity with the people to
whom you have been selling your cotton."

The Foreign Bankers in New York

In the foregoing quotation the matter of the tariff
overshadows the purely banking part of the question.
I do not intend in this work to (hscuss tariff <juestions.
However, I have included the whole quotation because of
the co-relation of the subjects. I give the following
further excerpt from the same address by Mr. Scudder,
because of its pertinency to the matter under discu.s-
sion:

"Although an American by birth and long ancestr>-,
I had the opportunity of getting my initial financial edu-
cation in an English, or, rather, in a Canadian bank. Very
often in those days, while trying to grasp the meaning of
that great world's business which was being done by the
Bank of Montreal ami similar institutions of foreign
ori;,Mn, I wondered why no large home organization then
existed in the United States which was especially Httfii
for work pertaining to those transactions daily takinj^
place between merchants of the Old World and those <A
our own country. I thought it strange that while fvery
leading nation of the \v .i],! had branch banks or banking
representatives here, not unv of our tmancial institutions
was at that lime represcnteti abroad. It was a constant
.source of astomshment to me that the American mer-

JO4

FOREIGN TKADE AND INTERNATIONAL STANDING

chant and the American manufacturer had not that finan-
cial backmg abroad which was vouchsafed to the business
men of other lands by their own banks. Not that there
was any scarcity in the United States of private firms
aiKl banks engaged in international banking- but I
found that almost without exception these firms, and
even the banks, either were of foreign origin, possessed
a foreign partnership, or else represented on this side
st»me foreign bank or banking house. At the same time
It ^^-a^i strongly impressed upon me that by far the larger
proportion of all strictly commercial international trans-
actions on this side pertained to exports and not imports.
And so the conviction came, and I think it is entirely cor-
rect, that the reason for the existence in our land of these
Kreat foreign banks and foreign private houses was
pnmanly because of the staple export trade which we
were funushmg to those countries."

Usefulness op Foreign Branches

From this last paragraph it is possible to get some idea
as to the services performed for the trade of their own
country- by bank agencies or branches established abroad
Again resorting to Canada's case, it will be seen that
many of the important banks are represented by a num-
ber of branches in foreign lands. Cana.lian bank i,ranches
and agencies are found in Nev^-foundlan.l, the Bermudas,
t.ie United States. Mexico. Cuba. Port-, Rico, the Ba-
hamas and London. England. One may well unrlerstand

t^f .r. '''', Tr""'' ''1"'^''" '^'y ''''''' ^'■^' Potential
act.n-s ,n building up Canada's foreign trade, in exten.l-

ink her good name, and in attracting capital to the

Dominion, while at the same time .inin,^ a useful service

m chscovenng profitable investments abroad for Canadian

capital No matter in what forms the commercial and

SofTh"'"''^ "' ''""^^ ^•"•^'^'" ^^«'Pl- "-'« --

prts.ion. the men m the Canadian branches are certain

265

• h

■ ' I

A RATIONAL BANKING SYSTEM

to be thoroughly informed about the whole. They also
bring with them a reasonably full knowledge of the vari-
ous goods which the different provinces of the Dominion
require to buy or sell abroad. Loyalty to Canada, to
the banks employing them, and to the localities in which
they are situated impels them to open new channels of
trade with the Dominion when such a course is likely to
result in mutual profit for the trading nations. It should
be observed here that usually the establishment of the
banking facilities follows the establishment of trade
rather than creates it. For example, it is the banking in-
stitutions especially identified with the Province of Nova
Scotia that have established the branches in the West
Indies. It is easy to trace the course of events that
induced them to take that step. They were called on
constantly to finance for their customers, the West India
merchants of Halifax, large transactions involved with
the importation of sugar, tobacco, rum, and other tropi-
cal products, and with the exportation of Canadian fish
and other products. With no branch establishments in
the West Indies they enjoyed only a part of the profitable
exchange business resulting from this trade. With
branches established at the principal tropical export
centres they might hope to have practically the whole
of it. Negotiation of bills of exchange drawn against
exports to Canada would almost certainly fall to them.
Also the accounts of Canadians resident in the tropics
would naturally gravitate into their ledgers. After the
branches were opened it transpired that the banks se-
ciired a large share of remunerative business outside the
Canadian trade. Thus the Royal Bank of Canada was
made the intermediary for paying off the Cuban troops
when they were disbanded; and it and the other Cana-
dian banks now negotiate an important share of the ex-
change resulting from shipments of tropical products
to the United States, to Europe, and other parts of the

world.

266

FOREIGN TRADE AND INTERNATIONAL STANDING

Foreign Branches a Good Advertisement

Furthermore, the foreign branches serve as a valuable
advertisement for the Dominion. The people of Cuba,
of Mexico, and of other foreign countries are imprcsjed
with the idea that Canada is a wealthy and important
country when they note that she establishes branch offices
of great banks in their principal cities and trading centres,
that she sends out clerks to man and operate them, and
provides capital to carry on a large share of the local
business. When they consider that in this respect of
providing banking facilities for them Canada is equal or
superior to the United States — notwithstanding that the
latter country is nearer -i-nd far more populous and wealthy
— their opinion of the banking machinery and resources
of the Dominion must be highly favorable.

U.xiTED States Banking as It Appears to Foreigners

There is yet another respect in which the non-branch
system of banks handicaps the United States in acquiring
a high standing abroad. When, in the course of their
business operations, the great bankers of Europe have
their attention drawn to United States banking, they do
not see it in the light of the large totals — many billions of
dollars — representing the aggregate of the country's
banking resources. In the ordinary course the banking
system of the United States comes before their notice in
the form of drafts and obligations of the individual banks.
Of these there are some few in the large cities the stand-
ing of which is well known. But of the great majority
the European bankers know little or nothing beyond the
fact that their names are to be found in the banking di-
rector}', which may als'. -ontain a list of the principal
executive officers and [■■ ihaps the amount of capital and
surplus and a few items of the balance sheet. This by
itself conveys practically no information to the foixign
18 267

•I

I? >

A RATIONAL BANKING SYSTEM

banker's mind as tu whether the various institutions are
sound or not. Ho knows very well, if the document he
is re<iuircd to act upon is a draft on New York or a check
on that or another American centre, that the drawer or
drawee bank may fail before collection can be made. He
knows that iliere is a constant succession of failures, and,
as likely as not, he has himself been involved in the failure
of smjll United States banks from time to time. Also,
while the New York City banks and the banks in the
other principal centres are well informed about and care-
ful to observe the various European usages and customs
having to do with financial transactions, there are a
great many bankers in the interior who transact their
European business and their foreign exchange busi-
ness either ignorantly or carelessly, and create endless
trouble and annoyance for their foreign and New York
correspondents. Of course, under a system of branch
banks the dealings with European and other foreign
countries would be carried on under careful regulations
and instructions. Probably all drafts and documents
would be passed through a central branch which pos-
sessed officers and clerks thoroughly familiar with foreign
usages and customs.

United States Bank Drafts

To illustrate how the existence of small banks in
.such large numbers affects the American standing abroad
I have mentioned Europe, but it is not necessary to go
so far afield. A good illustration can be had by noiing
the practice of the bankers in Canada as it relates to drafts
and checks of United States banks. In my several years'
experience in active bankinj: in Ontario and in western
Canada — coverinj? service in the teller's box and as branch
manager — I was frequently called on to deal with j)arties
presenting drafts on New York drawn by banks in various
parts of the United States.

26S

FOREIGN TRADE AND INTERNATIONAL STANDING

Of course, when they came to the counter in the de-
posits of the regular customers the drafts would go
through without discussion. With the authenticity of
the documents and their ultimate payment guaranteed
by the local depositors there were no reasonable grounds
for questioning them. But when presented, as they often
were, by strangers or by individuals not possessing any
means or credit, the case proved somewhat different.
Then to cash the draft meant to advance money solely
upon the credit of an instrument purporting to be the
obligation perhaps of a small bank in Colorado or New
Mexico about which nothing whatever was known. In
all cases of that kind there is, of course, the risk of forgery.
The draft may not be the thing it purports to be. As I
shall explain in the subsequent paragraph, the risk of
forgery is greater in handling drafts drawn or purporting
to be drawn by banks of the United States type than in
handling drafts emanating from large branch banks.
Apart altogether from the consideration of a possible
forgery the situation is perplexing enough. The holder
of the draft offers to procure identification, so there is
no trouble on that score. The amount is $200. What is
to be done? You say to the payee: " Wc know nothing
of that bank in the Western states. It may fail before
we could get our money back. So we musi ask you for
an endorser as well as for identification." This position
is perfectly consistent with sound banking principles.
AlthoujJTh a bank might continue cashing such drafts un-
endorsed without experiencing losses the risk is surely
there, and it is altogether disproportioned to the ben-
efit secured by the bank through cashing the drafts.
It is the duty of the branch officers and employees,
and they are so instructed in the code of rules, to
avoid subjecting the bank to any risk at all in deal-
ing with casual customers. Hence an endorser is
necessary unless some reliance can be placed upon the
payee.

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A RATIONAL BANKING SYSTEM

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Branch Banks Would Improve the

Standing

Country's

The case would be diflFerent if there were in the Repub-
lic a comparatively small number of large branch institu-
tions. Then the foreigners could without much difficulty
keep themselves informed regarding the individual banks.
And it is reasonably certain that every United States
branch bank that had occasion to remit money frequently
to a foreign country would have an arrangement with
an important bank in that country the officers of which
would feel honored by being selected to act as corre-
spondent. The branches of this correspondent bank
would be instructed to accord every respect to the drafts
and orders that were presented at their counters. In
this case, too, the risk of forgery would be greatly reduced,
for the United States bank would furnish the foreign
bank with complete sets ot specimen signatures of officers
authorized to sign on its behalf; and every branch of the
drawee bank would thus have the means of comparing
the signatures on the documents presented with the
specimens in the signature box. Unquestionably United
States banking would, under these circumstances and
under others which would be introduced with branch
banking, rise appreciably in the estimation of foreigners
near and far.

Fluctuations of the Interest Rate

I have already pointed out that with the business of
the country in the hands of large branch banks the de-
structiveness of panics would be materially lessened, and
that a practical immunity from panics might perhaps
be enjoyed. Also it is but reasonable to expect that the
operations of branch banks possessing rights of note
issue against general assets would entirely do away with
those extreme fluctuations in the interest rates at New

270

FOREIGN TRADE AND INTERNATIONAL STANDING

York. Eminent financiers have at different times char-
acterized those 10, 2o, so, and loo per-cent.-interest
rates as a national disgrace. It might be said that they
represent only one of a number of disgraces for which
the system of isolated small banks and rigid currency is
responsible. There is excellent ground for believing that
with a system of banking and currency such as I have
outlined, in good working order, a higher rate than 7 or
8 per cent, would never be seen in the American metropo-
lis. For during the fall season the banking institutions
would not be compelled to force a large mass of credits
from one set of borrowers in order to place them at the
disposal of another. They could provide the bulk of the
funds necessary for the special work of the crop moving
through calling into being an extra amount of currency
which could remain in existence only while there was work
for it to do. It is well known that the urgent bidding
of stock market borrowers whose credits are taken away
has much to do in bringing about the erratic fluctuations
in the interest rate.

How THE Skilled Financiers Profit

The two things — the panics and the extreme fluctua-
tions in interest — have some considerable effect in caus-
ing a certain class of European investors to be cautious
in dealing with the United States. Many of them look
upon it as a field to avoid, because of the danger of being
caught in a panic or semi-panic. The financial instability
and the tendency of money rates to rise on occasions to
very high levels have their effect, of course, in producing
violent fluctuations in security prices. From the present
order of things the skilled bankers at the centres and the
foreign banking institutions interesting themselves largely
in United States financial matters are able to extract good
profits. They benefit through the high rates of interest
prevailing in the fall of the year and in other seasons

271

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A RATIONAL BANKING SYSTEM

during which monetary conditions are upset or subject
to great strain. Their experience and position also enable
them usually to extract profit from the fluctuations in
securities. Mr. Andrew Carnegie is reported as saying
that if he had wished to make some money he could have
made $50,000,000 in the 1907 panic, as he had the neces-
sary cash and conditions were ripe. One may easily be-
lieve that he could have done so. It strikes an outsider
that it is quite time to consider the abolition of a banking
system which creates conditions permitting the great
capitalists to exploit the unlearned and ignorant in such
wholesale fashion. The extra pro. ts made by lenders of
money and by wealthy operators in securities represent,
of course, special expenses for the borrowing classes and
losses for thousands of humble speculators and investors.

1 >

Foreign Bankers Finance Domestic Business

In connection with this matter of international stand-
ing it should be borne in mind that, under the conditions
presently prevailing, foreign banking institutions finance
a large part of the foreign trade of the United States.
They also take a rather important part in financing the
domestic business of the country. Thus, in connection
with the cotton trade, the foreign bankers not only buy
a large proportion of the bills covering exports of raw
cotton, but I understand that they advance funds ex-
tensively to facilitate the purchase of the raw cotton
from the farmers and the movement from the fields to
the seaports. One might expect that in 1 country so
large and wealthy as the United States the native banks
would perform that service without assistance.

Also three of the Canadian banks assist materially to
finance the business of the Pacific Coast, through the
operations of their branches in San Francisco, Seattle,
and Spokane. When it is considered that they have built
up large discount and deposit businesses at these points,

27a

FOREIGN TRADE AND INTERNATIONAL STANDING

in competition with United States banks possessing strong
local boards and affiliations, and endowed with all the
advantage pertaining to home institutions, it seems fair
to conclude that their success is cliiefly due to the de-
ficiencies of the system of small local banks in regard to
caring for their own home industries and trades.

\ H

New York as Banker for Other Nations

On one or two occasions in the past decade New York
participated with London and other European centres
in bringing off some international loans. Thus ^ portion
of the British Government loans during the Boer War was
placed in New York. Japan borrowed in New York
during the war with Russia; and both Russia and Ger-
many have placed an amount of bonds with American
bankers. When these transactions occurred there was
discussed the probability of New York wresting from Lon-
don the supremacy in world-finance which the British
metropolis had held for so long. It now appears as if
New York's participation in important international is-
sues of securities at that time resulted merely from the
fact that money conditions in the American metropolis
happened then to be such as to permit that course being
followed. Since then New York has not rivalled London
or Paris in world-finance of this kind. True, a few South
American issues come to New York, and a large amount
of capital has gone into Mexico, but the bulk of the re-
quirements of the outside world are filled in London and
Paris. There is no doubt that British trade has bene-
fited tremendously from the foreign lendings of British
capitalists and investors. It is commonly supposed that
the United States has little capital to spare for loans to
foreign governments and corporations. But I venture to
assert t'lat if the country had a modernized banking
system that would do away with the unscientific and
wasteful use of cash resources, and utilize the cash wealth

273

V
•r

A RATIONAL BANKING SYSTEM

of the country as it should be utilized, it would be found
that there was enough capital in New York to permit
participation in good foreign loans to a much larger ex-
tent than prevails at present. And that would mean,
as a matter of course, that much of the proceeds of these
loans would be expended in the United States, to the
great benefit of the expoi trade and the working classes.

The Banking Business op Mexico and the West Indies

As I have mentioned, it is in the countries and isl-
ands, near and far, with which the United States trades,
and with which it has important financial dealings, that
United States banks are noticeably absent. There is one
New York institution — the International Banking Cor-
poration — which has been active in extending its opera-
tion in the Far East. Its Eastern branches are, of course,
controlled from the head office in New York City. There
are a few banking institutions in the West Indies and
Mexico which are owned in the United States. Howeveri
they are not branches of United States institutions, and
in most cases their titles do not indicate clearly that they
are of American origin. Of course, the reason for the non-
representatior abroad is that the branch idea is under the
ban of the laws and regarded with hostility by a large
part of the people.

Now let us picture the conditions that would likely pre-
vail in this respect if there were in the American Union
one hundred, or two hundred, or more, powerful branch
banks operating under kind but firm laws and enjoying
the confidence of the people. To make *\ip picture more
perfect let us suppose that pressure of public opinion has
produced a sensible lowering of the tariff wall, and that
it is possible for vessels carrying American goods to other
countries to secure return cargoes which will be admitted
through the customs at United States ports at moderate
rates.

274

FOREIGN TRADE AND INTERNATIONAL STANDING

Branch Banks Would Assume the Domestic Business

The banks would then, first of all, proceed to take upon
themselves the whole duty of financing the country's in-
ternal trade and industry. They would provide the cash
required for paying the producers of cotton, and would
carry the staple through its different stages. In the case
of that destined for home consumption they would see
it to the mills— in the South or in New England; they
would advance the money necessary to enable the mills
to pay for it and hold it; and finally negotiate the bills
drawn by the mills or their selling agents upon purchasers
of the manufactured cotton goods. And, in the case of
raw cotton destined for export, they would see it to the
seaports and buy the foreign bills drawn upon the Euro-
pean markets by the exporters. The same with wheat,
com, lumber, coal, tobacco, fruit, and other products.
By means of their branches the home banks would facili-
tate production and interchange at all points where
production and interchange took place. Each banking in-
stitution could by itself finance its due share oi the move-
ment of the great staples from producer to consumer in
the case of those consumed at home, and from producer
to foreign purchaser in the case of those exported. I
hazard the opinion that if there were great commerc" .1
branch banks that would carry the accounts of small dealers
and buyers, and assist them to export if necessary, there
would not be so much danger of important prouacing in-
dustries falling intc the hands of trusts and ".mbinations.

Extending Into Foreign Countries

If there were great banks, such as the Bank of Massa-
chusetts, the Bank of Minnesota, and the Bank of Georgia,
hereinbefore described, growing rapidly each year in /lum-
bers of branches, in resources and power, they would, as-
suredly, as soon as they were well established at home,

275

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1^1

i' {I

A RATIONAL BANKING SYSTEM

extend their operations into outside countries. There arc
three important fields into which they would naturally
extend at the outset — the West Indies, Mexico, and South
America. The trade of their country with all of these is
very large, and with a lower United States tariff it would
grow very rapidly. There would be many bills, drawn by
United States exporters, to negotiate; and many bills
drawn abroad upon United States importers. The branch
banks would be desirous of a large participation in this
business. By establishing branches in the principal
trading points in Mexico, the West Indies, and South
America they would doubtless get a good deal of it. In
all probability they would also develop into formidable
competitors with the English, German, and Canadian
banks that now transact so large a share of the general
international business of those countries. And it might
thus come about that the United States would draw a
regular tribute from the trade of foreign lands.

It should not be supposed that in establishing these
outside agencies the banks would be diverting to the
service of alien nations funds needed at home. As con-
ditions are now a large aggregate of balances owned by
United States firms and agents in these outside places is
carried on deposit with foreign banks. Much of this total
would be transferred at once on the opening of branches
of American banks. The foreign branches would thus
have deposits as well as advances. And it might tran-
spire that not a few of the banks operating abroad would
do so entirely on funds acquired abroad, without using
a dollar of their home resources.

United States Banks in London

1. i

The more important of the branch banks would, of
course, have offices in London. They would be found in
China and Japan, and perhaps in India. In short, they
would do a world business. Nowadays when Americans

276

FOREIGN TRADE AND INTERNATIONAL STANDING

arc travelling abroad they are obliged to be on the de-
fensive in discussions of banking matters. For the fre-
quent destructive panics and the periodical monetary dis-
turbances they must offer apologetic explanations. Also
when they visit London they may see great banks belong-
ing to the various nations creditably represented. They
may notice that Canada is well represented by the Bank
of Montreal, the Canadian Bank of Commerce, the Bank
of British North America, and the Royal Bank of Canada.
But no United States bank is to be seen. If on entering
the city they were confronted with the names of a num-
ber of great banking institutions belonging to their own
country, displayed over creditable buildings, they might
perhaps find satisfaction instead of humiliation m think-
ing of the representation of their banking power abroad.
Their satisfaction would be heightened by the knowledge
that these banks of theirs, which carried their names so
proudly in the world centres, were engaged in financing
an honorable share of the world business passing through
London.

■> 3

The Rightful PLxrE Among the Nations

When branch banking had got well under way there
would be, it is needless to say, some very large institu-
tions. In all probability the largest of them would, in
point of banking power or resources, excel most of the
great banks of Europe. Powerful banks such as these
w id desire to have their business in a world centre like
London housed in buildings that were in keeping with
their prestige and standing at home. At present, so far
as banking representation is concerned, Canada outclasses
the United States in London. The Canadian banks I
have named have creditable buildings in the heart of the
city, and it is probable that two or three of these banks
possess an influence or importance in London superior
to that of any bank in the United States.

277

'■^M

« ;

•'I

III

XVI

THE TREASURY'S BANKING BUSINESS

i r

The Functions op thk Siu-Treasuries

i I.

■ ' f.

IT will be well, at this point, to deal with the relations
of the national Government with the banks, and to
discuss th question of the treasury's banking operations.
I am aware of three diffef^ nt methods of conducting gov-
ernmental banking business.

First, there is the method in vogue in the United States
wherein the Government, through the several sub-
treasuries, retains the custody of a large part of its own
cash and acts largely as its own banker. It also selects
a large number of banks to act as depositories, but exacts
specific security for each deposit of national funds which
it confides to the banks. In the past it has happened
frequently enough that heavy collections of reven' " and
the sequestration of the funds in the treasury vaults
operated to distress commercial and other borrowers very
considerably, through causing stringency in the money
markets. This distress the treasury ofRcials have en-
deavored to alleviate through increasing the deposits of
Government funds in banks. For governmental disburse-
ments checks are drawn on the sub-treasuries, and every
day the sub-treasuries and banks exchange items, differ-
ences being settled in specie or legals. As the system is
familiar to banking and financial readers, it is not neces-
sary to describe the functions of the sub-treasuries in
detail.

278

lit!

THE TREASURY'S BANKING BUSINESS

The Medium op a Central Bank

Secondly, there is the method in vogue among the prin-
cipal European nations which is briefly to commit the
governmental ba king business to a central brnk. As
the several countries follow somewhat different methods,
I shall sketch the outlines of the scheme of the relations
between the Government and the central bank as exist-
ing in England, France, and Germany. In England the
Bank of England is banker for the Government. The
original capital of the bank was invested altogether in
advances to the British Government. In return for this,
and for its management of the public debt, the bank was
given certain valuable privileges, the most important of
which is the practical nionopoly of note issue in England
and Wales. Mr. Edward G. Lowry, in his Foreign Banks
and Financial Systems, gives the following description
of the specific services it performs in connection with the
management of the national debt:

"(i) The entire conduct of all operations incidental
to any issue of stock; (2) the keeping of the stock-ledgers
and transfer-books relating to inscribed stock; (3) the
issue of stock certificates to bearer; (4) the preparation
ap ' payment of dividends on stock, and the payment of
ci -certificate coupons; (5) the issue and payment of
tfv ury bills and exchequer bonds; and (6) as depository
of the public funds it keeps the banking accounts of the
various Government departments, receiving money, pay-
ing drafts, and holding securities, as in the case of ordinary
banking accounts.

" It facilitates the transmission of revenue moneys from
the provinces and acts as the med' -m for the issue of gold
and silver coin, and for the witudrawal of light coin from
circulation. It also grants temporary advances to the
Government in accordance with regulations sanctioned
by Parliament."

379

a 'f

A RATIONAL BANKING SYSTEM
The B'Nk op England

..;;

i t

I f i:

iiilrl

The stock of the Bank of England is owned by ten
thousand shareholders. The shares arc of the par value
of ;Cioo, and a holding of five shares is necessary to enable
a shareholder to vote. But he cannot have more than
one vote, no matter how much stock he acquires. So
there is no danger of a restless and ambitious financial
clique obtaining control of the Bank of England. It is
said that while its handling of Government business con-
stituted its most important function in its early days,
that duty is now relatively less important than its func-
tions of banker to other banks and custodian of the
national gold reserves. The British Government has no
ownership of the bank's stock, and it does not exercise
any control or supervision over its operations. Neither
docs the Government force the bank to divide its profit
with the state.

The Bank op France

The Bank of France has thirty thousand sharehoUers.
Its main function is to act as banker for the French Gov-
ernment and for other banks, but it also deals directly
with the public at all its branches, accepting deposits and
discounting bills for every one who has an account with
it. Although the Government has no ownership of the
bank's stock, it keeps in its hands the appointment of
the governor and the two sub-governors. Also the Gov-
ernment choof.es the names of the managers of the
brancnes fron: lists submitted by the governor of the
bank. Mr. Lc wry thus describes its functions as banker
to the Gov!'~ . nt :

"The bank acts without remuneration as the cashier
of the treasury, whose accountants can all pay in or
draw upon the account of the treasury in all the estab-
lishments of the Bank of France, the latter making, with-

289

THE TREASURY'S BANKING DUSINKSS

out charge, the necessary transicrs in order to central-
ize all these operations for the account of the treasury
in Paris. In 1897 the bank was obliged, in addition,
to assume all the expenses of transportation neccs*
sary to furnish the country with the different kinds
of coin, to furnish the necessary serv'ce for the issue
of treasury bills, and to pay the iupons of pub-
lic securities at the same time a. the Government
caisses. All these services are ren .ed by the bank
without remuneration. The French Treasury does not
have a deposit in any other bank than the Bank of
France."

Although the '"ink is not paid directly by the Govern-
ment for its sei V xes, it gives them, as everybody knows,
as the price of the Government deposits and the monopoly
of note issue it enjoys.

The Bank op Germany

The Bank of Germany also is privately owned, the
shares being distributed, like those of the Bank of Eng-
land and the Bank of France, in small lots. Regarding
its control and management, Mr. Lowry says: "The Gov-
ernment owns no shares. Tli. Tianageme- • is so con-
stituted that the Government has actual a. final con-
trol."

Regarding the disposition of the ;^ '•ohts, Mr. Lowry's
pamphlet says: "The profits of the hr.reholders in the
Reichsbank are severely ;, i!<-,ed. Aicr 3^ per cent, is
paid to them, the Govemuient recei>-es three-fourths of
the net earnings. As its share of the profits of the Reichs-
bank the Gennan Government received in igo; some-
thing over $8,500,000. As the Reichsbank, though pri-
vately owned, is under the final control of the Chancdlor
of the Empire, it inevitably enjoys close fiscal relations
with the Government. It is the sole depository of Im-
perial Government moneys, and all Government ex-

281

::i|

in q

A RATIONAL BANKING SYSTEM

penditures or interest on the public debt are made
through it. This service is rendered without direct
compensation."

However, it is the case that the Reichsbank has a prac-
tical monopoly of note *ssue in Germany, and in that
manner it is supposed to get some recompense for its
services to the state.

The Central Bank's Compensation

Reviewing these three systems, it is to be noticed that
in all three cases the Government has placed upon the
central bank the duty of handling the national finances.
Not one of the governments referred to issues notes to
serve as currency, and therefore none of them is obliged
to carry a specie reserve against note issues. I wish to
draw attention especially to the tendency exhibited by
these principal European nations to exact the perform-
ance of onerous or important services from the central
banks, and either to abstain from reimbursing the banks
or to compensate them through conferring upon them
some privilege or advantage not enjoyed by other banks
in the same country. The banks are expected to place
their resources freely at the Government service. The
system is undoubtedly beneficial to Government finance.
It has been of great value in assisting those European
nations to finance wars and large military and naval
expenditures. And there is no doubt that the United
States Government, by creating a central bank, might
facilitate issues of its bonds, and perhaps it might, like
the German Government, force a share of the profits
made by the central bank into its own coffers. But it
appears to me that there should be other considerations
taken into the account. The convenience of the Govern-
ment is not the only thing to be kept in mind. A broad
and statesmanlike view will take into account the effect
of such an arrangement as this European system of state

282

THE TREASURY'S BANKING BUSINESS

banks upon the general business of the people constituting
the several nations.

It may be considered good finance to force a bank of
this kind to perform services for the state without re-
muneration. But when the root of the matter is reached
the fact is that the exaction of the unremunerated service
constitutes a tax laid upon the borrowers of the bank
throughout the whole land. And when the bank is com-
pensated through giving it a special privilege, such as a
monopoly of note issue, I consider that the harmful effect
is more important. A monopoly of that kind cannot but
have a restrictive influence upon the usefulness of the
banking institutions which are outside the monopoly.
I have already indicated how such a monopoly conferred
upon a central bank in the United States would tend to
deprive small places of banking facilities which they
would otherwise have. It may be that in each of those
European countries the central bank is an absolute neces-
sity for Government finance; but it is doubtful whether
the United States Government is in the same need of its
services. But it is time to consider the third method of
governmental handling of its banking business.

:»
1

,if

The Canadian Treasury's System

The third method is that whereunder the Government
has to deal with a number of large branch banks, each
with a system of offices admirably situated for collecting
the national revenues and carrying on the banking busi-
ness of the treasury. In this case the banks are paid for
their services according to the value of the work done by
them. There is no monopoly, of note issue or anything
else, given to a favored institution; the banks are treated
as equals; when the revenue is in process of collection it
docs not happen that a large mass of funds is transferred
from the commercial banks to a Government vault or to
a central bank; the funds are simply transferred from one
19 283

A RATIONAL BANKING SYSTEM

commercial bank to another, and no matter where they
lie they are available for use in discounting the paper of
the general public. This is the system that has been
worked out naturally in Canada, and I propose to sketch
the outlines of such a system for the United States (as-
suming that branch banks will ultimately be adopted)
that would obviate the necessity or desirability of a
central bank and of the sub-treasury banking opera-
tions.

Revenue Collections Occasion No Disturbance

Perhaps it will be objected that the Canadian Govern-
ment's financial transactions are of trifling consequence
when compared with the national finances of the United
States, England, France, or Germany; and that a de-
scription of the smooth working of the Canadian system
would not constitute proof or evidence that the same
system would work satisfactorily when applied to such a
large aggregate of transactions as pass through the United
States Treasury. There may appear to be force in this
objection when it is remembered that the gross revenue
of the Dominion Treasury in the fiscal year ending March
31, 1910, was but $100,000,000, which is a very small
sum compared vnth the annual revenue of any one of the
other three countries mentioned. However, there is no
reason to suppose that in the future the Canadian system
will work less smoothly and easily than it at present works.
I have no hesitation in expressing the opinion that when
the Dominion's revenue is five or ten times as large as the
$100,000,000 of the fiscal year just closed the collection
and disbursement of the Government funds will proceed
nicely and easily. To-day there is no 1 irt ot the financial
machinery subject to noticeable pn ssure or friction.
There is no class of borrowers in Canada who concern
themselves in the slightest degree about the matter of
the Government's balances in the banks. In fact,

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THE TREASURY'S BANKING BUSINESS

neither the collection nor the disbursement of the revenues
is ever mentioned in the press as a factor bearing on the
monetary situation in Canada. A system which does its
work as applied to a revenue of $100,000,000 in such a
manner that the business interests take no notice at all
of its workings is surely efficient; and I leave it to my
readers to decide, after I have explained a few of the de-
tails, whether or not it is susceptible of being applied
\.xth good results to the much larger transactions and
totals of the United States.

1 '

The Government's Fiscal Agents

I have just remarked that in their dealings with the
Government the banks are on an equal footing. That
statement requires to be modified. For in London the
Bank of Montreal is the fiscal agent of the Dominion of
Canada. The bank handles the various issues of Govern-
ment bonds, pays the interest on the public debt held
abroad, and generally gives its services as fiscal agent.
As compensation for this work the Government pays a
cash commission — whatever it and the bank agree upon
as being reasonable. The Government does not hamper
and hinder the operations of the other banks by giving
the Bank of Montreal special privileges or by giving it
monopolies.

That is the arrangement in London. In Canada also
the Bank of Montreal is the chief fiscal agent of the Gov-
ernment. The revenues find their way to the credit of
the Government accounts in that bank, and the ex-
penditures are made by means of checks drawn by the
different Government departments upon the bank. But
all the important banks assist in the collection of the
revenue; all assist in its disbursement; and all are given
a share of the Government's deposits as recompense for
their services.

The balances carried by the Government are, however,

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not large. In the bank statement for February 28, 1910,
for example, the total is $8,524,657, and this is divided
among twenty-two banks. The balances, apart from
those carried in the Bank of Montreal, range from $9,986
to $348,012. The Bank of Montreal, which does the
major part oi the work, has $7,040,608 of Government
funds. Rarely does the total of the Dominion Govern-
ment's deposits in Canada amount to so much as
$15,000,000.

The Disbursements

The expenditures are made by check on the Bank of
Montreal, Ottawa. All chartered bank branches are re-
quired by law to pay checks of the Dominion Govern-
ment at par. So the collection of the revenue merely
means the transfer, in the books of the commercial banks,
of funds from the accounts of individuals and companies
to that of the Government; and the disbursement of
the Government moneys means the transfer of the funds
back again from the Government to the individuals and
companies.

There is, however, one class of Government disburse-
ment which removes the funds from the reach of the
private borrower. It is composed of the payments re-
mitted abroad for interest on I he Canadian debt held in
Europe, and for other obligations.

The Canadian Government does not exact specific se-
curity for moneys deposited by it in banks, but it is pro-
tected by the clause in the Bank Act which stipulates
that the amounts due by a failed bank to the Ottawa
treasury shall rank immediately after its note issues and
ahead of all other obligations.

The Banks as Fiscal Agents

I am convinced that if branch banks had developed in
the United States in the same manner as in Canada the

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THE TREASURY'S BANKING BUSINESS

relations of the treasury with the banking institutions
would have shaped themselves very much the same on
both sides of the boundary line. Then the banks would
have had the credit and the machinery for undertaking
the banking business oi the treasury and, if no central
bank existed, they would gradually hive assumed the
treasury's functions, because they could perform them so
much more satisfactorily. It would be an easy matter
to arrange a plan under which the whole of the revenues
would be paid directly into the banks by the collectors
and by parties paying the taxes. And all Government
disbursements might be made by means of checks on the
various depositories. The severa' 'epository banks would
insti-wu their branch offices to a ;^pt and give receipts
for all moneys deposited for Government account, whether
pertaining to customs, excise, post-office, or other revenue.
In return for their services in receiving the revenue, trans-
mitting the funds to points desired by the treasury, and
paying treasury checks at all branches, the barks would
be entitle-^ to have Government balances up to a reason-
able amount free of interest.

Bond Security for Treasury Balances

Under the present system the depositories are required
to lodge Government bonds as security for treasury
balances held by them. When the treasury deposits
$100,000 in a national bank, the bank must deliver thj
same amount in Government bonds as security for the
deposit. Tnus there is necessitated the purchase of bonds
at least equal in value to the amount of the deposit; and
actually the bank gains no new funds whatever, but it
makes a profit because it pays no interest, or perhap;'
I per cent., on the treasury balance which it holds, while
the bonds yield 2 per cent, or more. This stutement
holds notwithstanding the fact that it sometimes happens
that a bank, on receiving a new Government deposit, al-

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A RATIONAL BANKING SYSTEM

ready had on hand sufficient bonds of the type required
as security therefor. In all probability the bonds will
have been purchased beforehand with this end ir view.
Or, if they were purchased for another purpose altogether,
it may be that, on their being diverted for use as pledges
against Government deposits, other bonds are to be pur-
chased to replace them. Oi coMrse, it naight happen that
a bank purchased a certain ainount of Government bonds
solely for investment, without reference to the possibility
of its taking oot note circulation or being allotted treasury
moneys on deposit. But it is hardly likely, if there was
no thought of the note circulation or of treasurj- balances,
that bonds bearing so low an i terest rate as United States
Government bonds would be selected for investment, ex-
cept by some ultraconservative institutions.

I ■:

The United States Treasury and Branch Banks

If, on the other hand, it were possible or practicable
for the treasury to deposit its revenues and carry its bal-
ances in the banks without requiring them to lodge specific
security of any kind, then it would probably come about
that the collection and disbursement of the national
revenue would proceed without occasioning much, if any,
notice from the borrowing classes or the general public.
If the Government were given a preference over other
depositors it would be in much the same position, as re-
gards security, as at present; and the position of the
ordinary depositors would not be sensibly altered for the
w rse, since the exaction of the bond security is a prefer-
ence in effect.

Here again the branch banks would pro^•e decidedly
beneficial. Suppose there were banks of that character,
and the treasury had an arrangement with se veral of the
more important banks in each section of the country to
receive all revenues and disburse all payments, no bond
or specific security other than the preferential standing

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THE TREASURY'S BANKING BUSINESS

being required, the mercantile ind market interests would
hardly be aware of the treasury operations at all. Both
the collection of the revenue and the disbursements of
the treasury would consist nearly altogether of transfers
on the books of the banks.

It would happen frequently, when an importer ne-
gotiated with his bank for a lo^n to pay customs duties
on a consignment from abroac'., that the proceeds of the
loan would be placed to the credit of the Government's
account, and that no cash payment was necessary. And
when the Government made ii heavy payment to a ship-
building concern, or to anot. er creditor, the transaction
might represent merely a transfer from the Government's
balance to that of the ship-builder's. This transfer might
be made in the books of one pri idpal branch, or it might
be from one branch to another branch of the same bank.

Collection and Disbursement op the Revenue

These would be special cases. In most instances reve-
nue collections would consist of transfc s from the ac-
counts ci customc. 5 of one bank to the credit of the
Government in another; and treasury disbursements
would consist largely of transfers from the Government
account in one bfnk to the accounts of customers of other
banks. No matter where the funds lay they would, un-
til they were sent out of the country, be in the keeping
of commercial banks and available for commercial boi-
rowers.

Suppose the Government's balances rose to $220,000,000,
as they did during the 1Q07 panic, and suppose they were
divided among fifty great institutions. That would give
an average of $4,400,000 per bank; and probably in most
cases the Government deposits would represent less than
5 per cent, of the bank's total deposits. If a bank with
$100,000,000 of deposits holds Government deposits of
$4,000,000 or $5,000,000 a preference or priority given

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A RATIONAL BANKING SYSTEM

to the treasury balances would not weaken tht -ecurity
of the ordinary deposits to an appreciable extent.

At present the payment of large sums into the treasitry
often means the taking away of credits enjoyed by mer-
cantile, manufacturing, and producing interests. If there
were branch banks and the practice changed, as I have
explained, the necessity for that would pass; the Govern-
ment's operations would be passed through an immense
clearing-house comprising the whole country. There
would be a large number of transactions wherein scarcely
any cash need change hands, owing to entries offsetting
eacn other.

In regard to the ability of the branch banks to relin-
quish the Government balances when required, there need
be little apprehension. Each bank would quickly arrive
at a perfect understanding of the working of the Govern-
ment account carried by it. It would know in T\'iat
manner the funds might be used so as to yield some profit
and yet be available when called for.

The Comptroller of the Currency

At this point I may with propriety refer again to the
change which the institution of branch banks would
effect in the relations of the banks with the Comptroller
of the Currency. The Comptroller now has seven +hou-
sand national banks to supervise. He must obtain state-
ments from them; he must use his best endeavors to dis-
cover whether they observe the laws; and he must take
the responsibility of closing weak banks or of letting them
continue in operation. Also he is conscious that the
banks under his supervision comprise less than one-
third of the banking institutions of the country; in other
words, the bulk of the banking business of the United
States lies outside his influence or jurisdiction.

The collection, tabulation, and arrangement of the de-
tails submitted by seven thousand separate units involve

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THE TREASURY'S BANKING BUSINESS

a huge amount of labor; and the task grows ever more
formidable with the steady growth of the number of
national banks. Then, it always happens that there are
a considerable number of delinquents. Some banks oflend
against a certain rule ; others offend against a different rule ;
and others again go contrary to something else that the law
stipulates. It would hardly be practicable to invoke the
legal penalties against all violators of sound laws or sound
practices. They are too numerous. It would be differ-
ent if the Comptroller might concentrate his attention
upon a few offenders. In this respect the inauguration
of branch banks would greatly simplify the relations of
the Comptroller with the banks. Instead of being able
to give but a microscopic share of his attention to the
affairs of each banking institution, he could, if he had
only one-thirtieth of the present number to deal with,
devote a fair share of attention to each one. In all prob-
ability the delinquents would be few in number; and that
being so, it would be possible to deal with them in a more
satisfactory manner.

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Reduction :n the Number op Banks

Suppose there were in process a steady transformation
of single-office banks into branch banks. Each state-
ment day would see a decrease in the number of banks
reporting to Washington; but the statements received
would cover an increasing proportion of the banking busi-
ness of the whole country. It might be twenty-five or
thirty years before the process was in anywise complete.
While it was under way American banking and finance
would be growing more stable and satisfactory. When
the transformation was completed the responsibility for
collecting statistics from the thousands of branch offices,
and for transmitting the consolidated returns to the
Comptroller, would rest with the banking executives in
the centres of the different geographical sections. These

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A RATIONAL BANKING SYSTEM

executives would have much better means than the
Comptroller possesses oi disciplining delinquent officers.
They could easily arrange matters so that returns from
all offices were forthcoming with reasonable promptness
and certainty. So far as observance of the laws is con-
cerned, the rules and regulations of each bank, governing
all its branches, would necessarily be based on the law
of the land.

The returns published by the Comptroller would derive
< new significance.

'ii

The Banking Position by Geographical Divisions

For the general public the five abstracts published each
year contain only totals and generalizations; they give
no opportunity of stud3ring the progress and position
of the individual banks. The statements, however, show
in a measure the banking development of the different
cities, states, and sections. But they are imperfect, even
for this purpose, since they contain nothing but the
national bank figures.

If the country were served by branch banks, with the
offices of each large institution extending into several
sections or divisions, it perhaps would not be feasible to
show the development of the banking figures of the re-
spective geographical divisions or of the cities and towns.
The Government could, of course, require each bank to
publish the balance sheet of each branch; and in that
way the loans and deposits in the several districts could
be arrived at. But such a requirement would be calcu-
lated to annoy and distress the banks. It would mecn
tl'at each institution would be compelled to provide, for
the benefit of its competitors, a list of the places where it
had good and profitable business. It is very likely that
the publication by any bank of the fact that it had a
large line of deposits, or discounts, or both, at a certain
point, would result in inducing several new competitors

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THE TREASURVS BANKING BUSINESS

to appear at that point; and they would, of course, take
active measures to undermine its position. The risk of
attracting for.nidable opposition through publication by
a bank of the details of its business at particular points
would be much greater than the risk incurred at present
by a single-office bank in publishing its figures.

It is a much more difficult and laborious matter to
organize a new bank than it is to merely establish a new
branch of an existing bank. The process whereby a large
bank establishes an orfice in a territory or district where
another bank has an extensive and profitable business is
simple and easy. An order from tlie general manager cov-
ering the renting of premises, the sending of stationery and
other supplies, and the appointment of the staff is all that
is required. If the branch proved unprofitable it would be
withdrawn, and the stockholders of the parent institution
would not notice the loss. But if the newly created single-
office bank should fail to meet the expectations of its
founders it might be necessary to close it, or liqu-'date it,
or sell it to another concern — in any case the stockholders
would experience a disagreeable loss.

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XVII

BRANCH BANKS AND BUSINESS MORALITY

A Comparison of Commbrcial Papbr

IN his address to the Missouri Bankers' Association,
from which I have already quoted, Dr. Joseph French
Johnson made the following admission (see the Financier,
New York, May 17, 1909): "Now the quality of bankers'
credit in Canada, I am sorry to say, is a little better than
it is in the United States. I don't know about Missouri,
but in those parts of the United States with which I am
familiar I think the quality of our discounts, on account
of the system of granting discounts, is poorer than i..
Canada. In Canada the business man deals w-..h one
bank. He gets a line of credit at the beginning of the
year. He is told that he may have $20,000, $30,000,
$40,000, $100,000, or whatever his needs happen to be,
depending, of course, upon the bank's opinion of his
credit. He knows what he can rely upon, but he must
not sell paper in the street, he must not borrow from any-
body else, but lean absolutely on his bank, and they take
care of him.

" Then the law gives each bank grants which make it
remarkably easy for the bank to protect itself. Section
88 of the Bank Act has all the effect of a bill of sale. The
bank practically owns the wholesaler's stock or the manu-
facturer's stock if it so chooses. Whereas in the United
States we have smaller banks; a great many business
men borrow from different banks, sell their paper on the
street, so that no one banker is ever sure of the quality
of the assets in his portfolio."

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BRANCH BANKS AND BUSINESS MORALITY

Before proceeding to carry out the main purpose of
this chapter it will be well to deal with the remark in the
second paragraph referring to the extensive powers of
sale and ownership possessed by the banks over the goods
of certain of their debtors. It is indeed true that the
Parliament of Canada has granted large powers of this
kind to the banking institutions, powers which have a
considerable effect in protecting them from losses from
bad debts.

For the Benefit of Indtjstry and Trade

Doubtless it will seem to some readers as if legislation
of this kind had been enacted solely in the interest of the
banks. They probably will believe that the banks in-
itiated it in order to save themselves from making losses.
That idea would not be correct. The Parliament of
Canada would hardly have consented to confer large
powers of this kind upon the banks merely to enable them
to earn better net profits. One ot the . min ends held in
view by the parliamentary managers who were responsible
for these clauses was to create a set of conditions under
which the banks would be impelled to place tlieir resources
freely at the disposal of agriculture, commer-.;, and in-
dustry. They considered that the best way t Jo so was
to provide laws which would enable the banks, with
safety and comfort, to employ their rcsour'^es in loans and
advances to producers, merchants, and manufacturers.
The powers were granted quite as much in the interest of
trade and commerce as i: the interest of banking. It
might be said that tho whole policy of the Dominion in
regard to banking has latterly been framed on broad
statesmanlike lines. Parliament has abstained from bind-
ing or fettering the banks unduly, and from diverting or
(hrecting their investments into particular securities or
loans.

395

A RATIONAL BANKING SYSTEM

Influence of Banking Systems Upon Commercial

Morality

But it is time to discuss the matter of the influence
exerted by different systems of banking upon the com-
mercial morality of the people served by them. Doctor
Johnson says he thinks the discounted paper in Canada
is a little better in quality than the paper in the United
States, partly because of the system of granting discounts
and partly because of the extensive powers possessed by
the banks over the goods of their debtors.

Clearly there is involved here the question as to whether
commercial morality in Canada is higher or lower than in
the United States. Are the debtors of the banks north
of the international boundary more honorable, more
punctilious about meeting their engagements than are
bank debtors south of it? .

To this cu-stion I do not propose to give a aefmite
answer. It will be sufficient to show in what manner
certain characteristics of the banking systems in vogue
respectively in the United States and Canada influence the
business morals of the people.

Effect op a Bad Example

In recounting the things which bear upon the business
morality of banking debtors in the United States I would
assign a prominent place to the frequency with which
the banking institutions have generally suspended cash
payments. There is a striking contrast in this respect
between the records of the two countries. It is novv over
seventy years since there has been a general suspension of
specie payments by the Canadian banks. The United
States record is five times in fifty years. The thing has
occurred twice in the past eighteen years. I have shown
that these numerous suspensions cannot have been duo
to any other cause than the single-office banking system.

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KKANCH BANKS AND BUSINESS MORALITY

In these suspensions, as in such suspensions wherever
they occur, the banks refused, or were unable, to pay their
just debts in the form prescribed by law and by custom or
usage. After regularly taking deposits of cash or its
equivalent from their customers imder a positive con-
tract to repay them in that form on demand, they, on
several successive occasions, repudiated that contract.
On the last two occasions they offered to their creditors
depreciated certified checks or clearing-house certificates
instead of the cash to which the creditors were entitled.

Now it must be that even a single instance of general
suspension of banking payments will exert a profound
effect upon the morals of ths debtor classes of the country
in which it occurs. The effect must be vastly increased
when the instances of suspension are multiplied. It can
have none other than a debasing influence upon the char-
acter of the people. If the banks, to which everybody
looks for examples of probity and faithfulness, repudiate
whenever they find themselves in difficulties, why should
ordinary debtors be expected to do otherwise? When
circumstances make it difficult for him to meet his note
at the bank, the debtor, you may be sure, has his creditor's
numerous lapses in mind; and if he is not strongly en-
dowed with good principles he is impelled toward devious
ways. Instead of holding his mind firmly to the necessity
of meeting his bond in the agreed-upon manner he casts
about for means of evading his responsibility.

On the other hand, an unbroken and honorable record
for due payment of its obligations materially strengthens
the position of a bank in relation to its borrowing cus-
tomers. Its debtors when pressed can never throw in its
teeth the reproach, " You suspended payments to your de-
positors and the law did nothing to you."

Thus this circumstance imparts a certain superiority to
the discounted paper. The bank has a moral advantage
in enforcing collections over another bank which has
suspended several times in the memory of its customers,

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Blacklisting the Cheats and Scoundrels

In the chapter on defalcations and frauds I explained
how branch banking would have a tendency to lessen
them through subjecting all the banking offices in every
part of the land to uniform systems of rules and regula-
tions and to a continuous supervision and examination
more effective and thorough than the present system. It
will, perhaps, be admitted that the instances of banking
fraud and defalcation, which are constantly coming to
light, besides have a tendency to lower the credit of the
banks in the eyes of the depositors, tend to weaken the
moral fibr.' of debtors generally. Suspension of cash
payments is one form in which the bankers have set a
bad example to the rest of the community. Another
form of bad example is seen in the frequency with which
defalcations occur.

Next to be considered is the work done by the banks
in the two countries in educating their customers. Under
the branch system a powerful machine works with uni-
form pressure upon the borrowing community in every
part of the land. A faithless borrower does not escape
his creditor bank by moving to another place, for the
chances are there will be another branch in his new
locality, and he will not be suffered to rest in peace.
Direct pressure extends everywhere, and he is made to
feel that the arm of the bank reaches into all comers of
the land, and that honesty is the best policy. Of course,
a cheat or a scoundrel is blacklisted at all branches of the
bank which he has defrauded. The bank not only re-
fuses to deal with him directly, but it warns its customers
against him also when it perceives evidences of his deal-
ing with them. It may happen that one bad transaction
will forever close the doors of every chartered bank in the
country against the offender. When they have been de-
frauded large branch banks press the perpetrator of the
fraud with the whole machinery of the law as a matter

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BRANCH BANKS AND BUSINESS MORALITY

of policy. They do this more regularly and more rigor-
ously than small local banks. Although the American
Bankers' Association follows the practice of regularly pur-
suing and prosecuting burglars, forgers, and swindlers,
it does not take such an active part in punishing fraudu-
lent borrowers.

The Asset of a Good Character

All this has its effect on business morality. But per-
haps the factor bearing most strongly upon this issue is
the machinery by which the discounting business is car-
ried on. Take a small trader or storekeeper in Canada
who borrows $3,000 or $4,000 on his customers' trade-
bills and on endorsed accommodation notes. If he is
careful of his credit at the bank, and at the same time
successful with his business, his account will furnish a
continuous record of a favorable nature. It is not alone
upon the officers of the local branch that the good
impression is made. The executive officers are also im-
pressed, and the impression thus made constitutes for
him a valuable asset. It ensures him the consistent sup-
port of one of the strong financial organizations of the
country, and will stand him in good stead wherever he
goes in the Dominion.

If, on the contrary, he indulges in si:^.'p practice, and
by means of that inflicts a loss of $500 01 $1,000 upon the
local branch, the fact will be inscribed upon the records
at the branch and at the head office. Even if the branch
manager, because of his shame and humiliation n.t being
outwitted, feels disposed to pocket the loss and say noth-
ing about it, the head office will probably insist upon a
rigorous prosecution if the delinquent debtor has broken
the law. It does so with the purpose of impressing upon
the people of the community the fact that the bank can-
not be defrauded with impunity at any of its branches.
Every such prosecution, every instance in which the per-
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A RATIONAL BANKING SYSTEM

pettatot of a fraud is tracked down and punished, tends
to improve the business morality and to improve the
quality of the paper in the bill cases of the banks.

TttE Borrower and His Bank

Every liability account of any consequence carried by
the Canadian branch bank is watched by the h.ad ofuce
experts as well as by the branch manager. Though the
brdnch managei^ are trained men, possessing A wider
knowledge of banking risks than the men in charge of
many of the smaller banks in the United States, they are
inferior to the general managers at the head offices in the
matter of judging credits. At the branches attention is
given largely to methods of increasing the volume of
business and the profits, while at the head offices a ^.rfat
deal more consideration is given to the prevention of
losser> and the financing of borrowers' accounts in such
manner as to make them safe for the bank and a means
of ensuring solid and lasting prosperity for the borrowers.

Responsibility Undertaken by Branch Banks

I explained how the banks conduct a careful examina-
tion of the affairs of each business man or firm applying
to them for credits. The customer must submit full and
satisfactory statements of his position and affairs. The
bank will seek to verify the particulars furnished by the
applicant through inquiring about his record at the com-
mercial agencies if it cannot satisfy itself by studying his
record at the bank. In considering applications much
importance is placed upon character. It is almost an
essential that a man applying for a credit shall have a
good character. There may be cases where a bank can
lend money to a rogue or a scoundrel without danger of
loss. It may, in case of each loan, demand specific se-
curity that will protect it without reference to the bor-

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BRANCH BANKS AND BUSINESS MORALITY

rower. But as a rule these men are avoided if possible.
There is a strong disposition to extend credits and faci'i-
ties to parties bearing good reputations and possessed of
qualities likely to enable them to succeed in business even
when they have very small capital.

When the credit is granted it will be for a certain sum,
believed to be sufficient for the borrower's requirements;
and provided he continues worthy of his credit, the bank
undertakes a measure of responsibility for seeing its cus-
tomer through the season or year.

;

How THE Bank Watches Its Borrower

Undertaking such responsibility the bank assumes the
right to keep the closest watch upon the customer's doings.
It will observe his habits to learn whether he attends
properly to his business and whether he maintains so-
briety. He is given to understand that he must not
borrow elsewhere, and that the bank prefers to have all
his receipts deposited in his account, and his payments or
disbursements made by check. If this is done the local
branch manager has a comprehensive view of the cus-
tomer's business. He knows the volume of sales, where
the payments are made, and what they are made for.

The credit authorized by head office will be accom-
panied by exact instructions as to the security to be
given.

Dishonesty Endang rs the Credit

If there are signs that on these customers is not
honest, or if the record of his u .iigs contains indications
of dubious conduct, the bank's inspector may advise the
general manager to order the account closed. The branch
manager may, likely enough, resist the order; and if he
can satisfy the general manager, in his correspondence or
by means of a visit to head office, that the bank can with
safety continue the loan, it may be carried. The point is

301

A RATIONAL BANKING SYSTEM

that on the first appearance of dishonesty or bad moral
conduct on the part of the borrower the head office will
begin to press for the liquidation of the loan, while the
local banker may be desirous of continuing it. It is ob-
vious how in this way the branc system tends to pro-
mote honesty and morality in a more effective manner
than the local system. It often happens that the local
officers are averse to taking harsh measures against
parties in their own town, even when it is clear that they
should be proceeded against or punished. Disinclination
to cut down the volume of their business, and dislike of
taking action that might stir up local sentiment, operate
to induce them to hold their hand. But the expert
bankers at the head offices in the large cities are not de-
terred by those considerations.

Business Men Under Expert Observation

It is the doubtful accounts and the accounts which may
become doubtful that occasion the bulk of the correspond-
ence between the head office and the branches. Letter after
letter is dispatched to the branch, asking explanations,
taking exceptions to particular features of an account,
and ordering changes in methods or securities. In short,
every precaution that suggests itself to a skilled pro-
fessional mind is taken to prevent these customers from
inflicting loss upon the bank.

Now these are the people among whom the immoral
business men are chiefly found. And thus it is the case
that under a good system of branch banks the whole class
of them, in every part of the country, is brought under
the special observation of the best banking talent and »?
subjected at nearly every village, town, and city to the
strictest rules and the most expert control. In dealing
with defalcations and frauds by bankers it was explained
that while bankers in the United States and in Canada
might be by nature equal in point of morality, the exist-

302

■i

BRANCH BANKS AND BUSINESS MORALITY

ence of the branch system in the latter country makes it
much harder, as a rule, for a Canadian bank intent upon
fraud to accomplish his purpose. In the same way the
efficiency of the branch bank machinery, which places the
borrowings of all classes of the people under the control
of experts and ensures that each borrower shall borrow
only at his home bank, makes it more difficult for an im-
moral business man to defraud his bankers, and thus tends
to raise the tone of business morality.

Laxity in the Civil Laws

I concede here that the nature of the civil laws govern-
ing bank loans and investments has an important effect
upon the morality of business men. In any country when
debtors become involved in difficult circumstances many
of them will repudiate their obligations if the laws permit
them to do so. Any looseness in the laws which makes it
difficult for banks or other creditors to enforce collection
of their rightful claims, and prevents them from obtain-
ing satisfactory title or right to securities or goods form-
ing the basis of their loans, tends unmistakably toward
a low standard of business morality. Laxity of this kind
in the statutes also tends to make it more difficult for
worthy borrowers to secure the credits they need, and
tends to make interest rates generally higher. On the
other hand, wise legislation of the opposite character
enables banks and other lenders to supply credits liberally
to men of good character and ability, engaged in al-
most any kind of legitimate business; it also helps to
keep interest rates down.

«i

n
In

.' r

XVIII
CONCLUSION

A Comparison op Interest Rates

IN this, the concluding chapter, before proceeding to
stimmarize the various points of my argument, I shail
devote a few pages to the matter of the interest rates paid
by bank borrowers in the United States and Canada.
Taking the two countries, and considering how vastly the
former exceeds the latter in wealth and development,
ohe wotild expect that the rates of interest for commercial
borrowers would be much lower south of the international
boundary. Actually there is not a great deal of differ-
ence, and in many respects the conditions in Canada are
better for the borrowers.

In the United States there is a market for commercial
paper at New York, Chicago, Boston, and perhaps a
couple of other cities, in which paper can sometimes be
sold on the basis of very low rates of discount. The rates
quoted bear a more or less close relation to the rates pre-
vailing for time money in Wall Street. When money is
cheap in Wall Street the rates of interest on commercial
paper itl these city markets are less than those paid by
the best borrowers in Canada. But it is only the largest
and best-known concerns which can borrow at those rates
in the United States. And at times — the fall of 1909 and
that of 1 9 10 are two recent examples — they must pay
6 per cent, and more, while the best mercantile borrowers
in Canada are paying 5^. I understand that the im-
portant borrowers in Buffalo and other cities of its class,

304

CONCLUSION

and in the smaller cities, arc accustomed to go to New
York or Chicago for their accommodation. They could
not borrow from the banks in their home cities for less
than 6 per cent, or thereabouts.

Loans Based Upon the Borrower's Deposit

Also, it is well known that in New York and in all cities
the banks very generally limit the credit which they will
give a customer to an amount five times as large as his
free balance on deposit. Putting it in another way, they
insist that the borrower shall leave one -fifth of his
loan or advance on deposit with the bank free of in-
terest.

This, of course, amounts to charging a higher rate of
interest than that named in the agreement. A customer
who required $8,000 would be obliged to give his note for
$10,000 and leave $2,000 at his credit in the bank. If the
rate of discount was 6 per cent, the actual cost would be
$600 per year for the use of $8,000, or 7J per cent. This
fact should always be borne in mind whenever a com-
parison of interest rates in the United States and Canada
is instituted. The Canadian banks are not able to en-
force any such terms upon their borrowers. The bankers
would be glad indeed if they could do so. But the com-
petiMon is so keen in every part of the country that many
borrowers get advances in the form of overdrafts, and
when that is the case the borrower only pays for the sum
he actually uses. Thus it happens that a nominal rate
of 6 per cent, charged by a bank in an American city
quite often means 7 or 7 J because of this stipulation re-
garding the free balance; while a rate of 6 per cent, in
Canada means in most cases 6 and no more. It is a fact
that in almost every town and city in Canada, and in
some very small villages in the East and in the West,
the few Ai borrowers get their accommodation at 6,
if not sj.

30s

i <

\ *«

A RATIONAL BANKING SYSTEM
A Higher Deposit Rate and a Lower Discount Rate

;•;<

r.t

■i i

n §

And it should be remembered, further, that at every
banking office in the Dominion the banks stand ready to
accept savings and other time deposits from every one
at 3 per cent. In the United States there are plenty of
commercial banks which do not allow interest; and a
great many which do not allow more than a per cent. I
consider it likely that in the United States, especially in
the East, the commercial banks pay a less average rate
on their deposits than do the banks in Canada; and
taking them throughout the whole country, outside the
principal reserve centres, they charge their regular bor-
rowing customers a higher average actual rate for an ac-
commodation which is not so valuable as that extended
by the Canadian branch institutions. And where the
commercial banks pay a higher rate for their deposits
than the Canadian 3 per cent. — in some Western and
Southwestern states for example — the discount rates
actually charged are much higher than Canadian borrowers
in similar circumstances pay.

A moment's thought discovers that this is but a natu-
ral consequence of the difference between the banking
systems. It is one of the places where the more economi-
cal working of the branch system shows itself. Their
relatively cheaper cost of operation and their relatively
higher state of efficiency permit the branch banks to
pay more for deposits, to secure the depositor better, and
at the same time to charge less on discounts, and for the
lower rates to give an accommodation that is worth more
to the borrower.

'I'

Branch Banks the Rational Solution

There is a disposition on the part of some opponents of
the branch banks to regard them as being perhaps well
suited to the needs of a poor and thinly populated country

306

Ail

■

CONCLUSION

but not at all adapted for operation in a rich, populous
country hke the United States. This is not an a^^Sment
that a banking expert would use. for he would und!rand
clearly enough that the experience of the European na
tjons furnishes convincing evidence of the suit«bihty of
th nch bank machinery for handling large totals and

ZT^u""' «'"^"^ ^"'^"^^^ '^f '^'^' populatilrll
thf n2^^ Kf " ' °^ '■^*^*" ^'^^ "« "°t familiar with
the admirable manner in which the great branch banks
of Etirope perform their functions. I shall now rive
some genera reasons why it appears that branch banks

pTobLr''"''' ' "'""^ ^°^"^'°" °^ '"^^ banWng

I have already tried to show. I hope successfully that

here IS much misconception regarding the branch i^

stitutions in the minds of the bankers and of the publi^..

that the feare. commonly entertained, that branch banks

A.u J "® country are not founded upon reason-

extend n > "'^ .'' '^""''''^ ^^^* ^^^"^^ banks wouW
extend quite as effective a support to local industries as

asVt?srw'"bV"'^ ''"'/ T ^"pp'^- '' ^« --«"

th!. K u u ^ '"^^''^ °^ * ^""^ad and general survey

or theT >^'"«' "°"^^ ^°"^*'^"*« *h« national syslem

ni e y whh the h'"' '"'' *'^' ^'^^ "°"^^ harm':,niz^

Republir '"''' conditions prevailing i„ the

Transactions with the Politicians

actbn of1rA^7 convenient they would be for the trans-
he il^ r^ Government's financial business. In

iScaTlvL?/ •^'k''^*'^ government accounts should
hfre spect of t^ .^^ ^"^"'^"^ institutions commanding

lar J ?H u ''"^^ '^°""*'^' ^^1« and billing to make

arfv Itrr" .7^;" "«^«««ary. and strong enough to

carry the deposit funds of the states without pledging

307

Mi^

A RATIONAL BANKING SYSTEM

specific security therefor. For carrying the accounts of
municipalities also the branch banks would be very
suitable. Some of the most ilisagreeable and humiliating
scandals in American banking history have had their
origin in the tlealings of state and municipal politicians
with the local banks. These jwliticians, with their power
to dispose of large sums of state or city deposits, some-
times acquire a strong hold over certain of the local banks.
They will, perhaps, after they have been canvassed by the
officers of a bank in their constituency, give it a large
deposit, perhaps more than it is entitled to. The bank
may compensate them through lending them money on
inadequate security or through paying straight bribes of
cash, as in the case of the city of Pittsburg. In either
case the result is demoralizing and dangerous for the bank,
and unprofitable for the state or municipality concerned.
I venture to assert that small banks with purely local
boards are apt to be more susceptible to political pressure
of this kind than large branch banks would be. A great
institution with branches in every part of the Union, and
priding itself upon its good name, would not likely be
willing to dishonor itself for the balances or deposits of
any particular state or city. Neither w - ild its ofhi ers be
disposed to risk their stockholders' moneys in loans to
shady politicians for whom they entertained nothing but
contempt. Even a branch bank, the operations of which
were confined to a particular state, might be expected to
withstand political pressure better than a single-office
local bank, especially if its stockholding were scattered
through the state. It would be ridiculous to t,.^v that all
cal banks are susceptible to influence of this kind. Most
of them would treat these immoral propositions with the
scorn they deserve. But in my opinion it is fair to say
that in every state there will always be some local banks
willing to buy politicians, or to be bought by them.
Under the branch system the chances of that would be

lessened.

308

\l\

f'i

CONCLUSION
The Movement Toward Concentration

Next, consider the great railroad and industrial cor-
porations In no other country are they so large as in
the United States. Many of them have branch estabiisi"
ments in every section of the country, and some have estab-
hshments m a number of foreign lands. Surely it will be
admitted that large branch banks would constitute the
natural and proper means for transacting their business.
The wealthy railroad and industrial interests could
scarcely dominate or inf oce unduly the policy and
operations of banks such . . I have described in the pre-
cedir.g chapters. It has been remarked that in the mil-
road and industnal worid the tendency in recent years
has been steadily toward concentration of capital and
control. Notwithstanding that Congress and ma'nyof the
state legislatures have sought to prevent it by stringent
laws the concentration has gone forward almost irre-
sistibly. One reason it has done so is that capital can
work to be ter advantage when concentrated. If bank"
mg were allowed to develop naturally it would be tow-
ard concentration. As a matter of fact, the prohibition
or discouragement of bra-.cbes does not prevent concen-
tmtion of banking capital. It merely ensures that when
concentration takes place it shall be attended by resuUs
disagreeable and inconvenient for the general public

The Branch System Accepted in Commerce and
Industry

I have mentioned the fact that many of the great in-
dustrial concerns have bmnches in every part of the
United States. Also the great mercanSe or trad ng
corporations are establishing branches in all ^-recTion"
The agencies of the great life and fire insurance compan"es

nZf r h""''" V"' P^""* organizations Tin
mdustnal and mercantile life, and in some divisions of

309

M.'

A RATIONAL BANKING SYSTEM

3 t

financial life, the branch principle is accepted. People
are not disposed to argue that a branch factory, or a
branch store, or an insurance agency, is detrimental to
the public interest. I do not know of any business-
industrial, mercantile, or financial — in which branches
are so advantageous or so useful as they are in banking.
In banking the necessity for employing the services of
branches in other localities is constantly arising; and the
usefulness of the various units to each other, to the
parent organization, and to the localities they serve is
constantly in demonstration. To forbid them appears
to me somewhat like placing artificial barriers or hin-
drances in the way of the circulation of the blood of the
financial organism.

The Rights op the Borrowing Classes

In the course of the argument I have tried to show
that the two items which figure so prominently in the
discussion of banking reforms — the currency question
and the matter of panics — constitute only a part of the
problem. Any remedy which proposes merely to pro-
vide a suitable currency and to provide machinery to
enable the banks to go through a panic without dishonor-
ing themselves and the country is insufficient.

In every country it will be found that the borrowing
classes are always in the forefront in the matter of build-
ing and developing the national wealth and resources.
It is the borrowers who courageously risk their own funds
and undertake heavy responsibilities in order to better
their circumstances; and whenever they succeed in doing
so they have at the same time succeeded in building up
their country's resources. It is the army of borrowers
who have conducted and operated the industrial and mer-
cantile businesses that have built up the immense re-
sources of the United States. My contention is that in
any discussion of the banking question the claims of the

310

CONCLUSION

borrowing classes should get due consideration The
present banking system falls far short of giving them what
they have a ngh to expect; but. as they are not familiar
with the ber. nts enjoyed by borrowers in other countries
they do not gure proTiuner Ay in the present controversy!

/^iiicAPITUtATION OF PoiNTS

I think I have said enough to indicate that there are
very important interests in the United States which
would benefit materially from the institution of a system
of good branch banks with powers of issue and devoting
themselves to commercial banking. I may now recapitu-
ate the points which I have endeavored to bring out in
the course of the argument. Putting it briefly! if th^
single-office banks of the United States were trankormed
into branch banks one might expect that there would
ensue : ^^^^j-

f J"/" !?iP^°^ement in the record of defalcations and
frauds. Effective methods of checking and preventing
frauds would be put in force in all banking officlsand

i"pict'on."''°'''' '^ '" "P-*""^*^ 'y^'^^ °f -te"a1

2. A large reduction in the number of bank failures
and in the average annual loss suffered by depositors
The tmnsfer of the banking business from thouLnds of
small bankers to a few strong, well-managed concerns
subject to interna and external examination. wo^ldTnl
crease the financial stability.

3. A reduction in the expense of conducting the bank-
ing business combined with an increase of^ efficiency.
Both borrowers and depositors would benefit from this
as woud also thousands of persons who now h^ve no
transactions with the banks.

4. An improvement in the record of panics Thev

Ztc "°' u'^^.^ ^° '^^^'"^«-' -^ suspeSns of pay^
ments would be very unlikely to occur. Cohesion and

I' ,

A RATIONAL BANKING SYSTEM

\ »•

fJ!

co-operation of the banking units would tend toward this

result. r , , f

5. An improvement in the conditions of the bankmg
service. Every bank clerk who possessed ability and good
moral character would have the chance to rise rapidly
to high-salaried and dignified posts. And the efficiency
of the officers and men would be increased.

6. A notable extension of good banking facilities to
small villages and country communities. Owing to the
small expense at which branches can be operated a
branch bank would find a profit in a small annual turn-
over.

7. An extension of facilities to the residential, retail,
and factory districts of the cities, and into the suburbs
as well. The branch banks would be found in all city
districts, and would undertake business of all kinds for

the citizens.

8. A marked improvement in the facilities extended to
large manufacturing and mercantile borrowers. These
would be able to borrow altogether from one bank, or a
couple of ba ks, which had branches in their immediate

proximity.

9. A smooth and comfortable handling of the harvest
movement. The transfer of currency from the centres
to the country districts could be accomplished without
the forcible transfer of credits which now accompanies
the transaction.

10. A satisfactory and permanent solution of the cur-
rency question. The branch banks could be made to
provide an elastic and thoroughly safe currency. Their
note issues would constitute an exact measure of the cur-
rency requirements of the country in all seasons.

11. A large economy in the use of cash. With the ex-
tension of the bank branches into small places would
come the utilization by the banks of a huge fund of cash
now carried in houses or on the persons of citizens.

12. A lessening of the extent of Wall Street's domma-

3x8

! ',

CONCLUSION
tion over the other parts of the country. In each section
tnT^^TT.u'' *^' ^^" ^''''' P°"^^ ^°"W exist, and

Nt'^o'ltutr '"^ "^'""^ "°"'' ^^"^^^^ ^^- °-

13. A larger measure of banking publicity. The bank
statements would cover the whole banking business of
the country, and the position of the individual units could
be followed more satisfactorily and more closely by in-
terested depositors and students.

14. An entirely satisfactory settlement of the problem
regarding cash reserves. They might then be carried at

hands of the banks owning them.
15- A passing of the necessity for naming a legal mini-

r W, "t! r^'^'- • ^' °'^^^ ^"^ b^"«^ "^-thods would
ho available for ensuring that the banks carried suitable

.£.?«"'■ M r^?""' ^^'""^ ^^^ *he most mischievous
effects, could be discontinued.

16. A more generous allotment of banking resources
to commercial discounting. The diversion of resources
into bonds would not be so extensive as at present

-hnni/nr"'' ^'"""1°^ *^^ °P'"^"" *^^* commercial banks
should no act a savings bank business. With the

institution .ng branch banks there would not exTst

of blr'^lng.""''''' ''''''*'"^ '^''' '"° departments

h.nt ^"5^"*'''' competition on the part of the ordinary
banks with any system of postal banks which the GoverZ

S^f ? T''""'': '^^^ ''^'^^ °^ *he branch banks wouH
ultimately be neariy equal to that of the Government and
the facihties supplied by them would be superior

H„nL "itu""^ '^*^ "^ '"^^'^^^ °" deposits, and a re-
duction of the inequalities of the discount rates. SaWngs

L!:r T'' ?^"''' ^°"'^ "^"^^^^^ ^ fair rate of £
esou;ceTof'.r'^"'^'^ adjustment of the available cash
re ources of the vanous localities would occur. The sur-
plus of the quiet Eastern village would be placed, in the

3^3

(I'

ft ; f .jf

li'l!!

A RATIONAL BANKING SYSTEM

easiest and most satisfactory manner, at the disposal of
localities where borrowers were more in evidence.

20. An improvement in the international standing of
the United States. Branch banks would raise American
prestige abroad, because of their large resources and high
standing, and because of the improvements they effected
in banking conditions in the United States.

21. A better and more effective support by United
States banks to United States firms and corporations
transacting business abroad. This department of the
banking business would not be left so largely in the hands
of foreigners.

32. An assumption by United States banks of the whole
duty of financ:-- the domestic business of the country.
They would not be content to allow foreign institutions
to take a large share of the work of financing the cotton,
wheat, etc., to market.

23. An improvement in the business morals of the peo-
ple. Debtors would be under firmer and more intelligent
supervision, and banking credits would be more closely

watched.

24. A simplification of the relations of the treasury with
the banks. The Comptroller of the Currency would have
two hundred or so banks to deal with instead of seven
thousand; and the two htmdred would cover practically
the whole business of the country.

25. A transfer of the control of banking from the states
to the Federal Government. This would make possible
uniformity in the banking laws.

These preceding paragraphs suggest the principal
points which I claim for the branch banks. In the
course of my argument I have also indicated how the
transition from the one kind of banks to the other might
be effecood without causing an undue amount of distress
or loss to the owners of the existing banks. Also I have
pointed out how in my opinion the interests of the gen-
eral body of the stockholders, of the borrowers, depos-

IMHiii

CONCLUSION

itors, note-holders, and of the general public might be
satisfactorily safeguarded from unscrupulous insiders or
managers, and hov it might be ensured that the branch
banks on the whoh; would devote themselves honestly to
the proper performance of their legitimate functions.
21

->»-

t 1' ' <»

f. ,t

INDEX

Absorption of small banks Page 148

Accounts of manufacturers . . 93

Aldrich, Senator, Chicago address a

American Bankers' Association, supervision by . . . . 22a

Argument, presentation of 5

Asset currency i6g

Audit companies 218

Audit, external 214

Author, qualifications of 4

Availability of cash reserves 341

Bad debts 227

Balance of power 160

Bank building go

Bank credits, regulation of 301

Bank drafts, United States 268

Bank of England 279

Bank failures in Canada 32

Bank failures, immunity from 34

Bank of France 280

Bank of Germany 281

Bank of Massachusetts 89

Bank of Minnesota 133

Bank of Minnesota and a panic 137

Bank of Montreal, secondary reserves of 235

Bank-note circulation — how it benefits borrowers . . 147

Bank notes, Canadian S9. ^4

Bank notes — a means of fighting panics S9i 64

Bank notes, redemption of 171

Bank notes, secured 38

Bank notes, security for 170

317

~«»"T! i-fct ^3J?fj; . - - i,-

ill

i RATIONAL BANKING SYSTEM

I notes, sorting and retiring Page 177

1 offices in cities 105

I k resources, classification ot 38, 39, 40

bank of Western Carolina 198

Banks, Morgan 161

Banks, single-office, cost of at

Banks, Standard Oil 161

Bankers' Association as critic of cash reserves .... 34a

Bankers' Association, supervision by 33a

Bankers' balances in New York S*. 59

Bankers, foreign 372

Bankers for the Government 285

Banking business, consolidation of 391

Banking business of Canadian Treasury 383

Banking business of Mexico 374

Ranking business of United States Treasury 378

Banking business of West Indies 374

Banking competition in Canada 350

Banking, diversified I'S

Banking in England 47

Banking facilities in cities 105,107

Banking laws, uniformity of 325

Banking monopoly ^59

Banking offices and population 109,110

Banking position of geographical divisions 393

Banking power of geographical divisions 123

Banking reforms, trend of i

Banking revolution 19'

Banking system, acknowledged defects of 2

Banking system and commercial morality 296

Banking system — its responsibility for defalcations and

frauds 9

Banking system — its responsibility for losses 31

Baring crisis 47

Bill of exchange, domestic 116

Bond investments 37

Bond security for treasury deposits 287

Borrowers and branch banks • 3°^

Borrowers — how they benefit f/om bank-note circulation 147, 185

Borrowers, local, and head office i49

Borrowers, losses of 3 1

Borrowers, regulation and control of 299

Borrowing classes, rights of 3>o

Branch bank, a hypothetical 81

318

wmmmmk

INDEX

Branch bank defences against burglary .... Page 19

Branch bank examiners 3 1 j

Branch bank idea and postal banks 356

Branch bank inspectors aia

Branch bank issues, security for 189

Branch banks and borrowers 300

Branch banks and business morality 394

Branch banks and chain banks 194

Branch banks and Comptroller of the Currency ... .390

Branch bai ks, rridit of 358

Branch banks, directorates of ao6

Branch banks and domestic business 375

Branch banks and foreign business 375

Branch banks and manufacturers 96

Branch banks, misconceptions regarding 193

Branch banks in New York 167

Branch banks and panics 47, 55

Branch banks, reserves of 338

Branch banks, service in 74

Branch banks and state legislatures 1 54

Branch banks, stockholders of 303

Branch banks, the case for 3

Branch banks and the treasury 388

Branch banks and the wheat crop 136

Br.inch banks — why they are not considered .... a

Branch, establishment of 90

Branch extension and issue rights 184

Branch manager, checks upon 14, 307

Branch profits 103

Branch profits and ote issue 184

Branch system, economy of 22,131

Branches, competition in establishing 260

Branches, ex.unination of 221

Branches facilitate issue and redemption 173

Branches of financial banks 159

Branches in small places ... 99

British banks, stability of ... 33

Burglaries 18

Burglary, branch bank defences against 19

Business morality 394, 396

Call loans in New York 336

Canada, immunity from panics 43

319

)

1.*

1>V [ , 'I

■I ■

A RATIONAL BANKING SYSTEM

Canadian bank deposits, losses of Page 3.)

Canad' n bank failures 3a

Canadian bank notes 59. <>4

Canadian bank stockholders, losses of 33

Canadian banks, evolution of 154

Canadian banks, foreign branches of 365

Canadian banks and panics 56

Canadian banks, reduction in number of 35

Canadian banks, scope of 156

Canadian banks, service in 70

Canadian cities, banking facilities in 107

Canadian postal banks, decline of 254

Canadian Treasury, banking business ot 283

Capital speci6ed for each branch 1 93

Cash payments, suspension of 43. 3i)(>

Cash reserves 23 i

Cash reserves, availability of 241

Cash resTves in Canada .... 233

Cash restrves, comparison of 241

Cash reserves in New York 54. «6S

Central bank, compensation of 282

Centnl bank and Government business 274

Cenlr 1 ank and monopoly of issue 122,180

Ciiit' .' '/ank, objections to 182

Central bank and small banks 181,187

Chain banks and branch banks ig4

Chartered banks and postal banks 252

Characters and ratings '}■

Cheats and scoundrels, blacklisting of 298

Checks upon branch manager 14. 207

Checks upon minor officers and clerks 15

Chicago, commercial banking in 158

Chronic malcontents 0,1

Civil laws, laxity of 303

Cities, banking facilities in 105

Clas.sification of bank resources 38, 39. 4°

Classification of loans 229

Clearing-house committees 243

Clerks and officers • 'J^

Cohesion, attempts to introduce i</>

Combination, promoting 200

Combination, a Southern -"^

Commercial banking and financial banking ; '■!

Commercial banks with savings departments . . r")

Commercial discounting and savings bank funds . r.Ky

320

INDEX

Commercial loans, valuation of . , p.,^p j,q

Commercial morality ,,^, ^f^

Commerrial paper 116

Conimer. ,1 paper, u com, .risen of [ ' jg.

Comparison of banking practice . . . . . 33

Comparison of cash reserves . an

Comparison of commercial paper ' ' jqj

Comparison of cost of banking systems . . . . . ji

Comparison of interest rates ....... ,04

Competition in establishing branches ...... a6o

Comptroller of the Currency and branch banks . . ago

Comptroller, visitation of banks by ! aai

Conditions of service , , . 66

Consolidation of banking business ....!. aoi

Conversion of New York balanc 's ......[', |6»

Cost of providing currency ! . ! 14a

Cost of single-office banks ....,...".' 3,

Country banks, service in ....]'][* " -^

Country branches and a panic ...'..'..' jIq

Credits, regulation of ......',.*.' ,01

Currency associations, national •...'..' 60

Currency, cost of providing ...,'.'...'' jaj

Currency evils, remedies for •■..'.'.. 160

Currei.v,y question .* . ' ' 160

Currency, a redundant .......' jJg

Currency, a safe and flexible ...... '. [ * xoo

Defalcations, comparisons with Europe and Canada 7

Defalcations, effects upon public confidence ..." 7

Defalcations and frauds " ' ' ' , |

Defalcations often ruin small banks . . . . . 30

Defalcations, responsibility of banking system for . q

Demand for examiners • ■ . ^^y

Demand for men f-

Deposit balance, loans based upon ■ ■ . -iln

Deposit branches

Depositors in Canadian banks, losses of ." ??

Depositors, losses of

Depositors in national banks, losses ot 3?

Depositors and -issuing rights ,8?

Depositors in state and pilvate banks, losses of * " " " ^

Deposits, interest on ... . • • • J

Deposits and loans ■........,' ' Sa'll

321

;f I

(

■I

A RATIONAL BANKING SYSTEM

Depoiits of other banks Pages 50, 59

Disbursements, Government 386

Distribution of stock ownership 959

Disturbances of the money murkot 160

Diversified banking business uj

Dividends and eamirj^s ,09

Domestic bill of exchange 116

Earnings and dividends joq

Eastern branches and Western branches 1 J4

Economy of branch system aa, lai

Education of bankers yj

Emergency note issues 6a

England, Bank of 379

English banking 47

English joint-stock banks 46

Establishment of a new branch 90

Evils of legal minimum of reserve 344

Examination of branches 331

Examination, external 3

Examination, external and internal a i a

Examination, internal iji 15

Examiners, branch bank 313

Examiners, demand for a 16

Exchanges, regulation of 181

External audit 314

Failed Canadian banks 33

Failed national banks 33

Failed state and private banks 37

Failures, immunity from 34

Fidelity, guaranty of 16

Financial banking and commercial banking 158

Financial banks, branches of 159

Financial centres, rival 128

Financing the wheat crop 126

Flexible currency 190

Foreign bankers and domestic business 272

Foreign bankers in New York 264

Foreign banks in London 376

Foreign branches of Canadian banks 365

Foreign trade 302

322

INDEX

Porgan, J. B Paces it au tin

France. Bank of [ *^ '^' "'' [H

PraudH and defalcations '^'798

Frauds invited by loose banking practice ....', ? 1

Functions of auh-treuaury ..'98

Funds, movement of . , . '

lao

Geographical divisions, banking position of . . . -„,

Germany, Bank of ■ '. ' ' ' at

Government bankers •■'■'' aS<

Government bonds and national banks .....' jg.

Government business and a central bank . . , ' . ' j.Z

Government disbursements . ' agA

Government notes, retirement of ,.,][' '' ,gg
Government supervision of banks

Grain trade ....'*'

Guaranty of fidelity ....! i !!!..'' '^A

Head office and local borrowers ......

Hoarding by interior banks . . . * ' ' * ^„"-, ,;

Holding companies .' " ' *'* ' ' ^^

Hypothetical branch bank ...'.....' tl

Ill-regulated offices

Immunity from bank failures ..'....''

Indi pendcnce of geographical sections ,,*

Insolvent Canadian bunks ' ,

Insolvent national banks . . . .

Insolvent savings banks ......'*' JIq

Insolvent state and private banks . . „

Interest on deposits ....,,

Interest rates, comparison of soa !lfi

Interest rates, fluctuations of . ] ! ^ „°

Interior bankers' balances . . I

fpterior banks, cash withdrawals of ! "„

Interior banks, hoarding by . ao <t e

Interior banks and New York business .' ' " ' '.11

Internal examination ' i e

Internal and external examination ...... . aj,

3a.3

tfc

I (

1- ■

A RATIONAL BANKING SYSTEM

International banking — address by S. D. Scudder . Page 26a

International standing igj

Investments in bonds jy

Issue and redemption facilitated by branches . 175

Issue rights affect borrowers and depositors 185

Issue rights promote branch extension 184

Issues of isolated banks ij(,

Jasonville and Thompsontown 87

Johnson, Dr. Joseph French 74. 235. 294

Joint stock banks, English 46

Knickerbocker Trust Company 48

Laws, banking, uniformity of 225

Lawyer for bank branch gi

Legal minimum, evils of 244

Legal reserve 2 , ,

Legal reserve and real reserve 234

Legislatures, state and branch banks 154

Leroy-Beaulieu, M. Paul 203

Limitation of voting power 203, 204

Lincoln Trust Company 48

Loans based on borrower's deposit balance 305

Loans, classification of 2 2()

Loans, commercial, valuation of 220

Loans and deposits 82, 85

Local banks in England 46

Local banks and monopolies 111,113

Local borrowers and head office 14^

Local industries 84

Local manager, influence of 150

London, foreign banks in 276

London, tribute levied by 262

London, United States banks in 976

Losses of borrowers 31

Losses of depositors 30

Losses of depositors in Canadian banks 33

Losses of depositors in national banks 24

Losses of depositors in state and private banks .... 29

324

ilii

37
«7S
«8s
184
176

825

91
244

231

154
203

03. 204

305
22(|
220

82,85
46

H<)
84

150

276

262

276

INDEX

Losses of stockholders of Canadian banks p„„
Losses of stockholders of national banks * " " * ^^
Lowry, Edward G. 20, 34
279

Malcontents, chronic

Management, checks upon . . 93

Manager, local, influence of '4. 207

Manufacturers' accounts ^5°

Manufacturers and branch banks ^^

McLeod. H. C. 96

Men, demand for . '^^

Mexico, banking business of '**

Misconceptions regarding branch banks *'*

Money market disturbances . . ^''

Monopolies and local banks "^"^

Monopoly of issue and a central bakk Ill' "J

Morgan banks "'» ^^°

Movement of funds ..." '^'

Municipal and state politicians .' "**

Mutual savings banks ■3°?

351

National banks and asset currency

National banks and Government bonds ^^

National banks, insolvent . "'

National banks, losses of depositors "^

National banks, losses of stockholders ,« "*

National currency associations '°'34

New branches, establishment of ^°

Newfoundland . . 9°

New York balances, conversion "of "'

New York balances, recalling *°^

New York as banker for other nations IV

New York, the best reserve centre '^

New York, branch banks in ' "'

New York branch, functions of '*''

New York call loans '33

Now York, cash reserves'in "3 6

New York, control by "S

New York, foreii,a bankers in '^6

Note brokers ... "°4

Note circulation, profit in 94

'45, 171

325

A RATIONAL BANKING SYSTEM

Note issue and branch profits Page 184

Note issues, emergency 62

Note issues of isolated banks 176

Note issues, security of 140

Objections to central bank 183

Officers and clerks 66

Officers, prospects of 77

One-man control 10

Panic of 1907 48

Panics 42

Panics and branch banks 47, 55

Panics, causes of 44

Panics in England 46

Panics, immunity from 43

Panics, recent, effects of 1

Panics and remedial legislation 58

Panics and single-office banks 45

Payments, suspension of 42, 296

Pension funds 18

Points, recapitulation of 311

Politicians, state and municipal 307

Population and banking offices 109,110

Postal banks and branch idea . . 256

Postal banks in Canada, decline of 254

Postal banks and chartered banks 252

Postal banks in United States 255

Post-office banks 252

Power, balance of 160

Practice, comparison of 33

Practice, loose, invites fraud 11

Private and state bank depositors, losses of 39

Profits, branch 103

Profits in note issue 145, 171

Promoting combinations 300

Ratings and characters 91

Real reserve and legal reserve 234

Recapitulation of points 311

Redemption agencies 173

326

.->!-. jl '

INDEX

Redemption of bank notes .... p

Redemption of bank notes in Canada age 171

Redemption and issue facilitated by branches ' ' III

Redundant currency .... • • • • '75

Reforms, banking, trend of ''*

Regulation of the exchanges . . »'

Remedial legislation for panics i

Remedies for currency evils 5

Reserve against deposits . . . * '

Reserve agents and interior bankere '^'

Reserve centres '°*

Reserve law ^**

Reserve requirements . . . *^ '

Reserves of branch banks '^f

Reserves in New York '

Reserves, secondary ^fi* '^^

Resources of savings banks . . . '"' '^^

Retirement of Government notes . 'it

Revenue collections '"

Revolution in banking ' *

Rigid currency, evils of *''

Rival financial centres »»7. 131

laS

Safeguards

Savings bank business "°

Savings bank failures . . . .

Savings bank funds, investment of . '^°

Savings bank resources '^'

Savings banks. Eastern theory regarding '^l

Savings banks. English theory regarding , ,

Savings banks, mutual and stock . '*'

Savings departments of commercial banks' IV

Scudder, S. D. . . . '*9

Secondary reserves - **^'

Security for bank notes . . '^ ' '^^

Security for branch bank issues ^1°

Security prices .... * '

Service in branch banks . . *'*

Service in Canadian banks . '*

Service in country banks '**

Service in Wall Street banks It

Settlements between banks .

Single-office banks, cost of , '^^

A RATIONAL BANKING SYSTEM

Small banks, absorption of Page 148

Small banks and central bank iSi

Small places, banks in 99i 187

Sorting and returning bank notes 'lyy

Southern combination jog

Stability of British banks ^2

Standard Oil banks igj

State legislatures and branch banks 154

State and municipal politicians 307

State and private bank depositors, losses of 29

State and private bank failures 37

Statements ^o-j

Stock ownership, distribution of 359

Stock savings banks arj

Stockholders of branch banks jos

Stockholders of Canadian banks, losses of 33

Stockholders of national banks, losses of a 6, 34

Strings of banks j^j

Sub-agency ,04

Sub-treasury, functions of 278

Supervision by American Bankers' Association . . 222

Supervision by Government 217

Surplus deposits ,02

Suspension of cash payments 43, 296

Swindles 18

Thompsontown and Jasonville gy

Trade bills 1 1 ^

Treasury balancjs, bond security for 287

Treasury, banking business of 278

Treasury and branch banks 288

Trust Company of America 48

Uniformity of banking laws 22s

United States banks, increase in number of 36

United States banks in London 276

Valuation of commercial loans 2 so

Visitation of banks by Comptroller 223

328

\\ .

INDEX

Voting power, limitation of . , . p„„^. „, ,„^

VreelandbiU ... I'ages 303, 204

Vreeland, Hon. E. B. ^'

lao

Walker, Sir Edmund

Wall Street banks, service in ^99. '33. "63

Wall Street domination

Wall Street and the national resources lit

Weak banks *S7

Weekly statements ..'.'."'. "g

West Indies, banking business of

Western branches and Eastern branches 'It

Western Carolina, Bank of i

Wheat crops, financing the *^?

W-eat deliveries ' " "°

Wisconsin and holding companies ..... J*f

THE END