i913 
 
 THL L55LNTIAL AND THL UNESSENTIAL 
 
 IN 
 
 CURRENCY LEGISLATION 
 
 4) 
 
 THL PAGL LLCTURL DLLIVLRE.D AT YALL UNIVERSITY 
 
 MAY 1, 1913 
 
 BY 
 
 A. PIATT ANDREW 
 
 FORMLR ASSISTANT SLCRLTARY OF THL TREASURY 
 
 
Bigitized by the Internet Archive 
 
 in 2007 with funding from 
 
 Microsoft Corporation 
 
 (?l/Mmls;es^hti^tiMs$enO0andrri 
 
THL L55LNTIAL AND THL UNESSENTIAL 
 
 IN 
 
 CURRENCY LEGISLATION 
 
 
 
 THL PAGL LECTURE DLLIVLRLD AT YALL UNIVLR5ITY 
 
 MAY 1, 1913 
 
 BY 
 
 A. PIATT ANDREW 
 
 FORMER ASSISTANT SECRLTARY OF THE TREASURY 
 
 •^ 
 
 REPRINTED FROM THE YALE REVIEW OF JUNE 1913 
 
.e^r 
 
THE ESSENTIAL AND THE UNESSENTIAL 
 IN CURRENCY LEGISLATION. 
 
 The improvement of our banking: and currency system 
 can never be a popular issue. It is abstruse. We are only 
 intermittently conscious of its necessity. It makes no appeal 
 to the emotions. Whatever advocacy or support it may have 
 must come not from the many, but from the few, not from 
 the marching: clubs and cheering: throng's which g:ive color 
 and excitement to political campaig-ns, but from the quiet 
 thinking: men who are moved by the dry white light of reason. 
 
 Complexity of the Problem. 
 
 Currency questions have always been baffiingly intricate 
 and difficult to grrasp or resolve. They are in the field of 
 economics what metaphysical questions are in the field of 
 philosophy. They have to do with matters which underlie 
 and are implicit in, all other economic questions. William 
 James once said of metaphysics that it was only an unusually 
 obstinate effort to think clearly, and if that be true, those who 
 discuss the currency oug:ht above all thing:s, to be well 
 g-rounded in metaphysics. Many years ag:o the Eng:lish 
 economist Jevons remarked that a kind of intellectual vertig-o 
 seemed to attack most persons who devoted themselves 
 to this subject, and the Scotch economist Macleod was 
 accustomed to assert that more people had gone insane over 
 it than over anything else except religion and love. How- 
 ever that may be, it is certain that when the improvement of 
 our banking and currency law was last under discussion in 
 Congress, there were as many different diagnoses of the situ- 
 
 [ 5 ] 
 
 261347. 
 
ation, and as many suggested remedies as there were students 
 of the subject. Anyone who tried to follow the discussion, 
 and form a clear conception of the issues involved and of the 
 wrongs to be righted, was confronted with a whirling kaleido- 
 scope through which at every moment new arrangements of 
 facts were presented at new angles according to new theories 
 and with new interpretations. It is not strange if some of 
 those who had to face such complexities went mad. We have 
 here to do with a problem which requires an unusually 
 obstinate effort on the part of thoroughly balanced and well 
 trained minds. 
 
 Intermittency of Problem. 
 
 There is another reason why the achievement of abetter 
 banking and currency system depends for support upon the 
 more intelligent and better educated members of the com- 
 munity. We only suffer intermittently from the weaknesses 
 and deficiencies of the present banking system, and during 
 the intervening periods it requires the exercise of memory 
 and foresight to appreciate their momentous consequences. 
 Ordinarily we are but vaguely aware of the role played by 
 the banking and currency system in our daily life. We know 
 of course that it ramifies all through agriculture, industry and 
 trade, but we are no more conscious of its operation than we 
 are of the beating of our hearts or of the circulation of our 
 blood. Only when some unusual strain is put upon it, and 
 it fails to respond ; or it collapses, and the whole business of 
 the country withers and succumbs, is it brought home to us 
 that the very existence of every kind of business and com- 
 merce depends upon the proper working of our banking and 
 currency system, and that in this country the system is sadly 
 in need of thorough and scientific readjustment. Even after 
 
 [ 6 J 
 
the most distressing- crises have occurred, almost as soon as 
 normal conditions are resumed, the recollection of the suffer- 
 ing- that was entailed begins to weaken, the general appreci- 
 ation of the need for preventive and remedial arrangements 
 lapses, and interest in the subject on the part of most people 
 wanes. Hope springs eternal that the disasters through 
 which the country has just passed will never occur again, 
 and hope undisappointed for a short period, begets belief. 
 
 A Dispassionate Issue. 
 
 But, for still another reason the currency question is apt 
 never to become a popular issue. It appeals primarily to the 
 intelligence and not at all to sympathies or sentiments or 
 feelings of locality, party or class. One feels intensely 
 about wrong conditions if responsibility for them, or their 
 consequences, center in a particular locality or upon a 
 concrete individual or group of people. But when one has 
 to do with conditions to which no personal responsibility can 
 be attached and the effects of which are not confined to any 
 groups or classes or localities, but which influence people 
 throughout the country in every kind of business or profes- 
 sion and in every branch of labor, one's feelings flag. 
 One's sympathies with those affected become dilute. There 
 is no one in particular to be sorry for or to envy or to blame. 
 And proposals for remedy or improvement, because of their 
 ver}^ scope, are likely to lack warm popular support. Such 
 enterprises, whatever their pith and moment, unless they 
 have the active advocacy of men of trained intelligence, are 
 sure to lose the name of action. 
 
 Upon all of these accounts, because of the complexity of 
 the problem, because of the intermittency of its appearance, 
 and because of its essentially intellectual appeal, the country 
 
 [7] 
 
needs particularly the cooperation of university men in 
 achieving: its solution. 
 
 Growing Agreement Upon Essentials. 
 
 The outlook for currency leg-islation has never been as 
 favorable as it is today. In the winter following the great 
 panic of 1907 Cong:ress and the country weltered in a chaos 
 of conflicting" opinions as to its causes and as to the appro- 
 priate remedies. There was little time during the Cong:res- 
 sional session for any fresh or thorough analyses of these 
 matters . Representatives of the older communities harked 
 back to the discussions that had followed the panic of 1893 
 thirteen or fourteen years before, and revamped proposals 
 which were current then, some of which had been well 
 enough adapted to meet conditions at that time, but few of 
 which were pertinent or adequate for the situation in 1907. 
 Representatives of the newer experimenting states (the most 
 conspicuous of which lacked earlier experience in these 
 matters, having scarcely been settled by white men at the 
 time of the panic of 1893) without waiting for any careful 
 diagnosis of the ills requiring remedy, proceeded to pre- 
 scribe intuitively out of their inner consciousness remedies 
 for ills which had never really existed. If permanent cur- 
 rency legislation had resulted directly from the discussions 
 of the winter of 1907-8 it would have been a great misfortune 
 for this country. We should have had laws framed either to 
 remedy conditions of a generation before, which had for the 
 most part ceased to exist, or laws framed to remedy evils 
 which never had had any substantial existence outside of the 
 minds of the legislators. It was far better to jack the 
 system up with a temporary prop and then dig thoroughly 
 down to bed rock for the permanent foundations. This 
 
 [ 8 ] 
 
Congress did, and as a result the ground has now been 
 cleared. Effects have been traced back to their causes. 
 The essential has been sifted from the unessential, and out 
 of the chaos of opinions and theories that prevailed five years 
 ago a substantial agreement among competent authorities 
 has been attained, first, as to what most needs remedying- and 
 second, as to the g-eneral character of the remedies required. 
 There remain to be sure sporadic advocates of remedies for 
 evils that have never, or not for a long time, existed, and to 
 these we shall devote attention presently, but there seems to 
 be little serious disagfreement as to what are the primary 
 issues and the important discussion of today tends rather to 
 center around their details. 
 
 This remarkable chang-e is the result of five years' 
 deliberate and dispassionate discussion by leaders of thought 
 in all parts of the country, but in a large and important sense 
 it was brought about by the wise, persistent and broad- 
 minded impulse g-iven to the discussion by one man. What- 
 ever name the final act may chance to bear, and whatever 
 its details and terminology, if it embodies the essential pro- 
 visions which the best thought of the country today has 
 come to agree that such legislation requires, it will be largely 
 due to the guidance and impetus given to the discussion by 
 Nelson W. Aldrich, former senator from Rhode Island. 
 
 The Unessential Issues. 
 
 I have said that the defects and remedies about which 
 discussion ranged during the months immediately following 
 the panic of 1907 were by no means those to which the more 
 deliberate and better instructed opinion of today attaches 
 major importance. Many at that time were primarily con- 
 cerned with the insecurity of bank deposits and the possibil- 
 
 [9] 
 
ity of insuring: depositors against possible loss. Some were 
 still inclined to attach importance to the risk to the mone- 
 tary standard entailed by the continued retention in circula- 
 tion of the greenbacks. Many dwelt with exclusive empha- 
 sis upon the inflexibility of the banknote circulation and 
 considered a reorganization of the system of note issue as the 
 one necessary improvement in our banking arrangements. 
 Today, however, there are not many who have given serious 
 study to the subject who regard either the insurance of bank 
 deposits, or the retirement of the greenbacks, or even the 
 reorganization of the note issue as the dominant desideratum 
 of currency reform. 
 
 THE DEPOSIT GUARANTEE. 
 
 The deposit guarantee idea has occasional advocates 
 even in high places today but they are few as compared with 
 the legions who rallied around its standard four or five years 
 ago. Its strange eventful history teaches memorable lessons 
 and even at the risk of taking you over very familiar ground 
 I am going briefly to recall it to you. The idea was born 
 in Oklahoma in the very throes of the panic of 1907, 
 after the shortest possible period of gestation. The panic, it 
 will be remembered, began October 28, 1907, and it was not 
 until three weeks later, on November 16, that Oklahoma 
 became a state, and its first legislature began its sessions. 
 Nevertheless the panic was not yet over, currency was still at a 
 premium and clearing house certificates were still outstanding 
 throughout the country when the Oklahoma legislature passed 
 its famous law. This first legislature of a new state had been 
 in session only four weeks, when on December 17, it adopted 
 with scarcely any debate a law without any precedent in any 
 other country, and with only one dimly remembered unsuccess- 
 
 C 10] 
 
ful precedent in the United States, a law which notwith- 
 standing- presented what was probably the most far reaching 
 and drastic experiment in banking" legfislation that had been 
 made anywhere in the world for at least two g-enerations . The 
 only real precedent for it was the early safety fund system 
 tried in New York state between 1829 and 1842, which had 
 ended in a g-eneral banking: collapse, and had been discarded 
 sixty-five years before. The old State Bank of Indiana with 
 its thirteen branches mutually liable for each others' debts 
 has sometimes also been cited as a precedent, but the com- 
 parison is not valid as the branches of the Indiana bank were 
 branches of a central bank, and althougfh they had separate 
 capital and assets, they were not independent institutions, 
 but were indissolubly bound together under the joint respon- 
 sibility and control of the officers of the parent bank. 
 
 Yet, singularly enough (and this shows the possibilities 
 of hasty legislation even under representative government) 
 this unique and virtually unprecedented experiment of the 
 newest of the states, although it had been adopted without 
 deliberate or thorough discussion, and although it had not 
 yet been tested, was promptly espoused by the legislatures 
 of several neighboring states. Nothing of course could be 
 more popular with constituents than the freedom which 
 it ensured to them to "bank" with whatever institution 
 offered the largest inducements, without having to worry 
 about possible loss. It was almost as if the government 
 were to say ' * invest your money where you can get the 
 highest dividends and in case of failure we will oblige the 
 more conservative low-dividend-payers to reimburse you." 
 And so with variations of detail a * * compulsory' * deposit 
 guarantee was adopted in Nebraska and in Texas and 
 a ** voluntary" guarantee in Kansas and South Dakota, and 
 
 [ 11 3 
 
the Democratic party in its national platform in 1908 advo- 
 cated the establishment of a gruarantee in compulsory form 
 for the national banks. It may seem incredible that such 
 an idea should have attained such momentum in so short 
 a period, but the facts are that in the legfislatures of several 
 other states it was under discussion in 1909 and that it would 
 probably have been adopted in some of them, had not the 
 day of reckoning- begun in Oklahoma on September 29th 
 of that year. 
 
 Failure of the Guarantee in Oklahoma. 
 
 On that date the bank with the largest deposits in the 
 state, the Columbia Bank and Trust Company of Oklahoma 
 City, closed its doors owing its customers almost $3,000,000. 
 The possibilities of the guarantee law as a stimulus to hot- 
 house methods of banking were well shown in this instance, 
 for under its fostering security this bank had succeeded dur- 
 ing a single year preceding in increasing its deposits from 
 $365,000 to $2,901,000., or by more than 694 per cent. The 
 possibilities of the law as a source of expense to sound banks 
 was also shown in the losses charged to the guarantee fund 
 on account of this and the other failures that followed it 
 which during the succeeding four years amounted to more 
 than two million dollars. In other words, during this brief 
 period the solvent banks of the state were assessed and made 
 to pay an amount equal to more than twenty per cent, of their 
 capital, or an average of about five per cent, per year, in 
 order to make good the debts of unsound institutions for 
 whose mismanagement they were not even remotely respon- 
 sible. One solvent bank in particular has been cited as hav- 
 ing been obliged to turn over no less than 34 per cent, of its 
 capital during these four years in order to reimburse the 
 
 C 12 ] 
 
depositors of other institutions. In view of this situation it 
 is not surprising: to learn from the Secretary of the Oklahoma 
 Bankers Association that 200 of the Oklahoma banks have 
 not earned a dividend in the last three years. Nor need one 
 be surprised to learn from the Comptroller of the Currency 
 that while during the years 1908-9, — the first of the Oklahoma 
 experiment, — 82 national banks in that state left the federal 
 system to become state institutions, and secure the supposed 
 benefits of the state bank gfuarantee, during: the years 1911-2, 
 — after three or four years of distressing- and costly experience 
 with it, — no less than 88 state institutions reorganized under 
 federal charters in order to escape its known hardships. This 
 means of escape would probably have been still more exten- 
 sively resorted to were it not for the fact that the majority of 
 the Oklahoma state banks have not sufficient capital to meet 
 the requirements of the federal law. 
 
 With the collapse of the Oklahoma system the general 
 agitation for the adoption of deposit guarantee legislation in 
 other states and by the federal government also collapsed. 
 The flood of political oratory in its behalf subsided as quickly 
 as it had risen, and in 1912 even the political platform writers 
 whose word ranks only second in authority to Holy Writ and 
 the Constitution, forgetting their solemn demands of 1908, 
 omitted all reference to it from their sacro-sanct deliverances. 
 The only remaining supporters of such legislation today are 
 apparently its originators in the Southwestern states who not 
 unnaturally defend it. 
 
 Fallacy of the Guarantee Idea. 
 
 Looked at in the abstract such legislation never had any 
 
 real reason for existence. It was an unwise and unjust 
 
 remedy ' ' for an imaginary evil. It was unwise because of 
 
 [ 13 ] 
 
its inevitable tendency to lessen responsibility in bank man- 
 agement, its weakening: of the incentives for prudence whether 
 in fixing: interest rates, in g-ranting- accommodation, in declar- 
 ing: dividends or in building up a surplus, or in any of the 
 other matters that enter into the conduct of a bank. It was 
 unjust because it taxed well managed institutions for the 
 consequences o»f bad judgment, imprudence or dishonesty in 
 the conduct of other institutions, for which they were in no 
 way responsible, and which however aware they might be of 
 their existence, they had no means whatever to prevent. 
 It was certainly unfair to stockholders in carefully managed 
 banks to oblige them to protect persons who did not do busi- 
 ness with them, but had preferred banks of less conservative 
 policy. But above all the deposit guarantee legislation was 
 uncalled for. The losses entailed upon depositors because of 
 bank failures are not of sufficient proportions to demand so 
 drastic a remedy. In the national banks during the more than 
 half century in which the federal system has existed, accord- 
 ing to the Comptroller of the Currency, these losses have 
 amounted on the average to only about 3-100 of 1 per cent, 
 of the aggregate deposits, and there is no evidence to show 
 that the losses have been any greater in the state chartered 
 institutions, except in those states in which the deposit guar- 
 antee has been operating. 
 
 It is not altogether clear just what was aimed at by the 
 deposit guarantee agitators, but in all likelihood the objects 
 sought, in so far as they were reasonable and legitimate, 
 could have been more easily and adequately and less danger- 
 ously attained by other means. If what was desired was to 
 utilize the service and security of the government in hand- 
 ling the savings of people who are distrustful of banks, and 
 so to reduce the hoarding of actual cash, this object has been 
 
 [ 14 ] 
 
far more satisfactorily attained by the establishment of the 
 postal savings system and the issue of postal savingfs bonds 
 in small denominations. If, however, what was desired was 
 to make it possible for a bank at its discretion to ensure its 
 depositors against loss in case of insolvency, which would 
 seem to have been the object in the states where the * ' volun- 
 tary ' ' system was adopted, this could have been accomplished, 
 as the decisions of the Supreme Court have shown, without 
 further legislation through the agency of private insurance 
 firms. But if what was desired was to ensure to depositors 
 in thoroughly solvent banks the immediate availability of 
 their deposits at all times, this end would be best accomplish- 
 ed not by making the assets of such banks liable for the debts 
 of insolvent institutions, but by adding to our present bank- 
 ing system such facilities as would ensure to solvent banks 
 the possibility of always translating their sound assets imme- 
 diately and without limit into available funds. This we 
 shall see is the fundamental desideratum of our currency 
 system. 
 
 THE RETIREMENT OF THE GREENBACKS. 
 
 And now by way of clearing the ground further of the 
 unessential, let us turn abruptly to another quite different 
 corner of the currency field. Let us consider for a moment 
 an issue which twenty years ago was urgently pertinent, was 
 in fact the very crux of so called " currency reform," and 
 which still persists as a live issue in the minds of some of 
 the veteran " reformers " of those days, although the condi- 
 tions which then gave it point have long since disappeared. 
 We must pause to consider the retirement of the greenbacks, 
 not because the question is of itself of importance but because 
 it is most important to distinguish clearly between the 
 
 C 15 ] 
 
essential and the unessential, and not to encumber the 
 attempt to secure constructive currency legislation with 
 proposals which are not vital and which might arouse unnec- 
 essary friction. 
 
 In the middle nineties when it was estimated that the 
 total g-old stock of the entire country was only about 600 
 million dollars and less than 200 millions of this was in the 
 vaults of the Treasury, the government's fiduciary currency, 
 consisting of 346 millions of greenbacks and 400 millions or 
 more of over-valued silver, presented beyond question a 
 serious menace to the country's monetary standard. It 
 meant that the Treasury had outstanding currency obligations 
 payable in gold to the extent of three or four times its own 
 gold holdings, and amounting to far more than all of the gold 
 in the country, including the holdings of the Treasury, the 
 banks and the general public. At that time fluctuations in 
 the trade balance of a single year sometimes almost equalled 
 the Treasury's gold holdings in amount, and it was quite 
 conceivable, in fact not improbable, that a sudden unfavor- 
 able change in that balance might drain the Treasury of all 
 of its gold, and leave the country with a currency standard 
 of depreciated silver or paper. This was the situation which 
 continually menaced Mr. Cleveland's second administration, 
 causing great financial anxiety and forcing the Treasury dur- 
 ing those years of peace and normal expenditures to borrow 
 262 million dollars in gold in order to replenish its continually 
 dwindling reserve. Such a situation inevitably led the advo- 
 cates of monetary legislation in the nineties to place first and 
 foremost among their proposals the necessity of getting rid 
 of the precarious greenback, and most of the plans proposed 
 by bankers' associations, chambers of commerce and financial 
 
 [ 16] 
 
experts generally at that time emphasized the urgency of 
 this measure. 
 
 Why Retirement is not Important. 
 
 It sometimes happens that with the lapse of time and 
 with chang-ed conditions, infirmities, long left untreated, cure 
 themselves, and so it has been with the one-time bothersome 
 greenback. Twenty years ago, when the outstanding green- 
 backs amounted to twice the gold holdings of the Treasury 
 and to much more than half of the country's entire gold 
 stock, there was abundant reason for anxiety on account of 
 their continued circulation. The situation is utterly differ- 
 ent today. Gold has accumulated in the Treasury beyond 
 the wildest " dreams of avarice " of the nineties. From less 
 than 200 millions in the middle nineties the Treasury's gold 
 holdings have grown to approximately 1250 millions today, 
 and the estimated gold stock of the country has increased 
 from 600 to more than 1800 millions, ( despite the fact that the 
 Director of the Mint in 1907 reduced the estimate for gold in 
 circulation by 135 millions as compared with the basis of 
 previous years.) 
 
 The greenback has thus become each year a relatively 
 less important element in our currency system, an element 
 of ever less and less potency for harm. Doubtless the 
 absolute amount of outstanding greenbacks has diminished 
 considerably through loss and destruction during fifty years, 
 and is today far less than the $346,000,000 issued during the 
 Civil War which are still carried as an obligation on the 
 government books. Yet taking the greenbacks at the full 
 total of their original and unre tired issue, they now fall short 
 by 900 millions of the Treasury's holdings of gold, while 
 in 1894 and 1895 they exceeded those holdings by fully 200 
 
 [ 17 ] 
 
millions. With such an accumulation of reserves it is incredi- 
 ble that the Treasury should ever agfain experience the perils 
 of the nineties on account of the g^reenbacks. 
 
 The grreenbacks are less menacing: today for the further 
 reason that they are being- rapidly transformed into small 
 denominations which are absorbed in the g-eneral circulation, 
 and which could only with gfreat difficulty be collected in 
 sufficiently larg-e amounts to cause a serious drain upon the 
 Treasury throug-h presentation for redemption. Of the 489 
 millions of silver certificates at present in circulation all but 
 about 5 per cent, are now in denominations of one, two and 
 five dollars, and of the 346 millions of reported greenbacks 
 more than half are in similar denominations. So great and 
 continuous is the demand for notes of small denominations 
 that one may safely predict that in another decade practically 
 all of the greenbacks still in existence will be in small 
 denominations in the pockets of the people. 
 
 The ** endless chain " with its ineffectual bond issues, 
 the imminence of specie suspension, and the fear of Treasury 
 bankruptcy will never ag:ain result from the outstanding: 
 g:reenbacks. Their dangers, lurid and nerve-racking though 
 they were twenty years ago, are now only memories. They 
 require no present remedy and demand no consideration in 
 the currency legislation of today. 
 
 DIMINISHING IMPORTANCE OF BANK NOTES. 
 
 Few probably realize the change that has come over bank- 
 ing discussion during the last four years. Up to as recent a 
 date as 1909 when any economist or banker of the Eastern 
 states spoke of banking reform (especially as distinguished 
 from monetary reform) it was reasonably safe to assume that 
 what was primarily, and in all likelihood exclusively, referred 
 
 [ 18] 
 
to, was some project for reorg-anizing- the methods of note 
 issue. Such books as we had upon banking (and there were 
 some monumental works like the four volume * ' History of 
 Banking:" published in 1896 by the Journal of Commerce) 
 dealt only with the history of note issue and the legfislation 
 and practices connected with it. The plans for banking legf- 
 islation that were widely discussed, such as the plan of the 
 American Bankers' Association adopted at their convention 
 in Baltimore in 1894, and thereafter known as ** the Baltimore 
 plan " , or * * the Carlisle plan ' ' , proposed in the same year by 
 Cleveland's Secretary of the Treasury, or even the imposingly 
 and energetically propagandized plan of the Indianapolis 
 Monetary Commission of 1898, suggested no substantial 
 changes in our banking laws beyond a revision of the arrange- 
 ments for note issue. Individuals here and there tried to call 
 attention to other defects and suggested means for their 
 remedy, but they were only isolated voices crying in an 
 unresponding wilderness. The discussing public, whether 
 of academic or *' practical " or legislative affiliations, uncon- 
 sciously continued to debate banking questions from virtually 
 the same point of view, and in almost the same language as 
 the English authorities who debated banking reform in 
 England during the decades before the passage of Peel's great 
 act of 1844. They could not seem to realize that banking had 
 become vastly transformed during the last fifty years, and 
 that while it was formerly true that a community's demands 
 for credit were met in nine cases out of ten by the issue of 
 notes, now such demands are met in nine cases out of ten by 
 ledger balances, or what in ordinary langfuage are miscalled 
 deposits ' ' . Not realizing this, they could not perceive that 
 changed banking conditions had raised other problems and 
 
 [19] 
 
made other remedies requisite than those pertinent to bank- 
 ing: a half century or so ago. 
 
 Present Importance of Deposits. 
 
 It was not in fact until within the last three or four years, 
 when the investigations and reports of the National Monetary 
 Commission had disseminated a fresh "and thorough analysis 
 of banking- as it is currently conducted, that discussion cut 
 loose from the traditional lines upon which it had run for 
 generations and took a new start. Then at last it began to 
 be generally understood that in order to render our banking 
 system properly effective, not only is legislation required 
 which will make the issue and withdrawal of notes correspond 
 more closely with the fluctuating needs of business, but per- 
 haps even more urgently legislation is required which will 
 render credit more freely and closely responsive in the form 
 of ledger balances or deposits, inasmuch as these bulk so 
 much larger than note issues in the country's credit machinery 
 and in the conduct of business today. This was one great 
 contribution of the National Monetary Commission . It estab- 
 lished the idea that it is credit, not merely in the form of note 
 circulation, but prUnarily in the form of deposits that must be 
 viade flexible and responsive. The Commission did not discover 
 this fact. The situation had existed for decades and many 
 individuals had recognized it, but they emphasized it in their 
 reports, and provided especially for it in their bill and focussed 
 the general attention upon it, as it had not been focussed 
 before. And whereas hitherto there had been a few who 
 understood it, now one may say that it has become almost 
 axiomatic with the general public, including apparently our 
 representatives in Congress. 
 
 [ 20 ] 
 
THE REAL TROUBLE. 
 
 A physician would probably say that what primarily ails 
 our currency system and causes panics and desperate strin- 
 gencies is something akin to arteriosclerosis. The veins and 
 arteries of credit which, in order to function properly ought 
 to be elastic and contractile like rubber, are hard and brittle 
 as glass. When subjected to unusual strain they can yield 
 but little and are very liable to rupture, and when once 
 stretched they are apt to remain over enlarged. 
 
 Inflexibility of the Notes. 
 
 In the case of the notes the cause of this inflexibility 
 is too well known to require specific statement. I am not 
 one of those who undervalue the vast service rendered to this 
 country by the national bank notes. Their creation marked 
 the greatest forward step made during the nineteenth century 
 in this country's banking legislation. They brought order 
 out of utter chaos in our bank currency and the assertion of 
 Judge Alphonso Taft in a letter to Secretary Chase that * ' if 
 the Civil War resulted in nothing else than providing the 
 country with a uniform currency it would not have been 
 fought in vain ' ' was not a very great exaggeration of the 
 truth. They have been of uniform value throughout the 
 country and as secure as the government itself from the date 
 of their institution to the present hour. This however does 
 not alter the fact that the terms of their issue, which were 
 influenced by the financial exigencies of the government dur- 
 ing the war, do not allow the notes to respond in amount in 
 the slightest degree to the changing activity and needs of 
 business. It would be incredible if it were not true, that 
 fifty years after the war these notes should still be made to 
 serve as an artificial market for government bonds, when 
 
 [ 21 ] 
 
the cost to the country is the continual inability of the system 
 to respond to crop-moving: and other seasonal demands, 
 and a continual risk of general business collapse. The tem- 
 porary act of May 30, 1908, which relaxed the rigor of the 
 law in moments of critical emergency by permitting additions 
 to the currency to be based upon other security by payment 
 of a heavy and increasing tax, was no real solution of the 
 situation. It contained no provision to render the currency 
 responsive to ordinary fluctuations in currency demand, and 
 resort to its provisions in times of great stress might easily 
 precipitate a panic if one did not already exist. It was only 
 enacted for six years, and was only regarded by its sponsors 
 as a temporary palliative pending the preparation of a per- 
 manent cure. 0?ie universally recognized essential then of a. 
 proper banking and cur7'ency plan is provision ^or a more 
 flexible and responsive note issue. 
 
 Inflexibility of Ledger Balances. 
 
 When we turn to credit in the form of ledger balances 
 or ' * deposits ' ' and enquire as to the causes of their inflex- 
 ibility, the explanation also rests in quite familiar facts. 
 There are two peculiar features of our banking system which 
 are practically without counterpart in other important countries 
 and which render ledger balances or deposit credits in 
 this country less flexible and responsive than such balances or 
 credits are elsewhere. The first is the rigidity of our reserve 
 laws, and the second i^ the lack of any bankers' bank or 
 similar institution with ample resources and lending power, 
 from which the banks can replenish their own reserves when 
 necessary. 
 
 [ 22 ] 
 
Rigid Reserve Requirements. 
 
 Outside of the United States I know of only one other 
 country in which the law requires a cash reserve to be held 
 against deposits. That country is Holland, and the law 
 applies to only one institution, the Bank of the Netherlands, 
 and that institution does not hold enough deposits to make it 
 worth mentioning- in this connection (less than $3,000,000). 
 Our national banking law, however, and the banking laws of 
 most of the states are unreasonably and unsoundly rigorous 
 in this regard. Not only must stated proportions of all 
 deposits be held by the banks in reserve, but these reserves, 
 according to the law, can never under any circumstances be 
 used. It is very much as if the government, having estab- 
 lished naval and military reserve forces in time of peace were 
 to insist that these forces not be used in time of war in order 
 to maintain them intact as reserves. Whenever the cash held 
 by a bank has fallen to the required minimum, the bank can 
 not legally continue to extend accommodation. It cannot 
 issue more notes unless it has additional government bonds 
 to deposit for their security, and it cannot enlarge its ledger 
 balances unless it has additional reserves. No matter what 
 may be the stress of an emergency, or whether it is due to war, 
 catastrophe, or unreasoning fear, there are no legal means 
 for relaxing this requirement. And so in moments of great 
 sensitiveness and anxiety, legal spokes are apt to be suddenly 
 thrust into the wheels of credit, and the whole machinery of 
 business brought crunching to a standstill. A second essential 
 then of any adequate currency plan is some provision which will 
 render the reserve requireme^its pliable and the reserves of possible 
 use. 
 
 [ 23] 
 
Need of Bankers' Bank. 
 
 Our banks also have less flexibility in their power to 
 lend ledgfer balances than the banks of practically all other 
 countries for another reason, because of the lack of any 
 permanent institution or institutions which can perform for 
 them services similar to those which they perform for their 
 customers. An individual bank makes the money of each and 
 all of its customers flexible in amount, by rendering- it of mutual 
 service, and available to those who most need it when they 
 most need it, and in order that the money of individual banks 
 may be similarly flexible in amount, of mutual service to 
 each other and available to those institutions which most need 
 it, when they most need it, they require in their turn some 
 agfency which will do for them severally and jointly what 
 they do for the gfeneral public. 
 
 As this is the very crux of the whole currency problem, 
 we must examine a little more closely what an individual 
 bank is and does. A bank is (l) first of all an intermediary 
 between borrowers and lenders. It collects the surplus 
 money of those who do not intend to use it themselves and 
 lends it to those who do. But (2) more than this, a 
 bank, by pooling: the active accounts of a community, 
 inasmuch as only a fraction of those accounts will be wanted 
 at the same time, accumulates an additional reserve of lend- 
 ing power. And (3) this new lending: power, which it has 
 so to speak created, it can also place at the disposal of its 
 customers, discounting: their paper or bills receivable, 
 g-iving- them its better known credit for their own which is 
 less known, and making- funds immediately available for them 
 in place of their own unmatured obligations. Now banks 
 need for their own self protection and for their mutual 
 assistance and above all in order to serve the public freely 
 
 [ 24 ] 
 
and effectively, some ag-ency which will perform identical 
 functions in relation to themselves. It does not matter what 
 such an ag-ency may be called. It may be a discount bureau, 
 or a rediscount bureau, a national clearing: house, or a 
 national or reg^ional reserve association. Out of deference 
 to those g-reat financial experts who write the banking: clauses 
 of political platforms and whose bans and edicts are blessed 
 with sacerdotal infallibility, when such an institution is pro- 
 posed for this country, it must not be called a central bank. 
 Such an institution is perhaps most plainly designated if it 
 is called a "bankers' bank", but by whatever name it is 
 referred to, the need of such an institution is the fact of 
 primary importance in the American banking- situation. 
 
 Functions of Bankers' Bank. 
 
 Just as an individual bank economizes and mobilizes and 
 makes flexible in amount the funds of individual members of 
 a community so a bankers' bank mobilizes and economizes 
 and makes flexible in amount the money of the banks. It 
 collects money from institutions and localities when and where 
 they do not need it, and lends it to others when and where 
 they do. In like manner the active deposits of the various 
 banks, as they are not all wanted simultaneously, furnish the 
 bankers' banks with a larg:e surplus reserve of lending power, 
 which in turn is an invaluable source of flexibility to the 
 individual banks. By its means they can, if need be, redis- 
 count their commercial paper, exchange their unmatured 
 assets for actual cash, and secure its still better known credit 
 in place of their own. By its means their reserves can be 
 replenished and their lending- power made responsive to the 
 needs of their communities. A bankers' bank makes it pos- 
 sible for the money of the individual banks to do many times 
 
 [ 25 ] 
 
the work it would do if left in the separate institutions, and 
 to do it far more effectively. It is the only ultimate safe- 
 guard, the only scientific deposit g-uarantee, the only sound 
 basis of flexibility in any banking system. As some philos- 
 opher once said of God, — if such an institution did not 
 already exist, people would certainly have to invent one, and, 
 as we have no such institution permanently and leg-ally estab- 
 lished in America today, the prime essential of any sufficient 
 banking plan is the equipmeyit of our system in so??ie way or 
 other with the facilities of a bankers' bank. 
 
 We have now touched upon the three fundamental desi- 
 derata of our banking system. There are of course other 
 defects which affect one or another kind of banking-, but these 
 are the crying needs of universal importance. We need a 
 more flexible and responsive note issue. We need more flex- 
 ible requirements for reserves. And we need some kind of 
 an organization or institution of the nature of a bankers' bank. 
 Others may look at these needs from somewhat different 
 angles and name them differently, but the majority of what 
 might without too much presumption be called ' ' authorities ' ' 
 would agree in substance. 
 
 And now in bare outline, how should each of these needs 
 be met? 
 
 I. REMEDIES FOR THE NOTE ISSUE. 
 
 First. In making the note issue flexible there are at 
 least three important questions to be decided. Upon what 
 shall future issues of notes be based? Shall the bond secured 
 currency be retired ? And by whom shall notes in the future 
 be issued ? 
 
 It is generally admitted today, by all except possibly 
 by self-interested dealers in bonds, that in the future addi- 
 
 [ 26 ] 
 
tional issues of notes can only be made satisfactorily respon- 
 sive to business needs, if requirements as to the pledge of 
 bonds of whatever kind as collateral, are done away with, 
 and the amount and security of the notes are made contin- 
 gent upon the usual banking- assets, cash and commercial 
 paper. 
 
 Shall the Bond Secured Currency Be Retired? 
 
 Whether the security of the amount of notes now out- 
 standing should be changed, depends upon whether the 
 values of the United States bonds now so used can be other- 
 wise taken care of. We have some 730 millions of two per 
 cent, bonds now marketable at par, almost all of which are 
 used for this purpose and which would probably lose a quar- 
 ter or a third of their value if the circulation privilege were 
 removed without other compensation. Before changing 
 their traditional perquisites as collateral, in simple justice to 
 their owners, arrangement should be made to refund these 
 bonds into three per cent, bonds in some such manner as the 
 National Monetary Commission proposed. 
 
 Objections to Government Issue. 
 
 One hears rumors from time to time that some member 
 of Congress, and it is even hinted that a certain currency 
 expert in the Cabinet, has suggested that the government 
 hereafter be entrusted with the issue of all notes. We have 
 already made two experiments in this country with govern- 
 ment paper money, and certainly no one who is familiar with 
 their lamentable history, or with the parallel experiences of 
 most other governments with paper money, would advocate 
 a renewal of such an experiment except under the stress of 
 the direst extremities. Even if there were not the continual 
 
 [ 27 ] 
 
and precarious temptation to over issue in order to defray 
 the expense of government undertaking's, or in order to 
 stimulate trade, which is likely to beset any government that 
 is launched upon the boundless sea of greenbackism, the 
 proposal would still be objectionable because no government 
 is in a position to guage the needs of legitimate trade or has 
 any but arbitary means for adjusting the issue of notes 
 thereto. In this country we are already freighted as no 
 other important country is with government notes, and they 
 have left in their wake a trail of trouble. Of one thing 
 therefore we may be certain. The issue of any additional 
 notes, and above all an issue which is intended to be flexible 
 in amount and responsive to business, ought not to be 
 relegated to the cumbrous inexpert and ill adapted instrumen- 
 talities of the government. 
 
 Objections to Asset Currency. 
 
 A few years ago when the sole watchword of currency 
 reformers was " asset currency," it was often proposed to 
 allow any of our thousands and thousands of note issuing 
 banks to issue notes upon the security of their general assets 
 without special restrictions except possibly the necessity of 
 reserving a small proportional redemption fund. The notes, 
 it was said, could not be overissued if they were only issued 
 in exchange for commercial paper arising out of actual trans- 
 actions. "Any amount of notes may be issued," wrote one 
 distinguished expert whose name is almost a household word 
 among currency theorists, " so long as the claims held by 
 the banks are based upon actual and salable property." No 
 greenback theory was ever more fallacious or more danger- 
 ous than this. It was a revival of the old fallacy of John 
 Law, of the land banks, of the as signals , and of the directors of 
 
 [28] 
 
the Bank of Eng^land at the time of the Bullion Report. (It 
 would have been well indeed if the currency reformers ot 
 a half dozen years ag-o had read and pondered over that last 
 named sterling: document of the year 1810.) For if our 7400 
 or more national banks were to issue notes with no other 
 limitation than the requirement that they be issued only in 
 exchange for paper arising out of the sale of gfoods, or paper 
 secured by the pledge of goods or other property, there 
 would be practically no limit to the amount of notes that 
 might be issued except the consequent bankruptcy of the 
 country. The ensuing" rise in prices and adverse balance of 
 trade would instigate a demand for gold for export which 
 might easily sweep every remnant of specie from the bank 
 reserves. 
 
 Most of the plans for * ' asset currency " to be issued by 
 individual banks that were widely exploited a few years ago 
 were fraught with this most serious danger of extravagant 
 inflation. If we are to have a currency based upon commer- 
 cial paper and ordinary banking assets, which everyone is 
 agreed that we require, then the determination of its expan- 
 sion and contraction must not be left without check or hind- 
 rance to seven thousand or more independent institutions. 
 Its control must be entrusted in one way or another to the 
 judgment of the most expert and the most disinterested 
 board or committee that the country can provide, and this 
 board can best gruage the credit requirements of the country 
 or of its section of the country, if it controls the agency through 
 which the banks rediscount their commercial paper, and it 
 can best adjust the issue to these requirements if it can 
 influence or control the general rate of discount in the country 
 as do bankers* banks elsewhere. 
 
 [ 29] 
 
Note Issues in Other Countries. 
 
 It is worth noting- in this regard that judged by their 
 practice other leading countries do not regard the issue of 
 paper currency as a proper function either of the g-ovemment 
 or of ordinary individual banks. In England and France 
 and in Germany, with a slight exception which has an histor- 
 ical origin, the government issues no paper currency what- 
 ever ; and in these same countries and in many others which 
 might be mentioned (for instance, Italy, Switzerland, Sweden 
 and Japan) during- the last half century or so, the privilege 
 of note issue has been taken out of the hands of individual 
 banks, in which it was formerly located, and entrusted to a 
 bankers' bank. 
 
 Answering then the questions regarding bank notes which 
 we posed a moment ago, I should say that future issues of 
 notes ought to be freed from the requirement of bond collat- 
 eral, that the bond security of the present issue should how- 
 ever only be abandoned when the two per cent, bonds have 
 been refunded into three per cents., and that future issues of 
 notes ought certainly not to be made by the government, nor 
 by the individual banks, but can be most soundly and scien- 
 tifically issued by some superior banking agency which can 
 gfuage and regrulate their amount through the process of 
 rediscount and the control of the discount rate. 
 
 II. REMEDIES FOR RIGID RESERVE 
 REQUIREMENTS. 
 
 Second. As to ways and means for making- the reserve 
 requirements more flexible there has been curiously little 
 discussion. It has usually been regarded as necessary for 
 the law in this country to prescribe more specific standards 
 for bank reserves and for bank administration generally than 
 
 [30] 
 
are required elsewhere, for the reason that we have so vastly- 
 greater a number of independent institutions . It is not per- 
 haps realized that we have more than a hundred times as 
 many separate incorporated banks as there are in all Great 
 Britain, and more than fifty times as many as there are in 
 Germany. Mutual comparison and supervision are therefor 
 much less possible here and the opportunities for lax or 
 inefficient management are correspondingly increased. On 
 these accounts there is every reason for reluctance to take 
 any step which would seem to remove the reserve regulations 
 and give the banks a freedom that some of them might abuse. 
 Yet everyone recognizes that the law is hopelessly inept in 
 consigning bank reserv^es to eternal idleness and unavaila- 
 bility. Here is the dilemma — to make the reserves usable 
 and still to require their maintenance. It has sometimes 
 been suggested that the law might allow the banks to 
 use their normally required reserve upon payment of a 
 tax or fine proportioned either to the extent of the reserve 
 deficiency or its duration, but this proposal, though sound 
 in theory, would be difficult of enforcement in practice 
 because of our more than 7400 separate national institutions * 
 I know of no more satisfactory solution of this diffi- 
 cult problem of making the reserve requirements pliant 
 without seriously relinquishing them, than that suggested 
 by the National Monetary Commission which proposed 
 to leave substantially intact the present reserve require- 
 ments for national banks, but to permit the banks to 
 count ' ' as reserv^e their balances with a * ' reserve associa- 
 tion ' ' , which was the Commission's name for a bankers' bank. 
 This would make it still obligatory for every bank to keep at 
 all times uninvested and available the same proportion of 
 deposits as is required at present, but it would also make it 
 
 [ 31 ] 
 
possible, when occasion demanded, for it to increase its 
 reserves by transferring: some of its commercial paper to the 
 reserve association, and receiving* in exchang:e therefor, upon 
 payment of the discount rate, an increased balance upon the 
 reserve association's books. Some such arrangement is 
 already open to the banks of every other country today 
 and it makes their reserves indefinitely more flexible and 
 responsive than ours. Banks are thus enabled at any time 
 within reasonable limits to transform any solvent assets into 
 available reserve funds. 
 
 III. OUR PARAMOUNT NEED - A BANKERS' 
 
 BANK. 
 
 Third. This brings us back again to the same inevitable 
 point toward which all roads of currency discussion converge, 
 to the necessity of establishing in this country an institution 
 of the nature of a bankers' bank. From whatever direction 
 we survey the subject this impressive fact looms over and 
 dominates the field. 
 
 If you review our economic history for the last sixty 
 years you will find business in this country ever groping, 
 often blindly but sometimes almost with frenzy toward this 
 goal. In every period of unusual strain, when our banking- 
 and currency system has been on the verg-e of rupture, if not 
 actually collapsed, you will find a great variety of temporary 
 bankers' banks being: hastily improvised in all of our large 
 cities and even in many of the smaller towns to perform 
 tardily, locally, ineffectively and generally illegally the 
 functions which ought to be promptly and effectively exe- 
 cuted by permanently and legally established national insti- 
 tutions. You will find committees of the established clearing: 
 house associations, and where such institutions have not 
 
 [ 32 ] 
 
already existed, of associations of bankers orgfanized over- 
 night, pooling part of the reserves of the banks so that they 
 will be available for each other, making- loans on collateral, 
 rediscounting commercial paper, issuing currency and ledger 
 balances therefor, and performing every function appropriate 
 to a bankers' bank. 
 
 But you will also find unfortunately that these ingeniously 
 contrived makeshifts have seldom been able to get under way 
 in time to forestall prostration. The banking and currency 
 system has usually already broken down ; and the banks in 
 general have already suspended payment ; and all that the 
 temporary bankers' banks have been able to accomplish was 
 the slow rehabilitation of the great structure of credit, which 
 if our banking system had been scientifically constructed, 
 would never have collapsed. 
 
 Unfortunately too these temporary bankers' banks, hav- 
 ing been organized without any legal status, have been obliged 
 to exercise powers, not only which they were not authorized 
 by law to exercise, but from the exercise of which they were 
 distinctly prohibited by the law. It has only been through 
 the tolerance of broad-minded comptrollers of the currency 
 and state bank supervisors, who, in recognition of the great 
 extremities have practically suspended the execution of the 
 law, that these temporary bankers' banks, acting like Red 
 Cross agencies of relief in overwhelming emergencies, have 
 been allowed to proceed without hindrance. The participat- 
 ing banks in most cases however have made themselves liable 
 to injunction, withdrawal of charter, receivership and prose- 
 cution. 
 
 But most important and unfortunate of all, with all of 
 the ingenuity and energy with which American business is 
 endowed, it has never been possible even in the most desper- 
 
 [33 ] 
 
ate panics through which we have passed, to organize a tem- 
 porary bankers* bank covering more than a single locality. 
 No one seems ever to have even attempted to organize such a 
 temporary bankers' bank upon a national, or even a sectional 
 or ' ' regional ' ' scale. No means have ever been provided, or 
 probably ever could have been temporarily provided, for 
 making the reserves of different cities available for each 
 other. Yet the most serious feature of every American finan- 
 cial panic has been the jealous and disgraceful struggle of 
 different localities to fortify themselves at the expense of each 
 other, the sauve qui pent, which in periods of strain, or antici- 
 pated strain, has led the banks of each town and city to build 
 up their reserves at the expense of their neighbors, and had 
 led each region to protect itself at the expense of other 
 regions. It is this internecine slaughter which more than 
 anything else has caused from time to time the complete 
 stoppage of domestic exchange and the general suspension of 
 payments throughout the country, and this is the aspect of 
 the situation which more than any other requires remedy. 
 
 Our temporary illegal local improvisations of bankers' 
 banks have proved insufficient because they were temporary, 
 illegal and local. History as well as science, practice as well 
 as theory all agree in this. They agree also as to what this 
 country needs. Shall the hand of some unknown and not 
 overinstructed politician that on a hot June night hastily 
 penned a clause in a political platform prevent our achieving 
 it ? Let us believe enough in the ultimate power of truth to 
 hope not. 
 
 [ 34] 
 
THIS BOOK IS DUE ON THE IM,. 
 
 STAMPED BEWW^^°^™ 
 
 AN INITIAL FlNp'nv. „. 
 
 WILL BE Assr^Il. ^ °^ 25 CENTQ 
 
 l-lOOw-7,'33