Uncle Sam: From what you boys intimated the other night, I got the impression that the so-called Aldrich scheme demonstrated almost everything that we should not do in working out a financial and banking system. It must have been more or less of a warning to you, then, when you started out.
Mr. Lawyer: To tell the truth, I had become so convinced of its ulterior purposes from the standpoint of management, that I never studied it seriously from an economic point of view, until this last week.
Mr. Banker: My position was just the reverse of that of Mr. Lawyer, for while I had studied it from an economic point of view and that of a practical banker, and had become so convinced of its utter unsoundness on the one hand, and unfitness for use to ninety-nine out of every hundred of American banks, I never dug into the soul of its management, until the past week. So we compared notes, and found the situation particularly interesting.
Mr. Merchant: Before you go any further, I want to read something from a speech, delivered in Congress March 29, 1910, two years before the Aldrich plan was born. You are all doubtless aware that the Aldrich scheme was nothing more nor less than an attempt to transfer to this country the German scheme of note issue and banking generally.
Mr. Laboringman: I heard the other day, that the Aldrich bill was deader than a door-nail. Why do we want to spend any time on that? Or, are you fellows like the Irishman, who said that he was kicking a dead dog to teach him that there was such a thing as punishment after death?
[Pg 460]
Mr. Merchant: You must remember, Mr. Laboringman, that error is always repeating itself, and that sin and iniquity never die; so, the economic blunders of the Aldrich Bill and its administrative purposes should be exposed and held up as a lesson and an illustration to guide us in the future.
What I wanted to read, was a part of Congressman Fowler's speech, delivered in the House of Representatives. Referring to the German banking situation, he said:
"The position of both England and France, under present conditions, would seem sound and impregnable from a governmental as well as a banking point of view. Each has planted itself upon the gold standard, with certain precautions peculiar to its circumstances. Germany, on the other hand, has not pursued the course of England, with its limited gold reserve, forcing the public into the deposit and check system to meet the current demands of trade. This would have been impossible without a long-continued ruinous revolution, considering that there is a quarterly settlement in Germany that calls for an expansion in currency amounting to $125,000,000. Nor has Germany pursued the course of France, which has a gold reserve large enough to meet any test or burden that either the Government or the commerce of Germany might have imposed upon it, but has adopted a middle course which has not the strength of the position of either England or France, nor the credit facility of France.
"Its gold reserve is of the halfway sort, and its bank note issue is also of the halfway sort. The result is that the financial and banking situation of Germany must necessarily prove weak upon the first great test when the bank notes of the Imperial Bank of Germany must be made a legal tender.
"Indeed, upon the declaration of war by Germany or against Germany, the first step taken in a financial way would be for her to declare her bank notes a legal tender.[Pg 461] It is hardly problematical what would soon happen, with the wide divergence between her gold fund and the amount of her note issue."
Gentlemen, within eighteen months after he made that statement, when war seemed probable with France, Germany made her bank notes a legal tender.
Further along in the same speech, commenting upon the unsoundness of the German plan, he said:
"Imagine for a moment a central bank in the United States, like the Imperial Bank of Germany, issuing all our bank note currency and these notes going into the reserves of our myriad of banks as the basis of loans which, under our system, in turn become our deposits.
"The natural, first, and immediate effect would be an expansion of credit, an inflation to just the extent to which the notes were used for reserves.
"As soon as the situation became obviously dangerous, a halt would be called and a contraction in loans would follow. But a contraction of loans calls for liquidation, and liquidation produces an exigent demand for currency. We all learned that lesson only so short a time ago as 1907.
"But in the very face of the increased demand for more currency the currency would be contracting, because the loans would be reduced by calling in bank notes which were being used for reserves; or, in other words, the loans called would be paid in bank notes.
"For every $100,000 of notes so called in the loans might be reduced to an average of $500,000, and yet this very process of liquidation would be concurrently destroying the only instruments of credit that would adequately meet the demand created by forced contraction. It would clearly lead to self-destruction, to commercial suicide.
"The best thought of England recognizes this subtle but obviously destructive contradiction in the use of credit, and therefore opposes the use of credit notes by the Bank of England."
[Pg 462]
Gentlemen, the fact that we can force our banks to carry a specified amount of reserves and of a specified quality, by the power of taxation, will preclude the use of bank notes as reserves in the United States.
Mr. Fowler then concludes as follows:
"There are then, in addition to all of the objections to the Bank of France, three other unanswerable objections to the establishment in this country of any central organization approaching in character the Imperial Bank of Germany:
"First: It would give us a financial and banking structure so weak that it could not stand any great strain such as necessarily comes with a great war, if, indeed, it were not so weak as to lead to a suspension of gold payments even in time of peace.
"Second: No thought whatever should be given to any suggestion that makes it possible for one bank credit to be used in the reserves of another bank and so substitute any form of credit for gold in our bank reserves.
"Unless gold alone is ultimately recognized as fit for bank reserves, we shall continue to pay dearly for our mistake until it is corrected.
"Third: No proposal whatever should be entertained by us that involves the possibility of the suspension of gold payments, for no country can become the clearing house of the world that is not a free market for gold. The United States and not England ought to be the clearing house of the world."
These words, as I have said, were spoken about two years before Mr. Aldrich attempted to import the German Bank into this country.
Mr. Banker: That is very interesting and prophetic, but not more so than his speech at the Republican Club of New York, January 20, 1912. Let me read that to you, gentlemen, by way of an exposition of the economic faults of the so-called Aldrich scheme. He said:
"I wish to speak purely from an economic point of view and to cover only one single phase of the proposal;[Pg 463] its dangerous expansion, unbounded inflation and certain expulsion of gold from the country.
"'First: Nothing should ever go into the reserves of the banks of a country except what is coined out of its standard of value.
"'Second: The poorer money always drives out the better.'
"Every single note of the so-called Reserve Association used in the reserves of our banks will displace just that much gold and drive it out of the country.
"Judged, therefore, from a purely economic point of view, I assert that the Reserve Association plan is the most unsound, the most dangerous; indeed, it is absolutely the worst proposal that has been brought forward for serious consideration by any respectable body of men since the adoption of the Constitution, with the two following exceptions: First, the issue of legal tender money by the Government such as greenbacks; second, the free and unlimited coinage of silver at the ratio of 16 to 1.
"An officer of one of the largest banks of the United States recently used this language: 'Mr. Fowler, it is incredible that we should be called upon to consider such a proposition.'
"If this is really true, how does it happen, that so many business men and so many bankers approve it, is a most natural inquiry. The cause is not difficult to perceive.
"There is not a business man nor hardly a banker who is not even now still living in a state of fright from the terror of 1907. One thought alone seems to have taken possession of the country to the exclusion of everything else, and that thought is this: That we must hereafter be able to convert our commercial credits into bank or current credits. There seems to be something approaching madness; indeed, there seems to be an insane haste lest they be caught again, possibly tomorrow, certainly next fall. But they need not worry, for danger is not imminent; 1907 will not come again right away.
"During the past two years up to the present time the[Pg 464] entire thought of the country has been directed to a mere mechanism to achieve this result, without any reference to or consideration whatever of those fundamental, eternal principles of banking economics that demand recognition and obedience if we are to escape the frightful penalties which their violation always inflicts.
"In the outset I want to lay down two fundamental laws that I wish were burned into the minds of every banker and every business man within the borders of this republic. They are these:
"One—Nothing should ever be counted as a reserve which is not coined out of the standard of value. Our standard of value is gold, therefore nothing should go into the reserves of our banks except gold.
"Two—The poorer money always drives out the better.
"I hope that whoever hears these words will commit these two laws to memory, for they are as fundamental and eternal in their operation as the law of gravitation.
"I assert that the plan of the so-called reserve association is in direct violation of the first of these laws, and will put the second law into operation to a dangerous and destructive degree.
"Every intelligent student knows that the plan proposes to transport to this country the German system of banking, which I assert has completely broken down at home during the past six months. Now, if this system has broken down in Germany, where there are a few great banks with hundreds of millions of assets and not more than 500 banks all told, what can you expect it to do here with more than 25,000 individual, independent banks, directly responsible to their depositors?
"The following letter was given to me by an officer of one of our largest banks, accompanied with these words:
"'I realize that in giving you this letter I am, in a way, betraying a business confidence, but I regard it as my patriotic duty to give it to you, to use in any way[Pg 465] you may see fit. For what would happen to this bank if we should send out such a letter to our depositors? Our doors would be closed inside of twenty-four hours.'"
The letter referred to was written by the Deutsche Bank of Berlin, which has assets approximating $500,000,000, and is as follows:
"'In consequence of the restrictions recently made by the Imperial Bank, with regard to the supply of money at the end of every quarter of the year, we are, to our regret, compelled to ask you, when drawing against your account with us upon our head office and our branches by mail, kindly to advise us by cable of such drafts on them as are likely to come forward for payment during the last three working days of the quarter and the following two working days, so as to enable us to provide from here especially the necessary funds at the office drawn upon.
"'As to cable transfers which, during the five days in question, you may have to order on our head office or branches, to the debit of your account with us, we shall feel obliged by your ordering them only if you can advise us by cable one day before, the amounts to be placed by us to your debit on receipt of such advice, or ordering upon us for mail transfer from here.
"'The foregoing, of course, does not apply to small amounts.'
"As a further proof that the system has broken down at home, let us see what has been going on in Germany during the past six months to further demonstrate the weakness of their system.
"The great banks of Germany have been scouring the markets of the world, going into every nook and corner, hunting for gold. At what price? Was it at 5 per cent, 6 per cent, 7 per cent, 8 per cent, 9 per cent, 10 per cent? No. The New York Evening Post, in its annual review, says it was from 12 per cent to 20 per cent. I have been credibly informed that the great banks of Germany, with hundreds of millions of assets, were borrowing money in[Pg 466] our own markets at 7? per cent and 1? per cent for three months, or upwards of 13 per cent.
"I was told of one loan to one of the largest banks in Berlin, running for a whole year at 7 per cent.
"Think of it! What would the condition in our country have to be before The National City, The Bank of Commerce and the First National of New York, and the First National and Continental Commercial of Chicago, were scouring all quarters of the globe for gold and paying from 15 to 20 per cent for the loans?
"The Imperial Bank of Germany could not save the few great banks of Germany. What would the same kind of an institution in the United States do for 25,000 independent banks under the same circumstances, all pulling at the skirts of this proposed financial balloon? The Imperial Bank could not make real money out of paper credit when the crisis came.
"Let me ask the 25,000 individual independent banks of America, what they would do when the day of contraction and refusal came? Where would you go for gold with your comparatively small capital and limited credit?
"The financial situation in Germany is by far the weakest of all the great nations of Europe and the cause is not far to find nor difficult to detect.
"Their notes, which are based upon only 33 per cent of gold and 66 per cent of commercial credits, are used as reserves and made the basis of additional credits. Economically speaking, whenever a bank puts anything into its reserves it makes that thing a legal tender and exactly to that extent displaces that much gold, if gold is the standard of value.
"During the ten years from 1900 to 1910 the gold accumulated by Russia amounted to upward of $200,000,000; that accumulated by France, upward of $300,000,000; that accumulated by England, where nothing but gold is treated as reserves and where there has been comparatively little growth in business, $32,000,000.[Pg 467] The United States accumulated $1,100,000,000, while Germany, with all her development of trade during the last ten years, accumulated only $40,000,000 of gold when it ought to have been ten times as much, all things considered, or $400,000,000. If she had done this she would not have been compelled to send her great financial institutions all over the globe in search of gold and been compelled to pay 15 per cent and 20 per cent for it."
Gentlemen, within sixty days after those words were uttered, this conversation was reported to have taken place. The German Emperor asked Herr Havenstein, the President of the Imperial Bank of Germany, whether Germany was prepared, financially, to carry on a war with a first-class power. Herr Havenstein said: "No." To this the German Emperor replied, "I do not want that answer to that question when I ask it again."
Herr Havenstein immediately called the managers of the thirty great banks together, and told them that they must collect at least a 15 per cent reserve. To this they protested, saying that it meant the accumulation of at least $250,000,000 in gold; but Havenstein persisted and insisted upon his demand. Now, gentlemen, if you add the $40,000,000 they had accumulated, to what Havenstein insisted that they should accumulate, or $250,000,000, you have $300,000,000 as a minimum. It is altogether probable that $400,000,000 was nearer what they should have accumulated.
It should be noted in this very connection, that Germany recently appointed a commission to investigate her banking system, and that this commission reported that the individual banks of Germany should carry their own reserves, precisely as Congressman Fowler has always contended, declaring that it is especially important in the case of our individual, independent banking system. From what has been said, it has been demonstrated that every criticism that he has made of the German system, has been confirmed by their own subsequent action.
The rest of his speech was as follows:
[Pg 468]
"Mark this: If we did not have the $346,000,000 United States notes or greenbacks, the $650,000,000 of legal tender silver and a part of the $750,000,000 national bank notes in the reserves of our banks, we would now have in the United States $2,500,000,000 of gold instead of only $1,850,000,000. Does all this prove nothing to us?
"Every intelligent student of economics knows that after Alexander Hamilton, with the acquiescence and approval of Jefferson, had fixed the ratio of the gold and silver dollar in 1792, a differential of only one-half to one per cent drove all the gold out of the country by 1832, and that from 1834 to 1860 the changed ratio drove every dollar of silver out of circulation. Who does not know that from 1861 to 1865 the issue of fiat Government paper drove every dollar of gold out of the country; that for seventeen years we were off the gold standard, resuming specie payments in 1879?
"Has any banker over fifty years of age forgotten the silver struggle from 1879 to 1894, when, because of the silver purchase act by which we only added $50,000,000 a year to our reserve money, we came to the very precipice of repudiation and national dishonor?
"These four great and significant lessons have been taught us—since the establishment of this Government—the poorer money invariably drives out the better, and yet we are confronted by such stuff as the following falling from the lips of the reputed author of the so-called Reserve Association:
"'The banks will be able to replenish their reserves indefinitely.' The counterpart of this proposition is that the banks will be able to make loans indefinitely. Think of such a proposition! And again, he says it was deemed necessary 'to provide such effective regulation of discounts and note issues as would enable the organization to respond promptly at all times to normal or unusual demands for credit or currency without danger of undue expansion or inflation.' If this proposition survives at all it will be as the curiosity of the century. I submit[Pg 469] that neither of these propositions could have emanated from a mind capable of thinking in the terms of economics.
"I assert that if we adopt a sound financial system in the near future we shall have in the course of ten years upward of $3,000,000,000, possibly $3,500,000,000, of gold in the United States. I assert further that if we adopt the proposed so-called reserve association scheme we shall have at the end of five years thereafter in the neighborhood of only $1,250,000,000, allowing for a differential of $250,000,000 either way as a possibility. In other words, we would have as a result not more than 40 per cent and possibly not more than 30 per cent of the gold that we shall have if we pursue a wise economic policy.
"The scheme provides that any deposits with the association may count as reserves; also that any of its notes may be held as reserves.
"Since the average reserve of all national banks is and has been for many years about 20 per cent, let us assume, first, that a national bank called 'X' has $5,000,000 of deposits and holds a 20 per cent reserve, or $1,000,000 of gold; second, that X National Bank deposits this million of gold with the reserve association; third, that a national bank called the 'Y National Bank' exchanges $1,000,000 of commercial paper for $1,000,000 of the notes of the reserve association, which it puts into its reserves.
"In the course of time it will have a million of deposits, largely in the shape of loans based upon this million of notes; so that the original $1,000,000 which stood guard over $5,000,000 of debts now is called upon to protect $12,000,000 of debts, or only about an 8 per cent reserve as against 20.
"The X National Bank owes $5,000,000 of deposits against $1,000,000 deposited with the association. The association owes the X National Bank the $1,000,000 deposited with it and $1,000,000 of notes outstanding which[Pg 470] it issued to the Y National Bank. The Y National Bank has liabilities outstanding of $5,000,000 with the notes as reserves, or a net expansion and inflation of $7,000,000.
"It has been assumed or claimed by some advocates of the scheme that probably $1,000,000,000 of gold would be deposited with the association, in which event there would be an expansion and inflation of $7,000,000,000, or a total liability of $12,000,000,000 where now there are only $5,000,000,000.
"While this expansion and this inflation have been going on the notes have been going into the banks as reserves, and a corresponding amount of gold has been driven out of the banks and out of the country.
"Now, mark you, I have not pursued this expansion, this inflation, beyond the 50 per cent gold reserve for all the liabilities of the reserve association. When you turn your imagination to all the possibilities remaining in rediscounts, borrowing direct, acceptances and falling in your reserves, and the credits which grow out of credits directly and indirectly, the prospect becomes bewildering. The expansion and inflation becomes a matter of planetary distances and astronomical figures. The proposal leads into the nebulous somewhere, into the bottomless nowhere.
"Every student recognizes that the weakest point in our national bank system is the superimposed credit resulting from the deposits with our reserve cities and then with our central reserve cities. But in the very face of that fact here is a proposal that accentuates that fault one hundred fold.
"The strangest thing about this whole proposal is that it is based upon the fact that we have not sufficient capacity for expansion and inflation of credit. Will any one say that what we wanted during the years of 1913-4-5-6-7 was more inflation? Does not every intelligent student of banking economics know that what we should have had was some way of checking the delirium instead of increasing the mad speculation?
[Pg 471]
"To determine now what we want we must first ascertain with some degree of accuracy just what happened.
"Until we come to realize that there are two distinct kinds of capital involved in our banking business, and learn to treat them according to their peculiarities, we shall continue to have the same kind of trouble, to a greater or less degree, that we have had in the past.
"There is the trust fund or the savings of the people and money belonging to estates or the investment fund. Then there is the commercial fund or that capital engaged in production and trade. The law should compel the segregation or separation of these two funds, so that we know with some degree of certainty whether the investment fund has all been exhausted and our commercial funds or capital are being encroached upon and absorbed in fixed investments. This is precisely what happened by 1907.
"To illustrate this thought, let us assume that a railroad needs one hundred flatcars to carry its peculiar freight and needs one hundred passenger cars for the accommodation of the people. It is self-evident that if the road uses all the flatcars and half the passenger cars to carry its freight, the balance of the passengers will have to make some other provision for transportation or walk. This is just what occurred in 1907, and a great many people are still walking as a result of that misadventure. Liquidation is still going on, with a probability that we shall be well into 1913 before normal or really good business conditions will prevail all round.
"Now, it is apparent that if this diagnosis is correct, the bankers did not cause the panic, as is so frequently charged. Indirectly, the bankers had a good deal to do with bringing it about, but not in the manner usually supposed. The way they helped it on was this:
"The great syndicates or underwriting bankers adopted the practice of simply notifying rich men and bankers all over the country that to them so much of[Pg 472] some issue of bonds had been allotted. Those to whom they had been allotted, influenced, on the one hand by flattery and on the other by fear, lest if they refused to absorb what had been set apart for them they would be ignored in the future, took the allotment at all hazard.
"This forcing process went on until commerce broke down, because it had been robbed of its necessary capital and has not been able to replace it since, out of earnings."
Mr. Merchant: Mr. Banker, do you believe that to be a correct statement?
Mr. Banker: Believe it! I know it. There is no doubt whatever that the banks generally are under a kind of duress. They know that if trouble comes, they must go to the powers that be. When these underwritings are put out, and we bankers are notified that we are expected to take a certain amount, we feel compelled, half compelled at least, to respond, precisely as Mr. Fowler stated, and, as a natural consequence, the commercial fund of the country is sapped and absorbed, and transferred to passive investments, which, when the break occurs, become to all intents and purposes fixed investments because you cannot dispose of them at all.
What we must do, and what I am sure we have accomplished in the bill we have prepared, is to set every individual bank free, absolutely free, from any domination or influence of any kind, direct or indirect. Take my bank as an illustration of what I mean. Today I am living in a kind of terror of the possibility of 1907 coming again, because I have no way of protecting myself, except through my correspondents, and, under present conditions, that is no guarantee, as the banks may all break down again as they did then. This, you will remember, is due to the fact that we have no real economic reserve in the United States today. All the reserves are loaned out all the time.
Let me call your attention to what my position will be, under the bill we have prepared.
First: I shall be able to furnish all the currency I[Pg 473] need, by simply converting book debts or deposits into note debts or currency, up to twice the amount of my capital, if necessary. That is, I can regularly issue $100,000, the amount of my capital, and by going to my Board of Control, $100,000 additional. But, if I did this, I would not increase my liabilities a single dollar, but simply change the form of them from deposits to notes.
Mr. Merchant: Have you any doubt about the people taking your bank notes, as you suggest?
Mr. Banker: None, whatever. You see, in the first place, they do not come to the bank because they fear the bank cannot pay them; but, because when one of these shocks to credit comes, there is a tremendous demand for cash of some kind. You will remember, that in 1893 and 1907, when currency was sold in New York, it did not make any difference what it was: gold or gold certificates, silver or silver certificates, United States notes or bank notes—anything that was cash brought the same premium. But, suppose the question should arise and a man should ask, are these notes good? He would not hesitate long after I gave him these facts:
First: That they were a first lien upon all my assets.
Second: That there was a gold guarantee fund amounting to $60,000,000 in the treasury of the American Reserve Bank, to redeem them if my bank failed.
Third: That the American Reserve Bank with $1,250,000,000 would redeem the notes in case my bank failed.
Mr. Laboringman: Well, Mr. Banker, do you know what I would do, if I had a deposit in your bank, under those circumstances, and got scared of you? I would give you a check for my deposit, take your notes, and hold them until the storm blew over. That's what I would do.
Uncle Sam: There, can you beat that as a precaution against accidents? Mr. Laboringman never will get left, if you will give him half a chance.
Mr. Manufacturer: Under those circumstances, of course, the question of goodness of the notes would never[Pg 474] arise. The people would soon think only of the great central gold reserve, which would always be before their eyes.
Mr. Banker: In addition to my note issue, I would have the same recourse to my bank correspondent in New York that I have today, and he would then be in a far better position to assist me than he is now, because of his additional resources. Besides, I could fall in my required cash reserves, which would be about $100,000 down to $25,000, without any danger to my bank; because of my greatest, final, and practically inexhaustible resource, The Board of Control, which has examined my bank, knows my assets, and will give me any amount of gold to protect me in case of necessity.
Mr. Merchant: I see, your exact condition is known to the Board of Control; and the Board of Control has access to the gold in the American Reserve Bank, and could get fifty or one hundred million dollars to protect itself, if necessary.
Mr. Banker: That is so. My last protection is the American Reserve Bank, which actually holds reserves, real reserves, not United States bonds, United States notes, silver certificates, chips, and whetstones, nor any old thing; but gold, in unlimited quantities, to all intents and purposes.
Now don't you see, gentlemen, that if you will place me in that position, I will be absolutely free and independent of any bank in the United States, and of all banking influences of whatever kind—simply because my final appeal is to a great co?perative fund, in which I have a common interest with all my fellow-bankers, and I know that my protection is absolute?
Mr. Manufacturer: Yes, and I see another very important, all-important fact growing out of that situation; the complete liberation of every bank in that zone, as well as your bank; indeed, every bank in every zone would be absolutely liberated.
Mr. Merchant: Yes, and I see more than the liberation[Pg 475] of all the individual banks. I see the complete liberation of every commercial zone or section of the country from every other commercial zone or section of the country; as each zone will look for its protection to the American Reserve Bank, the holder of the great co?perative gold fund, that is more than ample for any emergency that can possibly arise.
Mr. Lawyer: Mr. Banker, how would you fare under the Aldrich scheme, if you wanted $100,000 of currency to use to move the crops in the fall?
Mr. Banker: I am glad that you have asked for a comparison of our plan with the Aldrich scheme, under the same conditions.
I could not have any accommodation whatever, unless I first subscribed for an amount of stock in his scheme, equal to 20 per cent of my capital, and I had paid up 10 per cent, or one-half of it, or $10,000. Then, I must have a deposit or balance with his institution, possibly as much as $20,000, if I wanted to borrow as much as $100,000. Even then, I could not get any accommodation unless I had notes or paper that had less than twenty-eight days to run. But country bankers such as I am have no short time paper worth speaking of, and any of the paper or notes that might happen to be coming due within twenty-eight days would be the paper of people who do not want it sold and collected at some remote city. They usually want to pay a part and renew a part, so that, practically, I could not get any accommodation along that line.
Indeed, I do not believe that there is one bank in a hundred in the United States that could use the scheme at all directly. Now, if I should go into that scheme I would have to become a member of what they call a local association. If I had no twenty-eight day paper, I would then have to go to my local association with my hat in one hand, and my grip full of notes in the other, and ask them to guarantee my paper for me, by paying a commission for such guarantee. Of course, some of the[Pg 476] officers of the local association would be from my particular neighborhood, and competing with me for business. I would not want to confess to my local fellow-bankers by asking their help in ordinary times, and I would not want to put into their hands the paper of my customers, and so expose their business to their neighbors. The result would probably be that I would resort to my correspondent banker, just as I am doing today. Of course, the large banks might have plenty of twenty-eight day paper, and could turn it over to the branch of Aldrich's Central Bank, and get some of the notes about which we have already heard something and supply me.
Now, let me suppose that I could use an average of $100,000 of currency throughout the year, and that I keep that amount of paper up all the time, for the purpose of supplying myself with currency of the Aldrich make; you can see that it would cost me 6 per cent upon $100,000, or $6,000 per annum.
Mark this, put it in your pipes and smoke it, that under our plan, allowing for the cost of my reserve of 15 per cent on $100,000 of notes, or 6 per cent on $15,000, or $900, and allowing my tax of 2 per cent on $100,000 of notes, or $2,000, it would make a total cost of only $2,900. My bank would, as you can see, be the loser of $3,100 by using the Aldrich scheme as against our plan. Do not fail to remember that the largest part of the 2 per cent tax on the notes under our plan will go to pay off the greenbacks.
Again, I want you to keep in mind the expense and trouble of shipping out the commercial paper, and looking after it throughout the year, and the interminable nuisance of buying just the right amount of currency every day, as compared with issuing your own notes, precisely as your customers want currency. You see, I will be getting back some of my notes every day through the Clearing House, as they will then be sent to the Clearing House with the checks and drafts, just as they are in Canada.
[Pg 477]
Mr. Merchant: Of course, if you can save $3,100 on your currency every year, and a large amount of additional expense, as well as an endless amount of trouble, you can afford to share your gain with us fellows.
Mr. Banker: Most certainly, and you may depend upon it, that all the extra expense that we incur will come out of our borrowers.
Mr. Manufacturer: As you say, there cannot be one bank in a hundred that would ever have what you call twenty-eight day paper. I know I would not want you, and I am sure that Mr. Merchant there would not want you, to take our paper to some local association and ask to have it guaranteed unless there was a panic and everybody was in the same boat. The whole scheme looks absurd and impractical.
Mr. Banker: Your opinion is confirmed by one of our most prominent country bankers, who said, "This proposition is impractical, unparalleled, and useless."
Mr. Merchant: Mr. Banker, if you should ask your city banker correspondent from whom you purchased the Central Bank notes, upon what he relied, when he gave you the notes, what would he say?
Mr. Banker: He would undoubtedly say that he relied upon the credit of my bank, and upon the paper I turned over to him in exchange for the Central Bank notes.
Mr. Merchant: Well, if your credit and the paper with your endorsement are good enough for that banker, why are they not good enough security for your own bank notes?
Mr. Banker: They certainly would be; especially since I would be under the supervision of the Board of Control, and my notes would be secured by being a first lien upon my whole assets; by a guarantee fund, and by the total amount of gold held by the American Reserve Bank.
Mr. Merchant: Mr. Banker, you spoke of belonging to a local association if you should go into the Aldrich[Pg 478] scheme. How many of those associations would there be in the United States?
Mr. Banker: No one could tell until they got through organizing them. The banks now have about two billion dollars of capital, and two billion dollars of surplus, or a total of four billion dollars. The scheme provides that any number of banks representing $5,000,000 of capital and surplus could form an association. If they succeeded in driving all the banks of the country into it, as was evidently their intention, you see there could be about 800 of these local associations engaged in guaranteeing their associates, if they wanted to, after prying into their private business.
Mr. Merchant: That is the worst feature I have heard yet, because it would let all the cliques and cabals get together and run things by manipulation. Don't you think so?
Mr. Banker: I certainly do think so. Bankers above all things do not want to expose their business to their immediate neighbors in the banking business.
You will remember that in the plan that we have just submitted, we confined all knowledge to the boards of control, of which there is to be no more than forty-two, possibly only twenty-eight, and that we required all members of the Board of Control to disassociate themselves from all banking connections in their respective zones.
Mr. Laboringman: Yes, but you have seven districts in every one of your zones, don't you? That would make two hundred and ninety-four districts, if you should have as many as forty-two zones, would it not? Or one hundred and ninety-six if you have only twenty-eight zones. I am sure my arithmetic is right, for I am fairly good at figures.
Mr. Banker: Yes, your figures are right, but you must remember this—that the only purpose for the creation of the districts in our plan, as we have constituted them, is to prevent combinations and cabals, and guarantee a fair[Pg 479] and evenly distributed representation of all parts of every zone.
These districts exist only for the single purpose of the organization of the commercial zones—the election of members to the Board of the Bankers' Council and to the Board of Control. When this is accomplished, their work is done.
Mr. Laboringman: Oh, I see, you would only have at most forty-two organizations in the United States that would have any actual business to do.
Mr. Banker: That is correct. Every zone would be so organized as to absolutely protect the confidences of the business world and the banking fraternity.
I think in the organization of the commercial zone, that we have taken such steps to emphasize and secure publicity of action, and so much pains to guarantee representation from every section of every zone, that the people as well as the bankers will be kept advised all the while of all that is being done. I think that the matter of the subsequent selection of members, both to the Board of Control and to the Board of the Bankers' Council, will always be a subject of general discussion and newspaper comment. This is true more particularly, because every bank has one vote, and because only one member will be elected to the Board of Control each year, and only two members will be elected to the Board of the Bankers' Council each year.
Publicity and direct representation are the two distinct ends sought, as we believe that in this way alone can a true and proper sense of responsibility be imposed upon the members of the two boards.
Mr. Merchant: I agree with you absolutely. It is precisely as President-elect Wilson said: "Publicity, pitiless publicity, is the only sure protection to the people."
Mr. Manufacturer: Just another word upon that point. Samuel J. Tilden I think it was who said: "Publicity is the only safeguard of republican institutions." How well we have guaranteed publicity in the organiza[Pg 480]tion of our commercial zone the public will have to judge. However, if our method for securing publicity can be improved upon, we will all welcome it.
Mr. Farmer: Since we have been discussing this feature of publicity and independence, I have become so deeply impressed with the fact that every bank will be set free, will be able to act so independently, and that every commercial zone will be such a complete, such a perfect democratic republic in itself, that I have been wondering whether each zone could ............