have been converted into gold certificates, as in this Act provided;
when practically all of the bank notes secured by Government bonds have
been returned to the United States Treasury and canceled; and when
practically all the silver certificates of the larger denominations
have been cut up into one and two dollar certificates or coined into
subsidiary coins; and when the American Reserve Bank shall be acting as
the fiscal agent of the United States Government, it shall thereupon
assume the maintenance of the parity of the silver certificates and
silver coins with gold coin.
COMMENT:--Uncle Sam may well rejoice because this section, you will
observe, provides that the American Reserve Bank shall then maintain
the parity of all his silver with his gold.
MR. MERCHANT: Gentlemen, have you estimated how much gold your plan
would bring into the American Reserve Bank?
MR. BANKER: Yes, sir; we should have approximately one thousand two
hundred and fifty million dollars ($1,250,000,000).
MR. MERCHANT: Where would this gold come from?
MR. BANKER: Partly from what the banks now hold, and partly from
the channels of trade. There is about $900,000,000 now in the banks
and $978,000,000 in the channels of trade, or $1,878,000,000 in the
United States. The present _dead reserves, I mean dead reserves held
by the banks under a legal prohibition against their use_, and the
gold floating around in the cotton fields, corn and wheat fields, in
the mining camps, in the stores, and in the pockets of the people
generally, would at once be brought to their proper use, vitalized,
and mobilized into a common defense of the bank credit of the country;
all of it, ready all the time, to meet the demands of commerce, and to
protect every bank in a liberal and wise use of its credit.
MR. MANUFACTURER: I presume that you have been deeply impressed, as
I have, with the importance of protecting our gold reserves from the
standpoint of a nation among the great commercial nations of the
world. We have learned that there are many forces now acting upon
gold, because it is the universal reserve of the world.
MR. BANKER: Precisely so, and this fact necessitates this
centralization of gold, and that a power be lodged somewhere to
protect it from those influences, which, if set in motion, and
unobstructed, will rob us of it almost in the twinkling of an eye.
Only a year ago we saw these influences at work in Germany. It was
stated that at least $350,000,000 was withdrawn in about sixty days.
Tomorrow, these same influences may be drawing away our foundations of
credit in a similar manner, and we would suffer an irreparable injury,
because we are without any means of defense. There are those who seem
to think that if we have a balance of trade in our favor, we are safe;
but this is only one factor; nor are we certain of this, for any
length of time. We are today, literally, living in a fool's paradise,
that may disappear while we contemplate it in serenity. History has
already taught the world many lessons upon this point, and if we are
wise, we will heed them.
MR. MERCHANT: Mr. Banker, just what are the influences that affect the
movement of gold to or from the country?
MR. BANKER: In our case, the causes that may influence the movement of
gold to or from us, may be summed up as follows:
_First_: The balance of trade.
_Second_: The state of foreign exchange throughout the world.
_Third_: The state of our currency, that is, the use of substitutes
for real reserves; such as United States notes, silver, and bank
notes, in place of gold. The present plight of Germany is due to her
use of bank notes as reserves. It is a vivid illustration. History
has furnished hundreds of illustrations; but the most forcible in
our recent history was the issue of the United States notes in the
Sixties, and the effect of the silver purchase act of 1890. Gresham's
law put into operation will overcome all opposing forces.
_Fourth_: Foreign financing.
_Fifth_: Political disturbances.
_Sixth_: The state of the money market in foreign financial centres.
_Seventh_: Demands for capital in periods of speculative development
in foreign countries.
_Eighth_: Changes in our tariff laws.
It is easy to imagine how complicated and powerful these forces might
become, and how essential it is that we should be ready to combat
them, when the tide turns against us. We must be in a position to
buy and sell gold bullion, and to buy and sell domestic and foreign
exchange, and to loan a large sum of money, gold, I mean, quickly,
through a board of control to stop a panic in some financial centre,
and last--and above all, we must hold the chief key to the situation.
That key lies, mainly, in the power to fix and enforce a price for the
use of gold, in what is popularly called a discount rate for gold, and
make it universal throughout the United States.
All these objects will be attained by the centralization of about
one-half of our reserves in the American Reserve Bank, and by having
them under the direction of a board of men, who come directly from
each of the commercial zones, and who are, therefore, responsible to
the people of their respective zones.
MR. MERCHANT: Now, gentlemen, you seem to have completed your report
so far as the commercial bank is concerned, and I must say your plan
looks good to me; but, I want to ask you something before we leave
this question, and that is, why did the English Bank Act of 1844
provide that only the Bank of England should issue bank notes, and why
did Germany follow in her footsteps in 1874, by giving to the Imperial
Bank the sole right of note issue?
MR. BANKER: I am very glad that you have asked that question, because
it is often a stumbling block to those beginning the study of this
subject. One naturally says to himself, if this plan of a Central Bank
of issue is good enough for England and Germany, why should we not
adopt it here? In the first place, the two banks act upon entirely
different principles, and in both cases their theories, so far as
their note issues are concerned, have broken down.
In 1797 the Bank of England suspended specie payments, and during the
Napoleonic wars issued an unwarranted amount of paper or notes, which
led to wild speculation. At the same time, the country banks joined in
the frenzy, and issued large quantities of notes also. All the paper
became greatly depreciated, causing such a derangement of commerce
as to call for a public investigation. The Bullion Report of 1810,
the most profound economic and important statement ever made in the
history of banking, followed. This declared that the mere numerical
amount of notes in circulation at any time was no criterion whatever
of their being excessive. The Bullion Report declared _that the only
sure criterion was to be found in the price of gold bullion and the
state of the exchanges_.
Ricardo says:
"The issuers of paper money should regulate their issues solely by
the price of bullion and never by the quantity of their paper in
circulation. The quantity can never be too great or too little, while
it preserves the same value as the standard."
If Ricardo had used the words _bank credit_, instead of _paper money_,
it would have been technically more correct.
This statement of Ricardo, and that contained in the Bullion Report,
constitute the very soul of this subject, so far as bank credit in any
form (bank notes or bank deposits, which are identical) and gold are
concerned.
Reserves in gold, in sufficient quantity to redeem all bank credit,
deposits as well as notes, are essential. Do not forget that. Of
course, gold will be seldom called for, but it must be forthcoming if
demanded. No better illustration of the Ricardo principle can be found
anywhere in the history of banking than in the banks of Virginia,
Louisiana, Kentucky, Ohio, Indiana, Iowa, and Missouri before the war.
This principle, announced in the Bullion Report was rejected by the
House of Commons, and was not recognized by the Bank of England, or
English bankers generally. From 1800 to 1844 bank notes were thought
good enough for reserves, that is, the basis of other credit. There
were constantly recurring business disturbances and banking troubles
up to 1821, when the Bank of England resumed specie payments.
In 1824 gold began to leave England again, and continued to go
throughout 1825, when the crisis came.
In 1827 the Bank seemed to be convinced that the principles of the
Bullion Report were correct, and it tried to apply them in part.
In 1836 and 1837 there was more financial trouble, and again at the
end of 1838 another serious period arrived. By the end of 1839 the
specie had dropped from $50,000,000 to $14,000,000. All these adverse
experiences convinced the public that something was radically wrong.
There then appeared upon the scene Lord Overstone, Mr. Norman, Col.
Torrens and other influential writers, who maintained that the amount
of bank notes should not exceed the amount of bullion, and that it was
the excess of bank notes over the amount of bullion or gold that sent
the gold out of the country. They carried the day, and even converted
Peel to their way of thinking.
The Bank Charter expired in 1844. They thought that they had now
found a panacea for all their ills; it was the so-called _Currency
Principle_; that is, that bank notes should not exceed the amount of
specie. In adjusting the matter, they did issue bank notes against
$72,000,000 of Government securities, which was in direct violation
of their own contention. They did not have to wait long to see how
completely they were mistaken. Their contention was, that if the bank
only issued notes against specie, the people would have to bring
the notes to get specie. The bank kept right on taking deposits and
making loans, apparently with no knowledge of the fact that it made no
difference what kind of debt the bank incurred, whether in the form of
a deposit or in the form of a note, it would have to be paid in specie
if the check holder wanted the specie, just as much as the note holder
wanted the specie.
Many business disasters occurred in 1846. The new scheme was to be put
to the test within two years after the English Bank Act was passed.
On Aug. 29, 1846, the amount of bullion in the bank was $81,000,000.
The bank notes outstanding were $102,000,000. By Jan. 9, 1847, the
bullion was down to $71,000,000. The bank notes outstanding were
$104,000,000. By April 10, 1847, the bullion was down to $48,000,000.
The bank notes outstanding were $101,000,000.
_It was demonstrated beyond question, you see, that you could get
gold with a check just as easily as with a bank note; for, while
$30,000,000 of bullion had disappeared, the amount of the bank notes
outstanding remained the same. In other words, the bank notes were not
retired as the gold was withdrawn, which was the whole theory upon
which the Bank Act of 1844 was based._
The Bank Act had failed completely and utterly to accomplish what it
was designed to do. There could have been no more abject failure.
It was upon this occasion that the bank employed, for the first
time, either by accident or with intention, the principle that was
subsequently, in 1856, expounded by MacLeod. He states the principle
thus, "That when the rate of discount between two places differs by
more than sufficient to pay the cost of transmitting bullion from one
place to another, bullion will flow from where discount is lower to
where it is higher."
While the Bank of England seemed to have employed this principle in
1847, it acted too slowly and very feebly. It lost a large part of its
gold before it raised its rate of discount, and then it raised it only
to 3-1/2 per cent, then to 4 per cent, and finally to 5 per cent.
The world has since learned the power of this weapon; but it is
not all-powerful against any odds, as we have seen in watching the
withdrawal of gold from Germany during the time when there was a
possibility of war with France.
When I started to answer your question, I said that both the English
and German banks had failed to accomplish the particular things which
they had set out to do.
I think you will admit that I have demonstrated my contention with
regard to the Bank of England. Now, the plight of Germany is this:
She had supposed that she could create true bank reserves out of
bank credits, but that scheme has completely broken down. Her own
commission appointed to revise the bank act during the past year
has just recommended that the individual banks carry their own coin
reserve.
Now, gentlemen, there is no point in common between England, Germany,
and France, so far as note issues go. The Bank Act of 1844 took away
from the Bank of England the power of note issue, and reduced the
bank to identically the same position that the United States Treasury
is in, with regard to the gold certificates; that is, the Bank Act
reduced the bank to a mere warehouse, with the power to issue gold
certificates in the form of bank notes. The Bank of England has no
more authority to issue bank currency than the New York Clearing House
has; not a bit.
The Imperial Bank of Germany issues notes against 33 per cent of coin
and other collateral.
The Bank of France issues notes without reference to any particular
amount of coin, but carries an enormous gold reserve, averaging about
65 per cent of its note issue.
The Bank of England usually carries about $150,000,000 in gold, and
has outstanding about $250,000,000 bank notes; the difference between
the gold and this amount being covered by Government securities. Her
deposits are $250,000,000. The Imperial Bank of Germany carries about
$200,000,000 of gold, and has outstanding about $700,000,000 bank
notes. Her deposits are about $250,000,000. The Bank of France holds
about $650,000,000 of gold, and has outstanding about one billion
dollars of notes ($1,000,000,000). Her deposits are usually about
$100,000,000.
MR. MERCHANT: It is true that there does not seem to be any great
similarity in the condition of these three institutions. The points of
contrast are as great as the points of likeness.
England is a great check using country; hence, there are few notes.
France is a great note using country; hence, comparatively few
deposits are kept, while Germany seems to occupy a middle ground
between the two.
The Bank of France has been operated upon the principle laid down
in the Ricardo axiom, and also in accordance with the principles
enunciated in the Bullion Report. But France is handicapped by the
load of silver she is carrying, which amounts to about $200,000,000;
and Germany is greatly handicapped by the fact that her use of bank
notes as reserves has prevented her, as she now discovers, from
accumulating a proper amount of gold to adequately protect her bank
credits. The result is, that neither Germany nor France are open
markets for gold; both throwing trammels and obstacles in the way, if
you desire to get gold in either country.
The entire commercial world is conscious of the difficulties you are
under when trying to take gold away from Paris or Berlin.
Bills of Exchange drawn in pounds, shillings, and pence are preferable
the world over to any other; because the Bank of England is an open
market for gold at the current price.
MR. LAWYER: Mr. Banker, since you cannot institute a comparison
between these three banks in the matter of note issues, in what
respect do they have a common purpose?
MR. BANKER: In only one single respect is there a common factor in all
of them, and that is, that each of them carries the final reserves
of its country. This is the one common fact, the all important fact,
because without this massing of their reserves two essential results
could not be achieved. First, a panic of any proportion could not be
quickly and successfully met. Second, no one of them would have any
means whatever of protecting its gold against the drafts that the rest
of the commercial world is likely to make upon it at any time, nor any
power of adding to its gold in case of some great necessity growing
out of a crisis.
MR. MERCHANT: Recently we have heard repeatedly that, while we were
having our ever-recurring spasms or panics in business, the countries
with central banks were not suffering in the same way. Is it not a
fact that Canada has been just as free from these spasms and panics as
any country in the world, and yet Canada has no central bank?
MR. BANKER: Yes, that is true. It never occurred to me before, but
I should say that Canada was, if anything, much freer from these
convulsions and panics, as you call them, than any other country.
MR. LAWYER: I agree with you. There has not been the suggestion of
such a thing, as far back as I can remember--thirty or forty years.
Now, since Canada has not a central bank but twenty-seven banks, the
protection against these disturbances or panics must lie deeper and
more fundamental. What is it? It cannot be the central bank idea,
because Germany has been having a vast amount of trouble for more than
a year, and at the present time seems to have plenty in store for her.
MR. BANKER: Yes, it does lie deeper than your mere form of
organization; I think I can explain it so that every man here can
understand and appreciate it. The reasons are fundamental and
economic: _First_, There must be ample _gold reserves and elasticity
in those reserves_. Without any law with regard to the amount of
reserves to be carried the banks of Canada carry about 14 per cent,
and since no specified reserves are required there is perfect
elasticity in their reserves.
_Second_: There must be convertibility, if necessity requires it and
precisely to the extent required, of bank book credits into bank note
credits. Bank credit currency in Canada amounts at its maximum to $16
per capita and the variation averages now about $4 per capita. The
same ratio would give us an expansion and contraction every fall of
about $400,000,000 without changing our reserves to the extent of a
single cent.
MR. FARMER: I catch on to that. Two principles are involved and it
doesn't make any difference how you apply them, only so that they
are in operation. _The first is the principle of ample coin reserves
and their elastic adjustment to current commercial needs. The second
principle is the interchangeability of bank book credits and bank note
credits and their current convertibility into coin._
MR. BANKER: That is the whole thing in a nut-shell, outside of
the principle of a central gold reserve, and it doesn't make any
difference whether you apply those principles to one bank or to
twenty-seven banks, as in Canada at present, or to five hundred
banks, as in the Suffolk System before the war, or to our twenty-five
thousand banks today.
MR. MANUFACTURER: As I understand the bill you have prepared, our
American Reserve Bank will have no liabilities whatever, and yet it
will have more gold than all of these three countries combined.
MR. BANKER: That is correct. You see, there are just three reasons for
the existence of the American Reserve Bank:
_First_: By it, all the banking power of the United States stands
ready to help every individual bank move the crops; and, in case a
panic breaks out, to protect every individual bank.
_Second_: By it, we shall always be in a position to control and
direct the movement of gold to and from the United States.
_Third_: By it, we have completely decentralized bank credit; because
each zone can rely absolutely upon the centralization of the gold
reserves to assist it whenever necessary; so also can every individual
bank.
NATIONAL LAND CREDIT BANK