Essential Financial and Banking Reforms
THE reformation of our financial and banking practices is the most important economic question that has ever confronted the world.
The financial resources of France in 1803, when the Bank of France was established, were comparatively small. So were the bank resources of Great Britain small in 1844 when the bank act, under which the Bank of England is administered, was passed. Nor can it be said that a comparison between the banking conditions of the German Empire and those of our own country can be reasonably instituted, so vast is the disparity from every point of view.
The significance of our problem becomes most impressive when considered in the light of two comparisons.
First, Great Britain has only 120,000 square miles; France only 204,000 square miles; Germany only 208,000 square miles; while the United States has 3,200,000 square miles.
Second, the banking resources of the entire world, including the United States, were only $15,900,000,000 in 1890; while the banking resources of the United States to-day exceed $20,000,000,000, or are twenty-five per cent larger than the banking resources of the whole world were, less than twenty years ago.
GOVERNMENTAL FINANCE
The United States Treasury should be placed in the same position precisely as that occupied by all of our great cities and states. It should cease exercising all banking functions. It should be relieved from the burden of maintaining $346,000,000 of United States notes on a parity with gold, by the retirement of these United States notes, or by converting the uncovered amount of them, $200,000,000, into gold certificates. It will be remembered, there is now $150,000,000 of gold in the trust fund, leaving $200,000,000 of these notes uncovered by gold.
The silver certificates, amounting to about $600,000,000, should all be cut up into one and two-dollar certificates, and instead of buying more silver for subsidiary coin, we should recoin our silver dollars into halves, quarters, and ten-cent pieces, up to the limit of current requirements. These things being done, and the national-bank-notes being disposed of, the silver would cease to threaten the solvency of the Treasury.
The national-bank-notes, amounting now to more than $700,000,000, should be redeemed, not by the government at the Treasury, but by the banks themselves over their own counters and at convenient places throughout the United States, in a natural commercial way, precisely as the banks now redeem their checks and drafts.
The government should not be engaged in the collateral loan business, redepositing the money, unnaturally withdrawn from the channels of trade, with the national banks, only upon condition that the banks secure the repayment of the amount by putting up security. The government has a first lien upon the assets of any national bank with which it may make a deposit.
The Comptroller of the Currency has statements of all the national banks, and therefore the government could make safe selections.
The government should accept the checks and drafts of national banks, which are its own creatures, in payment of all obligations due to it. These checks and drafts should be deposited the same day in the national banks, in the same locality, so as not to disturb the commercial conditions any more than would the same amount of business done by any commercial house. Actually to abstract the cash, and lock up that amount of reserves, is an act of barbarism; such a thing is not done by any other civilized country in the world. If the Standard Oil Company, or any great corporation, were known to be practicing such methods as the government has been practicing for more than sixty years, a mob would be justified in battering down its doors. So far as possible, the government should be a model in just, wise, and economic practices, not the laughing-stock of the commercial nations of the world.
The government should not draw a check upon itself, but upon its banking agent, precisely as New York City does, or New York State, or any other municipality. When the United States government is put into this position, its credit cannot be assailed and imperiled as it was in 1894,1895, and 1896, and as it may be again at any moment. For the real burden resting upon the Treasury to-day is about $1,700,000,000, — consisting of $346,000,000 United States notes, $700,000,000 of bank-notes, and $600,000,000 of silver, — and this vast mass rests upon the mere pin-point of $150,000,000 of gold, now in the trust fund of the Treasury.
BANKING
In any properly constituted and properly adjusted banking system there are two prime essentials. First: since gold is our standard of value, there must be an actual reserve of gold to meet the varying demands of capital from day to day in various parts of the country. Second: there must be convertibility of book-credits or deposits subject to check, into current credits or note-credits, to meet the varying demands of cash.
CURRENCY
Let me illustrate this point. By reason of our fall business there might well be a demand in the United States for the conversion of $300,000,000 of deposits subject to check into $300,000,000 of currency or cash, and yet no increase in the amount of reserves required; that is, there might be no demand for additional loans. On the other hand, the converse is equally true. There might be a demand for loans aggregating $500,000,000, which would call for $100,000,000 of additional gold as an adequate reserve, while the amount of currency in circulation was actually decreasing, if we had a wise and properly adjusted banking system.
In other words, the expansion and contraction in the reserves might not he followed by a corresponding expansion and contraction in currency or cash at all; but just the reverse might occur, which proves that reserves and currency are two different things; and that the expansion and contraction of each, independently of the other, under the operation of economic law, is essential to a properly constituted banking system.
The bank-note which we have today is not a true bank currency, which flows out and flows back to the bank with the same freedom, fluidity, and certainty that checks do. Our so-called bank-note is in reality a bond-note, bound to and controlled by the bonds to which it is related, and in no way responsive to business transactions, because it is not, related to and does not spring into being with business operations. Our bank-notes increase in the spring and early summer because the demand for capital is light, and some profit can be made on the bonds used for that purpose. But with a proper and natural currency, there would be a marked contraction during this period.
In the autumn months, when there should always be a large expansion in our bank-note circulation, there is often a considerable contraction, because capital is scarce and more can be made out of it in some other way than in purchasing or holding bonds for bank-note circulation. Hence the banks dispose of their bonds and retire their notes. What a marvelous piece of uneconomic ingenuity it is, actually reversing every normal demand of trade! And yet this monumental piece of stupidity has remained for nearly fifty years, with the approval of nearly all of our public men who have had charge of such legislation, and declared by them to be “ the best banking system in the world.” From an economic point of view, our currency system has been no currency system at all. From the day of its inception to this hour, it has been only a bond-speculating scheme, the banks having lost about $40,000,000 upon their bonds during the last five years, although they have had periods of profit.
Until we come to appreciate and recognize the fact that there is absolutely no difference between a bank deposit subject to check and a true bank-note, except that the one — the bank deposit — is non-current because it passes only by a written order ; and the other, the banknote, is current because it passes without a written order; — until, I say, we appreciate and recognize this great fundamental economic law, we shall not solve the currency feature of the pending problem right; indeed, not at all.
RESERVES
To-day, although we have central reserve cities and reserve cities, we have no reliable central reserve; a fact that we have learned to our commercial sorrow. In plain words, our present reserve system is almost a pure fiction; if, indeed, it is not a source of serious danger, because it invariably proves an exhausted resource —a broken reed.
Furthermore we shall not solve the problem of a central reserve unless when the strain, however great, comes again, we have an actual and adequate reserve in gold, not credit, upon which other credits are to be based.
Our standard of value is gold, and therefore our MEASURE of bank credit in the form of deposits or bank-notes, or our BANK RESERVE, should be gold, and gold alone; and we should not be content to place some form of credit in our bank reserves, because to that extent there must be inflation, as we should be basing one credit upon another credit. Again, to the exact extent that we use some form of credit for reserves instead of gold, to just that extent do we drive gold out of the country; the poorer always driving out the better money.
It is a matter of first importance, therefore, that the looked-for reform recognize gold alone as a proper reserve. Of course, our subsidiary coin, consisting of one and two-dollar silver certificates, which will make up our pocket-money and the till-change of our banks, may be passed over as relatively harmless; at least it will be so when it is reduced to the forms suggested, when the United States notes are out of the way, and the redemption of the bank-notes thrown where it belongs, directly upon the banks.
UNIFICATION OF OUR BANKS
With forty-seven states furnishing as many different kinds of banking laws, and requiring reserves differing in every instance, it can hardly be expected that we should have such a system of banking in this country as its commercial importance demands. Banks, in one state, may do anything known to the banking world. They may not be required to carry any reserve whatever, and may be under practically no restraint. In another state, banks may do one thing, trust companies another, and national banks still another. This conglomerate state of the laws has led to a confusion of relationships between state and national institutions that is most perplexing.
On the one hand, we observe the Comptroller of the Currency trying to have his examiners meet the state examiners for the purpose of preventing the state and national banks from shuffling their securities and improving their assets for examination day. On the other hand, we find the banks distrusting themselves and with little or no confidence in the state or national examinations, forming them selves into groups for mutual protection by establishing clearing-house examinations. This has been done in Chicago, St. Louis, St. Joseph, Kansas City, St. Paul, Minneapolis, Milwaukee, Los Angeles, San Francisco, and Philadelphia; while California as a state is preparing to do the same thing.
Recently I was informed by a leading banker in one of our largest cities that sixteen audits were required every year, that the matter had become a nuisance, and was seriously interfering with the business of the bank.
SAVINGS
The vast savings of the people are being used indiscriminately for commercial purposes, and, what is more to be criticised and deplored, for speculative purposes, although the savings accounts should be segregated and invested in prescribed securities.
Has anything ever been more clearly demonstrated than that some system should be evolved from this commercial or banking chaos ? Should it not be simplified, unified, and brought into one harmonious whole for the sake of economy, protection to banking and commerce, and that the welfare of the whole people may be conserved ?
Can we hope for any substantial reform in our banking system unless these ends can be achieved ?
In this age of gigantic organizations, and vast business enterprises, our banking system should be brought into harmony with the times, and rendered adequate to the demand upon it, and made so powerful and all-comprehending as to be the great steadying force in our world of commerce, instead of the weak thing it is to-day, certain to break down under the slightest increased strain.
The questions involved relate more to economic principles than to banking, and any attempt to superimpose banking practices found elsewhere, will prove a dismal failure. For the problem confronting us is unlike any ever before met, and unless we approach it as an economic question, with due regard to geographical and political considerations, keeping in view our determination to preserve the individual, independent, free form of banking that has grown up in this country since President Jackson drove the last United States Bank out of existence, we shall fail utterly in our attempt at reform.
WHAT WE DO NOT WANT
Geographically, politically, economically and practically the establishment of a Central Bank in the United States to-day is unthinkable; unless the sole purpose of starting such an institution is to serve some special interest to the incalculable and never-ending injury and cost of the American people.