THE EARLY EVENTS OF THE EUROPEAN WAR IN RELATION TO MONEY BANKING AND
FINANCE
AMERICAN FINANCE AND THE EUROPEAN WAR
[313]During the half-century that has elapsed since the Civil War, there
has probably been no period of six months within which there have
occurred transformations of so far-reaching a nature in American banking
and finance as during the half-year between July 1, 1914, and January 1,
1915. It will be long before the full meaning and significance of these
events are thoroughly understood; for what has been done cannot be
finally interpreted until facts which have not yet been ascertained have
developed their consequences. On the other hand, it would be impossible
to forecast the ultimate effect of the European war should any one of
certain tendencies which are still at least possible be fully carried
out. What has already taken place, however, comprises a range of events
full of important lessons and significant for the light they throw upon
the methods to be employed in the near future in the management of
industrial and commercial enterprises. This experience has been
particularly rich in its bearing upon the relationship between banking
and finance in the strict sense of the terms on the one hand, and the
future of commerce and industry in general on the other. Though it be
true that only hasty thinkers will endeavor to draw final conclusions
from what has thus far occurred, it is, nevertheless, also true that
much can be learned from the mere marshaling of recent events in their
relation one to another.
I
Upon the outbreak of the European war, it was at once evident to all
that very striking changes would result in every department of business
life. There was, of course, at the outset no knowledge of the strategy
or probable methods to be employed by any of the belligerents, and the
general attitude of the business community was based upon the assumption
that commerce would, for a time at least, become nearly impossible. As a
corollary to that assumption, there prevailed the belief in many circles
that American indebtedness to foreign countries would have to be
liquidated in cash, and that this process would result in draining away
from the United States a corresponding amount of gold. It was natural,
therefore, that the first phenomenon of the war should be the suspension
of dealings which it was believed would promote this gold movement, or
would cause more serious trouble in any direction than would otherwise
be inevitable. The closing of the principal stock exchanges of the
country almost immediately upon the definite announcement that war was
unavoidable was thus dictated by two considerations: (1) the belief that
prices for stocks and other securities would be reduced to a point so
low as to bring about the repurchase of the securities by Americans, who
would then be obliged to pay for them in gold; (2) the belief that, in
consequence of this reduction of prices, many bank loans based upon
securities would have to be "called," thereby bringing about failures
and incidentally assisting in the movement of specie out of the country.
In the case of the cotton exchanges, it was at once perceived that the
cotton crop, which is so largely produced for export, could not now move
abroad with any degree of facility, and that the demand for cotton would
undoubtedly be slack. The very fact of the war, therefore, implied heavy
reductions in the price of cotton, and the closing of the cotton
exchanges was a measure of self-preservation on the part of the
operators, who decided to protect themselves against the inevitable
failures which would result from the fulfilment of existing contracts at
very low prices. To close the exchanges would result in gaining time,
and would, therefore, enable operators to meet their maturing
obligations, besides perhaps affording an opportunity for actual
recovery in cotton prices. This very fact, however, of the closing of
the exchanges and the consequent removal of any other established method
of determining prices for standard securities and for a staple like
cotton involved most profound and far-reaching effects. The exchanges
had closed in previous years, but never for the reasons which now
controlled them. That they should close because of the fear of failure
and the loss of gold implied a serious danger of disaster which appealed
powerfully to the public mind, and which presented a problem that could
not be explained away. The fact that, coincident with this closing of
the exchanges, international trade was practically suspended for several
days, and was seriously interrupted for several weeks, until British
vessels assumed virtual control of the North Atlantic, tended greatly to
increase the public anxiety. It formed, apparently, good ground for the
suspension of business operations and for the non-fulfilment of
contracts, even when the very difficult conditions did not themselves
compel a recourse to such methods. The fact that foreign countries had
adopted legislation deferring the date when debts need be paid or
contracts fulfilled, although not paralleled here, produced a
sympathetic influence upon business in the United States, which
practically resulted in the partial or tentative adoption of a somewhat
similar relaxation of commercial requirements in many industries and
branches of trade.
It is notable that the Produce Exchange of New York and the other grain
exchanges of the country continued in operation and did an enormous
business in spite of the prevailing conditions. This was due to the fact
that grain of all kinds, provisions, and every sort of food-stuff were,
for the time being, subject to a very rapid upward movement. It was
early perceived that a long continuance of the war would bring about a
steady advance in the prices of all food products, the markets for which
are not dependent upon temporary fluctuations for support, but are
subject to far-reaching and semi-permanent influences. The fact that
these exchanges continued open while those whose staples were subject to
decline closed so speedily, naturally produced its own effect upon the
public mind. Many who had thought the exchanges invariably faithful
registers of price fluctuations were now reluctantly obliged to confess
that this could not be the case, since those exchanges where prices were
rising continued to operate without interruption, while those where
prices were falling were obliged to suspend business. From one point of
view, undoubtedly, the closing of the stock and cotton exchanges tended
still further to deepen the attitude of dissatisfaction with these
institutions that had been prevalent for some years among the American
public. On the other hand, however, as time went on, it became clear
that the exchanges of the country and the service they performed when in
operation were being appreciated as never before by the conservative
popular mind of the nation. With the exchanges closed it was seen that
the lack of a regular and established market subject to natural
conditions meant suffering and inability to secure the advantage of free
competition in the establishment of the price of products. This view was
once more emphasized when, later on, the cotton exchanges reopened; for
it was then seen that the effect of trading upon the exchanges was to
advance the price of the staple rather than to lower it, a view the
precise reverse of that which had been originally prevalent for a long
time past. Both in the psychological, as well as in the actual, effect
of these closings, and in the influence the episode exerted upon public
opinion, the suspension of the exchanges throughout the United States
must be regarded as a fact of first-rate importance in the financial
history of the United States during the European war.
II
Even without the suspension of certain classes of trading throughout the
country, partially due as it was to the frenzied demand of European
holders of American investments for money, the strain thrown upon our
banks as a result of the great change in conditions would have been
enormous. The closing of the exchanges, as already seen, had relieved
matters to some extent by enabling the banks to avoid the calling of
loans, and thereby to avoid the necessity of forcing customers into
liquidation, with the resultant disastrous effect upon themselves. But
on the other hand, the suspension of operations and the corresponding
loss by the public would, it was felt, tend to the hoarding of
legal-tender money. In order to meet this situation, the banks in many
of the large financial centres sought to limit specie payments, taking
out emergency currency and clearing-house certificates for the purpose
of meeting their indebtedness to the public and to one another.... A
phase of this phenomenon was seen in the tremendous rise in foreign
exchange rates, the rates becoming practically prohibitive and thereby
causing what amounted to a suspension of financial relationship between
the United States and foreign countries, particularly Great Britain.
III
It was early understood that the real difficulty and danger in the
international situation did not lie in the superficial symptoms of
trouble, but were found much deeper, being directly due to the fact that
international business had been practically suspended as the result of
the war. This was a factor of prime and material importance in the whole
situation, because the maintenance of established relations between the
United States and foreign countries was directly dependent upon the
regular exportation of goods. As was customary during the summer months,
there had been large expenditures by American tourists in Europe; and we
had become indebted to other countries, particularly Great Britain, for
material sums in excess of what we were currently able to liquidate.
This was on the assumption, as usual, that such indebtedness would be
liquidated through the shipment of agricultural products, particularly
of cotton, the country's principal cash crop. The breakdown of trade
with Europe through the inability of vessels to run regularly at the
outset of the war, and through the reduction of buying power, due to the
interruption of all regular industrial, commercial, and financial
operations, meant that in the absence of some restoration of the normal
course of business it would be necessary to find other means of
liquidating our obligations to foreign countries. The first phase of the
difficulty was met by investigating the extent of international
indebtedness, which, in the absence of other means of payment, would
necessitate the draining-away of gold from the United States. Such an
investigation was undertaken by the Federal Reserve Board, which, by
sending out questions to the principal international bankers of the
country, succeeded in forming a more or less trustworthy estimate of
the indebtedness on current accounts, these being, of course, of varying
maturities extending over several months. The problem thus raised was
how to provide for liquidating the debts without losing so much of the
underlying gold supply as to impair the convertibility of American
securities, and therewith general confidence in American ability to meet
obligations. The two chief proposals put forward for bridging over the
period of difficulty were the establishment of a joint gold fund by the
bankers of the country, and the undertaking of negotiations with Great
Britain whereby some relaxation of foreign demands on the United States
might be arranged for. These two phases of policy may best be cursorily
sketched at this point.
Since the new banks had not yet been established and could not be put
into operation for some weeks, it was deemed desirable to furnish a
makeshift substitute for the co-operative effort which would have been
available for the relief of the situation had the banks been in
existence. It was therefore determined to suggest to a number of
representative bankers the establishment of a joint gold fund to be used
in providing exchange on Great Britain, and to have this joint fund
developed at the earliest possible moment. A letter was consequently
sent out to the presidents of clearing-house associations throughout the
country, under date of September 21, in which request was made for
subscriptions to a fund intended to aggregate about one hundred million
dollars. This letter had previously been considered and approved at
meetings of representative bankers summoned to meet in Washington on
September 4 and 19 respectively, and was, therefore, issued with their
moral support. The answer to this invitation was prompt and effective, a
total of over one hundred and eight million dollars being subscribed and
rendered available.
It was almost immediately evident that the operation of this fund was
proving decidedly beneficial notwithstanding that only a comparatively
small percentage of the amount subscribed was asked for, and that a
still smaller percentage was actually used to furnish a basis for gold
shipments. Nevertheless, it seemed, during the ten days immediately
following the completion of the subscriptions, as if there might be
need for still further relief to the situation. Some of those who were
closely connected with the administration of the gold exchange fund
brought the subject to the attention of the Secretary of the Treasury
and he extended an invitation to the British Government to send
representatives to this country mainly for the purpose of considering
the possibility of further adjustment, in the event that the United
States did not succeed in liquidating its indebtedness to Great Britain
by the natural movement of commodities within a reasonably early period.
The British Government designated Sir George Paish and Mr. B. P.
Blackett, who came to the United States and on October 23 held a
conference with the Federal Reserve Board. Subsequently another
conference, attended by a number of representative bankers, was also
held and the situation was discussed in very great detail. Meantime the
establishment of a better understanding with reference to commodities to
be considered as contraband and the more effective policing of the North
Atlantic rendered possible the restoration of trade with European
nations, and the development of the export trade proceeded with a speed
which showed that current obligations of the United States to Great
Britain and other countries would be liquidated at an early date without
any necessity for further interference. By the time the reserve banks
were ready to open [November 16], exchange sales on London had fallen to
normal, and there was, therefore, no danger that when opened the reserve
banks might, as was for a time feared by some, find their gold rapidly
drawn away from them in order to meet the requirements of the gold
export movement.
In another way it was deemed desirable that the Federal Reserve Board
should help to facilitate the restoration of customary conditions in the
financial market. Almost immediately after the outbreak of war it was
seen that, unless hostilities should terminate within a very much
shorter period than anyone thought likely, serious injury would be
inflicted upon the cotton-producing states. As is well known, the cotton
crop is largely grown for export, about two-thirds of the total
production of the United States being annually sold abroad. It happened
that an unusually large crop had been planted and was approaching
maturity at the moment of the outbreak of the war. This would in any
event have depressed prices of cotton, even under ordinary conditions.
The almost immediate closing of the cotton exchanges of the country was,
however, precipitated by reason of the interruption to the movement of
cotton and the general understanding that, in view of the great area
involved in the hostilities, it would not be reasonable to expect a
normal demand for the staple to manifest itself. With the exchanges
closed, and with shipments of cotton interrupted, the price was unstable
and abnormally low, many sales undoubtedly having occurred at five cents
per pound. Inasmuch as the cotton crop is raised very largely upon
credit, it was necessary to provide some means whereby the Southern
planter could be assisted to such extension of accommodation as he might
require in meeting the obligations he would ordinarily have provided for
by the sale of his crop in the open market. Various suggestions were
brought to the attention of the Federal Reserve Board, one of them being
that of Mr. Festus J. Wade of St. Louis, who suggested, both to the
Board and to the Secretary of the Treasury, the establishment of a
cotton loan fund somewhat similar in purpose and management to the gold
exchange fund. After very anxious consideration, the conclusion was
reached that some measure of the sort would probably furnish relief to
cotton-growers. Various conferences were held with banking interests for
the purpose of securing their co-operation and advice in regard to the
matter. Ultimately the bankers of New York pledged fifty million dollars
in subscriptions to the fund, provided that fifty millions more should
be raised from other bankers in non-cotton-producing states. It was
understood that to the one hundred million dollars thus raised should be
added thirty-five million dollars contributed by the bankers of the
cotton-producing states under a special plan devised for that
purpose.[314]
IV
It was not, however, through any of these artificial means that real
relief was brought to the community. While bankers were laboring to
perfect the gold fund, and while the negotiations with Great Britain
were in progress, foreign trade was being re-established through the
effective policing of the North Atlantic, the re-establishment of
demands, and the resumption of the ordinary course of business. What
took place during the months of August and September can be understood
from ... comparative figures for importation and exportation which make
an impressive showing of the suffering to which the United States was
subjected through this decline in business. With the opening of October
there came, however, a decided improvement. Time had now been given for
the establishment of normal conditions....
V
With foreign trade in a fair way to recover, it was still necessary to
secure a restoration of normal trade conditions within the United
States, and for this purpose the thing most fundamentally necessary was
the setting in motion of the federal reserve banking system which had
been provided for by act of Congress the 23d of December preceding. The
time intervening between December 23, 1913, and the opening of the war
had been occupied in carrying out the preliminaries of organization; but
it still remained for the Federal Reserve Board, the controlling
mechanism of the new system, to appoint officers and to provide for the
active operation of the banks under its direction. The first detail to
which the Board necessarily addressed itself was the completion of the
boards of directors of the several institutions, it being necessary to
select and elect three in each institution, or thirty-six in all. The
task required an elaborate process of comparison of the names and
qualifications of the several candidates and was not completed until
early in October. With the announcement of the thirty-six directors, it
was possible to proceed to the active opening of the institutions. The
Board called for the first payment of capital stock on November 2, and
the Secretary of the Treasury, who by law had been vested with that
function, named November 16 as the actual date for opening....
The establishment of the system ... greatly relieved the banking
situation.... Sec. 19 of the Federal Reserve Act provided for a
readjustment of reserves upon a new and lower basis....
This readjustment, by the terms of the law, took effect immediately upon
the establishment of the new banks, _i. e._, on November 16. From the
outbreak of hostilities in Europe, there had been a difficult reserve
situation in most of the financial centers, New York banks particularly
being much of the time largely under their reserve requirements because
of the heavy drafts made upon them by interior banks and by the public.
The change in reserve requirements, however, made a very material
alteration in this condition of affairs, and released, not only in New
York, but throughout the country, a very considerable amount of funds
which had previously been held by the banks in order to bring themselves
within the requirements of law. Precisely what amount of reserves was
thus released throughout the country has not been accurately estimated,
and probably cannot be. It is, however, an undoubted fact that the
release of actual cash was very large, and that the release of lending
power as computed on the basis of reserves on the part of member banks
was correspondingly larger. Member banks were thereby enabled to extend
loans to their customers very much more freely than they had previously
been able to do, while at the same time they were able to grant lower
rates of interest in due proportion. The prevailing rate of discount for
prime commercial paper in New York at the beginning of November was
about 6 per cent., while other paper was considerably higher than that
figure, and even more difficult conditions prevailed elsewhere. The
opening of the reserve system enabled New York banks, because of the
very great relief given to them through the release of reserves, to
reduce this rate largely, and within two weeks after the new banks had
come into existence prevailing interest rates for the best paper went as
low as 3-1/2 per cent. and 4 per cent. while acceptances, which had been
provided for by the Federal Reserve Act, were marketed at a still lower
rate. In some parts of the South, Northern bankers were able to grant
accommodation as low as 4 per cent. and in considerable amounts. In view
of the greater ease and material relief which was thus accorded, the
federal reserve banks were naturally not called upon to assist member
banks with accommodation, such banks naturally refraining from asking
aid when they themselves were fully able to meet the situation.
The opening of the reserve banks released, as already shown, a large
amount of bank funds, and thereby rendered it possible to extend many
loans which otherwise could not have been carried by the banks. It was
also seen, soon after November 16, that the existence of the cotton
fund, as was the case with the gold fund, had done its work by
stimulating confidence and by leading to a more liberal extension of
credit. With the cotton fund available for long-time loans, and with
short-term credit much more freely extended by member banks in view of
the reduction of national bank reserve requirements, it was possible for
the reserve banks to open with full confidence that the work thus done
in safeguarding the situation would relieve them from undue strain,
while fully protecting the cotton-producers who were willing to pay a
moderate rate of interest in order to carry their cotton until such time
as would enable them to realize full market value for it.
As has been shown by the Secretary of the Treasury in his annual
report,[315] an early phenomenon of the war was the issue by
clearing-houses in many cities of clearing-house certificates.
Simultaneously therewith large quantities of emergency currency were
issued under the provisions of the act of 1908, which had been amended
and extended by the Federal Reserve Act, and which were still further
amended by Congress on August 4, so as to permit the freer issue of
notes.... The total amount of the emergency currency taken out by
associations had aggregated about three hundred and eighty million
dollars, but it is probable that the clearing-house certificates were
issued to a considerably larger sum. The channels of circulation were
thus clogged long before the end of the summer, notwithstanding the fact
that large quantities of gold and gold certificates were withdrawn and
hoarded either by banks or by individuals. This condition of affairs
made it certain that the reserve banks, upon their organization, would
not be instantly pressed for the issue of reserve notes. Two factors
combined to produce this result--the circumstance that many banks had
placed their best paper with the national currency associations in order
to protect emergency currency, and the further circumstance that the tax
on this currency at the lower rate established by Congress would not,
for some considerable time, be likely to approximate the rate of
discount which every bank would have to pay to federal reserve banks in
order to get the rediscounts that would enable them to obtain the notes
they needed. Combined with these factors was, of course, the natural
inertia which in all such cases tends to prevent the withdrawal of one
kind of currency and the issue of another. Upon the organization of the
federal reserve banks, moreover, the urgent pressure for note
accommodation passed away as quickly as it had come. Gold reappeared in
circulation at an early date, and the retirement both of the
clearing-house certificates and of the emergency currency was
undertaken. In those cities where rates of interest on clearing-house
certificates were very high, the reserve banks aided in the retirement
of the certificates remaining in circulation.
The emergency currency itself immediately began to be retired by its
issuers.... Had the reserve banks been in operation at the beginning of
August, they would naturally have supplied the great volume of currency
which was called for; but not having done so, a field of business which
would naturally be theirs has been temporarily taken from them by reason
of the fact that it was occupied by the clearing-house certificates and
emergency notes.[316]
VI
The result of the restoration of trade, banking, and credit to earlier
and more normal conditions has been steadily apparent. Cotton exchanges
reopened on November 16, and stock exchanges opened for restricted
trading shortly thereafter. In brief, by the close of the year, the
phenomenal conditions growing directly out of the European war had been
met and overcome. It is a notable fact that under the wholly unusual
circumstances prevailing, the recovery was so prompt and effective. What
share in this early improvement is to be assigned to the organization of
the new banking system and to the effectiveness with which the Treasury
Department co-operated in meeting the needs of the country cannot
accurately be stated, and will probably afford grounds for difference of
opinion. That it was great cannot be denied....
NATIONAL BANK FAILURES AND SUSPENSIONS--1914 COMPARED WITH 1893 AND
1907[317]
A comparison of the failures and suspensions of national banks during
the past year with failures and suspensions in the panic periods of 1893
and 1907 may be interesting at this time.
The figures show that for the 12 months ended October 31, 1914, 26
national banks, with aggregate capital stock of $2,510,000, failed or
suspended payment. The total liabilities of these banks (in the case of
receiverships claims proved) amounted to $14,177,408. In the case of six
recent failures, the figures of total liabilities, less capital,
surplus, and undivided profits, are used in lieu of the "claims proved,"
no report of the latter having yet been received as to these six banks.
For the 12 months ending October 31, 1893, 158 national banks suspended,
with capital of $30,350,000. Sixty-five banks, with total capital stock
of $10,935,000, were insolvent and required the appointment of
receivers; 86, with capital stock aggregating $18,205,000, were able to
resume business; and 7, with capital stock of $1,210,000, were placed in
charge of examiners in the expectation of resumption. The total
liabilities of failed and suspended banks for the period mentioned was
$83,042,347--in the case of failed banks, "claims proved" being
considered as "total liabilities."
During the six-months period from October 1, 1907, to April 1, 1908,
there were 22 national bank failures and suspensions, and the total
liabilities (in the case of receiverships these being "claims proved")
were $32,443,978; the total capital stock, $6,540,000. Of these banks,
however, 7, with capital stock of $1,440,000 and liabilities of
$22,124,662, resumed business.
It is worthy of special note that in the crisis of 1914, unlike the
panics of 1893 and 1907, there was no suspension of currency payments on
the part of the banks of this country, either in the large cities or in
the smaller towns. In the panics of 1893 and 1907, in addition to
clearing-house checks, many artificial methods of supplying a temporary
currency were resorted to, while actual currency commanded a premium of
from 3 per cent. to 5 per cent.--$100 in currency costing anywhere from
$103 to $105, or more, in certified bank checks.
In 1914 the banks of the country were enabled, as a result of the
instant and active co-operation of the Treasury Department, and through
the operations of the act of May 30, 1908, as amended by the Federal
Reserve Act, to supply actual currency, even during the period of
greatest stringency, to their customers and correspondents, both over
the counter and in response to requests for shipments. Whenever any
indications were seen of an attempt or disposition on the part of any
solvent bank or banks to withhold or suspend cash payments, the subject
was taken up immediately by the Treasury Department, and payments of
currency over the counter and shipments by the banks upon demand, from
the centers to the nearby and far-off districts, and vice versa, have
been maintained practically without interruption throughout this crisis.
THE EFFECTS OF THE WAR WITH SPECIAL REFERENCE TO THE CENTRAL BANKS OF
FRANCE, GERMANY, AND ENGLAND
I
[318]In France the gold held by the Bank of France (February, 1916) is,
in actual quantity, larger by about 25 per cent. than that held in
normal times before the war. Instead of former gold reserves of about
$800,000,000, they are now well over $1,000,000,000. The percentage of
gold to the notes--the main demand liability--has, of course, fallen
from about 65 to 35 per cent. because of the increase of notes from
about $1,200,000,000 to $2,800,000,000.
This increased supply of gold has come from hoardings and private
holdings which have been placed at the disposal of the bank in return
for bank-notes. There has been no reduction of this gold fund through
demands from note-holders, since the bank was freed from redemption in
gold at the very beginning of the war. That is, notes of the Bank of
France are inconvertible. As contrasted with the dollar of the United
States, when expressed in bills of exchange between New York and Paris,
the Bank of France note has depreciated nearly 14 per cent. Any paper
money not having immediate redemption will depreciate. As regards the
future it is a question of ultimate redemption.
With so large an available gold supply, there can be little question as
to the future intention or probability of redeeming the notes in gold.
It looks very much as if the same policy adopted in the war of 1871-3
had been consciously followed. Then, also, the _cours forcee_ was
declared, and the gold carefully retained in the vaults of the bank. The
presence of a large gold fund was an assurance of the ability to return
to specie payments after the close of the war. The war was short, and
the notes were not seriously depreciated, bearing a discount as compared
with gold of 1-1/2 to 4 per cent. In the present war, the same steps
have been taken; but this war is extending over a much longer time than
the former one, and the depreciation has already become much greater.
It is equally clear, however, that if the gold were now to be paid out
for redemption uses, it would become scattered, exported, and might even
pass through Holland or Switzerland into Germany. The increase and
preservation of this large fund of gold is the strongest evidence of the
ability of the bank to resume the gold redemption of its notes soon
after the close of the war. The actual time, however will depend upon
the rapidity with which the Government can repay some of its large loans
from the bank, since the excessive note issues have been largely due to
loans to the State.
II
In Germany, likewise, every effort has been made to accumulate gold,
even though the notes of the Reichsbank were made inconvertible at the
beginning of the war. Not only was the requirement to redeem the notes
in coin removed, but the regulations regarding a tax upon all notes
uncovered by a specie beyond a specified _Kontingent_ were suspended.
Thus, restrictions on the limit of note issues do not exist; and they
have risen from about $500,000,000 before the war to about
$1,500,000,000 (February, 1916), while the stock of coin and bullion has
changed from about $300,000,000 to over $600,000,000. That is, the coin,
which is mostly gold, is about 40 per cent. of the notes. Here, again
there is an obvious tendency to increase and maintain the gold reserves
so that Germany may have the means of resuming gold payments at no great
time after the close of the war.
The campaign to collect gold from the public and from hoards was
remarkable. It was successfully made a test of patriotism to hand in
gold in return for Reichsbank notes, and a house-to-house canvass in
many places resulted in providing the gold which so signally increased
the reserves behind the notes. Of course, the usual international
operations for obtaining gold were denied to Germany. It was this
campaign which was imitated by France. At the present time, certainly,
no thought has ever occurred to Germans that they would not go back to a
gold basis.
Nevertheless, Germany has clearly fallen into the same confusion of mind
which characterized our own policy in regard to the issue of greenbacks
in the Civil War. We confused the monetary with the fiscal functions of
the Treasury. So has Germany. Thinking the war would be short and
decisive, to be followed by large indemnities levied on her enemies, she
had expected to finance her expenditure by temporary expedients. That
is, the Government was led into the policy of borrowing through the
increase of monetary forms.
It does not change the principle that this increase of paper money was
not made solely by Imperial Treasury notes, but by a very large addition
to the circulation in the form of Reichsbank notes and _Darlehnskassen_
notes. It was the loans by the Reichsbank to the Government which
undoubtedly caused the main increase in the notes of this bank (just as
was true of the Bank of France), and the reduction of these issues, and
their redemption in gold, will depend directly on the power and
readiness of the Government to pay off its obligations to the Reichsbank
after the war.
The amount of borrowing by processes which led to an increase of the
circulation was necessarily limited; and very soon borrowing through
issues of paper money had to be followed by regular fiscal operations in
the form of long- or short-term bonds which would not affect the
quantity of the circulation. Expenses could not well be met to any
extent by current taxation, because taxes were already high, and in the
few years before the war, no doubt in anticipation of it, some four or
five hundred million dollars in taxes over and above normal taxation had
already been levied. In 1913 a non-recurring tax of $250,000,000 had
been imposed on the wealthier classes.
In addition a bonded debt, since the war, has been floated to the amount
of $10,000,000,000 over and above the existing public debt before the
war of about $1,200,000,000. But all these fiscal operations should be,
for our present purposes, separated from monetary operations. The
carrying of these heavy government debts is a question of the future
production of goods, of commerce, and of saving.
Whatever the burden of debts, the gold question is concerned with the
mechanism of exchange by which taxes, subscriptions to loans, payments
by the Government for munitions and supplies, current purchases of goods
by the public, payments to and by banks, are made. At present this
medium is paper money depreciated, as in the case of the Reichsbank
notes, by nearly 30 per cent. Of course, the Darlehnskassen issues would
follow the value set by the notes of the Reichsbank.
It is interesting to mention that the increase of paper money has not
been in answer to any need of the public for additional media of
exchange; for ordinary business transactions have decreased, and would
require a less quantity of money. It was an error not to separate
borrowing entirely from monetary issues.
Moreover, as bearing on the maintenance of the gold standard after the
war, it is worth noting that the rule requiring the Reichsbank to keep
one-third of its note issues covered by gold has not been violated. At
last reports (February, 1916) the gold item stood at $613,750,000, as
against $1,612,500,000 notes, or about 38.1 per cent. That is, the
greatest efforts have been made to concentrate the gold holdings of the
nation, including the "war chest" of about $30,000,000, in the reserves
of the Reichsbank.
At the same time no gold is paid out in redemption of notes, nor is it
allowed to be exported. Some sums have been sent to Holland in a vain
attempt to support German exchange in that country; but the difficulty
in exchange rates lies deeper than the relative supply of and demand for
bills, since the depreciation of German paper money determines the
general level about which the fluctuations of exchange due to demand and
supply range. In fact, wherever gold is not freely moved in
international exchange there are no shipping points, and hence no limits
to which exchange can fall short of the discount of the paper in terms
of gold.
III
As regards Great Britain, the gold standard is yet preserved for all
practical purposes. To her credit be it said that she has not fallen
into the error of borrowing by excessive issues of paper money; so far
she has not confused the fiscal with the monetary functions of the
Treasury. She resorted at once to fiscal operations in the form of heavy
taxation and loans in the form of short-time Treasury bills and
longer-term bonds. The issue of government paper money is, indeed, a new
departure; but its purpose has been more distinctly monetary than
fiscal.
The currency notes are emergency notes, issued under the act of August
6, 1914, directly by the Treasury, and not by the Bank of England,
although authorized by the same act which suspended the Bank Act in
regard to additional issues of bank notes not covered by gold. In other
crises the act of 1844 has been suspended to allow more notes based on
consols than permitted by the act (_i. e._, above the L18,750,000). In
August, 1914, such a suspension was in the future made legal, if
authorized by the Treasury, thus avoiding the old resort to a bill of
indemnity by Parliament.
But in spite of the usual suspension of the Bank Act, no use was made of
it. That is, a demand for more currency in the hands of the public could
have been supplied by the bank, but was not. In truth, the Lloyd George
currency notes need not have been issued. Nevertheless, when once
issued, they made unnecessary any resort to additional Bank of England
notes. There was no need of both. But in one respect the currency notes
helped to maintain the country's gold standard. By issuing them in small
denominations of one pound, and ten shillings, they replaced the gold in
general use for these denominations, and allowed it to be used as
reserves. Yet, it must be remembered that sound policy required a gold
reserve (which has been generally kept at about 40 per cent.) behind
these currency notes, so that the whole amount of gold replaced was not,
in fact, a gain.
As all know, the question of gold for Great Britain pivots on the
reserves of the Bank of England, which is the agent for the Government,
receiving its taxes and paying out its expenses, as well as the holder
of reserves for other banks--being thus a bankers' bank, as well as a
national agent. Moreover, the reserves mentioned, and which are of prime
importance, are those of the banking department--and these are chiefly
Bank of England notes (not gold). The percentage of reserves to
deposits, which marks the safety line for England, refers to the items
in the banking department. These notes, however, are protected (except
the bottom layer of L18,750,000 covered by consols), pound for pound, by
gold in the issue department. Hence, they can be turned into gold at any
moment.
Then, to what do these facts lead us? Simply that gold has increased
just in proportion to the issue of bank notes. In addition, the currency
notes of the Government served in the place _pro tanto_ of the Bank of
England notes. Hence, at the end of the war, the provision for
redemption of Bank of England notes will work automatically. Nor can
there be any question as to the gold being there to redeem them; for
they cannot get out without a previous deposit of gold. Indeed, the
questions of difficulty cannot arise regarding the basic currency of
Great Britain; they will arise, if at all, in connection with the assets
in the loan item of the banking department, since they will determine
the safety of the deposits chiefly created as the result of loans. The
bank discounted large sums of pre-moratorium acceptances and paper; and
yet even in these assets it is protected by the guarantee of the
Government.
DARLEHNSKASSEN AND OTHER FINANCIAL NOVELTIES IN GERMANY
[319]Germany, at the outbreak of the war, removed the limit of notes
issuable by the Reichsbank without tax; created about 1,800
Darlehnskassen (loan banks), located throughout the Empire, wherever the
Reichsbank maintained a branch; they were started without capital, in
lieu of which they issued _Darlehnskassen Scheine_ (Imperial Loan Bank
notes) in denominations of one mark and upwards, the aggregate amount
being limited to 1,500,000,000 marks; these banks made loans against
stocks, shares, produce, any personal property of a non-perishable
character, as collateral, and issued certificates, having the quality of
bank notes, to the borrowers; the loans ran for three and sometimes six
months; the minimum loan was 100 marks; a very wide margin of safety was
required, making the loans good beyond question; these certificates were
receivable for public dues and by the Reichsbank; the smaller
denominations circulated as money, the Reichsbank received the larger,
giving its notes in exchange; these certificates were not legal tender,
but were given the quality of gold and "may be considered by the
Reichsbank as gold cover, which means that against 100 marks of these
Scheine in its vault the Reichsbank is allowed to issue 300 marks of its
own notes." (I. De Bruyn.)[320]...
Sir Edward H. Holden, president of the London City and Midland Bank, in
a speech to his board of directors, January 29, 1915, said:
Germany proceeded to establish War Loan Banks, War Credit
Banks and War Aid Banks under the patronage of corporations,
municipalities and private financiers, and to make use of
the Mortgage Banks already established....
The Mortgage Banks are under the control of Chambers of
Commerce and municipalities, and they make advances on the
mortgage of properties by an issue of notes....
Germany made greater use (than of the Darlehnskassen) of the
Mortgage Banks, the notes of which are identical in power
and use with the notes of the Darlehnskassen. Another part
of their scheme was to relieve the pressure on insurance
companies (life), by forming an insurance bank, which
advanced 40 per cent. on the value of policies. These
advances were paid on notes which were exchanged for
Reichsbank notes in the same way as the notes of the
Darlehnskassen and Mortgage Banks.
Germany, with characteristic system and detail, provided different kinds
of banks to deal with different phases of the situation. War credit
banks were designed to aid Germans whose credits became unavailable,
owing to the exigencies of the war, as for instance those who had sold
and shipped goods abroad (the enemy's country), whose accounts would be
temporarily uncollectible, and those who might be otherwise embarrassed
in their foreign trade because of the interruption of business caused by
the war. War credit banks were more general in their dealings than war
loan banks. In Germany, business is largely done upon credit, and
especially so by small concerns and individuals, who possess no extended
bank credit nor available collateral, and hence are not in position to
make use of the Reichsbank or other commercial banks, or the
Darlehnskassen.
A German banker says: "It was deemed advisable to create an institution
of an intermediary character which would bear the greater share of the
risks involved. The so-called war credit banks are designed to serve
this purpose. They were established throughout the country, have their
own capital, and the obligations undertaken by them are guaranteed, and
losses, if any, refunded by the respective municipalities and
commercial associations. The war credit bank of Greater Berlin, for
instance, was established with a capital of 18 millions of marks, of
which 25 per cent. are fully paid in. In addition thereto, there is a
liability of 11.5 million marks by official bodies of commercial
organizations."
Still another kind of war credit bank was created on the co-operative
plan to assist the middle and lower classes.
Through the instrumentality of these institutions, a large amount of
credit instruments, possessing a currency function, was brought into
existence in Germany....
THE WAR AND THE WORLD'S FINANCIAL CENTRE
[321]With the end of the moratorium on November 4, it may be said that
the crisis produced by the outbreak of war was over. When peace comes
and prices [of securities] adapt themselves to the new price of capital
that the present destruction of some eight to ten millions of it a day
will bring about, and creditors begin to try to collect debts from
impoverished debtors in war-wasted countries, then there will be a new
set of problems, the acuteness of which will largely depend on the
length of the war and the extent to which the fighters are worn out.
These problems will exercise all the ingenuity and strength that Lombard
Street can muster. For the present it is enough to see how we stand at
the end of the opening period of the war, and what have been the effects
of the financial tornado with which its beginning was heralded....
The crisis of last August was the greatest evidence of London's strength
as a financial centre that it could have desired or dreamt of. It was so
strong that it did not know how strong it was. Consequently, being a
little flustered by the suddenness of the outbreak of war, on a scale
that mankind had never seen before, it made the mistake of asking its
debtors to repay it, not the thousands of millions that it had lent in
the form of permanent investment, but the comparatively trifling
amount--perhaps 150 or 200 millions--that it had lent in the shape of
bills of exchange drawn on it, and other forms of short credits.
Thereby it put the rest of the economically civilized world, for the
time being, into the bankruptcy court, and so, finding that none of its
debtors could pay, it thought itself obliged to ask for time from its
own creditors at home. Foreign creditors it had none, except Paris. It
sent gold to Paris as fast as it could be shipped and insured, and so
seems to have liquidated its debt. For when a market in exchange
reopened after the first shock of war, the Paris cheque soon steadied
itself at a more or less normal level, above the point at which gold
could be sent to France as an exchange operation. It is possible,
however, that London was still in debt to Paris, and that Paris
preferred for obvious reasons to leave its money on this side of the
Channel.
Of the three possible rivals to London as a financial centre, Paris was
the only one that gave any evidence of real financial strength. Behind
Paris stands the enormous power of the thrifty French investor, who
probably accumulates a greater proportion of his income than anybody in
the world, except, perhaps, some classes of Scotsmen. This accumulating
power of the French gives the Paris money market a position of
first-rate importance in the financial world, because capital has to be
saved, and a saving people has capital to lend. The advantage that
London holds in its more elastic credit system is partly balanced by the
advantage given to Paris by the thrifty habits of the French people. If
Paris adopted a more businesslike policy with regard to her huge store
of gold, which she has hitherto seemed to regard as a precious asset to
be sat on and protected by the charge of a premium to audacious people
who want to withdraw a bit of it, she might, in normal times, be a much
more dangerous rival to London than she is. But it need hardly be said
that Paris, as a financial centre, was soon wrapped in the cloud of war
and invasion, and had no chance of making any effort to oust London from
her pride of chief place.
Berlin was equally cut off from competition, for Berlin had to devote
herself to the task of financing war for Germany. Moreover, the rapid
depreciation in the value of the mark that took place before the war
began showed that Germany was still a debtor country in the short-loan
market. The Berlin exchange, while war was as yet only a dreaded
possibility, rose from 20 m. 50 pf. to 20 m. 60 pf. Germany invests
money abroad, but she seems to borrow as much, and more, in the discount
markets of London and Paris. So it came to pass that, in spite of the
big sales of securities that she had thrown on the markets of New York
and London, she still had to pay when the big day of settlement came,
and to pay so fast that she had not a bill on London left to pay with.
It was the chance of a century for New York. American ambition has long
ago informed the world that the United States, having been the world's
granary, is now the world's most progressive manufacturer, and means
soon to be the world's banker. This may happen some day, and might have
happened already if American policy in currency, financial and fiscal
matters had been more enlightened, and if her people had been more
thrifty. But they have tied their credit system in the bonds of narrow
banking laws and their trade in those of a cramping tariff. These bonds
they have just begun to shake off, and if the crisis had happened a few
years later they might perhaps have made a bid for London's place as
world banker. But it is hardly likely, for the development of the
enormous resources of the country still craves for much more capital
than its people can provide. The United States is still a debtor to the
world at large and seems likely to be so for some time to come, and it
is doubtful whether even New York, with all its skill in the jugglery of
finance, can make itself a great banking centre as long as its heavy
balance of indebtedness is always waiting to turn the world's exchanges
against it, whenever the monetary sky is overcast.
It was the chance of a century, but New York could not take it. When
London called in its credits from other countries, any centre that could
have said to these countries, "We will give you the credit that London
has cut off, and lend you the money to pay London," would have stepped
straight on to London's financial throne and set London a very difficult
task to regain it after the war was over. In spite of the large amounts
of gold taken from America to Europe before the war, the United States
had still a huge store within its borders--some estimates of it ranged
up to 400 millions sterling. If the United States had had the courage
to use this mountain of metal and let other countries draw on it, London
would have had more gold than it knew what to do with, and New York
would have had a big slice of London's business. The United States were
at peace, and, with all the chief countries of this antiquated
hemisphere engaged in the mediaeval business of killing one another's
citizens and destroying one another's property, the United States might
have been expected to leap into the position of economic leadership. But
America feared to use its gold, and held on to it as tightly as it
could, fearful of internal trouble and a run on its banks if too much of
the metal went abroad. In New York, as in most other centres, the
question of the moment was, not to take London's business, but to pay
what she owed to London and to buy bills on London at skyrocket prices
wherever they could be found. The strength of the fat old money-lender,
whom the Australian papers, angry with him because he did not lend fast
enough, used to call John Bull Cohen, was never more wonderfully made
manifest. Strength in money bags is not everything--very far from
it--but at least J. B. Cohen can claim that he has made good use of it.
He has peopled and fertilized the uttermost ends of the earth with his
sons and his capital, and he alone among the nations has had the courage
and the homely wit to throw his ports open to all and to tell all the
peoples of the world to send their stuff along if it is worth buying.
Moreover, he has lately shown that, in spite of all his alleged
decadence, he can still tuck up his sleeves on occasion and fight at
least as well as anybody else.
So far was New York from being able to supplant London that, as we have
seen, the United States had to make special arrangements to tide over
the difficulty which London's claims on her had produced....
The American Government found it necessary to ask officials of the
British Treasury to come over and help it to find ways and means for
meeting part of the debt of the United States to England, without
shipping any more American gold. This could only be done by England's
giving America some sort of credit to take the place of the finance
bills and other forms of accommodation which Lombard Street had
withdrawn.
At the same time there is no doubt that New York did some of the
business for herself that London had formerly done for her. If she was
not in a position to finance other countries, she did make a beginning
in financing her own imports. Exporters of goods from South America to
the United States who had formerly taken payment by drawing bills on
London, and were no longer able to do so, drew on financial institutions
in New York instead. Some of these bills were used to make
three-cornered payments from South America to London, and a very costly
means of payment they were to the debtor, owing to the high rate of
discount in New York, and the depreciation of the American dollar as
compared with the pound sterling....
It seems likely that this business of financing American trade New York
will keep in her own hands to a greater extent than she did before.
Probably she would have taken more of it to herself even if there had
been no war. Her new banking legislation has included in its aim the
establishment of branches of American banks abroad, and the development
of acceptance business in New York. It could not be expected that New
York would always be content to see the greater part of America's
external trade financed with English credit. Her next step will be to
endeavor to finance other people's trade, and she is already beginning
to set about taking it, being assisted by Lombard Street's shyness in
the matter of new acceptance business. If the war should be long
continued, its appalling drain on the combatants ought to help her by
exhausting the rivals whom she hopes to drive out of the field.
So far, then, from the late crisis having given any evidence of weakness
on the part of London, or of any likelihood that she will lose her
supremacy as the world's banker, the commanding strength of her portion
has been made abundantly manifest. The only weak point was not in her
armor but in that of her foreign customers. The question arises whether
she was wise in lending so much to debtors who showed such unanimous
inability to pay on the due dates. I have heard it contended by a
disinterested and well-qualified critic, that the risk run by Lombard
Street in allowing bills to be drawn on her from all parts of the world
against goods shipped from one country to another, has been shown by the
late crisis to be too great to be worth the candle. Bills drawn against
goods coming to England are safe enough, for as long as the goods come
to port and can be sold for them, the acceptor is sure of his money. But
when the goods go from China to Peru, and Peru finds that it cannot
remit to meet the bill, the acceptor is inconvenienced, and the bank or
bill broker who holds the bill finds that he has got a security which
was not quite as gilt-edged as he thought it. This is all quite true,
but contrariwise it may be argued that this sort of world crisis is not
going to happen again very soon, and that if all finance had to be
arranged on the theory that it was likely to recur frequently, there
would be very little finance of any kind. These bills drawn against
international shipments of goods do much to make the bill on London
popular all over the world, and if they are to be frowned on there will
be a considerable restriction of international commerce, which will
react unpleasantly on England. In ordinary times these bills are safe
enough, if due precautions are taken. If mistakes are made they happen
rarely and the resources of the accepting houses are easily able to
repair the damage.
As to finance bills, it has already been admitted that much credit was
given by their means which was used for purposes with which bills of
exchange ought not to be associated. The essence of a bill of exchange
is that it has to be met at its due date, and so it should only be drawn
to finance some commercial operation that will mature before the bill
falls due, or to provide means of remittance when they are scarce, owing
to seasonal causes which will have passed before the bill's maturity.
When rolling credits, as they are called, are established, which go on
from year to year, each bill being met by drawing another, and the money
so raised in the borrowing country is put into bricks and mortar or
machinery or other forms of fixed capital, the uses of the bill of
exchange are being strained. When a jolt comes to the machinery and the
rolling credit stops rolling, it is not possible to sell the factory or
plant to provide a means of remittance. But there is no doubt that for a
time, at least, this kind of finance bill is likely to be scarcer than
it was; in fact, as we have seen, it was the excessive suddenness of the
fit of virtue that seized Lombard Street on this subject that made the
crisis more acute than it need have been, by reducing the means of
remittance and so keeping the exchanges at an abnormal point.
Lombard Street has thus shown that it has fully learnt the only lesson
that the external side of the crisis had to teach it. Too many finance
bills of the wrong kind were out, and Lombard Street saw the fact so
clearly that for some weeks it rang with the cry that there must never
be any more finance bills of any kind at all. This exaggerated view is
already discredited, and there is good reason to hope that opinion will
settle down to a sensible midway path, taking the finance bill as a
quite legitimate and necessary convenience, dangerous only when abused
and distorted....
MR. WITHERS A GOOD ENGLISHMAN
[322]Mr. Withers is a very good Englishman indeed and points out with
pardonable pride how the London market stood the shock which rocked the
rest of the financial world to its very foundations. What would have
been his attitude had the book been written a little later, however,
when the pound sterling had fallen to a discount of over 2 per cent. as
compared with the dollar, is an interesting subject of speculation.
London financing the world is, from the Englishman's point of view, an
inspiring sight, but the pound sterling obtainable in New York for $4.76
... is something which it would be interesting to hear Mr. Withers
explain. _War and Lombard Street_ treats only with the beginning of a
very big subject. It is sincerely to be hoped that a little later we
shall have a continuation of the work from Mr. Withers' pen.
AMERICA'S CHANCE OF HOLDING WORLD PURSE-STRINGS[323]
Since the outbreak of the war New York has assumed a position of
leadership in international banking. Will this position be permanent or
will its duration be limited practically to the period of the war? Is
the mantle of world financial leadership about to pass from London to
New York, as it passed after the Napoleonic Wars from Amsterdam to
London? These are questions which many are asking, but which no one can
answer positively, because so much depends upon those incalculable
items--the duration of the war and the financial strength of the
belligerents at its close....
At the end of 1913 our provincial banking system was overhauled by the
Federal Reserve Act, and put in shape to meet the needs of our growing
trade, both domestic and foreign. By this act American commercial paper,
which previously had been essentially local paper, was given an
opportunity to assume a national, or even international, character,
through the provisions for bank acceptances, rediscount, and "open
market operations." An open discount market began to develop on American
soil; and slowly, but surely, short-time paper of an international
character and standing began to appear....
By the beginning of 1914, therefore, it may be said, that the way was
opened for our financial metropolis, New York, to play an increasingly
important role in the international money market, and that there was
already a movement in that direction.
To this movement the European war gave a strong impetus, and to-day New
York clearly holds the premier position in the field of international
finance, although at a time when national finance in the leading
countries of Europe has assumed proportions never before dreamed of. The
European exchange markets have been demoralized, and specie payments
among the belligerent countries of Europe have become little more than a
name. On the other hand, "dollar exchange" is now quoted in the
principal cities of Latin America, the Orient, and Australia; and the
American trade with those sections, which was formerly financed chiefly
through London, is now being financed directly, and in dollars....
The United States has brought back home from a billion to two billion
dollars' worth of the six billion dollars' worth of its securities
estimated to have been held abroad, and is preparing to take more,
either by purchase or as security for loans. It has loaned upwards of a
billion dollars to the belligerent countries, and has had a net
importation of gold during the year just closed greater than that of any
five years of its history. Our banks are carrying heavy surplus
reserves, those of the New York Clearing House banks alone on December
31 having amounted to $143,000,000, and the gold reserve against net
liabilities of the twelve federal reserve banks on December 23 having
amounted to 86 per cent.; and this, at a time when the large gold
reserves of the European banks are strained to the breaking point by the
tremendous liabilities placed upon them.
Our export trade has reached unprecedented heights, and for the year
1915 was approximately equal to twice that of 1906....
This war is likely to leave her [England] still with a secure position,
a great and loyal colonial empire, an efficient banking system, and the
control of the seas. Her position as a creditor nation will lie greatly
weakened, and she may even become a heavy debtor nation, but her foreign
trade connections have been so long and so well established that it does
not seem likely that they will be permanently impaired in any large
degree by the readjustments necessitated by the war. If she disposes of
her Latin-American and Asiatic investments to the United States she will
doubtless greatly weaken her trade position in those countries, but the
present evidence is that these will be about the last foreign
investments she will dispose of.
So far we have not made great progress in securing Europe's
Latin-American trade. Europe discontinued financing Latin America at the
same time that she discontinued her normal trading with Latin America.
For us to take her place it became necessary for us to loan before we
could sell and buy. But loaning to European belligerents and selling war
supplies offered larger immediate profits; and so our chief efforts have
been turned eastward rather than southward. An analysis of our large
export trade of last year shows that much of it was of a very abnormal
character, and gives promise of being but temporary. The following
figures comparing the exports of a few selected commodities for the ten
months ended October, 1915, with those for the same period of 1914 will
make this point clear:
_Ten Months Ended Oct. 31_
_Commodities. 1914. 1915._
Breadstuffs $212,025,814 $461,074,547
Iron and steel and mfrs. thereof, incl. wire 109,232,270 294,822,223
Meat products 110,180,785 214,212,955
Animals (notable horses and mules) 6,668,121 107,201,175
Explosives 6,439,693 103,527,382
Cars, carriages, etc. 36,844,923 117,366,359
Leather and mfrs. thereof 47,123,910 135,847,788
A glance at these articles will show that most of them were intended
chiefly for military uses, and that their heavy exportation presumably
will be but temporary.
It is interesting to note that some other articles of customary export
showed large declines in 1915 as compared with 1914. During the same ten
months' period, for example, our exports of agricultural implements (and
parts) declined from $21,028,588 in 1914 to $11,162,609 in 1915; of wood
and manufactures thereof, from $68,904,895 to $45,325,146; of
fertilizers, from $7,735,613 to $3,758,598; and of sewing machines, from
$7,757,421 to $4,902,594.
Viewed from the standpoint of the destination of the articles exported,
the significant fact is that the increase in exports was chiefly to
Europe, and not to Central and South America and Asia--the places in
which we have been strenuously endeavoring in recent years to build up a
permanent export trade....
... After the war is over Europe will presumably discontinue, or greatly
reduce, her importations from the United States of most of the articles
which figured so largely in the great increase of 1915. As her needs
tend to become normal again she will immediately endeavor to resume her
old-time trade connections, both import and export, at least in so far
as the trading centres are in countries that were friendly or neutral
during the war. In seeking to re-establish these connections the
merchants of the belligerent countries will be strongly backed by their
Governments, which the war will have made more socialistic and more
aggressive. They will have a great advantage in the fact of
long-established business relations, and in the fact that the war trade
will have been to such a large extent abnormal, both as regards the
products dealt in and the parties to the trade.
Europe's banking machinery in South and Central America, although it may
not be very actively functioning in these trying times, still exists,
and will be ready to resume its former activities as soon as peace is
declared....
On the basis of London Stock Exchange listings British investments in
Latin America early in 1914 were computed at nearly $6,000,000,000.
Germany also has a large number of banking establishments in South
America and heavy investments.... United States investments in South
America are very small as compared with those of England and Germany,
while only one American bank has established branches on that continent.
These branches are only five in number, and the oldest of them is but a
little over a year old.
The conclusion seems clear that the war will need to be very long and
very disastrous to England; and American merchants, bankers, and
investors will need to be much more active and far-sighted in their
exploitation of South American opportunities than they have been in the
past, if London is to yield to New York her financial premiership for
South America.
Other obstacles to New York's becoming permanently the world's financial
centre are its great distance from the financial markets of Europe,
America's small merchant marine, its provincial protective tariff
policy, the absence of an adequate supply of men possessing the
necessary training both in foreign languages and in commerce and
international finance to go into these foreign fields and to "tie them
up" commercially and financially with the United States, and the
slowness with which our recently reorganized banking system and our
American discount market must grow, as regards international business,
if it is to have roots that are strong and grow deep.
The United States has before it a great opportunity. Much depends upon
the foresight with which Americans prepare themselves to meet the
tremendous readjustments that will be demanded at the close of the war.
That will be the supreme test. Now is the time to build for the future,
and to avoid paying too much attention to immediate profits. New York
can hardly be expected to succeed to London's position as the world's
financial centre, at least for some time to come; dollar exchange will
not at once take permanent rank ahead of sterling, or even alongside it;
none the less, if the United States refuses to be blinded by the glamour
of large immediate profits from a type of trade that is necessarily
abnormal and temporary, and if she seriously turns her attention to the
opportunities now open to her in Latin America, she will make a long
step forward in the direction of financial leadership.
FOOTNOTES:
[313] H. Parker Willis, _American Finance and the European War_, _The
Journal of Political Economy_, Vol. 23, No. 2. February, 1915, pp.
144-165.
[314] A fuller account of the gold fund and cotton loan plans will be
found in the _First Annual Report of the Federal Reserve Board_,
Washington, January 15, 1915.
[315] _Report of Secretary of the Treasury_, December 7, 1914.
[316] _First Annual Report of the Federal Reserve Board_, p. 16.
[317] _Report of the Comptroller of the Currency_, 1914, pp. 15, 16.
[318] J. Laurence Laughlin, _Will the Gold Basis Survive in Europe?_,
_The Annalist_, Vol. 7, No. 162, Feb. 21, 1916, pp. 244, 252.
[319] A. Barton Hepburn, _A History of Currency in the United States_,
pp. 463-466. The Macmillan Company. New York. 1915.
[320] Of Boissevain Co.
[321] Hartley Withers, _War and Lombard Street_, pp. 98-111. E. P.
Dutton and Company. 1915.
[322] Franklin Escher, Review of _War and Lombard Street_, _The American
Economic Review_, Vol. 5, No. 3, September, 1915, pp. 624-5.
[323] E. W. Kemmerer, _America's Chance of Holding World Purse-Strings_,
_The Annalist_, Vol. 7, No. 158, Jan. 24, 1916, pp. 119-121, 144.
APPENDIX A
AN APPROXIMATE FORMULA FOR DETERMINING THE VELOCITY OF THE CIRCULATION
OF MONEY
[324]For the purpose of tracing the circulation of money, and measuring
it by bank records,[325] we may classify the persons who use money in
purchase of goods into three groups:
1. Commercial depositors, _i. e._, all engaged in business--firms,
companies, and others--who have bank deposits mainly or wholly apart
from personal accounts.
2. All other depositors, chiefly private persons.
3. All who, like most wage earners, are not depositors at all.
These three classes we shall distinguish as "Commercial depositors,"
"Other depositors," and "Nondepositors," or C, O, and N. The money in
the possession of "Commercial depositors" we shall call "till money,"
and the rest "pocket money."
The three groups necessarily include all in the community who circulate
money. By circulating money is meant expending it in exchange, not for
some other circulating medium, as checks, but for goods....
... The category of "commercial depositors" coincides for all practical
purposes with the category of business establishments.
"Other depositors" include most proprietors, professional, and salaried
persons. Almost no wage earners are included, and almost no business
establishments or business men in a business capacity....
... Although "other depositors" include most proprietors and
professional and salaried persons, yet some proprietors and professional
men, especially in rural communities, and some salaried persons, chiefly
small clerks, are "Nondepositors."...
... "Nondepositors" consist chiefly of those who are classed in
statistics as wage earners. While there are some wage earners who are
depositors,[326] they are rare: and while there are some "nondepositors"
who are not wage earners, especially (as just indicated) the
agricultural proprietors (farmers) and small clerks, the amount of money
circulated by them is small in comparison with the total circulation.
While the line separating wages and salaries is not definitely marked in
theory, it is usually easily recognised in practice....
We may now picture concretely the main currents of the monetary flow,
including the circulation of money in exchange for goods.... [The figure
here given] illustrates the three principal types.
[Illustration]
The corners of the triangle, C, O, and N, represent the three groups of
"commercial depositors," "other depositors," and "nondepositors," and
the B's represent banks. The arrows represent the flow of money from
each of these four categories to the others. Thus B_{o} represents the
annual withdrawals from banks by "other depositors," O_{c} the spending
of this withdrawn money by "other depositors" among "commercial
depositors," and C_{b} the return of the money from the "commercial
depositors" to the banks. This circuit (B_{o} O_{c} C_{b}) of three
links is very common. A second type of circuit is represented by a chain
of four arrows (B_{o} O_{n} N_{c} C_{b}). It is illustrated by private
depositors drawing money (B_{o}), and paying wages (O_{n}) to servants
who in turn spend the money (N_{c}) among tradesmen who finally deposit
it (C_{b}). A third type of circuit, also fourfold, is represented by
the arrows B_{c} C_{n} N_{c} C_{b}. It is illustrated by commercial
firms cashing their checks at banks (B_{c}) for pay rolls, with the cash
so obtained paying wages (C_{n}) to workmen who spend it (N_{c}) among
other tradesmen who redeposit it in banks (C_{b}). These three types are
not the only ones, but they are so much more important than any others
that they merit out undivided attention before a completer study is
undertaken.... [The accompanying figure] has been constructed for the
purpose of exhibiting them uncomplicated by other details.
It will be noted that not all of the flows described are examples of the
_circulation_ of money. As already indicated, money may be said to
circulate only when it passes in exchange for _goods_. Its entrance into
and exit from banks is a flow, but not a circulation against goods. In
the diagram the horizontal arrows represent such mere banking
operations, not true circulation. On the other hand, the arrows along
the sides of the triangle represent actual circulation. The diagram
shows four such arrows, representing the four chief types of
circulation: O_{c} payments of money from "other depositors" to
"commercial depositors" in the purchase of goods; O_{o} payments from
"other depositors" to "nondepositors," as when a housewife pays wages;
C_{n} payments from "commercial depositors" to "nondepositors," as when
a firm pays wages; and N_{c} payments from "nondepositors" to
"commercial depositors," as when a wage earner buys goods of a merchant.
There four types of circulation of money occur in the three circuits
already described, being sandwiched between the flows from and to the
banks. The first, O_{c}, is contained within the circuit B_{o} O_{c}
C_{b} and, since no "nondepositors" intervene, represents money changing
hands once between its withdrawal from bank and its redeposit there. The
remaining types (O_{n}, C_{n}, and N_{c}) are contained within the two
other circuits (B_{o} O_{n} N_{c} C_{b} and B_{c} C_{n} N_{c} C_{b}),
and, owing to the fact that "nondepositors" intervene, represent money
circulating twice between withdrawal and redeposit.
In short, one of the three circuits (B_{o} O_{c} C_{b}) shows money
circulating once out of bank. Both the others pass through N, and show
money circulating twice out of bank. The diagram, then, represents all
circulating money as springing from and returning to the banks; all of
it as circulating at least once in the interim; and that portion handled
by "nondepositors" as circulating once in addition. Therefore, the total
circulation exceeds the total flow from and to banks by the amount
flowing through "nondepositors." In other words, the total circulation
in the diagram is simply the sum of the annual money flowing from and to
banks and the money handled by "nondepositors." The quotient of this sum
divided by the amount of money in circulation will give approximately
the velocity of circulation of money....
FOOTNOTES:
[324] Irving Fisher, _Purchasing Power of Money_, Appendix XII. pp.
448-454. _The Macmillan Company. New York. 1911._
[325] For a complete formula for determining the velocity of the
circulation of money see pages 448-460, of the Purchasing Power of
Money.
[326] The term "depositors," as here used, does not, of course, include
savings bank depositors. A savings bank is not a true bank of deposit,
providing circulating credit.
APPENDIX B
SOME REGULATIONS OF THE FEDERAL RESERVE BOARD
FEDERAL RESERVE BOARD
WASHINGTON, January 12, 1915.
ACCEPTANCE OF STATEMENTS IN LIEU OF CERTIFICATES AS TO CHARACTER OF
COMMERCIAL PAPER
Whenever a member bank shall offer for rediscount any note, draft, or
bill of exchange bearing the indorsement of such member bank, with
waiver of demand notice and protest, the directors or executive
committee of the federal reserve bank may, until July 15, 1915, accept
as evidence that the proceeds of such note, draft, or bill of exchange
were or are to be used for agricultural, industrial, or commercial
purposes (and that such notes, drafts, or bills of exchange in other
respects comply with the regulations of the board), a written statement
from the officer of the applying bank that of his own knowledge and
belief the original loan was made for one of the purposes mentioned, and
that the provisions of the act and regulations issued by the board have
been complied with.
CHARLES S. HAMLIN,
Governor.
H. PARKER WILLIS,
Secretary.
FEDERAL RESERVE BOARD
WASHINGTON, April 2, 1915.
BANKERS' ACCEPTANCES
I
DEFINITION
In this regulation the term "acceptance" is defined as a draft or bill
of exchange drawn to order, having a definite maturity, and payable in
dollars, in the United States, the obligation to pay which has been
accepted by an acknowledgment written or stamped and signed across the
face of the instrument by the party on whom it is drawn; such agreement
to be to the effect that the acceptor will pay at maturity according to
the tenor of such draft or bill without qualifying conditions.
II
STATUTORY REQUIREMENTS UNDER SECTIONS 13 AND 14
Section 13 of the Federal Reserve Act as amended provides
that:
(a) Any federal reserve bank may discount acceptances:
(1) Which are based on the importation or exportation of
goods;
(2) Which have a maturity at time of discount of not more
than three months; and
(3) Which are indorsed by at least one member bank.
(b) The amount of acceptances so discounted shall at no time
exceed one-half the paid-up capital stock and surplus of the
bank for which the rediscounts are made, except by authority
of the Federal Reserve Board and of such general regulations
as said board may prescribe, but not to exceed the capital
stock and surplus of such bank.
(c) The aggregate of notes and bills bearing the signature
or indorsement of any one person, company, firm, or
corporation rediscounted for any one bank shall at no time
exceed 10 per centum of the unimpaired capital and surplus
of said bank; but this restriction shall not apply to the
discount of bills of exchange drawn in good faith against
actually existing values.
Section 14 of the Federal Reserve Act permits federal reserve banks,
under regulations to be prescribed by the Federal Reserve Board, to
purchase and sell in the open market bankers' acceptances, with or
without the indorsement of member bank.
III
RULING
The Federal Reserve Board, exercising its power of regulation with
reference to paragraph II (b) hereof, rules as follows:
Any federal reserve bank shall be permitted to discount for any member
bank "bankers' acceptances" as hereinafter defined up to an amount not
to exceed the capital stock and surplus of the bank for which the
rediscounts are made.
IV
ELIGIBILITY
The Federal Reserve Board has determined that, until further order, to
be eligible for discount under section 13, by federal reserve banks, at
the rates to be established for bankers' acceptances:
(a) Acceptances must comply with the provisions of paragraph II (a),
(b), (c) hereof;
(b) Acceptances must have been made by a member bank, non-member bank,
trust company, or by some private banking firm, person, company, or
corporation engaged in the business of accepting or discounting. Such
acceptances will hereafter be referred to as "bankers'"
acceptances;[327]
(c) A banker's acceptance must be drawn by a commercial, industrial, or
agricultural concern (that is some person, firm, company, or
corporation) directly connected with the importation or exportation of
the goods involved in the transaction in which the acceptance
originated, or by a "banker." In the latter case the goods, the
importation or exportation of which is to be financed by the acceptance,
must be clearly specified in the agreement with or the letter of advice
to the acceptor. The bill must not be drawn or renewed after the goods
have been surrendered to the purchaser or consignee.
(d) A banker's acceptance must bear on its face or be accompanied by
evidence in form satisfactory to a federal reserve bank that it
originated in an actual _bona fide_ sale or consignment involving the
importation or exportation of goods. Such evidence may consist of a
certificate on or accompanying the acceptance to the following effect:
This acceptance is based upon a transaction involving the importation or
exportation of goods. Reference No. ----. Name of acceptor ----.
(e) Bankers' acceptances, other than those of member banks, shall be
eligible only after the acceptors shall have agreed in writing to
furnish to the federal reserve banks of their respective districts, upon
request, information concerning the nature of the transactions against
which acceptances (certified or bearing evidence under IV (d) hereof)
have been made.
(f) A bill of exchange accepted by a "banker" may be considered as drawn
in good faith against "actually existing values," under II (c) hereof,
when the acceptor is secured by a lien on or by transfer of title to the
goods to be transported; or, in case of release of the goods before
payment of the acceptance, by the substitution of other adequate
security;
(g) Except in so far as they may be secured by a lien on or by transfer
of the title to the goods to be transported, as under (f), the bills of
any person, firm, company, or corporation, drawn on and accepted by any
private banking firm, person, company, or corporation (other than a bank
or trust company) engaged in the business of discounting and accepting,
and discounted by a federal reserve bank, shall at no time exceed in the
aggregate a sum equal to 5 per centum of the paid-in capital of such
federal reserve bank;
(h) The aggregate of acceptances of any private banking firm, person,
company, or corporation (other than a bank or trust company) engaged in
the business of discounting or accepting, discounted or purchased by a
federal reserve bank, shall at no time exceed a sum equal to 25 per
centum of the paid-in capital of such federal reserve bank.
To be eligible for purchase by federal reserve banks under section 14,
bankers' acceptances must comply with all requirements and be subject to
all limitations hereinbefore stated, except that they need not be
indorsed by a member bank: _Provided, however_, That no federal reserve
bank shall purchase the acceptance of a "banker" other than a member
bank which does not bear the indorsement of a member bank, unless a
federal reserve bank has first secured a satisfactory statement of the
financial condition of the acceptor in form to be approved by the
Federal Reserve Board.
V
POLICY AS TO PURCHASES
While it would appear impracticable to fix a maximum sum or percentage
up to which federal reserve banks may invest in bankers' acceptances,
both under section 13 and section 14, it will be necessary to watch
carefully the aggregate amount to be held from time to time. In framing
their policy with respect to transactions in acceptances, federal
reserve banks will have to consider not only the local demands to be
expected from their own members, but also requirements to be met in
other districts. The plan to be followed must in each case adapt itself
to the constantly varying needs of the country.
CHARLES S. HAMLIN,
Governor.
H. PARKER WILLIS,
Secretary.
FEDERAL RESERVE BOARD
WASHINGTON, April 2, 1915.
ACCEPTANCE BY MEMBER BANKS
By act of Congress approved March 3, 1915, section 13 (paragraphs 3, 4,
and 5 of the Federal Reserve Act) was amended and re-enacted so as to
read as follows:
Any federal reserve bank may discount acceptances which are based on
the importation or exportation of goods and which have a maturity at
time of discount of not more than three months and indorsed by at least
one member bank. The amount of acceptances so discounted shall at no
time exceed one-half the paid-up and unimpaired capital stock and
surplus of the bank for which the rediscounts are made, except by
authority of the Federal Reserve Board, under such general regulations
as said board may prescribe, but not to exceed the capital stock and
surplus of such bank.
The aggregate of such notes and bills bearing the signature or
indorsement of any one such person, company, firm, or corporation
rediscounted for any one bank shall at no time exceed 10 per centum of
the unimpaired capital and surplus of said bank; but this restriction
shall not apply to the discount of bills of exchange drawn in good faith
against actually existing values.
Any member bank may accept drafts or bills of exchange drawn upon it and
growing out of transactions involving the importation of exportation of
goods having not more than six months' sight to run; but no bank shall
accept such bills to an amount equal at any time in the aggregate to
more than one-half of its paid-up and unimpaired capital stock and
surplus, except by authority of the Federal Reserve Board, under such
general regulations as said board may prescribe, but not to exceed the
capital stock and surplus of such bank, and such regulations shall apply
to all banks alike, regardless of the amount of capital stock and
surplus.
In order to give effect to the above amendment of the law, the Federal
Reserve Board issues the appended Regulation K, series of 1915, stating
the conditions under which member banks may accept, up to 100 per cent.
of their capital and surplus, drafts or bills of exchange growing out of
transactions involving the importation or exportation of goods and
having not more than six months' sight to run.
CHARLES S. HAMLIN,
Governor.
H. PARKER WILLIS,
Secretary.
FEDERAL RESERVE BOARD
WASHINGTON, May 8, 1915.
CLEARINGS BETWEEN FEDERAL RESERVE BANKS
I
STATUTORY PROVISIONS UNDER SECTION 16
"The Federal Reserve Board shall make and promulgate from time to time
regulations governing the transfer of funds and charges therefore among
federal reserve banks and their branches, and may at its discretion
exercise the functions of a clearing house for such federal reserve
banks, or may designate a federal reserve bank to exercise such
functions, and may also require each such bank to exercise the functions
of a clearing house for its member banks."
II
GENERAL PROVISIONS
In the exercise of the functions of the clearing house authorised under
the provisions of section 16, quoted above, the Federal Reserve Board
and the federal reserve banks will be governed by and subject to the
following regulations and the Federal Reserve Board will be the
custodian of the funds hereinafter termed the gold settlement fund. The
board will appoint a settling agent who shall keep the necessary records
and accounts.
III
DEPOSITS IN THE GOLD SETTLEMENT FUND
(a) Each federal reserve bank shall, not later than May 24, 1915,
forward to the Treasury or the nearest Sub-Treasury, for credit to the
account of the gold settlement fund $1,000,000 in gold, gold
certificates or gold order certificates, and, in addition, an amount at
least equal to its net indebtedness due to all federal reserve banks.
(b) The Treasurer of the United States or Assistant Treasurer will, in
accordance with arrangements made with the Treasury Department, advise
the Federal Reserve Board, by mail or telegraph, of the receipt of all
funds deposited on account of the gold settlement fund, and the
Treasurer will issue and deliver to the Federal Reserve Board gold order
certificates made "payable to the order of the Federal Reserve Board"
covering the sum so deposited.
(c) Each federal reserve bank shall maintain a balance in the gold
settlement fund of not less than $1,000,000.
(d) Excess balances may, at the convenience of each federal reserve
bank, remain deposited with the gold settlement fund.
IV
CUSTODY OF FUNDS
(a) A safe in the Treasury vault will be set apart for the exclusive use
of the Federal Reserve Board.
(b) To open the Treasury vault, the presence of two persons designated
by the Secretary of the Treasury is required. The combination of the
safe set apart for the use of the board will be controlled by two
persons designated by the board.
(c) A vault record shall be kept, giving a memorandum of all entrances
to the safe, by whom made, for what purpose, and the certificates
deposited or withdrawn. Each entry on the vault record book shall be
signed by the persons having access to the safe.
V
ACCOUNTS
In its relations with other federal reserve banks each federal reserve
bank shall keep an account showing balances "due to" other federal
reserve banks representing the proceeds of items which it has actually
collected, and payments and transfers which have been made to it for the
account of such other federal reserve banks; and an account showing
balances "due from" other federal reserve banks representing the
proceeds of items which it has sent to such other federal reserve banks,
and payments and transfer which have been made to such other federal
reserve banks for its account.
VI
PROCEDURE
(a) At the close of business each Wednesday night, each federal reserve
bank shall telegraph to the Federal Reserve Board, confirming such
telegram by mail, the amounts in even thousands due to each other
federal reserve bank as of that date, as indicated by its "due to"
account provided for in Rule V. If Wednesday is a holiday in the State
in which a federal reserve bank is located, then such bank shall
telegraph as herein provided on Tuesday, at the close of business.
(b) The settling agent shall, on each Thursday, make the proper debits
and credits in the accounts of each federal reserve bank with the gold
settlement fund, and shall telegraph to each bank the amounts, in even
thousands, of credits to its settlement account, giving the name of each
federal reserve bank from which each of its credits was received and
also its net debit or credit balance in the weekly settlement.
(c) Each federal reserve bank shall, on receipt of the telegram from the
settling agent, debit the "due to" federal reserve banks' accounts, and
shall credit the gold settlement fund; and shall credit the "due from"
federal reserve banks' accounts and charge the gold settlement fund. The
difference between the total debits and credits shall equal the net
debit or credit to the gold settlement fund, as advised in the telegram
from the settling agent.
VII
DEFICITS
(a) Should the debit settlement balance of any federal reserve bank be
in excess of the amount of its credit in the gold settlement fund, such
deficit must be immediately covered either by the deposit of gold, gold
certificates, or gold order certificates in the Treasury or nearest
Sub-Treasury, or by credit operations with other federal reserve banks
which have an excess balance with the gold settlement fund. Any delay in
covering such deficit shall be subject to such charge as the Federal
Reserve Board may impose.
(b) As required in III (c) of this regulation, each federal reserve bank
shall maintain a balance in the gold settlement fund of not less than
$1,000,000. Should the credit balance of any federal reserve bank in
such fund fall below $1,000,000, such bank shall restore its balance to
that amount in either manner indicated under VII (a) of this regulation
on or before Tuesday of the following week.
VIII
EXCESS BALANCES
Any excess balance shall, on request, either by telegraph or letter, of
the federal reserve bank to which it is due, be refunded by the return
to the reserve bank of the gold order certificates held by the gold
settlement fund properly indorsed; or by the indorsement and delivery to
the Treasurer of a like amount of such certificates for which he will
give in exchange bearer gold certificates, which the Federal Reserve
Board may send by registered mail, insured, to the banks, if they want
funds other than gold order certificates, or in lieu of such payment,
the Treasurer may by wire or mail direct payment to be made by a
Sub-Treasury office through the medium of the general account, provided
funds are held in such office available for the purpose. Gold order
certificates will, when presented at the office of the Treasurer of the
United States or any Sub-Treasury, bearing the signatures of duly
authorised officers of the federal reserve bank, be payable in gold or
gold certificates. If the Treasury finds it necessary to ship from one
point to another in order to have the gold or gold certificates
available at the Sub-Treasury to which such gold order certificates are
presented, the Federal Reserve Board will, for the account of the gold
settlement fund, refund any expense incurred by the Treasury in making
such shipments.
IX
RESERVE
Each federal reserve bank shall count as a part of its legal reserve the
funds standing to the credit of its account on the books of the gold
settlement fund.
X
EXPENSES
Cost of operation of and shipment of currency by the gold settlement
fund shall be apportioned by a semi-annual accounting among the 12
federal reserve banks on a basis to be hereafter determined by the board
after consultations with the federal reserve banks.
XI
AUDIT
At least once in each three months an audit shall be made of the gold
settlement fund by a representative of the Federal Reserve Board and
representative appointed by the federal reserve banks.
XII
The Federal Reserve Board reserves the right to add to, alter, or amend
these regulations.
CHARLES S. HAMLIN,
Governor.
H. PARKER WILLIS,
Secretary.
FEDERAL RESERVE BOARD
WASHINGTON, June 7, 1915.
MEMBERSHIP OF STATE BANKS
I
STATUTORY REQUIREMENTS
Specific provisions of the Federal Reserve Act applicable to State banks
and trust companies which become member banks are quoted at the end of
this regulation.
II
BANKS ELIGIBLE FOR MEMBERSHIP
A State bank or a trust company to be eligible for membership in a
federal reserve bank must comply with the following conditions:
(1) It must have been incorporated under a special or general law of the
State or district in which it is located.
(2) It must have a minimum paid-up unimpaired capital stock as follows:
In cities or towns not exceeding 3,000 inhabitants, $25,000.
In cities or towns exceeding 3,000 but not exceeding 6,000 inhabitants,
$50,000.
In cities or towns exceeding 6,000 but not exceeding 50,000 inhabitants,
$100,000.
In cities exceeding 50,000 inhabitants, $200,000.
III
APPLICATION FOR MEMBERSHIP
Any eligible State bank or trust company may make application on Form
83, made a part of this regulation, to the federal reserve agent of its
district for an amount of capital stock in the federal reserve bank of
such district equal to 6 per cent. of the paid-up capital stock and
surplus of such State bank or trust company.[328]
Upon receipt of such application the federal reserve agent shall submit
the same to a committee composed of the federal reserve agent, the
governor of the federal reserve bank, and at least one other member of
the board of directors of such bank, to be appointed by such board, but
no Class A director whose bank is in the same city or town as the
applying bank or trust company shall be a member of such committee. This
committee shall, after receiving the report of such examination as may
be required by the federal reserve bank in pursuance of directions from
the Federal Reserve Board, consider the application and transmit it to
the Federal Reserve Board with its report and recommendations.
IV
APPROVAL OF APPLICATION
In passing upon an application the Federal Reserve Board will consider
especially:
(1) The financial condition of the applying bank or trust company and
the general character of its management.
(2) Whether the nature of the powers exercised by the said bank or trust
company and its charter provisions are consistent with the proper
conduct of the business of banking and with membership in the federal
reserve bank.
(3) Whether the laws of the State or district in which the applying bank
or trust company is located contain provisions likely to interfere with
the proper regulation and supervision of member banks.
If, in the judgment of the Federal Reserve Board, an applying bank or
trust company conforms to all the requirements of the Federal Reserve
Act and these regulations, and is otherwise qualified for membership,
the board will issue a certificate of approval. Whenever the board may
deem it necessary, it will impose such conditions as will insure
compliance with the act and these regulations. When the certificate of
approval and any conditions contained therein have been accepted by the
applying bank or trust company, stock in the federal reserve bank of the
district in which the applying bank or trust company is located shall be
issued and paid for under the regulations of the Federal Reserve Act
provided for national banks which become stockholders in the federal
reserve banks.
V
POWERS AND RESTRICTIONS
Every State bank or trust company while a member of the federal reserve
system:
(1) Shall retain its full charter and statutory rights as a State bank
or trust company, and may continue to exercise the same functions as
before admission, except as provided in the Federal Reserve Act and the
regulations of the Federal Reserve Board, including any conditions
embodied in the certificate of approval.
(2) Shall invest only in loans on real estate or mortgages of a
character and to an extent which, considering the nature of its
liabilities, will not impair its liquid condition.
(3) Shall adjust, to conform with the requirements of the Federal
Reserve Act and these regulations, within such reasonable time as may be
determined by the board in each case, any loans it may have at the time
of its admission to membership which are secured by its own stock, or
any loans to one person, firm, or corporation aggregating more than 10
per cent. of its capital and surplus or more than 30 per cent. of its
capital, or any real estate loans which, in the judgment of the Federal
Reserve board, impair its liquid condition.
(4) Shall maintain such improvements and changes in its banking practice
as may have been specifically required of it by the Federal Reserve
Board as a condition of its admission, and shall not lower the standard
of banking then required of it: and
(5) Shall enjoy all the privileges an observe all those requirements of
the Federal Reserve Act and of the regulations of the Federal Reserve
Board applicable to State banks and trust companies which have become
member banks.
VI
WITHDRAWALS
Any State bank or trust company desiring to withdraw from membership in
a federal reserve bank may do so twelve months after written notice of
its intention to withdraw shall have been filed with the Federal Reserve
Board. The board will immediately notify the federal reserve bank of the
receipt of such notice. At the expiration of said twelve months, such
bank or trust company shall surrender all of its holdings of capital
stock in the federal reserve bank, which stock shall then be cancelled
and the withdrawing bank or trust company shall thereupon be released
from its stock subscription not previously called. Such bank or trust
company shall, immediately upon the cancellation of its stock, cease to
be a member of the federal reserve bank, and the federal reserve bank
shall then refund to such bank or trust company a sum equal to the
cash-paid subscription on the shares surrendered, with interest at the
rate of one-half of one per centum per month computed from the last
dividend, if earned, not to exceed the book value thereof, and the
reserve deposits, less any liability of such member to the federal
reserve bank: _Provided_, That no federal reserve bank shall, except by
the specific authority of the Federal Reserve Board, cancel within the
same calendar year more than 10 per cent. of its capital stock for the
purpose of effecting voluntary withdrawals during that year. All
applications, including therein any on which action may have been
deferred because in excess of the aforesaid 10 per cent. limitation,
will be dealt with in the order in which they were originally filed with
the board.
Any State bank or trust company desiring to withdraw from membership at
the expiration of the twelve months' notice, notwithstanding the fact
that the federal reserve bank has previously cancelled 10 per cent. of
its stock during the same calendar year, may do so. In such case,
however, the federal reserve bank shall not be required to repay to the
withdrawing bank or trust company the sums due as above, until such time
as its stock would have been cancelled had it not exercised this option.
The federal reserve bank shall, however, give a receipt for the stock
surrendered.
VII
EXAMINATIONS
Every State bank or trust company, while a member of the Federal Reserve
system, shall be subject to such examinations as may be prescribed by
the Federal Reserve Board in pursuance to the provisions of the Federal
Reserve Act.
In order to avoid duplication, the board will exercise the broad
discretion vested in it by the act in accepting examinations of State
banks and trust companies made by State authorities wherever these are
satisfactory to the board and are found to be of the same standard of
thoroughness as national bank examinations, and where in addition
satisfactory arrangements for co-operation in the matter of examination
between the designated examiners of the Board and those of the States
already exist or can be effected with State authorities. Examiners from
the staff of the board or of the federal reserve banks will, whenever
desirable, be designated by the board to act with the examination staff
of the State in order that uniformity in the standard of examination may
be assured.
VIII
FUTURE REGULATIONS
The Federal Reserve Board reserves the right to make such amendments and
adopt and issue, from time to time, such further regulations authorised
by the act as it may deem necessary, but no amendment of section VI of
these regulations, relating to voluntary withdrawals, shall take effect
until six months after its adoption and issue by the board.
CHARLES S. HAMLIN,
Governor.
H. PARKER WILLIS,
Secretary.
FOOTNOTES:
[327] Drafts and bills of exchange eligible for rediscount under section
13, other than "bankers'" acceptances, have been dealt with by
Regulation B, series of 1915.
[328] Three per cent. has already been called from national and other
member banks, but the remainder of the subscription or any part of it
shall be subject to call if deemed necessary by the Federal Reserve
Board.