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 BANKING REFORM IN THE 
 UNITED STATES 
 
 ADDRESS 
 
 OF 
 
 NELSON W. ALDRICH 
 
 BEFORE THE 
 ACADEMY OF POLITICAL SCIENCE 
 
 NEW YORK, OCT. 15, 1913 
 
BANKING REFORM IN THE 
 UNITED STATES 
 
 ADDRESS ^ ^ ^ 
 
 OF 
 
 NELSON W. ALDRICH 
 
 BEFORE THE 
 
 ACADEMY OF POLITICAL SCIENCE 
 
 NEW YORK, OCT. 15, 1913 
 
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 9/V^'~ 
 
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NOTE TO SECOND EDITION. 
 
 Since the following address was read before the Academy of Political Science, 
 the "Federal Reserve act" has become a law. The Senate and the Democratic 
 caucus practically remodeled the measure, ehminating many of the objectionable 
 features of the House bill, and modifying provisions which had been subjected 
 to severe criticism. The act as finally adopted will, I beUeve, be accepted by the 
 national banks with a view of seeking in good faith to make its operation a practical 
 success and with the hope that defects may be cured by subsequent legislation. 
 
 Whether the measure will meet the expectation of its friends will depend 
 largely upon the manner in which it is administered. Its success will depend, 
 first of all, upon the character and wisdom of the Federal Reserve Board, which 
 is granted extraordinary powers of control over vast interests and intrusted with 
 the decision of the intricate questions which are involved in the various pro- 
 visions of the act. Very much will also depend upon the conservative character 
 of the management of the several Federal Reserve banks. 
 
 The act adopts many of the principles of the bill reported by the National 
 Monetary Commission, as will be seen by a comparison of the texts of the two 
 measures. Its authors concede that effective legislation for banking reform must 
 embody provisions for the concentration and mobilization of bank reserves 
 through an organization of banks, and that member banks must be able through 
 such an organization to maintain and replenish their reserves by a rediscount of 
 commercial paper. Whether the organizations provided by the act will secure 
 these results in a satisfactory manner can be ascertained only by experience. 
 
 If the loaning and note issuing power of the reserve banks is used to the fullest 
 extent in ordinary times as anticipated by some of the authors of the act, these 
 institutions will be found powerless in case of emergency for purposes of support 
 or protection. The adoption of this poHcy would naturally lead to an expansion 
 of credit and inflation of the currency, producing an appearance of prosperity 
 and a boom in speculative prices, but the ultimate result would be disastrous. 
 
 N. W. A. 
 
 Warwick, January, 1914. 
 
 284679 
 
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BANKING REFORM IN THE UNITED STATES. 
 
 Any intelligent criticism of legislative proposals for banking 
 and monetary reform must be based on a knowledge of existing 
 conditions and of the present and prospective needs of the 
 country, and a clear understanding of the defects to be cured 
 and the evils to be avoided, as well as the nature of the remedies 
 to be adopted. The magnitude of the interests to be affected 
 favorably or unfavorably by suggested changes should lead us 
 to exercise the greatest care in the formation of our judgments, 
 and to see to it that we are not influenced in our opinions by 
 local or other prejudices. Statistics are available to show the 
 extent of the banking interests directly affected by monetary 
 legislation, but we cannot possibly measure the magnitude of 
 the interests which the American people of every community, 
 of every section, have in the wisdom or unwisdom of suggested 
 changes. The number of stockholders and depositors in, and 
 borrowers from our banking institutions is greater than that of 
 the adult population of the country. The people who have the 
 deepest direct interest in the efficiency and good management 
 of our financial institutions are the active business men through- 
 out the country, whose enterprise has earned for the United 
 States the first place in the world of industry and commerce. 
 The people who will suffer most from injurious changes will 
 be the wage earners and the great mass of people engaged in 
 productive industries. 
 
 CHARACTER AND MAGNITUDE OF OUR BANKING SYSTEM. 
 
 The current report of the Comptroller of the Currency shows 
 that we have in the United States approximately 29,000 state 
 
and national banks (about 22,000 state and 7,000 national)^ 
 with resources in excess of 25,000 millions of dollars. The 
 rapid growth of our banking facilities in recent years is shown 
 by increases from 1900 to 1912, in the number of institutions, 
 from about 13,500 to 29,000; in banking resources from 10,785 
 million dollars to 24,986 millions; in loans and discounts from 
 5,657 millions to 13,953 millions; in individual deposits from 
 7,239 millions to 17,024 millions. The increase in population 
 between 1900 and 1912 was twenty-two per cent, while the 
 increase in banking resources was one hundred fifty-eight per 
 cent. The wise management of these banks, for in the main 
 the management has been wise, and the judicious use of these 
 enormous banking resources have been perhaps the most im- 
 portant factors in promoting the growth and securing the 
 unexampled prosperity of our agricultural, commercial, and 
 industrial interests in recent years. 
 
 Every community in the United States, large or small, has 
 one or more banks. The managers of these banks are men 
 f amiUar with the wants of their customers and they are usually 
 accepted as the financial advisers of their neighbors. In all 
 matters affecting the prosperity of the neighborhood in which 
 they are located their advice and judgment are often sought 
 and usually followed. The intimate and important relations 
 existing between banks and bankers and the people and 
 communities should be carefully considered in any examina- 
 tion of the provisions of suggested legislation. 
 
 GENERAL CONDITIONS DEMAND REFORM. 
 
 The exceptional record of the successful growth of our bank- 
 ing interests to which I have referred has been coincident with 
 the unexampled prosperity of the country. We must not, 
 
however, lose sight of the fact that our great banking resources 
 have been found in serious emergencies powerless to avert 
 general disaster. Our banking system has broken down when 
 subjected to any very severe strain. While there is nothing in 
 present or prospective business conditions that should occasion 
 alarm, we must remember that financial troubles often, in fact 
 usually, come unheralded. Even the causes that produce them 
 even can never be definitely stated. It is evident that in the 
 near future the adequacy of our banking facilities is to be tested 
 by new demands for credit in addition to our normal business 
 requirements. In magnitude, unusual demands at home and 
 abroad for additional credit and for the placing of new loans by 
 states and industrial organizations have never been equaled. 
 Demands of this nature, world-wide in extent, impose 
 new and greater burdens upon the banking resources of the 
 world. With the close business and financial relations which 
 modern conditions have established between the great commer- 
 cial nations, each country must bear some share of these new 
 responsibiUties. The need of the states of the near East to 
 fund indebtedness contracted during the late conflict and to 
 enable them to repair the ravages of war adds largely to the 
 usual European demand. 
 
 In Europe, fear that grave political problems may not 
 always be found capable of peaceful solution, and dread of the 
 evil effects of an undue expansion of credit in some quarter, are 
 disturbing elements. The high rates demanded for government 
 and other loans, the impossibility of floating long-time loans at 
 any rate, are evidences of unsettled and unsatisfactory condi- 
 tions in the world's money markets. In the United States our 
 financial institutions will be called upon to meet insistent 
 requirements of steam and electric railroads and industrial 
 corporations for new loans to pay for necessary improvements 
 
8 
 
 and extensions, and to refund maturing obligations. Govern- 
 ment and other large borrowers will be obliged to pay rates 
 which a few years ago would have been considered extor- 
 tionate. The effect of recent tariff legislation on business 
 and government revenues is yet unknown. These conditions 
 taken together naturally create a feeling of uncertainty in 
 all financial centres. The enormous shrinkage, amounting to 
 thousands of milHons of dollars, which has recently taken 
 place in the value of securities and property in the United 
 States, furnishes evidence, whatever may be the cause, of a 
 want of confidence in our continued prosperity on the scale 
 of our past achievements. 
 
 These among other considerations should lead us to exercise 
 the greatest care in the selection of remedies for admitted de- 
 fects in our banking system. The people of this great country, 
 with all the momentous consequences involved, cannot afford 
 to venture on untried experiments, or to adopt principles or 
 methods that have been rejected by the teachings of universal 
 experience. We cannot measure the direful results which 
 might follow revolutionary changes. Any remedial legislation 
 should be constructive and not destructive. We should seek 
 to strengthen rather than weaken the efficiency of our credit 
 organization. We should supplement rather than supplant 
 a system which has grown to such enormous proportions under 
 state and national laws, and to which the business of the 
 country has with more or less satisfactory results become 
 adjusted. 
 
 CHAKACTER OF THE REFORM DEMANDED. 
 
 To secure a wise and comprehensive reform of our banking 
 and monetary system, we require: 
 
9 
 
 1. An efficient banking organization by which bank sus- 
 pensions and financial crises with their evil results can be 
 avoided. 
 
 2. Means to secure a concentration of cash reserves of the 
 banks and their mobilization for use whenever and wherever 
 needed in times of trouble. In times of stress, scattered re- 
 serves of banks have been found useless, either for defense or 
 protection. The scramble of 25,000 banks in 1907, each to 
 take care of its own interests and to increase its own cash 
 reserves, contributed very largely to the panicky conditions 
 which led to general disaster. Banks must be furnished with 
 effective means for replenishing their reserves and increasing 
 their loaning power at times when the need for credit expansion 
 is imperative. 
 
 3. The general cooperation of banks must be secured to 
 protect their own or the public interests when these are menaced 
 and when individual or local efforts are ineffectual to prevent 
 the paralysis of business and domestic exchanges. 
 
 4. An organization must be provided that can deal effec- 
 tively with conditions which imperil the credit and status of the 
 United States as one of the great financial powers of the world. 
 In times of threatened trouble or actual panic, the power to 
 control the movements of gold and the course of foreign ex- 
 change through raising the rates of discount or otherwise is 
 essential, from both a national and an international standpoint. 
 
 5. We must have an organization whose influence can be 
 made effective by an advance in discount rates or otherwise in 
 preventing an undue expansion or dangerous inflation of bank 
 credits. 
 
 6. A currency should be provided that, in character and 
 volume, in contraction as well as in expansion, will be respon- 
 sive to normal or unusual demands. Seasonal or unusual 
 
10 
 
 demands for currency or credit for crop moving or other pur- 
 poses have at times produced very unsatisfactory conditions 
 in the money market owing to the inelastic and unscientific 
 character of our monetary system. 
 
 7. A broad discount market must be created with recognized 
 and legaUzed standards of commerical paper. Recent conditions 
 also impose unnecessary burdens upon business and production, 
 and hinder the natural development of certain sections of the 
 country. These evil results are felt more keenly in new and 
 undeveloped communities. The lack of such a discount market 
 leads banks in all sections to send surplus money to New York 
 to be loaned there on stock exchange securities. 
 
 The methods necessarily used in raising the enormous sums 
 required for the production, movement, and marketing of our 
 agricultural and other products, are crude and unnecessarily 
 expensive to producers. Notes and bills of exchange issued 
 or drawn for agricultural, commercial, or industrial pur- 
 poses, can be discounted only in a narrow, local market, 
 and the result has been that our farmers and all others 
 engaged in productive industries have been obliged to pay 
 higher rates for their loans and have been placed at a great 
 disadvantage in securing the credit which they have required 
 and to which they are fairly entitled, for the growth, retention, 
 and distribution of their products. The adoption and use of 
 proper standards for such commercial paper would enable our 
 banks profitably to replace in their portfolios speculative low- 
 rate loans of all kinds with notes, bills of exchange, and accept- 
 ances, based on the products and property of the country. If 
 this change can be made, it will prevent the dangerous conges- 
 tion which takes place at times in the great financial centres. 
 It is difficult to understand, in this connection, why national 
 banks, which are authorized by the House bill to accept drafts 
 
11 
 
 growing out of transactions involving importation or exporta- 
 tion of goods, are not permitted to accept domestic drafts of the 
 same character. Why should a bank in Mississippi or Texas 
 be permitted to accept the draft of a cotton planter on Liver- 
 pool, based on cotton shipments, when it could not accept the 
 drafts of the same planter on a domestic consumer? Why 
 should an importer in New York have better facilities than 
 the western farmer who ships his grain to an eastern market? 
 
 EFFECTIVE REMEDIES SUGGESTED BY EUROPEAN EXPERIENCE. 
 
 While there seems to be a general agreement as to the nature 
 of the reforms demanded, unfortunately there is no such con- 
 sensus of opinon as to the methods and machinery which should 
 be employed in securing the desired results. This is to be 
 regretted, as it seems certain from the experience of other 
 nations that simple and effective remedies for defects are 
 easily within our reach. While we have suffered greatly 
 in almost every decade of our history from the evil 
 effects of financial crises, the people of the great commercial 
 countries of Europe have been entirely free for nearly half a 
 century from disastrous losses arising from this cause. This 
 exemption may be said to be due solely to the character and 
 efficacy of their credit and banking organization. The ex- 
 perience of England and France, and later of Germany, in this 
 respect, has led all the important commercial nations of the 
 world except the United States to follow, in the essential 
 features of their credit organization, in the foot-steps of these 
 great countries. The adoption within a few years by Sweden, 
 Switzerland, and Japan of banking organizations along the 
 lines of the countries I have referred to, completes the ad- 
 herence of the commercial world, outside of this country, to 
 one general banking and monetary policy. 
 
12 
 
 CRITICISM OF THE BILL. 
 
 In considering the character of the remedies proposed by the 
 bill which recently passed the House of Representatives I am 
 not unmindful of the fact that it is much easier to criticise than 
 to construct, and I certainly do not intend by any criticism 
 I may make to increase the difficulties of legislators charged 
 with serious responsibilities, but rather to call attention to 
 changes which, it seems to me, must be made in the plan in 
 the interest of wise and permanent legislation. The authors 
 of the bill having in a majority of cases accepted remedies of 
 the character I have suggested and adopted ideas based on 
 experience of other countries, and on sound economic principles, 
 it is all the more to be regretted that in some of the most 
 important provisions of the bill the lessons of experience have 
 been ignored. 
 
 My suggestions with reference to certain provisions of the bill 
 are made with the hope that they may prove of service to those 
 who have the bill in charge, in their difficult task of perfecting 
 the measure. It is certainly desirable that the American 
 people, whose highest interests are to be affected favorably or 
 unfavorably by congressional action, should have as clear an 
 understanding as possible of the nature of the proposals. 
 
 The two features of the bill which are open to the most 
 serious objection are, first, the provisions which authorize the 
 issue of government notes to be circulated as money and loaned 
 on collateral security to the federal reserve banks created by 
 the bill; second, the provisions which create a government 
 board which can be accurately described as a government 
 central bank of an objectionable type. 
 
13 
 
 NOTE ISSUES. 
 
 The proposals with reference to note issue are radical and 
 revolutionary in their character and at variance with all the 
 accepted canons of economic law. 
 
 It can hardly be necessary for me to recount in this pres- 
 ence the disastrous results which have inevitably followed the 
 issue of paper money by governments or states. I need only 
 remind you of our own colonial and continental experiences. 
 That of France at the time of John Law and the French Revolu- 
 tion is equally significant. In exceptional cases, like our own 
 experience with United States notes, where continuous depre- 
 ciation has not ended in absolute worthlessness of issues, the 
 losses arising from the use of a depreciated currency have 
 greatly exceeded any possible financial benefits which have 
 resulted from the violation of economic laws. Competent 
 authorities estimate the greater cost of our civil war, owing to 
 the use of depreciated currency, at more than five hundred 
 millions of dollars. 
 
 In all cases of government issues, when the resulting ex- 
 pansion and inflation have brought about instability of con- 
 ditions and values, those dependent upon wages and salaries 
 and those engaged in agricultural and other production have been 
 the principal sufferers, while the capitalists and speculators who 
 could take advantage of constantly changing conditions have 
 been the only classes who have been benefited. This con- 
 dition has never been better characterized than by Daniel 
 Webster, who said: 
 
 ^'Of all the contrivances for cheating the laboring classes 
 of mankind, none is so effectual as that which deludes them 
 with paper money. It is the most perfect expedient ever in- 
 vented for fertilizing the rich man 's fields by the sweat of the 
 
14 
 
 poor man's brow. Ordinary tyranny, oppression, excessive 
 taxation, these bear lightly on the happiness of the community 
 compared with fraudulent currencies and the robberies com- 
 mitted by depreciated paper. Our own history has recorded 
 enough, and more than enough, of the demoralizing tendency, 
 the injustice and intolerable oppression on the virtuous and 
 well-disposed, of a degraded paper currency, authorized by law, 
 or in any way countenanced by Government."* 
 
 Peletiah Webster, writing in 1781, after the total volume 
 of Continental paper money had become worthless, said: 
 
 ''We have suffered more from this than from any other 
 cause or calamity. It has killed more men, pervaded and cor- 
 rupted the choicest interests of our country more, and done 
 more injustice than even the arms and artifices of our enemies. "f 
 
 Leading enconomists, financiers and statesmen of every 
 shade of political belief have joined in the condemnation of the 
 use of the obhgations or notes of governments as a circulating 
 medium. On this subject the views of Alexander Hamilton 
 who beheved in a centraHzed national government, were fully 
 concurred in by General Jackson and Mr. Benton and the 
 leading statesmen who represented opposite views of govern- 
 ment and of currency and banking questions. 
 
 Mr. Hamilton said in his report of 1790: 
 
 ''The emitting of paper money by the authority of Govern- 
 ment is wisely prohibited to the individual States by the 
 national constitution, and the spirit of that prohibition ought 
 not to be disregarded by the Government of the United States. 
 Though paper emissions, under a general authority, might have 
 some advantages not applicable, and be free from some dis- 
 advantages which are applicable to the like emissions by the 
 
 ♦Congressional Globe, 27th Cong., 2d sess., app., p. 65. 
 tHorace White, Money and Banking, 4th ed., p, 92. 
 
15 
 
 states, separately, yet they are of a nature so liable to abuse — 
 and, it may even be affirmed, so certain of being abused — that 
 the wisdom of the Government will be shown, in never trusting 
 itself with the use of so seducing and dangerous an experiment." 
 
 I will quote the views of General Jackson and Mr. Benton 
 later. 
 
 Among American economists, the position and authority of 
 Professor C. F. Dunbar will not be questioned. I know of no 
 political economist of standing in this country who will not 
 agree that the following statement of Professor Dunbar sets 
 forth the sound economic doctrines that should control our 
 note issues: 
 
 ^'The necessary conclusion from our experience with the 
 
 legal tender notes plainly is that a government currency, under 
 
 our conditions, is an unfit subject for national legislation. 
 ****** 
 
 'The often-repeated argument that a government issue, being 
 a loan without interest, results in a saving to the treasury 
 which is lost when the right of circulation is delegated to banks, 
 is frequently resorted to. The experience of the United States 
 presents a complete answer to this penny-wise reasoning. 
 * * * rpj^g people of the United States have lost by shaken 
 confidence, discouraged enterprise, and the actual ruin of 
 thousands of citizens, resulting from the mismanagement of 
 their currency, an amount beyond all comparison with the 
 annual saving made by them at the treasury, * * * 
 
 ' 'Errors made in the past will be also made by the new men in 
 the future; and the possibility that, in any moment of popular 
 discouragement or passing delusion, some fresh experiment or 
 abandonment of wholesome limitation may be resolved upon 
 in haste, but with irreparable results, must continue to be a 
 standing menace to our credit, pubUc and private. * * * 
 
16 
 
 ''Experience has shown that we can rely upon no principle or 
 policy as a safeguard against the caprice or the temptation 
 which at intervals must surely beset any legislative body having 
 control of the direct issue of paper/'* 
 
 Among British economists, Mr. H. D. Macleod is perhaps 
 the leading authority on banking and currency questions, and 
 the view he expresses in the following quotation would be 
 universally acquiesced in by foreign political economists. He 
 says: 
 
 ^'Governments and states should never issue paper money 
 themselves. WHien states and governments once begin to issue 
 paper money, they can never resist the temptation to issue it 
 in boundless quantities, so that it soon begins to depreciate. 
 They have no power to redeem it: and the depreciation is 
 incurable.^'t 
 
 Citations of a similar character could readily be made from 
 the opinions of all leading authorities, from the pubUc utter- 
 ances of statesmen, from the views of the representatives of 
 all parties and of all classes. 
 
 Note issues in all commercial nations are made through 
 banks of issue created by the government; all the conditions 
 of issue, including those relating to character and amount 
 are fixed by government. This method of note issue finds 
 universal approval in all enlightened countries. 
 
 In the thorough reexamination of banking and monetary 
 questions which has recently taken place in Germany, Switzer- 
 land and elsewhere, no representative of any party and no 
 individual appeared to favor the substitution of government 
 notes for bank issues. 
 
 *C. F. Dunbar, Economic Essays, pp. 219, 225-7. 
 
 tH. D. MacLeod, Theory of Credit, v. 2, pt. 2, p. 1105. 
 
17 
 
 It is true that in the period from 1814 to 1861, Congress 
 authorized the issue of treasury notes in hmited amounts, 
 which were in every case issued as evidences of indebtedness on 
 account of money borrowed to meet deficiencies in revenue or 
 expenses growing out of wars. These treasury notes were 
 receivable for public dues and were, with few exceptions, pay- 
 able at a fixed time with interest, and were usually in denomina- 
 tions that precluded their use as currency. 
 
 The power given Congress by the constitution to borrow 
 money clearly involved the right of issue of securities of such 
 character and in such form as Congress might determine, and 
 the right of the Government to issue obligations of this nature 
 was not seriously questioned in any quarter. Our own exper- 
 ience prior to the adoption of the constitution led the framers 
 of that instrument to expressly forbid the states from emitting 
 bills of credit, and the doctrine that the issue of notes of the 
 government of the United States for circulation as money was 
 not authorized by the constitution, found wide acceptance. 
 
 The opinion of Professor Woodrow Wilson was that generally 
 held by statesmen of the period. In his history of the United 
 States, he says: 
 
 '^It (the constitution) absolutely forbade the states to issue 
 bills of credit, did not give the federal government power to do 
 so, and was meant practically to prohibit the use of any currency 
 which was not at least based directly upon gold and silver."* 
 
 The first issues of United States notes with full legal-tender 
 quaUties and intended to circulate as money were made during 
 the civil war and grew out of the urgent necessities of the 
 government at that time. The plea of necessity was the only 
 justification urged for this radical departure from the policies 
 and doctrines of the founders of the republic. Excessive issues 
 
 ♦Woodrow Wilson, History of the American People, v. 4, p. 46. 
 
18 
 
 of these notes and the repeal of the right to exchange the notes 
 for interest-bearing obhgations of the United States produced 
 the usual result of depreciation and discredit. 
 
 The reasons for the general condemnation of government 
 note issues are not difficult to understand. No government 
 has yet been found strong enough to resist the pressure for en- 
 larged issues in times of real or imaginary stress^ or to meet some 
 real or fancied exigency in its own affairs, or a popular demand 
 for more money. Issues have been at first limited in amount 
 and surrounded by proper safeguards as to exchangeability 
 and convertibility, and by what seemed to be ample provis- 
 ions for ultimate safety, but experience has shown that in every 
 case in response to a popular demand these safeguards have 
 been one after another ignored or removed, restrictions as to 
 amounts of issue have been modified or repealed, and the ex- 
 hiliration which has followed the initial issues has led to an 
 irresistible demand for continuous inflation, and this has been 
 followed by progressive depreciation, a necessary destruction 
 of value, and general bankruptcy. 
 
 Some of the friends of the House bill who do not like to be 
 classed as advocates of the further issue of government notes 
 assert that the notes to be issued are after all notes of the reserve 
 banks and that the United States occupies the same relation 
 to them that it does to national bank notes. 
 
 The differences are, of course, perfectly obvious and funda- 
 mental. The notes to be issued by the House bill are by its 
 express terms '^ obligations of the United States, " issued for the 
 purpose of '^ making advances to federal reserve banks," the 
 banks to furnish ''collateral" and to pay ''interest" on the 
 loans. National bank notes are in terms and in fact obliga- 
 tions of the national banks. The treasury under the banking 
 law redeems national bank notes for the national banks and 
 
19 
 
 takes as security for any failure of the banks to respond in 
 payment of advances United States bonds equal in amount to 
 the total amount of bank-note issues, with right to sell at any 
 time at public or private sale without notice. In the one case 
 we have obligations of the United States issued by a govern- 
 ment agent and loaned to reserve banks. In the other case, we 
 have obhgations of the national banks with a pledge of Govern- 
 ment bonds to secure their final redemption by the banks. 
 
 EXPERIENCE OF FRANCE. 
 
 In this connection the experience of France in 1790 and the 
 years following with the issue of assignats furnishes valuable 
 lessons. France had confiscated the real property of the French 
 church, which consisted of valuable estates in town and 
 country forming about one-third of the real property of France 
 and having a value of about 4,000 miUions of francs and 
 yielding a yearly income of about 200 milUons. The first issue 
 of notes made in 1790 was limited to 400 millions of francs, and 
 was based upon a specific pledge of this vast property. The 
 holders of the notes had a right to exchange them for the 
 property pledged at perfectly satisfactory prices. The argu- 
 ments that were used in support of this issue have a famiUar 
 sound. It was contended : 
 
 ''Paper money under a despotism is dangerous; it favors 
 corruption; but in a nation constitutionally governed, which 
 itself takes care of the emission of its notes, which determines 
 their number and use, that danger no longer exists."* 
 
 It was claimed that paper so limited and so secured was as 
 good as gold and that, as it could not be issued in excess, there 
 was no possibility of depreciation. Great stress was placed 
 upon the fact that entirely different conditions existed in 
 Law's time, and that with a free government and new con- 
 
 *A.*D. White, Fiat Money in France, p. 4. 
 
20 
 
 ditions only beneficial results^ could follow; that prosperity and 
 abundance were assured. A scientific, practical guarantee of 
 goodness was asserted and in an address issued by the French 
 Assembly it was said that the paper had no ''value derived 
 from the national authority, but a value real and immutable; 
 a value which permits it to sustain advantageously a competi- 
 tion with the precious metals themselves." In the later 
 discussions it was asserted that the precious metals would 
 soon be used only in the arts, and a currency of paper, secured 
 upon the first and most real of all property, would take its 
 place. A demand was made later for an issue sufficient in 
 amount to pay the government debt. 
 
 No paper currency ever had what seemed to be a more prac- 
 tical guarantee for its security and value. It was based upon 
 what was then and is now the highest form of security, a 
 mortgage on productive real estate of unquestioned value. 
 The notes bore interest at a rate of three per cent, per annun^ 
 and this, it was claimed, would insure their retirement when not 
 needed. Within the next six years 36 billions of assignats and 
 2,500 millions of mandats had been issued, and then the collapse 
 came, and the whole issue became worthless and was repudi- 
 ated. Conditions at the end of this period are thus described by 
 a historian of the French Revolution : 
 
 ''Before the end of the year 1795 the paper money was 
 almost exclusively in the hands of the working classes, employ- 
 ees, and men of small means, whose property was not large 
 enough to invest in stores of goods or national lands. The 
 financiers and men of large means, though they suffered ter- 
 ribly, were shrewd enough to put much of their property into 
 objects of permanent value. The working classes had no such 
 foresight, or skill, or means. On them finally came the great 
 crushing weight of the loss."* 
 
 ♦Von Sybel, History of the Revolution, v. iv, pp. 337-8. 
 
21 
 
 AMOUNT OF ISSUE. 
 
 I believe it will be found that there is no substantial limita- 
 tion upon the amount of notes that can be issued under the 
 House bill except in the requirements for reserve. It is 
 claimed that the issue is Hmited to the amount applied for by 
 the reserve banks, and that the aggregate amount of applica- 
 tions is Umited by the amount of paper in the possession of the 
 banks, and further that the central board has the discretionary 
 power of declining applications. It is impossible to say what 
 if any restraining effect on the volume of note issues these pro- 
 visions would have. The demand for currency in increasing 
 amounts, under ordinary circumstances, as shown by our own 
 experience and that of other countries, is insatiable. 
 
 Selfishness is naturally a controlling factor in business cor- 
 porations. We may be certain if the loan is a profitable one 
 for the bank, applications will be made and insisted upon. If a 
 reserve bank could hire money at 3^ per cent, or 1 per cent and 
 loan two-thirds of it to its customer at 4 per cent, 5 per cent, 
 or 6 per cent, the business would certainly be a profitable one, 
 and so long as the notes could be kept in circulation the 
 amount of loans and note issues could be indefinitely increased. 
 The power of the reserve banks to buy in the open market 
 from private parties commercial paper and bills of exchange 
 of individuals, firms, and corporations, and to pay for their 
 purchases in government notes and to furnish the cen- 
 tral board with security for the notes by a deposit of the 
 paper purchased, provides another method of profitable note 
 inflation. 
 
 It is certain that the central board would find it difficult 
 to withstand insistent demands made on behalf of communities 
 or the public. There is no limitation in the bill of the 
 
22 
 
 amount of commercial paper that a reserve bank may- 
 rediscount or purchase. The amount of the loans and 
 discounts of all the banks in the United States is about 
 fifteen thousand million dollars and the amount of securities 
 held by banks about five thousand millions more. The 
 House committee fixes the amount that would be available for 
 rediscount by the reserve banks at about six thousand millions. 
 In my opinion this amount is likely to be largely increased by 
 the exercise of the authority given the central board to fix the 
 character of the loans available for rediscount. 
 
 It is, of course, problematical what portion of this vast 
 amount could, by an insistent demand for money, or by a desire 
 on the part of the reserve banks to increase their profits, be 
 made available as security for loans of notes from the central 
 board. If notes should be issued in place of national bank notes 
 this would add seven hundred millions to any amount other- 
 wise required. The report of the committee states that it is in- 
 tended that the government notes shall take the place of 
 national bank notes, but the bill is silent upon the subject. 
 The commercial paper pledged by a reserve bank as the 
 security for loans of notes is delivered to the chairman 
 of their own board of directors and kept in his custody 
 in a vault on their own premises. As the notes fall 
 due, or a change is necessary for other reasons, a substitution 
 takes place under the direction of the custodian, and, as long as 
 the necessary amount is kept intact, the loan may go on indefi- 
 nitely. It should be remembered in this connection that, by 
 the various provisions for redemption, the notes issued to any 
 reserve bank are returned to it by other reserve banks and by 
 the treasury, but that there is nothing to prevent their retention 
 and reissue by the receiving bank, and for this no new appli- 
 cation is necessary, and the transaction can be repeated. 
 
23 
 
 We may expect that the notes will become a permanent 
 addition to the currency of the country, as currency of this 
 character, once issued, by the operation of the Gresham law, 
 will not be retired, and its amount will constantly increase. 
 There will be no inducement to retire it. Each one of the federal 
 reserve banks, by the provisions of the bill, is forbidden to pay 
 out the notes of any other federal reserve bank, the purpose 
 being, I suppose, to attempt to secure their prompt redemption. 
 But this provision would not be effective, as no such prohibition 
 applies to the twenty-five thousand other banks in the country, 
 or to the business men and people in whose possession the notes 
 would be found. 
 
 With extended use of the new notes, another form of currency 
 would be added to the seven already in existence, and if the 
 provisions in regard to the use of letters and serial numbers to 
 distinguish notes which are to be ultimately redeemed by 
 particular banks should give a greater value to some notes than 
 others, as might be the case if the proposed earmarking is 
 successful, we should have twelve additional forms of currency. 
 
 REDEMPTION OF GOVERNMENT NOTES. 
 
 The methods provided by the bill for the issue and redemption 
 of government notes are unsatisfactory. All notes are 
 redeemable on demand at the treasury of the United States or 
 at any of the federal reserve banks in gold or lawful money. 
 The banks are required to deposit with the agent of the 
 Federal Reserve Board, with their application for notes, 
 commercial paper and bills of exchange equal in amount 
 to the notes applied for. Whenever any of the notes received 
 by a federal reserve bank shall be paid out, the bank is required 
 to segregate from its reserves, held against outstanding obliga- 
 tions, an amount in gold or lawful money which shall be equal 
 
24 
 
 to 33f % of the amount which is held for the redemption of the 
 notes. The notes issued to any federal reserve bank are 
 made a first lien upon all the assets of the bank. 
 
 These provisions, if effective in ordinary times when there is 
 no call for redemption of the notes, would, I believe, fail in 
 times of trouble. Take a condition of affairs like that in 1907 
 when so many of the the banks of the country suspended 
 payment. At such a time the collateral could not be used for 
 redemption purposes and the lien upon assets could not be 
 enforced. The inadequate means of redemption by the reserve 
 banks would fail to insure immediate convertibility and the 
 treasury might be obliged to assume the entire burden. But 
 the treasury would have no gold or other lawful money in its 
 possession available to meet this demand, except a 5% fund. 
 The general fund of the treasury, which includes its gold coin 
 and bullion, would be deposited in the suspended banks, and 
 there would be no alternative but government discredit and 
 repudiation of its obligations. 
 
 It is said to be the purpose of the bill to consolidate re- 
 serves so that they can be made useful at any time, but in the 
 case of reserves for note issues these would be scattered at 
 twelve different points. Even if the reserves were consolidated 
 and held in a manner that would permit their use they would 
 still be found inadequate, judging by the experience of other 
 countries. 
 
 The percentages of the average cash holdings of the three 
 great European banks for the ten years, 1901-10, to note issues 
 and all demand liabilities were as follows : 
 
 England. France. Germany. 
 
 To note issues 86.6 84.5 72.5 
 
 To all liabilities 47.4 72.9 50.4 
 
25 
 
 Convertibility of note issues should be insured by adequate 
 cash reserves; and these should be so placed and held that they 
 would be at all times available for redemption purposes. 
 
 It is difficult to understand why the proposition to 
 make these new notes redeemable in lawful money, that is, 
 in other obligations of the United States, was incorporated in 
 the bill. Bank notes, the obligations of banks, are necessarily 
 redeemable in lawful money, that is, in any form of money which 
 is made legal tender by the government, but the same rule 
 should certainly not be applied to government obligations. 
 In colonial times it was quite common, when one issue of notes 
 had become practically valueless, to authorize their redemption 
 on some basis in new notes, and this process went on continu- 
 ously until the final collapse of all issues. 
 
 In considering the adequacy of the reserves proposed for the 
 redemption of the new notes I have not overlooked the fact 
 that a provision is inserted which gives the central board the 
 right to require the reserve banks to deposit in the treasury for 
 redemption purposes a fund equal to 5% of the out- 
 standing notes. There is a similar provision in the national 
 banking law which requires a 5% fund to be deposited 
 in the treasury, but this fund has been found for years to be 
 entirely inadequate to meet the demands upon the treasury 
 for redemption of national bank notes. The Secretary of the 
 Treasury, in his last report, makes this statement : 
 
 *' Redemptions of national bank notes during the year have 
 been constantly in excess of the 5% redemption fund 
 required under section 3 of the Act of June 20, 1874, to be kept 
 by the banks on deposit in the treasury of the United States 
 for the redemption of their notes. Consequently, that fund 
 has been overdrawn during the whole year and the treasury has 
 had to advance payment for notes as they are presented out of 
 
26 
 
 the general fund. The largest overdraft was $26,900,000 on 
 February 3, 1912." 
 
 These serious overdrafts are still going on, and in some con- 
 ditions of the treasury they might cause serious embarrassment 
 to the government. On October 1 this account was actually 
 overdrawn, $21,760,000. 
 
 If there is to be any redemption fund held in the treasury it 
 should be not only adequate in amount to meet ordinary 
 demands but sufficient for all emergencies. The redemption 
 fund provided in this bill, as well as the redemption fund for 
 national bank notes, should be substantially increased. 
 
 EACH KESERVE BANK RESPONSIBLE FOR REDEMPTION OF TOTAL 
 
 ISSUE. 
 
 Each of the federal reserve banks, notwithstanding an 
 attempt is made to make it responsible only for notes issued to 
 it, would be practically, and it might be actually responsible for 
 the redemption of the total issue, as, so far as the public is con- 
 cerned, all notes without distinction as to whom they are issued, 
 are entitled to redemption at any one of the reserve banks 
 as well as at the treasury. For instance, if a thousand 
 millions were issued, any one of the banks would be required 
 to redeem the whole or any part of this on demand, and this 
 would apply to a federal reserve bank to which no notes had 
 been issued by the board. It must be, I think, apparent, that 
 with any considerable amount of notes outstanding, with 
 reserves for redemption scattered in twelve different banks, 
 any of the reserve banks or the treasury of the United States 
 would be likely to find itself in a position where it would be 
 unable to meet its obligations in gold or lawful money. If two 
 hundred million dollars in these notes should be sent to the 
 South or West for crop moving-purposes, one or two reserve 
 
27 
 
 banks with $5,000,000 capital might in time of trouble be 
 called upon to redeem notes greatly in excess of their reserves 
 
 or resources. 
 
 The redemption in specie of the United States notes which 
 were issued during the war was only possible after the accumula- 
 tion of one hundred millions of gold coin procured by the sale 
 of government bonds, and the continuous redemption is 
 assured by the one hundred and fifty millions of gold now held 
 in the treasury as a trust fund. We now have a proposition 
 to issue an unknown and unlimited amount of United States 
 notes without any government reserves of any kind. 
 
 NO SECURITY AGAINST FRAUDULENT ISSUES. 
 
 Heretofore in legislation looking to the regulation of currency 
 or to the issue of government obligations. Congress has sur- 
 rounded its authorization with every possible precaution 
 against fraud. Issues of currency are made through the appro- 
 priate bureau of the Treasury Department, and their character 
 and denominations are fixed by Congress itself. In the case of 
 the pending bill, the Federal Reserve Board is authorized to 
 issue obligations of the United States, and to fix their character, 
 form and tenor. The transfer of this important function of 
 government to a board whose acts are not subject to the 
 supervision of any department of the government, with require- 
 ment for but one annual report, with no requirement for 
 publicity of transactions, and with no power on the part of 
 any representative of the government to detect or punish a 
 flagrant abuse of power, has no precedent in the history of this 
 or any other country. 
 
 If the board should prefer to substitute the notes which it 
 has authority to issue for other forms of currency to give them 
 a wider circulation, it might easily do so, by providing for 
 
28 
 
 the issue of the new notes in small denominations of ones, twos 
 and fives, and thus drive out of circulation and into the treas- 
 ury and the banks, silver certificates and United States notes of 
 equivalent denominations, and give this important field per- 
 manently to this new form of government currency. 
 
 RECORD OF THE DEMOCRATIC PARTY ON GOVERNMENT 
 NOTE ISSUES. 
 
 The reasons given to justify the extreme pressure which is 
 being brought upon Congress to enact the administration bill 
 is that its adoption is necessary in fulfillment of promises 
 made by the dominant party. This statement would seem to 
 justify us in an examination of the record of the party to ascer- 
 tain when and under what circumstances these promises were 
 made. Prior to the civil war no great leader of the Dem- 
 ocratic party advocated the issue of government notes to be 
 used as money, as proposed in this bill. After the panic of 
 1873, the efforts of the friends of sound money to secure 
 the resumption of specie payments and their insistence that 
 the public credit could only be sustained by the payment of 
 all government obligations according to their tenor in stand- 
 ard coin, led to the formation of a party which was opposed 
 to resumption and demanded the payment of government 
 bonds in a depreciated currency and declared for the first 
 time in favor of the issue of United States notes in substitution 
 for national bank notes. These opponents of resumption 
 and the friends of further inflation and of the free coinage of 
 silver included members of both pohtical parties, but they 
 were not strong enough in the early stages to induce either 
 of the great parties to openly espouse their cause in national 
 platforms. 
 
29 
 
 The greenback sentiment was strong enough to secure the 
 passage of an act in 1875 increasing the limit of United States 
 notes in circulation. The veto of this measure by General 
 Grant was an effective check to the first and only post bellum 
 attempt prior to 1913 to secure an increased use of government 
 money. The Democratic platform of 1872 contained an empha- 
 tic declaration in favor of a return to specie payments and a 
 maintenance of the public credit, and denounced repudiation 
 in every form and guise. The failure of the friends of inflation 
 to secure the formal support of either of the great parties to 
 their peculiar views led to the formation successively of the 
 Greenback, People 's, and Populist parties. 
 
 The first declaration in the national platform of any party 
 in this country in favor of a further issue of United States 
 notes was made by the Greenback convention of 1876, which 
 declared for a United States note issue directly by the govern- 
 ment, and convertible on demand into United States obliga- 
 tions. 
 
 In 1875 the Democrats of Ohio demanded that the policy of 
 contraction should be abandoned, that the resumption law 
 should be repealed, and that the volume of currency and 
 United States notes should be made and kept equal to the wants 
 of trade, and that these notes should be substituted for national 
 bank notes. The notable campaign in Ohio in this year be- 
 tween William Allen and Hayes resulted in the defeat of Allen. 
 In the following national campaign the Democrats repudiated 
 the Ohio idea and nominated Mr. Tilden for President on a 
 platform which declared that reform was necessary to establish 
 a sound currency, restore the public credit, and maintain the 
 national honor. 
 
 The Democrats in their platform of 1880 reaffirmed the decla- 
 ration of 1876 and declared for honest money and strict mainte- 
 
30 
 
 nance of public faith. The Greenback platform of that year 
 declared that all money, whether metallic or paper, should be 
 issued and its volume controlled by the government and not 
 through or by banking corporations. 
 
 The Democratic convention of 1884, which nominated Mr. 
 Cleveland for President, declared in favor of honest money and 
 the gold and silver coinage of the constitution. The Demo- 
 cratic convention of 1888 renominated Mr. Cleveland and 
 reenacted the provisions of the platform of 1884. The Demo- 
 cratic platform of 1892 demanded the repeal of the Sherman act 
 of 1890, and demanded that all paper currency should be kept 
 at par and redeemable in coin, ^^a policy made specially 
 necessary for the protection of the farmers and laboring classes, 
 the first and most defenseless victims of unstable money and 
 a fluctuating currency." 
 
 The attitude of leading Democratic statesmen at that time is 
 shown by the statement of President Cleveland in his mes- 
 sage of August, 1893: 
 
 ''The people of the United States are entitled to a sound and 
 stable currency and to money recognized as such on every 
 exchange and in every market of the world. Their govern- 
 ment has no right to injure them by financial experiments 
 opposed to the policy and practice of other civilized states, nor 
 is it justified in permitting an exaggerated and unreasonable 
 reliance on our national strength and ability to jeopardize the 
 soundness of the people's money." 
 
 Similar expressions representing the views of leading repre- 
 sentatives and statesmen of the party of the period could be 
 readily cited. 
 
 The Democrats, in the national convention of 1896, which 
 nominated Mr. Bryan for the presidency, announced for the first 
 time their adherence to the doctrines enunciated by the Green- 
 
31 
 
 back, Populist, and Farmers' Alliance conventions in previous 
 years. Mr. Bryan received the nomination of the Democrats, the 
 Populists, and the Silver party on practically identical platforms. 
 As the advent of Mr. Bryan as the Democratic nominee marked 
 a new era in the history of the Democratic party, and, as it was 
 persuaded under his leadership to abandon its traditional princi- 
 ples, it is interesting to examine in detail the proposals of this 
 new political combination. The Democratic platform provided : 
 
 " Congress alone has the power to coin and issue money, and 
 President Jackson declared that this power could not be dele- 
 gated to corporations or individuals. We therefore denounce 
 the issuance of notes intended to circulate as money by national 
 banks as in derogation of the constitution, and we demand 
 that all paper which is made a legal tender for public and private 
 debts, or which is receivable for dues to the United States, shall 
 be issued by the government of the United States, and shall be 
 redeemable in coin." 
 
 The platform in this form was reported by a majority of the 
 platform committee, and after a long discussion was adopted by 
 a vote of 628 to 301. The minority members of the platform 
 committee, consisting of the representatives of sixteen States, 
 which included such well-known Democrats as David B. Hill, 
 of New York, William F. Vilas, of Wisconsin, Judge George 
 Gray, of Delaware, Lynde Harrison, of Connecticut, and John 
 E. Russell, of Massachusetts, declared that "the Democratic 
 party is a party of hard money and is opposed to legal-tender 
 paper money as a part of our permanent financial system." 
 They further declared, "We therefore favor the gradual re- 
 tirement and cancellation of United States notes and treasury 
 notes under such legislative provisions as will prevent undue 
 contraction." 
 
32 
 
 The bolting Democratic convention which nominated John 
 M. Palmer, of IlUnois, for President, declared for '^such intelli- 
 gent currency reform as will confine the government to its 
 legitimate functions, completely separated from the banking 
 business, and afford to all sections of our country uniform, safe, 
 and elastic bank currency under governmental supervision, 
 measured in volume by the needs of business." 
 
 The Democratic platform of 1900, when Mr. Bryan was again 
 a candidate, reenacted the currency provisions of the platform 
 of 1896, and demanded the retirement of national bank notes 
 as fast as government paper and silver certificates could be 
 substituted for them. 
 
 In the Democratic convention of 1904, which nominated 
 Judge Parker for President, there was a notable contest in the 
 platform committee which resulted in an agreement that the 
 platform should remain silent on all monetary questions, on 
 the theory that these questions had been settled by legislation 
 and events, and that there were no monetary questions at issue 
 in the campaign. This agreement was concurred in by Mr. 
 Bryan, but Judge Parker's telegram to a member of the con- 
 vention, saying that he regarded the gold standard as affirma- 
 tively and irrevocably established, led to a prolonged discussion 
 in which Mr. Bryan took an active part, but his ideas with 
 reference to the government issue of notes were not adopted. 
 
 The Democratic platform of 1908, when Mr. Bryan was again 
 a candidate, in addition to a pledge to secure legislation for a 
 guarantee of deposits, declared, ^'We believe that, in so far as 
 the needs of commerce require an emergency currency, such 
 currency should be issued, controlled by the federal govern- 
 ment and loaned, on adequate security, to national and state 
 banks." The Democratic platform of 1912 was silent upon the 
 question of government note issue. 
 
33 
 
 DOCTRINE OF THE BILL. 
 
 The theory that the United States should issue currency in the 
 form of its promises to pay is a popuHstic doctrine. It had no 
 standing as a Democratic party principle until the advent of 
 Mr. Bryan as its nominee for the presidency in 1896. It was 
 injected by Mr. Bryan into the party platform in spite of the 
 protests and against the votes of the men who had been most 
 prominent in the party councils, men who advocated loyalty to 
 the policies and principles to which the party had adhered 
 throughout its existence. This greenback doctrine has 
 never received the approval of the American people at 
 the polls and there is every reason to suppose that it 
 would today meet with their positive condemnation if the ques- 
 tion could be submitted to a vote in a national election. It is 
 not too much to say that the proposals in the bill came to the 
 country as an absolute surprise. There had been no suggestion 
 that an attempt was to be made to revive the greenback heresy 
 or to adopt in legislation the rejected theories of the Populist 
 party. The Democratic candidate for the presidency was 
 silent upon the subject during the campaign and he has not, 
 so far as I am aware, up to this time, publicly expressed his 
 approval of Mr. Bryan's ideas with reference to note issue. 
 The large majority of the American people who favor sound 
 money believed that the question of further greenback issues 
 was settled permanently by the elections of 1896 and the follow- 
 ing years. If the House bill should be enacted into a law, Mr. 
 Bryan will have achieved the purpose for which he has been con- 
 tending for a decade. It would be difficult to find in history an 
 occasion where a political dogma which had never found a per- 
 manent place in the tenets of the dominant party and which had 
 been rejected by unanimous verdict of the civilized world could 
 be successfully injected into a great legislative measure as a 
 
34 
 
 price for the support of a faction. It is not surprising that Mr. 
 Bryan should consider the insertion of his pecuhar views into 
 the measure we are considering as of transcendent importance. 
 His views upon this subject throw such an important 
 side-hght upon this feature of the bill and the reasons for its 
 incorporation that it seems to me desirable to quote them in full. 
 In a recent letter to a member of the banking and currency 
 committee of the House of Representatives, he makes the 
 following statement: 
 
 ^'The provision in regard to the government issue of notes 
 to be issued by the banks is the first triumph of the people in 
 connection with currency legislation in a generation. It is 
 hard to overestimate the value of this feature of the bill. 
 
 ''In the second place the bill provides for government 
 control of the issue of this money — that is, control through a 
 board composed of government officials selected by the Presi- 
 dent with the approval of the Senate. This is another distinct 
 triumph for the people, one without which the government 
 issue of money would be largely a barren victory. 
 
 ''The third provision of the bill, which I regard as of first 
 importance, is the one permitting state banks to share with 
 national banks the advantages of the currency system proposed. 
 
 "These three provisions are, to my mind, of such trans- 
 cendent importance that I am relatively very little concerned 
 as to the details of the bill." 
 
 The letter was written to a member of the House upon the 
 eve of the Democratic caucus called to act upon the bill and 
 amendments. While this frank and courageous declaration of 
 Mr. Bryan's had the expected result of solidifying his followers 
 in the support of the bill, it also, I venture to suggest, opened 
 the eyes of that numerous portion of the American public, 
 which is not and never has been in sympathy with his opinions 
 
35 ^^--^Sc^^h'-^' 
 
 on this subject, to the dangerous character of the proposals he 
 commends so warmly. 
 
 The Bryan proposition as now made and accepted furnishes a 
 plan of distribution of notes that is skilfully devised. The 
 printing of the notes is a simple matter, but no advocate of 
 greenback theories has heretofore been able to suggest any 
 practical way by which they could be put in circulation. Mr. 
 Bryan himself has not always been clear upon this point. 
 In a speech made by him in 1894 he says : 
 
 ''If it is said that we must institute banks of issue in order 
 to put money into circulation, I answer that there is a better 
 way. The issue of money by the government directly to the 
 people gives us a safer money and saves to the people as a whole 
 the profit arising from its issue. When a bank issues money you 
 must pay the market rate of interest in order to get it, but when 
 the government issues money the people save the interest 
 if the money is afterward called in, and they save the principal 
 also if the money is kept in circulation. Numerous plans 
 have been suggested for putting this money into circulation. 
 Some have an idea that a government issue can only be put 
 forth by loaning it to the people, either directly or through the 
 agency of banks. 
 
 ''There are, in my judgment, other and better ways. If a 
 limited amount is issued, and of course the amount must be 
 strictly limited, and it is loaned to the people, partiality will be 
 shown in its distribution, for only a few, relatively speaking, 
 can be accommodated. 
 
 "But aside from the danger of placing so great a power in 
 the hands of the dominant party, there are plans more just and 
 equitable than that of loaning. The money can be used to pay 
 the expenses of the government, as the greenbacks now in cir- 
 culation were used to pay the expenses of the war. If Congress 
 
36 
 
 decides to increase the currency a certain amount annually, 
 say for illustration, fifty millions a year, it can reduce the tax 
 levy to that extent and the people will receive the benefit of the 
 issue just in proportion as they pay taxes, for they will save to 
 that extent the taxes which they would otherwise pay." 
 
 Aside from its announcement of general principle there 
 are two points in this quotation that are worthy of 
 attention. He says that of course the amount must be 
 strictly limited, and calls attention to the danger of 
 placing so great a power, that is, the power to loan money, in 
 the hands of a dominant party. It would seem that Mr. 
 Bryan's ideas upon the subject are progressive. He certainly 
 could not have anticipated in 1894 that it would be possible for 
 him to secure the adoption of a plan of distribution much more 
 comprehensive in its character than he at that time thought 
 wise to advocate. Mr. Bryan, in his letter to which I 
 have referred, reiterates with increasing emphasis the state- 
 ment that a government issue of notes through a board of 
 government officials is a distinct triumph for the people. If the 
 method of distribution by loaning notes to a class of banks is a 
 triumph for the people, why not make the triumph more definite 
 and beneficial by loans on similar terms to all banks, or to all 
 individuals or corporations doing business, or, better still, 
 directly to all the people? If the proposals for note issues con- 
 tained in the bill are really in the interest of the people, why not 
 make them comprehensive and include all the people rather 
 than a certain privileged class? Why not give the people the 
 profits of issue rather than confer them on undeserving middle 
 men? If the United States is to engage in the business of 
 loaning its obligations on collateral, then logically the demand 
 for the loaning of government money on warehouse receipts 
 issued on deposits of cotton and grain cannot be resisted. 
 
37 
 
 It is not surprising that Mr. Bryan and his followers should 
 be but little concerned as to the other details of the bill. 
 I have no disposition to detract from the credit to which Mr. 
 Bryan is entitled for the victory he has attained, but I think we 
 have a right to ask that the American people should be given an 
 opportunity, under the circumstances, for a full hearing upon 
 the question before a judgment is rendered adverse to their 
 highest interests. 
 
 The incorporation of the provisions for government note 
 issues in the administration bill is certainly a great personal 
 triumph for Mr. Bryan, but it is, at the same time, an emphatic 
 condemnation of the theories of government and the economic 
 teachings of every great Democratic leader from Andrew 
 Jackson and Thomas H. Benton to Samuel J. Tilden and 
 Grover Cleveland. It is undoubtedly true that the support of 
 Mr. Bryan and his followers was necessary to secure any 
 legislation upon this subject, but it is unfortunate that to 
 secure this support it seemed to be necessary to sacrifice the 
 cherished principles and traditions of a great party. 
 
 The ascription by Mr. Bryan of transcendent importance to 
 the issue of government notes by a government board, taken 
 together with the propositions which have been offered by two 
 leading members of the Senate committee, to issue United 
 States notes in place of gold certificates, national bank notes, 
 and government bonds, indicate that the bill as it now stands 
 is but the first step in a revolutionary program. The bills I 
 refer to contemplate the issue of two dollars of United States 
 notes to take the place of one dollar of gold certificates which 
 are to be retired, the gold retained in the treasury to be issued 
 as a reserve for the new notes issued on a fifty-per-cent basis. 
 The gold upon which gold certificates have been issued is held 
 as a trust fund by the United States under a solemn pledge made 
 
38 
 
 in the act of 1900 that it shall not be used for any other pur- 
 pose. The exchange suggested, if carried to its conclusion, 
 would result in unbounded inflation. 
 
 The policy of issuing gold certificates based on a deposit of 
 gold was adopted deliberately and with wisdom as a means of 
 providing a currency absolutely safe under all circumstances, 
 and to secure and encourage the use of gold through its repre- 
 sentatives. To abandon this policy and use the gold through 
 manipulation of notes for other purposes, not only would 
 involve the good faith of the government, but would be ex- 
 tremely dangerous from the point of view of the public interest. 
 The fact that proposals of this kind have been made by respon- 
 sible legislators points the way which is sure to be followed if 
 we once enter upon the poUcy of government note issue. 
 
 THE TYLER PLAN. 
 
 In the proposals to create a Federal Reserve Board and to 
 provide for the issue of government notes, the authors of the 
 House bill followed a plan submitted by President Tyler to 
 Congress in 1841 for the creation of an Exchequer Board. 
 It is quite natural, perhaps, that Virginians should follow a 
 Virginian President in the preparation of a plan but the selec- 
 tion made is a matter of surprise. President Tyler, after 
 having vetoed, on constitutional grounds, a bill to establish a 
 fiscal bank and another to create a fiscal agency, in his annual 
 message suggested a plan to estabhsh a Board of Control in 
 place of a Bank of the United States. Following this sugges- 
 tion. Secretary Forward submitted to Congress, December 21, 
 1841, a plan for the creation of an Exchequer Board, the 
 designation having been changed from a Board of Control. 
 The Exchequer Board was to be composed of the Secre- 
 tary of the Treasury for the time being, the treasurer 
 
of the United States for the time being, and three com- 
 missioners to be appointed by the President, with the advice 
 and consent of the Senate, one of the commissioners to be 
 appointed for two years, one for four years, and one for six 
 years, and vacancies subsequently occurring, to be filled 
 at the end of every period of two years. The board was 
 authorized and directed to cause to be prepared and issued 
 treasury notes of a denomination of not less than five dollars 
 or more than one thousand dollars which were to circulate 
 as money. These notes were redeemable in gold or silver on 
 demand. The amount of the notes was limited to fifteen 
 millions of dollars unless otherwise provided by law. They 
 were made receivable for all dues to the United States and it 
 was provided that the central board and all of its several agen- 
 cies should keep on hand at all times a gold and silver reserve 
 which should equal one-third of the amount of outstanding 
 notes. The board was also authorized to estabUsh agencies for 
 the transaction of its business in different parts of the country, 
 and to purchase and sell domestic bills of exchange payable in 
 another state from that in which they were drawn. The pur- 
 pose of this provision, it was claimed, was to facilitate domestic 
 exchanges which for some time had been in a most demoralized 
 condition, being dependent upon state banks in different 
 parts of the country, most of whom had suspended specie pay- 
 ments and whose notes were at a large discount. You will 
 notice the wonderful resemblance between the two plans — the 
 same kind of a board with the same power over the currency, 
 except that the amount of the notes to be issued was hmited to 
 fifteen milHons of dollars in the Tyler plan; but, with the same 
 proportion of reserves, the redemption however to be in gold 
 and silver alone. None of the enormous powers granted the 
 Federal Reserve Board to loan money and control the bank- 
 
40 
 
 ing system of the country are, however, to be found in the 
 Tyler plan. This plan was presented to Congress at the 
 beginning of the December session in 1841. It was discussed 
 at some length in both houses and finally referred to friendly 
 committees in each house. The terms of this original plan, 
 the character of the men who discussed its provisions, and 
 the final disposition of the measure, all have the strongest 
 possible interest for us in the consideration of the Democratic 
 caucus bill. The senators who took the leading part in the 
 discussion in the Senate were James Buchanan, Thomas H. 
 Benton, John C. Calhoun, Levi Woodbury and Robert J. 
 Walker, men whose right to speak for their party and its 
 policies was not then doubted and can not now be called in 
 question by the friends of the enlarged Tyler plan which we 
 are now considering. It was apparent upon the presentation 
 of President Tyler's plan that it had few friends or even 
 apologists in either house. The principal discussion occurred 
 before the reference of the bill to the committees. 
 
 In the Senate, Senators Buchanan and Benton led the 
 opposition to the measure. I feel justified in quoting from the 
 debate at length on account of its illuminating qualities. 
 Senator Buchanan, in his speech of December 29, 1841, as 
 reported in the Congressional Globe, said that ''he had viewed 
 the plan submitted by the Secretary in every aspect and he 
 could see nothing in it but a great government bank. They 
 (the Exchequer Board), were to put in circulation a government 
 paper currency not exceeding $15,000,000 in notes of a de- 
 nomination not lower than five nor higher than one thousand 
 dollars and they were expressly authorized, according to the 
 rules of banking, to issue three paper dollars for every gold and 
 silver dollar in their possession. ~ 'Hften it was a bank of issue. 
 Was it also a bank of discount? Could any man doubt it? 
 
41 
 
 ****** Mr. Buchanan therefore took it for granted 
 that it could not and would not be denied that this Exchequer 
 Board was a bank. ****** jJqw could it possibly 
 be supposed that any honorable senator belonging to the party 
 with which it was Mr. Buchanan's happiness to act could ever 
 adopt a plan of this description. ****** WTiat 
 would the President become, according to this plan? He was 
 already the great fountain of poUtical patronage; and he was to 
 become the head of an immense moneyed institution. Pro- 
 testing always that no remarks he should now make had the 
 remotest application to President Tyler, he put the case of an 
 ambitious and dangerous man being at the head of the Govern- 
 ment — an Aaron Burr being in the chair — and let him have it 
 in his power to control the whole of the pubhc revenue; let him 
 have at his disposal all the money of the people, with which to 
 purchase the services of political partisans on the eve of a great 
 presidential election, and what would become of the national 
 liberty. All they had formerly heard about a union of the 
 purse and the sword was mere idle declamation; but here was 
 that union in reality, and without a veil. All the money of the 
 people was to be subjected to the executive disposal, and the 
 President was to become at once the fountain of individual 
 wealth as well as of political power. The treasury bank was 
 to be completely and exclusively under the control of the 
 government; and an able, who should be at the same time a 
 bad man, would be in circumstances, by the use of this double 
 power, both pohtical and fiscal, to spread unbounded corrup- 
 tion throughout the community, to subsidize the venal to the 
 purposes of his ambition, and so to corrupt and to impair the 
 liberties of his country, that they would be no longer worth 
 preserving. ****** 
 
42 
 
 '' These exchequer notes constituted in every respect a Govern- 
 ment paper money, and what had the past history of the world 
 invariably demonstrated to be the fate of such money? Was 
 there one country under the sun which ever had tried it and 
 had not been a sufferer from the experiment? Everywhere its 
 value had depreciated from day to day, until at length it had 
 sunk to nothing. The two most striking examples of this were 
 to be seen in the assignats issued during the French revolution, 
 and the continental money of our own Revolutionary days. In 
 both cases, indeed, the paper accomplished a glorious purpose — 
 it established and sustained public liberty, and enabled each 
 of these nations to resist and overcome a despotic power; but 
 as a currency, as money, it sank and sank until at length it 
 lost all value. And should we, in these piping times of peace, 
 when the people were abundantly able to pay all the expenses 
 of Government, resort to an expedient suited only to the most 
 desperate emergency, and of so tempting and seducing a 
 character as to have been abused by every Government that 
 had resorted to it?^'* 
 
 The part which Mr. Benton took in the discussion was even 
 more important and significant. He said : 
 
 ''In his (Hamilton's) report on a national bank in 1791, he 
 ran a parallel between the dangers of bank paper and govern- 
 ment paper, assigning to the latter the character of far greatest 
 danger and mischief — an opinion in which I fully concur with 
 him."t 
 
 After quoting the report, he says: 
 
 ''I can add nothing to the force of these sentiments by adding 
 my own concurrence in them. I fully concur in the sentiment 
 
 ♦Congressional Globe, 27th Cong., 2dses3., app., pp. 43-4. 
 tCongreasional Globe, 27th Cong., 2d seas., app., p. 65. 
 
that government issues of paper are far more dangerous than 
 bank issues — as much more so as the power and sphere of action 
 of a government is greater than the power and sphere of action 
 of a bank. ****** 
 
 ^' The point of difference between them is a government bank 
 and government paper on one hand, and a banking company 
 under a national charter, issuing bank notes, oh the other. 
 This is the point of difference, and it is a large one, very visible 
 to my eye; and I am free to say that, with all my objections 
 to the national bank and its paper, I am far more opposed to 
 government banking, and to government issues of paper 
 money."* 
 
 And again: 
 
 "A great number of our American people ****** 
 have become possessed of a fixed idea that paper money is the 
 summum honum of human life. Possessed of this idea they 
 direct all their thoughts to the erection of a national institu- 
 tion — no matter what — to strike paper money, and circulate 
 it upon the faith of the credit and revenues of the union. No 
 argument, no reason, no experience of our own, can have the 
 least effect in dislodging that fixed and sovereign conception. 
 To this we are indebted for the cabinet plan of the federal 
 exchequer and its appurtenances, which has been sent down 
 to us."t 
 
 Senator Calhoun, in the course of his speech, said: 
 
 ^* There were many and decisive objections to the scheme 
 proposed. They had been clearly and strongly pointed out 
 by the senator from Pennsylvania (Mr. Buchanan) . He agreed 
 with him that it would be a government bank, not only in 
 
 ♦Congressional Globe, 27th Cong., 2d sess., app. p. 66. 
 tT. H. Benton, Thirty Years View, p. 392. 
 
44 
 
 effect, but in reality. ****** jj^ ^^so concurred 
 with the senator that it would, at no long interval, become a 
 mere machine for issuing irredeemable paper. The report, 
 itself, among its admissions, states that there is an almost 
 irrepressible tendency on the part of banks to excess in their 
 operations. It is true, but not the less so, that there is the 
 same tendency in all paper circulations; and, if possible, stronger 
 in most of its forms than that of the banks themselves.''* 
 
 Senator Woodbury said in debate: — 
 
 *' When what is called money rests for its character on naked 
 legislation or inadequate means in specie to redeem every 
 dollar of the paper due, affairs might, to be sure, go on con- 
 fidingly while no deficiencies were threatened, no extravagant 
 expenses incurred, or no great fallings off in resources appre- 
 hended. ****** Let a scheme like this be tested 
 by such panics and over trading as have characterized the few 
 years past — and the whole would explode in a single month. 
 
 All the evils of old Continental money and French assignats, 
 and all the ravages inflicted by colonial paper, before the 
 Revolution, would be probable, if not inevitable. * * * * 
 In such a panic as that in 1834, or 1837, or 1840, — and many 
 more which might be named, contrary to the views in the 
 report, that they are only few and far between — and the Fiscal 
 Agency would be broken in single day."t 
 
 More important even than the discussion in the Senate were 
 the expressions of Andrew Jackson with reference to this 
 Tyler plan for an Exchequer Board. In his message proposing 
 the plan, President Tyler had claimed that the plan he pro- 
 posed was similar to that which had been advocated by Presi- 
 dent Jackson, and Senator Rives of Virginia had made a similar 
 claim in the Senate. These claims having been brought to the 
 
 ♦Congressional Globe, 27th Cong., 2d sess., p. 70, 
 tCongressional Globe, 27th Cong., 2d sess., app., pp. 55-6. 
 
45 
 
 attention of Jackson, he wrote two letters to William B. Lewis, 
 his intimate friend and the man who had been the chief of his 
 kitchen cabinet. In the first of these, he said: 
 
 ^^I informed you in my last, that I regretted that part of 
 the President's message that recommended a paper currency 
 of treasury notes, and as the President has observed that it was 
 shadowed forth by my message of 1830, I sincerely regret that 
 he did not fully embrace the propositions therein set forth. 
 Turn to it and you will find that there is no expression there 
 that will justify the idea of Congress making a paper currency 
 of any kind, much less by issue of treasury notes — and it is 
 impossible to make out of any paper system, a sound cir- 
 culating and uniform currency."* 
 
 In the second letter written two weeks later, he said : — 
 ^'I discover that Mr. Rives has adverted to my message of 
 1830 in support of the measures recommended. I regretted 
 to see this — it shows him uncandid, because there is no likeness 
 between them. ****** jyjy explanatory remarks 
 show this. ****** The word bank was used by 
 me in its proper sense to distinguish it from an incorporated 
 bank — a place where the money of the government was to be kept, 
 to clearly show that it was to have no stockholders, no power to 
 issue paper, discount or exchange and if Mr. Rives will read all 
 my messages and my farewell address which was intended to 
 give my full views on banking he will find he has done me great 
 injustice in referring to my messages, as authority for the 
 fiscal plan proposed by President Tyler. Every one who 
 knows me, must be aware of my universal hostiUty against 
 all government paper currency. The old continental currency 
 was sufficient to convince me that a greater curse could not 
 visit a nation than a paper currency."* 
 
 *W. G. Sumner, Andrew Jackson, pp. 286-7. 
 
46 
 
 After these discussions, the bill was referred to committees 
 as I have already stated. In the house report, the committee 
 of which Caleb Gushing was chairman recommended a change 
 requiring gold and silver to be held equal to the amount of notes 
 issued, making them substantially coin certificates. They 
 held that it was no part of the business of the federal govern- 
 ment to carry on, directly or indirectly, a business of dis- 
 counting notes or bills or otherwise lending money, or to furnish 
 funds to be so lent. The committee of the Senate recom- 
 mended changing the formation of the board by leaving out the 
 ex-offiaio members. They also provided that the amount 
 of note issue should never exceed the actual amount of specie 
 on hand, dollar for dollar, stating that the committee were 
 of the opinion that no paper should issue on the credit of 
 the government to circulate as money, and that such issue 
 would be in violation of a great, fundamental principle. Even 
 in the modified form proposed, the bill found no substantial 
 support in either house and the Tyler plan went down into 
 oblivion with the unanimous disapproval of the men of all par- 
 ties, only to be restored three quarters of a century later as a 
 Democratic party measure. Every criticism made by the great 
 leaders of the Democratic party in 1841 of the Tyler plan 
 would apply with even greater force to the plan of the bill we 
 are considering. It seems somewhat singular that a Democratic 
 administration should have selected the plan of John Tyler for 
 the creation of an Exchequer Board as a model for their plan 
 of a Federal Reserve Board. 
 
 FEDERAL RESERVE BOARD A GOVERNMENT CENTRAL BANK. 
 
 I have stated that by the establishment of the Federal 
 Reserve Board Congress would create a government central 
 bank. The board is a bank of issue, as all the government 
 
47 
 
 notes authorized by the bill are issued by it. It is a bank of 
 discount as it makes loans of government notes to Federal 
 Reserve Banks, taking commercial paper as collateral at a rate 
 of discount fixed by the board. The following recital in out- 
 line of the powers granted and functions assigned by the bill 
 to the Federal Reserve Board fixes its character as a central 
 bank. The imperial powers improvidently granted, and the 
 authority given the Federal Reserve Board over reserve banks 
 and their members, are vastly greater than those exercised by 
 any central bank in existence. The reserve banks and their 
 offices scattered throughout the country are for most purposes 
 merely branches of the central board. This board is described 
 by the committee which reported the bill in the House as a 
 ^^ general board of management intrusted with the power to 
 overlook and direct the general functions of the banks referred 
 to." 
 
 The Federal Reserve Board has authority to create and 
 readjust districts within which federal reserve banks are to be 
 located. It may permit state banks to become members, and 
 may also suspend such banks from membership at its dis- 
 cretion. It may establish branches of the federal reserve 
 banks within each federal reserve district and prescribe their 
 management. There might possibly be 200 of such branches in 
 the United States on this basis. The board fixes the compen- 
 sation of all the directors of the federal reserve banks. Of the 
 nine directors of the reserve banks six, three representing the 
 shareholding banks and three representing the conamercial and 
 other interests of the district, are elected by the member banks 
 acting in groups which are estabUshed by the agent of the 
 Federal Reserve Board, and the elections are held under the 
 supervision of the same agent who, by various provisions, be- 
 comes an important, if not a controUing factor in all elections. 
 
48 
 
 The central board appoints three of the nine directors, and it 
 has the power to remove three others, if in its opinion they are 
 not proper representatives of the commercial interests of the 
 districts. The central board appoints the chairman of the 
 board of directors of each reserve bank, who is evidently in- 
 tended to be the manager of the bank, and who is also the agent 
 of the central board for the transaction of its business. He 
 reports all acts to the central board, which fixes his salary and 
 can remove him at any time without notice and appoint 
 another in his place. The directors of the bank have no con- 
 trol over him or his acts. The central board has an office in 
 the reserve bank in charge of its agent, the chairman of the 
 board. These provisions taken together give the central board 
 a potential voice in the management of the reserve banks. 
 The central board has the right, subject to an exception, to 
 determine or define the character of paper eligible for discount 
 by the federal reserve banks; to fix the conditions under which 
 member banks may discount 120-day paper; to review and 
 determine the rate of discount which can be charged by federal 
 reserve banks; to require, or, on application, to permit any 
 federal reserve bank to rediscount paper of any other federal 
 reserve bank. With reference to reserves, the power of the 
 central board over the reserves of the federal reserve banks and 
 of all national banks is plenary. It is authorized to suspend 
 any and every provision of law with reference to the reserves 
 of reserve banks or national banks, except that having reference 
 to note issue. It has the power to add to the number of cities 
 classified as central reserve cities, to reclassify central reserve 
 or reserve cities, and to designate any of the banks therein as 
 country banks, at its discretion. The central board is author- 
 ized to issue, without any limitation as to the amount, obliga- 
 tions of the United States and to loan these on collateral to the 
 
reserve banks. The agent of the central board, who is also 
 chairman of the board of the reserve bank, acts in the double 
 capacity of applicant for loans and custodian of the collateral 
 offered as security for the loan of government notes which may 
 be made at any time, and has charge also of changes in collateral. 
 The central board may, at its discretion, require a deposit by the 
 federal reserve banks of a redemption fund of five per cent of 
 the notes issued, and it can fix the rate of discount, not however 
 less than one-half of one per cent per annum for the loans of 
 government notes to the reserve banks. 
 
 It may, at its discretion, suspend the operations of any federal 
 reserve bank and appoint a receiver therefor. The routine 
 business of the federal reserve banks is also under the control of 
 the central board. It may make regulations governing the 
 transfer of funds between the federal reserve banks. The cen- 
 tral board may itself act as a clearing house for federal reserve 
 banks or may require, at its discretion, the federal reserve banks 
 to act as clearing houses for shareholding banks. It may 
 remove officials of the banks for incompetency; it may require 
 the writing off of doubtful or worthless assets upon the books 
 of the reserve banks; it may levy semi-annual assessments upon 
 the reserve banks for the expenses of the central board. 
 
 The central board is given the power to exempt national 
 banks from those provisions of law which restrict the character 
 of their investments, and may reduce the number of cities 
 within which national banks are permitted to make loans upon 
 real estate. It is given not only the power to regulate the 
 savings departments of national banks, but it can fix the char- 
 acter of their investments, which may differ in different parts 
 of the country. The central board may fix the terms upon which 
 national banks may apply for authority to estabUsh branches 
 in foreign countries, and it may reject any application on the 
 
50 
 
 ground that its approval would be inexpedient. By an unusual 
 provision, the central board is authorized to perform all the 
 duties, functions and services implied by the act in addition 
 to those that are specified. How extensive this grant of power 
 may be, it is impossible to say. By another provision, extra- 
 ordinary in its character, the central board is authorized to 
 levy taxes on all banks, national, state, or reserve, whenever 
 their reserves fall below a point to be fixed by the board. 
 There is no limit fixed for the amount of the levy and no rule 
 laid down which is to be followed in making the assessment. 
 It will not be possible for me in the time I have at my disposal 
 to take up and examine in detail this long Ust of powers 
 granted to the central board. It must be evident that it con- 
 tains more than one grant of legislative power which, upon 
 principles heretofore declared by the courts, would be pro- 
 nounced unconstitutional. 
 
 By the different provisions of the bill with reference to re- 
 serves it might happen that one bank in the city of New York 
 or any other reserve city would be required to have 18% 
 reserve, another one 12% and another one no reserve at 
 all. The mere existence of this power of discrimination 
 might, in itself, have a very persuasive influence, political or 
 otherwise, upon the attitude of all the banks towards an 
 administration which could dispense favors and impose penal- 
 ties of this nature. 
 
 The Federal Board is given the power to determine each 
 week, or as much oftener as required, the rate of discount to be 
 charged by each reserve bank for each class of paper. This 
 provision contemplates different rates for different sections of 
 the country and different rates on different classes of paper. 
 In other words, the board sitting in Washington will be called 
 upon to review and determine at least once a week, 48 rates of 
 
51 
 
 discount covering the entire country, and to fix these rates — 
 in the language of the bill — ^'in view of accommodating the 
 commerce of the country." 
 
 The fixing of this miscellaneous collection of rates could not 
 possibly be made effective for 'any of the purposes for which 
 bank rates are fixed and changed in other commercial countries. 
 There can be no justification for fixing a different rate of dis- 
 count to be charged by a government institution, supposedly 
 created in the public interest, on the same class of paper in one 
 section of the country as distinguished from another. The 
 bill evidently contemplates a higher discount rate in the South 
 and West than in eastern or central localities. In other words, 
 the rate might be 4% in New York and 6 or 8% in Nebraska 
 or Texas. 
 
 It should be borne in mind that we are dealing with oflicial 
 rates and not commercial rates, which are controlled more or 
 less by local conditions. Any substantial difference in rates 
 fixed for federal reserve banks would send standard commercial 
 paper from one district to another by direct or indirect means, 
 to secure the benefit of the lower rates. In my opinion it is 
 of the very highest importance to the people of the South and 
 West that there should be a uniformity of rates in all the reserve 
 banks for identical classes of paper. Any other course would 
 result in an unjust discrimination by the national authority 
 between sections. Uniformity of rates is most important from 
 the standpoint of the desirabiUty of securing approximate equal- 
 ity of rates and facilities to every section of the country. There 
 is no use in establishing standards for commercial paper if 
 paper representing the products of the South and West is to 
 be discriminated against by a government agency in contrast 
 with paper representing the products or industries of the East. 
 One of the principal purposes for which this government 
 
52 
 
 machinery is to be erected is to give the paper representing the 
 products and industries of the country a new and better status 
 in our own markets and those of the world. Can this be accom- 
 pUshed if we declare that the securities of great sections of our 
 common country are not entitled to the credit which is accorded 
 to those of other sections in government banks. 
 
 One of the main purposes of creating the federal reserve banks 
 is to secure such a concentration of reserves as will permit their 
 prompt use in any amount and in any part of the country to 
 establish confidence and avoid panics. I think it must be 
 evident to anyone familiar with conditions that the creation of 
 these twelve or more federal reserve banks would not accom- 
 plish this purpose. 
 
 The Federal Reserve Board, an organization without capital 
 or financial responsibility, has no reserves of its own and is 
 given no control over the reserves of the reserve banks. It 
 has power to increase, at its discretion, the demand obligations 
 of the United States, but it has no power, in times of stress, to 
 keep the banks or the Treasury on a gold basis, or to prevent 
 suspension of domestic or international exchanges. It is 
 given, improvidently, autocratic powers over business of the 
 banks — which can only be successfully managed by the men 
 who own and control existing institutions and who are familiar 
 with all local conditions. It is granted powers that can only 
 be properly exercised by trained bankers, and it can take no 
 effective action for reUef in times of national or international 
 crises. In great emergencies when some sustaining power is 
 necessary, it will be powerless. It can take no steps in the 
 interest of the country at large to control the movement of 
 gold or to increase the supply of gold through negotiations with 
 the great banks of Europe or otherwise. It might be able to 
 control elections and insure the success of a political party, 
 
53 
 
 but, in times of stress, it would have no power to preserve 
 public or private credit. It would be able to loan government 
 money to impecunious banking friends or to deposit govern- 
 ment funds in ^^pet banks," but it would be unable to assist a 
 bank or a community in time of serious trouble. It would have 
 no status in the commercial world, and its standing at home 
 would be fixed by its importance as a poUtical machine rather 
 than as a force in financial circles. 
 
 Jackson's government bank. 
 
 Friends of a government central bank quote General Jackson 
 as one of its advocates. It is true that he suggested on several 
 occasions that it might be desirable to establish a government 
 bank, but these suggestions were always more or less vague in 
 character, and he never committed himself in detail to any 
 definite plan. His opponents, however, claimed that General 
 Jackson intended, by these indefinite suggestions to advocate 
 the creation of a government central bank under political con- 
 trol, and that the effect would be to place the whole banking 
 power of the country at the mercy of the president. I think it 
 may be said that this claim did not fairly represent General 
 Jackson's views and that he intended merely an institution like 
 the independent treasury that should take over government 
 business alone. The quotations which I have already made from 
 his letters to William B. Lewis are confirmed in this respect by 
 his statement with reference to the removal of the public 
 deposits as follows: 
 
 '^ It is the desire of the President that the control of the banks 
 and the country shall, as far as possible, be entirely separated 
 from the political power of the country as well as wrested from 
 an institution which has already attempted to subject the 
 government to its will. In his opinion the action of the 
 
54 
 
 general government on this subject ought not to extend beyond 
 the grant in the constitution, which only authorizes Congress 
 'to coin money and regulate the value thereof ; all else belong 
 to the states and the people, and must be regulated by public 
 opinion and the interests of trade."* 
 
 The suggestion, however, led to a prolonged discussion on the 
 merits of the government central bank. 
 
 The objections to the creation of a government central 
 bank were never, perhaps, more clearly and forcibly stated than 
 in the report of the House committee of ways and means of 
 which Mr. McDuffie of South Carolina was chairman, in 1830. 
 In the course of this report, the following statement was 
 made: 
 
 ''It will be difficult to find any warrant, either in the letter 
 or the spirit of the constitution, for the creation of this tremen- 
 dous engine of pecuniary influence. It may, indeed, be 
 doubted, whether all the branches of the legislative authority 
 united have any constitutional power to lend the public revenue 
 either to individuals, corporations, or states, without reference 
 to the objects to which it shall be appUed. But, whatever may 
 be the power of Congress on this subject, it appears to the 
 committee to be inexpedient, in every view of the question, 
 that the government should be converted into a great money 
 lender. There is no species of trade in which it would be wise 
 for the government to embark; but of all the variety of pur- 
 suits known to human enterprise, that of lending money by the 
 government to the citizens of the country, would be fraught 
 with the most pernicious consequences. * * * 
 
 ''In the first place, it is a business to which, in the very 
 nature of things, no government is adapted, and, least of all, a 
 
 *F. N. Thorpe, Statesmanship of Andrew Jackson, p. 280. 
 
55 
 
 popular government. There is no employment of capital that 
 requires a more vigilant and skilful superintendence. * * * 
 
 " Nothing that has not happened can be more certain, than 
 that every unfavorable vicissitude in trade, every period of 
 commercial distress and embarrassment, would give rise to 
 importunate and clamorous calls for indulgence, and for an 
 injudicious extension of discounts, which no administration 
 would have the firmness to resist. * * * 
 
 ^'The government would have scarcely any faculty of re- 
 sistance, when appeals for indulgence should come from all 
 quarters of the Union, sustained by the strong plea of public 
 distress and embarrassment. * * * 
 
 ^^ But the inevitable tendency of a government bank to 
 involve the country in a paper system, is not, in the opinion 
 of the committee, the greatest objection to it. The powerful, 
 and, in the hands of a bad administration, the irresistible and 
 corrupting influence which it would exercise over the elections 
 of the country, constitutes an objection more imposing than all 
 others united. No matter by what means an administration 
 might get into power, with such a tremendous engine in their 
 hands it would be almost impossible to displace them, without 
 some miraculous interposition of Providence. 
 
 *^ Deeply impressed with the conviction that the weak point 
 of free government is the absorbing tendency of executive 
 patronage, and sincerely beUeving that the proposed bank 
 would invest that branch of the government with a weight of 
 moneyed influence, more dangerous in its character, and more 
 powerful in its operation, than the entire mass of its present 
 patronage, the committee have felt that they were imperiously 
 called upon, by the highest considerations of public duty, to 
 express the views they have presented, with a frankness and 
 freedom demanded by the occasion."* 
 
 *M. St. C. Clarke and D. A. Hall, Bank of the U. S., pp. 758-9. 
 
56 
 
 NATIONAL BANKS. 
 
 It is sought to make the control of the Federal Reserve 
 Board over the banking business of the country effective by 
 compelling national banks to subscribe within a year to the 
 stock of the federal reserve banks a sum equal to twenty per cent 
 of their capital under penalty of dissolution in case of failure or 
 refusal. The national banks are further required to deposit 
 with the reserve banks a portion of their reserves. These 
 drastic provisions disclose an amazing want of confidence on the 
 part of the author of the bill in the wisdom of its methods. 
 The banks are now acting under charters for a fixed period 
 under certain definite conditions which have been faithfully 
 lived up to with the result that note holders have suffered 
 no loss, and that depositors and shareholders have lost only 
 infinitesimal amounts. The United States is bound by every 
 equitable consideration to protect the banks from serious losses 
 on their investments in government bonds. 
 
 I submit that it is not fair to impose upon these insti- 
 tutions as the price of their continued existence new, onerous, 
 or impossible conditions especially in legislation enacted 
 ostensibly to assist them the better to discharge their duties to 
 the public in times of trouble. The conditions imposed are 
 of such a character that unless changed they cannot be ac- 
 cepted by the smaller banks which form a large majority of 
 the national banks, without serious losses and dangerous im- 
 pairment of their resources and their ability to serve the pub- 
 lic. It will be noted that the penalty of dissolution goes into 
 effect in one year, even if it has not been possible within that 
 time to organize a single federal reserve bank with the requisite 
 capital. It would seem that the only method by which a 
 national bank could avoid the serious consequences of this legis- 
 
57 
 
 lation would be to take out a state charter and transfer its 
 business through voluntary liquidation. 
 
 It does not seem possible that the authors of this bill can 
 have considered the dreadful consequences that would ensue 
 if the national banking system is broken up by enforced dis- 
 solution or liquidation. The national banks have outstanding 
 $742,000,000 of circulating notes and banks going out of 
 existence must deposit lawful money in the treasury for their 
 redemption. These banks hold $685,000,000 of 2% bonds. 
 A state bank could not afford to hold these for investment and 
 their sale would mean a large loss to the owners, and the credit 
 of the United States would suffer unmeasured injury. It is 
 safe to say that the serious disarrangement of credits, the 
 contraction of circulating medium, and the destruction of con- 
 fidence that would certainly arise from a transfer of any 
 considerable amount of the banking business of the country 
 from the national to the state system would end in a financial 
 panic such as has never been seen in any country. 
 
 RESERVES OF NATIONAL BANKS. 
 
 Under the provisions of the national banking act estabhshing 
 the character and amount of reserves for national banks a 
 system has grown up which in the main is satisfactory to both 
 the banks and the pubhc. It has been found ineffective in 
 times of crisis, and the rigid provisions forbidding discounts 
 whenever the legal hmit of reserves is reached is unsatisfactory 
 in operation, but there has been no popular demand for a 
 reduction of the amount of reserves required. As authorized 
 by law country banks maintain balances with reserve agents 
 in local centers and in central reserve cities. This arrangement 
 affects favorably the convenience and the revenues of banks of 
 all classes. Banks are obUged to maintain balances with cor- 
 
58 
 
 respondents or reserve agents for exchange and collection as 
 well as reserve purposes. Banks in reserve cities have been 
 able to use the deposits of country banks, and this use has 
 assisted in the development of important business centers in 
 various parts of the country. 
 
 The relations between country banks and their reserve agents 
 have been usually of an intimate character. The banks which 
 act as reserve agents are, in almost every case, important 
 institutions of large capital and resources, and in ordinary 
 times amply able to respond to any demands for the reserves 
 in their custody, as well as to furnish assistance and support 
 to their country correspondents in cash or credit whenever 
 required. 
 
 The country banks receive a revenue from their deposits with 
 reserve agents and can invest a portion of their capital more 
 profitably than in the capital of the reserve banks. If the bill 
 should pass in the form proposed it would take away from the 
 country banks an important part of their revenue by the re- 
 quirement that reserve banks shall accept checks and other 
 collection items at par. But these results are unimportant com- 
 pared with the fact that their deposits in reserve banks might 
 not be available even in the ordinary times for reserve purposes, 
 as the scheme of the bill contemplates making the reserve banks 
 discounting machines which may be kept in perpetual operation 
 to their full capacity, in order to prevent a contraction of credits. 
 The framers of the bill evidently not only intend that the 
 reserve banks shall make loans to their members to the extent 
 of their deposits, but it is suggested that they may loan them 
 the money to pay for their subscriptions to the capital of the 
 reserve banks. Banks that do not borrow money for loaning 
 purposes would find that their reserve had disappeared in 
 loans to rival institutions. 
 
59 
 
 It should not be forgotten that the United States has a first 
 lien upon all the assets of the reserve banks as security for 
 government deposits and for issues of government notes which 
 have been loaned to them. In cases of large losses by the banks 
 this preference would be a serious matter for the bank's 
 creditors. 
 
 The change from the old system to the new involves a direct 
 loss to the country banks and imperils their investments and 
 deposits. National banks are required to submit to the losses 
 and inconvenience I have referred to. 
 
 The principal advantage which national banks have over 
 state banks is in the profit they derive from their note circulation 
 and the fact that they are permitted to share at times in the 
 benefits of government deposits. Both of these advantages are 
 practically removed by the bill, one to take effect immediately 
 and the other by the progressive reduction in national bank 
 note issues. Country banks hold a much larger proportion of 
 their capital in United States bonds than city banks. These 
 bonds have been bought in many cases within the last ten or 
 twelve years, and bought with the belief that the national bank- 
 ing system was to be permanent and that they were not likely 
 to be deprived of their charter rights. The losses on their 
 holdings of government bonds, unless Congress shall take 
 effective means for their relief, will be a serious matter to these 
 institutions. 59% of the national banks have less than $100,- 
 000 capital; 91% have less than $250,000 capital. Of state 
 banks the proportion of small banks to the total number is 
 much greater. 
 
 We should not lose sight of the fact that the national banks 
 in many locaUties have not been able to compete successfully 
 for business with the state banks. In 1912 67% of the 
 individual deposits of the country was in state institutions. 
 
60 
 
 The number of these institutions is practically three times 
 as great as that of national banks. The remarkable growth 
 of state banking institutions has been largely owing to advan- 
 tages growing out of more Uberal reserve requirements and 
 out of the fact that they have been able under state laws 
 to transact business which is forbidden to national banks. 
 
 With reference to state reserve requirements, ten states 
 have no provisions at all for reserves. In almost every state 
 the provisions are more hberal than the national requirements. 
 In all states national bank notes can be counted as a part of 
 the reserves of state banks, and in some states the reserves may 
 consist in part, and in one state wholly, in securities. The laws 
 of all the states leave the banks almost entirely free to deposit 
 their funds in the banks of the great commercial centers. In 
 most states they are entitled to keep a larger proportion of 
 their reserves in the hands of reserve agents than is permitted 
 by the banking act or the proposed bill. 
 
 With legislation depriving national banks of the advantages 
 which they now have and imposing upon them new and onerous 
 burdens, and with the state institutions retaining all the advan- 
 tages which they now have, it is not unreasonable to expect the 
 decUne if not the extinction of the national system. 
 
 It is impossible to predict the effect which the radical reduc- 
 tion in the amount and change in the custody of the reserves of 
 national banks will have upon the business of the country. It 
 is certain that the effect at first will be to create confusion and 
 uncertainty, and that the readjustment of credits and with- 
 drawals of deposits will lead to credit contraction. Just what 
 amount of credit expansion will take place later owing to re- 
 duction of reserves depends upon whether the national banks 
 accept the legal limit of cash reserves fixed by the bill as a 
 basis for their future credit operations. One of the witnesses 
 
61 
 
 who appeared before the Senate committee estimated that the 
 national banks hold 12.75% of their net deposits in cash. He 
 estimated that under the House bill a cash reserve of 6.8% will 
 be required. If the national banks should continue, notwith- 
 standing the provisions of law, to maintain a cash reserve of 
 12.75% against their Habihties, the result of the changes 
 proposed by the bill would be a contraction of credits. If on 
 the other hand the credit business of the national banks is to 
 be conducted hereafter on a 6.8% cash basis, this, taken in 
 connection with an expansion of note issues, would certainly- 
 lead to indefinite and destructive inflation. 
 
 One of the purposes of the proposed legislation, as stated by- 
 its friends is to take from the bankers the control of the bank- 
 ing and monetary interests of the country and to place it in the 
 hands of a Federal Reserve Board, and to prevent the concen- 
 tration of money in New York and other great financial centers 
 by the creation of twelve federal reserve banks. The reserve 
 banks are to take over and hold reserves now held by the banks 
 in reserve and central reserve cities, with a view of weakening, 
 if not of destroying, the supremacy of the money power, or of 
 the money trust, as it is sometimes described by political re- 
 formers. To aid in the accomplishment of this purpose, the 
 new system of reserves as well as of reserve banks is proposed. 
 Keeping these purposes in mind, it is desirable to examine 
 somewhat in detail the methods proposed for their accom- 
 pHshment. The cash reserve of the banks in the central reserve 
 cities is reduced from twenty-five to nine per cent. The 
 change in the custody of the reserves is more apparent than 
 real. 
 
 59% of the national banking capital of the country is 
 located in thirteen states, classified in the comptroller's report 
 as eastern and middle western states, while the other thirty- 
 
62 
 
 six have 41% of the capital. The thirteen states have 67% 
 of the banking resources of the country, while the other 
 thirty-six have 33% of these resources. The capital of the 
 federal reserve banks is fixed by a percentage of the capital- 
 ization of the national banks. It follows that 59% of the 
 capital of these banks will be located in the thirteen states. 
 The deposit of the reserve in these thirteen states, outside of 
 government deposits, will be 67% of those of the country. 
 If we assume that the central board will not exercise the 
 powers of control over the management of the reserve banks 
 and that the banks in these states will have the potential voice 
 in the management of the reserve banks in their section that 
 some of the friends of the measure claim, the supremacy of the 
 money power of the East will be strengthened rather than weak- 
 ened by the House bill. A portion of the capital and resources 
 of the section are transferred from one class of organization to 
 another without change of ownership. A new machine to be 
 operated by the same men is set up with government approval. 
 The banks in different sections are not controlled by conflicting 
 interests, but if they were, this legislation would only emphasize 
 existing conditions. 
 
 If four reserve banks should be located in these thirteen states 
 they would, on the basis that all national banks assented, have 
 a capital of about fifteen millions each. The eight located in 
 the remaining thirty-six states would have a capital of about 
 five milUons each. The reserve bank in New York would have 
 a larger capital and much greater resources than the three that 
 might be located in the thirteen southern states. 
 
 It is true that a very large amount will be withdrawn, by the 
 operations of the bill, from the banks in the reserve and cen- 
 tral reserve cities, but at least two-thirds of this amount will 
 be redeposited in the reserve banks in the thirteen eastern and 
 
63 
 
 middle western states. If we assume that these reserve banks 
 are simply adjuncts of existing institutions, this process will 
 largely consist of taking money out of one pocket and putting 
 it into another. 
 
 The treatment of bank reserves in the central reserve cities is 
 interesting. They now hold cash reserves amounting to 407 
 million dollars, this being 25% of their net deposits, and this 
 must be held in their vaults and cannot be used for any other 
 purpose. By the terms of the bill they would be required 
 to hold only 146 millions in cash and 261 millions would 
 be released for other purposes; but 146 milhons might be 
 deposited in a reserve bank where it would form a basis for 
 discount, leaving 115 millions available as a basis for credit 
 expansion. If cash reserves are accepted as the basis for 
 credit expansion, the banks in the central reserve cities will 
 be able to increase their loans in the proportion of 9 to 25 
 under the new law as compared with the old. If the bankers 
 of New York and other central reserve cities should consult 
 their selfish interest they would be found earnest advocates 
 of the new plan. 
 
 It was undoubtedly intended that the reserves concentrated 
 in the reserve banks should be made available for the assistance 
 and support of any bank or banks in time of serious trouble. 
 Heretofore, scattered reserves have been found useless and 
 panics precipitated by a general scramble of banks throughout 
 the country to increase their cash reserves. The trouble, 
 I am sure, would be intensified rather than relieved by the 
 creation of this new class of banks. In addition to 29,000 
 banks, each looking out for itself, we should have twelve 
 reserve banks of varying size and importance, each trying 
 to protect its own reserves and the interests of its own section. 
 The great disparity in the financial strength of these banks 
 
64 
 
 would give some great advantages over others in this contest. 
 New York and Chicago, with their immense resources and 
 foreign connections, if relieved from responsibilities for other 
 sections of the country, as proposed, could easily obtain the 
 gold necessary to protect themselves and enable them to meet 
 their obligations. Other sections might not be as fortunate. 
 That the authors of the plan believe that it could not be rehed 
 upon in emergencies and that it would fail when a real concen- 
 tration of reserves and resources was necessary, is shown by the 
 provision that the central board may require one reserve bank 
 to rediscount the commercial paper of another. It would be 
 almost impossible to put this plan of relief into operation with- 
 out doing more harm than good. Its wise administration would 
 necessitate an intimate knowledge, on the part of the cen- 
 tral board, of the financial conditions and loaning power of each 
 of the reserve banks, otherwise the transaction might of itself 
 precipitate a crisis. 
 
 The other method by which it is proposed to afford rehef to 
 banks or communities in trouble, is by a transfer of govern- 
 ment deposits from one reserve bank to another. The govern- 
 ment cannot afford to maintain a large surplus for the purpose 
 of transferring it from one section to another for relief purposes. 
 This method would be equally perilous with the other. Trans- 
 actions of this character, as well as the enforced discounts, 
 would appear in the weekly reports of the reserve banks, and 
 the knowledge that a bank in any section of the country was in 
 such need of assistance as to demand help on such terms, would 
 be likely to cause a run upon the advertised institution and the 
 attempt to reUeve might not only prove futile, but productive 
 of serious results. The deposit of treasury funds in 1907 was 
 efficacious in helping to restore confidence, but in that case the 
 money was taken from the treasury, and not withdrawn from 
 
65 
 
 one bank to be deposited in another; otherwise the beneficial 
 results would have been lost. 
 
 The suggestion of these questionable methods of making the 
 resources of one reserve bank available for the reUef of another, 
 discloses the inherent weakness of the plan. To be effective, 
 the capital and resources of reserve banks must be concentrated 
 under the control of some central organization. 
 
 CONTROL OF FEDERAL BOARD. 
 
 As I have shown, by the terms of the bill national banks are 
 obliged to furnish the capital and the deposits of the federal 
 reserve banks, the only other depositor being the United States. 
 They are obliged to invest a part of their funds and to place a 
 considerable part of their resources beyond their own control 
 or to submit to a sacrifice of their property and business. This 
 large contribution of national banks is placed under the control 
 of political appointees, the majority of whom of necessity cannot 
 have the knowledge or experience to qualify them for the 
 important duties assigned to them. 
 
 The national banks are forced into the position of stock- 
 holders and principal creditors of the reserve banks. The 
 reserve banks are forced to conduct their affairs under instruc- 
 tions from the central board, and yet neither the reserve banks 
 nor the national banks are allowed to participate in any way in 
 the management of the central board. It is not a question 
 whether the banks are to be permitted to control the board 
 created to supervise their transactions, but whether they shall 
 have any voice whatever in the management of their own prop- 
 erty. There is nothing in our form of government, the basic 
 principles of democracy, or the equitable principles which 
 should govern the organization of society, which warrants any 
 such exclusion. If this usurpation of the rights of property of 
 
66 
 
 protesting citizens is not without warrant in our constitution, 
 it certainly is in violation of every principle of equity. 
 
 The attempt is made by the friends of the measure to justify 
 this exclusion from the councils of the proposed government 
 central bank by a reference to the means by which central 
 banks of Europe are controlled, but a comparison of the man- 
 ner in which the central banks of the three most important 
 commercial nations of Europe are controlled with that sug- 
 gested for this government central bank would show that 
 no precedent can be found in European practice for the action 
 contemplated in this case. The question at issue is what, if 
 any, voice shareholders have in the management of European 
 central banks. European central banks have no control 
 whatever over the joint stock banks or their management. 
 
 A comparison of the manner in which the central banks of 
 the three most important commercial nations of Europe are 
 controlled with that suggested for this government central 
 bank, is of interest to us. With a very few exceptions (Russia 
 and Sweden are the only important ones) the central banks of 
 Europe are private institutions, in the sense that their shares 
 are held entirely by private owners, but the character of their 
 management varies. 
 
 In the case of the Bank of England, the government has 
 no voice in its management, nor does it own any stock in the 
 bank. The supreme control is vested in the governor, deputy 
 governor and 24 directors, all elected annually by the share- 
 holders. It is the custom of the shareholders to elect mer- 
 chants, representatives of important business houses, to mem- 
 bership on the board, and to exclude directors of joint stock 
 banks, and brokers. This custom is undoubtedly a proper one, 
 and is, I think, adopted universally in other institutions of a 
 similar character. I have never heard of any suggestion that 
 
67 
 
 a different course should be followed in this country. The 
 inclusion, however, of merchants as the principal directors of 
 the Bank of England admits to membership representatives 
 of all the greatest banking houses of the world. These mer- 
 chant houses are called banking houses in this country, and on 
 the board of directors of the Bank of England are found the 
 representatives of houses like the Rothschilds, Barings and 
 Morgans. The case we are considering is not one as to who 
 should be selected by shareholders on a board of direction, but 
 whether shareholders should have any representation in the 
 management. 
 
 The Bank of France is a private estabhshment and the 
 government owns no shares. The management of the bank is 
 in the hands of a governor and two deputy governors, who are 
 appointed by the Chief of State and a board of fifteen regents 
 (five of the regents must be chosen from the commercial and 
 industrial classes), and three censors (auditors) who are elected 
 annually at a meeting of shareholders. The regents correspond 
 practically to the board of directors of our banks. They decide 
 upon all important matters of policy and management, in- 
 cluding the fixing of the bank rate. 
 
 The administration of the Imperial Bank of Germany is 
 carried on by three boards: (1) The Curatorium, consisting 
 of the Chancellor of the Empire, one member appointed by the 
 Emperor, and three elected by the Federal Council from its 
 own members. The board meets once in three months and 
 very rarely interferes in the actual management of the bank. 
 (2) The Directorium, or board of managers, consisting of the 
 president, vice-president and seven others, who are the active 
 managers of the different departments of the bank and who are 
 appointed for life. These are recommended to the Emperor 
 by the Federal Council and appointed by him. In their 
 
68 
 
 appointment the Central Ausshuss are consulted. (3) The 
 Central Ausshuss. The powers and functions of this board are 
 defined by the Vice-President of the Reichsbank, Dr. von 
 Glasenapp, as follows: 
 
 "The third body, the Central Ausshuss (which takes the 
 place of our directors) , is composed of 15 members, who are 
 elected at the annual meeting of the stockholders, together 
 with 15 alternates, who serve in the absence of any of the 
 members of the board. This body meets once a month. From 
 among their numbers they appoint a sub-committee, known as 
 deputies of the Central Ausshuss, of 3 members and 3 alter- 
 nates. The deputies meet weekly with the president and mana- 
 gers. The Central Ausshuss are made familiar with the trans- 
 actions carried on by the bank and give their advice and 
 recommendations to the Direktorium in reference thereto. In 
 practice, their advice is generally carefully considered and 
 taken. In the fixing of the bank rate, it is their custom to 
 call a special meeting, if need be, of the Central Ausshuss, who 
 always confer in regard to the advisability of a change in the 
 bank rate. " 
 
 MANAGEMENT OF BANKS. 
 
 The experience of banking institutions generally establishes 
 the fact that the best results are obtained by leaving the 
 practical management of banking affairs to men of tried capa- 
 city and experience, whose positions are of a permanent 
 character, and whose services in most cases command large 
 salaries on account of the nature of their responsibilities. 
 Successful banking on any considerable scale can be carried 
 on only in this way. There is a clear distinction between 
 the actual managers of a great bank, that is, those who have 
 charge of its technical banking business, and the directors 
 
69 
 
 who pass in a more or less perfunctory way upon the action 
 of the managers, and who decide upon important questions 
 of general policy affecting the bank. This distinction is rarely 
 defined by law, but it exists in all well managed banking 
 institutions. It is sufficient to say that there is no important 
 banking institution in existence that could prosper under the 
 sole management of a political board whose membership was 
 certain to be changed at least once in four years. 
 
 SOCIALISTIC CHAKACTER OF THE BILL. 
 
 I am aware that there seems to be a marked tendency in 
 recent years, in some quarters, to abandon the doctrine that 
 States have still any virile powers under our form of govern- 
 ment, and to assent to the concentration of all powers and 
 authority in the national government, to be exercised through 
 Congress, or in later days, through agents of the executive. 
 But this is, I think, the first attempt to give a government 
 board the right to manage a great business, which is, more 
 important in its intimate relations to all the people than 
 any other. If the attempt is successful it will be the first and 
 most important step toward changing our form of government 
 from a democracy to an autocracy. No imperial government 
 in Europe would venture to suggest, much less enact, legislation 
 of this kind. 
 
 It will be remembered that the Federal Reserve Board con- 
 sists of three members of the President's official family and 
 four others to be appointed by the President and confirmed by 
 the Senate. One of the four members is made manager and 
 executive officer of the board, and acts under the supervision of 
 the Secretary of the Treasury, who is made chairman of the 
 board. It is provided that not more than two of the appointed 
 members shall be of the same political party. These pro- 
 
70 
 
 visions taken together fix the character of the board as a politi- 
 cal organization. Every change in administration means a 
 change of four, and probably five, of seven members of the 
 board. 
 
 As I have shown, the powers granted to this central board are 
 intended to give it the control of the functions and the business 
 of the reserve banks by arbitrary, direct, or indirect methods- 
 It is clearly intended that the government of the United States, 
 through these instrumentalities, shall be placed in a position 
 where it can control and manage the banking business 
 of the country. It is further intended that government obli- 
 gations shall ultimately take the place of all other forms of 
 note issues. This general purpose is either illy concealed or 
 openly announced by the promoters and advocates of the plan. 
 
 The creation of this board, with its improvident grants of 
 executive and legislative authority is repugnant to every 
 fundamental principle of popular government. No instru- 
 mentality could be further removed from popular control. 
 The functions of the board are exercised in secret and there is 
 no provision for publicity of any kind, except an annual 
 report to Congress. There can be no review of its opinions 
 and no appeal from its decisions. It is doubtful whether its 
 members could be impeached for flagrant abuse of power. 
 They are appointed by the President and apparently respon- 
 sible to him alone for the manner in which they discharge their 
 duties. This attempt to give to a political oligarchy the power 
 to control the banks and currency of the country, to be exer- 
 cised at its discretion, with no means of preventing or punish- 
 ing abuses, is promoted by the same men who are proclaiming 
 their purpose to destroy monopolies and to repeal all grants 
 of special privilege. No monopoly or grant of special privilege 
 
71 
 
 could be so great, so far-reaching in its consequences, as that 
 proposed by the bill under consideration. 
 
 The proposition that our government has the power, or could 
 properly exercise the right, to take possession and control, 
 through its agents, of the private business of its citizens, has 
 never before been seriously advocated in this country. No 
 reason can be given why the United States should take over 
 and manage the banking business of the country which does 
 not apply with equal force to any of our important indus- 
 tries or business organizations. In other countries the doctrine 
 of state socialism has found vigorous support from a limited 
 class, but the experiment of managing private business by gov- 
 ernment agencies has not yet been tried. 
 
 The creation of this board, however, is clearly a favor- 
 able response to socialistic demands. The aims of social- 
 ism were recently defined as follows by an acknowledged 
 authority: '^It demands that the machinery of wealth- 
 creation be taken from the individual capitalist, and placed in 
 the hands of the nation to be organized and operated for the 
 benefit of the whole people.'^ There could be no more accurate 
 description of the proposals we are considering. 
 
 It is urged, in answer that the President, having only the 
 public interests in view, would appoint men of the highest class, 
 men whose patriotism and loyalty to the pubhc interests would 
 be unquestioned, and that therefore no evil results could follow. 
 Good appointments will undoubtedly be made, but legislators 
 are bound to take into account the possiblity that an ambitious 
 man in the presidential chair might use the great powers of this 
 organization to advance the interests of a political party or to 
 perpetuate an administration. A President who had the power 
 to dominate his party and to dictate to Congress, if he were at the 
 same time ambitious for the succession, might be tempted to 
 
72 
 
 use for personal or party purposes an organization of his own 
 creation whose influence for this purpose would be irresistible. 
 
 The President has not as yet, I believe, expressed his con- 
 currence with Mr. Bryan as to the transcendent importance of 
 government note issues. In his earlier days he was enthu- 
 siastic in his defense of the Second Bank of the United States. 
 He said : ^ ' Only a great commanding bank, everywhere known, 
 whose notes really and always represented gold could supply 
 paper worth its face value in all places or keep exchanges from 
 chaos. Such an agency of adjustment and control the Bank of 
 the United States had proved itself to be. It had not only 
 served its purpose as a fiscal agent of the government to the 
 satisfaction of the treasury, but had also steadied and facili- 
 tated every legitimate business transaction and rid the money 
 market of its worst dangers. But many of the men to whom 
 General Jackson was accustomed to listen believed, or affected 
 to believe, that it had done much more, that its power was used 
 to serve a party and to keep men who were no friends of the 
 people or of popular rights in a position to manage and corrupt 
 the whole politics of the nation."* 
 
 The President will undoubtedly concede that we cannot 
 adopt the Bank of the United States as a model, but we should 
 certainly seek to secure the qualities and results which he so 
 eloquently ascribed to the bank. The accusation that the 
 Second Bank of the United States advanced money on the paper 
 of its political friends, and used its control over credits to per- 
 petuate its existence and to defeat General Jackson had more 
 effect in arraying public opinion against the bank than any 
 other cause. 
 
 The bill we are considering was, it is said, prepared by five 
 Virginians. I commend to these gentlemen the serious admoni- 
 
 ♦Woodrow Wilson, History of the American People, v. 4, p. 63. 
 
73 
 
 tion of a distinguished son of Virginia, the friend and biographer 
 of Jefferson, Professor George Tucker, of the University of 
 Virginia. He said: 
 
 '^ Those who administer the federal government must be 
 always expected to have a vigilant and active opposition; in 
 other words, there will always be two great political parties 
 in the country, one of which will be in favor of the administra- 
 tion, and the other will be opposed to it. Now, it is contrary 
 to all experience to suppose that those who have so powerful a 
 machine under their control as the whole banking power of the 
 country, and which would be ten times as great as at present, 
 by being undivided, would not be disposed to use it in favor of 
 one party, and against the other; and, if skilfully used, what 
 might it not achieve? The power of the late bank of the United 
 States, with a capacity of only $35,000,000, was thought, by 
 some, to be formidable to the government as well as to the 
 state banks, and this was one of the principal reasons assigned 
 for putting it down; but what was its power, when exerted 
 against that of the government, and of numerous rivals, com- 
 monly equal to itself in any one place, compared with what 
 would be the power of all the banks united, when added to that 
 of the government? If the people were capable of being bought, 
 of trafficking away their rights and liberties, a government, 
 provided with such means, might be able to purchase them; and, 
 though that should not be the fatal result, such an accession to 
 the power and patronage of the government would make the 
 will of its party resistless; and we know that no tyranny is 
 more merciless and unprincipled than that of party. We 
 every day see the men who compose it, tolerate and approve 
 what, as individuals, they would revolt at. We may then infer, 
 that such potent means of influence would not be conferred by 
 any people possessing the smallest degree of discernment, or 
 
74 
 
 jealousy of power, and that in this country the experiment will 
 never be made until the love of civil freedom shall cease to find 
 a place in the hearts of the American people."* 
 
 I feel sure that it is not necessary to remind the 
 Senate committee who have the responsibility of recom- 
 mending proper legislation upon this subject, that no credit 
 can attach to any Congress or administration unless the legis- 
 lation adopted shall prove wise and effective. The features 
 of the bill to which I have called attention are of such a char- 
 acter that they should not be accepted. I have tried to show 
 that the House bill has serious defects. It appeals to the popu- 
 lists by adopting their plan of note issues; to the socialists by 
 seeking to place the management of the most important 
 private business of the country in the hands of the government ; 
 it seeks the support of bankers in great centers by its unex- 
 pected discrimination in their favor, but its dangerous doctrines 
 and unwise methods do not appeal to the sound judgment of the 
 American people. The bill as it stands with its partly in- 
 effective and partly dangerous provisions would be detrimental 
 to the interests of banks, with the exception, perhaps, of the 
 great banks in the central reserve cities. Its objectionable 
 features have neither the support of pubhc opinion nor the 
 approval of the banking fraternity. They are contrary to the 
 teachings of political economists and they are not supported by 
 the judgment of practical men. Its immediate enactment is 
 urged by its sponsors upon the plea that it will create confidence 
 and furnish remedies. It just falls short in its beneficial 
 features of accomplishing a wise purpose and by the radical 
 character of its objectionable provisions it threatens to upset 
 business and to produce the evil results which it was projected 
 to cure. Its authors have not ignored the lessons of exper- 
 
 "CGeo. Tucker, Theory of Money and Banks Investigated, pp. 266-8. 
 
ience, but are apparently afraid to make their legislation con- 
 form to its teachings, on account of the declaration of a 
 party platform. 
 
 For centuries the world has witnessed recurring waves of 
 popular delusion with reference to the magical power of paper 
 money and the belief that wealth could be created by the 
 stamp of the government upon pieces of paper. The losses 
 occasioned by the folly of one generation have not deterred 
 their successors from trying the same experiment and with the 
 same results. It is, however, a source of satisfaction to the 
 philosophic student of history to realize that no matter how 
 severe the attack of monetary mania may be, sooner or later 
 sanity will return and intelUgence regain its control. We 
 should keep in mind that any departure from sound economic 
 principles will surely invite new disaster. There can be no 
 permanent and satisfactory solution of this great problem so 
 fraught with momentous consequences, until the American 
 people shall be satisfied, after careful investigation or exper- 
 ience, that any plan proposed or adopted will surely respond 
 to their reasonable demands for banking and monetary reform. 
 Questions of this character cannot be finally settled by the 
 majority of a party caucus or by the mere force of executive 
 dictation. There are much broader questions involved than 
 how best to secure an advantage to a political party. Any 
 attempt to construct a plan for monetary reform upon a basis 
 of sectional or political prejudices must fail. The enactment of 
 legislation having this basis will raise an issue that will surely 
 overshadow every other in future poHtical contests. 
 
 No large part of the American people had any idea that the 
 election of 1912 involved a reopening on the part of Mr. Bryan 
 and his friends of the controversies of the past and an endeavor 
 to secure, by partisan legislation, the triumph of the doctrines and 
 
principles which had received the repeated condemnation of the 
 American people at the polls. This should be a fight in the 
 open. The party in power has no accredited mission to 
 reverse these repeated judgments and to fly in the face of the 
 concurrent judgment of the people of every commercial nation, 
 based on universal experience. 
 
 Unless the teachings of an unbroken line of great statesmen 
 are to be ignored, the features of this bill that I have discussed 
 must be rejected. The administration that should force upon 
 the American people by arbitrary methods an unwise solution 
 of this problem will merit and sooner or later receive the 
 condemnation of thoughtful men of all political parties. 
 
 It is the irony of fate that in a measure whose sole purpose 
 should be to give strength and stability to our banking insti- 
 tutions and to furnish the people with a currency whose value 
 could never be questioned that it should be found necessary to 
 sacrifice the principles of a great party and to make the national 
 banks the unwilling instrument in the work of their own 
 destruction in order that Mr. Bryan may proclaim to the world 
 a triumph of transcendant importance for his monetary and 
 governmental theories. 
 
 Let us hope that the sober second thought of the national 
 legislature may lead it to reject false doctrines and with a 
 patriotic spirit to construct a plan of banking reform which is 
 worthy the intelligence of a great people and which will serve 
 their highest interests. 
 
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