218 



THE INDIA RUBBER WORLD 



[February, 1, 1912. 



dred millions of silver; about seven hundred millions of national 

 bank notes secured by government bonds, as you know, and 

 three hundred and forty-six millions of greenbacks. The green- 

 backs are limited by law to three hundred and forty-si.x mil- 

 lions ; the gold is limited liy the amount of gold that comes in 

 for coinage; the silver is limited to the present outstanding by 

 law, and the only elasticity wliicli we are able to get is in the 

 national bank notes. We have over seven hundred millions — 

 some seven hundred and twenty millions outstanding to-day. 

 There are but little more than nine hundred millions of govern- 

 ment bonds outstanding now. Therefore, all but about two 

 hundred millions of our government bonds are now in the Na- 

 tional Treasury, held as a basis for circulation of l)ank notes out- 

 standing. Therefore, we cannot extend very much more in that 

 direction ; because it would be impossible to get the bonds. Many 

 of them are held by savings banks and trustees, in such ways that 

 they would not go on the market under any conditions, and that 

 is the only remedy we have for issuing additional circulation 

 when you, gentlemen, require it in your business. 



Then, we found — and already knew, of course — that our re- 

 serves were not properly placed. You know that country banks 

 are required to keep fifteen per cent, of tlieir deposits in reserve, 

 of which 6 per cent, must be in their own vaults, and nine per 

 cent, may be with reserve agents. Banks in reserve cities must 

 keep twenty-five per cent, of their deposits in reserve, one-half 

 of which must be in their own vaults, and the other half may be 

 with reserve agents. Central reserve cities — New York, Chicago 

 and St. Louis — must keep twenty-five per cent, of their deposits 

 in their own vaults. 



The result of that is that the reserves of the country gradually 

 get into the hands of the banks in the central reserve cities.' and 

 that is especially true when business throughout the country is 

 slack and money cannot be used to advantage at home. 



Not only do the reserves gradually centre in New York — 

 which is our great financial centre — but also the surplus moneys 

 which country banks have is either sent here to their reserve 

 agents, because they can get two per cent, for it, or else is sent 

 here to be loaned — likely to the customers of the New York 

 banks themselves. 



Now, that was the condition in 1907. The money from the 

 country had centered in New York to an unusual extent. The 

 New York banks in order to take care of the money which came 

 to them, in order to get a new dollar for an old one. naturally 

 tried to loan it, because they are paying two per cent, for their 

 balances. They must get two and a half or two and three-quar- 

 ters per cent, at least for that money or else they are losing on 

 it. The tendency, therefore, is to loan that money somewhere 

 where they can get it back promptly in case there is necessity 

 for it, and that tendency leads inevitably in this coimtry to loan- 

 ing on stock exchange collateral as security — on notes secured 

 by stock exchange collateral. In other words, it is a temptati(<ri 

 to create speculative use of the money at, perhaps, the expense 

 of its commercial use. It is inevitable with our system that 

 that should be so : because the New York banks cannot certainly 

 obtain their loans promptly in any other way unless we have 

 .some other kind of paper in circulation in this country than we 

 have to-day. 



In 1907, when the country banks wanted to get their money 

 back in the fall, they called for their surpluses in New York, and 

 called for their reserves, and the result was the precipitation of 

 that panic. Quite likely the country was ripe for the panic at that 

 time. I think myself that it was. But I want to say that it 

 was no fault of the New York banks that we had the panic, 

 although the failures commenced here ; because the New York 

 banks, which at that time had something like a billion, one 

 hundred and fifty millions of deposits, Iiad two hundred and 

 sixty, two hundred and seventy or two hundred and eighty mil- 

 lions reserve in their own vaults, which they were required to 

 keep, but they had absolutely five hundred and fifty millions of 

 bank deposits, and if the banks of the country had called on 

 them for one half of the deposits it would have taken all the 

 reserves they had. The result was that they commenced to call 

 loans, and the calling of loans precipitated the sale of securities 

 on the stock market, and finally created a panic in the stock 

 market, which was followed by banks failing in New York. That 

 frightened the country banks so tliat they not only drew home 

 the money they needed, but they drew home more than they 

 needed, and it was found at the end of the panic that they not 

 only had their fifteen per cent, reserve, but, in many cases, 

 twenty-five and thirty and forty per cent, reserve. The business 

 men too, likely did exactly the same thing. I know large business 

 enterprises in New England that carried twice the ordinary pay 

 roll in cash all of the time so that they would not fail to be able 

 to take, care of their pay roll when it came due, fearing that they 

 might not be able to unless they kept themselves supplied ; but, 

 of course, keeping themselves supplied with a double supply 



added to the distress of somebody else. Then, frightened and 

 foolish people took their money and locked it up in safe deposit 

 vaults, and the result of the panic was widespread, and ended, 

 as it always does, in the issuing of clearing house certificates. 



Now, the issuing of clearing house certificates has just one 

 effect — it clears the local situation at once ; because it enables the 

 banks in the central cities to pay their balances off by clearing 

 house certificates, but it brings about distress in business all 

 throughout the country, except local business. 



Now, that was the result in 1907. If one of you gentlemen 

 deposited a check in your bank on a bank in Dallas, '1 exas, and 

 that check was forwarded to Dallas for collection, the ))roba- 

 bilities are that your bank would get back word that it had been 

 given credit for that check on the books of the Dallas, Texas, 

 bank. Well, you wanted your money, and the result was that 

 you drew on your bank, and the bank was obliged to make a 

 forced loan. It had not received any return on that check, but 

 it had to supply the money in some way to keep you going. The 

 result was distress and breakdown and failure of business in all 

 directions. 



Then, again, there was no co-operation and is none today 

 between banks. Every bank is jealous of every other bank. It 

 is trying to get what business it can. It never comes to the 

 rescue pi the general situation through the issuing of clearing 

 house certificates, until the distress becomes so general that every 

 bank is fearful that there will be a general failure of banks unless 

 that is done. Banks do not like to show their hands to their 

 rivals ; they don't like to say, "We need to issue clearing house 

 certificates," even to their best friends in the banking business. 

 There is absolutely no co-operation. The reserves of the coun- 

 try, as I have said, furthermore, are scattered from one end of 

 the country to the other. .^ large percentage of them are in the 

 vaults of the banks, which is just the same principle as we would 

 have if we claimed that we had a national military reserve of 

 five millions of men, because we have five millions of men in 

 this country of military age. But those men are scattered from 

 one end of the country to the other. They live in villages and 

 cities here and there and everywhere. They are of no use as a 

 defense to the country unless they are brought together in some 

 co-operative way, and, therefore, you finally add nuich to the 

 present difiiculty by having a captain of each one of those little 

 villages trying to get more men than another village to help 

 him. We would have just exactly the condition which obtained 

 in banks under such circumstances. 



Furthermore, banks are prohibited by law from loaning money 

 when they are below their reserve. If the New York City banks 

 have a reserve of twenty-five per cent., and it should fall to 

 twenty-four per cent., they are prohibited by law from loaning 

 money. Be it said to tlieir credit that they did loan money in 

 1907, and nearly every other bank was below its reserve. There 

 were first-class banks in New York down to fifteen, and perhaps 

 twelve per cent, in their reserve during the panic, and they had 

 to do it or have a general collapse ; but they were breaking the 

 law when they did it. 



I recall the story of a certain hospital, where, under the law 

 which provided the means for supporting that hospital a certain 

 number of rooms had to be maintained as emergency rooms 

 under the law. They could not be used, but must l)e maintained 

 as emergency rooms. Well, a building fell, or something hap- 

 pened in the neighborhood of that hospital, and inevitably a 

 great number of people had filled up all the other rooms of the 

 hospital, and then the superintendent said he would have to stop, 

 because he couldn't use those rooms, for, under the law, they 

 were emergency rooms and must be retained as such. 



That is just as sane as to compel banks to hold their reserves 

 after they have gotten down to the legal limit. The proper use 

 of reserves is to have them where they can be used, and make 

 use of them when the business communitv requires it. ("Hear!" 

 "Hear!") 



Now. those are some of the troubles which we found in our 

 banking system, in our currency system. 



Then, again, our currency, our bank note currency, is composed 

 very largely — almost entirely, in fact — of two per cent, bonds. 

 The two per cent, bonds are not worth par, or would not be if 

 they did not have a circulation privilege behind them, and, there- 

 fore, if the circulation privilege should happen to be removed, 

 those bonds, whicli cost the banks all the way from par to 110, 

 would drop to perhaps about seventv : because our national debt 

 has no definite date of maturity. They are a menace, not only 

 to the comnnmity, but to the banks that hold them, and we have 

 had to consider how we would get rid of those two per cent. 

 bonds. 



Well, now, about a year ago, after we had consulted with 

 various authorities the .world over, in all of the European coun- 

 tries, witli the authorities of Canada and with banking men in 

 this country, by direction of the Monetary Commission, Senator 



