Uncle Sam: Here we all are, every man in his accustomed place for the tenth night. Not a man has been late on a single occasion, although Mr. Farmer just got in under the wire one night by the skin of his teeth. It is most agreeable and satisfying to note that there has been no lagging in interest since we began. Indeed, there seems to me to have been a most pronounced gain in your enthusiasm, at times amounting almost to religious fervor.
Mr. Laboringman: That's the way it always is; the more you know about anything, the more interesting it becomes.
Mr. Merchant: Certainly the man who has a fad or who is even a crank upon any subject, enjoys life a good deal more than a dead level commonplace fellow, who never takes any particular interest in anything—just passes the time. Every man for his own pleasure, if for no other reason, ought to have something in which he is interested outside of his regular employment. It may be a good horse, a good cow, a good dog, or some fine chickens—a good garden, a fine front yard, or just some flowers, or some subject affecting the welfare of his fellows. Every man ought to have something; it doesn't matter so much what it is, so long as he is devoted to it intensely. Of course, if he can profit by it, or help his fellows at the same time, so much the better. However, we have our hands full just now with a subject which has become mighty interesting, I think, to all of us, and I hope that our work will prove not only interesting to us, but profitable to our fellows. At all events, it can do no one any harm, and will better fit everyone of us for our duties as citizens. There is too little work of[Pg 196] this kind done all over the country; men can accomplish so much more, if they only get together in small groups like this, instead of plugging along alone. It's a good deal like the football game, where team work counts for so much. It may be that what we are now doing will inspire thousands of other little groups to get together and discuss this, the greatest, the most important business question that can possibly come before the American people, and then when this is finished, they will, as a matter of habit, take up others, in precisely the same way.
Uncle Sam: Hold on there, Mr. Merchant, you've lectured us long enough this evening, now let us get down to business. You know if there is anything that your Uncle Samuel is noted for all the world over, it is business, and business is business, you know. But, before we tackle the tenth topic, tonight, I am going to retrace the road we have traveled, and see if you can all recall and recognize the mileposts we've passed.
First: There was the Standard of Value, gold.
Second: Money, our only money is gold.
Third: Currency, the wrong kind.
Fourth: Currency, the right kind.
Fifth: Exchange by which one debt is made to pay another.
Sixth: Value, the value of anything is measured by the thing for which it is exchanged.
Price, the amount of money received for anything.
Wealth, what can be exchanged for money.
Property, the right of ownership.
Capital, anything that may be so used as to result in a profit.
Credit, result of confidence and trust; creates a debt, and is the right to demand payment.
Seventh: Land or Government credit is unfit as a basis for money or currency.
Eighth: Our Colonial experience proved that land and[Pg 197] Government credit were unfit as a basis for money or currency.
Ninth: Our United States Notes again demonstrated the fact that Government credit should never be used as a basis of legal tender money. Tonight we are to discuss Reserves, which are the protection or guarantee of credits granted or debts created.
Is that a correct definition of reserves?
Mr. Banker: Uncle Sam, I don't think anyone could give a better one.
Uncle Sam: By way of encouragement to you men, before you begin to discuss the subject of reserves, I want to gamble the prophecy that if you will work out some method or plan that will make it possible for the banker to pay all his deposits on demand, and at the same time will enable him to continue to use practically all of them in profitable employment, I will guarantee you now the support of every banker for your plan, when you've completed it.
Mr. Merchant: I don't think you assume any risk in that guarantee, Uncle Sam.
Mr. Laboringman: Uncle Sam, you say that you will guarantee that every banker will support it. That insurance policy won't be any risk at all. Won't cost you a cent. I tell you now that if you can work out a plan that will amount to an absolute guarantee of deposits, as a matter of administration, I will guarantee the support of every depositor in the country, and if I could prove it to their satisfaction, every depositor would gladly pay me from one-quarter to one-half per cent on his deposit. Do you know what I would get at that rate, say at one-quarter per cent, only $42,000,000 every year; for our deposits you say are now seventeen billion ($17,000,000,000).
Have you men ever looked up bank failures in the United States? Here is something I stumbled upon yesterday.
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Our country is so extensive and our banks are so numerous that nothing whatever is thought in one part of a bank failure in another part. Especially is this so since they occur so frequently. Like the operation of the guillotine during the French Revolution and the automobile manslaughter of today, bank failures in the United States have become mere passing occurrences. Is this putting it too strongly? Let us see.
Since the establishment of the national system in 1864, 518 national banks have failed, with liabilities reaching $244,000,000. The direct losses of the failed banks amount to $38,000,000.
Two thousand and fourteen state and private banks have failed since 1864, with liabilities amounting to $825,000,000, and probable losses of $200,000,000.
The total liability of all banks, national, state and private, failing since 1864 is $1,069,000,000. Their aggregate is 2,532 banks. In other words, fifty-six banks have failed every year on an average, or nearly five banks every month, and more than one bank every week.
Three hundred and fifty-one national banks have failed since 1890, with liabilities aggregating $174,000,000.
One thousand four hundred and six state and private banks have failed since 1890, with liabilities aggregating $694,000,000.
The total liabilities of all banks failing since 1890 aggregate $898,000,000.
The total number of all banks failing since 1890 is 1,757. In other words, eighty-eight banks have failed every year on an average, or more than seven banks every month, and one bank about every four days, during the last twenty years.
But who can estimate the indirect losses or depict the consequences of these bank failures?
If this tragic condition can be obviated, it is a crime against the people of the United States, it is a crime against civilization itself, to permit its continuance.
Mr. Banker: No, indeed, neither Uncle Sam nor Mr.[Pg 199] Laboringman assume any risk in their guarantees. They certainly do not, and I will go still further, and under those circumstances will guarantee the support of every merchant, manufacturer, farmer, laboringman, and every man, woman and child, whether depositors or not, as we would be the greatest benefactors of the human race, if we could devise a plan that would remove all risk from every deposit. And yet, humanly speaking, I am not sure that this very result, the absolute guarantee of all deposits may not be accomplished, and the chief factor in the accomplishment of so great a blessing to the people is locked up in the principle of reserves, assuming, of course, that the administration of the banking business is such as to keep it sound.
If all the deposits made with the bank were in gold, or were convertible into gold, and held to meet the deposits when called for, the problem would be simple indeed, and would be solved already. But such a plan would be impracticable and archaic. Indeed, it would preclude all profit, unless a charge were made for such service, and would reduce a bank to a safe deposit company. It would exclude the use of all credit, and therefore destroy the possibility of doing approximately more than nine-tenths of the business carried on today, unless we should go back to actual barter. Our problem is to make the business of banking absolutely safe and yet preserve the great credit structure by which the business of the country and the world is carried on.
Mr. Merchant: For the purpose of this discussion we must assume that the business is honestly managed, and is, therefore, ordinarily sound, and confine ourselves to just the single subject of reserves, which my study leaves me to think, may be considered; 1st, from the standpoint of the single bank; 2d, from a standpoint of the community or a single city; 3d, from a standpoint of the whole country; 4th, from the standpoint of the whole world or our relation to the rest of the commercial world.
Now, generally speaking, we mean by reserves in bank[Pg 200]ing that part of the capital which is retained in order to meet the average demands upon deposits. But this, of course, varies with every bank to some extent; and, while 5 per cent cash would be ample reserve for a high-class mutual savings bank, a commercial bank, in equally good standing, may require from 10 per cent reserve up to 50 per cent, according to the character of the business carried on. A country bank dealing with the farmers might require the smaller amount, while a bank dealing entirely with bankers would require the largest possible reserve, to meet any emergency at any time. Each individual bank must be judged by itself and its reserves adjusted accordingly. In the second instance, as suggested, the locality or environment must be taken into account; in many instances the character of the neighboring banks and their peculiar business are all factors of great importance, and no one of them can be overlooked. So also when the bank credit is considered as a unit of the structure of the nation, the general situation from one end of the country to the other has a bearing upon it, and from some cause terror may sweep over the entire land in a single day, and every nerve of trade be paralysed.
Then, finally, if our nation is an integral part of the commercial world, we must devise some method that will conserve our reserves when possibly for a hundred of various reasons, they may be steadily leaving us or be drawn away by foreign influences.
Mr. Banker: Your statement of the condition and forces that are always playing upon every center of credit from the single bank in the country town to the largest and strongest in our financial centers makes it necessary for the welfare of the whole people, that we should develop in the United States an atmosphere of absolute confidence that nothing can shake. Unless we can do this we shall continue to have commercial earthquakes of ever increasing violence and destructiveness.
How to develop, establish and retain a defense of[Pg 201] impregnable confidence should be then our purpose, and if we succeed, this must be our great achievement.
Speaking of the matter in a more definite way, we must assume that from the primary form of reserve, which is what we started out with, such a part of our capital in gold as will always prove equal to the average demands upon deposits must be kept constantly available.
We must have what are aptly called secondary reserves, which will meet all ordinary, yes extraordinary, or unusual calls; but, finally we must have such access to an almost incomprehensible store of gold, as to impress and overwhelm the imagination, and place its possible exhaustion beyond human conception.
Mark this, your cash on hand of the reserve order, that is in gold coin, ought under all circumstances, to be ample to care for current requirements, while your credits, subject to call, with other banks, or arrangements for credit, ought to be ample to meet all ordinary, or seasonal, or periodic demands—and your general assets, which most of necessity be your ultimate reserve, must be of such a liquid character that if a panic comes, and the necessity arises, they can be converted into cash, of the reserve order; that is gold coin.
You perceive, of course, that such a condition assumes two things; first, that gold should always be running through the channels of trade in sufficient quantities to touch and characterize the quality of all credits; book credits, as well as note credits; both must always be equal to gold, and commerce must be kept conscious of that fact by the persistent presence of gold.
There must be kept before the business eye, the people's eye, the national eye, such a vast horde of gold concentrated for the purpose as to compel even the most timorous to feel safe, beyond a peradventure. There must be a conviction everywhere that the system cannot break down or fail.
Mr. Manufacturer: Mr. Banker, your position, or[Pg 202] statement, is in perfect accord with Bagehot, the great banking economist of England. Here's what he said: "I have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserves, with the penalty of failure before them if they neglect it." In another place he says: "Of course, in such a matter the cardinal rule to be observed is that errors of excess are innocuous, but errors of defect are destructive. Too much reserves only means a small loss of profit, but too small a reserve may mean ruin. Credit may be at once shaken, and if some terrifying accident happens to supervene, there may be a run on the banking department, that may be too much for it, as in 1857 and 1866, and may make it unable to pay its way without assistance, as it was in those years." And again he writes: "Why should a bank keep any reserve? Because it may be called upon to pay certain liabilities at once and in a moment."
Upon the same point I want to support your position by another great English economist, Stanley Jevons. He says: "There is a tendency to frequent severe scarcities of loanable capital, causing sudden variations of the rate of interest, almost unknown thirty years ago. I will therefore in the next chapter offer a few remarks intended to show that this is an evil naturally resulting from the excessive economy of the precious metal which the increasing perfection of our banking system allows to be practiced, but which may be carried too far, and lead to extreme disaster." Again he says: "The vast trade of the country cannot be placed upon a sound basis, until the force of public opinion among bankers imposes upon each member the necessity of holding a cash reserve, bearing a fair proportion to the liabilities incurred. It matters little who holds the reserve, provided it actually does exist in the form of metal, and is not evaporated away, by being placed at par, or deposited with other banks which make free use of it. In the absence of some common action among bankers, it is[Pg 203] certain that the sensitiveness of the money market will increase, and it is probable that commercial crises will from time to time recur, even exceeding in their violence and disastrous consequences those whose history we know too well."
The want of the conservation of proper gold reserves is what has led to the weakness of the German situation today and compels them to take steps to strengthen the reserves of the individual banks in accordance with the finding of the commission appointed to revise the banking laws of Germany. The individual banks of England have also been increasing their cash reserves for several years past, recognizing the force of what Jevons wrote several years ago.
Mr. Farmer: That's all right, Mr. Banker, as a statement of principles, and I think it is perfectly clear to me just what you mean; but there is one point that I would like to have settled, and that's this: what is a reserve in the United States? That is, what can you call a reserve? You know I am a director of our little bank down in the village below. The other day I asked them what they held for reserves and the cashier brought out this list; $3,000 silver certificates; $3,500 of United States notes, or greenbacks; $4,500 National bank notes; $2,500 gold certificates; $1,500 gold coin; and some silver change. As quick as I saw that bunch of stuff, I said to myself, just what you pounded into me some nights ago, that those bank notes ought never to be held as reserves, because they were nothing but another bank's debts, nothing but another bank's I.O.U.'s. Do you know that idea never penetrated my cranium until that very minute. Now, that is an absolute absurdity, that one bank's debts should be used as another bank's reserves. Just imagine what a high old time we would have, if the banks went around the country exchanging their debts with each other for the purpose of creating reserves. The sky would be the limit. Just think of it; where would it stop?
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Mr. Banker: Well, Mr. Farmer, that is precisely what the bankers of this country are doing. I know of one National banker who took $3,000,000 of his own bank notes, and put them into the reserves of a Trust Co., and all the stock of the Trust Co. was owned by his bank, and was locked up in the safe of the bank. I know another National bank that got a large Trust Co. to bury $3,500,000 of its notes down at the bottom of its reserves, so that they could not get out; and this is a fair sample of just what is going on all over this country today. This is done just to keep their notes out, so that they can make the extra 1 per cent or 1? on the notes in circulation, as we call it. Some one of you may say, well! these notes are secured by Government bonds. Yes, suppose they are, what of it? Congress has just passed a law providing for $500,000,000 more just like these present National Bank Notes, which are to be secured by State Bonds, Municipal Bonds, Railroad Bonds and Promissory Notes and what not, and the boast of that wonderful economist Aldrich was that you could not tell them apart. Any fraud, apparently, would suit him, so long as no one found it out. Now, I assert, and challenge any man to deny it, that if any good debt is fit to be used for reserve money, then every good debt is equally fit. If a Government debt is good reserve money, then New York State debts, Pennsylvania, Illinois, and all state debts; and if all state debts, then New York city, Philadelphia, Chicago and all city debts; and if New York, Chicago and Philadelphia debts are good reserve money, then the United States Steel, Standard Oil and all corporation debts; and if all corporation debts are good reserves, then the debts of J.P. Morgan, John D. Rockefeller, Andrew Carnegie and all private debts are good reserves. When you stop to think of it, what a preposterous proposition it is to make any debt a reserve for another debt. The State of California has just waked up, and will not permit her state banks to hold a National Bank Note as reserve; but the great State of[Pg 205] New York specifically provides that her banks may hold National Bank Notes as reserves.
Mr. Merchant: I must confess that I never knew that before; such a scheme as that is perfectly rotten, and it seems to me as though something ought to be done to correct so obvious an evil. Why, gentlemen, these men who are using bank notes as reserves, must have known that they were driving just that much gold out of the country, and weakening the basis of credit to just that extent.
Mr. Banker: I don't know whether they know enough to know that or not, and I don't know whether it would have made any difference with them if they did. When a man's cupidity and greed make a slave of him, they drive all patriotism out of his soul, just as debts, promises to pay, or wind money drives the gold out of the country.
Mr. Manufacturer: This scheme of banks exchanging their promissory notes or their debts for the purpose of making reserves is a new one to me, too. But, if any one thing can be much worse than another, it must be this scheme.
Gentlemen, a true reserve must be the measure and touchstone of credit, therefore a reserve cannot be a credit itself nor a debt created by granting credit. Now, what is the thing by which we are measuring the value of all credit? Indeed, the thing by which we are measuring the value of everything? It is gold, is it not? Then certainly gold is the only thing that ought to be considered as a reserve.
Mr. Banker: Right you are, Mr. Manufacturer, no greater economic truth was ever uttered, or better said, than you have just put this one. In support of that, I want to read something just written by Joseph T. Talbert, Vice-President of one of our greatest banks. It is this: "What is a Bank Note? It is the available gold behind a Bank Note that gives it value. Substitution of any form of credit paper, the greenback, for instance, is[Pg 206] a substitution of a deferred promise of a thing, for the thing itself. A statute which forces such notes upon the people as a legal tender, works a fraud and vitiates all reason in regard to money and banking. It perverts the moral sense of right and justice."
Mr. Farmer: There is no doubt whatever that all the true reserves that that little country bank really had, was only the gold and gold certificates amounting to $4,000 out of the total of $14,250, the rest being only a substitution of some form of credit which must itself be redeemed by gold which is certainly the only redeemer. We settled that a long time ago, but it never came home to me until right now. This thing is growing on me so rapidly that I shall soon be a real, unregenerate Gold Bug. I guess I am that now. But, how plain and self-evident that truth is when we get close to it. We are living and teaching a gigantic economic fraud, an economic lie.
Mr. Banker: Some reference may have already been made to this fact; however, it will do no harm to repeat it right here because of its force and great importance. Under the English Bank Act of 1844, permission was given to count silver as one-quarter or 25 per cent of the reserves of the Bank of England; but it has never done so, since it is regarded as an economic falsehood. The reason is obvious. If the bank today held $50,000,000 of silver and $150,000,000 of gold, the gold would not only have to carry the $50,000,000 of silver, which is nothing but another form of credit money, because actually worth only 50 cents on the dollar in bullion, but the gold would also have to carry $150,000,000 additional; that is, all the credit based upon this $50,000,000 of silver, a condition that is wholly misleading; for the silver instead of being a reserve at all, as it seems, or pretends to be, would actually be, so to speak, a bundle of dynamite under the whole structure of English credit.
So, in the United States our $346,000,000 of United States Notes, or greenbacks, instead of being an actual[Pg 207] reserve to that extent, are not only a burden resting upon our gold, to the amount of their face value; but the burden our gold is carrying is multiplied to the extent of all the credit that is resting, or is based upon these United States Notes, which may be anywhere from one billion to three billion according to the per cent of the reserves the banks using them carry. They may be used as a 5 per cent reserve, and carry twenty times the amount of the reserves, or more than six billion; it is possible that they may be carried as a 17 per cent reserve, the average of all the National Banks, or only 7 per cent, the average reserves of all the other State Banks, excluding the Mutual Savings Bank.
Mr. Merchant: What's that? Do you mean to say that the State Banks do not carry more than an average of 7 per cent reserve, and that the National Banks carry an average of two and a half times as much or 17 per cent cash?
Mr. Banker: I have the statement of the Comptroller right here, which shows that the average cash reserves of all the State Banks is 5 per cent, including the Mutual Savings Banks, but excluding them, only an average of 7 per cent, and that the average reserves of all the National Banks is 17 per cent.
The report of the Comptroller also shows this fact, that while all other banks than the National Banks, excluding the Mutual Savings Bank, hold only 7 per cent cash reserves of their individual deposits, or demand liabilities, they have 24 per cent of their assets invested in bonds and other securities, which must of necessity be slower than current commercial paper, while the National Banks, which hold 17 per cent in cash of their individual deposits, have invested only 17 per cent of their assets in bonds, or other securities.
The inconvertibility of a great per cent of the assets of the State institutions is another burden then, thrown upon the total cash bank reserves of which the National Banks carry $996,000,000, with $5,825,000,000 individual[Pg 208] deposits, while the other banks, excluding the Mutual Savings Banks, have only $577,000,000 cash reserves, with individual deposits amounting to $7,589,000,000.
The average cash reserves of the United States therefore are only a trifle over 11 per cent, when they should not be less than 16 per cent under any circumstances at the low level, reaching nearer 20 per cent at the high level. That is, reserves should be held for use, not ornament. There should be such an elasticity in the use of reserves, as to enable any community or section of the country to adjust itself to the ever-changing conditions of trade.
Let me make this point perfectly clear by giving you an illustration. Under the law of today, our bank carries 6 per cent cash, which amounts to about $120,000. There are times of the year when I could carry $180,000 or even $200,000 a good deal easier than I could carry $60,000, or even $50,000 at another time. Common sense would say that I ought to be able to adjust my business and my reserves somewhat to the varying conditions, but no, I am tied down by a cast-iron rule, so that I cannot bend without breaking the law. There is no doubt that my reserves ought to average for the year fully 6 per cent cash. In addition to this, I ought to carry at least 10 per cent more that I know absolutely is available at any time. Yes, and this should be so carried with the combined reserves of my fellow bankers all over the United States, as to make any amount available that could possibly be necessary at any time under any circumstances. This is the principle of the elasticity of reserves.
The wide variation between the State reserves and the reserves of the National banks is not difficult to explain. There are eighteen states today which have no reserve requirements at all. In the remaining states, the reserve requirements range all the way from 5 per cent to 25 per cent. The reserve laws in some of the states are excellent, just as good as that of the National Bank Act, while[Pg 209] in an adjacent state, there may be no provision whatever requiring reserves. The result is that half of the banks of the country which are compelled to carry adequate reserves are carrying the other half, a condition that is unfair, unjust and manifestly unsound.
Mr. Merchant: It is not only manifestly unfair as between the bankers themselves, but such a condition imperils the banking situation as a whole, and more than any other single cause, brings on a general commercial disaster, as things now stand. The banking of the United States and all the productive and transportation interests are, comprehensively speaking, but one single business, so intimately associated and interwoven are their affairs. The banks put up their capital as an insurance fund, to protect their customers, and should handle their resources, and should keep such an amount of reserves on hand or at their command as to guarantee the payment of all depositors upon demand, or in accordance with their contracts. Since the banks, commerce and the people are all bound up together, the contracts of the banks with th............